Agglomeration and

China Economic Review 22 (2011) 313329
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China Economic Review
Agglomeration and productivity: Firm-level evidence from China's textile industry

Hui-Lin LIN a,, Hsiao-Yun LI a, Chih-Hai YANG b
a b
Department of Economics, National Taiwan University, Taipei, Taiwan, ROC Department of Economics, National Central University, Jhongli, Taiwan, ROC
a r t i c l e
i n f o
a b s t r a c t
Is the spatial concentration of manufacturing activity able to enhance firm-level productivity? This question is particularly relevant to production in China, which has a huge territory and population, but a skewed distribution in terms of urbanrural development. This paper aims to examine the dynamics of industrial agglomeration and the impact of agglomeration on firmlevel productivity in China's textile industry by using a firm-level panel dataset from 2000 to 2005. First, the average value of the EllisonGlaeser (EG) index (city level) is found to be approximately 0.00019. Moreover, the calculated city EG index of spatial concentration for each year exhibits a decreasing trend of spatial agglomeration for garments and other fiber products, but an increasing trend for the textile industries' agglomeration in China. The above findings are similar to the findings of Lu and Tao (2009). Secondly and importantly, this study nds an inverted U-shape relationship between agglomeration and productivity. It suggests that while industrial agglomeration enhances rms' productivity, agglomeration diseconomies may appear if the degree of agglomeration is too high. 2011 Elsevier Inc. All rights reserved.
Article history: Received 8 January 2010 Received in revised form 17 March 2011 Accepted 28 March 2011 Available online 9 April 2011 JEL: L67 L14 R39 C33 O53 Keywords: Textile industry Agglomeration Productivity China
1. Introduction The tendency toward the spatial agglomeration of production activity was a widely observed phenomenon in past decades, especially for high-tech industries. The successful experience of industrial agglomeration, e.g., Silicon Valley in the U.S.A., has attracted wide attention among economists and inspired a stream of research referred to as the New Economic Geography that has been revitalized by Krugman (1991, 1998). While agglomeration can be discerned at various geographical levels, such as at the city and provincial levels, the spatial concentration of manufacturing activity is thought to benet from the advantages of knowledge externalities, specialization, the existence of local public goods, and reduced transaction costs within industries, all of which can positively contribute to the rms' productivity. Recently theoretical developments, e.g., Neary (2001), and Duranton and Puga (2004), have provided comprehensive explanations of the micro-foundation of agglomeration. An important question worth examining is whether the spatial concentration of manufacturing activity really enhances rms' productivity. Furthermore, most of the literature relating industrial agglomeration to economic activity focuses on advanced countries, providing the main inspiration for this study: Does the New Economic Geography theory based on Western experiences apply to China? This question is both interesting and important. On the one hand, it is particularly relevant to
Corresponding author at: Department of Economics, National Taiwan University, No.21, Hsu-Chow Road., Taipei, 100, Taiwan, ROC. Tel.: +886 2 23519641x377; fax: +886 2 23225657. E-mail addresses: huilin@ntu.edu.tw (H.-L. Lin), d94323008@ntu.edu.tw (H.-Y. Li), chyang@mgt.ncu.edu.tw (C.-H. Yang). 1043-951X/$ see front matter 2011 Elsevier Inc. All rights reserved. doi:10.1016/j.chieco.2011.03.003
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H.-L. Lin et al. / China Economic Review 22 (2011) 313329
production in China, in view of its huge geographic territory and population coupled with a high degree of regional inequality (Fleisher & Chen, 1997; Kankur & Zhang, 1999). On the other hand, China's economic reforms that have transformed the economy from a centrally-planned to a market-based economy further complicate the applicability of this argument. The textile industry has traditionally been an important industry and has played a critical role in terms of output, exports and employees in China's manufacturing sector. It remained well developed for a long time since the early 1950s during the central planning period.1 Even though China has aggressively developed its high-tech industries since the late 1990s, and has aimed to transform its primarily labor-intensive industries into technology-intensive industries in its manufacturing sector to meet the challenges of the current era of a knowledge economy, the textile industry has remained one of its key industries. In 2007, the output of the textile industry amounted to RMB 263.33 billion, accounting for 6.5% of total industrial output of RMB 4051.77 billion. The textile industry's exports amounted to US$ 16.580 billion (approximately RMB 128 billion), implying that approximately 50% of its products were being exported to other countries. Indeed, China is the largest producer as well as exporter of textile and clothing products in the world. Unlike the newly-developed high-tech industries that are concentrated in Beijing, the Yangtze River Delta, and the Pearl River Delta due to the advantages of reduced transaction costs under the industrial structure of vertical disintegration, with raw materials being spread over a wide area,2 lower product prices, and high transportation costs, it does not seem to be necessary for textile rms to benet from agglomeration advantages. Specically, in the early 1950s, the government asked the textile industry to begin deploying its resources in a raw material-oriented, market-oriented, and labor-oriented fashion, in order to shift textile rms toward the areas from which the raw materials originated, as well as areas with a concentration of workers, and consumer markets. In this way, the textile industry could be developed in the hinterland and in areas where minority ethnic groups were clustered. Along with the open-door policy implemented in the early 1980s, the spatial concentrations of textile rms, however, appear to have gradually changed. Liu and Ren (2004) showed that 80% of textile rms in terms of rm numbers were concentrated in the southeastern coastal regions in 2002. The location quotient values of the textile industry in Zhejiang and Jiangsu provinces increased correspondingly to more than 2,3 suggesting a higher degree of spatial concentration. Thus, it might be asked whether there really was an increasing degree of spatial agglomeration among textile rms along with China's accession to the WTO in 2001 that forced textile rms to enter the large markets in the coastal regions to meet the demand there and also to enable them to export to international markets more conveniently. While some Chinese scholars have discussed this possible development of concentrated clusters in the manufacturing sector (Shiung, 2005; Wang & Wang, 2005; Zhang, To, & Cao, 2004), they have not used microdata to conduct in-depth examinations of the degree of agglomeration. One of the main purposes of this study is therefore to explore the dynamics of agglomeration in China's textile rms using the EllisonGlaeser (EG) index of spatial concentration. More importantly, if there is an increased trend of agglomeration in the textile industry that is caused by the rms' selfselection, it needs to be asked whether the industrial agglomeration positively contributes to rms' productivity, as is the case in the developed countries. In fact, the relationship between agglomeration and productivity has been widely examined empirically and has tended to exhibit a signicantly positive relationship, e.g., Ciccone (2002) and Lall, Shalizi, and Diechmann (2004). While the issue of productivity is of much concern and is claimed to serve as one of the major driving forces of sustainable economic growth, e.g., Young (2003) and Yang (2009), no studies have systematically examined the relationship between agglomeration and rm-level productivity in China. This paper therefore aims to ll this gap in the empirical literature regarding the application of the New Economic Geography theory to a transition economy, China. This paper analyzes the dynamics of spatial agglomeration and the impact of agglomeration on rm-level productivity in China's textile industry by using a panel dataset constructed from the Chinese National Bureau of Statistics. The dataset covers 22,152 textile rms from 2000 to 2005, yielding 83,801 observations. We rst adopt the spatial agglomeration index developed by Ellison and Glaeser (1997), the so-called EG index, to measure the degree of spatial agglomeration and dispersion within the textile industry. The results show that market-oriented agglomeration occurs in the textile industry to the extent that there was an increasingly spatial concentration toward the southeastern coastal provinces during the 20002005 period. The agglomeration arises from the benet of close proximity to large markets and convenience in exporting. The regression analysis that seeks to quantify the relationship between agglomeration and productivity leads to results that are consistent with previous ndings in that the degree of spatial concentration does have a signicantly positive impact on enhancing productivity in China's textile industry. Moreover, some interesting ndings regarding the inuences of productivity are also discussed in this study. The remainder of this paper is organized as follows. Section 2 begins by discussing the nature of agglomeration and productivity and then provides a summary review of the empirical literature on the impact of agglomeration on rm-level productivity, with a particular focus on studies related to Chinese rms. Section 3 examines the dynamics of spatial agglomeration in China's textile industry. Section 4 introduces the data and demonstrates the descriptive statistics. The empirical specications and estimation results are explained and discussed in Section 5. The nal section presents the conclusions and policy implications.
For the development and corresponding industrial policy of the textile industry in China, please refer to Li et al. (2009). The main production areas for cotton and linen include the coastal regions of Jiangsu and Shandong, as well as the inland regions of Anhui, Hubei, Jiangxi, Shanxi, and Sichuan. 3 The location quotient index refers to the ratio of the net output of an industry to the whole industrial net output in a region, and to the industrial net output to the country's net output for all industries. It can be expressed in the form of the following formula: Z = (g1/g2)/(Q1/Q2). Z 1 shows that the industry is not the basic industry in this area. Z N 1 indicates that the industry is a specialized sector in this area.
