Special economic zones, export status, and firms’ productivity: Theory and evidence from China

• Published date: 01 August 2022
• Author: Yang Liu,Yidan Jin
• Date: 01 August 2022
• DOI: http://doi.org/10.1111/rode.12883

1338 

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     wileyonlinelibrary.com/journal/rode  Rev Dev Econ. 2022;26:1338–1360.

© 2022 John Wiley & Sons Ltd

Received: 8 March 2021 

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  Revised: 10 February 2022 

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  Accepted: 11 February 2022

DOI: 10.1111/rode.12883  

REGULAR ARTICLE

Special economic zones, export status, and

firms’ productivity: Theory and evidence from

China

YangLiu1

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YidanJin2

1School of Applied Economics, Renmin 

University of China, Beijing, China

2Department of Economics, Georgetown 

University, Washington, District of 

Columbia, USA

Correspondence

Yidan Jin, Department of Economics, 

Georgetown University, 37th and O 

Streets, N.W. Washington, DC 20057, 

USA.

Email: yj105@georgetown.edu

Funding information

National Natural Science Foundation of 

China, Grant/Award Number: 72101254

Abstract

This  paper  explores  the  impact  of  special  economic 

zones  (SEZs)  policy  and  export  status  on  firms’  pro-

ductivity. We first sketch a theoretical model to explain 

the selection mechanism  of different types  of exporters 

and  SEZ  firms,  and  provide  the  productivity  ranking 

of  firms.  SEZ’s  exporters  have  the  highest  productiv-

ity. Firms facing high imported intermediate tariffs will 

select  themselves  into  SEZs  to  avoid  imported  input 

tariffs; firms become non- SEZ’s exporters when their in-

termediate inputs tariffs  are low. Compared  with other 

types of firms, non- SEZ’s non- exporters have the lowest 

productivity. Then, we empirically test the  productivity 

ranking by firm- level data, and the results are consistent 

with our  theoretical framework.  Besides, different  SEZ 

policies are  associated  with  heterogeneous  impacts  on 

the firms’ productivity. Our  paper further suggests  that 

preferential policies are responsible for the productivity 

ranking of firms.

KEYWORDS

exporters, firm productivity, intermediate input tariffs, special 

economic zone

JEL CLASSIFICATION

F1; O3; R1

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LIU et al.

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INTRODUCTION

Over the past  few decades, there  are a  few topics in  international economics extensively  exam-

ining the effect of trade on  firms’ productivity. A large  body of  theoretical and empirical  works 

has focused  on  the  extent to which  international  products  and foreign  inputs  can  serve  as an 

important channel of increasing firms’ productivity. Developing countries around the world have 

policies that encourage, subsidize, or remove restrictions on imported intermediate goods, in the 

belief that firms  can benefit from the  presence of  foreign trade (such as Lileeva &  Trefler, 2010; 

Yu, 2015). More recently, the agglomeration economies have been rigorously  identified produc-

tivity advantages  for  firms  located in  spatially  target  areas; especially  in  developing countries, 

a good example  of the  program is special  economic zones  (SEZs) (Lu  et al., 2019;  Wang, 2013). 

However, only trade or agglomeration economy effect may be insufficient to ensure the gains in 

productivity. Despite the increasing comprehensive work on the international trade or agglomer-

ation economies effect, there is a lack of evidence of evaluating the impact of both SEZ programs 

and exporting status on the productivity of firms.

As an  approach to increasing  productivity and  economic growth,  SEZ programs  are heavily 

conducted in developing  countries. Nearly  three- quarters of all  countries have  SEZs that  man-

ufacture $7.5 trillion  in gross output  each year. Especially  in China, SEZs constitute 60%  of  ex-

ports and  5.2%  of  the  total  employment  (Boyenge,  2007).  Many developing  countries  use  this 

policy as a potential catalyst  for development (Alder et  al., 2016; Grant, 2017). According to the 

World Bank, there were approximately 3,000 SEZs in 135 countries in 2008, accounting for  over 

68 million direct  jobs and  over 

$500

 billion of  direct  trade- related value- added  within the zone 

(Akinci &  Crittle,  2008).  SEZs  contain  geographic  regions within  a  country  with  more  liberal 

trade laws and  policies to  encourage investment,  international trade,  and relaxed labor  regula-

tions. The benefits of  firms in the SEZs  include producing and importing intermediate  goods at 

a lower price with  zero or lower tariffs  and reduction in  the corporate income tax  rates, aiming 

at being  globally competitive.  To receive the  low  production cost  in the  SEZs, zone  firms  have 

to pay a  high initial  cost to enter  the zones.  The main objective  of  this paper  is to  theoretically 

demonstrate the productivity ranking of four types of firms: non- SEZ’s non- exporters, SEZ’s non- 

exporters, non- SEZ’s exporters,  and  SEZ’s  exporters.  To explain  these  stylized  facts,  we  apply 

comprehensive firm- level data that match the public information of Chinese SEZs to empirically 

explore the impact of the SEZ policy and exporting status on the firms’ productivity.

This study is  first related to  the literature studying the  effect of  SEZ policy  conducted in de-

veloping countries. Though many papers, both theoretical and empirical, have studied the effect 

of SEZs  on the firm  level and district level  (Amirahmadi & Wu, 1995; Bräutigam  & Tang, 2014; 

Chaudhuri &  Yabuuchi,  2010;  Davies et  al.,  2018;  Davies  &  Mazhikeyev, 2019;  Defever  et  al., 

2019; Farole &  Akinci, 2011;  Grant, 2017; Wang, 2013),  none of  these  papers have  investigated 

the productivity ranking of SEZ firms. This paper also builds on the research estimating the effect 

of SEZs on firms’ exporting behavior. Some existing literature shows the direct effect of SEZs on 

the firms’ extensive and intensive margin of export (Davies & Mazhikeyev, 2019). Compared with 

studies that conclude  a positive influence  of  SEZs on firms’ exporting behavior, this paper  sug-

gests a two- part selection of firms on whether to join SEZs and become exporters, with potential 

mechanisms for the firms’ productivity ranking.

The paper also contributes to the literature studying the behavior of exporters and export pro-

cessing firms (Dai  et al., 2016;  Lu, 2010;  Melitz, 2003; Verma & McWilliams,  2013). The results 

of this  paper match  the  finding that  regular exporters  are more productive  than non- exporters 

for a  wide range  of  countries. Some  recent papers  argue  the opposite  result for  China because