Geographic Distribution of Firm Productivity and Production: A “Market Access” Approach

This paper studies the distribution of firm productivity and production in a network of geographic locations. Using firm-level data from China’s manufacturing sector from 1998 to 2007, we document that, on average, firms’ geographic locations explain approximately 14% of the productivity dispersion, yet the explanatory power of locations varies significantly across industries. These empirical patterns motivate us to develop two “market access” measures in a Melitz (2003) framework to illustrate how changes in inter-location trade costs select local firms and shapes the distribution of firm productivity and production across locations. A decrease in a location’s trade cost with other locations improves its (1) consumer market access (CMA), which captures import competition; (2) firm market access (FMA), which captures export access. To distinguish between these two effects empirically, we use reduction in road travel time due to massive nationwide highway construction as a source of variation in trade costs between Chinese prefectures. Reduced-form evidence supports theoretical predictions ∗Wentao Xiong is deeply indebted to his advisers Shawn Cole, Edward Glaeser, and Elhanan Helpman for their invaluable advice and continued support. We would like to thank Pol Antras, Kirill Borusyak, Raj Chetty, Alonso De Gortari, Xiang Ding, Richard Hornbeck, Andrew Garin, William Kerr, Michael Kremer, Marc Melitz, Nathan Nunn, Martin Rotemberg, and participants at Harvard economics department’s international, public, development, and informal practice seminars for many helpful suggestions. Errors are solely our own.