Controls for omitted variables

In this section, we also apply more variables related to dynamics impacts on industrial agglomeration. We include firm size and firm age together with new product ratio, export ratio and wage premium to estimate their impacts on industrial agglomeration.

Table 2.8 and 2.9 exhibit definitions of these indicators and the statistic summary. We can see that correlation Figures 2.6 and 2.7 show us the distribution of the share of domestic and foreign investment by ownership and export ratio in plots at the 4-digit industry level. We can see from figure 2.7 that the more foreign enterprises a 4-digit industry has, the higher its export ratio. However, in figure 2.6, an industry with a higher share of SOEs may have a lower export ratio, excluding the limited number of exceptions. It shows clearly that the export-oriented growth pattern has still mainly been contributed to by foreign enterprises since 1990s (Buckley et al., 2002; Hu et al., 2002;

Graham et al., 1995). Therefore, export ratio may have a collinearity problem with the share of foreign enterprises in employment.

[Table 2.8 and 2.9 about here]

[Figure 2.10 and 2.11 about here]

After the reform of the planned economic policy in 1978 in China, the wage level has changed from equalised wage payments into being strongly industry- and region-specific.

The fast growth in the coastal regions has attracted immigrants from the inner land since the 1990s. However, the Hukou system restricts such immigration behaviour²⁸. Besides,

28 The Hukou system is a Chinese characteristic household registration system based on the place of birth of citizens. There are two types of registration named as agriculture and City/County Hukou. Citizens who were born and live in an agricultural area find immigrating to large cities such as Beijing or Shanghai very difficult – this is to protect the social welfare and population of the urban areas. The labourers from the inner land can apply for a temporary residence permit to stay in the big cities and find work. The Hukou system is also activated when a citizen moves their residence from one city to another in the coastal regions.

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labourers from the inner land can only work on labour-intensive enterprises due to their lack of skills and lower levels of education. Their wage level is therefore below the average. Moreover, the high-tech or capital-intensive industries are the main targets that the local government aims to persuade to stay as they can be the economic pillars of a local economy. On the other hand, foreign enterprises would prefer to stay if they gain profits and attract other foreign investment to locate within an authority region. In order to estimate the labour market pooling at the 4-digit industry level, we apply the wage premium, which is defined as the average wage for an industry within a region over the average wage in that region, aggregating into overall regions and also weighted by the share of employment in those regions²⁹. It implies the wage level of an industry in a region in excess of the average wage level within that region. Moreover, the high wage in an industry implies that the industry has high value-added or is a high-tech industry. The correlation between wage premium and agglomeration also indicates the impact of high-skilled labour force on agglomeration. We can use the wage premium to check if high-tech industries are likely to be agglomerated in China indirectly.

The localisation of industries has a positive impact on vertical disintegration (Holmes, 1999), which implies an industry-specialised region. The pattern of specialised markets and industry clusters has also been illustrated by many academics in case studies of south China (Barbieri et al., 2012). This variable has another meaning in China. The emergence of the processing industry in China attempts to take advantage of the large number of unskilled and low-wage labourers in China, and the positive impact from the intermediate inputs ratio on agglomeration, suggesting the importance of the processing industry to agglomeration in China. Considering that most of the industries are clustered in the coastal region, the high share of inputs in the processing industries primarily could be raw materials from the inner land or primary materials that need to be obtained from overseas. Therefore, it can also be explained as a measurement of economic liberalisation or degree of easy access. We construct the purchased-inputs ratio as the share of

29 We only use wages from non-SOEs to estimate the wage in an industry and in a region as SOEs’ wage level is not driven by market forces (Gordon et al., 1999).

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purchased inputs (including raw material, operation and other costs) over the total output in current price.

Knowledge spillovers are also examined using the new product ratio. The application of the ratio of R&D expenditure to total sales, which is generally applied, has been said to ignore the accumulation of technology over the time and the impact of R&D on output performance (Feldman et al., 2002). We therefore conduct a new product ratio and define it as the amount of new products over the total output to estimate knowledge spillovers.

The positive R&D ratio impact on agglomeration implies that innovations bolster agglomeration while the negative impact implies that certain innovations work against agglomeration.

Another advantage of industrial clusters is the gain from scale economies. From our previous results, the geographic concentration is in general more skewed than the industrial concentration. Alecke et al. (2006) argue that the value of the EG index is still influenced by industry size and is non-linear through the Herfindahl index. They find a significant effect of scale economics on agglomeration using the EG index as the measurement of agglomeration. We construct the average firm size to examine their findings. The average firm size is defined as the total output over the number of enterprises within the industry.

The export value and total sales output in the dataset enables us to estimate the export ratio, which is defined as the export value over the total sales output in the industry. It tells us how important the overseas market is to Chinese manufacturing firms. All input and output values are deflated using an input or output deflator³⁰.

[Table 2.10 about here]

[Table 2.11 about here]

30We use 2000 as the benchmark and deflated input/output variables in other years.

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[Table 2.12 about here]

[Table 2.13 about here]

Our results with other controlled variables also show the similar sign in the regression for SOEs and domestic private firms. Besides, the export ratio together with wage premium have a significant positive impacts on agglomeration over time. There are also some evidence to show firm age have positive impacts on agglomeration while firm size have negative impacts. The reason that wage premium promote the agglomeration is the typical cluster of labour-intensive industry in China, firms offer higher wage would attract many employees within the region. The firm age finding is consistent with decreasing of SOEs and increasing of Domestic firms during the decade. Recent established firms are more likely to prefer locations with good externalities.