Firm Self-selection And Regional Productivity Inequality

Since reform and opening up, China’s economy has developed rapidly, but at thesame time the growing economic gap of China’s eastern region and western regionsexpands. This gap is not only for the performance of the total economy but also for thegap of economic efficiency. We can observe that firms are more productive on average inindustrial clusters. Whether it is based on the self-selection effect of heterogeneous firmsor based on the agglomeration economies effect of externalities?To examine these two sources of spatial productivity differences, we construct acombined model of selection effect and agglomeration effect, and put forwardidentification method and empirical hypothesis aiming at two effects. Based on a paneldataset of Chinese Cotton and textile processing industry from the database of Chineseindustrial enterprises from1998to2007, the paper investigates the relationship betweenfirm density and productivity distribution in cities. The result indicates that higher firmdensity means higher average productivity, higher productivity distribution dispersion andmore obvious left-truncation effect, but no right-shift in distribution. It implies that onlyself-selection effect exists in China’s Textile clusters. In further robustness checks, thepaper confirms the previous conclusions and excludes the possibility of the impact on thefirms from agglomeration externalities in other forms with firm-level data. It also signifiesthat there exists a possibility that traditional research overestimates agglomerationexternalities because of overlooking self-selection effect.