Market Integration and the Dynamic Evolution of China’s Comparative Advantages

In a big country like China, economies of scale based on the domestic market are an important source of the dynamic evolution of comparative advantages. In the process of market integration, economic activity has a better chance to gain returns in a larger market. A unified big market is the basis for realizing economies of scale. In light of the international division of labor, a large domestic market is an advantage in production and division, which is obtained by means of economies of scale. According to the theory of the home market effect, a large domestic market brings about large-scale production and improvement in efficiency. Such production can not only meet the demands on the domestic market, but also gain new advantages in export. Consequently, the integration of the domestic market is bound to boost the dynamic evolution of comparative advantages and bring into shape new comparative advantages. Such new comparative advantages take shape based on the domestic market demand and facilitate the formation of a more proactive model of international division driven by domestic demand. After decades of opening-up and economic growth oriented to external demands, China’s economic development is gradually and inevitably transforming into a more active model oriented toward its domestic demand. It is evident that constant improvement in the degree of domestic market integration can not only promote the dynamic evolution of comparative advantages, but also facilitate the transformation of economic growth. In this chapter, we will first analyze in theory the relationship between market integration and the dynamic evolution of comparative advantages. Next, we will make empirical tests of market integration and the home market effect in China. Finally, we will put forth some policy suggestions on how to boost market integration and the dynamic evolution of comparative advantages.