From Local Clusters to Global Production: The Role of Producer Services Agglomeration in China's GVC Position

ABSTRACT

Economic globalization in the 21st century has been characterized by the emergence and expansion of the global value chain (GVC). Producer services are essential to the modernization and structural transformation of the manufacturing sector, and their agglomeration patterns significantly influence firms' GVC position. Our study addresses a critical gap in the literature by examining how producer services agglomeration (PSA) affects the GVC position of manufacturing firms in a global context. Our empirical analysis, based on a comprehensive dataset that encompasses 600,000 firms in China from 2003 to 2014, reveals several key findings. PSA significantly enhances manufacturing firms' GVC upstreamness. This agglomeration effect manifests heterogeneity across firm characteristics, industrial sectors, and geographic regions. The positive impact of PSA operates through the home market effect (HME) and productivity effect, the labor pool effect, and the innovation and knowledge spillover effects. Our work extends conventional agglomeration theories by incorporating the GVC framework, offering a more nuanced analysis of how PSA influences the global competitiveness of manufacturing firms. Our findings highlight that firms can leverage the favorable conditions generated by PSA to enhance productivity, foster technological innovation, and deepen participation in the global division of labor.