Financial Development and Manufacturing Agglomeration: From the Perspectives of Specialized Agglomeration and Diversification Agglomeration

【Authors】

HU Jinyan & GUO Tairan, ZHANG Bo

【WorkUnit】

HU Jinyan （Shandong University, 250100; Qingdao University, 266071）；GUO Tairan, ZHANG Bo （Shandong University, 250100）

【Abstract】

Since the implementation of the reform and opening-up policy, China’s manufacturing sector has experienced a notable rise in agglomeration levels, though these remain below those observed in developed Western countries. Against the backdrop of the Fourth Industrial Revolution and intensifying global industrial competition, among other complex challenges, China’s manufacturing industry faces a pivotal transformation phase where spatial agglomeration is expected to remain a central theme in shaping economic geography. As industrial agglomeration is a key driver of new quality productive forces and high-quality economic growth, the role of financial system efficiency in shaping agglomeration effects becomes pronounced. Using micro-level data from the Chinese Industrial Enterprise Database, this paper measures the specialization agglomeration and diversification agglomeration across manufacturing subsectors at the prefecture-city level. A two-way fixed effects model is employed to assess how formal finance and constructive informal finance affect agglomeration patterns in manufacturing subsectors with varying external financing needs.
The results show that constructive informal finance significantly promotes specialization agglomeration in industries with high external financing dependence, while formal finance fosters their diversification agglomeration. These conclusions are robust across a range of empirical tests, including instrumental variable approaches and alternative specifications. Mechanism analysis indicates that constructive informal finance drives specialization by enhancing cities’ risk-sharing capacity, whereas formal finance supports diversification by improving the total factor productivity. Industry-level heterogeneity analysis reveals that the benefits of constructive informal finance are concentrated in non-state-owned and low- to medium-tech sectors, while formal finance plays a more prominent role in state-owned and high-tech sectors. Moreover, formal finance significantly encourages related diversification but has a limited impact on unrelated diversification. Finally, regional heterogeneity analysis shows that the agglomeration effects of financial development—both the diversification effect of formal finance and the specialization effect of constructive informal finance—are more pronounced in regions with strong locational advantages. These findings support optimizing finance to better serve the real economy.
The marginal contributions of this paper are as follows. First, it measures manufacturing sub-sector agglomeration across all Chinese prefecture-level cities using large-scale, granular data, thus expanding research on financial determinants of industrial agglomeration. Second, it enriches the understanding of dual financial systems’ impact on macroeconomic outcomes by linking them to horizontal and vertical agglomeration patterns and regional development. Third, it provides empirical evidence on how formal finance and constructive informal finance jointly underpin China’s industrial growth, offering new insights into region-specific development paths and economic segmentation driven by financial structures. 

JEL: G20, L60, O17

【KeyWords】

Formal Finance, Constructive Informal Finance, Specialization Agglomeration, Diversification Agglomeration, Risk Sharing