How does agglomeration promote the product innovation of Chinese firms?

- This paper investigates the effect of agglomeration on product innovation.
- I use Chinese firm-level data and consider the effects of both localization economies and urbanization economies.
- Urbanization size and industrial diversity contribute to new product introduction and new product intensity.

This study empirically analyzes the effect of agglomeration economies on firm-level product innovation (new products), using Chinese firm-level data from 1998 to 2007. In terms of new product introduction and new product output, I find that Chinese firms benefit from urbanization economies (as measured by the number of workers in other industries in the same city and by the diversity of industries in the same city). Conversely, I find no positive effects of localization economies (as measured by the number of other workers working for neighboring firms in the same industry and in the same city). These results suggest that in China, urbanization economies play an important role in fostering product innovation by urban size and diversity.