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2. Agglomeration and productivity 2.1. The nature of agglomeration and its potential impact on productivity Following Krugman's work, there have been numerous theoretical developments on advancing the theory of agglomeration.4 According to Porter's (1998) denition, industrial agglomeration refers to the geographical clustering of a group of companies and institutions which are related in terms of specic production and/or economic activities. Why do rms choose to concentrate themselves geographically? Krugman (1991) provided three possible reasons: agglomeration provides a labor market pooling; a higher degree of industrial agglomeration can support non-trade specialized inputs and improve the level of industrial specialization; and information spillover in spatially concentrated regions can induce a positive externality on the rms' productivity. An important point concerning the above-mentioned causes of agglomeration is that they are classed as positive externalities. In fact, the concept of agglomeration economies was rst initiated by Marshall (1920) when he claimed that external economies can be achieved by industrial regionalization. When industrial output is large enough to support the specialized production of many rms and enables rms to enjoy economies of scale, the average cost of production of a rm will decrease considerably. In other words, the advantage of industrial regionalization (agglomeration) lies in its promoting the division of specialized producers of intermediate goods in a specic region and then generating information spillovers. Consequently, many studies have provided explanations as to the causes of agglomeration and have categorized the agglomeration effects into localization economies and urbanization economies.5 The localization economies indicate that the clustering of rms within an industry can improve efciency while the urbanization economies imply that an efciency-boosting effect is brought about by the agglomeration of various kinds of activity in a given region. Recently, scholars have often referred the agglomeration economies to, respectively, MarshallArrowRomer (MAR) externalities and Jacobs externalities (e.g., Beardsell & Henderson, 1999). In summarizing the possible positive externalities and their effect in terms of fostering productivity, Fan and Scott (2003) have further broken down the types of externalities into ve main issues: the clustering of proximate rms can reduce the transaction costs incurred per unit of distance; dense local labor markets represent improved opportunities for job seekers and job vacancies; transactional relations also involve ows of certain kinds of business information or knowledge spillovers; the clustering of various producers is helpful in fostering the formation of benecial business alliances and organizations to augment local competitiveness; and the formation of public goods can achieve signicant economies of scale due to the consumption of infrastructures being spread over many individuals in any one place.6 Due to their beneting from the aforementioned positive externalities, rms located within a relatively concentrated area are thought to have higher productivity. However, it is also worth noting that agglomeration diseconomies may appear as regions grow in size due to diminishing returns. A high degree of urbanization may result in disadvantageous environments for dense rms, such as congestion, heightened competition, higher costs of land and other factor inputs, and intense competition in output markets. These increased costs of trade brought about by agglomeration diseconomies can negatively impact rmlevel productivity, thereby inducing lower productivity for rms located in spatially concentrated regions. Ultimately, whether the advantages of agglomeration economies or the disadvantages of agglomeration diseconomies dominate is an empirical issue.
2.2. Literature review There have been plenty of empirical studies that have analyzed the inuence of spatial agglomeration on industrial or regional productivity and most conclude that a positive relationship exists.7 However, the estimation of agglomeration effects using aggregated measures of rm performance is attributed to the limited availability of rm-level data required to obtain direct estimates of productivity (Rosenthal & Strange, 2004). Economic analyses directly relating agglomeration to rm-level productivity have, however, emerged recently. One line of research focuses on examining the potential impacts of agglomeration externalities on rms' labor productivity. Ciccone and Hall (1996) rst related agglomeration to labor productivity and found that doubling employment density in a U.S. county increases average labor productivity by 6%. Similarly, Henderson (2003) used rm-level panel data for the machinery and high-tech industries to estimate production functions, aiming to examine the inuences of various externalities brought about by agglomeration on rm production. He found that a ten-fold increase in the number of local plants in a high-tech industry, representing several local information spillover sources, increased labor productivity by over 20%. Moreover, he found little evidence of economies of scale based on the diversity or scale of local economic activity outside the own industry. The New Zealand case conducted by Mar and Timmins (2006) conrmed that labor productivity is higher for rms in geographicallyconcentrated industries (localization), for rms in more industrially-diversied labor markets (urbanization), and for rms
See Fujita and Thisse (2002) for a comprehensive up-to-date discussion. For example, Hill and Brennan (2000), Rosenthal and Strange (2001), Iammarino and McCann (2006), and Ellison et al. (2009). Some recent studies have emphasized the importance of demand-side externalities, such as the network of strongly interdependent rms, knowledge producing agents and (demanding) customers, linked to one another in a value-adding production chain. See Drejer et al. (1999), Fingleton et al. (2005), and McCann and Folta (2008). 7 There are a number of excellent up-to-date surveys of the empirical literature, such as Graham (2006) and Broersma and van Dijk (2008).
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operating in larger labor markets. By controlling for heterogeneity among industries, locations and rms, they found some support for a positive productivity effect of changes in both localization and urbanization, although not all estimated effects were statistically signicant. Lee, Jang, and Hong (2010) revisited agglomeration economies by estimating the effects of localization, urbanization, and local competition on labor productivity using establishment-level data in Korean manufacturing industries. By controlling for issues such as self-selection bias, omitted variable bias and the xed effects of establishments/ locations and industries, their estimates showed that, when an establishment locates in a more localized/specialized, more urbanized/diversied, and more competitive area, its workers become more productive, due to the external benets from agglomeration. Some studies examine the agglomeration-rm productivity nexus by starting from different perspectives. Lall et al. (2004) examined the extent to which agglomeration economies contribute to economic productivity in India by employing rm level data for manufacturing and using an input demand framework in the empirical analysis which allows agglomeration economies to be factor augmenting. The empirical results indicate that access to markets through improvements in inter-regional infrastructure is an important determinant of rm level productivity, whereas the benets from locating in dense urban areas (measured by the index of the location quotient (LQ)) do not appear to offset associated costs. Yamamura and Shin (2007) used census data from Japanese assembly industries during the period 19602000 to investigate how innovation and imitation lead to the exploitation of long-term subcontract networks and agglomeration economies, thus having an effect on an improvement in productivity. By adopting the data envelopment analysis (DEA) approach to decompose productivity into innovation and imitation, their empirical ndings indicated that the level of efciency readily improves in areas where the division of labor is advanced by relatively small establishments, providing evidence of a positive impact of the agglomeration externality on productivity. Similarly, Cainlli (2008) analyzed the impact of innovative activities and agglomeration effects connected with a rm's membership in a Marshallian industrial district, as well as the possible effects arising from the interaction between these two factors, on rm productivity in Italy. Based on the estimate of an augmented CobbDouglas production function to account for the impact of innovative activity and agglomeration effects on rm productivity, the empirical results showed that the rms' membership in industrial districts, product innovation, and the interaction effects between these two factors are key factors in explaining the rms' productivity. While the above-mentioned studies have lent support to the importance of agglomeration to rm-level productivity, studies relating spatial agglomeration to productivity in China remain few, especially for rm-level studies. Batises (2002) investigated the relationship between the local economic structure (local sectoral specialization, diversity, and competition) and the value-added growth of Chinese provinces during 19881994. The econometric analysis showed that while diversity and competition have a positive inuence on local growth, specialization has a negative impact. In addition to the impact that competition has on local growth, Tian, Wang, and Chen (2010) used Solow growth theory to study 313 Chinese prefectures over the period 19912007, and found there to be a competition effect in terms of the growth of capital accumulation and urbanization among neighboring regions. That is, the urbanization growth rates for the prefectures were found to have a positive impact on growth, but the competitive effect was found to have a negative inuence on physical capital accumulation in the neighboring areas. For this reason, the eastern coastal, central, and western regions exhibited different spatial patterns. The eastern coastal region was characterized by a substantive form of spatial diffusion, while the central and western regions were characterized by the nuisance form of spatial dependence. Kuo and Yang (2008) utilized panel data for 31 provinces over the period from 1996 to 2004, and found that R&D capital and technology imports had positive impacts on regional economic growth. Therefore, they recommended that the government encourage rms to engage in R&D spending or import advanced technologies through industrial policies. Chen (2009) used data for 30 provinces covering the period from 1993 to 2006 to calculate different measures of agglomeration, and discovered that urbanization and foreignspecic agglomeration had a signicant and positive impact on FDI location and industrial FDI. His results suggest that there exist cross-regional agglomeration effects, and that local provinces need to coordinate their agglomeration-related activities with their neighboring provinces. Based on 30 manufacturing sectors in 2000, Fan and Scott (2003) rst calculated the H-index for each industry in Chinese provinces. They also showed that many kinds of manufacturing sectors are characterized by a strong positive relationship between spatial agglomeration and productivity. Au and Henderson (2006a, 2006b) modeled and estimated net urban agglomeration economies for cities in China. Theoretical models of cities postulated an inverted U-shape of real income per worker in relation to city employment. Econometric estimates found that urban agglomeration benets in the form of high real incomes per worker rise sharply with increases in city size from a low level, thus supporting the theoretical prediction. The authors also found that a large proportion of cities in China are undersized due to strong, nationallyimposed migration restrictions, resulting in large income losses. Based on panel data for China's provincial electronic information manufacturing industry since 2002, Lei and Zhao (2009) discussed the relative importance of Marshallian and Jacobs externalities on productivity. Their empirical results indicated that, while there are strong scale economies and Jacobs externalities, there are, however, Marshallian externalities and related industries' convergence externalities which should be strong in high technology industries. That is to say, there are no economic advantages in terms of the agglomeration of China's electronic information manufacturing industry on a provincial level. Recently, studies analyzing the effect of spatial agglomeration on Chinese rms' productivity have emerged. Lu and Tao (2009) investigated trends and determinants of the geographic concentration of manufacturing industries using large rm-level data for the period from 1998 to 2005. They found that the extent of industrial agglomeration, measured by the EG index, has increased steadily throughout the sample period. Moreover, they found that industrial agglomeration is lower in industries with higher shares of state-owned enterprises (SOEs) in employment, suggesting a role of local protectionism among China's various regions
