Industry characteristics and agglomeration of heterogeneous firms

In this paper, we study the impact of two industry characteristics—relocation cost and market competition—on the location choice of firms with productivity heterogeneity between large market and small market. We find that only in industries with high relocation costs or fierce market competition, large markets are more attractive to high-productivity firms. We use Chinese firm data to test the predictions of the theoretical model, and the empirical results are consistent with the conclusions of the theoretical model.