Does the Establishment of Shanghai Pilot Free Trade Zone Promote Yangtze River Delta’s Economic Development?

3.1 Research Design

The establishment of PFTZs is an ongoing policy issue. To explore the impact of launching SPFTZ on YRD economic development, relevant policy research methods should be adopted, that is, DID method is employed to evaluate the policy effect (Tan and Yan, 2020; Wang et al., 2020; Zhao and He, 2022).

According to the plan of National Development and Reform Commission and Ministry of Housing and Urban-Rural Development on the issuance of the YRD City cluster Development Plan issued on June 1, 2016, the planning scope of YRD city cluster includes the following 26 cities: Shanghai; Nanjing, Wuxi, Changzhou, Suzhou, Nantong, Yangzhou, Zhenjiang, Yancheng, Taizhou in Jiangsu Province; Hangzhou, Ningbo, Jiaxing, Huzhou, Shaoxing, Jinhua, Zhoushan, Taizhou in Zhejiang Province; Hefei, Wuhu, Ma Anshan, Tongling, Anqing, Chuzhou, Chizhou, Xuancheng in Anhui province. Owing to the close connection between Shanghai, Jiangsu, Zhejiang, and Anhui, these regions formed an economic zone with Shanghai as the main body, Zhejiang and Jiangsu as two wings, and Anhui as the hinterland, and the economic volume of the region outside the YRD plan takes up a relatively minor proportion of total economic volume. Considering data availability, this paper defines the scope of YRD to include four provinces of Shanghai, Jiangsu, Zhejiang, and Anhui (Ma, 2018). According to the planning scope of YRD city cluster, this research defines 26 prefecture-level cities in Shanghai, Zhejiang, Jiangsu, and Anhui as the treatment group, with the remaining 15 prefecture-level cities as the control group. On the other hand, according to the official establishment of SPFTZ as a time node on September 29, 2013, the policy implementation time is determined in 2013. In order to eliminate the endogeneity problem of missing variables, this paper selects the urban opening degree, industrial structure, population density, human capital, domestic trade, government potential, and science and technology development potential as control variables (Jia, 2022).

In terms of the design of empirical ideas, this paper first makes a descriptive statistical analysis of the data set, then adopts DID method to study the impact of the establishment of SPFTZ on the economic growth of YRD, adopts lag terms of the explained variable and counterfactual testing to examine the robustness, and finally verifies the transmission effect of financial level and FDI level from the perspective of mechanism analysis.

3.2 Research Hypothesis

According to new economic geography, regardless of the existence of exogenous differences, economic spatial evolution differentiation as an inevitability is the economic agglomeration of some regions, and economic agglomeration results from the interaction of centripetal and centrifugal forces to achieve regional equilibrium (Krugman, 1991). In terms of spatial differentiation, PFTZs have become a carrier for labor factor agglomeration. Enterprises, whether from the same or different industries within the zone, gather their strength and exert the reservoir effect of the labor force, thus producing a pronounced stimulating effect on the economic development of the zone. In other words, establishing PFTZs is a logical policy measure after the economic circle surrounding PFTZ has reached a certain level of factor agglomeration and industry agglomeration development (Hirschman, 1958). The policy purpose of PFTZs is to further strengthen the circulation of factors and industrial agglomeration within PFTZs through clearer and more detailed planning documents, to form a regional economy with more robust production capacity, higher operating efficiency, and more significant development potential. PFTZ can provide a more convenient and open business environment, so it also helps to maximize the absorption of more advantageous enterprises via more channels and form industrial synergy. From these perspectives, establishing PFTZs can stimulate regional economic growth. The first hypothesis is put forward:

Hypothesis 1: The establishment of the SPFTZ promotes regional economic growth.

