48(11) 2339–2354, August 2011

Information and Communication

Technologies and the Geographical
Concentration of Manufacturing
Industries: Evidence from China
Junjie Hong and Shihe Fu
[Paper first received, December 2009; in final form, August 2010]

Abstract
Using the 2004 China economic census database, this paper examines the impact of
information and communication technologies (ICT) on the geographical concentration
of manufacturing industries, controlling for a broad set of other determinants of
industrial agglomeration. Contrary to the argument that ICT leads to more dispersion,
it is found that ICT promotes geographical concentration of industries. The results
are robust to different measures of ICT, at different geographical levels and to the
consideration of endogeneity.

1. Introduction
Economists have long recognised that
agglomeration—of both population and
firms—in cities, yields economic benefits.
In Marshall’s view (Marshall, 1920), firms
of the same industry concentrate in a city to
incorporate specialised labour pooling and
the availability of intermediate inputs, as well
as information and knowledge spillovers. In
Jacobs’ opinion (Jacobs, 1961), firms of dif-
ferent industries concentrating in a city can
facilitate cross-fertilisation of new ideas. In
both arguments, the underlining determinant
of agglomeration economies is geographical
proximity. To be more specific, the demand
for geographical proximity stems from the
demand for face-to-face communications,
especially in an innovative business environ-
ment where tacit, uncodifiable and rapidly
changing information is crucial to decision-
making (Storper and Venables, 2004).
Many recent studies have confirmed the
existence and significance of agglomera-
tion economies among firms and among
workers in cities. Further, economists have

Junjie Hong is in the School of International Trade and Economics, University of International Business
and Economics, Beijing, 100029, China. E-mail: hongjunjie@alumni.nus.edu.sg.
Shihe Fu is in the Research Institute of Economics and Management, Southwestern University of
Finance and Economics, Chengdu, China. E-mail: fush@swufe.edu.cn.

0042-0980 Print/1360-063X  Online

© 2010 Urban Studies Journal Limited
DOI: 10.1177/0042098010388956
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2340  JUNJIE HONG AND SHIHE FU
tried to disentangle the foundations of firm
agglomeration. For example, Rosenthal and
Strange (2001) examined the impact of
knowledge spillovers, labour market pool-
ing, input-sharing and natural advantage
on industrial agglomeration. Audretsch and
Feldman (1996) found that industries that
emphasise research and development (R&D)
are more likely to concentrate in an area.
Lovely et al. (2005) investigated whether the
need to acquire information contributes to
spatial concentration, while Nakamura (2005)
focused on the forward and backward linkage
externalities.1
Along with the rapid progress and wide
application of information and communica-
tion technologies (ICTs) during the past few
decades, an interesting research question has
been debated: if people can communicate over
a long distance at decreasing cost via phones,
fax machines, the Internet and e-mails, is
it still necessary for people and firms to be
located close to each other? Or, put in another
way, will the improvement of ICT attenuate,
or even eliminate the geographical concen-
tration of economic activities, or even cities?
There is no consensus, either theoretically or
empirically.
Theoretically speaking, while ICTs have
led to the de-agglomeration or dispersion
of some routine activities, ICTs have also
created a knowledge-based economy result-
ing in more new complex opportunities
that continue to require face-to-face contact
(Storper and Venables, 2004). In addition,
it is argued that information is inevitably
embedded in social relations since learn-
ing (transforming information to people’s
knowledge) relies on complex social interac-
tions (Brown and Duguid, 2002). Therefore,
whether ICT promotes agglomeration or not
is an empirical question.
Existing empirical studies on the relation-
ship between ICT and the geographical con-
centration of industries can be grouped into
roughly three strands. The first strand found
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that agglomeration economies are localised
and decay with geographical distances. For
example, Jaffe et al. (1993) found that pat-
ent citations decrease when distance from
the company holding the patent increases.
Previous studies also found that business
agglomeration economies (Rosenthal and
Strange, 2003) and labour market agglom-
eration economies (Fu, 2007; Rosenthal and
Strange, 2008) attenuate rapidly with distance.
Although these studies did not explicitly pre-
dict the impact of ICT on agglomeration, the
implication is that a decrease in the cost of
communication and transport over distance
will attenuate agglomeration and lead to more
dispersion.
The second strand of literature predicts
that ICT will attenuate the demand for face-
to-face communications and thus will result
in greater dispersion of economic activities.
Ota and Fujita (1993) constructed a general
equilibrium model of multiunit firms’ loca-
tion and showed that the development of
information technology will lead to a greater
concentration of front-units in the city cen-
tre and to a dispersion of back-units in the
far suburbs. Sivitanidou (1997) found that
between 1989 and 1994 the office-commercial
land value gradients within polycentric Los
Angeles flattened. His interpretation was
that the recent information revolution had
weakened the attractiveness of large business
centres to office-commercial activities, result-
ing in the increasingly dispersed patterns of
business locations. Ioannides et al. (2007)
developed a formal model showing that the
improvement of ICT will increase the disper-
sion of economic activities across cities, sug-
gesting that city sizes would be more uniform.
They also used cross-country city size data
and found supportive evidence.2
The third strand, however, has an opposite
viewpoint. Gaspar and Glaeser (1998) devel-
oped a theoretical model and demonstrated
that ICT and face-to-face interactions could be
complementary, rather than substitute goods.

