A Dynamic Panel Data Approach and HCW S Method Ass - 2021 - Journal of Manageme

Journal of Management Science and Engineering 6 (2021) 249e267
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A dynamic panel data approach and HCW's method:

Assessing the effect of China (Shanghai) Free Trade Zone on
local GDP
Jun Cai a, Kai Xin b, *, Yahong Zhou c
a
School of Management, Huazhong University of Science and Technology, Wuhan, Hubei, 430074, China
b
School of Economics, Shanghai University, Shanghai, 200444, China
c
Shanghai University of Finance and Economics, Shanghai, 200433, China
a r t i c l e i n f o a b s t r a c t
Article history: We propose a simple-to-implement dynamic panel data method to evaluate the impacts of
Available online 8 June 2021 place-based policies. The idea is to exploit both the cross sectional dependence and the
serial correlation within a panel and implement a semi difference-in-difference decom-
Keywords: position. Different from the method by Hsiao et al. (2012), the proposed model is easy to
Dynamic panel model implement statistical inferences and can incorporate multiple treated groups at different
Difference-in-Difference
time thresholds. We use the proposed method to explore the effect of the Free Trade Zone
Free trade zone
(FTZ) policy implemented in Shanghai at the end of 2013 on local GDP growth rate and
GDP growth
Treatment effect
compare it with that from Hsiao et al. (2012). The empirical results show that the FTZ does
have a positive effect on the local GDP growth rate and it adds 1:2 1:8 percent point to
the growth rate of the GDP per capita for Shanghai in 2014 which is about one fourth to
one third of the total GDP growth rate per capita. This effect largely comes from the growth
of the tertiary sector. The results lend support to the duplication of FTZ policy to other
cities and provinces in China.
© 2021 China Science Publishing & Media Ltd. Publishing Services by Elsevier B.V. on
behalf of KeAi Communications Co. Ltd. This is an open access article under the
CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).
1. Introduction
Place-based macro policies like the Free Trade Zone play an important role in the local and international economy. Policy
makers are interested in the overall effects of such policies. However, the literature on the effect of macro policies like Free
Trade Zone (FTZ), Special Economic Zone (SEZ) and Employment Zone (EZ) program on employment, wages, prices or even
welfare is ambiguous (Glaser and Gottlieb, 2008). Some evidence shows it is positive on employment (Busso et al., 2013)
whereas some suggest it is heterogeneous on FDI and wages (Wang, 2013) and even insignificant impact in terms of GDP
(Zheng, Barbieri, Tommaso, & Zhang, 2016). To add an additional piece of evidence, this paper explores the impact of the
China (Shanghai) Pilot Free Trade Zone which started in the late 2013 by a proposed dynamic panel data model (DPD,
hereafter). As the first FTZ in China, the China (Shanghai) Pilot Free Trade Zone has drawn hot debate about its impact on the
local economy. With publicly available data, the present research provides some insights and support for FTZ policies
currently under intensive discussion in China.
* Corresponding author.
E-mail addresses: juncai@mail.hust.edu.cn (J. Cai), xinkai.shufe@gmail.com (K. Xin), yahong.zhou@mail.shufe.edu.cn (Y. Zhou).
https://doi.org/10.1016/j.jmse.2021.06.004
2096-2320/© 2021 China Science Publishing & Media Ltd. Publishing Services by Elsevier B.V. on behalf of KeAi Communications Co. Ltd. This is an open
access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).
J. Cai, K. Xin and Y. Zhou Journal of Management Science and Engineering 6 (2021) 249e267
Existing literature provides good benchmarks for the place-based policy evaluations. Busso, Gregory and Kline (2013) use
the rejected and future applicants of a US EZ program as control group to assess the incidence of the program. They find a
substantial increasing local employment and wage hikes without a corresponding rising in population or cost of living. Wang
(2013) uses both difference-in-difference (DID) and the synthetic control method suggested by Abadie, Diamond, &
Hainmueller (2010) to exploit the heterogeneous effect of the impact of the Special Economic Zones on local economy in
China. Recently Zheng et al. (2016) implement a two-way fixed effect model to examine the effect of expanding Special
Economic Zone in China using macro-level and firm-level output data. They find the Development Zone policy does not
contribute to economic growth in proportion to their share of land in host cities on the whole. Specific for the China
(Shanghai) Pilot Free Trade Zone evaluation, Yao and Whalley (2015,2016) find that China's capital control is loosening after
the establishment of the FTZ in Shanghai. Huang et al. (2017) make a good trial for the FTZ's impact on GDP with a coun-
terfactual approach. They implement a step-wise regression by They implement a step-wise regression by Thompson (1995)
to select the control group and find big effects as time goes on. However, they do not consider the panel structure of the
quarterly data and only choose two provinces (i.e., Inner Mongolia and Chongqing) to predict the hypothetical GDP growth of
Shanghai. Inner Mongolia is one of the few provinces who has admitted to manipulate the GDP data in the previous years
before 2017.1 More detailed and rigorous research about the aggregate effect of the newly-implemented FTZ policy in China is
needed.
This paper examines the impact of FTZ on local GDP in China under a counterfactual framework with a DPD model, taking
advantage of a pilot FTZ implemented in Shanghai, China on October 1st, 2013. More details about the background infor-
mation are introduced in the following section. Our approach is similar to the method proposed by Hsiao, Ching and Wan
(2012) (HCW, hereafter) in the sense that both target a counterfactual analysis with panel data. HCW proposed a panel
data method exploiting the dependence among cross-sectional units to construct the counterfactuals. In this paper, we
exploit both cross-sectional dependence and series dependence within units. Specifically, a dynamic panel data model with a
difference-in-difference decomposition for the residuals is derived to examine the macro policy impact.
Though both the proposed method and HCW's method are applicable with a panel data set, the proposed model dis-
tinguishes itself from HCW's method in at least two aspects. First and foremost, the proposed model pools the treated group
and control group together and utilizes a DID decomposition to disentangle the treatment effect, which can be easily obtained
by regression. However, for HCW's method and its following development (Bai et al., 2014; Du and Zhang, 2015; Li and Bell,
2017), the inference is complicated. Second, the proposed method can incorporate multiple treated groups at different time
thresholds, while HCW's method can only investigate the effect on one treated group at a time. Another interesting finding is
that the proposed model turns out not to be affected by the presence of the suspect data in the application. For HCW's
method, it could create misleading estimation if the donor units with suspect data are selected into the control group in their
first step.
Based on the counterfactual analysis with the proposed model using China's GDP growth data and the comparisons with
HCW's method, we find a significant positive effect of FTZ policy on local GDP growth rate per capita which largely comes
from the positive shock to the tertiary sector of the economy. The estimates suggest that the FTZ policy in Shanghai, which
started in the 4th quarter of 2013, raised the average GDP per capita in Shanghai by about 1:2 1:8 percent point in 2014. The
added value is about 1168 1753 yuan (167 250 dollars) on nominal GDP per capita. Meanwhile, the GDP growth rate of
the tertiary sector was 6 percentage points higher due to the FTZ policy in our analysis. This may result from a few substantial
reforms in the FTZ area which reduce much of the government's intervention in the service industry.2 These results are robust
to various estimation specifications both in time scale and district effect.
Our paper also contributes to the applied econometric theory as well as the empirical trade analysis. First and foremost, we
derive a dynamic panel difference-in-difference model (DPD model) which exploits both cross-sectional dependence and
series correlation within a panel and relaxes the homogeneous effect assumption in the traditional DID model. It is easily
applicable to the dynamic dependent macro indexes such as GDP growth rate, GDP per capita, CPI etc, with a GMM procedure
by Arellano and Bond (1991). Moreover, our approach is less data-hungry and robust to partial data manipulation or falsi-
fication which is desirable for macro policy analysis. This can be shown clearly in the empirical analysis in which the method
can be applied with no exogenous covariates and to full sample with data manipulation units. Finally, it provides a valuable
robustness check to HCW's method, which is very popular in macro program evaluation with panel data when some of their
required assumptions may not hold.
We would like to mention that there are also some other applicable macroeconomics policy evaluation tools such as
synthetic control method (SCM, hereafter) suggested by Abadie et al. (2010). However, SCM restricts the weights on the
control units to be between 0 and 1 and the inference about the treatment effect is still under debate and not straightforward
(Doudchenko and Imbens, 2016).3 Recently Gardeazabal and Vega-Bayo (2017) undertook an empirical comparison between
SCM and HCW's method to program evaluation and showed the differences and connections between them. Gharehgozli
(2018) made a thorough comparative study between the SCM and dynamic panel data model. She found that SCM method
1
In the Chinese political system, local governors have great incentive to manipulate the GDP data for future promotion.
2
Specifically, there are “Negative lists”, “inboard territory with off-board policy” and “ex post supervision”. We will talk about these in detail in the
following section.
3
We employ the synthetic control method for comparison and leave the details in the appendix.
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Table 1
Major economic indicators in Shanghai free trade zone.
Items Unit (RMB) Value Growth (%)

