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Economic Impact of SEZ
Economic Impact of SEZ
a r t i c l e i n f o a b s t r a c t
Article history: The paper exploits a unique Chinese municipal dataset to assess the impact of Special Economic Zones on the
Received 4 October 2010 local economy. Comparing the changes between the municipalities that created a SEZ in earlier rounds and
Received in revised form 1 September 2012 those in later waves, I find that the SEZ program increases foreign direct investment not merely through
Accepted 31 October 2012
firm relocation, and does not crowd out domestic investment. With dense investment in the targeted
municipality the SEZ achieves agglomeration economies and generates wage increases for workers more
JEL classification:
O16
than the increase in the local cost of living. The effects are heterogeneous: for zones created later the benefits
O47 are smaller while the distortions in firm location behavior are larger than those for the early zones.
F21 Municipalities with multiple SEZs experience larger effects than those with only one SEZ.
R10 © 2012 Elsevier B.V. All rights reserved.
Keywords:
Special Economic Zone
Foreign direct investment
TFP growth
Factor price
1. Introduction To fill that gap this study takes advantage of the gradual establish-
ment of Special Economic Zones (SEZs) across Chinese municipalities
Economists have long debated the potential benefits and distortions since 1979, which constitutes a unique laboratory for a large-scale
associated with the spatially targeted programs.1 More recently, the study of SEZs. Special Economic Zones are contained geographic re-
agglomeration economies have been rigorously identified that explain gions within a country with more liberal laws and economic policies
productivity advantages for firms located in denser areas (Combes et to encourage foreign-invested manufacturing and services for export
al., forthcoming; Greenstone et al., 2010; Kline and Moretti, 2011), (Shah, 2008). Fig. 1 displays the significant correlation between the
while the efficiency losses from mobile workers and firms relocating SEZ experiment and FDI outcome in China. 3 Worldwide there were
across the boundaries of targeted areas are found to be modest in the approximately 3000 SEZs in 135 countries in 2008, accounting for
case of US Federal Empowerment Zones (Busso et al., forthcoming). over 68 million direct jobs and over US$ 500 billion of direct trade-
Despite the increasingly sophisticated work on place-based policies, related value added within the zones (World Bank, 2008). Like
there is a tremendous lack of empirical evidence for evaluating such many place-based programs, the SEZs attempt to foster agglomera-
programs in the context of developing countries. 2 tion economies – they promote firm interactions that increase
productivity in dense areas – by building clusters or attracting tech-
nologically advanced industrial facilities (Combes et al., 2011).
☆ I am indebted to Oriana Bandiera and Timothy Besley for their guidance. I thank Eric The question of whether SEZs have meaningful effects on the local
Verhoogen, two anonymous referees, Joshua Angrist, Robin Burgess, Rajeev Dehejia, Greg economy therefore has great policy relevance, and yet previous
Fischer, Maitreesh Ghatak, Henrik Kleven, Guy Michaels, Gerard Padró i Miquel, Albert
research on SEZs consists mainly of case and theoretical studies. 4
Park, Steve Pischke, Mark Schankerman, Cheng-gang Xu and Alwyn Young for their com-
ments. Seminars at the LSE, the RES UK Conference, the University of Oxford, the HKUST, My main objective in this paper is to quantify the impact of the SEZ
and the Nanyang Technological University Singapore made helpful comments to improve programs and explore the mechanisms through which the effects
the work. I am also grateful to Junxin Feng for support with the data collection, and to the work. Kline (2010) and Busso et al. (forthcoming) are the two closest
LSE STICERD members as well as Ruixue Jia for helpful discussions. All errors remain my own.
predecessors to my investigation in framework and method. In the
⁎ Tel.: +852 2358 7834; fax: +852 2335 0014.
E-mail address: sojinwang@ust.hk.
1
See Glaeser and Gottlieb (2008), Glaeser et al. (2010), Greenstone and Looney
3
(2010), and Moretti (forthcoming). See Prasad and Wei (2007) and Feenstra and Wei (2010).
2 4
See Peters and Fisher (2002) for reviews on the UK enterprise zones and more re- See Willmore (1996), Kung (1985), Ge (1999), Park (1997), Rolfe et al. (2004),
cent US empowerment zones and regional development initiatives. Aggarwal et al. (2008), Aggarwal (2005) and Litwack and Qian (1998).
0304-3878/$ – see front matter © 2012 Elsevier B.V. All rights reserved.
http://dx.doi.org/10.1016/j.jdeveco.2012.10.009
134 J. Wang / Journal of Development Economics 101 (2013) 133–147
Fig. 1. SEZs, FDI and trade outcome: national aggregate statistics. Notes: the graph displays the significant correlation between the SEZ experiment and FDI related outcome
including Foreign Direct Investment, Exports, Imports and the proportion of foreign invested enterprises' industrial output in China.
J. Wang / Journal of Development Economics 101 (2013) 133–147 135
context of U.S. place based programs they developed a spatial equilib- creation effect by the SEZ in the municipality and a partial diversion
rium model with landlords, firms, and mobile workers and show that effect that increases with the number of neighboring SEZs. By 2008
the incidence and efficiency of local subsidies depend critically on the municipality's own SEZ program had on average increased per
“the degree of preference heterogeneity in the population and the capita FDI by 112% while adjacent SEZs had diverted away per capita
structure of any agglomeration economies” (Kline, 2010, p.383). FDI by 33%.