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in obstructing the process of geographic concentration in manufacturing industries. By studying a cashmere sweater cluster in China, Ruan and Zhang (2009) highlighted one key advantage which is that clusters bring about a ner division of labor. This in turn lowers the capital entry barriers, attracting more entrepreneurs with limited capital who would otherwise have difculty entering the business. Moreover, Fleisher, Hu, McGuire, and Zhang (2010) examined a cluster of children's garment rms in Zhili township in Hangchou province in 2000 and 2008 to investigate the evolution of industrial clusters, and found that specialization and outsourcing had resulted in a large increase in the number of rms in the township, so that TFP had tended to rise over time. However, because of the low entry barriers, rising wage costs and the stricter imposition of safety regulations, the rms saw their prots decline. 3. Developments in industrial agglomeration in China's textile industry There are three models of industrial agglomeration which have been formed due to the policy restrictions that have accompanied the economic development in China (Chen & Tang, 2003). The rst is the planning-based aggregation model which gathers together mainly large and medium-sized state-owned enterprises of traditional industries as the core members to form a traditional industry cluster. The second is the government-supported aggregation model, which comprises industrial agglomerations that are mainly high-tech industrial development zones planned and established by the government to attract hightech rms through the provision of benecial policy measures, e.g., the famous high-tech park Zhongguancun in Beijing. The nal kind of model comprises the market-oriented aggregation model which is naturally formed by private enterprises through the market mechanism and is mostly concentrated in the coastal regions, such as Wenzhou in Zhejiang. This model of spatial agglomeration is similar to the industrial agglomerations in the US, Europe, and other developed countries. As for the development of industrial agglomeration within the textile industry, the government enacted an industrial policy that was raw material-oriented, market-oriented, and labor-oriented to direct the geographical distribution of the textile rms in the 1950s. This strategy was implemented under the period of the centrally-planned economy, with a view to balancing the provision of job vacancies across regions and achieving a balanced regional development, because the textile industry was the most critical industry in that decade. It therefore led to textile rms being dispersed across different regions in China. Along with the open-door policy proposed in the early 1980s, the government implemented a series of export-expansion policies, with a preference for the coastal regions. In 1979, Special Economic Zones (SEZs) were established to attract FDI to specically designated export-oriented areas in Shenzhen and Guangzhou. This export-oriented economic policy relied heavily on the exports of labor-intensive manufacturing. To further link China's economy to the world, the Open Port Cities policy was launched in 1984 which led to the establishment of Economic and Trade Development Zones (ETDZs) in 1985. As China entered the 1990s, a new policy of Free Trade Zones (FTZs) was proposed by removing tariffs on numerous exports and imports for rms locating themselves in FTZs in 1992. To be specic, after China's accession to the WTO in 2001, Chinese textile rms faced tough competition in international markets, which forced them to improve their productivity to compete with foreign rms. As a series of market-opening policies were implemented, the geographical layout of textile rms gradually changed from being dispersed over wide areas to the formation of industrial agglomeration in the coastal regions. It is attributed to both the movement of textile rms affected by the market mechanism and the establishment of foreign-owned textile rms concentrated in the coastal regions, because the textile industry is a labor-intensive as well as export-intensive industry. For example, Zhejiang province contains several industrial agglomerations of textile sub-industries, e.g., chemical bers and chemical ber fabrics in Shaoxing and Xiaoshan, the garment industry in Ningbo and Wenzhou, ladies' clothing in Hangzhou, the tie manufacturers in Shengzhou, the warp knitting industry in Haining, and the socks manufacturers in Zhuji. It is clear that these industrial agglomerations have been formed through the market mechanism, belonging to the market-oriented aggregation model. Figs. 1 and 2 depict the spatial distribution of textile rms in China in 2000 and 2005, respectively. A province with a bigger circle indicates that there are more textile rms located in that province, as specied at the bottom of the gures. The geographical distributions of textile rms were quite similar in 2005 and 2000 in that they were mainly concentrated in the coastal provinces, with Zhejiang, Jiangsu, Guangdong, Shandong and Shanghai being ranked the top ve in terms of the number of rms and having more than 1000 rms each. To be specic, there were 3217 rms (about 22%) located in Zhejiang province alone in 2005.8 By contrast, there were relatively few rms, usually less than 15 rms, which chose to establish plants in Tibet, Qinghai, Hainan, Yunnan, Ningxia, and Guizhou. In terms of the inland regions, Hubei province possessed the most textile rms due to the abundance of cotton. The numbers of rms at the provincial level are calculated and displayed at the bottom of Figs. 1 and 2. From Figs. 1 and 2, we can observe the numbers of rms that are clustered in Shanghai, Jiangsu, Zhejiang, Shandong and Guangdong and elsewhere. In addition, the number of rms increased rapidly in the above regions from 2000 to 2005. The most remarkable increase in the number of rms occurred in Fujian province (the southeastern coastal province) where the number of rms grew from 515 rms (about 5.5%) in 2000 to 969 rms (about 6.5%) in 2005. The above gures suggest that the textile industry appears to exhibit a geographical concentration toward the southeast coastal regions. In fact, these regions were the main textile manufacturing areas before 1950 when the new Chinese government formed
8 In fact, the statistical data encompasses only large and medium-sized enterprises (with sales in excess of RMB 5 million), implying that the actual number of rms is much larger than the statistics suggest.
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Legend
below 50 50 - 300 3001 - 450 450 - 600 above 600
Fig. 1. The distribution of the Chinese textile industry in 2000.
Legend
below 50 50 - 300 300 - 450 450 - 600 above 600
Fig. 2. The distribution of the Chinese textile industry in 2005.
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by the Communist Party implemented its centrally-planned economic policy with its emphasis on balanced regional development.9 While this policy led to a lack of regional specialization, the subsequent transformation from a centrally-planned economy to a market-oriented economy caused the distribution of textile rms to change from one of geographical dispersion to one of geographical concentration due to considerations of transportation costs, exports, vertical disintegration and so on. It has provided the basis for the principal question with which we are concerned, which is whether spatial aggregation can increase rm-level productivity in China or not. 4. Data and measurement of the spread of the textile industry 4.1. Data sources Due to its long-standing importance in China's manufacturing sector which has undergone a transformation from a centrally-planned to a market-oriented economy, the textile industry provides an interesting as well as excellent case for us to examine the relationship between industrial agglomeration and rm-level productivity. The dataset of textile rms used in this study is based on the National Bureau of Statistics (NBS) Enterprise Data Set covering the period from 2000 to 2005. The annual survey conducted by the NBS of China contains almost all state enterprises and large and medium-sized non-state enterprises (with sales of above 5 million RMB). Information regarding nancial statements and some non-nancial information, such as the entry date, district code, industry code, and main products of the enterprises are surveyed in the questionnaire. The textile industry selected in this study encompasses two two-digit manufacturing industries coded 17 textiles industry and 18 manufacturer of garments and other bers, containing a total of nine three-digit industries. The nine three-digit industries include: the cotton, chemical ber textile and printing/dyeing nishing industry (171), wool textile and dyeing nishing industry (172), hemp textile industry (173), silk textile and nishing linen textile industry (174), textile product industry (175), knitwear/woven goods and their products manufacturing industry (176), textile and garment manufacturing industry (181), textile and fabric shoe manufacturing industry (182), and hat manufacturing industry (183). One point worth noting is that this survey is conducted based on a minimum sales threshold of RMB 5 million, implying that the surveyed rms may vary from year to year, especially for medium-sized enterprises. After cleaning the dataset by deleting observations with unreasonable variables, which prevented us from calculating the productivity measure, such as negative or zero values for variables including sales, capital, wages and so on, we nally obtained an unbalanced panel dataset of 22,152 rms, yielding a total of 83,801 observations for the 20002005 period. 4.2. Measures of industrial agglomeration How should industrial agglomeration be measured? Following Krugman's (1991) work, there has been a renewed interest in location patterns of economic activity, with two broad measures of industrial agglomeration, namely, geographical proximity and geographical concentration, mostly being used. Classical measures such as the Gini index have been criticized for having several drawbacks in the measurement of spatial inequality. Several recent contributions argue that only when the share of an industry's employment in manufacturing employment varies signicantly across regions, can we refer to the existence of industrial agglomeration within a region. To be specic, Ellison and Glaeser (1997) simultaneously considered the share of an industry's employment within a region, the share of aggregate manufacturing employment within a region, and the market concentration of an industry in developing an agglomeration index. This is the well-known EG index in the economic geography literature and we adopt the index to measure the degree of agglomeration in this study. This index is based on a comparison between the observed geographical distributions of rms of a random distribution which is dened as the expected distribution in the absence of agglomeration. It is specied as follows 2 2 2 2 Sjk Xk 1 Xk Zij Gj 1 Xk Hj k k i j = k = 2 2 2 1 Xk 1 Xk 1Hj 1 Zij
