Place-Based Policies, Creation, and Agglomeration Economies: Evidence from China’s Economic Zone Program

Place-based programs—economic development policies aimed at fostering economic growth in a specific area within a larger jurisdiction—have grown popular and been pursued by many governments around the world over the past several decades. By design, place-based policies can potentially influence the location of economic activity, as well as the wages, employment, and industry mix in the targeted area (Kline and Moretti 2014b). Some economists are skeptical about the efficiency of such programs (Glaeser and Gottlieb 2008; Glaeser, Rosenthal, and Strange 2010). Firms may move from other regions to the targeted area and arbitrage away the benefits associated with the program without improving the welfare of local residents (Kline 2010, Hanson and Rohlin 2013). Still, agglomeration economies are considered an important rationale for policies that encourage new investment in a specific area (Kline and Moretti 2014a, Combes and Gobillon 2015).

Although there has been much research focused on such programs in the United States and Europe (see Neumark and Simpson 2014 for a comprehensive review), there have been few attempts to evaluate interventions in developing countries. Several questions loom especially large: who benefits and who loses from place-based programs? Do the economic gains substantially outweigh the costs? Which factors determine the effectiveness of such interventions? Since developing countries usually suffer from poorly developed institutions and markets, would the assumptions and conceptual approaches of the place-based policies in the United States and Europe still hold for them? Very little progress has been made in addressing these issues, largely because of a lack of longitudinal studies in developing countries, in particular research that traces a place-based program’s effects on microlevel units such as firms and workers.

This study constitutes a novel step in that direction.Combining rich firm and administrative data, this paper examines the incidence and effectiveness of a prominent place-based policy in China: special economic zones. Establishing zones is found to have had a positive effect on capital investment, employment, output, productivity, and wages, and to have increased the number of firms in the designated areas. Net entry plays a larger role in generating those effects than incumbents. The special zone program’s net benefits over three years are estimated to amount to about US$15.62 billion. Capital-intensive industries benefit more than labor-intensive ones from the zone programs.