The reason is that, while some face-to-face
contacts will be replaced and conducted elec-
tronically, the improved ICT may result in more
face-to-face interactions. If the second force is
dominant, then ICT may strengthen agglomer-
ation. They also provided some suggestive evi-
dence, such as the negative correlation between
geographical distance and number of phone
calls, the complementary relationship between
business travel and telecommunications, and
the increase in co-authorship in economics.
Panayides and Kern (2005) extended Gaspar
and Glaeser’s model and found that improve-
ments in ICT may increase or decrease the
demand for face-to-face interactions, depend-
ing on the cross-price elasticity. If the cross-
elasticity is negative, then city size may increase
with electronic communications. Kolko (2000)
found that commercial Internet domain density
(the ratio of commercial Internet domains to
commercial establishments) is higher in larger
cities, controlling for a broad range of other
factors. He interpreted this as evidence that
face-to-face contact is a complement to elec-
tronic communication.3
This study contributes to the literature by
providing new evidence for unravelling the
dispute between the competing hypotheses
regarding the relationship between ICT and
the geographical concentration of manufac-
turing industries. Specifically, we examine
the impact of ICT on the spatial concentra-
tion of manufacturing industries in China,
controlling for other main determinants of
geographical concentration. The data used in
this research are drawn from the 2004 China
economic census database, which is believed
to be the most comprehensive micro-level
database in China thus far. It contains detailed
information on the entire universe of manu-
facturing firms in China. For each four-digit
manufacturing industry, we compute the
Ellison–Glaeser index (Ellison and Glaeser,
1997) to measure the level of geographical
concentration at the county, city and province
levels. The econometric analyses are carried
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ICT AND MANUFACTURING IN CHINA   2341
out separately, at these three geographical
levels. The empirical results show a positive
and strong association between the adoption
of ICT and the geographical concentration
of industries. These results are quite robust
to different measures of ICT as well as at
different geographical levels. To deal with
the concerns on omitted variables and endo-
geneity issues, we add two-digit industry
dummies and control for government policy
that might have affected both ICT usage and
geographical concentration. We also use an
instrumental variable approach based on a
predetermined value of ICT. The estimation
results provide further support to the argu-
ment that the adoption of ICT promotes the
geographical concentration of industries.
The next section describes the measurement
of variables, the econometric model specifica-
tions and identification issues and strategies.
Section 3 introduces the data and provides
summary statistics. Section 4 presents the
estimation results and section 5 concludes.
2. Variable Definitions and
Econometric Model Specification
This section begins by discussing the mea-
surement of geographical concentration.
The variables that proxy for ICT, and other
determinants of industrial agglomeration,
are then defined, followed by the specification
of econometric models and identification
strategies.
2.1 Measuring Geographical
Concentration
The two widely used indexes of geographical
concentration are the Gini coefficient, pro-
posed by Krugman (1991), and the Ellison–
Glaeser index (Ellison and Glaeser, 1997). The
difficulty with the Gini coefficient is that an
industry will be regarded as highly localised if
there are several very large firms concentrat-
ing in a limited number of locations. The EG
index, however, can control for differences
2342  JUNJIE HONG AND SHIHE FU
in firm size. This paper uses the EG index,
calculated according to the following formula
G − (1 − ∑ mi2 )H
γ=
i (1)
(1 − ∑ mi )(1 − H )
2
i
where, γ is the EG index (also called the
Gamma index), for a particular industry;
G = ∑ i (si − mi )2; and s is the ratio of location
i their own website may have more advanced
i’s employment in a particular industry to the
national employment in that industry; mi is
the ratio of location i’s total employment to
the national employment; and H = ∑ j z j
2
denotes the (employment) Herfindahl index
of the J plants in the industry, with z j repre-
senting the employment share of the jth plant.
The Gamma index has been widely
employed in recent studies on industrial
agglomeration (for example, Lovely et al.,
2005; Rosenthal and Strange, 2001). Values
of the Gamma index usually range between
-1 and 1. γ takes on a value of zero when
an industry is as concentrated as one would
expect if the plants in the industry choose
locations by throwing darts at a map. A posi-
tive value of γ indicates excess concentration,
while a negative value of γ implies an excess
diffusion of employment.
2.2 Measuring Information and
Communication Technologies
Geographical distance is a hindrance to face-
to-face contacts and the communication of
ideas. With the improvement of ICT, some
face-to-face contacts are replaced electroni-
cally and the costs of communicating ideas
over distance are reduced, implying that
advanced ICT may affect agglomeration
forces. The focus of this paper is to test the
impact of ICT on industrial agglomeration.
The rapid development of ICT has been
characterised by the ever-increasing use of
phones, fax machines, personal comput-
ers, the Internet and e-mails, over the past
few decades.4 Many companies have their
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own websites where relevant information is
posted, including descriptions of companies
and products, company and industrial news,
career information and after-sale services.
Some company sites also support business
transactions and electronic commerce. With
the popularity of the Internet, a company’s
website has become increasingly important.
One can expect that the companies that have
information technology. Thus, we use share of
companies that have a website in an industry,
as a proxy of ICT.
E-mails and fax machines have also been
widely used in business and generate new
options for communication. Some rela-
tionships that previously would have been
conducted face-to-face have been replaced
by telecommunications. For instance, a com-
pany manager now can send an e-mail to the
clients instead of meeting them in person.
Business partners can fax or e-mail draft
contracts to each other instead of delivering
them by hand. However, as noted by Gaspar
and Glaeser (1998), there is an opposing
effect when telecommunication improves:
advanced ICT makes communication easier
and hence increases the number of relation-
ships. For example, with improved ICT, a
company manager can contact more clients
and run more projects, which implies that the
manager needs more face-to-face contacts.
Since the requirement of face-to-face contacts
contributes to agglomeration, the net effect of
telecommunication improvement on indus-
trial agglomeration is unknown. Therefore,
we use the share of firms that have a fax number
or an e-mail address in an industry, as a proxy
for ICT. Since firms that have more computers
per worker are believed to have better ICT,
we also try share of firms with above-average
computer share, as an additional proxy.5
2.3 Controls for Other Variables
Our model includes a set of control variables
that may affect industrial agglomeration. The

