Does development zones improve the capacity utilization of firms? Based on the dual perspectives of firms inside and outside the zone

Weijie Jiang, Jiaying Dai and Laiqun Jin

Economic Analysis and Policy, 2025, vol. 85, issue C, 2247-2264

Abstract: Development zones (DZs), as a crucial place-based industrial policy, are widely adopted by developing countries to attract investment and promote economic growth. This study investigates the economic impacts of DZs in China, with a focus on firm capacity utilization and total factor productivity (TFP). Using the Annual Survey of Industrial Firms dataset from 1998 to 2013 and employing the PSM-DID method, we find that the establishment of DZs significantly enhances the capacity utilization and TFP of firms within the zones. However, this comes at a cost: non-DZ firms experience a decline in both capacity utilization and TFP. Mechanism analysis reveals that DZ firms capitalize on preferential policies, such as lower interest rates and higher subsidies, to engage in low-price competition, improving their capacity utilization. This, in turn, creates a crowding-out effect, reducing capacity utilization for non-DZ firms and leading to broader negative spillover effects at the county level. These findings call for a more cautious approach to DZ policies, highlighting their unintended consequences on regional industrial dynamics and offering insights into their nuanced economic impacts.

Keywords: Development zone; Capacity utilization; Price competition; TFP (search for similar items in EconPapers)
JEL-codes: D24 L11 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:85:y:2025:i:c:p:2247-2264

DOI: 10.1016/j.eap.2025.03.007

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