National urban agglomeration policy, market integration, and interregional capital flows: Firm-level evidence from China

This paper investigates whether spatial integration policies reshape firms’ intercity investment decisions and the extensive margin of interregional capital flows. Exploiting the staggered approval of China’s national urban agglomeration policy as a quasi-natural experiment, we use firms’ cross-city subsidiary establishment as a micro-level indicator of the extensive margin of interregional investment and construct a firm–destination city–year panel for multi-period difference-in-differences estimation. The results show that national urban agglomeration policy significantly increases firms’ subsidiary establishment in other cities within the same designated agglomeration. The finding is robust to parallel-trend tests, estimators accounting for heterogeneous treatment effects, alternative measures of investment and policy exposure, sample restrictions, changes in the estimation window, instrumental-variable estimation, controls for concurrent policies, and placebo tests. The mechanism results provide evidence consistent with three potential channels: reducing product-market segmentation and strengthening customer and supplier linkages, shortening passenger and freight travel times and improving the business environment, and enhancing intercity collaborative innovation and knowledge diffusion. The effect is stronger for capital-intensive and labor-intensive firms, non-state-owned enterprises, and intra-provincial city pairs. Further analysis shows that core-to-core, core-to-peripheral, peripheral-to-core, and peripheral-to-peripheral investment all increase significantly, although the effects are larger for peripheral-to-core and core-to-core flows. This pattern indicates a hierarchical spatial structure in firms’ intercity investment destination choices, in which core cities remain major investment destinations and organizational hubs, while investment linkages involving peripheral cities also deepen. By linking regional institutional integration to firm-level destination choices, this study provides new evidence on how spatial policies reshape the extensive margin and spatial organization of firms’ intercity investment.