Building on their work, this study proceeds to examine the effect of Second, the SEZ program generates significant agglomeration
Chinese SEZs on agglomeration economies as well as on firm and economies. It increases the technological progress of the earlier treat-
worker behavior. In particular, after showing that investment in the ed municipalities by 1.6 percentage points compared to the counter-
subsidized municipality increases, I estimate the elasticity of the mu- parts that carried out the program later, an effect which builds up
nicipal total factor productivity (TFP) growth with respect to the SEZ gradually after a SEZ program is in place.
program. I further distinguish the scenario that the SEZ program sim- Third, the average wage of workers in the treatment group in-
ply shifts firms from one municipality to another from the case that it creases by 8% more than in the control group while there is a 5%
creates new activity. I also assess through the local price change rise in the cost of living. The estimates of factor prices suggest that
whether the SEZ program's benefits were arbitraged away by the benefits of the SEZ program are not completely arbitraged away
workers' migration. Finally, I evaluate whether the effects are hetero- by worker mobility.
geneous across municipalities belonging to different granting waves Fourth, the early zones overall experience a larger increase in in-
as well as receiving different SEZ treatment intensities. vestment, TFP growth and factor prices. The early zones' FDI creation
For the analyses I use a large number of official sources to effect in particular is much larger than the diversion effect. In con-
construct a novel dataset covering 321 Chinese prefecture-level trast, the newly attracted FDI of zones established later is not much
municipalities between 1978 and 2008. Detailed data allows for an larger than the reallocation of activities. These results imply that
examination of China's municipal economies before, during and once the whole country becomes liberalized, SEZs might generate
after the expansion of SEZs, and the empirical analysis compares large distortions in firm behavior as later zones tend to be closer
changes between municipalities establishing SEZs earlier and later, substitutes for each other (Busso et al., forthcoming).
as well as between municipalities with multiple SEZs and only one Finally, municipalities with multiple SEZs exhibit greater FDI at-
SEZ, conditional on a rich set of control variables. To the best of my traction, agglomeration economies and factor price changes relative
knowledge, Wei (1995) and Alder et al. (2012) have been the only ex- to those with only one SEZ.
ceptions to use city-level data to assess the effect of the SEZ policies. In addition to the research on place-based policies, my paper adds
Wei (1995) examines the relationship between the SEZ policy and to several other strands of literature. First, the paper evaluates the
growth, but the limited data from 1980 to 1990 prevents him from FDI's impact of the SEZ program at the municipal level and so builds
conducting a comprehensive evaluation. A recent paper by Alder et a bridge between country-level and firm-level studies of FDI. 5 The de-
al. (2012) exploits a panel dataset covering 270 Chinese cities for sign balances the inferential validity and the understanding of FDI's
23 years to examine the impact of SEZs on city GDP growth. That macro-level impact on the local economy. The findings that FDI
work, however, examines the state-level zones approved by the cen- brought by the SEZs enhances the municipal investment and techno-
tral government, which are a subset of the SEZs considered in my logical progress is consistent with the results of studies of Chinese
study. Moreover, their work focuses on GDP growth while this manufacturing and exporting firms (Fernandes and Tang, 2012; Liu,
paper investigates a rich set of welfare indicators such as investment, 2008). Second, methodologically this study follows the lead of
TFP growth and factor prices. Persson and Tabellini (2008), Abadie (2005), Heckman et al. (1997)
The validity of the standard Difference in Difference (DID) strategy and Blundell et al. (2004) in combining matching and difference in
and the causal interpretation given to the results relies on the as- differences to analyze the effects of reform in a macroeconomic con-
sumption that the later moving municipalities are a valid counterfac- text. The matching technique controls for selection into the SEZ pro-
tual for what would have happened to the earlier adopters in the gram at different times and allows for estimating the treatment
absence of a SEZ program. However, the timing of the SEZ programs effects in a non-parametric way.
is not likely to be random. The earlier group might differ substantially The next section starts with the historical background of China's
from the later adopters in terms of a set of factors such as geographic SEZ experiment. Section 3 provides a brief description of the dataset.
location, industrial conditions, human capital, infrastructure, financial Section 4 estimates the average impact of the SEZ experiment on local
development, factor prices and other unobserved characteristics. To economic outcomes. Section 5 further explores the heterogeneity in
tackle the identification challenge, the arbitrary permanent heteroge- the SEZ granting sequence as well as the program intensity to
neity between earlier and later adopting municipalities in their examine the different impacts of the SEZs. Section 6 offers concluding
unobserved characteristics is addressed by allowing for municipality remarks.
fixed effects. I also include flexible province-year fixed effects to
control for differential province-specific time effects such as macro
shocks. Beyond that, I use detailed information on municipal charac- 2. Background
teristics to construct meaningful comparable groups. I match each
municipality which established SEZs in the first wave with its closest In this section I discuss some essential features of the SEZ experi-
counterparts that established SEZs in the second wave in terms of ment. China's administrative system has five hierarchical levels of
various characteristics and, more importantly, historical trends of government: (1) central; (2) provincial; (3) prefecture; (4) county;
main outcomes. A similar approach is then adopted for the later and (5) township. This paper focuses on the prefecture level where
rounds. The municipalities of adjacent rounds are similar in terms of the SEZ experiments have been carried out.
observable characteristics, and so perhaps more likely to be similar In the late 1970s, China's State Council approved small-scale SEZ
in unobserved traits as well. experiments in four remote southern cities: Shenzhen, Zhuhai and
The analysis reveals several important findings. First, the SEZ Shantou in Guangdong Province, as well as Xiamen in Fujian Province.
program has an overall positive effect on investment. The introduc-
5
tion of a SEZ program on average significantly increases the level of Some scholars view FDI as an important source of capital using country level data,
including Whalley and Xin (2006), McGrattan and Prescott (2009), Desai et al. (2009).
per capita FDI by 21.7% and the growth rate of FDI by 6.9 percentage Others focus on FDI as an important source of technology spillover, for example Coe et
points. On the other hand the SEZ program neither crowds in nor al. (2009) [cross-country study], Liu (2008), Hale and Long (2007) and Abraham et al.
crowds out domestic investment. Moreover, there exists a sizable (2010) [firm-level study].