Total Revenue billion 1600.00 11.0
Commodity Sales billion 1380.00 11.5
Shipping Logistics billion 118.00 15.0
Industrial Output billion 57.27 10.1
Tax Revenue billion 57.64 13.4
Contracted Foreign Capital billion ($) 11.8 5.2 times
Registered Enterprise one 11440 1.6 times
Inner Enterprise Investment billion 332.90 2.9 times
Resource: Shanghai Bureau of Statistics (2014)
provides an unbiased estimator if the outcome variable follows a dynamic panel data model whereas the dynamic panel data
model appears to perform better with the macro level aggregate data in terms of variance. Our proposed DPD which yields
similar results compared with HCW's method, adds an alternative method to the current literature.
The rest of our paper is organized as follows. Section 2 introduces the background of the FTZ policy in China. Section 3
proposes the general econometric model and compares it with HCW's method. Section 4 talks about the estimation of the
proposed DPD model. Section 5 describes the data. The empirical results are discussed in Section 6. Section 7 explores the
robustness check. Some empirical findings on the differences between the proposed model and HCW's method is shown in
Section 8. The possible mechanism of the effect is investigated in Section 9. Section 10 concludes the paper with discussion of
future work.
2. China (Shanghai) Pilot Free Trade Zone
In the past three decades since the reform and opening policy in 1978, China has experienced a high speed of economic
development with an average yearly GDP growth rate of 9%. But in late 2008, the international financial crisis occurred. In
response to that, the Chinese central government put forward the controversial “four trillion” fiscal stimulus plan to mitigate
the negative impact in 2009. It seemed to work and the economy bumped up in the following year. However, the effect did not
last very long. The GDP growth rate of China stepped down to single digit in 2011, i.e,9.5%. Then from 2012 to 2014, the GDP
growth rate decreased further to 7.7%, 7.7%, 7.4% respectively, which came into the so-called “New Normal"4. Under such
circumstances, the central government brought out a Pilot Free Trade Zone in Shanghai to explore potential methods to
reinvigorate the economy and sustain a high speed growth.
As the first Free Trade Zone in China, the “China (Shanghai) Pilot Free Trade Zone” (Shanghai FTZ, hereafter) was set up on
October 1st, 2013. Unlike many developed countries, there had been no Free Trade Zone in China until then.5 The FTZ policy in
Shanghai acted as a pilot experiment by the central government to explore ways to boost the national economy. Generally
speaking, there are two ways to increase the total output of production besides increasing capital and labor: one is innovation
and another is efficiency. Different with other countries, China has a powerful government which is notorious for its low
efficiency and market intervention in economic activities. The FTZ policy is focused on tackling both of them: improving
governmental management efficiency and reducing government intervention on the markets. “Negative lists”, “inboard
territory with off-board policy” and “ex post supervision” are three most significant characteristics of the newly set-up
Shanghai FTZ (Yao and Whalley, 2016). To be specific, “Negative lists” is a short list of forbidden investment areas rather
than permitted areas which will improve consumer surplus and overall consumption at the mild cost of local enterprise's
benefit (Lin Chen et al., 2014). “Ex post supervision” gives the market economy more room and boosts the entrepreneurs'
creativity. “inboard territory with off-board policy” facilitates the trade both in goods and most importantly in services.
More specifically, the Shanghai FTZ covered four industrial parks with an area of 28.87 square kilometers at the beginning.
In April 2015, it was enlarged to 120.72 square kilometers which is about 1/54 of the Shanghai municipality area. It mainly
focused on facilitating the development of the tertiary sector such as finance, trade and logistics entrepreneurs. It might
crowd out some traditional industry such as some of the low-end manufacturing factories and high-energy consuming
chemical industry.
Table 1 reports the major economic indexes in China (Shanghai) Pilot Free Trade Zone for the post-FTZ year 2014. It shows
that the industrial output does experience a significant decrease even though total revenue is increasing. The commodity
sales and shipping logistics are increasing as expected. In general, the impact of the Pilot Free Trade Zone policy appears
mixed. Some “crowding out” effects do exist in the raw statistics.
4
Strictly speaking, the “New Normal” economy concept was raised after the 18th National Congress of the Communist Party of China in March 2013.
5
The Free Trade Zone set up recently in China is the newly defined FTZ which means that less government intervention, less forbidden commercial areas
and more convenient customs issues, etc. And it is set up by only one country(i.e.China) in its own territory rather than bilateral or multilateral trade
agreements.
251
On the other hand, we do not know what the performances of the items listed on Table 1 would be if there were no Free
Trade Zone in Shanghai. As its known, China is still one of the fastest growing countries in the world. It is not clear whether
the major economic indicators in Shanghai FTZ would experience higher growth rate if FTZ weren't set up in October 2013 or
not. In this sense, the specific cause impact of FTZ becomes more complicated.
3. Econometric model
As FTZ's impact on GDP per capital is of interest here, one may want to exploit the convergence pattern on growth rate of
the real GDP per capita worldwide (Barro, 1991; Mankiw et al., 1992) or nationwide in China (Maasoumi and Wang, 2008;
Zhou et al., 2009). To exploit the convergence rate pattern on growth nationwide in China, we build an econometric model
starting from a Solow growth model in Appendix A and combine it with a pseudo difference-in-difference decomposition as
follows:
yitþ1 ¼ gyit þ bt þ aTt þ hTt Di þ di þ εitþ1 i ¼ 1; ::; N; t ¼ 1; :::; T (1)
where Tt ¼ 1ft > T * g is a dummy variable for the post-event or post-treatment time period and Di ¼ 1fi 2lg is a dummy
variables for treated group location set l. In the following application, l ¼ fShanghaig which is a singleton. Putting them
together, aTt þ hTt Di is the added pseudo difference-in-difference decomposition to the original model (equation (19) in the
Appendix). t is the time trend and it is just a convenient representation for exogenous covariates that impact GDP but hard to
get a precise measure of, such as labor growth, technology, innovation, etc. Obviously, εitþ1 ¼ vitþ1 from the structural model
analysis. The parameter of interest is h which captures the pure impact of a place-based policy incidence on the outcome
variable yit .
Note that the lag dependence structure gyit is crucial in the proposed DPD model here. On one hand, it captures the lag
dynamics in the macro economic indexes such as GDP growth rate, CPI etc which could be informed by either the structural
model or the diagnostic test or both (what we implemented here). On the other hand, it relaxes the traditional uncon-
foundedness assumption in the causal inference to unconfoundedness given lagged outcomes (Imbens and Wooldridge,
2009). We discuss this in detail in the following subsections. Moreover, the lag dependence could be generalized to higher
order lags or multiple lag dependent outcomes.
In order to make the proposed model estimable, the following assumptions are imposed:
Assumption 1. di IIDð0; s2d Þ, εit IIDð0; s2ε Þ for each i and di is independent with εit
Assumption 2. No serial correlation: Eðεis εit Þ ¼ 0 for any sst.
Assumption 3. Semi-parallel trend: E½εitþ1 jt; di ; D ¼ 0 ¼ E½εitþ1 jt; di ; D ¼ 1 where D is the policy (treatment) assignment.
Assumption 1 and Assumption 2 are the typical assumptions for a dynamic panel model with fixed effects. Assumption 2
ensures the validity of the GMM procedures using the lag variables as instrumental variables. The Arellano-Bond procedure
and related diagnostic tests would be implemented to estimate the proposed model.
Assumption 3 means that after considering the first lag dependence of the dependent variable, the average of the
transformed outcome,i.e., yitþ1 gyit , follows a parallel trend for the control group and the treated group given some
exogenous covariates (here, time trend t). It relaxes the parallel path assumption in traditional DID models and is similar to
Assumption 3.1 in Abadie (2005).6 This assumption yields the causal interpretation of the estimated effect. We exclude g
equal to 0 and 1 as this would violate the traditional dynamic model assumption and make the applicable instruments weak.
3.1. Understanding the dynamic panel data model
Model (1) can be understood in at least three ways:

