Agglomeration externalities or network externalities? Explaining productivity in Chinese urban regions

Abstract

This paper explores the relative importance of agglomeration externalities and network externalities in explaining regional productivity through the lens of a polycentric development framework specific to China. Using enterprise investment data, a spatial econometric model and an instrumental variables strategy, we find that both externalities are important in explaining regional productivity. There are no interaction effects between agglomeration and network externalities, with the latter being more prominent in urban regions with higher levels of polycentricity. Compared to agglomeration externalities, which are geographically confined, network externalities can generate spatial spillovers.