136 J. Wang / Journal of Development Economics 101 (2013) 133–147
China started with virtually zero foreign direct investment and almost and human capital. 11 From 1992 to 1994, the State Council opened a
negligible foreign trade before 1978, so those zones were considered number of border cities and all the capital cities of the inland prov-
a test base for liberalization of trade, tax and other policies inces and autonomous regions. In addition, 222 state-level economic
nationwide. In August 1980 the People's Congress passed the first zones and 1346 province-level economic zones were gradually
Regulation for Guangdong SEZs. This regional law was the first of its established within municipalities to provide better infrastructure
kind to be tested, drafted with the help of legal experts sent from and achieve agglomeration of foreign investors. 12 As a result, a
the central government (Cai, 2008; Xu, 2011). When the experiment multi-level and diversified pattern of opening coastal areas and inte-
was later expanded into other provinces, this was the law they grating them with river, border, and inland areas took shape in China.
adopted and modified. 6 The law explicitly provides the following The Chinese SEZ program is described by the World Bank as a unique
policy package for foreign investors: zone-within-zone case because large opened economic zones (the
whole municipality) hosted smaller zones (state-level and province-
1) Private Property Rights Protection: the SEZs encourage foreign cit-
level economic zones) within their territory.
izens, overseas Chinese, and compatriots from Hong Kong and
According to the laws and regulations, open economic areas,
Macau to set up enterprises and other establishments on their
state-level and province-level economic zones maintain no systematic
own or in joint ventures with Chinese partners. The SEZs guaran-
tax policy differences towards foreign investors. There are, however,
tee to protect their assets, accrued profits and other rights. This is
some differences in SEZ administration.13 Open economic areas and
a very important commitment by the Chinese government, since
state-level economic zones have higher level administrative committees
there was no constitutional protection of private property rights
than provincial level SEZs and their committees enjoy more authority in
outside the SEZs until a constitutional amendment in 2004.
managing the zones. For example, they are allowed to approve FDI pro-
2) Tax incentives: foreign investors are promised a reduced corporate
jects up to a higher threshold. They are also given priority access to
income tax rate of 15–24% further differentiated on the basis of the
state-owned land and SEZ-related infrastructure loans.14
technological content of their products, compared to the 33% paid
Fig. 2 displays the geographic evolution of the SEZ experiment.
by domestic firms. They are to bear virtually zero custom duties
Table 1 presents descriptive characteristics of the four big SEZ granting
and enjoy duty free allowances for production materials. There are
waves: 1978–1985, 1986–1990, 1991–1995, and 1996–2008. The pro-
income tax exemptions for foreigners working in the SEZs as well.
portion of municipalities with SEZs was 0% in 1978, 9% in 1985, 24% in
3) Land use policy 7: under Chinese law, all land is under state own-
1990, 69% in 1995 and 92% in 2008. The SEZ experiment was expanded
ership. In the SEZs foreign investors may lawfully obtain the rights
from coastal, industrially more developed locations to inland, industri-
for land development and business use. They may also transfer or
ally less-developed areas. Municipalities that implemented the SEZ
lease land rights, or mortgage them for stipulated purposes and
program earlier had higher land prices than those in later rounds.
terms of use. When foreigners invest in projects encouraged by
They also had better infrastructure including highway density, airports,
the state for an operational term of more than 15 years they are
ports, telecommunications, and better financial development. But there
exempt from land use fees for five years and pay half the usual
were no significant differences in human capital across the four groups
fee for the following five years. The land use right is guaranteed
of municipalities that established the SEZs in different periods.
for projects that have a total investment of at least US
$10 million, or that are considered to be technologically advanced
3. The data
with a major influence on local economic development.
A distinctive feature of the SEZ program is its decentralized imple- In order to evaluate the impact of SEZs, I constructed a new panel
mentation (Huang, 1998; Xu, 2011). An administrative committee, dataset on 321 Chinese prefecture-level municipalities. 15 Detailed
commonly selected by the local government, oversees the economic data contains information on GDP, investment, employment, exports
and social management of the zone, including approving the FDI pro- and factor prices, as well as a digital GIS map of Chinese municipali-
jects up to a certain limit, building and improving the infrastructure, ties that is coded with the year the SEZ was created. Data Appendix
and regulating the land use on behalf of the local administration I contains more details on the construction of these variables.
(Zeng, 2011). The government made clear the targets of SEZs in terms
of four principles: “Construction primarily relies on attracting and uti- 3.1. Special Economic Zone Index
lizing foreign capital; primary economic forms are Sino-foreign joint
ventures and partnerships as well as wholly foreign-owned enterprises; The dataset comprises the SEZ information detailed in Appendix II:
products are primarily export-oriented; economic activities are primar-
1. Lists of coastal and inland municipalities which have been granted
ily driven by market forces.”
open economic area status and the year of granting;
Supported by the initial achievements of the first group of SEZs,
2. Lists of state-level Economic and Technological Development
the central government expanded the SEZ experiment in 1984. Four-
Zones, New and High-technology Industrial Development Zones,
teen other coastal cities were opened to foreign investment. 8 From
Export Processing Zones, and Border Economic Cooperative
1985 to 1988 the central government included even more coastal mu-
Zones, the size of the zones and the year when the municipalities
nicipalities in the SEZ experiment. 9 In 1990 the Pudong New Zone in
were authorized to establish them;
Shanghai was opened to foreign investment along with other cities in
3. Lists of province-level Economic and Technological Development
the Yangtze River valley. The pattern of granting SEZ status in those
Zones, and New and High-technology Industrial Development
earlier years is not random. According to State Council documents, 10
the central government authorized municipalities to establish the 11
China's development strategy based on location is discussed in Démurger et al.
SEZs based on their better geographical location, industrial condition
(2002).
12
State-level SEZs are authorized by the central government; Province-level SEZs are
6
See Zhongfa (1979). authorized by provincial governments. These zones are typically located in the subur-
7
Source: the government website of Zhejiang Province. ban regions of a major city (Zeng, 2011).
8 13
Listed north to south: Dalian, Qinhuangdao, Tianjin, Yantai, Qingdao, Lianyungang, The industrial preference of some zones is discussed in Alder et al. (2012).
14
Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang, and Beihai. See Guofa (2005, 2010), Shangzifa (2006, 2008, 2009), Caijian (2010) and
9
Listed north to south: Liaodong Peninsula, Hebei Province (which surrounds Fagaidiqu (2010).
15
Beijing and Tianjin), Shandong Peninsula, Yangtze River Delta, Xiamen-Zhangzhou- I drop provincial-level municipalities including Beijing, Shanghai, Tianjin and
Quanzhou Triangle in southern Fujian Province, Pearl River Delta, and Guangxi. Chongqing from the sample to address the concern that they are not comparable with
10
See various State Council documents issued in 1984,1985,1987,1988,1991,1992,1993. prefecture-level municipalities.
J. Wang / Journal of Development Economics 101 (2013) 133–147 137
Fig. 2. The geographic evolution of the Special Economic Zone experiment. Notes: if the whole municipality was granted the status of open economic area; or within the munici-
pality, only a certain geographical area was allowed to establish state-level economic zones, or province-level economic zones, the municipality was entitled to use preferential
policies (including property rights protection, tax breaks, cheaper land bills, etc.) to attract foreign direct investment. Therefore, I define the municipality to be a Special Economic
Zone (SEZ) from a general prospective.
