Threshold Effects, Industry Agglomeration And TFP Growth

China has been witnessed a rapid economic growth since its reform and opening up to the outside world. However, this process has also been accompanied with several serious problems. The low level of productive efficiency and increasing regional disparities are mostly important of all. Correspondingly, it is a key to solve these two problems that how to improve the level of total factor productivity.As another point of view, new economic geography theory focuses on the effect of agglomeration on productivity. With the assumption of increasing scale return, imperfect competition, and ice trade cost, this theory has a significant advantage over neoclassical theory in explaining the disparity of productivity. In their view, agglomeration can promote total factor productivity through many channels, such as knowledge and technology spillovers, infrastructure and factor resources sharing, forward and backward linkage of industry and et al. Although the theoretical analysis is definite, the empirical tests conclusions for which whether agglomeration can promote total factor productivity are still ambiguous. Some tests conclusions support the theoretical analysis while the others not. Are there any other elements affecting in the process of agglomeration promoting total factor productivity? Based on this, we try to study this question under the perspective of trade openness.Firstly, this paper reviews the related literature at home and abroad, and then through the introduction of agglomeration variables into the theoretical model of Melitz (2003), it analyzes the effect of agglomeration on equilibrium productivity in the state of trade opening as well as in the closed situation. The results indicate that the contribution of agglomeration on total factor productivity depends on the external economic environment. When the level of trade opening is high, the low sunken cost benefited from agglomeration will facilitate firms'entering into home market and oversea market, which will cause highly demand of production factors, and then the lower profits at home market. With the decrease of profits at home market, those poor productivity firms which can't make up the loss through benefiting from oversea market will be forced to exit, and with the exit of those poor firms, the average productivity of the whole industry will raise. But when the level of trade opening is low, owing to the small external market scale, the shock of market expanding is the same for every firm, so the redistribution of resource and market share in the market will not happen, and correspondingly the average productivity of the industry will not change a lot.Secondly, this paper measures the level of China's agglomeration and total factor productivity from regional and industrial aspects separately. Based on this, this paper takes China's economic characteristics into account and investigates the relationship between the agglomeration and total factor productivity as well as the mechanisms that agglomeration promotes total factor productivity, using the non-linear model (Threshold Regression). We find that the theoretical conclusions are supported by the empirical results. The threshold effect exists in the relationship of agglomeration and productivity. The effect of agglomeration on productivity is not significant unless the level of agglomeration reaches a certain threshold. We also find that not only the effect of agglomeration on productivity, but the mechanism that agglomeration affects it, both depend on the level of trade openness. In the case of a higher level of openness, though agglomeration has a significant promotion on technical progress, it hinders the improvement of technical efficiency.Finally, based on the above analysis, we propose some policy suggestions on the adjustment of industry layouts and coordination of regional economic development.