Firstly, it is a dynamic panel data model with difference-in-difference decomposition. Since the location specific (fixed)
effect di has already been included in the original DPD model in equation (1), we only need to add the post-treatment period
indicator Tt and the interaction term of the time period indicator and the location indicator Tt *Di. Consequently, h is the
parameter of interest which captures the incidence effect of Shanghai FTZ policy. Equation (1) can be rewritten as follows
yitþ1 ¼ gyit þ bt þ uitþ1 (2)
uitþ1 ¼ aTt þ hTt *Di þ di þ εitþ1 (3)
Clearly, equation (2) is a first order dynamic panel data model (without fixed effect); equation (3) is the difference-in
difference decomposition for the residuals from the first equation. Two points worth mentioning are: First, the lag
6
Assumption 3.1 in Abadie (2005) states that conditional on the covariates, the average outcomes for treated and controls would have followed parallel
paths in absence of the treatment.
252
dependent variable yit1 here captures the serial correlation; Second, equation (3) is slightly different from the traditional DID
model since we include the fixed effect “di " rather than the dummy variable for a specific location l “Di ". For instance, if we
only have two districts (cities or provinces or countries): i ¼ l; other, then the above model is equivalent to
yitþ1 ¼ gyit þ bt þ uitþ1 (4)
uitþ1 ¼ aTt þ hTt *Di þ q*Di þ εitþ1 (5)
Which is standard DPD model with a DID decomposition on the residuals. This is in the same sense of Least Square Dummy
Variable (LSDV) estimation for the fixed effect model (Baltagi, 2008).
Secondly, it is a panel DID model. Under mild assumptions such as unconfoundedness given lagged outcomes, the pro-
posed DPD model reduces to the unconfoundedness DID model with panel data mentioned in Imbens and Wooldridge (2009)
as follows7:
yitþ1 yit ¼ ða þ bÞ þ h*Git þ ðg 1Þyit þ εitþ1 (6)
where Git : ¼ ðTtþ1 Tt Þ*Di . This is a within group transform. Let t ¼ 0 we can get exactly the same equation in section 6.5.4 of
Imbens and Wooldridge (2009):
yi1 yi0 ¼ ða þ bÞ þ h*Gi þ ðg 1Þyi0 þ εi1 (7)
in which they demonstrate that this unconfoundedness-based approach in the context of panel data is more attractive than
the traditional DID with repeated cross-sectional data. In consequence, the causal interpretation of h on the dependent
variable (for instance, GDP per capita growth in the application) is more credible.
Finally, it is a one-period shot causal analysis. The proposed model essentially estimates a one-period impact at the
treatment cutoff time. The one-period here means the time period defined in the study rather than the data. For example, if
the FTZ impact on yearly GDP growth rate is the research goal, then with yearly data, the one-period means the post-
treatment year (i.e., the year right after the FTZ policy was implemented), with one effective observation for each treated
city in the data. Alternatively, if we have quarterly data, the one-period still means one year (i.e., the following four quarters
after the implementation time) but now there are four effective post-treatment observations for each treated city in the data.
This can be seen easily in the estimation procedure. The Arellano-Bond estimation procedure used first-differences model
(1):
yitþ1 yit ¼ gðyit yit1 Þ þ b þ aðTt Tt1 Þ þ hðTt Tt1 ÞDi þ εitþ1 εit (8)
and then estimate it by GMM with lag dependent variables as IVs. For each treated city or province i2l, the variable
ðTt Tt1 ÞDi is equal to zero except in the first post-period of the policy. In this sense, the identification relies on the com-
parison of the first period of the policy and time periods before the policy. The effective observation number is one for each
treated city or province in the yearly data, but four in the quarterly data if we want to assess the one-year impact of the policy
or intervention.8
This one-period shot analysis facilitates the causal inference of the proposed model as Assumption 3 is more likely to
satisfied in short post-treatment periods. Some may worry about the precision of the estimate of h as it hinges on a limited
number of observations.9 This concern is valid but solvable. As its mentioned in the previous two paragraphs, one can increase
the post-treatment periods by either gathering more detailed sub-period data or involving more treated individuals. For
example, if the FTZ impact on yearly GDP growth rate is the research goal, we have four effective observations for each treated
city or province with the quarterly GDP growth data, twelve with monthly data rather than one with yearly data. Moreover,
with more treated cities or provinces, i.e., bigger l set, the effective observations also increase. In the application, we apply the
proposed model with quarterly GDP growth data in addition to the yearly data to alleviate this concern.
3.2. Comparison with HCW's method
Based on the Solow growth model in the appendix, we derive the dynamic panel model in equation (1). Hsiao et al. (2012)
propose a similar panel data approach to evaluate the benefit of political and economic integration of Hong Kong with
7
We eliminate the exogenous covariates xit here for comparison.
8
Generally, it takes months of time for macroeconomic policy such as trade policy, monetary policy, tax policy, etc, to take effect on the real economy.
9
For example, with the yearly data and one treated city, any noise εitþ1 εit will go to the estimated impact h.
253
mainland China, which can be readily applied in the present setting. It is useful and insightful to compare the proposed
dynamic panel data model (DPD) with HCW's method.
First, the two models are related with each other. If one rearrange the DID decomposition into vector multiplications, the
proposed model in equation (1) can be written as:
yitþ1 ¼ gyit þ b0i ftþ1 þ di þ εitþ1 t ¼ 1; 2:::T; i ¼ 1; 2:::N (9)
where bi ¼ ð1; 1; 1:::1; a; a; aÞ0 for isl, bi ¼ ð1; 1; 1:::1; a þ h; a þ h; a þ hÞ0 for i ¼ l and ft ¼ ð0; 0; 0:::0; 1; 1; 1Þ for all t. The dots
mean the same as previous elements and only the last three arguments are different for bi and ft in order to mimic the DID
decomposition.10 This is a special case of the dynamic factor model (Bai, 2013) and it is very similar to the general factor model
in Hsiao et al. (2012) except for the lag dependent variables.11 However, the coefficient h in the factor loading structure rather
than g is the parameter of interest in the present model. In some sense, the proposed model is less general in terms of the
specification of bi and ft while it is more specific for including the lag dependent variable yit1 . The lag dependence captures
the time serial correlation which is derived from the neoclassical Solow growth model and can be diagnosed by corre-
sponding tests.12 Also, the proposed DPD method exploits the instant and short term effect of a policy intervention (treat-
ment) while HCW's method tends to give a long run effect which sometimes may be hard to justify as causal effect in some
cases.
One may find our Assumption 2 regarding the lack of serial correlation given the dynamic structure as similar to the weak
dependence assumption (Assumption 7, specifically) in Hsiao et al. (2012). And both Assumption 3 in this paper and HCW's
Assumption 5 are saying something about the policy (treatment) assignment which is usually needed in the causal inference.
Though similar to HCW's method, the proposed DPD model has its own merits: First, different from HCW's method, the
proposed method pools the treated group and control group together and utilizes the dynamic structures and a semi-DID
decomposition to disentangle the effect of our interest. The effect can be easily obtained by regression as well as its infer-
ence. HCW's method, similar to SCM, fits the pre-treatment model by some criteria (AIC or AICc) in the first step and then
takes difference of the realized outcome and the predicted (hypothetical) outcome of the treated group to get the treatment
effect. This two-step procedure complicates the inference of the estimated effects (see Li and Bell, 2017). Second, the proposed
method can incorporate multiple treated groups at different time thresholds, i.e., multiple elements in l set and t set in model
(1), due to the pooling regression structure. However, HCW's method can only investigate the effect on one treated unit at a
time as multiple treated units at different time thresholds would mess the donor pool in their setting. In addition, the
proposed model is robust to the presence of suspect data as it utilizes the systematic lag or lead dynamic structures of all the
units in the data while HCW's method could give out misleading estimations if the suspect data units are selected into the
control group.13
In general, the proposed DPD model is complimentary to the general factor model in HCW's method and it sheds light on
the technical assumptions needed to apply HCW's method. For the policy evaluation on general macroeconomic indexes such
as GDP, GDP growth rate, CPI, etc, the results from HCW's method are very likely to be supported or underlined by the
inherent dynamic structure underneath, as we will show in the application section. A good strategy in empirical analysis is to
combine HCW's method and the proposed DPD model together and to get more information about the real dataset at hand
and increase the credibility of the results.
4. Estimation of the DPD model
The estimation of proposed model is based on the GMM procedure by Arellano and Bond (1991). In order to get the causal
impact or treatment effect, we need to generate two sets of dummy variables based on the time thresholds and locations:Tt
and Di , and incorporate them in the GMM estimation as Model (1) shows.
As it is mentioned in Arellano and Bond (1991), the moment conditions utilize the orthogonality conditions between the
first-difference disturbances and lagged values of the dependent variable. The higher lag dependent variables are used as IVs
for the estimation and the consistency of the GMM estimator relies on the fact that EðDεit Dεit1 Þs0 and EðDεit Dεit2 Þ ¼ 0.
Two diagnostics are computed to test for above conditions (i.e., the first-order and second-order serial correlation in the
disturbances) based on the Arellano and Bond GMM procedure: ARM1 and ARM2.14 A special feature of dynamic panel data
GMM estimation is that the number of moment conditions increases with T. Therefore, a Sargan test is also applied to detect
the over-identification restrictions.
10
There may be more than one way to mimic the DID decomposition as the first T-3 elements are zeros for ft and the specification b0i ft is a very general
expression.
11
By Remark 4 in Hsiao et al. (2012), HCW's method could incorporate the lag dynamic dependence by setting the weight matrix A in the objective
function to be a nondiagonal matrix, however nothing informs about the matrix A and they didn't consider that in their applications.
12
Specifically, the ARM1 and ARM2 test in the dynamic panel data model.
13
The dynamic structure can be either derived from a structural model or be verified with diagnostic tests or both.
14
These tests can be obtained using the command estat aBond in Stata.
254
5. The data
5.1. Yearly GDP data
To apply the model to the data,we need a panel of GDP per capita growth across cities/provinces including our “treatment”
cityeShanghai, ideally at a high frequency to obtain sufficient sample size. As the population data of every city or province is
collected yearly in China, we can only get GDP per capita in years. The National Bureau of Statistics (NBS) provides this kind of
data. It reports yearly nominal GDP, real GDP growth rate, and nominal GDP per capita across 27 provinces and 4 munici-
palities nationwide and has done so since 1978.15 This dataset is compiled from the information collected by local bureaus of
statistics in China.
For the proposed dynamic panel data model (DPD model), we need the real GDP per capita across 27 provinces and 4
municipalities.16 As the real GDP per capita is nearly nonstationary even after detrending time, we use the real GDP per capita
growth rate instead.17 First, we use the national nominal GDP value, real GDP growth rate in consecutive years to calculate the
national GDP deflator as follows (m1978 ¼ 1):
GDPtþ1 *mt
mtþ1 ¼ (10)
GDPt *ð1 þ gtþ1 Þ
where mt stands for the deflator in year t and g denotes the real GDP growth rate in year t. Then we convert the nominal GDP
~it can
per capita into real comparable GDP per capita, i.e., lnyit (base year is 1978). At last the real GDP per capita growth rate y
be obtained easily by taking the difference within consecutive years.
5.2. Quarterly GDP data
An alternative method is to construct the quarterly real GDP per capita growth from the real accumulated GDP growth rate
(hereafter, GDP growth rate) reported by the local Bureaus of Statistics starting from 2005 and population growth.18 Here the
quarterly GDP growth rate is calculated on an annual basis which is aimed at eliminating the effects of seasonal changes. It is
used to illustrate the relative growth in the same period across years. Since the local Bureaus of Statistics in China report the
population growth of corresponding jurisdictions in years rather than quarters,19 we use the yearly population growth in each
city or province to approximate the quarterly population growth. It implicitly assumes the population increases or decreases
smoothly in the four quarters of each year. This assumption is not unreasonable as China maintained a stable population
policy in the last two decades which covers the time periods of our data 2005e2016.20 Then the real GDP per capita growth
can be calculated by
Gq ¼ gq nq (11)
where Gq stands for the quarterly real GDP per capita growth, gq is the reported quarterly real GDP growth rate and nq is the
approximated quarterly population growth.
For each municipality city or province i in China at quarter q, we can calculate the real GDP per capita growth Giq (starting
from 2005Q1). It consists of a panel which can be adequately applied to the proposed DPD model in equation (1) with four
post-policy periods as is mentioned in the remark in previous section.
Even though two panels of nationwide real GDP per capita growth can be readily constructed in certain period of time (48
quarters from 2005 to 2016 and 39 years from 1978 to 2016 respectively), the GDP data in China is notorious for its low
accuracy and poor credibility. There is already some concern in the literature about the falsification and manipulation of GDP
data in China, see Holz (2014), Bernanke and Olson (2016), Owyang and Shell (2017) and Ji (2019) and references therein.
Officially, three provincial governments in China admitted the manipulation of GDP data in previous years until 2017. They are
Inner Mongolia, Tianjing Municipality and Liaoning province. To alleviate the concern on the credibility of the GDP data from
NBS of China, we construct a reliable sample dataset which excludes above three districts.
15
The National Bureau of Statistics in China does not provide the real GDP per capita and its growth directly. But we can obtain that indirectly from the
data provided.
16
A municipality city, also called direct-controlled municipality, is the highest level of classification for cities used by the People's Republic of China. These
cities have the same rank as provinces, and form part of the first tier of administrative divisions of China.
17
The GDP level data does not pass the Dickey-Fuller test and the coefficient of first-order lag regression is very close to 1.
18
The accessible quarterly GDP growth data starts from 1993. Here we use that starting from 2005 in the concern of data quality and statistic methods'
change.
19
Here the population refers to the resident population used to calculate the GDP per capita by the local Bureaus of Statistics in China.
20
Until the end of 2015, China starts to relax the“one-child” policy and allows one couple to have two children legally. As the proposed model estimate
the treatment effect in one period after the policy, i.e., the effect of GDP growth of 2014, the population policy change does not impact the analysis.
255
Table 2
FTZ Impact on the Yearly GDP per capita Growth.
Variables Reliable Sample
reg1 reg2
L.Git 0.2947*** (0.0245) 0.2368*** (0.0358)
T ftz 0.0165*** (0.0017) 0.0311*** (0.0027)
T ftz*D sh 0.0174*** (0.0065) 0.0188*** (0.0046)
t1978 base 0.0007*** (0.0002)
Constant 0.0646*** (0.0020) 0.0562*** (0.0030)
ARM1 4.68 4.52
ARM2 1.18 1.44
Sargan Test 26.9 (0.76) 27.4 (0.70)
Observations 1008 1008
Groups 28 28
Notes: Robust variance estimator are reported in parentheses. P-Value for c2 statistics are reported in parentheses.
* p < 0.10, ** p < 0.05, *** p < 0.01.
In the following empirical analysis, we apply the proposed DPD model only on the reliable sample dataset (25 provinces
and 3 municipalities) unless otherwise specified.21
6. Assessing the effect of FTZ
In this section, both the proposed DPD model and HCW's Method are applied with the yearly GDP growth data specified to
evaluate the effect of the FTZ policy. As explained before, the proposed DPD model aims at estimating the short run effect
while HCW's method can shed some light on the long run impact. Moreover, the DPD model can provide a corresponding
verification of the implicit factor loading structure in HCW's method and is a good robustness check. The combination of these
two methods will shed some light on the underlying mechanisms that drive the identification of the model and give us a
comprehensive understanding of the impact of FTZ policy.
In order to assess the impact of FTZ which was set up in Shanghai on October 1th 2013, we modify the DPD model in
equation (1) accordingly to incorporate this specific event as follows:
Gitþ1 ¼ gGit þ bt þ aTftz þ hTftz *Dsh þ di þ εitþ1 (12)
where Git is the real GDP per capita growth, Tftz is a dummy variable for the time periods (quarter or year) after October 1st
2013 and Dsh is the district indicator of Shanghai. Tftz and Dsh capture the time effect of the FTZ policy and district effect of
Shanghai respectively. t stands for the time trend, di for the unobserved heterogeneity for each province/municipality and εit
is the residual which are defined as the same as in equation (1).
Implicitly, we assume the unobserved heterogeneity di is independent with the residual εit and there is no serial corre-
lation among the residuals: Eðεis εit Þ ¼ 0 for any sst. These are the typical assumptions in the dynamic panel model literature
which can be informed by diagnostic tests. Assumption 3 is the additional one which ensures the causal interpretation of the
coefficient h. It is much weaker than that in traditional Difference-in-Difference estimation as it only assumes semi-parallel
trend. As we consider the short run effect (one year after the policy) on only one treated municipality Shanghai, this semi-
parallel trend assumption is very likely to be satisfied.22 Moreover, we also apply some pre-analysis tests and find some
suggestive evidence that the traditional parallel trend assumption in DID model is likely to hold.23
6.1. DPD model with yearly GDP data
Using the constructed reliable yearly real GDP per capita growth data set across 25 provinces and 3 municipalities in China
from 1978 to 2016, we can directly apply the DPD model from equation (12).
Specifically, the GMM procedure by Arellano and Bond (1991) is applied to estimate the proposed DPD model. We consider
model specifications with and without time trend t.24 In order to assess the credibility of doing this, two diagnostics are
computed to detect the first order and second order serial correlation in the disturbances: ARM1 and ARM2. Table (2) reports
21
In section 8, we apply the proposed DPD model and HCW's method on the full sample data and the reliable sample to illustrate some interesting
findings.
22
Actually for one treated district case, this semi-parallel trend assumption reduces to constant treatment effect assumption by EðhjD ¼ 0Þ ¼ EðhjD ¼ 1Þ
for one post-treatment period.
23
Applying the tvdiff command in Stata, we find that the test for parallel trend passed using the “leads” but did not when using the “time trend”. For
details, please see the Stata file for tvdiff .
24
For specification without time trend, Stata can only provide one-step GMM estimator by Arellano and Bond (1991) due to the near singularity of the
variance-covariance matrix of the two-step estimator.
256
Table 3
Weights of control provinces by HCW method with yearly data.
Districts Estimate Std. Error t value

