Special Economic Zones and Firms' Trade Regime

Establishing a special economic zone (SEZ) is the most important place-based policy for developing countries to promote regional growth since the 20th century. SEZs have played an important role in China's reform and open-up policy. In this study, we investigate the effect of China's SEZs on firms' trade regime: choosing between processing and ordinary trade- implicitly a choice of production technology and position in global supply chain. We treat the establishment of SEZs as a quasi-natural experiment and apply a Difference-in-Differences (DID) method using firm-level data sourced from Annual Survey of Industrial Firms (ASIF) and the Chinese Customs Trade Statistics (CCTS). The results suggest that firms within SEZs are associated with lower shares of ordinary trade in total trade value compared to non-SEZ firms. This indicates that while benefiting from various preferential policies, SEZ firms increase total exports but at the expense of positioning themselves lower in the global value chain. However, both industrial agglomeration and geographic clustering could mitigate this negative impact. Moreover, firms inside provincial-level SEZs are more engaged in processing trade than those in national-level SEZs. This study offers cautionary insights for analyzing exporter performance and regional development in other developing countries integrated into global value chains.