The Impact of Urbanization on Industrial Transformation and Upgrading: Evidence from Early 20th Century China

Urbanization is key to advancing national modernization and regional socioeconomic sustainable development. This paper empirically investigates the impact of urbanization on industrial transformation and upgrading in early 20th-century China, based on historical data from the initial stages of China’s economic development. We utilized industrial and commercial data from China spanning 1910 to 1927 to construct a fixed-effect model, incorporating instrumental variables to ascertain the causal relationship between urbanization and industrial transformation and upgrading. Additionally, this study tested the hypotheses concerning the effects of human capital and transportation scale, which are identified as the primary channels influencing this relationship. Our findings reveal that (1) the development of urbanization in modern China has significantly promoted industrial transformation and upgrading, and this conclusion remains valid under various robustness tests and the examination of instrumental variables. (2) The improvement in urbanization levels has a more obvious promoting effect on secondary industry, commercial enterprises, and small and medium-sized enterprises, and the positive effect of urbanization on industrial transformation and upgrading is most prominent in the eastern region. (3) Modern Chinese urbanization promoted industrial transformation and upgrading by improving the level of human capital and expanding the scale of transportation. This paper provides historical empirical evidence to study the current social urbanization and industrial policy formulation.