Do China’s Industrial Clusters Increase Energy Efficiency?

To date, China has built 169 national high-tech industrial development zones (HTIDZs) across the country aimed at adjusting its industrial structure and enhancing innovation. These national HTIDZs share comparable preferential policies set by the national government but are established in regions with vastly different local socio-economic contexts. Therefore, the ability of these zones to drive local industrial upgrading and energy efficiency gains can vary greatly between cities.

This research builds on existing studies which have generally praised the economic success of industrial zones in China to enhance its productive capabilities and facilitate integration with the world economy. It critically examines how the industrial clusters interact with local conditions to produce different energy efficiency outcomes. To analyze how effective national HTIDZs have been in driving local energy efficiency gains, this research uses empirical data between 2003 – 2018 of 276 prefecture level cities, which accounts for 94.4% of China’s industrial output and 84.1% of its total energy usage. This research considers local levels of economic development, industrial structure, energy mix, energy price, and level of technical human capital. This research ultimately finds that the presence of industrial clusters alone is not sufficient to improve local energy efficiency. Furthermore, out of the local factors considered, the level of technical human capital, measured by a city’s number of researcher and technicians per capita is the only indicator that have a consistent and significant relationship with local energy efficiency improvements.

The results of this research suggests that while HTIDZs offer an opportunity to increase energy efficiency, it is not a sufficient condition to do so. Instead, local technical capability matters for industrial clusters to realize their intended energy efficiency gains. Without technical human capital to adopt existing energy-efficient technology and innovate through on-the-job learning-by-doing, industrial clusters might not always be able to achieve energy efficiency results. Overall, this paper finds that while industrial policies, such as HTIDZs, can be key to drive industrial upgrading, to realize this potential, China needs to address its institutional imbalance to realize energy efficiency gains. Energy efficiency touches on a wider institutional challenge for China. Industrial policy provides an opportunity for local players to realize energy efficiency potentials. But without other necessary conditions, some cities might struggle with energy efficiency gains, even with significant policy support from central government.

By: Gary Xie