BeiJing 0.1750 0.0560 3.13
ZheJiang 0.4256 0.0956 4.45
HeBei 0.7250 0.1222 5.93
JiLin 0.3245 0.0783 4.14
ShangDong 0.4792 0.1607 2.98
GuangDong 0.3744 0.1090 3.43
HaiNan 0.1095 0.0490 2.23
GuiZhou 0.5055 0.0705 7.18
XiZang 0.1867 0.0369 5.05
Constant 0.0258 0.0081 3.16
Ave.Effect 0.0206 0.0059 3.52
R2 0.905
F Statistics 26.47(F9,25)
Notes: The results are calculated by the pampe package in R. Standard error of the average effect is calculated by the formula in
Theorem 3.2 of Li and Bell (2017).
the z statistics of both tests which are asymptotically normally distributed under the null of no series correlation of corre-
sponding orders. We reject no autocorrelation of order 1 and cannot reject no autocorrelation of order 2 at 5% significance
level for both specifications which suggest that the GMM estimator is consistent. The Sargan test for over-identification is also
considered as we have more moment conditions than needed.25 The c2 statistics with degrees of freedom are reported in
Table 2. We can not reject the null hypothesis of over-identification at 5% significance level. The evidence suggests that the
extra moment conditions are valid.
Table 2 presents the empirical results using the yearly GDP per capita growth data with the reliable sample constructed in
previous section. We consider specifications with time trend and without time trend. The coefficients before the interaction
term Tftz *Dsh are all positive and significant which indicates that the FTZ policy has a positive effect on the real GDP per capita
growth in Shanghai. Specifically, the effect is 1:74% and 1:88% from the DPD model without time trend and with time trend
respectively. That is a decent proportion out of the total GDP per capita growth of Shanghai in one year after the policy
implementation, i.e., year 2014. According to the constructed yearly real GDP growth data, the GDP per capita growth in
Shanghai is 5:83% in 2014. The incidence of FTZ policy in Shanghai contributes about 30% of the annual GDP per capita growth
in one year after its implementation. Moreover, the proposed DPD model is robust to different model specifications. This can
be seen from the coefficients of the lag dependent variable, the FTZ time threshold as well as the treatment dummy between
column 1 and column 2 in the table.
Table (2) also reveals some interesting patterns of the annual real GDP per capita growth in China. The current year real
GDP per capita growth shows a strong correlation with that of the previous year and all of the serial correlation coefficients
are highly significant and around 0:3 which is far from a unit root.26 Another point worth mentioning is that the negative
coefficient before Tftz indicates the real GDP per capita growth experienced a significant declining trend after the estab-
lishment of the Pilot FTZ in Shanghai. This is a corroboration of the “New Normal” economy in China for the past few years.
6.2. HCW's method with yearly GDP data
To look at the long run effect of the FTZ policy on local GDP growth rate and corroborate the finding by the proposed DPD
model, we apply HCW's method to the same yearly GDP data with the reliable sample in this section.
Specifically, the R package pampe by Vega-Bayo (2015) is implemented. Eight provinces and one municipality (out of 25
provinces and 2 municipalities) are selected as control groups for the FTZ effect on Shanghai using the default corrected
Akaike information criterion (AICc) (Hurvich & Tsai, 1989). The detailed results are shown in Table (3). All the weights are
statistically significant and the R2 is 0.905. The estimated average treatment effect across year 2014e2016 is very significant,
i.e., 2.06% with a standard error of 0.0059. The standard error is calculated based on the asymptotic distributions derived in Li
and Bell (2017) as Du and Zhang (2015) did.27
In Table (4), we also list the estimated treatment effect by year after 2000 using HCW's method. As the FTZ policy was
implemented in October 2013 at Shanghai, the time threshold is 2014 with yearly data. Before year 2014, the estimated
pseudo treatment effect is very small as expected. In the post-treatment period, the estimated treatment effects are 2.15% in
25
By Arellano and Bond (1991), the Sargan test in the two-step GMM procedure has been shown to have a good power while that in the one-step GMM
and Hausman test in both procedures show a tendency to over-reject.
26
For the real GDP growth rate per capita, the Dickey-Fuller test shows that we can reject the unit root hypothesis at 5% critical value level.
27
The R package pampe does not include the asymptotic distribution of the estimated average treatment effect as it was released in 2015. The theoretical
justification of the asymptotic distribution came out two years later by Li and Bell (2017).
257
Table 4
Treatment effect of FTZ on yearly GDP growth.
Time Actual Predicted Treated

