State and market integration in China: A spatial econometrics approach to ‘local protectionism'

In the past two decades, controversial evidence has been produced supporting the case for localprotectionism in China. This paper overviews the most important contributions and presents a newapproach which applies spatial econometrics on prefectural-level data. The main advantage of thismethod is to rely on a theoretically less biased and internal benchmark for assessing the impact ofprovincial borders on spatial interdependences, as we compare within province and across provincegrowth spillovers for neighbouring prefectures. We show that provincial borders exert astrong impact on spillovers. Further, we also analyze spillovers of local public expenditures,which could be interpreted as proxies for government interventions. Again, provincial bordersmatter. Yet, we are cautious in interpreting this as evidence for local protectionism, and proposethe notion of ‘cellularity’ as an alternative explanation. Cellularity results from a confluence ofdifferent factors, such as administrative structure, institutional changes and regional culture.