How manufacturing and service industries affect regional inequality? Evidence from China

By integrating the literature on urban specialization and externalities, this paper proposes that the industrial sector is likely to reduce regional inequality between core cities and surrounding small and medium-sized cities through its effects on city size, while core cities that focus on these advanced producer services (APS) contribute to greater regional inequality. The mechanisms by which the industrial sector influences regional inequality are examined using China’s regional systems. The results support the hypothesis that large core cities with a high concentration of manufacturing reduce regional inequality through positive local spillover effects. On the other hand, cities with a high concentration of high value-added services have lower spillover effects, which in turn increases regional inequality.