k i k
The term j represents the degree of the jth industry's agglomeration at the city level. The EG index, however, does not consider the geographical proximity and distance of industrial agglomeration. The different distances impact the external economies, knowledge spillovers, and competition and cooperation effects that are produced by agglomeration differently. Therefore, even if the concentrations are the same, they have different agglomeration effects because of the differences in distances. An alternative approach is to use Busch and Reinhardt's (1999) method to calculate the degree of agglomeration which is measured based on the distance between rms. However, we need the latitude and longitude of rms to determine their location, if we are to use the latitude and longitude to calculate both the distance and the agglomeration index. Because we lack the data on the rms' latitude and longitude, we are unable to calculate the index. If we could collect such data in the future, we would then be able to estimate the agglomeration index. Nevertheless, the EG index is still one of the most popular and commonly used agglomeration indicators.
9
The People's Republic of China was established in 1949 to replace the Republic of China.
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In addition, the denition of a cluster at the city level is better than that at the provincial level, with the result that we calculate the EG index at the city level. In this way, we can reduce the impact of distance. The logic underlying the construction of this index 2 is as follows. The rst part of the numerator is the traditional space Gini coefcient Gj = Sjk Xk , representing a raw
k
geographical concentration. The term Sjk denotes the share of industry j's employment in the city k and Xk is the share of aggregate
2 2 2 manufacturing employment in the city k. In the second part 1 Xk Zij , the term Zij is the HerndahlHirschman Index
of industry j (Hj) which is measured as the sum of squares of rm i's sales to industry j's share (Zij). Assuming that there are no agglomeration economies and that each province is equally attractive, the raw geographical concentration Gj of industry j should be proportional to its market concentration Hj. Ellison and Glaeser (1997) showed that Gj = h i 2 1 Xk Hj + j 1Hj
k
From Eq. (2), we can obtain an estimate of the excess-concentration , referred to as the agglomeration index, as shown in Eq. (1). 4.3. Results for the EllisonGlaeser index Table 1 displays the results for the EG index for China's textile industries at the city level during the period 20002005. From observing the gures for the EG index in Table 1, several points are worth mentioning. First, from Table 1, the calculated city EG index of spatial concentration for each year exhibits an increasing trend in the textile industries, having increased from 0.0007 in 2000 to 0.00014 in 2005. On the contrary, the EG index for garments and other ber products exhibits a decreasing trend as the ndings of Lu and Tao (2009) indicate. Overall, the dynamics of industrial agglomeration for both textile and garments appear to have experienced a slightly decreasing trend from relatively high concentration in 2000 to relatively low concentration in 2005. While there are some studies measuring the EG index in various countries, it is hard to compare the degree of agglomeration directly due to the differences in the measured unit of industry. For example, Mar (2005) nds that the estimated mean EG ranges from a small negative value (0.006) to a large positive value (0.179) for the two-digit industry classication in New Zealand in 2002. The study on Belgium conducted by Bertinelli and Decrop (2005) shows that the value of the EG index ranged from 0.045 to 0.69 for four-digit industries in 2000. Leahy, Palangkarayaa, and Yong (2010) estimated the geographic agglomeration of establishments in the Australian manufacturing industries and found that the EG index ranged from 0.029 to 0.148 for four-digit industries in 1997. Second, the EG index varies signicantly among sub-industries. For instance, in 2000, the industry with the highest degree of industrial agglomeration was the textile and fabric shoe manufacturing industry (182), which reached a value of 0.00415. By contrast, the textile product industry experienced the lowest degree of agglomeration of 0.00008. An interesting issue worth examining is the change in ranking. The textile and fabric shoe manufacturing industry (182) was often ranked among the top two in each year, whereas the textile product industry (175) tended to be ranked the lowest in every year, suggesting that the geographical distribution of textile product rms is much dispersed. The reasons why there are different geographic concentrations in the silk textile and nishing linen textile industry (174) and the textile product industry (175) are that there are more rms in the industry, the sizes of the rms are more or less the same and there are not many large rms. For these reasons, the degrees of agglomeration for SIC 174 and 175 are lower than those in other industries. More interestingly, in the garments and other ber products, the textile and garment manufacturing industry (181) and the textile and fabric shoe manufacturing industry (182) the corresponding EG indices decreased sharply. On the other hand, the hat manufacturing
Table 1 The calculated EG Index of the 3-digit textile industries at city level, 20002005. SIC 171 172 173 174 175 176 181 182 183 Industry Cotton, chemical ber textile and printing/dyeing nishing industry Wool textile and dyeing nishing industry Hemp textile industry Silk textile and nishing linen textile industry Textile product industry Knitwear/woven goods and their products manufacturing industry Weighted means of Textile Industry Textile and garment manufacturing industry Textile and fabric shoe manufacturing Industry Hat manufacturing industry Weighted means of garments and other ber products Weighted means EG, 2000 0.00006 0.00005 0.00074 0.00020 0.00008 0.00010 0.00007 0.00024 0.00415 0.00047 0.00134 0.00022 EG, 2001 0.00009 0.00021 0.00047 0.00033 0.00007 0.00007 0.00011 0.00017 0.00210 0.00116 0.00032 0.00019 EG, 2002 0.00010 0.00038 0.00089 0.00033 0.00009 0.00009 0.00013 0.00015 0.00193 0.00152 0.00029 0.00020 EG, 2003 0.00011 0.00020 0.00130 0.00033 0.00007 0.00009 0.00013 0.00015 0.00187 0.00120 0.00027 0.00018 EG, 2004 0.00006 0.00022 0.00134 0.00019 0.00010 0.00015 0.00013 0.00017 0.00285 0.00151 0.00030 0.00019 EG, 2005 0.00011 0.00023 0.00159 0.00022 0.00002 0.00012 0.00014 0.00014 0.00202 0.00147 0.00024 0.00017
Note: The city level refers to municipal districts, prefecture cities and county level cities such as the Beijing municipal districts, Wenzhou, Wuhan, Chengdu and Zhuji.
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industry (183) experienced an increase in industrial agglomeration so that the EG index increased from 0.00047 in 2000 to 0.00147 in 2005. To sum up, the distribution of industrial agglomeration within the textile industry appears to have exhibited a twin-peaked distribution in that few industries have an EG index that reects a moderate degree of agglomeration, while more industries exhibit either high or low industrial agglomeration. Moreover, along with the accession to the WTO, the degree of industrial agglomeration within the textile industry has tended to decrease. After China's accession to the WTO, the exports of the textile industry increased because the quotas were abolished. While many textile rms were set up, they were not necessarily located in places where textile rms were clustered together, thus giving rise to the decline in the agglomeration index. In addition, it may be because the Chinese government adopted the Western Development 10 in 2000, and many rms set up factories in the West, with the result that rms became more decentralized and the agglomeration index was affected. Furthermore, the Rise of Central China11 policy was adopted in 2004. This policy encouraged rms to set themselves up in the middle of China, so that the agglomeration level also decreased in 2004. 5. The link between agglomeration and productivity 5.1. Measure of productivity Has industrial agglomeration led to higher rm-level productivity in China's textile industry? To answer this question, we rst need to provide an appropriate measure of productivity. The concept of productivity is dened as the relationship between output (produced goods) and inputs (consumed resources, such as labor, capital, and energy), and generally refers to the unobserved rm-specic effect that can be recovered from an estimated production function as the difference between actual and predicted value added. It is perhaps one of the most important variables governing economic production activities and affecting a manufacturing rm's competitiveness (Singh, Motwani, & Kumar, 2000). There are two widely-adopted measures of productivity in the literature, including labor productivity and total factor productivity (TFP). Labor productivity is a partial measure of TFP that focuses on evaluating the productivity of labor inputs, whereas TFP considers the production efciency of utilizing all inputs. This study adopts labor productivity and describes its measurements as follows. To reduce the inuence of uctuations in output prices on the estimation of productivity, the study adopts the price-adjusted measure of labor productivity developed in Aw and Lee (2008) as follows: ln LPijt = ln VAijt ln VAjt ln Lijt ln Ljt
VA refers to the value added which is measured by price-adjusted sales minus intermediate inputs. L is employment. The subscripts i, j, and t denote rm, 3-digit industry, and time, respectively. ln VAjt and ln Ljt are respectively the average of value added and employment in the jth textile industry. This labor productivity index denotes the relative productivity of each rm within an industry. This index is perhaps suitable for measuring rm-level productivity in this study, because the quality of the Chinese micro data is sometimes criticized for not being sufciently reliable. We describe the relationship between the EG index and productivity in Table 2a. From Table 2a, we can see that the relationship between labor productivity and industrial agglomeration for the textile industry as a whole from 2000 to 2005 exhibits no clear positive relationship. However, for the textile industry, as the degree of agglomeration increases, the trend of labor productivity also increases. Moreover, in the case of the garment industry, the relationship between labor productivity and industrial agglomeration is not too obvious. This is because there are many factors that affect a rm's labor productivity. If we can further control other factors such as rm size and the types of enterprises that affect labor productivity, we can truly verify the relationship between agglomeration and labor productivity. Table 2b displays the classication of the EG index (High EG, Middle EG and Low EG), the type of enterprise, rm size and labor productivity in the textile and garment industry. From Table 2b, we nd several points of interest. First of all, in our sample, a higher EG seems to have higher labor productivity. Secondly, foreign-owned enterprises account for about 35%, state-owned enterprises (SOEs) for about 4%, and private enterprises for 48% of all enterprises. In addition, for foreignowned and private enterprises, the labor productivity is positive. SOEs are found to have negative values of labor productivity. In sum, the labor productivity of foreign-owned enterprises is higher than that of other types of enterprises, and state-owned enterprises have lower labor productivity values. This phenomenon is consistent with the ndings of some scholars (Jefferson, Hu, Guan, & Yu, 2003). Furthermore, since many large rms are SOEs, small rms are more likely to have higher labor productivity than large rms.
