Institutional Arrangement And Industrial Agglomeration: Theory And Empirical Evidence

With the level of global economic integration as well as China's economic openness and market-oriented reform deepening, industrial agglomeration as a geographic phenomenon of cross-regional movement and relocation of production factors, its forming and changing inner mechanism have always been the focus of academic circles and policymakers. Since 1990s, the creation and perfection of new economic geography has surpassed the strict assumption restrictions under constant or diminishing returns to scale of traditional mainstream economics and brought spatial factors into the general equilibrium analytical framework, which greatly succeeded in the interpretation of the geographical distribution and behavior mechanisms of production activities. However, existing theoretical and empirical researches of industrial agglomeration are more concentrated on objective factors in market mechanism, while the study of policy and institution influences on industrial agglomeration is rather rare. Empirical intuition tells us more and more that a series of institutional arrangements can affect not only the production location choice of enterprises microscopically, but also the industrial distribution macroscopically. The strong demand of reality needs new theoretical support and empirical research for them. Therefore, this article attempts to explore the mechanism of institution impacting on the forming and changing of industrial agglomeration from the historical review, theoretical analysis and empirical researches. The study will not only broaden the sources of industrial agglomeration mechanism, but also provide a theoretical and empirical foundation for policymakers to optimize regional division and promote industrial development.Firstly, this article studied the historical phenomenon and inner mechanism of world industrial agglomeration center's forming and changing from an economic history perspective. The earliest world industrial agglomeration center was originated in the United Kingdom, and then transferred to the United States. Japan will also become one of the world industrial agglomeration centers after the United States. After the analysis of world environment and different periods of economic development, we found that the world industrial agglomeration center was formed and changed despite of historic opportunities, yet behind that there must be corresponding policies and system securities. Apart from the country's geographical location, natural resource endowment, labor, population, transport infrastructure, foreign trade and other factors, building the protection of property rights, trade policy, investment policy, finance system, education and other institutional strengths of a country can significantly boost the country's industrial development. Then the country may gradually become the center of the world industrial agglomeration.Secondly, based on the historical interpretation of the inner forming and changing mechanism of world industrial agglomeration center, the article referred to the theory that transaction cost was divided into exogenous and endogenous transaction cost. Then we introduced the latter to the model of new economic geography and analyzed the mechanism of endogenous transaction cost impacting on the production location decision of enterprises in general equilibrium framework to clarify the micro-mechanism of regional institutional arrangements for the forming and changing of industrial agglomeration. Theoretical study showed that the endogenous transaction cost was also an important factor for enterprises to choose the production location. Under the conditions of a certain regional exogenous transaction cost, level of expenditures and regional market size, effective institutional arrangements could directly reduce the endogenous transaction cost of production and business activities in the region for enterprises, and promote enterprises to migrate to the area and thus speed up the regional industrial agglomeration.Thirdly, on the basis of controlling factors of the first nature, economic geography and new economic geography, the article introduced institutions into econometrical model of industrial agglomeration impacting factors, and empirically analyzed the influences of institutions on the manufacturing industrial agglomeration from the international level, Chinese district level as well as the industry level. On one hand, the conclusions of empirical study on the international level showed that a country's institutions could affect the level of transferring and agglomerating of the manufacturing industry to the country more significantly than the geographical location. The freer a country's investment policy was, the more perfect taxation policy and commercial transactions institution were, and the more stringent property rights protection system was, then the easier to improve the level of agglomeration of the manufacturing industry in the country. Among them, the investment policy was the most important factor, and the following were the taxation policy and commercial transactions institution. The impact of property rights protection system on improving industry agglomeration level was relatively weak but very significant. On the other hand, based on the effective measure of Herfindahl indices, this article used the calculating method of industrial agglomeration level coefficient built by the consideration about the scale and quantity distribution of enterprises. Then we dynamically calculated the industrial agglomeration levels of 20 two-digit manufacturing sub-industries from 1986 to 2006 in China. The article pointed out the manufacturing industry and most of its two-digit sub-industries had staged from an intermediate up to high agglomeration level. The agglomeration level of technology-intensive sub-industries had surpassed resource-intensive sub-industries and entered the scope of a high agglomeration level. As for the geographical distribution, there were also significant differences between the eastern region and other regions. The technology-intensive sub-industries were most concentrated in the eastern region, while the resource-intensive sub-industries were in the central and western regions. Through empirical researches, the article analyzed the effects of regional economic openness and the institutions in maketization process on the manufacturing industry in the national and district level of China respectively. According to the conclusions, from the view of the whole manufacturing industry agglomeration, the higher a region's protection to producers was, the freer investment and trade policies were, the less control of labor mobility was, and the more conveniently corporate financing was, then the more easily manufacturing industry agglomeration was attracted. From the agglomeration degrees of manufacturing industry in the eastern, central and western China, freer trade policy could significantly promote the manufacturing industry agglomeration in all the districts level, and more liberal investment policy could significantly stimulate the manufacturing industry agglomeration in the eastern and central China. Furthermore, more convenient financing system could significantly promote the manufacturing industry agglomeration in the central China. While higher protection to producers, less regulation of labor mobility and price could significantly stimulate the manufacturing industry agglomeration in the western China. In addition, according to the impact of institutions on the agglomeration levels of 2-digit manufacturing sub-industries, the more perfect property rights protection system to the producers of a region was, the more easily capital-intensive sub-industries were attracted to gather. And the more conveniently corporate financing was, the looser the institutions reflecting the degree of economic openness in a region were, such as the trade policy, investment policy and regulation of labor mobility, then the more significantly capital-intensive and technology-intensive sub-industries were attracted to agglomerate. Releasing the price regulation institution could significantly promote resource-intensive sub-industries concentration. In addition, empirical studies in China also indicated that the manufacturing industry agglomeration advantages of municipalities were gradually weakening, and they were more likely to become political, cultural and service centers.According to conclusions of the economic historical interpretation, theoretical model and empirical research in this article, for one thing, in order to speed up the process of modern industrialization and achieve the economic surpass of advanced countries, for another, in order to enhance the regional specialization and promote coordinated development among regions, China must actively create conditions to promote two-way transfer and agglomeration of the industries. China should improve the institutional environment not only to undertake the transferring of international manufacturing industry and attract advanced manufacturing to concentrate in the country, but also to promote the industries of coastal areas to shift to central and western regions as well as attract manufacturing industries to agglomerate in the corresponding exogenous comparative advantage regions. Therefore, it can play dual effects of the endogenous comparative advantage and exogenous comparative advantage, and optimize the spatial structure of the industries. To this end, this article not only put forward some policy recommendations for policymakers on adjusting and further improving the investment policy, taxation policy, commercial transaction institution and property rights protection system from the whole China, but also provided policy adjustments and institution innovations for the districts of China to strengthen property rights protection to producers, raise the level of economic openness and release the price regulation as well as provide financing convenience for enterprises.