Yardstick Competition and the Formation of Enterprise Zones in China

While numerous studies have been found to examine the social and economic impacts of enterprise zones, studies on the formation of enterprise zones are surprisingly scant. This study aims to fill such a gap by examining the driving forces behind the formation of enterprise zones in China in the framework of fiscal competition. Using China's city level data and a spatial econometric technique, we find that Chinese local governments tend to act strategically when considering establishing their own enterprise zones. The formation of enterprise zones seems to be not due to the result of local economic status, but the result of yardstick competition created across local governments.