Why Do Numerous Highly Efficient Firms Remain in Small and Medium-Sized Cities:An Explanation Based on Ranking Effects and Heterogeneous Firm Productivity
In response to the phenomenon that numerous highly efficient firms remain in small and medium-sized(SMS)cities,which significantly contradicts the predictions of het-erogeneous location theory,this paper proposes the Ranking effect hypothesis.According to this hypothesis,highly efficient firms stay in SMS cities because their economic ranking is higher locally.This higher ranking,through the signaling mechanism,provides advantages in financing,labor market,and upstream and downstream supply chains.Based on empiri-cal results from Chinese industrial firms data,this paper demonstrates that a higher local ranking of firms,measured by sales revenue,significantly enhances their productivity.Even after controlling for factors such as firm size,industry,and the characteristics of the cities,and using composite instrumental variables to control for endogeneity,the conclu-sions remain robust.This paper's findings provide theoretical support for regionally differen-tiated preferential policies.Specifically,focusing subsidies on higher-ranked firms in rela-tively underdeveloped areas can further enhance the attractiveness of these locations to highly efficient firms,thus promoting regional development more effectively than uniformly subsidizing all firms.
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