2000 0.0939 0.0933 0.0006
2001 0.0464 0.0423 0.0041
2002 0.1031 0.0854 0.0177
2003 0.0642 0.0824 0.0182
2004 0.1151 0.0906 0.0245
2005 0.0885 0.0853 0.0032
2006 0.0885 0.0867 0.0018
2007 0.1145 0.1018 0.0127
2008 0.0177 0.0108 0.0069
2009 0.0450 0.0615 0.0165
2010 0.0615 0.0669 0.0054
2011 0.0489 0.0503 0.0014
2012 0.0553 0.0595 0.0042
2013 0.0603 0.0468 0.0135
2014 0.0583 0.0368 0.0215
2015 0.0671 0.0438 0.0233
2016 0.0679 0.0510 0.0169
year 2014, 2.33% in year 2015 and 1.69% in 2016 which shows an obvious decay effect in the long run. This pattern can also be
seen in Fig. 1.
Comparably, the estimated effect in year 2014 by HCW0 method is very close to (but a little larger than) the counterpart by
proposed DPD model: 2.15% VS 1.8%. They are statistically different at 1% significance level based on a Student's t test.28 Based
on the fact in 2014 the GDP growth rate per capita in Shanghai is only 5.83%, the DPD model seems to give out a more
reasonable estimate of the impact of FTZ policy. A straightforward justification is that the FTZ in 2014 only covers 28.87 square
kilometers which only counts 1/226 of the Shanghai municipality area even though it is highly productive in terms of GDP
output.
7. Robustness check
In order to assess the credibility of the results and the validity of the proposed DPD model, we also apply the proposed DPD
model and HCW's method to the quarterly GDP growth data. The DPD model with quarterly GDP growth data could lend more
justification to the estimated effect from the yearly data as the treated groups include observations in four periods rather than
one. Moreover, the exercise with quarterly data using HCW's method can shed some light on the long run effect in quarters
and the differences between the proposed method and HCW's method.
7.1. DPD model with yearly GDP data
Using the constructed quarterly real GDP per capita growth data set across 27 provinces and 4 municipalities in China from
2005Q1 to 2016Q4, we can apply the DPD model from equation (12) by replacing the Git with quarterly growth rate Giq .
The same GMM procedure by Arellano and Bond (1991) is applied for the estimation. We consider two specifications with
the reliable sample data. To check the validity of Arellano-Bond estimation procedure, two diagnostic tests for first order and
second order serial correlation in the disturbances and the Sargan test for over-identification are reported in Table 5: ARM1,
ARM2 and Sargan Test. Again, we can reject the absence of first order series correlation at 5% significance level but we can not
reject the absence of second order series correlation at 5%. This suggests that the assumptions of Arellano-Bond estimation
procedure is satisfied. The c2 statistics for Sargan test indicates that the over-identification restrictions are valid as we can not
reject the null hypothesis at 5% significance level. There is evidence suggesting that the extra instruments are valid.
Table 5 shows the empirical results of the effect of the FTZ policy on the local GDP per capita growth. The incidence of FTZ
adds 1:24% and 1:30% to the year-on-year based quarterly GDP per capita growth for the specification without time trend and
with time trend respectively. It seems that the proposed DPD model are robust to both model specifications and with suspect
data which is a potential advantage over HCW's method as we will see. Both of them show a significant positive effect of the
FTZ policy on local GDP growth.
One point worth mentioning is that the estimated treatment effects in Table 5 are close to those from the Yearly DPD
model in Table 2 but smaller than the latter ones, i.e., 1.30% VS 1.80%. As the target is to estimate the FTZ impact on the post-
year GDP growth rate in both models, the estimated results should be comparable. With quarterly GDP data, more infor-
mation about the GDP growth can be utilized due to the increased treated time periods, i.e., four seasonal observations in the
28
Basically, the estimates from the two models are a sample mean or a difference of sample means. So a Student's t statistic is appropriate to test the
difference between them.
258
Actual and Counterfactual Path
Fig. 1. Actual and Predicted Growth Rate of GDP per capita in Shanghai.
Table 5
FTZ Impact on the Quarterly GDP per capita Growth.
Variables Reliable Sample
reg1 reg2
L.Giq 0.6886*** (0.0292) 0.6677*** (0.0275)
T ftz 0.0129*** (0.0014) 0.0079*** (0.0015)
T ftz*D sh 0.0124*** (0.0036) 0.0130*** (0.0025)
t200503 base 0.0002*** (0.0000)
Constant 0.0345*** (0.0036) 0.0414*** (0.0036)
ARM1 4.07 4.02
ARM2 1.34 0.98
Sargan Test 27.8 (0.96) 27.7 (0.96)
Groups 28 28
Notes: Robust variance estimator are reported in parentheses. P-value for c2 statistics are reported in parentheses.
* p < 0.10, ** p < 0.05, *** p < 0.01.
post-treatment year while with yearly GDP data there is only one. More post-treatment observations improve the precision of
the estimated treatment effect in the post one year. It seems that even though there may be random noise in the estimation of
DPD model with yearly data, the random noise is negligible and it does not dominate the estimation.
Also note that Table 5 indicates a similar interesting pattern as that in Table 2. The yearly-based quarter real GDP per capita
growth shows a strong first order series correlation and the previous quarter growth can determine about 70% of the growth
rate this quarter. Coefficients before the time indicator of setting up FTZ are all negative which implies a similar negative time
trend of GDP per capita growth in Table 2. Recall that the coefficient before the time trend is defined as b :¼ b2 ¼
ð1 lðy+ ÞÞ 1
a lðy+ Þ in equation (19) in the appendix. The negative sign of the empirical coefficient before the time trend
a
t2005Q 1 base is also consistent with the structural model.
7.2. HCW's method with quarterly GDP data
In this subsection, we apply HCW's method to the same quarterly GDP growth data of the reliable sample for robustness
check and compare it with the proposed DPD model.
Table 6 presents the detailed results about selected control groups and their corresponding weights. Comparing with those
of yearly GDP growth data, HCW's method selects very different control groups for the quarterly GDP dataset. Specifically,
259
Table 6
Weights of control provinces by HCW method with quarterly data.
Districts Estimate Std. Error t value

