Manufacturing on the move...

As the “The World’s Factory”, China’s industrialization has largely been driven by the fast growth of export-oriented and labor-intensive industries in the coastal areas in Eastern China. Since the mid-2000s, the rising congestion costs associated with the industrial agglomeration in large coastal cities began to drive the shift of the nation’s industrial geography.


Manufacturing output in the coastal and inland regions

"What market factors contribute to the geographical shift of 

manufacturing activities?"


"What institutional factors contribute to the geographical shift of manufacturing  activities?"

"Regional Growth Policies"

Vast infrastructure investment

Rising income inequality across regions

Implications for Spatial Variation of Income, Pollution and Local Quality of Life

To reduce this high income inequality between the coastal areas and inland areas, China’s central government made large fiscal transfer payments to under-developed inland regions. Such transfers had a short-term effect in reducing regional income inequality.

Chen and Groenwold, 2010

But in the long-run, increasing the mobility of labor and firms is believed to be a better way to mitigate such income inequality issue.

Lu, 2013

The labor income gap between coastal cities and inland cities shrank slightly from 1.4 in 2005 to 1.3 in 2010 (NBSC). However, the income increase in those inland cities has been accompanied with more industrial pollution emission there.

Pollution Production as a Consequence of Industrial Location Choice


Current data shows that the geographical shift is likely to be a zero-sum game. However, if the technique effect out-weighs the scale and composition effects in the long-run in inland cities, it is possible that the on-going geography dynamics of industrial production will not become a zero-sum pollution game.

When industrial production was concentrated in the coastal area, a large number of coal-fired power plants were located close to those industrial clusters to minimize transmission line loss. Since the 2000s, new coal-fired power plants are not allowed to locate near coastal cities. 

Energy Production as a Function of Industry Location


Population density and the distribution of coal reserves (2010)

Positive Side:

  • Densely populated coastal area will be exposed to less pollution.

  • Newly-built coal-fired power plants are required to install desulfurization equipment.

Negative Side:

  • Insufficient monitoring of the operation desulfurization equipment.

  • High carbon emissions factor 

Spatial Displacement Effects Caused by Differential Environmental Regulation

Two kinds of environmental regulations in China

  • Administrative interventions such as stipulation of filter installment

  • Economic incentives such as pollution levy


Many energy-intensive manufacturing firms relocated or started their new business in inland cities with lower production cost and laxer environmental regulation. 


The Local Quality of Life Impact of Industrial Pollution Dynamics

Industrial emission directly affects a city’s air and water pollution levels.


Proportions of different sources contributed 
on Beijing’s PM2.5 concentration

Industrial pollution has many negative impacts on local quality of life, such as lowering worker productivity, hurting children and the elderly, and reducing the desire to outdoor activities.

A revealed preference methodology to identify urban households' demand for non-market goods, including urban environmental amenities

The urban quality of life literature emphasizes that spatial variation in wages and rents represents a compensating differential for place based local public goods.

In both periods, the richer coastal cities have a higher willingness-to-pay for less PM10 pollution than the poorer inland cities, and both numbers are rising over time.


This finding may incentivize local governments to internalize quality of life effects because this will increase their land's value.


Elasticity estimates of the real estate capitalization rates of PM10 concentration
* All else equal, a 1% decrease in PM10 concentration is associated with a 0.32 – 0.64% increase in home price.

This paper has surveyed several literatures to provide a comprehensive overview of the spatial evolution of industrial production, income, pollution and quality of life across China’s cities over the last 30 years. We can predict that, as the

booming industrial activities continue to generate income growth in the inland area, urban households there will also have a higher willingness-to-pay for local quality of life, and will push local leaders to impose stricter environmental regulations.


Siqi Zheng

MIT China Future City Lab, Department of Urban Studies and Planning, 

Center for Real Estate

Cong Sun
Shanghai University of Economics and Finance

Ye Qi
School of Public Policy and Management
Tsinghua University

Matthew Kahn

University of Southern California and NBER


Web and Visuals

Zheng, Siqi, Cong Sun, Ye Qi, and Matthew E. Kahn. "The evolving geography of China's industrial production: implications for pollution dynamics and urban quality of life." Journal of Economic Surveys 28, no. 4 (2014): 709-724.

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