Zones, the size of each zone and the year when the municipality smaller economic zones within their city areas. The fact that the coastal
was authorized to establish it. municipalities were allowed to establish more and larger SEZs is highly
correlated with their potential for attracting foreign direct investment.
Being granted open economic area status means that the whole area I set a general SEZ dummy variable, Sipt, to one if an entire municipal-
of the municipality is a large SEZ for foreign investors. Being authorized ity was granted open economic area status, or if a state-level or
to establish a state-level or province-level economic zone means that province-level economic zone was authorized within the municipality,
within the municipality a certain geographical area can be used as a SEZ and zero otherwise.
to host foreign investors. In the full sample, some municipalities were Although in the baseline specification the evaluation of the SEZ policy
granted open economic area status and then allowed to establish the focuses on the average effects of being or not being in the SEZ program, I
state-level and province-level economic zones in later years. A large SEZ also examine whether or not early zones exhibit different impacts relative
can thus contain multiple specific zones within its boundaries. Today, to later zones, along with whether municipalities with multiple zones ex-
some coastal municipalities such as Shenzhen, Dalian and Guangzhou perience different effects from those with only one. To do so, I group the
have such nested zones. In contrast, most inland municipalities were municipalities based on the SEZ granting waves: group 1 [1978–1985] is
not granted open economic area status. They have relatively fewer and composed of 28 municipalities that were exposed to the SEZ reform
138 J. Wang / Journal of Development Economics 101 (2013) 133–147
Table 1
The summary statistics of the SEZ granting sequence.
A. Granting sequence
Municipalities newly granted with SEZs 28 49 143 75 26
Municipalities with SEZs 28 77 220 295 295
Ratio of municipalities with SEZs 0.09 0.24 0.69 0.92 0.92
The SEZ program onset year 1984 1988 1993 2002 –
(2.02) (0.57) (1.09) (3.76) –
Notes: Standard Errors reported in brackets. Based on the timing of experimenting with SEZs, the sample is classified into four groups (group 1 [1978–1985], group 2 [1986–1990],
group 3 [1991–1995], and group 4 [1996–2008]).
between 1978 and 1985; group 2 [1986–1990] is composed of 49 munic- Bureau of Statistics acknowledges the potential bias, and apart from
ipalities that had the SEZ experiment between 1986 and 1990; group 3 annual revisions to the national income and product accounts data,
[1991–1995] is composed of 143 municipalities that were chosen to it has so far conducted two benchmark revisions in 1993 and 2006.
implement the SEZ program between 1991 and 1995; group 4 The first, following the 1993 tertiary (service) sector census, adjusted
[1996–2008] is composed of the remaining 101 municipalities. Moreover, the 1978–93 tertiary sector value added and, by implication, the sum
I define the treatment intensity parameter as one when a municipality
only has one treatment among state-level SEZs, provincial SEZs and
open economic areas. When a municipality has two of the programs,
the treatment intensity is defined as two. When a municipality has carried
out three programs, the treatment intensity is three. According to the
classification, 67 municipalities had been exposed to treatment intensity
3, 53 municipalities had been exposed to treatment intensity 2, and 175
municipalities had been treated with intensity 1 by the end of the sample
period.
of the sectoral value added, i.e., gross domestic product (GDP). The Here the Yipts are the outcome variables including foreign direct
second benchmark revision occurred in early 2006 following the investment, domestic investment, TFP growth and factor prices in
k
2004 economic census of the secondary sector (industry, construc- municipality i of province p at time t. The dummy variables, Dipt ,
tion) and of the tertiary sector using OECD methods. The dataset for jointly represent the SEZ program designation event. In particular, si
this study uses the latest municipal statistics after these adjustments. denotes the year when municipality i carried out its SEZ experiment.
−6 − k
Following the lead of Caselli (2005) and of Young (2003), I have I further define Dipt = 1, if t − si ≤ − 6, and 0 otherwise; Dipt = 1, if
constructed series for real GDP, real capital stock, human capital t − si = k, and 0 otherwise, k = − 5, − 4, − 3, − 2, 0, 1, 2, 3, 4, 5;
6+
augmented labor and share of labor income. It is noteworthy that Dipt = 1, if t − si ≥ 6, and 0 otherwise.
the municipal statistics only offer the total municipal employment, The dummy for k = − 1 is omitted so that the post-treatment
which reflects the actual utilization of total labor force during a effects are relative to the period immediately prior to the start of
certain period of time (National Statistical Bureau, 2002). There are the program. Therefore, the parameter of interest δk identifies the
no disaggregated statistics on the number of employees within the causal effect of the SEZ program k years following its occurrence,
SEZs, nor on the residents living inside and outside the SEZ. assuming setting up a SEZ affects outcomes up to 6 years prior to
the program. αi is a fixed effect that captures permanent differences
3.4. Factor prices in the municipalities' observed and unobserved characteristics, such
as underlying abilities and endowments which might influence FDI
Average Wage of Workers refers to the average nominal wage performance. The γpts are the coefficients of a set of dummy variables
during a certain period for those who work full-time for state for each province in a given year in the sample period that capture the
owned enterprises and also those with collective, private, joint or for- general time pattern of primary outcomes in the same province. 17 To
eign ownership. It reflects the general level of wage income in the deal with potential problems of serial correlation, I adopt a conserva-
municipality, which however does not distinguish the wage level tive approach in estimating standard errors and allow the disturbance
within the SEZ from that outside the SEZ. terms εipt to be clustered by municipality throughout. 18
In terms of the cost of living, the National Statistical Bureau (NSB) Table 2 reports the estimates of Eq. (1) for a set of local economic
of China uses a consumer price index (CPI) to measure changes over outcomes. To help visualize the dynamic effect, Fig. 4 displays the
time in the amount consumers need to spend on a representative point estimates of FDI along with the 95% confidence bands. The
consumption basket. More precisely, the CPI covers the prices of municipalities seem to have absorbed substantial foreign direct
tobacco and liquor; clothing; household facilities, items and mainte- investment from the time their SEZ program took hold. Further, the
nance services; health care and personal articles; transportation and estimated effect of the SEZ on FDI intensifies following its establish-
communication; recreation, education and cultural articles and ment. As is shown in Column (1), per capita FDI increases by an aver-
services; and residence costs including rent, utilities and mainte- age of 6% in the year when the SEZ program is implemented relative
nance. It is worth noting that home prices are not included in the to the previous year. The magnitude becomes 75% six years after the
CPI because the CPI reflects the price change of households' current SEZ experiment begins. Moreover, no substantial increase or decrease
consumption. The acquisition of, payment for, and use of a house do is evident during the periods before the SEZ experiment. Therefore,
not occur simultaneously. The volume of housing consumed in a my confidence in these results – the FDI attracted is large and
period may have little relationship to the payments made in the long-term and appears only after municipalities have carried out a
period. Moreover, houses are an asset that many households pur- SEZ program – is enhanced. A similar dynamic pattern holds for a
chase and hold as an investment. Their prices reflect both the user rich set of outcomes including TFP growth, wages and the CPI though
cost and the expectations of future appreciation. The NSB therefore there is no such increase in domestic investment and house prices, as
uses rents, utility bills and maintenance fees to estimate the user reported in Table 2. The dynamics of the SEZ's effect seem to be
cost of housing as one component of the CPI. As a complement to meaningful since investment, technological progress and price
the CPI, I also collect municipal housing transaction prices to examine changes take time to accumulate.
