How May Governments Affect The Location Of New Businesses? Evidence From China

This paper examines how Chinese local governments influence the location choices of new businesses through various policy measures. As China transitions toward high-quality economic development, local authorities actively implement strategies to attract firms, yet the complexity of these policies and their combined effects remain underexplored. Using data from 266 major Chinese cities, we analyze the impact of demographic, monetary, infrastructural, and environmental factors on firm entry, with a particular focus on government interventions. Our contribution to existing literature lies in assessing both direct and indirect effects of local government policies, revealing that expenditures on research and development, education, and infrastructure significantly enhance a region’s attractiveness for businesses. Additionally, we find that firms are more likely to establish themselves in areas with looser environmental regulations, aligning with cost-minimization strategies. The results suggest that policy interventions play a crucial role in shaping business distribution, but their effectiveness varies depending on regional economic conditions. For economically lagging cities, additional government efforts in infrastructure and human capital development are needed to improve competitiveness. Stricter environmental policies may also help balance economic growth with sustainability without necessarily deterring firm entry. Future research should explore long-term policy effects and consider a broader range of industries, particularly small and medium-sized enterprises, to provide a more comprehensive understanding of firm location dynamics.