Geography of productivity: evidence from China’s manufacturing industries

Empirical evidence has confirmed that the locational agglomeration of firms is associated with productivity benefits. Several competing explanations have been proposed for this association: agglomeration externalities effect, sorting effect and selection effect. This work builds on these studies and seeks to make four contributions by using a firm-level dataset on China’s manufacturing industries over the 1999–2007 period. First, it points out that this stand of literature pays insufficient attention to the possibility of adverse sorting. Second, agglomeration externalities have been decomposed to two constituting parts: inter- and intra-industry, which play different roles in the process of sorting and agglomeration. Third, this paper also points out the need to pay attention to firm heterogeneity, in terms of market orientation and ownership type. Finally, the complex role of government policies has been also examined. Econometric results support our hypotheses.