2. empirical results of the key literature, which

2. Literature Review


The purpose of this chapter is to give an overview of the vast literature covering the effects Special Economic Zones (SEZs) have on economic growth. Specifically in the case of China, the resulting differential in growth rates between provinces – only some of which contain SEZs.

SEZs are designated areas within a country that are generally more economically liberal than the rest of the country, thus encouraging superior economic growth in the stated region to the national average (Shah, 2008).

This chapter begins by addressing the various theoretical arguments of this topic, followed by a consideration of which econometric methods have been used in previous literature. The final section covers the empirical results of the key literature, which covers the topic of the effects SEZs have on unequal regional growth.


2.1. Theoretical Arguments


There is extensive theoretical literature covering how various economic factors are affected by SEZs, and in extension, the effects these have on economic growth itself. This paper will look at how being an SEZ affects certain variables and their subsequent effects on economic growth. The variables covered include:……(____FILL ONCE DECIDED____)…… Investment, trade, factor mobility, property right, locational effects…..


            2.1.1. Investment

A key argument in favour of SEZs is that they encourage an upswing in foreign investment (Jones et al., 2003) and have a neutral effect on domestic investment (Wang, 2013), resulting in an aggregate positive effect on investment. As shown by Borensztein et al., (1998) – see 2.3. for further details – this leads to an increase in the growth rate of the provinces containing SEZs, resulting in regionally unequal growth. 

A key feature of SEZs in China is their openness to foreign firms in comparison to other parts of the country. This results in concentrated areas of FDI, as originally these were the only areas possible for a foreign entity to invest in China, leading to FDI “beginning to flow into China at a significant rate.” (Jian et al., 1996). Furthermore, as the whole country has gradually opened up, these areas are at an advantage by being comparatively simpler to invest in than non-SEZ areas. In the case of domestic investment, Wang (2013) finds that it is not crowded out by foreign investment, but nor is it crowded in, leading to a neutral outcome with regards to levels of domestic investment.


            2.1.2. Trade

The theory relating the effects of trade on economic growth are as old as economics itself, with Adam Smith originally indicating free trade would benefit economies in The Wealth of Nations (1776). The link between trade and economic growth was then theorised by Ricardo in 1817 and has subsequently been researched very thoroughly by economists across the world.

Theory dictates that the liberalisation of trade will result in superior economic growth than under autarky. Quah and Rauch (1990) theorised that if trade does not occur, a country will grow at a slower rate due to the need to produce many intermediate goods, resulting in bottlenecks. Another, more mainstream theory that explains the benefits of free trade is that of Grossman and Helpman (1991), they theorised that it encourages technological progress. This occurs because developing nations can absorb technology which is already available in more developed countries with greater ease.


            2.1.3. Labour Mobility

The Lewis Model theorises the structural change which developing economies undergo when they industrialise. It shows that surplus rural workers can move from the agriculture sector – without any loss to the economy – and move into the more productive industrial sector.


“the benefits of the SEZ program are not completely arbitraged away by worker mobility.” (Wang, 2013)

Jian, Sachs and Warner (1996)

            2.1.4. Property Rights – Wang (2013)

Also see development lecture term 2 week 1 covering importance of property rights.

            2.1.5. Productivity – ??


            2.1.6. Spillover Effects – Litwack & Qian (1998)


            2.1.7. Location Effects

Coast v Noncoast

Port v No port

Proximity to a coastal/urban province (if a rural area)











2.2. Empirical Arguments

            2.2.1. Measurement of Growth


2.2.2. Measurement of Regional Inequality

Differences in GRP per capita

2.2.3. Measurement of Investment

Wang’s use of Capital Stock –

I’m using total investment in fixed assets


Widespread use of Capital Stock due to Chinese data


2.3. Empirical Results

There are a number of papers that have investigated the effects of SEZs in China on regional inequality, specifically looking at convergence between provinces.

Chen & Fleisher (1995) were amongst the most important of these papers as they used an augmented Solow model to investigate the presence of conditional convergence of per capita production across China’s provinces between 1978 and 1993. They found that growth rates at this time were converging, however, this is heavily conditional on ‘coastal location’ being included as a variable in the augmented Solow model. Thus they conclude that there is a split between coastal and non-coastal provinces, resulting in convergence within the two groups but divergence between them.

Jian et al., (1996) look at provincial convergence over a longer period than Chen & Fleisher, starting in 1952. They find that, in contrast to its supposed aims, there is strong evidence of provincial economic divergence during the Cultural Revolution (1965-78). This was followed by convergence within coastal and rural areas during the reform period (1978-1990), this corresponds to the findings of Chen & Fleisher during a similar period. Jian et al., (1996) however, find that post-1990 regional incomes diverge again. One explanation for this is that this is because provinces in the south-east, containing many of the early SEZs, overtook the average Chinese GRP, meaning they became drivers of divergence rather than of convergence post-1990 (Jian et al., 1996).


Yeung et al., (2009) found using empirical methods that SEZs (particularly the first ones) received huge amounts of FDI – the first four SEZs accounted for 59.8% of China’s total FDI in 1981. Although this percentage declined over time, these SEZs still formed a formidable 20% of the national total of FDI in 1985 (Wong, 1987).

The findings of Xu & Chen, (2008) that between 1980-84, Shenzhen’s GRP grew at an average of 58% per annum provide evidence to support the theories of Jones et al., (2003) that SEZs encourage increased levels of FDI and that this leads to greater economic growth within provinces containing SEZs than those that do not.

Borensztein et al., (1998) found that in the case of developing countries, FDI is of relatively more importance than domestic investment in encouraging economic growth due to its role in ensuring the spread of technology. This view is supported by Lensink & Morrissey (2001) who also found that increases in FDI stimulate economic growth. This further confirms the theory of Jones et al., (2003) that one of the reasons SEZs experience higher growth rates is because of the larger amounts of FDI they receive.






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