Emerging Markets Finance and Trade

ISSN: 1540-496X (Print) 1558-0938 (Online) Journal homepage: http://www.tandfonline.com/loi/mree20

Empirical Spatial Econometrics: Applications to

China’s Economy

Yihua Yu

To cite this article: Yihua Yu (2017) Empirical Spatial Econometrics: Applications

to China’s Economy, Emerging Markets Finance and Trade, 53:9, 1939-1942, DOI:
10.1080/1540496X.2017.1363489

To link to this article: http://dx.doi.org/10.1080/1540496X.2017.1363489

Published online: 29 Aug 2017.

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 Emerging Markets Finance & Trade, 53:1939–1942, 2017
Copyright © Taylor & Francis Group, LLC
ISSN: 1540-496X print/1558-0938 online
DOI: https://doi.org/10.1080/1540496X.2017.1363489

GUEST EDITOR’S INTRODUCTION

Empirical Spatial Econometrics: Applications to China’s
Economy
Yihua Yu
School of Economics, Renmin University of China, Beijing, China
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Spatial econometrics is a branch of econometrics that began to emerge in the 1970s and 1980s. The
spatial correlation study in the economic field can be dated back to Cliff and Ord (1973), but until the
late 1970s, Paelinck and Klaassen (1979) coined the term spatial econometrics for the first time and
outlined the five main characteristics of spatial econometrics: (1) the role of spatial interdependence in
spatial models; (2) the asymmetry in spatial relations; (3) the importance of explanatory factors located
in other spaces; (4) the differentiation between ex-post and ex-ante interaction; and (5) the explicit
modeling of space (Paelinck and Klaassen, 1979, 5−11). On the basis of Paelinck and Klaassen (1979),
Anselin (1988) provides a new definition and richer contents on spatial econometrics and defines
spatial econometrics as “the collection of techniques that deal with the peculiarities caused by space in
the statistical analysis of regional science models.” According to Anselin, “Spatial econometrics is a
subfield of econometrics that deals with spatial interaction (spatial autocorrelation) and spatial
structure (spatial heterogeneity) in regression models for cross-sectional and panel data” (Baltagi
2001, 310). The main contents of spatial econometrics are to consider the spatial effects of economic
variables in the econometric models and to carry out a series of model specifications, estimations,
testing, and predictions.
As Arbia (2016) pointed out, spatial econometrics is a rapidly evolving discipline. In the past thirty
years, spatial econometrics has been advanced quickly through the endeavors of an exploding number
of spatial econometricians such as Luc Anselin, Giuseppe Arbia, Badi Baltagi, Anil Bera, Paul Elhorst,
Bernard Fingleton, Raymond Florax, Arthur Getis, Mudit Kapoor, Solmaria Halleck Vega, Harry
Kelejian, Donald Lacombe, Lung-Fei Lee, James LeSage, Jean Paelinck, Michael Pfaffermayr,
Gianfranco Piras, Ingmar Prucha, Sergio Rey, Jihai Yu, etc. Empirical spatial econometrics span a
wide range of fields, such as regional economics, public finance, international trade, labor economics,
industrial organization, political sciences, agricultural economics, health economics, urban planning,
social sciences, economic development, innovation diffusion, environmental studies, resources and
energy economics, transportation, and real estate analyses. The list of applied disciplines is in fact a lot
longer and likely to further increase in the future (Arbia, 2016).
Motivated by the rapidly expanding applications of spatial econometric techniques in so many
diverse scientific fields and also the widespread interests in the subject, as can be seen from some
special issues on spatial econometrics in journals like Geographical Analysis (2004), Papers in
Regional Sciences (2008), Regional Science and Urban Economics (2010), Economic Modelling
(2012), International Regional Science Review (1997 and 2014), Review of Regional Studies (2014),
Econometrics (2016), and Annals of Regional Science (coming soon), I am delighted to organize a
special topic titled “Empirical Spatial Econometrics: Applications to China’s Economy” with the
invitation from the Editor-in-Chief, Ali M. Kutan.
The theme of this symposium focuses on China, as it serves as an excellent laboratory for the
spatial study of emerging markets due to its largest developing economy, fast economic growth, largest