first set of control variables concern labour
market pooling. We use share of workers with
a master’s or college degree6 in an industry
respectively, as proxies for labour pooling.
We also define average labour intensity in an
industry as proportion of number of employ-
ees over total asset to examine the impact of
labour markets. The basic idea is that the
need for human capital and labour intensity
may have an impact on a firm’s motivation
to concentrate.
The second set of variables controls for
natural advantages and knowledge spillovers.
Industries concentrate partially due to natural
advantages, as discussed in Ellison and Glaeser
(1999). We use share of firms in the industry
that are located in coastal provinces as a proxy
for natural advantage, because coastal regions
in China tend to have flatter terrain, a bet-
ter climate and easier access to seaports and
international markets. Knowledge spillover
is also an important factor in determining
industrial concentration. Because knowledge
spillover is found to be more significant in
R&D intensive industries, industries that are
highly innovative are expected to have higher
levels of agglomeration (Lovely et al., 2005).
Similar to previous studies (for example,
Lovely et al., 2005), we use number of innova-
tions per worker in an industry, as a proxy for
knowledge spillover.7
Previous studies have shown that local
protectionism is an important and special
determinant of geographical concentra-
tion in China (Bai et al., 2004; Lu and Tao,
2009). Local governments have motivation
to protect local firms and industries due to
fiscal decentralisation after China’s economic
reform. There was a rise of local protection-
ism in China during the reform era (Young,
2000), creating barriers to trade and imped-
ing the process of industrial agglomeration.
Local governments give more protection to
industries with higher shares of state owner-
ship, because state-owned enterprises can cre-
ate much more benefit for local government
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ICT AND MANUFACTURING IN CHINA   2343
officials and help to maintain social stability
and serve other social purposes (Bai et al., 2004;
Lu and Tao, 2009). Therefore, share of employ-
ment in state-owned enterprises in an industry
is used to measure local protectionism.
Our model also considers the impact of
firm age. Rosenthal and Strange (2001) found
that, compared with the agglomeration of all
establishments, agglomeration of new estab-
lishments is not as strongly related to agglom-
erative spillovers and natural advantages. We
include share of young firms in an industry in
the model, where young firms are defined as
those that are five years old or younger.
2.4 Econometric Model Specification
and Identification
We are interested in how the Gamma index is
affected by ICT, controlling for other determi-
nants of industrial agglomeration, as defined
earlier. The econometric model is specified
as follows
γ ij = δ X j + eij
(2)
where, γ ij is the Gamma index for industry j
(four-digit code) at geographical level i; X j is
a vector of industry characteristics, including
variables that proxy for ICT, labour pooling,
knowledge spillovers and natural advantages;
δ is the coefficient vector to be estimated; and
eij is the error term, assumed to be indepen-
dently and identically distributed.
The benchmark model is estimated at the
county level. To test the robustness of our
specification, we also estimate the model at
the city and province levels. In China, a city
is larger than a county, in terms of land area.
A city normally contains a number of coun-
ties. There are 31 provinces, 345 cities and
2831 counties in mainland China.
The key identification assumption is that,
after including the control variables in the
model, the ICT variables are uncorrelated
with the error term. This assumption may
be violated if there are important omitted
variables or if firms in highly concentrated
2344  JUNJIE HONG AND SHIHE FU
industries have a stronger preference to
adopt ICT, generating omitted variable bias
and an endogeneity problem. To address the
omitted variable bias problem, we add to
the benchmark model two sets of variables
that may affect ICT adoption as well as geo-
graphical concentration. Since unobservable
industrial characteristics may affect both
ICT and geographical concentration, we
add 29 two-digit industry dummies to the
model. Another important omitted variable
that we can think of is government policy.
In China, government zoning policies have
played an important role in both business
location and ICT adoption. Local govern-
ments have established high-tech industrial
parks to promote high-tech industrial clus-
tering, and some other special zones (such
as export-processing zones and free trade
zones) to promote export. Within high-tech
industrial parks, some preferential policies
(such as tax holidays, preferential account-
ing treatment) are implemented to promote
adoption of new technologies like ICT. Within
export-processing zones and free trade zones,
export-oriented firms tend to locate close
to each other. Because these firms are more
exposed to international trading practices
and standards, they are more likely to adopt
ICT as well.8 Therefore, the government
zoning policies could have driven up both
geographical concentration and ICT usage.
To deal with this concern, two proxy variables
are added to the model. The first is a dummy
for high-tech industries, used to capture the
effect of government policy towards high-tech
industries. The classification of high-tech
industries is based on the standard used by
the State Statistical Bureau of China. There
are 59 high-tech manufacturing industries at
the four-digit level. The second variable is to
measure the export orientation of an industry,
which equals one if an industry has an above-
average export share and zero otherwise.9
The estimation results based on equation
(2) provide evidence on the correlation
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between ICT adoption in an industry and
geographical concentration. However, the
causality direction can run both ways.10 It is
possible that ICT causes more concentration
by facilitating more face-to-face interactions
or through other channels; it is also possible
that concentration causes firms to adopt more
ICT because of the harsh competition among
firms in the same geographical cluster. To deal
with the causality problem, we use instrumen-
tal variable estimation. A valid instrument
should be correlated with ICT variables, but
orthogonal to the error term. Following previ-
ous studies (for example, Henderson, 2003),
we use a predetermined value of ICT as an
instrument. We use another dataset—the
2003 State Statistical Bureau enterprises sur-
vey dataset, which covers all manufacturing
enterprises that are state-owned or are above
a designated size.11 The database contains
information on firms’ e-mail addresses, but
does not provide information on website,
fax and computer usage. Therefore, we use
the share of firms in each industry that had
e-mail addresses in 2003 as an instrument.
3. Data and Summary Statistics
The data used for this research are drawn
from the first economic census in China,
conducted by the Chinese government from
2004 to 2005. It is believed to be the most
comprehensive micro-level database on
Chinese industries thus far. We obtained
the manufacturing industry data from the
State Statistical Bureau of China. The dataset
contains detailed information on all manufac-
turing firms (over 1.3 million) at the end of
2004, including firm location, year of entry,
ownership, employees and the like.
Two characteristics of this database make
it distinct from those used in previous stud-
ies. First, the dataset contains information
on the entire universe of manufacturing
firms in China, while many recent studies
(for example, Lovely et al., 2005; Maurel and

