Relationship between city size and firm productivity – A new interpretation using the Chinese experience

Yang Yang, Pundarik Mukhopadhaya, Zhuangxiong Yu*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

This paper contributes to the literature on the relationship between city size and firm productivity by focusing on agglomeration, selection (market competition), and sorting (presence of firms with diverse productivity) effects using Chinese firm-level data for 1998–2013. Contrary to the existing literature, our parametric regression estimates from nearly two million firms show that when the selection effect is controlled, productivity advantage in big cities is reversed. This outcome is explained through a quantile regression showing the existence of left-sided sorting (inefficient firms sort themselves to larger cities) in big cities which is not captured in existing empirical literature. We further find that (1) left-sided sorting is stronger in exporters than non-exporters; (2) is also generated mainly in enterprises with high asset-liability ratios; and (3) selection has a positive effect on firm productivity, suggesting that market competition is key in an explanation of the rapid growth of big cities in China.

Original languageEnglish
Pages (from-to)546-558
Number of pages13
JournalEconomic Modelling
Volume93
DOIs
Publication statusPublished - 1 Dec 2020

Keywords

  • Agglomeration
  • China
  • Firm sorting
  • Productivity advantage
  • Selection

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