The influence mechanism of the SPFTZ on urban economic development may come from financial circulation and FDI. Regarding financial circulation, establishing PFTZs can promote regional economic development via financial circulation. Financial circulation plays an essential role in economic growth, and its main contribution is that the effective financial resources allocation in the market can continue to export power to the real economy (Wurgler, 2000), relax financing constraints, and boost effective investment. SPFTZ has optimized the cross-border financing system to reduce financing costs and accelerate the flow of financial capital (Yao and Whalley, 2016). Additionally, establishing SPFTZs enables domestic capital to invest abroad, realizing the financial resources allocation in the world, forcing reform and domestic financial system development, and driving RMB internationalization (Geng, 2022). Regarding FDI, SPFTZ has lowered the entry threshold for foreign investment and enhanced foreign investment utilization efficiency by relaxing entry qualifications. On the other hand, the new and efficient administrative procedures of release, management, and service in SPFTZ and the gradually improved legal system have boosted the enthusiasm for foreign capital. Building PFTZs provides good conditions for regional investment facilitation. At present, some scholars have done relevant research and come to the conclusion that FDI can significantly promote regional economic development. Most scholars believe that FDI can boost high-quality economic growth (Sui, 2013), improve domestic asset quality and capital utilization rate (Wang et al., 2020). To make FDI a driving force for high-quality economic development, it is necessary to further optimize business environment and expand market access, building a policy guarantee system for FDI (Sang and Zhang, 2018). The main purpose of launching PFTZs is to expand opening up and vigorously promote trade and investment facilitation. The main mechanism path that FDI affects regional economic development is that when foreign capital enters relevant domestic industries, it will directly bring advanced technology and mature management experience, which will greatly enhance the competitiveness of industries and promote the faster flow of factors. From these perspectives, the second and third hypotheses of this paper are proposed.

Hypothesis 2: The establishment of SPFTZ stimulates urban economic growth through the dynamic mechanism of financial circulation.

Hypothesis 3: The establishment of SPFTZ boosts urban economic growth through the dynamic mechanism of FDI.

3.3 Variables Selection and Data Source

Given the availability and reliability of data, panel data from 41 cities in Shanghai, Anhui, Zhejiang, Jiangsu, and other provinces, spanning from 2006 to 2022, were selected. Based on PFTZ planning scope, 26 cities are designated as PFTZ cities, while the remaining 15 are non-PFTZ cities (Ma, 2018). The data are primarily derived from China City Statistical Yearbook and the annual statistical yearbook of each province and city. The specific variables selected and their definitions are presented in Table 1.

3.4 Model Specification

In view of the research design and variables, the following model is used to verify Hypothesis 1. To address potential endogeneity problems, heteroscedasticity, and missing variables, the treatment methods of Wang (2022) and Li (2022) are used for reference, the province-fixed effect and year-fixed effect are added to the model, and the model coefficients are estimated by robust standard error. The model formula is as below:

In the above formula, β represents the coefficient of each variable, X_ij denotes the control variable, μ_s expresses the province fixed effect, year_t represents the year fixed effect, ε_ij shows the random error term.

The formula of mechanism analysis and verification model is shown in (2) and (3):

Mediator_it represents the mediating variable (lnFDI or Loan). If both coefficients β_M3 and θ_M are significant, it indicates that the PFTZs policy indirectly affects economic growth through the mediating variable, which means that the transmission mechanism of PFTZs policy is caused by the mediating variable (actual use of FDI or financial circulation).

4.1 Descriptive Statistical Results

The sample for this study includes 41 prefecture-level cities in Shanghai, Anhui, Zhejiang, Jiangsu, with time period from 2006 to 2022. Table 2 presents descriptive statistics for the explained variable, explanatory variable, control variables, and mediating variables.

