Externalities of Urban Agglomerations: An Empirical Study of the Chinese Case

Abstract

Urban agglomerations are playing an increasingly important role in regional economic development, and economic externalities are the key factors in the formation and development of urban agglomerations. According to different mechanisms, agglomeration externalities can be divided into pecuniary externality and technological externality, but the literature has not paid enough attention to the differences between them. Based on the case of China’s five representative urban agglomerations, this paper analyzes and compares the origins, mechanisms, and factors of the two types of agglomeration externality. The results indicated that the pecuniary externality of urban agglomerations originates from the intercity flow and allocation of production factors, and its mechanisms include the specialized production brought by industrial division and the cost reduction caused by scale economy. While the technological externality originates from technological spillovers between cities, its mechanisms include knowledge sharing and technology cooperation. Among China’s five representative urban agglomerations, the key factor affecting their pecuniary externality is market size, and the key factor affecting their technological externality is economic density. In other words, the pursuit of a larger market and higher economic density are the two main driving forces for the formation of urban agglomerations in China. By distinguishing core cities from peripheral cities in China’s five representative urban agglomerations, we also find that there is no significant difference in their pecuniary externality. However, their technological externality presents complex differences. There is still much room to improve the externalities of agglomeration in China’s urban agglomerations. For example, the flow of capital does not show a shift to more productive cities. R&D activities are still mainly concentrated within a city, not intercity, in urban agglomerations.