Firm sorting, clustering, and vertical disintegration: Evidence from China

Using universal firm-level data on the garment sector in Pearl River Delta, China, we show that clustered firms are more likely to be vertically disintegrated. Additionally, an increase in clustering and vertical disintegration is observed following China’s accession to the World Trade Organization. However, most models of changes in agglomeration forces fail to explain these findings. Contrary to the commonly held view that high-productivity firms sort into clusters, we show that agglomeration can disproportionately benefit less productive firms when the agglomeration force is input sharing. Empirical evidence supports this view.