Address correspondence to Yihua Yu, School of Economics, Renmin University of China, No. 59
Zhongguancun Street, Haidian District, Beijing 100872, China. E-mail: yihua.yu@ruc.edu.cn
 1940 Y. YU

population size, vast regional disparities, increasing role in the global community, and especially,
uniqueness to other countries in various aspects which, with no doubt, include mechanisms of spatial
interactions in the spatial econometrics framework. For instance, Yu et al. (2013) found that a
provincial government will decrease its own health spending as a response to the rise of health
spending of its neighboring provinces. This result supports the expenditure externality hypothesis,
or alternatively rules out the yardstick competition or fiscal competition hypothesis, which is in line
with our expectation if we notice that (1) yardstick competition hypothesis cannot be applied in China
where it does not have an effective voting system established (as might be seen in the developed
nations); (2) China is a country with a unified tax system where the tax rate is identical across all
jurisdictions (local governments are unable to alter the tax base, but instead take the tax set by the
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central government, implying that local governments are not expected to engage in tax competition);
and (3) a race to the bottom in terms of local health expenditures will not occur (as might be seen in
the developed nations), as people are not mobile without costs due to China’s Hukou (or household
registration) system. Following our call for papers, we received many articles and decided to publish
only those that were successfully passed a rigorous peer-review process. At the end of this process, 13
articles, all empirical applications, were selected which addressed empirically various hot topics in
present-day China using different spatial econometric techniques. Although only a limited number of
papers can be published in this symposium, the selected papers, two of which refer to cross-sectional
spatial models and 11 to spatial panel data models, shall provide a good snapshot of the on-going,
cutting-edge spatial research on China.
This special issue opens up with two papers of local governmental interactions. The first paper, by
Lei, Chen, Jia, and Liu, proposes a spatial simultaneous equations approach to model and estimate
the spatial interactions of multiple spending categories across Chinese local governments. Using a
panel data set of counties (a smaller administrative unit than city in China), they find mainly that a
positive endogenous peer effect presents for capital construction among Chinese local governments,
capital construction expenditure and administrative expenditure are complements rather than substi-
tutes, administrative expenditure crowds out social welfare spending, and lastly, there is no fiscal
mimicking of social welfare expenditure, a result consistent with Yu et al. (2013) on examining
strategic behaviors of public health expenditure across local governments. The second paper by Yu,
Zheng, and Zhang, examines the role of local governments that played on the formation of enterprise
zones using China’s city-level data and a spatial autoregressive modeling approach with three different
types of spatial weighting matrices accounted for, respectively. They find that enterprise zones are
slightly related to the economic growth, job creation, or poverty reduction, which deviates from the
governments’ initial intention that they expect to promote the local economic growth via building
enterprise zones. Empirical analysis indicates that Chinese local governments act strategically when
considering establishing their own enterprise zones, and more importantly, the mechanism of spatial
interaction is due to yardstick competition created across China’s local governments. Overall, this
study seems to imply that yardstick competition originates from local governments’ “card-playing”
mimicking behavior, regardless of whether the enterprise zone to be built will indeed boost local
economic growth, job growth, or poverty reduction, or not.
The next four papers in the issue focus on different types of investment at the national,
provincial, city, and firm levels, respectively. The paper by Zhou, Liu, Pan, Yang, Wen, and
Xia investigates qualitatively and quantitatively the effect of tourism-building investments on
tourism revenues in China. The empirical results of this paper show that the development of
China’s tourism industry has both significant geographical clustering effect and positive spillover
effect. While the paper by Wang, Wei, Deng, and Yu examines whether and how fiscal decen-
tralization as well as degree of environmental regulation stringency affects foreign direct invest-
ment (FDI) inflows in China using a spatial Durbin model (SDM) approach, the two papers by Sun
and Shao and Wu, Song, and Deng respectively target outward FDIs (OFDIs). Specifically, the
former explores how the distribution of Chinese OFDIs across different host countries are affected
by various traditional determinants (market size, natural resource endowment, openness, political
 GUEST EDITOR’S INTRODUCTION 1941

