Agglomeration, resource reallocation and domestic value‐added ratio in exports

Abstract Using micro merged data of China's customs transaction and National Bureau of Statistics Annual Surveys of Industrial Firms data, this paper analyzes the effect of industrial agglomeration on domestic value‐added in exports to gross exports (DVAR). It is found that industrial agglomeration significantly improves DVAR. Mechanism tests show that industrial agglomeration promotes DVAR by increasing the relative price of imported intermediate inputs and domestic inputs (relative price effect), as well as restrains DVAR by restraining cost markup of firm (cost markup effect). However, the promotion effect of the “relative price effect” is greater than the restraint effect of the “cost markup effect”. In addition, accession to the World Trade Organization and exchange reform strengthen the promotion effect of industrial agglomeration. The result of dynamic decomposition shows that 74.62% of the industry's DVAR increase is attributed to the resource re‐allocation effect, which is an important channel for industrial agglomeration to promote DVAR.