Impact of China’s free trade zones on the innovation performance of firms: evidence from a quasi-natural experiment

Abstract

AbstractTo analyse the impact of the free trade zone (FTZ) policy on firms’ innovation performance, this study conducted a quasi-natural experiment involving FTZ promotion, matched information on the establishment of China’s FTZs with patent data for listed companies from 2012 to 2020, and applied identification, estimation and inference processes to identify the effects of FTZs using a time-varying difference-in-differences model. The validity of the findings was confirmed using the parallel trend test, the placebo test and a high-dimensional fixed effects estimation, and the mediating roles of financing constraints and industrial agglomeration on firms’ innovation performance were analysed. To address the endogeneity issue and eliminate regression bias resulting from non-random selection, an instrumental variable regression and propensity score matching were employed. In addition, the policy effects were further explored by analysing the moderating effects of contextual factors and firm heterogeneity. The results showed that the FTZ policy has considerably enhanced the innovation performance of enterprises in the pilot areas, increasing the innovation level of enterprises by alleviating financing constraints and enhancing industrial agglomeration. The level of economic development and the degree of government involvement have also influenced the effect of the FTZ policy on enterprises’ innovation performance. Firm heterogeneity, including factors such as size, ownership, industry affiliation and location, influences the policy effects. In an effort to accelerate the implementation of the policy, an in-depth analysis of the underlying mechanism of the FTZ policy and its effects on enterprise innovation performance was provided, thereby providing a realistic basis for the expansion of the FTZ policy.