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Does development zones improve the capacity utilization of firms? Based on the dual perspectives of firms inside and outside the zone

Author

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  • Jiang, Weijie
  • Dai, Jiaying
  • Jin, Laiqun

Abstract

Development zones (DZs), as a crucial place-based industrial policy, are widely adopted by developing countries to attract investment and promote economic growth. This study investigates the economic impacts of DZs in China, with a focus on firm capacity utilization and total factor productivity (TFP). Using the Annual Survey of Industrial Firms dataset from 1998 to 2013 and employing the PSM-DID method, we find that the establishment of DZs significantly enhances the capacity utilization and TFP of firms within the zones. However, this comes at a cost: non-DZ firms experience a decline in both capacity utilization and TFP. Mechanism analysis reveals that DZ firms capitalize on preferential policies, such as lower interest rates and higher subsidies, to engage in low-price competition, improving their capacity utilization. This, in turn, creates a crowding-out effect, reducing capacity utilization for non-DZ firms and leading to broader negative spillover effects at the county level. These findings call for a more cautious approach to DZ policies, highlighting their unintended consequences on regional industrial dynamics and offering insights into their nuanced economic impacts.

Suggested Citation

  • Jiang, Weijie & Dai, Jiaying & Jin, Laiqun, 2025. "Does development zones improve the capacity utilization of firms? Based on the dual perspectives of firms inside and outside the zone," Economic Analysis and Policy, Elsevier, vol. 85(C), pages 2247-2264.
  • Handle: RePEc:eee:ecanpo:v:85:y:2025:i:c:p:2247-2264
    DOI: 10.1016/j.eap.2025.03.007
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    More about this item

    Keywords

    Development zone; Capacity utilization; Price competition; TFP;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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