Sedillot, 1999; Rosenthal and Strange, 2001)
used only a proportion of manufacturing
firms in a country.12 Secondly, all data used
in this research are from the same census
database, therefore the consistency of data
is guaranteed. However, the census database
available for research is only at the firm level
and not at the establishment or plant level.
One concern is that, if a firm has several plants
located in different places, and all employees
are assigned to the headquarter, a measure-
ment error arises when we calculate industrial
agglomeration. Fortunately, only a very small
proportion (about 1.778 per cent) of firms
have multiple plants. In addition, according
to the rule of the State Statistical Bureau of
China, all employees of a multiplant firm are
allocated to the address where the main pro-
duction takes place. Thus, we believe that this
issue does not lead to serious bias, especially,
at the higher geographical levels.
The data cover 482 four-digit manufac-
turing industries. Based on the firm-level
data, we calculate the Gamma index at the
county, city and province levels, for each
four-digit industry. Table 1 shows that there
is substantially more concentration at the
higher geographical levels: the mean value
of the Gamma index at the province level
is 0.0657, while at the county level it is only
0.0155. These results are as expected, since
provinces are larger than cities and counties.
If employment in an industry is spread over a
number of counties within one province, the
Gamma index at the provincial level would
Table 1.   Summary of the EG Gamma index at the four-digit industry level
γ Mean SD
County 0.0155 0.0231
City 0.0287 0.0370
Province 0.0657 0.0718
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ICT AND MANUFACTURING IN CHINA   2345
be very high, but the EG index at the county
level may not be so high. These results are
also consistent with those of previous studies
(for example, Rosenthal and Strange, 2001),
suggesting that spillovers go beyond a small
area (Ellison and Glaeser, 1997).
Table 2 indicates that there are large varia-
tions in spatial concentration across two-
digit industries. At the county level, the most
localised industries are cultural, educational
and sports goods, and smelting and pressing
of non-ferrous metals. At the city and prov-
ince levels, the most concentrated industries
are smelting and pressing of non-ferrous met-
als, and electronics and telecommunication.
We note that some high-tech industries are
highly concentrated (for example, electronics
and telecommunication), while other high-
tech industries are much less concentrated
(for example, medical and pharmaceutical
products). The pattern of traditional indus-
tries is also mixed. For instance, cultural, edu-
cational and sports goods are very localised,
while the tobacco processing industry is quite
dispersed.
An industry is as concentrated as a ran-
dom allocation when the EG index equals
zero and is excessively concentrated when
the index is positive. Using manufacturing
census data for the US, Ellison and Glaeser
(1997) defined not very localised (state level
0 < γ < 0.02), intermediate, and very localised
(state level γ > 0.05) ranges. When we apply
the same classification criteria of Ellison and
Glaeser (1997) to Chinese manufacturing
Correlation with γ at
the level of
Minimum Maximum City Province
–0.0188 0.1931 0.8482 0.6531
–0.0186 0.2919 0.7373
–0.0812 0.5195
2346  JUNJIE HONG AND SHIHE FU