10 China Western Development is a policy adopted by the State Council of China to boost its less developed western regions in January 2000. The policy covers 6 provinces (Gansu, Guizhou, Qinghai, Shaanxi, Sichuan, and Yunnan), 5 autonomous regions (Guangxi, Inner Mongolia, Ningxia, Tibet, and Xinjiang), and 1 municipality (Chongqing). 11 The Rise of Central China is a policy of the central government. It was advanced by the Chinese Premier Wen in March, 2004. The Chinese government wants to raise economic zone in central China which are Henan, Hubei, Hunan, Jiangxi, Anhui and Shanxi provinces.
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Table 2 Agglomeration and labor productivity in the textile industry, 20002005. a Year All Firm number 2000 2001 2002 2003 2004 2005 b Firm number (ratio%) Level of EG EGH EGM EGL Foreign-owned State-owned Private other Large Small 27,973(34) 27,917(33) 27,911(33) 29,065(35) 3162(4) 40,526(48) 11,048(13) 42,665(51) 41,136(49) 83,801 lnLP Mean 0.1353 0.0430 0.0432 0.1935 0.8941 0.0006 0.1327 0.1981 0.2383 0.0161 S.D. 0.9219 1.0637 1.0654 0.9657 1.4226 0.9591 1.0876 0.9819 1.0167 1.0226 Max 5.4892 5.6348 5.1865 5.1865 4.1616 5.4892 5.6348 5.6348 5.4892 5.6348 Min 6.2879 9.6573 7.6450 7.6450 9.6573 9.1079 5.8190 9.6573 7.6450 9.6573 8695 12,367 14,892 17,504 15,476 14,867 Weighted EG mean 0.00022 0.00019 0.0002 0.00018 0.00019 0.00017 lnLP mean 0.027 0.018 0.162 0.019 0.011 0.007 Textile industry Firm number 4894 6920 8411 10,135 9810 9386 Weighted EG mean 0.00007 0.00011 0.00013 0.00013 0.00013 0.00014 lnLP mean 0.048 0.031 0.029 0.029 0.018 0.009 Garments and other ber products Firm number 3801 5447 6481 7369 5666 5481 Weighted EG mean 0.00134 0.00032 0.00029 0.00027 0.0003 0.00024 lnLP mean 0.001 0.002 0.411 0.006 0.001 0.004
Type of enterprise
Firm size All
Note: Based on actual capital received, foreign-owned enterprises include foreign joint ventures, foreign cooperatives, foreign wholly-owned enterprises and foreign companies with limited shareholdings. State-owned enterprises include state-owned enterprises, state-owned jointly operated enterprises and wholly state-owned companies. Private enterprises include private wholly-owned enterprises, private-cooperative enterprises, private limited liability companies and private shareholding companies.
5.2. Empirical specication To examine whether industrial agglomeration contributes to rm-level productivity, we specify the empirical model as shown below: Yijkt = 0 + 1 EGjt + 2 EG2 + 3 EGjt lnLijkt + 4 lnLCITYjkt + 5 AGEijt + 6 SIZEijt + 7 lnKLijt + 8 FCijt + 9 SOEijt jt + 10 PRIVATEijt + 11 WBijt 12 lnPGDPkt + 13 lnRDkt + 14 lnFDIkt + DINDj + DYEARt + ui + ijkt 4
The dependent variable is either the relative labor productivity (lnLP) calculated in the previous subsection, whereas the industrial agglomeration index and other controlling factors are the independent variables. The subscripts i, j, k, and t denote rm, industry, province, and time, respectively. Among the explanatory variables, EG is the EllisonGlaeser index of industrial agglomeration at the city level which is the main variable of concern in this study. If the externalities of industrial agglomeration do contribute to enhancing productivity as discussed in the existing literature, the EG variable will be associated with a signicantly positive coefcient. The squared term of the EG index is included in the equation to test the nonlinear relationship between industrial agglomeration and productivity. Since agglomeration diseconomies may arise if the industrial agglomeration is too high, we therefore expect a negative sign for the squared term of the EG index. Moreover, if there is a positive contribution brought about by agglomeration to rm-level productivity, we would like to examine whether this impact varies between large and small rms. To explore this interesting issue, the interaction term between the EG index and rm size (in terms of employment) is also included. In order to consider variation in agglomeration of rms in a sub-industry across different location in China, we use lnLCITY, the logarithm of the total employment of rms in a sub-industry located in the city, to measure agglomeration in city. With this variable we are able to measure time and geographic variations in city agglomeration. Two-dimensional factors to differentiate productivity are also considered, namely, rm-specic and province-specic characteristics. The rm-specic characteristics include rm age (AGE), large rm (SIZE), the capital-to-labor ratio (lnKL), foreign capital (FC), state-owned enterprises (SOE), private enterprises (PRIVATE) and the worker benets-to-wage ratio (WB). Kortum and Lerner (1998) proposed the regulatory-capture hypothesis, claiming that incumbent rms have more management and administrative advantages than the new entrants and can adapt to the changing environment. Therefore, the impact of rm age (AGE) on productivity should be positive. However, some scholars, e.g., Liu, Tsou, and Hammitt (1999) and Bernard and Jensen (1999, 2004) found a negative impact of rm age on productivity in Taiwan and Germany. Therefore, there is no expected sign
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for the rm age variable a priori. The large rm (SIZE) is a size dummy variable. If a rm's employment is larger than median employment, then the value equals one. Biesebroeck (2005) used a sample of manufacturing rms from nine sub-Saharan African countries, and large rms are found to achieve higher productivity levels and to be more likely to survive. However, Cabral (1995) proposed a theory to explain the empirically observed negative relationship between rm size and rm growth, although we would not expect such a sign a priori. The term KL is the capital intensity which is measured by the ratio of capital to labor and is expected to have a positive impact on productivity. FC is an ownership dummy variable which equals one if a rm has a positive value of foreign capital. The issue of ownership in differentiating productivity in China has been widely examined in the existing literature, e.g., Jefferson, Rawski, Wang, and Zheng (2000) and Li, Hu, and Chi (2007). Most studies have obtained consistent results whereby foreign-owned enterprises (FOEs) tend to have higher productivity relative to domestic rms, because FOEs usually possess more advanced technologies and management knowledge. To further examine the question of whether there is a difference in the productivity effect between various sources of foreign capital, we further divide foreign capital into foreign capital from Hong Kong, Macau and Taiwan (HMTFC) and other foreign capital (OFC). The logic of this division arises from the fact that more than half of the FDI inow into China comes from Hong Kong, Macau and Taiwan. In addition, we also include SOE and PRIVATE variables to see the effects of different types of enterprises. Jefferson et al. (2003) demonstrate that SOEs with higher concentrations of state assets perform at the lower end, whereas these with lower concentrations of state assets perform at the higher end. As for the PRIVATE variable, Chen and Feng (2000) proved that private and semi-private enterprises lead to an increase in economic growth in China. From that, we expect the sign of SOE to be negative and that of PRIVATE to be positive. Finally, the worker benet variable (WB) is measured by the ratio of expenditures on insurance and pensions to the wage. From the perspective of the employees, this expenditure is one type of working compensation in China that induces higher productivity in China's electronics industry (Yang, Lin, & Ma, 2010).12 Thus, a better worker benet can be accompanied by higher labor productivity, because the benet is helpful to consolidating the loyalty of employees and can then induce higher labor productivity. As for the province-specic variables, PGDPkt is the per capita GDP in province k in year t that is used to capture the income level in the local market. Moreover, the logarithm of a province's R&D expenditure (RD) and the amount of foreign direct investment (FDI) are also considered in this study. We use them to capture a province's technological capability and the possible technological spillovers of advanced technological and management knowledge from capital inows. In addition to rm and provincial characteristics, we include two sets of dummies, that is, eight three-digit industry dummies and ve year dummies. The terms ui and ijkt denote the unobserved rm-specic effect and pure white noise, respectively. To obtain robust estimates of the potential impact of industrial agglomeration on rm-level productivity, this study applies another strategy to include the EG index. Ellison and Glaeser (1997) suggested that the degree of geographical concentration can be classied into highly concentrated ( N 0.05), relatively concentrated (0.02 0.05), and not very concentrated ( b 0.02). However, the city EG indices are relatively small. We therefore classied EG into highly concentrated ( N 0.0007), relatively concentrated (0.0000367 b b 0.0007), and not very concentrated ( b 0.0000367).13 Using the above classication, we replaced the EG variable in Eq. (4) by two dummies for the EG indices in each province: EGH and EGM. They represent highly concentrated and relatively concentrated degrees of geographical concentration, respectively. Eq. (4) can be re-specied as: Yijkt = 0 + 1 EGHjt + 2 EGMjt + 3 EGHjt ln Lijkt + 4 EGMjt ln Lijkt + 5 ln LCITYjkt + 6 AGEijt + 7 SIZEijt + 8 ln KLijt + 9 FCijt + 10 SOEijt + 11 PRIVATEijt + 12 WBijt + 13 ln PGDPkt + 14 ln RDkt + 15 ln FDIkt + DINDj + DYEARt + ui + ijkt To deal with the unobservable rm-specic effect ui in a panel data model, we used a within panel estimator, the xed effect (FE) or the random effect (RE) technique, to eliminate the rm characteristic as a standard estimation method. The xed effects model can eliminate the biases in the estimated coefcients due to time-persistent un-observation including important determinants of rm productivity such as the entrepreneurial skill of owners, and can cater for the self-selection of rms that are clustered together. By contrast, the random effects model controls the unobserved rm characteristics and follows a normal distribution. However, these rm-specic components in the error term may be plausibly correlated with the rm's productive characteristics, implying that the RE estimators are inconsistent when the assumption of zero correlation between the error term and right-hand side regressions is violated. We use both the random effects and xed effects models along with the Hausman test to judge which model is more accurate. The denitions and basic statistics of the variables are summarized in Table 3. 5.3. Empirical results and discussion A series of estimates obtained from regressing Eq. (4) are shown in Table 4. Columns 2 and 3 are estimates obtained by regressing on all variables, whereas columns 4 and 5 are estimates obtained by regressing on all variables except EG^2. The estimates do not include SIZE in columns 6 and 7, and in columns 8 and 9, we separate Hong Kong, Macau and Taiwan (HMTFC) and other foreign capital (OFC) from foreign capital.
12 Before the Labor Contract Law was enacted in 2008, it was not compulsory for Chinese rms to pay the insurance and pensions on behalf of their employees. Therefore, the expenditures on employee insurance and on pensions by employers can be treated as a part of job compensation. 13 When we arrange the city EG index in order and divide it into three portions, the cutting points are 0.0000367 and 0.0007.
