Good neighbors, bad neighbors: local knowledge spillovers, regional institutions and firm performance in China

Recent evolutionary economic geography studies have stressed technological relatedness as a key explanatory factor for regional industrial diversification. It is further argued that firms that manufacture products with dense connections to regional industrial structure benefit the most from local knowledge spillovers and thus should grow faster. Based on a firm-level dataset on China's manufacturing industry over the 1998-2008 period, our results indicate that the density of links between a firm's products and local industrial structure does yield firm performance enhancing spillovers. We further decompose the overall density indicator and point out the lack of connections between firms of different ownership types in terms of information exchange and technological diffusion. Finally, empirical results confirm that regional institutions play a critical role in the spillover diffusion between firms of different ownership structures.