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  Project Flame: Social Innovation and Entrepreneurship@CityU

  Centre for Research into Circulating Fetal Nucleic Acids

  Regional Innovation Systems in Post-reform China: Indigenous Innovation and Regional Transformation in the Pearl River Delta

  Chinese Local Governments, Industrial Clusters, and Regional Disparities

  Time to leave? The Influence of Resource Dependence Structures on Sequential Investment Termination by Venture Capital Firms

  Children of Empire: Eurasians in Hong Kong, China and Britain, 1830-1960

  Antecedents and Consequences of the Establishment of Host Country Headquarter in Large Emerging Markets: Evidence from BRIC Countries

  Hong Kong Women Filmmakers: Sex, Politics and Cinema Aesthetics, 1997-2010

This project makes substantial contributions to the literature on economic growth and inequality, new economic geography: industrial clusters, and Chinese institutions.
  Prof Chenggang XU  
  Dr Kun JIANG  

One of the most important engines that has been driving China’s growth over the past three decades is the industrial clusters in which thousands of specialized small towns have developed into "world factories". Yet, during the same period of time, income inequality in China has worsened rapidly and China has become one of the most unequal economies in the world. Is, as suggested by Simon Kuznets six decades ago, the tradeoff between growth and equality unavoidable at the early stage of economic development? This is the first study in the literature to systematically examine the effects of China’s industrial clusters on local economic growth and inequality at the firm-county level.

The leading indices of economic clusters developed in the new economic geography literature and economic development literature capture the features of market economies well, where labor and capital are mobile, and land is freely traded in the market. Thus, industrialization and urbanization correspond to each other. Under the assumption of perfect mobility of factors, industrial agglomeration is an equilibrium outcome of firms’ co-location decisions.

However, these factors were completely controlled by the government at the onset of reform in China, and thus there was no free mobility. Although the institutional restriction on factor mobility has been reduced gradually over the past few decades, the remaining restrictions are still substantial. As a result, the leading indices of economic clusters developed in the literature are not applicable for China. Indeed, as a consequence of the institutional constraints, much of China’s industrialization process has been implemented in rural areas in the absence of urbanization through township and village enterprises or rural industries. Consequently, a substantial proportion of entrepreneurial industrial firms in China are clustered in officially defined rural towns. Through a series of field work trips, we have visited a large number of industrial clusters, firms within those clusters, and the townships and counties in which the clusters are located. During the field work, we have interviewed hundreds of entrepreneurs and local officials.
  Dr Di GUO  
  Dr Xiyi YANG  

Guided by the insights from our field work, we have constructed measurements of clusters based on the density of firms of the same industry within a geographical location to capture the key features of clusters developed under the institutional constraints in China. Based on this principle, we have developed a series of indices for the existence, strength, and ownership structure of the industrial clusters. Compared with the measurements used in the existing literature, our measurements are more consistent with observations of the clusters of economic activities in China from other sources such as satellite photos of night lights.
  Professor Chenggang XU and Dr Di GUO on a field work trip with an entrepreneur and township and county leaders in Linhai County, Zhejiang Province  

Based on the results derived using these measurements and applied to a combination of firm- and county-level panel data sets from 1998 to 2007, we find that clustering enhances local economic growth. In particular, counties with strong clusters and clusters consisting of a more developed non-state sector experience higher economic growth. Moreover, urban–rural income inequality is substantially lower within counties with clusters consisting of an advanced non-state sector than in other counties because of the increased income of rural residents. The results remain robust after addressing the endogeneity issues using the two-stage Heckman estimation.

Prof Chenggang XU
School of Economics and Finance

The University of Hong Kong