324 Table 3 Variable denitions and basic statistics. Variable names LP EG EG^2 EGH EGM EG*lnL EGH*lnL EGM*lnL LCITY AGE SIZE K/L FC OFC HMTFC SOE PRIVATE WB PGDP RD FDI Denition
Mean (S.D.)
Maximum (Minimum)
Labor productivity: measured by Eq. (3) EG index: calculated according to Eq. (1) at city level. The square of the EG index at city level. High EG dummy: equals 1 if the EG index at city is larger than 0.0007. Middle EG dummy: equals 1 if the EG index at city is between 0.0000367 and 0.0007 The interaction term between the EG index and employment. The interaction term between the High EG dummy and employment. The interaction term between the Middle EG dummy and employment. The city employment by rms in a sub-industry (thousand people) Firm age: measured by the sample year minus the established year. Size dummy: equals 1 if the rm's employment larger than median employment. Capital intensity: measured by the ratio of xed capital to employment. (RMB ten thousand/person) Foreign ownership dummy: equals 1 if the rm has positive foreign capital. Foreign ownership dummy: equals 1 if the rm is a foreign-owned enterprise but not a Hong Kong, Macau, or Taiwan-owned enterprise. Foreign ownership dummy: equals 1 if a rm is a Hong Kong, Macau, or Taiwan-owned enterprise. SOEs ownership dummy: equals 1 if the rm has positive SOEs' capital. Private ownership dummy: equals 1 if the rm has positive private capital. Worker benet variable: measured by the ratio of expenditures on insurance and pensions to the wage. Per capita GDP of a province R&D expenditure of a province (RMB billion) Foreign direct investment of a province (RMB billion)
0.0168 0.0005 0.000002 0.3338 0.3331 0.0027 1.7751 1.8013 153.1734 9.5408 0.505 45.0949
(1.0243) (0.0015) (0.00001) (0.4716) (0.4713) (0.0079) (2.5701) (2.6223) (125.0065) (10.2210) (0.500) (69.7938)
6.4374 ( 9.6573) 0.0126 ( 0.0093) 0.0002 (0.000000) 1 (0) 1 (0) 0.1024 ( 0.0854) 10.2885 (0) 10.4980 (0) 609.1930 (0.0270) 146 (0) 1 (0) 811.6129 (0) 1 (0) 1 (0) 1 (0) 1 (0) 1 (0) 288.75 ( 3.2103) 53.2070 (2.7958) 39.2084 (0.0200) 2506.8254 (2.7624)
0.3468 (0.4760) 0.1511 (0.3581) 0.1997 0.0378 0.4836 2.2629 (0.3998) (0.1906) (0.4997) (12.6519)
18.5502 (8.9949) 11.6551 (7.5658) 939.0373 (731.9609)
Note: The means and standard errors are calculated by pooling data for the 20002005 period.
We rst focus on the main question with which this study is concerned: does a concentrated industrial agglomeration really contribute to enhancing rm-level productivity due to the positive agglomeration externalities? It is obvious that the coefcient for the EG index is signicantly positive at the 1% statistical level, and that the EG square is signicantly negative at the 10% statistical level.14 The EG coefcient is 134.120 and the coefcient of the squared term of the EG index is 660.480. That means that when the EG index increases by 0.0001, the growth rate of labor productivity will increase by 1.33% (the mean of the EG index is 0.0005). If the EG index changes by a unit standard deviation, the growth rate of labor productivity will increase by 20.02% (the standard deviation of the EG index is 0.0015). In addition, if we look at EG's quadratic model, from the calculations we will see that when the EG index is over 0.1015, there will be agglomeration diseconomies and labor productivity will decline. However, because the maximum value of our EG index is 0.0126, there will be over agglomeration and so it not very likely that agglomeration diseconomies will occur. This result suggests that industrial agglomeration does have a positive impact on rm-level labor productivity in China's textile industry, while this productivity-enhancing effect decreases as the degree of industrial agglomeration increases. That is, rms belonging to sub-industry with higher EG index may enjoy the advantages brought about by positive agglomeration externalities, such as improved opportunities for labor markets and pooling, the reduced transaction costs of intermediate goods, as well as technological and knowledge spillovers and so on. However, such close proximity may result in agglomeration diseconomies if the spatial concentration is too high. This nding supports the theoretical predictions regarding the agglomeration-productivity nexus, validating the application of agglomeration economies in a developing and transitional economy. It is also consistent with those ndings using rm-level panel datasets in developed countries, e.g., the US (Ciccone & Hall, 1996; Henderson, 2003) and New Zealand (Mar & Timmins, 2006). More importantly, the argument regarding the existence of agglomeration economies in China is not only supported by provincial-level data (Fan & Scott, 2003) and city-level data (Au & Henderson, 2006a, 2006b), but is also supported by rm-level cases in this study. Combes, Duranton, Gobillon, Puga, and Roux (2009) used French rm-level data and arrived at similar conclusions to those in our study. However, their paper was based on the use of a city's size for measuring agglomeration. They believed that if a worker is able to interact to a signicant degree with other workers, his productivity will be higher. Therefore, workers in a large city will tend to have higher productivity and a higher level of agglomeration, compared to workers in a small city. The authors measure the level of agglomeration by ranking the cities according to size, but their use of such a calculation method does not appear to be sufciently precise. Interestingly, the interaction term between the EG index and rm size is associated with a signicantly negative coefcient, implying that as the degree of industrial agglomeration remains constant, small rms benet from a larger productivity-enhancing effect from the agglomeration externalities than their larger counterparts. Small rms usually bear a higher unit cost of searching for qualied workers and intermediate inputs transactions. The advantages derived through the spatial benets of economic activities can largely reduce the unit cost of transactions involving labor and specialized intermediate input markets for small rms. Therefore, spatial concentration contributes more to small rms than large rms in terms of enhancing their productivity.
14
We have tried to run separate regression for each sub-industry. The empirical results indicate that the signs of the EG and EG squared terms are not affected.
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Furthermore, we found the lnLCITY has a statistically signicant positive impact on the labor productivity. It denotes that the rms located in cities with higher agglomeration again enjoy the advantage brought by positive agglomeration externalities and their labor productivity will increase. As for the inuences of rm characteristics, rm age is negatively associated with productivity, suggesting that younger rms have higher productivity on average. The possible explanation is that younger rms usually adopt more advanced technologies, enabling them to perform better in productivity terms. The large rm (SIZE) has a negative effect on labor productivity, and means that small rms are more productive in the Chinese textile industry. This result is consistent with Cabral's (1995) research and our statistics in Table 2b. The capital intensity has a signicantly positive impact on labor productivity. A higher capital-to-labor ratio will lead to higher labor productivity because the increase in per capita capital can enhance production efciency to promote productivity. The share of worker benet expenditure in salary (WB) is found to be associated with a signicantly positive coefcient after controlling for other variables, suggesting that rms with a higher intensity of employee benets are associated with higher relative labor productivity. This result is consistent with the ndings in the case of Chinese electronics rms obtained by Yang et al. (2010). Moreover, we nd that ownership matters to rm-level productivity, as suggested in previous studies. The coefcient of the foreign capital (FC) dummy is positive and signicant at the 1% statistical level, indicating that FOEs have higher labor productivity than their domestic counterparts. We further examine the potential differences in the productivity-enhancing effects of various foreign ownerships. The estimates in Tables 4 and 5 show that the estimated coefcient of HMTFC is slightly lower than that of OFC. This implies that textile rms with capital inows from Hong Kong, Macau and Taiwan do not experience higher productivity than other FOEs. In fact, Motohashi and Yuan (2009) also found that Hong Kong-, Macau- and Taiwan-owned manufacturing rms experienced slightly lower productivity than other foreign-owned enterprises during the 19952003 period. In addition, SOE exhibits a negative coefcient at the 1% statistical level and the coefcient of private enterprises is positive. This result is consistent
Table 4 Estimates of industrial agglomeration at the city level and rm-level labor productivity. Dep. variable lnLP RE Constant EG EG^2 EG*lnL lnLCITY AGE SIZE lnKL FC OFC HMTFC SOE PRIVATE WB lnPGDP lnRD lnFDI Industry Year Adj. R2 Hausman test # of obs. 0.468*** (0.022) 0.040*** (0.011) 0.003*** (0.0002) 0.076*** (0.019) 0.005 (0.013) 0.060*** (0.011) yes yes 0.195 83,801 0.090*** (0.031) 0.027** (0.013) 0.002*** (0.0002) 0.557*** (0.077) 0.039 (0.037) 0.076*** (0.029) yes yes 0.146 45.16*** 83,801 0.468** (0.022) 0.039*** (0.011) 0.003*** (0.0002) 0.076*** (0.020) 0.005 (0.013) 0.060*** (0.011) yes yes 0.195 83,801 0.090*** (0.031) 0.027** (0.013) 0.002*** (0.0002) 0.553*** (0.078) 0.037 (0.037) 0.078*** (0.029) yes yes 0.146 620.28*** 83,801 0.470*** (0.023) 0.050*** (0.011) 0.003*** (0.0002) 0.110*** (0.019) 0.011 (0.014) 0.071*** (0.011) yes yes 0.172 83,801 0.092*** (0.031) 0.028** (0.013) 0.002*** (0.0002) 0.555*** (0.078) 0.046 (0.037) 0.081*** (0.029) yes yes 0.116 73.50*** 83,801 1.319*** (0.077) 137.304*** (11.863) 348.448 (342.017) 28.101*** (2.155) 0.063*** (0.006) 0.008*** (0.0005) 0.303*** (0.008) 0.230*** (0.003) 0.154*** (0.013) FE 1.692*** (0.274) 134.120*** (13.755) 660.480* (407.357) 27.513*** (2.500) 0.004 (0.016) 0.002 (0.001) 0.251*** (0.010) 0.235*** (0.004) 0.078*** (0.020) lnLP RE 1.324*** (0.076) 134.818*** (11.609) FE 1.690*** (0.274) 130.671*** (13.590) lnLP RE 1.617*** (0.078) 204.206*** (11.846) 629.425* (345.080) 40.482*** (2.151) 0.062*** (0.006) 0.010*** (0.0005) FE 1.763*** (0.275) 160.623*** (13.785) 836.181** (409.388) 32.582*** (2.504) 0.0012 (0.016) 0.002 (0.001) lnLP RE 1.324*** (0.077) 137.207*** (11.861) 356.202 (341.965) 28.007*** (2.154) 0.062*** (0.006) 0.008*** (0.0005) 0.304*** (0.008) 0.229*** (0.003) FE 1.690*** (0.274) 133.883*** (13.754) 660.773* (407.317) 27.464*** (2.500) 0.005 (0.016) 0.002 (0.001) 0.251*** (0.010) 0.235*** (0.004)
27.787*** (2.133) 0.063*** (0.006) 0.008*** (0.0005) 0.303*** (0.008) 0.230 (0.003) 0.154*** (0.013)
26.978*** (2.478) 0.004 (0.016) 0.002 (0.001) 0.251*** (0.010) 0.235*** (0.004) 0.078*** (0.020)
0.247*** (0.003) 0.119*** (0.013)
0.258*** (0.004) 0.068*** (0.021)
0.182*** (0.014) 0.133*** (0.014) 0.467*** (0.022) 0.041*** (0.011) 0.003*** (0.0002) 0.072*** (0.019) 0.001 (0.013) 0.065*** (0.011) yes yes 0.196 83,801
0.104*** (0.021) 0.064*** (0.020) 0.089*** (0.031) 0.029** (0.013) 0.002*** (0.0002) 0.556*** (0.077) 0.038 (0.037) 0.076*** (0.029) yes yes 0.146 45.98*** 83,801
Note: Figures in parentheses are standard deviations. ***, **, *, and + represent signicance at the 1%, 5%, 10% and 15% statistical levels.
326
