Technological Relatedness and Firm Productivity: Do low and high performing firms benefit equally from agglomeration economies in China?

Building on the evolutionary economic geography literature, we employ the density measure introduced by ? to dynamically track the impact of technological relatedness on firm productivity. We rely on advanced quantile regression techniques to determine whether technological relatedness stimulates productivity and whether the size of the effect varies for low and high performing firms. Lastly, taking China’s economic transition into account, we test whether changes in the local industrial mix brought about by China’s market reforms enable or inhibit performance-enhancing spillovers. We show that a dynamic tradeoff exists between agglomeration costs and benefits that depends, in part, on the firm’s placement along the productivity distribution: the effect of technological relatedness reduces productivity for the least performing firms, but enhances it for better performing firms. As a result, spillovers via technological relatedness lead to improvements in the geographical welfare by intensifying the learning effect for the vast majority of co-located firms, in spite of increasing productivity disparities between the bottom and top performing firms.