Agglomeration and Technological Spillovers: Firm-Level Evidence from China's Electric Apparatus Industry

We use a spatial autoregressive model to study the determinants of firm-level productivity growth using longitudinal data on China's electric apparatus industry over the period of 1999-2007. Factors considered include technological spillover, R&D and export behavior, agglomeration economies, and public expenditure. We propose modifications to Kelejian and Prucha's (1998) FE-2SLS procedure and Mutl and Pfaffermayr's (2011) RE-FG2SLS procedure to cope with the technical difficulties with our unbalanced panel. Statistical evidence strongly favors the fixed effects model over the random effects model. According to our estimates, there are large and signiffcant technological spillovers among firms. Individually, firms benefit from their own R&D and export activities. Market competition and public expenditure in the local and neighboring jurisdictions are found to be important determinants to productivity. Our model also provides direct evidence that the technological spillover effects attenuate rapidly in spatial distance. Finally, the inter-regional spillover effects are found to be more pronounced and more significant on urban districts or jurisdictions with smaller geographical areas. Geographic proximity to neighbors and special administrative role jointly contribute to this observation.