Human capital externalities in cities: evidence from Chinese manufacturing firms

We investigate whether increased geographic concentration of human capital generates positive externalities that benefit firms located in the area. Using a panel of Chinese manufacturing firms, we find a positive and statistically significant relationship between firm productivity and city-level human capital. This result is robust to alternative model specifications and estimation methods used and distinguishable from the effect of industry agglomeration and the spillover effect associated with foreign direct investment. We argue that human capital spillovers do not occur automatically and freely. The intensity of spillovers depends on the benefits and costs accrued to individual workers, which in turn depend on the growth, technological and institutional environments in which the firm operates. We find that the intensity of spillovers is greater in industries where human capital matters more, in larger or more densely populated cities and in more economically vibrant coastal cities. We also find that the intensity of spillovers is generally greater for non-state-owned firms than for state-owned ones and displays an upward trend, which is suggestive of an intensifying impact of market-oriented reforms on human capital externalities.