An Empirical Study on Agglomeration Economies and Optimal Agglomeration for China’s Manufacturing Industries

LIU Changquan

Rural Development Institute, Chinese Academy of Social Sciences

Abstract:

Employing the statistics of 750,000 firms obtained from China’s Third National Industrial Census, this paper estimates the production functions of 112 3-digit industries in four categories to examine the patterns of agglomeration economies, optimal scale of agglomeration, and the endogeneity of agglomeration level in manufacturing industries. Results indicate the existence of localization economies at city level and urbanization economies at province level, while the latter has very small economic significance. Decreasing returns to scale at firm level suggest that the source of agglomeration economies is technological externality emphasized by urban economic theory. With a rising scale, agglomeration economies exhibit an inverted U-shaped curve. Each industry has an optimal scale of agglomeration where the agglomeration economy is maximized. However, the actual scale of agglomeration is generally far lower than the optimal level. Corresponding to the optimal scale of agglomeration, the level of industrial agglomeration measured by the index1 is endogenous.

Key word: Industrial agglomeration, agglomeration economies, localization economies, urbanization economies

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