Firm-Level Evidence on Market Competition and Corporate Performance

• In Event: Chinese Politics Mini-Conference: Firms, Industries, and China's (International) Political Economy

Abstract

Do Economic Development Zones (EDZs) help foster economic development? EDZs have been established by governments around the world to encourage the growth of industrial clusters, to facilitate collaborations, and to achieve more efficient utilization of local resources. Yet, we still have limited firm-level evidence on the effectiveness of EDZs. The extant literature has offered two expectations regarding the impact of EDZs on firms. The conventional and optimistic view suggests that EDZs encourage greater competitions among firms by creating industrial clusters, where firms receive government support to become industrial leaders. The pessimistic view suggests that EDZs concentrate disproportionately high amounts of economic and political resources, which disadvantage and discriminate against outsiders, especially smaller, late-comer firms and foreign businesses. In this paper, we examine EDZs' impact on economic development by using an original geocoded dataset of EDZs, which include a total of 177 national-level and 1,264 province-level EDZs in China. We merge the EDZ dataset with a firm-level dataset of about 1.1 million enterprises, combined with census data for 3,137 counties, including the 1,343 counties where the EDZs are located. Exploiting spatial discontinuities in firms' distances to EDZs, our RDD analysis finds that firms located within provincial EDZs benefit from their presence similarly as firms located nearby. Meanwhile, firms located nearby national EDZs perform significantly worse than those located inside national EDZs. Our mechanism analysis shows that, compared with national EDZs, firms in provincial EDZs are more sensitive to competition from foreign and domestic firms and to the needs of the local economy.

Authors

• Jian Xu, National University of Singapore

• Tianguang Meng, Tsinghua University

• Jing Xu, Tsinghua University