Abstract | Urbanization is considered to be an important driving force for China's economic growth. From 1978 to 2018, China's urbanization rate rose rapidly from 17.9% to 59.6%, covering the urbanization process which Western developed countries realized over a century. In order to accelerate the citifying process against rural economic and social forms, an innovative policy tool has been used, that is to adjust administrative divisions and levels, and rely on the ensuing regional expansion to carry out government- dominated reforms of rural-urban spatial patterns. In this paper, we focus on a unique form of the above-mentioned government-dominated urbanization tool-- “city-county merger”.
Since the 1990s, more than 200 counties in China have been integrated into central cities, accelerating the deepening of regional urbanization. However, the potential effect of city-county merger is still obscure, especially regarding the micro-level firm behavior. On the one hand, it promoted the integration of resources and regional market integration through regional market integration and economic factor agglomeration, which has a positive effect on regional economic development and urbanization On the other hand, it leads to the concentration of administrative power in municipal governments, which reduces the enthusiasm for competition among regions; the concurrent disorderly expansion of urban space and the repeated construction of infrastructure caused by the withdrawal of districts have also led to “false urbanization”. Different from the existing literature focusing on regional aggregate indicators, this paper focuses on the micro-firm behavior. We believe that the government-dominated city-county merger will change the government incentives and constraints faced by enterprises within the domain in a short period of time through the supply of resource elements and the change of the competitive landscape between enterprises. In particular, the high-density convergence of various elements in the city provides various conveniences for the company's innovative activities, and it is well-documented that urbanization can promote the technological innovation of enterprises. However, no scholars have yet explored the “jumping” urbanization model of “city-county merger” and its impact on regional innovation activities.
This paper exploits the panel data from Chinese Industrial Enterprises Database during 1998 and 2009, combining the patent application data, then using the panel fixed effect model to analyze the impact of the city-county merger on the innovation activities of firms. As it turns out, city-county merger significantly improves the innovation output of firms within the area. In order to address the endogeneity problems, we take the instrumental variable method and the placebo test to estimate again, and the conclusion remains robust. We explain the impact mechanism in two dimensions: economic agglomeration and resource allocation optimization. Our test based on agglomeration economic mechanism shows that after city-county merger, the accumulation of capital, labor and enterprises in the region has realized the “aggregation economy” within the region. Providing resources and talent support, the agglomeration economy has expanded the market size of the relocated areas and strengthened market competition, which has stimulated the innovation power of the company in the intensified market survival and inferiority. The test on the optimal allocation of resources mechanism indicates that the county-level district has weakened the county government's inefficient intervention in the economy. As a result of city-county merger, the inefficient configuration of resources in the domain is reduced, which helps to promote enterprise innovation through optimal configuration of resources within the domain. Therefore, a positive cycle of “removing county-urbanization-enterprise innovation-urbanization” will be formed in the reformed zone.
Compared with the existing literature, the contribution of this paper is mainly reflected in the following three aspects: Firstly, the existing research on the impact of the city-county merger is mainly focused on the regional economic aggregate level. This paper uses industrial enterprises as a sample, and analyzes the impact of the city-county merger on the innovation activities of firms with a more robust panel fixed effect model. Secondly, it expands the research on the influence of urbanization and government policies on enterprise innovation: we find that the city-county merger can promote the technological innovation of enterprises within the domain. Finally, from the perspective of urban agglomeration economy and resource optimization allocation, the mechanism through which urbanization could enhance enterprise innovation activities and regional innovation vitality is clarified. The research results of this paper provide a certain empirical evidence for deepening China's urbanization process, promoting market economy integration, transforming the economic development model, and activating the innovation vitality of enterprises.
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