Beijing 0.5855 0.0470 12.46
Shanxi 0.1456 0.0219 6.65
Guizhou 0.0709 0.0199 3.56
Ningxia 0.1394 0.0344 4.05
(Intercept) 0.0131 0.0042 3.12
Ave.Effect 0.0116 0.0133 0.87
R2 0.968
Notes: The results are calculated by the pampe package in R. Standard error of the average effect is calculated by the formula in
Theorem 3.2 of Li and Bell (2017).
HCW's method selects one common municipality and three different provinces using the default AICc criterion. The R2 of the
fitted model is very high which means the pre-treatment fit is very good. Overall, the average treatment effect for the post-
treatment period (i.e., 2013Q4-2016Q4) is 1.16% and it is statistically insignificant even at 10%.
To look at the details in the average treatment effect and check the short-run effect after the FTZ policy, we report the
quarterly estimated effects as well as their significance levels in Table 7. The four quarterly estimates in bold are the effects
within one year after the treatment, which are comparable to the estimates by the proposed DPD model. Specifically, the
average treatment effect of FTZ policy between 2013Q4 and 2014Q3 is 0.95% and significant at 5%. This estimate is statistically
smaller than that of HCW's method with yearly data (i.e., 2.15%) at 5% significance level. However it is very close to the es-
timate by the DPD model with quarterly GDP data (i.e., 1.30%) in terms of magnitude, and both of them are statistically
positive. This corroborates the positive effect of FTZ policy on the growth rate of GDP per capita as well as the justification of
the proposed DPD model. Moreover, it demonstrates an empirical difference between the proposed DPD model and HCW's
method. Due to their estimation strategy, HCW's method might not be robust to the data transformation (yearly GDP data VS
quarterly GDP data) while the DPD model is.
In addition to above two exercises, we also consider two additional robustness checks: (1) adding more covariates, e.g.
capital stock, to xit and apply the proposed DPD model with reliable sample data; (2) applying the synthetic control method
(SCM) by Abadie et al. (2010) with the same reliable sample of yearly GDP data. In general, both of them give similar sig-
nificant positive results: (1) 1.09% significant at 5% significance level for the DPD model with extra covariates; (2) FTZ impact
for the growth rate of GDP per capita in 2014e2016 are 0.73%, 1.34% and 0.72% respectively and all of them are significantly
different from zero in the placebo test using the SCM. The details are in Appendix B and Appendix C respectively.
8. An interesting finding on DPD model
To check how the suspect data may affect the estimates of our analysis, we apply the proposed DPD model and HCW's
method with the full sample data (with three data-manipulation provinces/cities) and compare the estimates with those from
the reliable sample.29
For the yearly GDP growth data, the proposed DPD model and HCW's method yield similar and statistically significant
estimates for the full sample and the reliable sample: (1.89% VS 1.81%) and (2.10% VS 2.10%) respectively.30 An interesting
finding is that for the quarterly GDP data, the proposed DPD model yields consistent and significant estimates (i.e., 1.30% VS
1.27% in Table 8) while HCW's method gives out very different estimates (i.e., insignificant 2.08% VS 1.16%).31 This is due to
the fact that HCW's method selects very different control groups with those from the reliable sample: 4 provinces VS 13
provinces with one in common. In addition, the selected control provinces in the full sample data include all the three data
manipulation provinces/cities: TianJin, Inner Mongolia and LiaoNing which could lead to misleading fitting for the post-
treatment periods. This can be seen clearly in Table 9.
In this application, the estimates from DPD model turn out not to be affected by the presence of the suspect data which
could be a very desirable property in the empirical analysis as researchers usually have little information about the data
quality.
9. Potential mechanisms of the FTZ impact
Though the FTZ policy may have a positive effect on the growth rate of GDP per capita (and consequently the total GDP),
little can be learned about the mechanism of the effect with just total GDP data. Based on the institutional information of the
FTZ policy, we collected some data on the gross domestic product (GDP) of the secondary and tertiary sector across different
29
In reality, the macro level data may be error-ridden or even manipulated without the acknowledge of the researchers.
30
The default significance level is 5% and we report the average estimates of the two specifications using the proposed DPD model for simplicity.
31
Though neither of them are statistically significant, the fitted models and counterfactual paths for the growth are very different.
260
Table 7
Treatment effect of FTZ on quarterly GDP growth.
Actual Predicted Treatment

201003 0.1079 0.1051 0.0028
201006 0.0849 0.0840 0.0009
201009 0.0729 0.0672 0.0057
201012 0.0569 0.0613 0.0044
201103 0.0659 0.0658 0.0001
201106 0.0649 0.0652 0.0003
201109 0.0639 0.0651 0.0012
201112 0.0629 0.0662 0.0033
201203 0.0559 0.0587 0.0028
201206 0.0579 0.0592 0.0013
201209 0.0599 0.0604 0.0005
201212 0.0609 0.0626 0.0016
201303 0.0633 0.0613 0.0020
201306 0.0623 0.0600 0.0023
201309 0.0623 0.0606 0.0016
201312 0.0623 0.0610 0.0013**
201403 0.0654 0.0521 0.0134**
201406 0.0664 0.0542 0.0122**
201409 0.0654 0.0544 0.0110**
201412 0.0654 0.0539 0.0115 *
201503 0.0705 0.0523 0.0182 *
201506 0.0745 0.0541 0.0204 *
201509 0.0725 0.0527 0.0198
201512 0.0735 0.0549 0.0186
201603 0.0649 0.0579 0.0070
201606 0.0649 0.0586 0.0063
201609 0.0649 0.0596 0.0053
201612 0.0659 0.0605 0.0054
Notes:Only quarters in 2010e2016 are presented.

For brevity.*p < 0.10, **p < 0.05.
Table 8
FTZ Impact on the Quarterly GDP per capita Growth.
Variables Full Sample Reliable Sample
reg1 reg2 reg3 reg4

L.Giq 0.7233*** (0.0329) 0.6945*** (0.0305) 0.6886*** (0.0292) 0.6677*** (0.0275)
T ftz 0.0125*** (0.0014) 0.0073*** (0.0014) 0.0129*** (0.0014) 0.0079*** (0.0015)
T_ftz*D_sh 0.0125*** (0.0037) 0.0135*** (0.0032) 0.0124*** (0.0036) 0.0130*** (0.0025)
t200503 base 0.0003*** (0.0000) 0.0002***
(0.0000)
Constant 0.0310*** 0.0393*** 0.0345*** 0.0414***
(0.0039) (0.0038) (0.0036) (0.0036)
ARM1 4.24 4.19 4.07 4.02
ARM2 1.56 1.18 1.34 0.98
Sargan Test 30.8 (0.92) 30.7 (0.90) 27.8 (0.96) 27.7 (0.96)
Observations 1426 1426 1288 1288
Groups 31 31 28 28
Notes: Robust variance estimator are reported in parentheses. Giq is the real GDP per capita growth for province i and in quarter q.
P-value for c2 statistics are reported in parentheses.
* p < 0.10, ** p < 0.05, *** p < 0.01.
provinces and municipalities nationwide and applied the proposed DPD model to explore the potential impact by FTZ.32 This
could help shed some light on the mechanisms of the FTZ impact on the local economy.
The data on the GDP of the second sector and the tertiary sector in China also comes from NBS. It contains two balanced
yearly panels across 27 provinces and 4 municipalities from 1994 to 2016 for the secondary sector and from 2000 to 2016 for
the tertiary sector.33 The tertiary sector in China (also called service sector) refers to economic sectors exclusive from the
primary sector and the secondary sector. The primary sector includes farming, forestry, animal husbandry and fishery, and the
32
We also tried to explore the FTZ impact on the unemployment, wage, price index etc but did not succeed due to the limited data access.
33
Actually the tertiary sector data starts from 1990. Due to some concerns about the completeness of the statistic data on the tertiary sector, we choose a
subsample from 2000 to 2016.
261
Table 9
Weights of control provinces by HCW method with quarterly data.
Districts Full Sample Reliable Sample
Estimate Std. Error t value Estimate Std. Error t value