Table 2.   Mean value of the Gamma index in two-digit industries

Industry code and name County γ City γ Province γ

13 Food production 0.0118 0.0261 0.0829

14 Food manufacturing 0.0089 0.0176 0.0473
15 Beverage production 0.0052 0.0167 0.0465
16 Tobacco processing 0.0030 0.0034 0.0663
17 Textile industry 0.0219 0.0330 0.0703
18 Garments and other fibre products 0.0112 0.0173 0.0334
19 Leather, furs, down and related products 0.0264 0.0471 0.0866
20 Timber processing, bamboo products 0.0136 0.0260 0.0519
21 Furniture manufacturing 0.0153 0.0195 0.0640
22 Paper making and paper products 0.0111 0.0142 0.0319
23 Printing and medium reproduction 0.0053 0.0126 0.0250
24 Cultural, educational and sports goods 0.0375 0.0506 0.0947
25 Petroleum refining and coking 0.0049 0.0087 0.0665
26 Raw chemical materials and chemical products 0.0098 0.0182 0.0493
27 Medical and pharmaceutical products 0.0037 0.0099 0.0270
28 Chemical products 0.0083 0.0124 0.0296
29 Rubber products 0.0063 0.0123 0.0281
30 Plastic products 0.0176 0.0257 0.0646
31 Non-metal mineral products 0.0207 0.0323 0.0593
32 Smelting and pressing of ferrous metals 0.0045 0.0189 0.0814
33 Smelting and pressing of non-ferrous metals 0.0317 0.0583 0.1516
34 Metal products 0.0161 0.0283 0.0479
35 Ordinary machinery 0.0091 0.0170 0.0436
36 Special-purpose equipment 0.0098 0.0209 0.0528
37 Transport equipment 0.0154 0.0445 0.0726
39 Electrical machinery and equipment 0.0182 0.0266 0.0768
40 Electronics and telecommunication 0.0206 0.0538 0.1119
41 Instruments and meters 0.0156 0.0308 0.0721
42 Artwork and others 0.0269 0.0460 0.0988
43 Recycling and disposal of waste 0.0109 0.0119 0.0138

Table 3.   Distribution of the Gamma index at the four-digit industry level

Number of four-digit industries

Gamma γ at the county level γ at the city level γ at the province level
γ≤0 286 144  45
0 < γ ≤ 0.02 135 197 107
0.02 < γ ≤ 0.05  44  92 147
0.05 < γ ≤ 0.10   9  33 113
0.10 < γ ≤ 0.20   8   9  47
γ > 0.20   0   7  23

industries, 107 out of 482 four-digit industries Compared with the spatial concentration
are not very localised at the province level, of US manufacturing industries (for example,
while 183 of them are very localised, as shown Rosenthal and Strange, 2001), Chinese indus-
in Table 3. tries are more concentrated on average. For

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 ICT AND MANUFACTURING IN CHINA   2347

example, the average EG index equals 0.0657
at the province level in China, while that for
the US is 0.0485 at the state level (Rosenthal
and Strange, 2001). However, we need to be
cautious when making such comparisons,
since the Chinese provinces are normally
larger than American states in terms of land
area. In addition, the official classification of
industries is different.
Table 4 reports descriptive statistics of
the explanatory variables. In the census, all
firms were required to report their websites,
fax numbers, e-mail addresses and number
of computers, if any. There was an auditor,
who has been trained formally by the State
Statistical Bureau, to recheck the data and
information reported after a firm filled in
the census form, which guarantees the qual-
ity of the database. The value takes one if a
firm has a website, fax or e-mail, and zero
otherwise, based on which we compute ICT-
related variables at the four-digit industry
level. The shares of firms that have their own
websites, e-mail addresses and fax numbers
are, on average, 6.58 per cent, 8.16 per cent
and 42.04 per cent respectively. There are 33.4
per cent of firms with a computer share above
the average level. The correlation coefficients
among these ICT-related variables are quite
high. To avoid multicollinearity, we will not
include them in the same equation.
Table 4 also reports descriptive statistics for
other control variables. The variable of num-
ber of innovations per worker is at the three-
digit industry level and is drawn from the
China Economic Census Yearbook 2004 (State
Statistical Bureau, 2006). All other variables
are computed directly from the census data-
base and are at the four-digit industry level.
4. Estimation Results
4.1 Benchmark model results
Table 5 presents the estimation results for
the benchmark model, with the EG index
at the county level as the explained variable.

Table 4.  Descriptive statistics of explanatory variables

Variable Definition Mean S.D.

Master’s degree Share of workers with master’s degree 0.0044 0.0094

College degree Share of workers with college degree 0.0910 0.0443
Average labour intensity Number of employees/total asset 0.0385 0.1038
Innovations per worker Number of innovations per worker in an industry 0.0006 0.0006
Natural advantage Share of firms in the industry that are located in 0.6973 0.1691
coastal provinces
Local protectionism Share of employment in state-owned enterprises 0.1025 0.1472
in an industry
Young firms Share of young firms (5 years old or younger) 0.5166 0.0800
Website Share of firms that have website 0.0658 0.05197
Fax Share of firms that have fax 0.4204 0.1534
E-mail Share of firms that have e-mail 0.0816 0.0580
Computer Share of firms with above-average computer 0.3340 0.0982
share
High-tech dummy A dummy variable, which equals to 1 for 0.1224 0.3281
high-tech industries, and 0 otherwise
Export orientation The ratio of export sales over total sales 0.3838 0.4868
Notes: The variable of innovations per worker is at the three-digit industry level, drawn from the
China Economic Census Yearbook (State Statistical Bureau, 2006). All other variables are at the four-
digit industry level, computed by the authors, based on the census database.