risk, etc.), and more importantly by economic cooperation between the host country and home
country (a factor ignored in the existing literature); the latter uses the Chinese industrial enterprises
and foreign investment enterprises database (2003–2007) to examine the influence of OFDIs,
together with institutional environment, on total factor productivity (TFP) at both the firm and
provincial levels, via using a SDM approach with three different types of spatial weight matrices
(geographic distance-, economic distance-, and human capital distance–based weighting matrix)
accounted for, respectively.
The third set of papers focuses on applying spatial econometrics to China’s financial and
banking issues. The paper by Zhang, Guo, Xiao, and Wang applies spatial panel data models
to investigate the spatial spillover effects of non-performing loans for commercial banks for 31
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provinces of China during the 2005–2014 period. After a set of model specification tests (panel
unit root tests, Moran’s test for spatial dependence, and likelihood-ratio tests for various spatial
models), they find that the spatial spillover effect (or indirect effect of an explanatory variable of
interest) plays a significant role in regional non-performing loans for commercial banks. Similarly,
using the provincial level data covering the same period as the first one, the paper by Yu, Li, and
Huang aims to study how regional financial development (measured by per capita GDP of
regional financial industry) in China is affected by various financial functions, i.e., financial
depth measured by financial institutions’ loans to GDP ratio, financial access measured by the
number of bank branches for every million people in each province, and financial efficiency
measured by financial institutions’ loans divided by its deposits. Applying three spatial panel
models of different spatial weight matrices (contiguity, geographic distance, or economy-spatial
distance based matrix), the authors show that two financial function variables (i.e., financial access
and financial efficiency) have significantly positive direct effects and indirect effects (or spatial
spillover effects) on promoting the local financial development, while these effects are not obvious
for financial depth.
The last set of papers can be broadly classified in the context of economic development. The
first paper focuses on economic growth, the second on employment, the third on innovation, and
the last two papers on green development. Particularly, in the first paper in this set, Sun, Chen,
and Hewings develop a spatially extended neoclassical Solow growth model to examine several
spatial characteristics of regional economic growth using China’s city-level panel data such as
spatial heterogeneity or convergence in regional economic growth, and spatial spillover effects on
neighbors. The second paper, by Wang and Tian, analyzes how the spatial and sectoral patterns of
employment growth have changed between 2000 and 2010 by estimating aggregate and sectoral
employment growth equations using county-level employment data. The main result of this
empirical study is that significant β convergence effects are found in all sectors. The third paper,
by Song and Zhang, assesses whether and how the effects of spatial spillovers contribute to
regional innovation growth in China using provincial-level panel data and the spatial Durbin
model. The author states that the study contributes to the literature by providing the following
empirical evidence: (1) innovation in China is spatially interdependent; (2) the innovation output
and R&D input are sources of spillover effects that have substantially promoted innovation within
and surrounding a given region; (3) the impact of absorptive capacity (measured by average
schooling years) and agglomeration economies (measured by urban employment density) on
innovation is spatially localized, and FDI is a negative driver of innovation; and (4) different
types of patenting innovation show different growth patterns. The last two papers, written respec-
tively by Tao, Zhang, Hu, and Duncan and Liu, Tao, and Zhang, focus on the development of
green economy. Both papers introduce the global Malmquist–Luenberger productivity index to
measure green TFP growth, except that the index is calculated at the city level in the former paper
and at the provincial level in the latter. In addition, both papers analyze spatial spillovers and
determinants of green TFP growth, though each from somewhat different angles. For instance,
although environmental regulation is accounted for in both papers as one determinant of green TFP,
the latter pays more attention to the role of the term limits of public officials.
 1942 Y. YU

Acknowledgments
I would like to thank Ali M. Kutan, the Editor-in-Chief of Emerging Markets Finance & Trade, for his
close and professional guidance, as well as all authors and reviewers for the contributions of their
valuable comments to the academic quality of this symposium.

Funding
I acknowledge the financial support provided by the Fundamental Research Funds for the Central
Universities and the Research Funds of Renmin University of China (13XNJ017).
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ORCID
Yihua Yu http://orcid.org/0000-0003-2709-6092

References
Anselin, L. 1988. Spatial Econometrics: Methods and Models. Dordrecht, Netherlands: Kluwer Academic Publishers.
Arbia, G. 2016. Spatial econometrics: A rapidly evolving discipline. Econometrics 4 (1):1−4.
Baltagi, B. 2001. A Companion to Theoretical Econometrics. Oxford, UK: Blackwell Publishing.
Cliff, A., and J. Ord. 1973. Spatial Autocorrelation. London: Pion.
Paelinck, J., and L. Klaassen. 1979. Spatial Econometrics. West-mead, Farnborough, UK: Gower.
Yu, Y., L. Zhang, F. Li, and X. Zheng. 2013. Strategic interaction and the determinants of public health expenditures in China: A
spatial panel perspective. Annals of Regional Science 50 (1):203−21.