How Urbanization Economies Impact TFP of R&D Performers: Evidence from China

Abstract

There have been extensive studies exploring the relationship between agglomeration economies and economic growth. However, far less attention is paid to the nonlinear relationship of urbanization economies-firm productivity nexus, especially in developing countries. This paper aims to explore how urbanization economies impact the total factor productivity (TFP) of research and development (R&D) performers using a large sample of Chinese manufacturing firms. The generalized propensity score matching methodology is employed to not only address the selection-bias and endogenous issues, but also quantitatively investigate how firm TFP responds to urbanization economies at each urbanization level. Based on the full data sample, our results show that there exists an S-shaped relationship between urbanization economies and TFP of Chinese R&D performers. Importantly, there is an optimal interval in which urbanization economies' impact on firm TFP can be maximized. There is also a threshold value, only beyond which a further increase in urbanization economies improves firm TFP, and a saturation point, beyond which a further increase in urbanization economies does not increase and even decrease firm TFP. The relationship between urbanization economies and TFP of Chinese R&D performers presents a consistent pattern for firms in high-and medium-low-technology industries, as well as in Eastern and North East China. However, for firms in Central and Western China, there is a much smaller and even no range of optimal interval of urbanization economies, respectively. Our research helps provide insights into policy makers to maximize urbanization economies' positive impact on firm TFP.

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