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2348  JUNJIE HONG AND SHIHE FU
Huber–White’s robust standard error is used
to control for heterogeneity. The adjusted
R2 ranges from 0.097 to 0.113. The labour
market pooling effect is represented by three
variables: share of workers with master’s degree,
share of workers with college degree, and aver-
age labour intensity. The results in Table 5
consistently show that share of workers with
college degree has negative and significant
impact. The coefficient estimates range from
–0.159 to –0.191. The variable share of workers
with master’s degree is negative and significant
in one out of the four models. These results
show that labour quality, in terms of educa-
tion, is negatively associated with geographi-
cal concentration of manufacturers. These
results are consistent with some of the previous
studies (for example, Shaver and Flyer, 2000;
Hong, 2009), which find that firms with
better human capital are less likely to locate
close to other firms in an industry. One pos-
sible reason is that such firms gain little from
access to competitors’ human capital, while
firms with weaker human capital greatly
benefit from proximity to competitors. This
asymmetry in returns to agglomeration may
motivate firms with better human capital
not to cluster geographically (Shaver and
Flyer, 2000). The coefficient of average labour
intensity is positive and significant in two of
the four models. Taken together, these results
provide supportive evidence that labour
market pooling has a significant effect on
industrial agglomeration.
We also examine the impact of natural
advantages and knowledge spillovers. Share of
firms in the industry that are located in coastal
provinces is used as a proxy for natural advan-
tages and its impact is insignificant, consistent
with Rosenthal and Strange (2001). The
impact of number of innovations per worker,
a proxy for knowledge spillovers, is positive
and marginally significant in two of the four
models. These results suggest that natural
advantage has an insignificant impact, while
knowledge spillover has a moderate and positive
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effect on the geographical concentration of
Chinese industries at the county level.
Table 5 consistently shows that coefficient
estimates for local protectionism are posi-
tive and insignificant. This is in contrast to
the findings of Bai et al. (2004), who found
that stronger local government protection
decreases the degree of geographical concen-
tration during the period of 1985–97. One
possible interpretation is that our sample
includes all manufacturing firms, but Bai
et al. (2004) considered only firms that are
above designated size and state-owned.
Another possible interpretation is the differ-
ent periods studied. Lu and Tao (2009) found
that the impacts of local protectionism may
have become weaker over time. The variable
share of young firms, the percentage of firms
that are five years old or younger, in an indus-
try, is worth noting. The coefficient is positive
and significant in most models, suggesting
that industries with more young firms are
associated with a higher degree of geographi-
cal concentration. Since young firms are easily
exposed to ICT, this may suggest that ICTs
have not weakened the incentives of new firms
to concentrate.
The key interest of this paper is to inves-
tigate the impact of ICT on geographical
concentration. Four variables are used to
measure the adoption of ICT in an industry:
share of firms that have websites, share of firms
that have fax numbers, share of firms that have
e-mail addresses and share of firms with above-
average computer share. Table 5 indicates that
the coefficients for website, fax, e-mail and
computer share are 0.088, 0.037, 0.095 and
0.031 respectively. All coefficient estimates are
significant at the 5 per cent level. Contrary to
the argument that ICT leads to more disper-
sion, these results provide strong evidence
that the adoption of ICT is associated with a
higher degree of geographical concentration
of manufacturers. This evidence is consistent
with the view that improved ICT may result
in more face-to-face relationships (Gaspar
 ICT AND MANUFACTURING IN CHINA   2349

Table 5.   Benchmark model: regression results at the county level (N = 482)

Variables (1) (2) (3) (4)

Master’s degree -0.129 -0.092 -0.163* -0.094

(-1.46) (-1.35) (-1.80) (-1.48)
College degree -0.181*** -0.191*** -0.185*** -0.159***
(-4.31) (-5.12) (-4.50) (-4.81)
Average labour intensity 0.008** 0.006 0.008** 0.006
(2.20) (1.42) (2.32) (1.38)
Innovations per worker 4.270* 4.056 3.961 5.016*
(1.72) (1.46) (1.58) (1.80)
Natural advantage 0.003 -0.009 -0.001 0.004
(0.33) (-0.78) (-0.11) (0.49)
Local protectionism 0.024 0.016 0.023 0.029
(1.03) (0.72) (1.03) (1.42)
Young firms 0.034** 0.032* 0.034** 0.034**
(2.17) (1.95) (2.11) (2.01)
Website 0.088**
(2.52)
Fax 0.037***
(3.53)
E-mail 0.095***
(3.55)
Computer 0.031***
(2.83)
Adjusted R2 0.105 0.109 0.113 0.097
Notes: Dependent variable is g at the county level. Constants are not reported in order to conserve
space. T-values are given in parentheses. Huber–White’s robust standard error is used to control
for heterogeneity. *, ** and *** denote significance at the 10 per cent, 5 per cent and 1 per cent level
respectively.

