abstract

This paper examines the relationship between agglomeration and firm-level performance in China. The author estimates firm-level production functions, total-factor productivity, and return on assets to compare the performance of heterogeneous firms within and outside the agglomeration. Agglomeration studies distinguish between localization regions characterized by a particular economic activity and urbanization, which corresponds to the development of overall economic activity. This paper investigates both types. Results suggest that negative localization economies exist in labor-intensive industries and positive urbanization economies are observed in capital-intensive industries. From the perspective of examining heterogeneous firms, negative localization effect is explained by the negative selection effect fewer highproductivity firms are clustered in the apparel and fiber industries and is explained by the negative agglomeration economy in the miscellaneous goods industry. The positive urbanization effect is explained by the agglomeration effect, i.e., the benefits of agglomeration serve all firms in the auto and communication equipment industries. Note that the productivity of Chinese firms in "Marshallian" localization clusters is not higher than that of firms located outside clusters. This finding challenges the theoretical prediction, prompting the need for further research.