whether a SEZ program drives up local house prices. 16
4.2. Baseline specification
4. Average SEZ effects
The point estimates in the event study suggest that the SEZ
The empirical analysis relies on the variation in the timing of program affects not only the levels but also the trends in primary out-
when SEZs were created across the sample of municipalities. As comes such as FDI outcomes, TFP growth, wages and the CPI. Specifi-
described in Section 2, the timing of the SEZ experiment provides cally, I define the post-SEZ trend to be Fipt = t − si if t ≥ si and
significant variations both between and within municipalities which 0 otherwise, where si again denotes the year the municipality
I will exploit in my identification strategy. launched its SEZ program. I also specify the SEZ to influence only
the level of outcomes such as domestic investment and house prices.
4.1. Event study The specifications are as follows:
Before introducing a parametric specification, I conduct an event Y ipt ¼ α i þ γpt þ Sipt δ þ F ipt β þ εipt ; ð2aÞ
study along the lines of Jacobson et al. (1993) for the primary
outcomes.
Y ipt ¼ α i þ γpt þ Sipt δ þ εipt : ð2bÞ
X
6
k
Y ipt ¼ α i þ γpt þ Dipt δk þ εipt ð1Þ
k≽−6;k≠−1 Sipt is the key variable indicating the SEZ experiment and is defined in
Section 3.1. All other controls are as previously defined. The effect of
16 17
The data available since the 1990s denote the price of newly constructed residen- An alternative specification using the municipality specific trends cannot fully ac-
tial buildings, and were calculated according to the floor space sold and the sale values count for the nonrandom SEZ assignment.
18
in real estate development reports. Because the transaction records have been reported Clustering the disturbance terms by province–assume that municipalities in the
only since 2010, year-on-year data with the same scope as in the US cannot be same province face common shocks–leads to the standard errors on the estimates be-
calculated. ing slightly larger than those reported.
140 J. Wang / Journal of Development Economics 101 (2013) 133–147
Table 2
An event study: the effects of the SEZs on local economy.
FDI Exports FIEs output Domestic investment Wage Consumer price index House prices
≥6 years before 0.122⁎ 0.011 0.289 0.026 −0.000 −0.004 0.012⁎ −0.108
(0.072) (0.113) (0.203) (0.057) (0.0046) (0.012) (0.006) (0.066)
5 years before 0.022 −0.113 0.305⁎ 0.020 −0.005 −0.006 0.003 −0.021
(0.055) (0.081) (0.173) (0.042) (0.005) (0.008) (0.004) (0.052)
4 years before −0.044 −0.097 0.075 0.048 −0.004 −0.003 0.004 −0.094⁎⁎
(0.054) (0.068) (0.149) (0.038) (0.005) (0.007) (0.003) (0.046)
3 years before −0.002 −0.025 0.060 0.078⁎⁎ 0.000 −0.001 0.003 −0.045
(0.047) (0.052) (0.133) (0.032) (0.005) (0.005) (0.002) (0.043)
2 years before 0.009 −0.013 0.003 0.055⁎⁎ 0.000 −0.004 0.002 0.048
(0.038) (0.038) (0.117) (0.028) (0.005) (0.004) (0.002) (0.040)
Year of change 0.064⁎ 0.169⁎⁎⁎ −0.025 0.041 −0.003 −0.010⁎⁎ 0.002 −0.008
(0.038) (0.041) (0.106) (0.027) (0.004) (0.005) (0.002) (0.036)
1 year later 0.278⁎⁎⁎ 0.312⁎⁎⁎ 0.235⁎ 0.031 −0.002 −0.002 0.005⁎⁎ 0.018
(0.058) (0.063) (0.129) (0.034) (0.004) (0.006) (0.003) (0.035)
2 years later 0.318⁎⁎⁎ 0.440⁎⁎⁎ −0.002 0.027 0.005 −0.004 0.006 0.038
(0.065) (0.078) (0.174) (0.039) (0.005) (0.007) (0.004) (0.043)
3 years later 0.386⁎⁎⁎ 0.591⁎⁎⁎ 0.260⁎ 0.035 −0.001 0.009 0.008⁎ −0.000
(0.071) (0.092) (0.143) (0.046) (0.005) (0.008) (0.005) (0.043)
4 years later 0.434⁎⁎⁎ 0.619⁎⁎⁎ 0.367⁎⁎ 0.018 0.005 0.008 0.008 −0.018
(0.078) (0.102) (0.162) (0.050) (0.005) (0.010) (0.006) (0.047)
5 years later 0.509⁎⁎⁎ 0.766⁎⁎⁎ 0.274 0.023 0.005 0.009 0.009 −0.018
(0.083) (0.108) (0.176) (0.054) (0.005) (0.011) (0.007) (0.046)
≥6 years later 0.749⁎⁎⁎ 1.110⁎⁎⁎ 0.473⁎⁎ −0.046 0.011⁎⁎ 0.038⁎⁎⁎ 0.019⁎ −0.048
(0.095) (0.144) (0.211) (0.073) (0.005) (0.015) (0.010) (0.052)
Obs. 9947 9946 3929 9933 9614 9933 9944 5170
R -sq 0.87 0.89 0.93 0.93 0.26 0.99 0.99 0.85
Notes: Observations are at the municipality-province-year level. “Year of change” is an indicator variable that equals one in the year of a SEZ program onset and zero otherwise. The variable
“≥6 years before” is an indicator variable that equals one if an observation is at least six years before the SEZ program starts. The variables “2 years before” to “5 years before” are indicator
variables that equals one if an observation is two to five years before the SEZ program starts. The variables “1 year later” to “5 years later” are indicator variables that equal one if an ob-
servation is one to five years after the SEZ program starts. The variable “≥6 years later” is an indicator variable that equals one in all other post-SEZ program years. The indicator variable
“1 year before” is left out so that the post-treatment effects are relative to the period immediately prior to the start of the program. In columns 1–3, the dependent variables are the natural
log of the measure of per capita Foreign Direct Investment related outcomes that are reported in the column heading. In column 4, the dependent variable is the natural log of per capita
domestic investment. In column 5, the dependent variable is the total factor productivity growth. In columns 6–8, the dependent variables are the natural log of the average worker's wage,
CPI and house prices. Robust standard errors are reported in parentheses, clustered by municipality. All regressions control for province-year fixed effects and municipality fixed effects.
