Policy Coherence in Innovation and Openness and the Spatial Distribution of Firms

【Authors】

JI Tianzheng, HU Xueping & LIU Meihan

【WorkUnit】

JI Tianzheng, HU Xueping (Zhongnan University of Economics and Law, 430073)；LIU Meihan (Xiamen University, 361005)

【Abstract】

Innovation and openness remain enduring priorities for China’s development in the new era. Amidst profound global transformations unseen in a century, fully leveraging the synergistic development advantages of national independent innovation demonstration zones (IDZs) and free trade pilot zones (FTZs) is essential for overcoming institutional bottlenecks, such as “innovation islands” and “openness depressions,” and for achieving high-quality development. From the perspective of policy coherence between innovation and openness initiatives, this study constructs a composite quasi-natural experiment based on FTZ-IDZ linkage. For the first time, it combines the heterogeneous enterprise location choice probability model with China’s full-scale enterprise dataset spanning 2007 to 2021 to measure the spatial distribution of enterprises at the city level and empirically test the impact of FTZ-IDZ linkage on enterprises’ spatial distribution. 
The study finds that FTZ-IDZ linkage significantly optimizes the spatial distribution of firms. This conclusion remains robust across a series of endogeneity, robustness, and competitive hypothesis tests. Mechanism analysis indicates that the linkage enhances enterprises’ spatial distribution through three channels: strengthening supply-demand matching, enhancing innovation incentives, and facilitating financial support. Compared to cities implementing only a single policy, the empowering effect and the underlying mechanism are more pronounced in cities implementing the combined FTZ-IDZ policy. Spatiotemporal heterogeneity tests show that an “innovation before openness” sequence yields superior outcomes compared to the reverse order. Expanding the geographic scope or increasing the number of functional zones within these areas will strengthen the optimizing effect of the FTZ-IDZ linkage on firms’ distribution. 
Additionally, the FTZ-IDZ linkage generates spatial spillover effects characterized by point-to-area and gradient diffusion. Identification tests at a finer scale confirm strong directional consistency between innovation and opening-up policies when implemented jointly. In addition, the FTZ-IDZ linkage lays a favorable foundation for enterprises’ spatial distribution under a relational embedding mode, but its expected effectiveness under a structural embedding mode has yet to be fully realized. This paper not only addresses the contemporary challenge of how innovation and opening-up can generate a development synergy but also provides important insights for improving the coordination mechanism of China’s major regional strategies.

JEL: D24, O14, R11

【KeyWords】

FTZ-IDZ Linkage, Combination of Innovative and Openness Policies, Location Selection of Heterogeneous Enterprises, Spatial Distribution of Firms