Table 5 The degree of industrial agglomeration at the city level and rm-level labor productivity. Dep. variable lnLP RE Constant EGH EGM EGH*lnL EGM*lnL lnLCITY AGE SIZE lnKL FC OFC HMTFC SOE PRIVATE WB lnPGDP lnRD lnFDI Industry Year Adj. R2 Hausman test # of obs. 0.458*** (0.022) 0.032*** (0.011) 0.003*** (0.0002) 0.047** (0.019) 0.019 (0.013) 0.045*** (0.011) yes yes 0.202 83,801 0.081*** (0.031) 0.023* (0.013) 0.002*** (0.0002) 0.547*** (0.077) 0.050 (0.037) 0.113*** (0.029) yes yes 0.150 673.90*** 83,801 0.458*** (0.022) 0.035*** (0.011) 0.003*** (0.0002) 0.057*** (0.019) 0.013 (0.013) 0.049*** (0.011) yes yes 0.196 83,801 0.081*** (0.031) 0.023* (0.013) 0.002*** (0.0002) 0.544*** (0.077) 0.054 (0.037) 0.123*** (0.029) yes yes 0.140 777.03*** 83,801 1.283*** (0.077) 1.049*** (0.037) 0.830*** (0.034) 0.196*** (0.007) 0.160*** (0.006) 0.067*** (0.005) 0.007*** (0.0005) 0.189*** (0.008) 0.219*** (0.003) 0.170*** (0.013) FE 1.634*** (0.273) 1.224*** (0.045) 0.878*** (0.041) 0.227*** (0.008) 0.169*** (0.007) 0.027* (0.016) 0.002 (0.001) 0.178*** (0.010) 0.209*** (0.005) 0.087*** (0.020) lnLP RE 1.422*** (0.076) 1.347*** (0.034) 1.100*** (0.032) 0.252*** (0.006) 0.211*** (0.006) 0.068*** (0.006) 0.008*** (0.0005) FE 1.667*** (0.273) 1.397*** (0.044) 1.033*** (0.040) 0.260*** (0.008) 0.198*** (0.007) 0.022 (0.016) 0.002 (0.001) lnLP RE 1.287*** (0.076) 1.050*** (0.034) 0.832*** (0.034) 0.195*** (0.007) 0.160*** (0.006) 0.066*** (0.005) 0.007*** (0.0005) 0.190*** (0.008) 0.218*** (0.003) FE 1.631*** (0.273) 1.223*** (0.045) 0.878*** (0.041) 0.227*** (0.008) 0.169*** (0.007) 0.028* (0.016) 0.002 (0.001) 0.178*** (0.010) 0.209*** (0.005)
0.223*** (0.003) 0.158*** (0.013)
0.220*** (0.005) 0.082*** (0.020)
0.197*** (0.014) 0.149*** (0.014) 0.457*** (0.022) 0.032*** (0.011) 0.003*** (0.0002) 0.043** (0.019) 0.015 (0.013) 0.050*** (0.011) yes yes 0.202 83,801
0.111*** (0.021) 0.074*** (0.020) 0.080*** (0.030) 0.024** (0.013) 0.002*** (0.0002) 0.546*** (0.077) 0.049 (0.037) 0.114*** (0.029) yes yes 0.150 680.18*** 83,801
Note: Figures in parentheses are standard deviations. ***, **, *, and + represent signicance at the 1%, 5%, 10% and 15% statistical levels.
with the ndings of Jefferson et al. (2003) in the case of Chinese manufacturing rms. Therefore, the sign of the private enterprises is signicantly positive. It means that private enterprises can improve their labor productivity, which will then lead to an increase in economic growth in China (Chen & Feng, 2000). To sum up, the most productive type of enterprise is the foreign-funded enterprise, followed by the domestic private enterprise, and the productivity of state-owned enterprises is at its lowest in the Chinese textile industry. Based on the impact of the rm-specic components in the xed-effects model, the coefcients of the province-specic variables do not appear to be either signicant or ideal. However, from the random-effects model, we can clearly see that the coefcients of these variables are in line with our expectations. The estimated coefcients of provincial characteristic variables, including per capita GDP and foreign direct investment, are signicantly positive in the random-effects model estimates. This nding suggests that textile rms located in provinces with higher per capita GDP and FDI tend to have higher productivity, ceteris paribus. The above analyses indicate that industrial agglomeration has a non-linear positive impact on rm-level labor productivity. To obtain more robust estimates and examine the differences in the productivity-enhancing effect among various degrees of industrial agglomeration, we replace the EG variable by two dummies of the EG indices: EGH and EGM, and then estimate Eq. (5). Table 5 displays the results of the estimation. By comparing the estimates in Table 4, the results are quite similar and we therefore pay attention to discussing the results regarding the EG indices. It is apparent that both variables for highly concentrated (EGH) areas and relatively highly concentrated (EGM) areas are associated with a signicantly positive coefcient, revealing that textile rms located in highly or relatively spatially concentrated areas have higher productivity than their counterparts located in areas with less industrial agglomeration, ceteris paribus. As explained earlier, this result arises from the positive externalities brought about by industrial agglomeration.
327
From a closer look at the magnitude of the estimated coefcients, one more interesting nding arises. We can see that the estimated coefcient for EGH is higher than that of EGM, implying that compared to relatively concentrated areas, highly spatially concentrated areas appear to exercise a stronger positive externality effect, thus inducing stronger productivity-enhancing effects on rms located in those regions. It is worth emphasizing here that estimates of the EG index variables in Table 4 reect a positive but decreasing productivity effect induced by industrial agglomeration. However, the above analysis shows that the productivity-enhancing effect for textile rms in highly spatially agglomerated areas is much higher than that in relatively concentrated areas. By drawing from a combination of these analyses, it is suggested that the phenomenon of agglomeration economies does exist among textile rms in China. More importantly, the degree of industrial agglomeration is not so high as to result in agglomeration diseconomies during the sample period.15 6. Conclusions and policy implications While an abundance of urban economic theories have utilized the concept of agglomeration to explain the formation of industrial concentration and have predicted a positive impact of spatial concentration on productivity brought about by positive externalities, existing empirical studies using aggregate or micro datasets of developed countries have also identied evidence of agglomeration economies for manufacturing industries. In this paper, we have sought to explore the interconnections between industrial agglomeration and economic activity in China, paying special attention to observe the degree of spatial concentration within the textile industry and to examine the role of industrial agglomeration as a conduit for rm-level productivity. China's textile industry provides us with an excellent case study because the China economy experienced a series of open policies prior to its accession to the WTO in 2001. Moreover, most of the previous studies focused on examining the advantages of agglomeration externalities in the high-tech industries rather than traditional industries. If the New Economic Geography theory is robust, it should be broadly applied to a variety of industries and countries. By using an unbalanced panel dataset of Chinese textile rms during the period 20002005, we rst depicted and discussed the spatial distribution of the textile industry. Before the open policy was implemented in the 1980s, textile rms were forced to spread out across different provinces due to the restrictions imposed upon regional policy. However, it is obvious that there has been a tendency toward industrial agglomeration among the southeastern coastal regions in the textile industry. This can be attributed to the open policy that induced textile rms to (re)locate plants in the coastal regions, with a view to serving the large local as well as export markets. By adopting the agglomeration index developed by Ellison and Glaeser (1997) (EG index), we found that the overall weighted city EG index among three-digit textile industries ranged from 0.00017 to 0.00022 during the 20002005 period. Overall there appears to have been a twin-peaked distribution in the city EG index during that period. However, the EG index of spatial concentration for each year exhibits an increasing trend for textile industries' agglomeration and a decreasing trend of spatial agglomeration for the garments and other ber products in China, which is similar to the ndings of Lu and Tao (2009). Next, in this study we examined the relationship between industrial agglomeration and rm-level productivity in China's textile industry. Estimates obtained from various specications conrmed the common nding that industrial agglomeration has a signicantly positive impact on rm-level labor productivity, validating the application of the New Economic Geography theory to a developing and transition economy such as China. Moreover, the positive relationship between industrial agglomeration and productivity was found to be nonlinear in that highly-concentrated areas seemed to give rise to a stronger productivity-enhancing effect through positive externalities. Interestingly, the productivity-enhancing effect brought about by industrial agglomeration was observed to be stronger for small rms, ceteris paribus. This can be attributed to the positive externalities of industrial agglomeration that can largely reduce the transaction costs of labor and intermediate inputs for small rms so that they benet much more from the advantages of industrial agglomeration as they promote their productivity. In addition, we nd that ownership matters to productivity in that foreign-owned enterprises experienced higher productivity, especially the non-Hong Kong, Macau, and Taiwan foreign-owned enterprises. Finally, we also demonstrate that state-owned enterprises have lower productivity than other types of enterprises. This may be caused by a heavy historical load and social burden in Chinese state-owned textile enterprises which always lacked effective constraints and incentive mechanisms in regard to operational controls and ownership. The government should absorb the foreign management experience and speed up the reform of state-owned enterprises to improve the SOEs' productivity. Moreover the smaller rms have higher productivity than the larger rms. Several important policy implications are derived from the empirical analysis. First, due to the existence of positive agglomeration externalities that can enhance rm-level productivity, the government could continue to implement its science park policy, in order to create agglomerations of high-tech rms with positive externalities that will further enhance the hightech rms' productivity. Since agglomeration diseconomies may occur as the spatial concentration increases to a certain degree, the government should note this possibility. Second, small rms established in more clustered regions could obtain more external economic benets of agglomeration than large rms, for example, through information sharing, greater ease in nding professionals, the savings from lower transportation costs, and so on. Thus the government could set up an industrial zone for
15 (1) The sensitivity analysis we conducted seems to suggest that different ways of deating variables do not result in any material differences. (2) As for the endogenous relationship between agglomeration and productivity, we simply used the number of rms and employment to deal with this problem. The results showed that agglomeration still has a positive effect on productivity.
328
small rms to help them to improve their productivity and development. Third, foreign enterprises have the highest productivity, state-owned enterprises have the lowest productivity, and private enterprises are ranked second in terms of productivity, which is increasing. Therefore, the government could encourage the establishment of private enterprises, and state-owned enterprises should carry out institutional reforms to strengthen their management and production efciency. Our results need to be qualied in light of the data limitations and measurement problems present in the sample of mediumsized and large rms. In particular, we do not know whether the results apply to small enterprises. This paper studies how the agglomeration impacts the labor productivity. As for the causal relationship that results from the high productivity among the clustered rms, the current literature in this area is limited. This is an area where more research could be conducted in the future. References
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China Economic Review

