Does agglomeration promote internationalization of Chinese firms?

- This paper examines the knowledge spillover caused by the agglomeration of exporters.
- We employ both semiparametric and parametric analyses using Chinese firm-level data.
- The agglomeration of incumbent exporters contributes to export participation.
- The effect is different according to the ownership of incumbent exporters.

Knowledge spillover from the agglomeration of exporters can reduce the initial costs of exporting faced by other firms and thereby facilitate exports. We use a large dataset of Chinese manufacturing firms to assess whether industrial agglomeration lowers the minimum productivity level required for exporting and whether it increases a firm's probability of exporting. Semi-parametric quantile regressions reveal that the productivity advantage of exporters against non-exporters is markedly smaller in agglomerated regions. Furthermore, a parametric estimation of an export entry model indicates that the agglomeration of incumbent exporters contributes significantly to export participation, although its magnitude is limited. These spillover effects are generated not only by the agglomeration of exporting foreign invested firms (FIFs), but also, more importantly, by that of indigenous Chinese exporters. In fact, the agglomeration of exporting FIFs only contributes to the export entry of FIFs.