and Glaeser, 1998; Panayides and Kern,
2005), which motivates firms to agglomerate
geographically.
4.2 Robustness Tests
In the benchmark model, we regress the
Gamma index on possible determinants
at the county level. Readers might wonder
whether our results are sensitive to different
levels of geography. To address this concern,
we estimate the model at the city and prov-
ince levels. The results are reported in Table 6,
where each estimate is taken from a separate
regression. It shows that all ICT variables are
significant at both the city and the province
levels. This provides supportive evidence that
our results are robust at different geographical
levels. One interesting finding is that the
magnitude of all four ICT variables increases
at higher geographical levels. For instance,
the coefficient for website is 0.088 at the
county level; it increases to 0.113 at the city
level and to 0.280 at the province level. We
also note that model fitness is improved sig-
nificantly at higher geographical levels. This
pattern is consistent with that in Rosenthal
and Strange (2001).
Another concern is that our results may be
subject to outlier bias. Compared with other
industries, the electronics and telecommu-
nication industry has a significantly higher
Gamma index, as well as ICT adoption.
A natural concern is that the estimation
results may be biased by the inclusion of

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2350  JUNJIE HONG AND SHIHE FU
Table 6.   Robustness test: regression results
at the city and province levels
Variables City level γ Province level γ
Website 0.113* 0.280***
(1.94) (2.74)
Fax 0.067*** 0.210***
(3.94) (4.45)
E-mail 0.147*** 0.427***
(3.54) (4.54)
Computer 0.054*** 0.148***
(2.69) (3.11)
Notes: Each estimate is taken from a separate
regression. All other variables in Table 5 are
included, but the coefficients are not reported
here. T-values are given in parentheses. Huber–
White’s robust standard error is used to control
for heterogeneity. *, ** and *** denotes the
significance at the 10 per cent, 5 per cent and 1
per cent level respectively.
this outlier industry. We experiment to drop
this industry and re-run the regressions. The
results show that dropping the electronics and
telecommunication industry does not change
the coefficient estimates substantially.13 Most
ICT variables are still significantly and posi-
tively associated with geographical concen-
tration. This provides an additional piece of
evidence that our regression results are robust.
4.3 Endogeneity Issues
To deal with possible endogeneity issues, we
try two experiments. The first experiment
concerns possible omitted variable bias. We
add to the benchmark model two sets of
variables that may affect ICT adoption as well
as geographical concentration, including 29
two-digit industry dummies and two proxies
for government policies (a high-tech dummy
and the export-orientation of an industry).
The results are reported in Table 7. The results
are still robust: all coefficient estimates for
ICT variables are positive. The variable fax
is significant at all three geographical levels,
while e-mail is significant at both county and
province levels. The coefficient estimates of
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Table 7.   Estimation results: inclusion of
two-digit industry dummies and policy effects
County City Province
level γ level γ level γ
Website 0.062 0.033 0.011
(1.26) (0.39) (0.08)
Fax 0.019* 0.038** 0.132***
(1.68) (1.98) (2.95)
E-mail 0.071* 0.078 0.229*
(1.71) (1.13) (1.84)
Computer 0.009 0.017 0.036
(0.64) (0.72) (0.65)
Notes: Each estimate is taken from a separate
regression with 29 two-digit industry dummies
and policy effects (high-tech dummy and
export orientation) included. High-tech
industries are at the four-digit level and cross
nine two-digit industries. The coefficient
estimates for the high-tech dummy range
between -0.009 and 0.013, and are insignificant
in all regressions. The estimated coefficients
of export orientation range between 0.006
and 0.029, and are significant at the 1 per cent
level in all regressions. All other variables in
Table 5 are included, but the coefficients are
not reported here. T-values are given in the
parentheses. Huber–White’s robust standard
error is used to control for heterogeneity.
*, ** and *** denote the significance at the 10 per
cent, 5 per cent and 1 per cent level respectively.
other control variables are quite consistent
with those in Table 5, in terms of both signifi-
cance and magnitude (to save space, the results
for other variables are not reported here).
The other experiment involves instrumen-
tation. A valid instrument should be cor-
related with ICT variables but orthogonal
to the error term. We use the share of state-
owned or above-designated-size firms in an
industry that had e-mail addresses in 2003
as an instrument (lagged e-mail thereafter).
The correlation coefficients between ICT
variables and lagged e-mail range from 0.408
to 0.606 (column 1 of Table 8). We regress
each ICT variable on lagged e-mail, and find
that all coefficients are positive and significant
 ICT AND MANUFACTURING IN CHINA   2351

Table 8.   Correlation between ICT variables instrument. With regard to the exclusion
and the instrumental variable restriction (i.e. the instrumental variable does
not affect geographical concentration through
Correlation
between ICT with channels other than the ICT variables), we
instrumental believe that the causality of lagged e-mail is
variablea Coefficientb irreversible: new firm location can respond
to past industry ICT adoption, but not vice
Website 0.557 0.507*** versa. We do a test related to the exclusion
(5.58)
Fax 0.536 1.388*** restriction by regressing the residuals from
(6.39) the second-stage estimations on the instru-
E-mail 0.606 0.593*** mental variable. If the instrumental variable
(6.42) affects the industrial agglomeration through
Computer 0.408 0.678***
(5.19) other channels, the residuals from the second-
stage estimations should be correlated with
a
The instrumental variable is the share of the instrumental variable (Lu and Tao, 2009).
state-owned or above-designated-size firms that
The regression results consistently show that the
have e-mail in an industry in 2003.
b
Coefficient is on the instrumental variable correlation between the two is close to zero in
(lagged e-mail) in a regression of ICT variables magnitude and is statistically insignificant.14
(website, fax, e-mail, computer respectively) on In summary, these tests show that lagged
lagged e-mail. e-mail is a good instrument.
Note: *** indicates the significance at the Table 9 shows that all ICT coefficient esti-
1 per cent level. mates are positive and significant, although
the coefficient estimates lose some signifi-
at the 1 per cent level (column 2 of Table 8), cance compared with the benchmark models.
which indicates the instrument strength. The As in previous studies (for example, Alfaro
IV regression results are reported in Table 9. et al., 2004), the coefficients increase consid-
F-values greater than 10 in the first-stage erably in values compared with the earlier
regressions confirm again the validity of the OLS results in Tables 5 and 6. One possible