Beijing 0.5855 0.0470 12.46
Tianjin 0.5496 0.1052 5.22
Inner Mongolia 0.5322 0.0660 8.06
Liaoning 1.0176 0.1057 9.63
Jilin 0.2311 0.0433 5.33
Shanxi 0.1456 0.0219 6.65
Jiangsu 1.0638 0.1153 9.23
Jiangxi 0.2691 0.0711 3.79
Hubei 0.4193 0.0789 5.32
Hunan 0.5155 0.0740 6.97
Guangdong 0.3955 0.0556 7.12
Hainan 0.1659 0.0291 5.70
Sichuan 0.2276 0.0343 6.64
Guizhou 0.3082 0.0284 10.84 0.0709 0.0199 3.56
Ningxia 0.1394 0.0344 4.05
Gansu 0.4006 0.0347 11.54
(Intercept) 0.0617 0.0076 8.11 0.0131 0.0042 3.12
Ave.Effect 0.0208 0.0366 0.57 0.0116 0.0133 0.87
R2 0.993 0.968
Notes: The results are calculated by the pampe package in R. Default selection criteria is AICc. Standard error of the average effect is calculated by the formula
in Theorem 3.2 of Li and Bell (2017).
secondary sector includes mining (excluding mining assistance activities), manufacturing (excluding metal products, ma-
chinery and equipment repair), power, heat, gas and water production and supply, construction.34 A typical example is the
financial service sector. In the FTZ area in Shanghai, most of the economic activities pertain to the secondary sector and the
tertiary sector.
For completeness, we construct two reliable samples excluded from the three data-manipulation provinces accordingly
and apply the DPD model with two specifications. Detailed results are presented in Table 10. The Arellano-Bond GMM
procedure is applied. We pass two diagnostic tests for first order and second order serial correlation in the disturbances and
marginally pass the Sargan test for over-identification.35 The results are reported in the table.
In Table 10, the results for each economic sector are reported in pair columns and the parameter of interest is still the
coefficient before the interaction term T ftz*D sh. For the secondary sector, it gives very similar and statistically insignificant
estimates: 8.85% and 8.75% for the two specifications. However, the estimates are marginally significant with the tertiary
sector data: 6.58% and 5.88%. These suggest that the FTZ policy has no significant impact on the growth of the secondary
sector while adding around six percentage points to the GDP growth rate of the tertiary sector in the following year. This is
intuitive and it corroborates the mixed evidence in the raw statistics discussed in the background section. Even though some
of the economic indicators in the secondary sector declined in Table 1, that may not result from the FTZ policy as the FTZ policy
shows no significant negative impact on the secondary sector based on the proposed models. The effect on the tertiary sector
is about a 50% increase concerning the fact the actual GDP growth rate of the tertiary sector at Shanghai was 13.6% in 2014.
Since Shanghai is a city with highly developed tertiary sector, this large positive effect is very likely to be an important driving
force for the significant GDP growth rate increase studied in the previous sections.
In an unreported counterfactual analysis, we also apply HCW's method with the same data set on the secondary sector and
the tertiary sector. We get a similar insignificant effect of 7.99% for the secondary sector and a significant effect of 7.58% for the
tertiary sector. This justifies the validity of the proposed DPD model and the possible mechanisms of the FTZ effect again.
10. Conclusions
Estimation of the general effect (on GDP or CPI) of a macro policy incidence such as FTZ, SEZ etc. is very difficult because of
the lack comprehensive data and many potential confounding factors. In this paper, we propose a DPD model with a semi-DID
decomposition to evaluate the effect of a macro place-based policy (i.e.,Shanghai FTZ) and compare the results with those
from a similar method by Hsiao et al. (2012). The proposed method can be easily implemented by the GMM procedure by
Arellano and Bond (1991) once the diagnostic tests and over-identification test are satisfied. Though related with HCW's
method, the proposed method has at least two recognized merits: first, it exploits both the cross sectional dependence and
34
This is the latest definition of the tertiary sector by NBS, China. The range of the tertiary sector changed slightly in 2003 and 2013 national wide. For
details, please refer to the Chinese NBS website http://www.stats.gov.cn/tjsj/tjbz/201301/t20130114_8675.html.
35
For specification 2 and 4, we do not pass the over-identification test at 0.05 confidence interval. See Table 10 for the details.
262
Table 10
FTZ impact on the yearly GDP growth of secondary and tertiary sector.
Variables Secondary Sector Tertiary Sector
reg1 reg2 reg3 reg4

L.Git 0.2481*** (0.0925) 0.2459*** (0.0846) 0.0083 (0.0260) 0.0179 (0.0232)
T ftz 0.0799*** (0.0124) 0.0923*** (0.0132) 0.0363*** (0.0075) 0.0413*** (0.0085)
T_ftz*D_sh 0.0885 (0.0568) 0.0875 (0.0566) 0.0658* (0.0399) 0.0588* (0.0344)
t2000 base 0.0010* (0.0005) 0.0008 (0.0008)
Constant 0.1150*** (0.0175) 0.1049*** (0.0161) 0.1661*** (0.0071) 0.1587*** (0.0093)
Arm1 3.1826 3.0891 3.2808 3.2864
Arm2 0.0717 0.0978 1.1940 1.3010
Sargan Test 27.88 (0.06) 27.98 (0.03) 27.9 (0.06) 27.9 (0.03)
Observations 616 616 420 420
Groups 28 28 28 28
Notes: Robust variance estimator are reported in parentheses. L.Git is the first order lag of the real GDP per capita growth for province i and in year t. P-value
for c2 statistics are reported in parentheses.
* p < 0.10, ** p < 0.05, *** p < 0.01.
serial correlation of a panel and it's easy to do inference; second, it can incorporate multiple treated groups at different time
threshold, i.e., multiple elements in l set in model (1). Empirical analysis shows that the estimates by the proposed DPD model
turns out to be unaffected with the presence of the suspect data as it utilizes the systematic dynamic structures of all units in
the data. A good strategy in empirical analysis is to combine the proposed DPD model with HCW's method so that we can get
more information about the real dataset at hand and increase the credibility of the results.
Based on the empirical analysis applying the proposed DPD model (and comparisons with the HCW's method) with
publicly available data, we find that the Shanghai FTZ policy has a significant positive effect on the local economy (in terms of
the real GDP per capita growth) in the post-treatment year and this largely comes from the positive impact on the tertiary
sector. The estimation is about 1:2% to 1:8% on the real GDP per capita growth of the local economy. That is about one fourth to
one third of the real GDP per capita GDP per capita growth in 2014 at Shanghai. And it transfers into an average adding of 1168
to 1753 yuan (168e250 dollars) in terms of nominal annual GDP per capita in 2014.36 This effect largely comes from the
positive shock to the tertiary sector and no significant impact is suggested on the secondary sector.
For future research, the proposed model can be readily extended to include the factor and loading components which may
have abroad appeal in macro-policy evaluation. For the empirical part, many specific effects of macro policies like FTZ or SEZ
can be explored with meso-level or even micro-level data set which could shed more light on the mechanism of how these
policies work. Also, due to the data and model limitation, we consider the short run effect here. The long run and hetero-
geneous effect of FTZ or SEZ is also a very interesting topic to explore.
Declaration of conflict interest
The authors declare no conflict of interest.
Acknowledgment
The authors would like to thank Jonathan Presler, David Schwegman, Alfonso Flores-Lagunes for their kind help and
discussion. This work is supported by the Key Project of the National Natural Science Foundation of China (Grant No.
71833004); the National Natural Science Foundation of China (Grant No. 71471108); and the Fundamental Research Funds for
the Central Universities (HUST: 2021WKYXQN010).
Appendix
A. The Structural Model
Generally speaking, the neoclassical growth model assumes that the GDP per capita will converge to a stable point which is
defined as a general equilibrium. Let Y denote the output, K denote the capital, L denote the labor and A denote the pro-
ductivity with technology improvement. Then yt ¼ Yt =ðAt Lt Þ represents the efficient gross domestic product per capita (GDP
36
According to the published data from Shanghai Bureau of Statistics, the nominal GDP per capita from 2014 is 97370 yuan.
263
per capita) at time t. Let y+ denote the equilibrium real GDP per capita. Consider the transition process from yt to y+ for a
fixed province or country (Phillips and Sul, 2007)37
!
vlnyt_
lnyt_ ¼ j ðlnyt lny+ Þ ¼ lðlnyt lny+ Þ (13)
vlnyt lnyt ¼lny
+
!
_
vlnyt
where l ¼ j
vlnyt lnyt ¼lny+
. The representation of l indicates that l is not a constant and it depends on the steady real GDP
per capita (we will discuss this in more detail later). Normally, l denotes the speed of economy growth to the equilibrium.
In order to capture the dynamic pattern of the economy growth in China and the difference of GDP growth rate in different
cities and provinces, following Islam (1995), write equation (13) in a panel model form with a first-difference to approximate
the derivative:

lnyitþ1 lnyit ¼ l y+ +
it ðlnyit lny Þ þ uit (14)
The above equation can be represented as