⁎⁎⁎ Significant at the 1% level.
⁎⁎ Significant at the 5% level.
⁎ Significant at the 10% level.
the SEZ experiment on the level of the outcomes is identified by δ, the level of per capita FDI by 21.7% and the growth rate of FDI by
and the effect on the trend of the outcomes is identified by β. 6.9 percentage points. Columns (2f)–(3f) confirm the contribution
Table 3 presents the results. To begin with, Column (1f) provides of the SEZs in attracting vertical FDI, which takes advantage of
the estimates of Eq. (2a), indicating that the SEZ program increases low-cost production in China for products to be exported and is
fueled mostly by China's Asian neighbors. 19 Column (4) investigates
the effect of SEZs on domestic capital formation. The estimate
shows that a SEZ program neither crowds in nor crowds out domestic
investment. Hence the SEZs increase a municipality's investment
overall. In aid of quantifying any agglomeration economies I apply
the growth accounting approach (Caselli, 2005; Young, 2003) to cal-
culate total factor productivity growth. A key step is to estimate
labor and capital shares. The most disaggregated GDP data Chinese of-
ficial statistics provide using the income approach is at the provincial
level. 20 I use the provincial capital share as a proxy for the municipal
capital share. By 2008 the average post-treatment period is
13.45 years. Column (5) therefore implies that the SEZ program
increases total productivity growth by 1.6 percentage points. To com-
pare this contribution with average TFP growth at municipality level,
2.6%, during the sample period, the treated municipalities experience
a 62% increase in TFP growth relative to the not-yet treated ones. For
comparison purposes I also use national capital share, θk = 0.4,
19
Fig. 4. The dynamic effect of SEZs on FDI. Notes: the horizontal axis measures the See Whalley and Xin (2006) and Ekholm et al. (2007). Horizontal FDI, which in-
number of years since the SEZ program took place. The plots connected by the solid volves the transfer of production (mainly from North America and Western Europe)
line indicate changes in ln(per capita FDI) compared to the period immediately before to service the Chinese internal market is not the main form of FDI in China especially
the SEZ experiment conditional on municipality fixed effects and province-year fixed during the 1980s and 1990s when the SEZs were widely established (National Statisti-
effects. See Table 2 for the exact numbers of these point estimates. The dotted lines cal Bureau, 2009 and other various issues).
20
indicate the 95% confidence intervals where standard errors are clustered at the See Hsueh and Li (1999) for 1978–95, and the National Statistical Bureau (2007)
municipality level. for 1993–2004.
J. Wang / Journal of Development Economics 101 (2013) 133–147 141
Table 3
The effects of the SEZs on local economy.
FDI Exports FIEs output Domestic investment Wage Consumer price index House prices
Notes: All observations are at the municipality-province-year level. SEZ is an indicator variable that equals one if an observation is after the SEZ program starts and zero otherwise.
PostSEZ trend is an indicator variable that denotes a linear trend after the SEZ program onset. In columns 1f–3f, the dependent variables are the natural log of the measure of per
capita Foreign Direct Investment related outcomes that are reported in the column heading. In column 4, the dependent variable is the natural log of per capita domestic invest-
ment. In column 5, the dependent variable is the total factor productivity growth. In columns 6–8, the dependent variables are the natural log of the average worker's wage, CPI and
house prices. Robust standard errors are reported in parentheses, clustered by municipality. All regressions control for province-year fixed effects and municipality fixed effects.
⁎⁎⁎ Significant at the 1% level.
⁎⁎ Significant at the 5% level.
⁎ Significant at the 10% level.
Table 4
The effects of the SEZs on local economy: diversion versus creation.
FDI Exports FIEs output Domestic investment Wage Consumer price index
Notes: All observations are at the municipality-province-year level. SEZ is an indicator variable that equals one if an observation is after the SEZ program starts and zero otherwise.
PostSEZ trend is an indicator variable that denotes a linear trend after the SEZ program onset. The dummy variable “OtherSEZ” equals one if the municipality is adjacent to any other
SEZs and zero otherwise. In columns 1f–3f, the dependent variables are the natural log of the measure of per capita Foreign Direct Investment related outcomes that are reported in
the column heading. In column 4, the dependent variable is the natural log of per capita domestic investment. In column 5, the dependent variable is the total factor productivity
growth. In columns 6–7, the dependent variables are the natural log of the average worker's wage and CPI. Robust standard errors are reported in parentheses, clustered by
municipality. All regressions control for province-year fixed effects and municipality fixed effects.
⁎⁎⁎ Significant at the 1% level.
⁎⁎ Significant at the 5% level.
⁎ Significant at the 10% level.