Table 9.   IV estimation results

First-stage partial
County level γ City level γ Province level γ R2 and F-value

Website 0.381* 0.649** 0.809** [0.167, 14.749]

(1.77) (2.09) (2.29)
Fax 0.126* 0.215** 0.267** [0.147, 22.518]
(1.87) (2.29) (2.54)
E-mail 0.301** 0.513** 0.640** [0.207, 22.150]
(1.97) (2.32) (2.54)
Computer 0.300* 0.510** 0.636** [0.059, 13.083]
(1.83) (2.07) (2.22)
Notes: Each estimate is taken from a separate regression. All control variables in Table 5 are included
in the model. The ICT variables are instrumented by the share of state-owned or above-designated-
size firms that have e-mail in an industry in 2003. T-values are shown in parentheses. Huber–White’s
robust standard error is used to control for heterogeneity. *, ** and *** denotes significance at the 10
per cent, 5 per cent and 1 per cent levels respectively. Partial R2 and F-value based on the first-stage
regression are shown in brackets.

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2352  JUNJIE HONG AND SHIHE FU
interpretation is that instrumental variable
estimation here corrects for measurement
error, which biases the OLS coefficients to
zero. Taken together, the results in this sec-
tion lend additional support to the view that
modern information and communication
technologies have resulted in a higher degree
of industrial agglomeration.
5. Conclusions
It has long been speculated that adoption of
ICT may decrease industrial agglomeration
because developments in telecommunications
have generated new options for communica-
tions and have replaced face-to-face contacts.
Some people even predict that industrial
clusters will decline or disappear because
firms have no need to locate close to each
other with improvements in telecommuni-
cations technologies. However, others argue
that face-to-face communication and tele-
communication can be complements, since
face-to-face contact is necessary for learning
and creative activities, and adoption of ICT
can increase the number of business relation-
ships. Our research examines the impact of
advanced information and communication
technologies on the geographical concentra-
tion of manufacturing industries in China.
We use the 2004 China economic census
data and compute the Ellison–Glaeser index
to measure the geographical concentration
of four-digit industries. After controlling for
the main industrial characteristics that may
influence geographical concentration, such
as labour pooling and natural advantage, we
find that adoption of ICT actually increases
geographical concentration. These results
are quite robust to various measures of ICT,
at different geographical levels, the inclusion
of other determinants of agglomeration and
consideration of endogeneity. Our findings
suggest that knowledge spillovers through
face-to-face contact might still be important
for manufacturing industries. However, the
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exact mechanisms through which ICT affects
industrial agglomeration are left for future
research agenda.
Notes
  1. For more related studies, see the literature
review by Duranton and Puga (2004) and
Rosenthal and Strange (2004).
  2. There are a few futurists predicting the
disappearance of cities, see Toffler (1980) and
Naisbitt (1995).
  3. Using individual on-line and off-line
shopping behaviour data, Sinai and Waldfogel
(2004) found that the Internet can be both
a complement to cities and a substitute for
cities.
  4. We do not test the impact of phone lines,
because almost all firms use telephones.
  5. We do not use average computer share of an
industry as a proxy, because a small proportion
of companies have a very large number of
computers. We use share of firms with above-
average computer share to avoid outlier bias.
  6. The variable share of workers with bachelor’s
degree is not included, since it is highly
correlated with other variables. In China,
college-degree holders normally receive a
three-year education, while bachelor-degree
holders require a four-year education.
  7. Following Rosenthal and Strange (2001), we
have also tried to use energy consumption per
worker and technological funds per worker
to measure natural advantage and knowledge
spillover respectively, and find quite consistent
estimation results.
  8. Lovely et al. (2005) found that exporter
headquarters are more agglomerated when
foreign market information is difficult to
obtain.
  9. We do not use average export share of an
industry as a proxy, because a small proportion
of companies have a very high export share.
In order to avoid outlier bias, we use share of
firms with above-average export share instead.
10. The causality direction between some
industrial characteristics (such as labour
quality) and agglomeration can run both
ways. For these variables, the coefficients may
reflect the equilibrium relationship rather than

causal effects. Since our focus is the impact of
ICT, we will conduct causality analysis only
on ICT effects.
11. Firms that are above designated size are defined
as those with annual sales of over 5 million
Chinese yuan. We did not use predetermined
values of ICT in earlier years as instruments,
because the industry category and code by
State Statistical Bureau changed significantly
in 2003.
12. An exception is a recent paper by Lu (2010)
that used the first and second Chinese national
establishment censuses in 1996 and 2001,
which cover all manufacturing establishments
in China.
13. To save space, the estimation results are not
reported here, but are available from the
authors upon request.
14. To save space, the estimation results are not
reported here, but are available from the
authors upon request.
Acknowledgement
Shihe Fu gratefully acknowledges financial support
from Project 211 (Phase III) of the Southwestern
University of Finance and Economics, Chengdu,
China.
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