Agglomeration and productivity: Firm-level evidence from China's textile industry

H.-L. Lin et al. / China Economic Review 22 (2011) 313329

H.-L. Lin et al. / China Economic Review 22 (2011) 313329

H.-L. Lin et al. / China Economic Review 22 (2011) 313329

H.-L. Lin et al. / China Economic Review 22 (2011) 313329

H.-L. Lin et al. / China Economic Review 22 (2011) 313329

Fig. 1. The distribution of the Chinese textile industry in 2000.

Fig. 2. The distribution of the Chinese textile industry in 2005.

H.-L. Lin et al. / China Economic Review 22 (2011) 313329

H.-L. Lin et al. / China Economic Review 22 (2011) 313329

H.-L. Lin et al. / China Economic Review 22 (2011) 313329

H.-L. Lin et al. / China Economic Review 22 (2011) 313329

Firm size All

H.-L. Lin et al. / China Economic Review 22 (2011) 313329

H.-L. Lin et al. / China Economic Review 22 (2011) 313329

18.5502 (8.9949) 11.6551 (7.5658) 939.0373 (731.9609)

H.-L. Lin et al. / China Economic Review 22 (2011) 313329

0.247*** (0.003) 0.119*** (0.013)

0.258*** (0.004) 0.068*** (0.021)

H.-L. Lin et al. / China Economic Review 22 (2011) 313329

0.223*** (0.003) 0.158*** (0.013)

0.220*** (0.005) 0.082*** (0.020)

H.-L. Lin et al. / China Economic Review 22 (2011) 313329

H.-L. Lin et al. / China Economic Review 22 (2011) 313329

H.-L. Lin et al. / China Economic Review 22 (2011) 313329

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