4.2 Benchmark Regression Result

Table 3 presents the Benchmark regression result. Column 1 displays the regression results without control variables, year-fixed effects, and province-fixed effects. Column 2 illustrates the regression results that include year-fixed effects and province-fixed effects but without control variables. Column 3 shows the regression results with control variables, year-fixed effects, and province-fixed effects. The estimation results indicate that the variable Treat is significantly positive in all three models, suggesting that the urban agglomerations economic development level in SPFTZ is significantly higher than that of the non-planned urban agglomerations. The variable Post is significantly positive, indicating that the city’s economic development level has significantly improved after the establishment of the SPFTZ. The variable DID is significantly positive, suggesting that the planned cities’ economic development level in the SPFTZ was dramatically improved after its establishment. Therefore, Hypothesis 1 of this paper is confirmed. We take column 3 data as an example to investigate the effect of variable coefficient. DID coefficient is 0.1506, significant at a 1% level, indicating that the treatment city’s economic development level after the PFTZ policy is significantly higher by 0.15 units higher than the control group before the policy implementation. This coefficient is higher than the coefficient of Post, indicating that the treatment group and the control group have a higher level of economic development after the implementation of the PFTZ policy, demonstrating that the PFTZ has a more apparent stimulating impact on the treatment group economic development.

4.3 Parallel Trend Test

The premise of using DID method is that if PFTZ policy does not exist, the treatment group and control group can keep the same development trend, which does not change with time. Therefore, a parallel trend test is needed (Wang, 2022).

Here, the year of policy implementation is taken as the cut-off point. Several years before (pre i represents the i years ahead) and several years after (post i represents the i years after) are also included in the regression. When verifying the parallel trend, the expected result is that the variables in the year ahead are insignificant, or the significance level is not high, the significance in the year after is significant, or the significance level is higher. If this condition is satisfied, then a parallel trend test can be considered to pass.

From the results of Table 4, column 1 presents the parallel trend test results for three years forward and backward, while column 2 displays the results of the parallel trend test for four years forward and backward. It can be found that the variables before policy implementation are not significant, or the significance level is low (10%). The variables after policy implementation are significant at 1% level, demonstrating that before the policy was implemented, there was no significant difference in the economic development level of the treatment group and control group. However, after the policy was implemented, there is a significant difference in economic development between the two groups. In other words, the parallel trend test is passed, and it is meaningful to use the DID method.

4.4 Robustness Test

Two methods are chosen to conduct the robustness test, one is counterfactual test (Wang, 2022); the other is Propensity Score Matching (PSM) to alleviate the possible endogeneity problems.

4.5 Mechanism Analysis

To verify the mechanism through which PFTZ policies influence urban economic development, this paper finds the transmission mechanism from financial circulation and FDI from theoretical analysis.

5.1 Research Conclusions

In view of the annual panel data from 41 prefecture-level cities in the provinces Shanghai, Anhui, Zhejiang, and Jiangsu from 2006 to 2022, this research employs a DID model to assess PFTZ policy impact on regional economic development. Empirical results demonstrate that the founding of SPFTZ has significantly promoted YRD’s economic development with good results and effect. The parallel trend test results show that policies of PFTZ greatly promote urban economic growth. Additionally, the mediating effect test shows that PFTZ supplement urban economic growth through two dynamic mechanisms of financial circulation and foreign direct investment.

5.2 Policy Recommendations

The research results of this study fully indicate that the establishment of PFTZs can be an effective carrier for regional economic stable development. PFTZs leverage regional industrial, financial, talent, and other multi-dimensional advantages to create economies of scale, thereby becoming powerful drivers of economic development. Of course, PFTZs should not be built blindly and indiscriminately; instead, they should be based on the economic foundation, industrial foundation, infrastructure construction foundation, and factor agglomeration foundation, and should be the product and result of national or local unified and scientific planning. As far as the construction of PFTZs is concerned, it is suggested that the construction of PFTZs can be continuously strengthened from the aspects of optimizing the spatial layout of PFTZs, giving the PFTZs greater autonomy in reform and innovation, and giving full attention to financial opening-up and innovation. In addition, PFTZs should make full use of its own advantages to create conditions for international trade facilitation, formulate a reasonable negative list system, expand the scope and fields of foreign investment, learn high-quality production and management experience of foreign investors for more industries, and drive its own economic progress, so as to promote regional economic development. Finally, we can also make more attempts to make effective use of emerging financial forms such as internet finance and scientific & technological finance, simplify the foreign exchange management process, further promote the industrial economy of PFTZs to go out and expand cross-border two-way investment and financing of financial institutions.