5. Heterogeneous SEZ effects In contrast, the creation effect for the 1996–2008 SEZs is 39% while
the diversion effect of surrounding SEZs is 28%. FDI seems to be sen-
The SEZs can affect the local economy differently at different sitive to the relative advantages enjoyed by the municipalities.
stages of the program expansion, or the impacts may be heteroge- These results imply that when China becomes more liberalized, the
neous across different treatment intensities. To shed light on that, I later SEZs tend to be closer substitutes for each other and therefore
now exploit the full richness of the SEZ program to explore these generate more distortions in FDI location choice.
two forms of heterogeneous effect that have not been previously In terms of the domestic investment, the OLS estimates in column
studied. 2 indicate that a crowding-in effect disappears for later SEZs. There
are positive, however, no significant difference between the early
5.1. Early zones versus late zones groups and late groups in terms of agglomeration economies. Finally,
as reported in columns 4 and 5, in line with the evidence on invest-
To see whether earlier SEZs exhibit different impact patterns than ment, the early zones experience the largest increases in local factor
those founded later, I estimate the following OLS specifications for the price changes among the four groups. As the SEZ program gradually
municipal outcomes Yipt: expands to more municipalities, its effect on local prices becomes
less bigger.
X
4
q
X
4
q To further address the endogeneity of the SEZ granting sequence, I
Y ipt ¼ α i þ γpt þ δ1 Sipt þ δq Gi Sipt þ β1 F ipt þ βq Gi F ipt implement a difference-in-differences matching estimator.24 I establish
q¼2 q¼2
that matched earlier treated and later treated municipalities are similar
þ Oipt ϕ þ Oipt Nipt θ þ εipt ; ð4aÞ in terms of observables, so the performance of the latter can serve as a
counterfactual for what would have been the performance of earlier
X
4 group during the same period in the absence of a SEZ program.
q
Y ipt ¼ α i þ γpt þ δ1 Sipt þ δq Gi Sipt þ Oipt ϕ þ Oipt Nipt θ þ εipt : Extending the standard DID matching in microeconomic applica-
q¼2
tions (Abadie, 2005; Heckman et al., 1997; Blundell et al., 2004),
ð4bÞ Persson and Tabellini (2008) develop an approach that copes with
complications such as different treatment dates for different
Where Gi2 is equal to one if a municipality was granted a SEZ observations in the treatment group. Their method is highly relevant
between 1986 and 1990 (group 2), and zero otherwise; Gi3 is equal for my research setting as the municipalities were authorized to
to one if a municipality was granted a SEZ between 1991 and 1995 establish SEZs in different years.
(group 3), and zero otherwise. Gi4 is equal to one if a municipality Within their framework, I implement the estimation in four steps.
had not been granted with the SEZs by 1995 (group 4), and zero First, I define a group of treated and a group of control municipalities
otherwise. The municipalities that carried out the SEZ program and estimate the probability of treatment. In particular, I estimate a
between 1978 and 1985 (group 1) are the reference group in the propensity score model over the period 1978–1990 on the sample
specification. All other controls are as previously defined. treated between 1978 and 1985 using as controls the group with
Table 5 presents the results comparing changes on local economic SEZs created between 1986 and 1990. The same technique is applied
outcomes in group 2, which carried out the SEZ program in the sec- in contrasting the municipalities that were treated between 1986 and
ond wave, group 3, which introduces the SEZ program in the third 1990 with those treated between 1991 and 1995 used as control
round, and the final group relative to group 1, the earliest SEZ group. areas over the period between 1978 and 1995, and then the munici-
Column 1 shows that the creation effect for the early zones is palities that were treated between 1991 and 1995 with the last
much larger than for the later zones. Moreover, diversion becomes in- group as controls over the period from 1978 to 2008. Table 1 provides
creasingly important for the later zones. To take the 1978–1985 SEZs
for example, by 2008 a SEZ program on average increases per capita 24
See Smith and Todd (2005), Imbens and Wooldridge (2009), Caliendo and
FDI by 254%, while neighboring SEZs decrease municipal FDI by 21%. Kopeinig (2008).
J. Wang / Journal of Development Economics 101 (2013) 133–147 143
Table 5
The effects of the SEZs on local economy: by the SEZ timing.
Notes: All observations are at the municipality-province-year level. SEZ is an indicator variable that equals one if an observation is after the SEZ program starts and zero otherwise.
PostSEZ trend is an indicator variable that denotes a linear trend after the SEZ program onset. Group 2 [1986–1990] is an indicator variable that equals one if a municipality created
the SEZs between 1986 and 1990 and zero otherwise. Group 3 [1991–1995] is an indicator variable that equals one if a municipality created the SEZs between 1991 and 1995 and
zero otherwise. Group 4 [1996–2008] is an indicator variable that equals one if a municipality had not created a SEZ by 1995 and zero otherwise. The dummy variable “OtherSEZ”
equals one if the municipality is adjacent to any other SEZs and zero otherwise. In column 1, the dependent variable is the natural log of the measure of per capita Foreign Direct
Investment. In column 2, the dependent variable is the natural log of per capita domestic investment. In column 3, the dependent variable is the total factor productivity growth. In
columns 4–5, the dependent variables are the natural log of the average worker's wage and CPI. Robust standard errors are reported in parentheses, clustered by municipality. All
regressions control for province-year fixed effects and municipality fixed effects.
⁎⁎⁎ Significant at the 1% level.
⁎⁎ Significant at the 5% level.
