Inter-Industry Relatedness, Absorptive Capacity and Firm Productivity in a Transitioning Chinese Economy

This paper investigates the relationship between industry relatedness and firm productivity and the role of firms' absorptive capacity in moderating that relationship. The results reveal a positive relationship between industry relatedness and firm productivity and that the relationship is driven by Marshallian-based sources – better access to goods, people and ideas. In general, the effects of technological related spillovers are mediated positively by the firms' absorptive capacity. I further develop an identification strategy to study the impact of technological related spillovers on firm productivity and the importance of absorptive capacity during China's gradual and spatially uneven economic transitioning process. The results reveal that the effects of relatedness (and each Marshallian source) on firm productivity are larger in areas following more intensive market-oriented economic reforms, especially for firms with comparatively higher absorptive capacity