Wage-based evidence of returns to external scale in China’s manufacturing: a spatial analysis

Wage-based evidence of returns to external scale in China’s manufacturing in 2004 is assessed using county-level units of observation. Two models are used: one with population and percent manufacturing employment as measures of urbanization and localization, respectively, and the other with population density and total manufacturing employment. Global results estimated from spatial error models and local results from geographically weighted regressions indicate that urbanization economies of scale, measured in terms of population but not population density, and localization economies of scale, measured in terms of percent of employment in manufacturing or total manufacturing employment, are apparent—but only when internal scale of production is not included as an explanatory factor in the models. Economies of scale are still outcomes of the models, but only when the urbanization, localization, and internal scale factors are considered in combination. The results not only illustrate particular characteristics with respect to recent returns in China’s manufacturing, they are also interesting with respect to schools of thought concerning increasing returns as externality effects.