⁎ Significant at the 10% level.
evidence of the validity of using the groups in this way. The munici- a k-nearest neighbor approach, a treatment case is matched with k
palities of adjacent rounds are more similar in terms of the observed control cases in an interval.
characteristics which may have played important roles in the selec- Second, for each treated municipality i I compute the difference in
tion process. They might also, therefore, be more similar in terms of the mean outcomes measured before and after the treatment date (si)
unobserved characteristics. and prior to the start of its matched control j's SEZ program (sj):
The variables used in estimating the propensity score include the
pre-treatment per capita industrial output, per capita number of sec-
ondary school students, the distance to the coast, highway density, j 1 1
dY i ¼ ∑ Y − ∑Y : ð6Þ
airport, port, per capita post and telecommunications, per capita T aij si ≤tbsj ipt T bi tbsi ipt
loans by and deposits in the financial institutions, wages, land price
levels and more importantly historical trends in the outcomes
examined to compare municipalities with similar outcomes trends Where Yipt is the municipal outcome in period t, the subscript i de-
prior to being designated a SEZ. For example, for the 1978–1990 SEZ notes the treated municipality and the superscript j refers to a certain
sub-sample, I use the characteristics in 1978 and pre-trends of prima- control municipality j. Tija is the number of years after the treatment
ry outcomes to estimate a logit model. These variables, denoted as X, date and prior to the start of j's SEZ program; Tib is the number of
are likely to affect the propensity for a municipality being selected to years before the treatment date.
experiment with the SEZ earlier and are also likely to be instrumental For each of the not-yet-treated controls j, I compute the difference
in affecting the outcomes. I create a D = 1 if the municipality had in outcomes over the periods before and after the SEZ program onset
implemented a SEZ program by 1985 and D = 0 if the municipality date in the treated municipality i it is matched with and prior to the
carried out the SEZ experiment between 1986 and 1990. start of j's own SEZ program:
′
Pr fD ¼ 1jX g ¼ ϕ X β : ð5Þ i 1 1
dY j ¼ ∑ Y − ∑Y : ð7Þ
T aij si ≤tbsj jpt T bi tbsi jpt
Table 7
The impact of the SEZ intensity on local economy.
Notes: All observations are at the municipality-province-year level. 26 municipalities that received no SEZ treatment during the sample period are excluded from the regression. SEZ
is an indicator variable that equals one if an observation is after the SEZ program starts and zero otherwise. PostSEZ trend is an indicator variable that denotes a linear trend after the
SEZ program onset. I define the treatment intensity parameter as one when a municipality only has one treatment among state-level SEZs, provincial SEZs and open economic areas.
When a municipality has two of the programs, the treatment intensity is defined as two. When a municipality has carried out three programs, the treatment intensity is three. In-
tensity being 2 is an indicator variable that equals one if a municipality had been exposed to treatment intensity 2 by 2008 and zero otherwise. Intensity being 3 is an indicator
variable that equals one if a municipality had been exposed to treatment intensity 3 by 2008 and zero otherwise. In columns 1f–3f, the dependent variables are the natural log
of the measure of per capita Foreign Direct Investment related outcomes that are reported in the column heading. In column 4, the dependent variable is the natural log of per capita
domestic investment. In column 5, the dependent variable is the total factor productivity growth. In columns 6–7, the dependent variables are the natural log of the average
worker's wage and CPI. Robust standard errors are reported in parentheses, clustered by municipality. All regressions control for province-year fixed effects and municipality
fixed effects.
⁎⁎⁎ Significant at the 1% level.
⁎⁎ Significant at the 5% level.
⁎ Significant at the 10% level.
⋏
of the SEZ program is heterogeneous across different treatment β 2 > 0. There is also a positive and significant effect when moving
intensities using the following panel data specification: from the first to the third treatment intensity (treatment intensity
⋏ ⋏
equals three), so δ 3 > 0 and β 3 > 0. These confirm that the treat-
X
3
q
X
3
q
ment intensity effects increase in absolute magnitude when moving
Y ipt ¼ α i þ γpt þ δ1 Sipt þ δq Ii Sipt þ β1 F ipt þ βq Ii F ipt þ εipt ; ð10aÞ from the first to the second intensity, and from the first to the third
q¼2 q¼2
intensity.
Moving from the first to the second treatment intensity in Column
⋏ ⋏
X
3
q (1f), δ 2 and β 2 imply a level effect size of 22% and a growth-rate
Y ipt ¼ α i þ γpt þ δ1 Sipt þ δq Ii Sipt þ εipt : ð10bÞ
effect size of 3.4 percentage points on per capita FDI. Moving from
q¼2 ⋏ ⋏
the first to the third treatment intensity, δ 3 and β 3 indicate a level
effect size of 84% and a growth-rate effect size of 4.3 percentage
Where Iiq is equal to one if the municipality had been exposed to points on per capita FDI.
the treatment intensity q (q = 2, 3) by 2008, and zero otherwise 26; There is no significant difference in domestic investment across
all other controls are as previously defined. The 26 municipalities the intensities. The empirical results for other outcomes, including
that received no SEZ treatment during the sample period are TFP growth, wages and the CPI, leave unchanged the basic implication
excluded for two reasons. First, a city which had not carried out the that treatment intensity effects are heterogeneous, as shown in
SEZ program by 2008 might have been fundamentally different Columns (5)–(7). The municipalities with multiple SEZs experience
from the treated municipalities. Second, the sample size of the larger increases in TFP growth rate, wages and the CPI.
untreated group is too small. The group with a treatment intensity
of one is a more suitable reference group. All the other controls are 6. Conclusion
as previously defined. An important feature of this empirical setting
is that various municipalities could be exposed to very different Capital as well as advanced technology is typically desirable for de-
treatment intensities, making it feasible to estimate the δq and βq velopment. Aiming to attract foreign capital, boost exports and absorb
coefficients using the intensity variation and time variation of advanced technology, SEZs have been widely adopted as a place-based
treatments across municipalities. program. This study contributes to the long-standing debate about
The result of Table 7 shows there to be a heterogeneous effect of their effectiveness by providing some of the first estimates of the im-
treatment intensities on local economic outcomes. More precisely, pact of the SEZs on the local economy, as measured by investment,
there is a positive and significant treatment intensity effect when TFP growth and factor prices.
moving from a single SEZ (treatment intensity being equal to one) China's SEZ policy package, including private property rights pro-
⋏
to the dual treatment (treatment intensity equals two), δ 2 > 0 and tection, tax breaks and land use policy, on average increases per capita
foreign direct investment mainly in the form of foreign-invested and
26
Among the municipalities with more than one SEZ program there are rich varia- export-oriented industrial enterprises. The FDI inflow does not,
tions in the timing of their first, second and third program. However, exploring the
time-varying jump intensity (from 1 to 3) suffers from the endogeneity problem,
however, crowd out domestic investment. More importantly, the
which is difficult to control for. Therefore, I only explore the static differences in the majority of the FDI attracted by the SEZs is new activity rather than
municipalities' treatment intensities in 2008. simply a reallocation from other non-SEZ areas. Due to the
146 J. Wang / Journal of Development Economics 101 (2013) 133–147
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