Industrial Clustering with Production Networks: Micro Evidence and Aggregate Implications in China, with Hongsong Zhang (Job Market Paper)
Presentations: 2025 World Congress of the Econometric Society (Seoul), CES China Annual Conference (SYSU), China International Conference in Macroeconomics (WHU), ICCDS 2025 (SJTU), the 18th North American Meeting of the Urban Economics Association (Georgetown University), the 2nd Summer Meeting in Urban Economics China (PKU), the Econometric Society Australia Meeting 2024 (Monash University), the European Winter Meeting of the Econometric Society 2024*, CUFE, HUST, JNU
Abstract: Firms may benefit from the input-output relationships in the production networks, incentivizing them to co-locate and form industrial clusters. This paper documents the patterns of industrial clustering in China for nearly two decades using detailed firm-level data and examines its impact on firm performance and regional economic growth. We develop a new measure of industrial clustering that accounts for the horizontal agglomeration of firms from the same industry and the vertical clustering of firms from up- and downstream industries. We find robust industrial clustering in China, with significant variation across industries and regions. The overall clustering patterns in China experienced a substantial change over time, peaking in 2004. Micro evidence shows that industrial clustering boosts firms' advantages in productivity, sourcing costs, and innovation, which are largely driven by vertical clustering. It also improves regional industrial dynamism and economic growth by incentivizing more entry/exit and faster sales growth for incumbent firms. Variance decomposition shows that while horizontal clustering explains 83% of the variation in regional sales, upstream and downstream clustering explains the remaining 17%. Ignoring production networks and vertical clustering substantially underestimates the gains from industrial clustering.
Development Zones, Industrial Dynamics, and Regional Economic Growth with Production Networks, with Hongsong Zhang (Draft available upon request)
Presentations: 2025 HKUST GEAR Conference on Trade and Development, HKU Brownbag Seminar
Abstract: This study examines the impact of place-based industrial policies on industrial geography and regional economic growth in China, emphasizing the role of input-output linkages through production networks. Utilizing comprehensive geo-coded data on new firm registrations and development zone policies (DZ) from 1979 to 2019 in China, we find that although most development zones focused on supporting a particular set of industries, they induced fast growth of the downstream and upstream industries of the DZ-target industries by increasing new entry and sales of incumbent firms. The effects are greater for industries closer to the DZ-target industries in the input-output linkages. The spillover effect on IO-linked industries is due to the cost and demand effects arising from industrial clustering. Moreover, the effect is mainly driven by private firms. Overall, development zones had a significant, positive impact on regional economic development, and the spillovers to upstream and downstream industries (and their interactions with the DZ-target industries) played an important role.
Environment Regulations, Pollution Abatements, and Firm Performance: Evidence from China
Optimal Place-based Industrial Policy: Theory and Evidence from China