Agglomeration and sector composition across cities: Evidence from China

This paper studies the spatial distribution of economic activities across urban hierarchy from an agglomeration perspective by constructing a new economic geography model with manufacturing and service sectors, two types of labor with perfect geographical mobility, and two regions. Holding the size of the sectors constant, the theoretical model shows that the larger city has a disproportionately larger concentration of the manufacturing sector compared to the smaller city. We test this prediction by estimating a spatial panel model with data from 285 Chinese cities over the period 2009-2019. We find a positive and statistically significant relationship between city size and manufacturing-to-service ratio. The findings shed new light on the importance of the manufacturing sector relative to the service sector for urban economic development. Despite the nationwide domination of services, larger cities are relatively specialized in manufacturing due to agglomeration economies.