Market Segmentation and the Location of Production Activities

This paper examines whether local protection has hindered China's market integration process using a firm-level data set. Our empirical results show that an industry's geographic concentration level is negatively correlated with its labour productivity while its concentration at plant level is not. Since labour productivity is strongly positively correlated with an industry's profitability, this evidence supports Bai et al.'s (2004) argument that local government has a stronger incentive to protect highly profitable industries. We also find that a province's market shares of its protected industries grow faster than other industries, which also supports the argument that local protection slows down China's market integration process. Comparative Economic Studies (2009) 51, 302–322. doi:10.1057/ces.2008.49; published online 21 May 2009

Bureaucratic integration and regional specialization in China

10.1016/j.chieco.2006.11.005China Economic Review192308-31