Convergence of City Relational Network, Production Sector Structure, and Regional Development

Abstract

There is a strong correlation between government intervention and urban production structure in China. Particularly, the outputs of the cities partly come from the economic rent of city relational network (CRN), which is a unique regional policy and administrative hierarchy. In order to analyze the gravity flows of CRN under the nonmarket mechanism, we attempt to build a new gravity model that adopts the production sector. The new gravity produces relational data with direction, which makes it possible to use social network analysis (SNA) and overcome the endogeneity of the linear model. The empirical results show that (1) modified new gravity model can effectively capture the distribution of CRN gravity flows and the convergence of regional development in China, (2) the CRN, which especially stems from the government financial intervention, increases the share of nontradable sectors in cities, and (3) adjustment of the production sector leads to the difference of CRN gravity flows, so asymmetric flows distribution leads to the heterogeneity of regional economic performance. Cities with higher share of nontradables have relatively slower productivity growth in long-term.