The effects of factor proximity and market potential on urban manufacturing output

•We model spillover effects of factor supply and market demand on urban economies.•Four factor proximity variables and two market potential variables are constructed.•FE and SLX models are estimated for prefecture cities in China and in three regions.•Proximities to factor supply contribute to manufacturing growth in the central region.•Cities in the east and west benefit more from domestic and foreign market potentials.

This paper derives a NEG-style model that outlines several spatial spillover channels and examines the effects of proximities to spatially distributed factor supply and market demand on Chinese urban economies. A panel dataset of 283 prefecture or higher-level cities from 2003-2013 is used for the empirical analysis. The estimation shows that proximities to government expenditure on science and technology, to professionals in science and technology, and to the domestic and foreign markets all contribute to urban manufacturing growth, while concentrations of specialized labor force and producer services in neighboring cities have negative effects. The spatial effects of factor proximities and market potentials differ in China's three regions. Surprisingly, cities in the central region have the most significant gain from spillovers of factor supply, and cities in the eastern and western regions benefit substantially from the domestic and foreign markets. Policy implications are derived from the findings.