Does development zones improve the capacity utilization of firms? Based on the dual perspectives of firms inside and outside the zone

Development zones (DZs), as a crucial place-based industrial policy, are widely adopted by developing countries to attract investment and promote economic growth. This study investigates the economic impacts of DZs in China, with a focus on firm capacity utilization and total factor productivity (TFP). Using the Annual Survey of Industrial Firms dataset from 1998 to 2013 and employing the PSM-DID method, we find that the establishment of DZs significantly enhances the capacity utilization and TFP of firms within the zones. However, this comes at a cost: non-DZ firms experience a decline in both capacity utilization and TFP. Mechanism analysis reveals that DZ firms capitalize on preferential policies, such as lower interest rates and higher subsidies, to engage in low-price competition, improving their capacity utilization. This, in turn, creates a crowding-out effect, reducing capacity utilization for non-DZ firms and leading to broader negative spillover effects at the county level. These findings call for a more cautious approach to DZ policies, highlighting their unintended consequences on regional industrial dynamics and offering insights into their nuanced economic impacts.