14. How Do Firm Dynamics Affect Regional Inequality of Productivity in China?

The level, causes, and development of regional income inequalities in both developing and developed countries have received considerable and interdisciplinary attention, resulting in an extensive literature emerging in recent years that have sought to measure inequality and examine its evolution over time (Lewis and Williams 1981; Yuen Tsui 1991; Martin and Sunley 1998; Hudson 2007; Pike and Tomaney 2009; Wei and Liefner 2012). The spatial dimension of inequality has also attracted interests from policy-makers and governments, since regional disparities in economic activities boost overall income inequality. Besides being a determinant of interpersonal inequality, regional inequality matters since it is often associated with political and ethnic conflicts, causing social dissatisfaction and political instability (Kanbur and Zhang 2005). Existing literature tends to focus on a region’s different factor conditions, the quantity and quality of input factors (e.g., capital, labor, technology, and infrastructure), and their contributions to regional inequality (Florida and Kenney 1988; Wei 2001; Wan et al. 2007; Wei et al. 2011), while few studies have pointed out the importance of factor productivity as a driving force of regional inequality. This chapter contributes to the literature on the causes of regional inequality by paying special attention to factor productivity—the effectiveness with which accumulated factors of production, or capital, are used to produce output—rather than factor accumulation.