+
lnyitþ1 ¼ 1 l y+
it lnyit þ l y+
it lnyit þ uit (15)
where uit is the Taylor expansion error. When yit approaches to y+

it , uit goes to zero.
According to the typical Solow growth model, equilibrium GDP per capital y+ i is related with some exogenous factors in
each district such as savings rate, technology accumulation, etc. Let n and g denote the labor growth rate and technology
improvement, s denote the savings rate, d denote the rate of capital depreciation. a is the exponent index of capital in the
Cobb-Douglas production function which is also called the capital allocation rate. Similar to Mankiw et al. (1992), assume yit ¼
ð1dÞ*kit þs*f ðkit Þ
f ðkit Þ ¼ kait with the macroeconomics law of motion equation kitþ1 ¼ ð1þgit Þð1þnit Þ , we can easily get
a
a sit 1a
y*it ¼ k*it ¼ (16)
ð1 þ git Þð1 þ nit Þ ð1 dÞ
where the i and t are subscripts for the district i and time t. Plugging in equation (15), we can get
lnyitþ1 ¼ glnyit þ b1 lnsit þ b2 lnðnit þ git þ dit Þ þ uit (17)
where gðy+ it
Þ ¼ 1 lðy+
it
Þ, b1 ¼ ð1 lðy+
it
a þ lðy+ Þ, b ¼ b . we use lnðg þn þgn þdÞzlnðg þn þdÞ here as g and n are
ÞÞ 1a it 2 1
typically very small.
In order to simplify the above econometric model further and make it tractable, we need to introduce following
assumption.
Assumption 1. Assume there that there is only one equilibrium output per capita for a certain growth path,38 namely, y+
it
does not vary across time and districts in equation (17).So the gðy+
it
Þ ¼ g, b1 ðy+
it
Þ ¼ b1 , b2 ðy+
it
Þ ¼ b2 .
As the savings rate in a certain province in China is very stable though it varies a lot in different provinces (Zhou et al.,
2009), lnsit can be simplified to lnsi and consequently b1 lnsit to an idiosyncratic term di under above Assumption. Then we
have
lnyitþ1 ¼ glnyit þ di þ b2 xit þ uit (18)
where xit ¼ lnðnit þgit þdit Þ and b ¼ b2 .

As xit ¼ lnðnit þgit þdit Þ describes major exogenous macro characteristics of an economy, it can be substituted with time
variable t as in Kumar and Ullah (2000) and Lee et al. (1997,1998) did. The time trend t captures the growing trend of
population and technology development or even depreciation rate. Then equation (18) can be written as
lnyitþ1 ¼ glnyit þ di þ bt þ uit (19)
_
37 vlnyt
The dot means taking derivatives with respect to time t. Following the literature in macroeconomics, we evaluate the deviation vlnyt
at steady output
point y+ rather than yt . When yt approaches to y+ , the difference diminishes.
38
As there is only one equilibrium(optimum) k+ and y ¼ ka , it is reasonable to get that there is only one optimum y+ ¼ ðk+ Þa .
264
Table 11
FTZ Impact on the Yearly GDP per capita Growth.
Variables reg1 reg2

L.Git 0.2483*** (0.0312) 0.2296*** (0.0347)
lncapital 0.0057*** 0.0163**
(0.0017) (0.0064)
T
ftz 0.0299*** (0.0035) 0.0263*** (0.0030)
T
ftz * Dsh 0.0193*** (0.0050) 0.0109** (0.0053)
t1978 base 0.0027***
(0.0007)
Constant 0.0412*** 0.0994***
(0.0070) (0.0177)
ARM1 4.6452 2.5138
ARM2 1.3788 1.4490
Sagan Test 25.4 (0.83) 26.2 (0.75)
Groups 28 28
Fig. 2. Shanghai FTZ impact by SCM
We would like to mention that Wansbeek and Knapp (1999) consider a similar dynamic panel model but with hetero-
geneous coefficients on the lag dependent variable and the time trend. Their model is also derived from Islam's (1995) version
of Solow's model on growth convergence among countries. Here we only explore the dynamic panel data structure and
combine it with a semi-difference in difference decomposition to disentangle the policy-incidence impact.
B. Robustness Check I: DPD model with covariates
For robustness check, we introduce the capital stock information in China between 1978 and 2015 based on recently
available data and add it to the xit based on the econometric model equation (1) as following:
Gitþ1 ¼ gGit þ bxitþ1 þ aTt þ hTt *Di þ di þ εitþ1 (20)
The data comes from Holz and Yue (2017). They calculated the physical capital estimates for China's provinces between
1952 and 2015, applying the most recent methodology advanced by the OECD, the U.S. Bureau of Labor Statistics, and the
Australian Bureau of Statistics. For conformity, we only use the capital information between 1978 and 2015 and all the values
are based on 1985 price level.39
We consider above specification with or without time trend using reliable sample data as before. The results are reported
in Table (11). The same Arellano-Bond GMM procedure applies. We passed the serial correlation test and over-identification
39
Rigorously speaking, there is a little nonconformity since all the GDP data in the paper are calculated based on 1978 price level. But the inflation is very
mild at the beginning period of Reform and Opening Policy in China.
265
Fig. 3. SCM placebo test for Shanghai FTZ impact.
test. The coefficients before the Tftz *Dsh are both positive and significant: 1:93% and 1:09% respectively. These are very
consistent with what we get with just time trend t in xit in section 5.
C. Robustness Check II: SCM with the yearly data
Another robustness check we did is to apply the synthetic control method (SCM) directly on the same data. We apply SCM
on the yearly reliable real GDP per capita growth sample and do the placebo test for all the 28 provinces and municipalities as
well.
Fig. 2 shows the results for Shanghai with corresponding FTZ effects during 2014e2016 as 0.73%, 1.34% and 0.72%
respectively. And the placebo test in Fig. 3 shows that they are significantly different from zero. The bright yellow line in-
dicates the estimated effects by SCM on Shanghai and all the control groups are in grey lines.
All these shows that the FTZ policy does have a positive impact on the growth rate of real GDP per capita in Shanghai after
its establishment which are very consistent with the regression results by the proposed DPD model in section 6.
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Journal of Management Science and Engineering 6 (2021) 249e267

Contents lists available at ScienceDirect

Journal of Management Science and Engineering

A dynamic panel data approach and HCW's method:

Items Unit (RMB) Value Growth (%)

Resource: Shanghai Bureau of Statistics (2014)

2. China (Shanghai) Pilot Free Trade Zone

yitþ1 ¼ gyit þ bt þ aTt þ hTt Di þ di þ εitþ1 i ¼ 1; ::; N; t ¼ 1; :::; T (1)

3.1. Understanding the dynamic panel data model

Model (1) can be understood in at least three ways:

yitþ1 ¼ gyit þ bt þ uitþ1 (2)

uitþ1 ¼ aTt þ hTt *Di þ di þ εitþ1 (3)

yitþ1 ¼ gyit þ bt þ uitþ1 (4)

uitþ1 ¼ aTt þ hTt *Di þ q*Di þ εitþ1 (5)

yitþ1 yit ¼ ða þ bÞ þ h*Git þ ðg 1Þyit þ εitþ1 (6)

yi1 yi0 ¼ ða þ bÞ þ h*Gi þ ðg 1Þyi0 þ εi1 (7)

3.2. Comparison with HCW's method

yitþ1 ¼ gyit þ b0i ftþ1 þ di þ εitþ1 t ¼ 1; 2:::T; i ¼ 1; 2:::N (9)

4. Estimation of the DPD model

5.1. Yearly GDP data

5.2. Quarterly GDP data

Variables Reliable Sample

6. Assessing the effect of FTZ

Gitþ1 ¼ gGit þ bt þ aTftz þ hTftz *Dsh þ di þ εitþ1 (12)

6.1. DPD model with yearly GDP data

Districts Estimate Std. Error t value

6.2. HCW's method with yearly GDP data

Time Actual Predicted Treated

7.1. DPD model with yearly GDP data

Actual and Counterfactual Path

Variables Reliable Sample

7.2. HCW's method with quarterly GDP data

Districts Estimate Std. Error t value

8. An interesting ﬁnding on DPD model

9. Potential mechanisms of the FTZ impact

Actual Predicted Treatment

Notes:Only quarters in 2010e2016 are presented.

Variables Full Sample Reliable Sample

reg1 reg2 reg3 reg4

Districts Full Sample Reliable Sample

Estimate Std. Error t value Estimate Std. Error t value

Variables Secondary Sector Tertiary Sector

reg1 reg2 reg3 reg4

Declaration of conﬂict interest

The authors declare no conﬂict of interest.

A. The Structural Model

The above equation can be represented as

where uit is the Taylor expansion error. When yit approaches to y+

lnyitþ1 ¼ glnyit þ b1 lnsit þ b2 lnðnit þ git þ dit Þ þ uit (17)

lnyitþ1 ¼ glnyit þ di þ b2 xit þ uit (18)

where xit ¼ lnðnit þgit þdit Þ and b ¼ b2 .

lnyitþ1 ¼ glnyit þ di þ bt þ uit (19)

Variables reg1 reg2

Fig. 2. Shanghai FTZ impact by SCM

B. Robustness Check I: DPD model with covariates

Gitþ1 ¼ gGit þ bxitþ1 þ aTt þ hTt *Di þ di þ εitþ1 (20)

Fig. 3. SCM placebo test for Shanghai FTZ impact.

C. Robustness Check II: SCM with the yearly data

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uitþ1 ¼ aTt þ hTt Di þ qDi þ εitþ1 (5)