Download Analysis on the Regional Market Integration and Its Effect Factors

Analysis on the Regional Market Integration and Its Effect Factors﹡
ZHAO Baoting1, LIU Qinglin2
1. School of Public Finance & Tax, Shandong University of Finance, Jinan, China, 250014;
2. School of Economic, Shandong University, Jinan, China, 250100;
[email protected]
Abstract: The paper attempts to analyze the regional market integration and its effect factors within a
provincial region. Based on a case study of Shandong Province in China, it uses the production method
to test the level and trend of the regional market integration or segmentation. It adopts the method of
econometric to analyze the effect factors of market segmentation. It draws some new conclusion. On the
one hand, since the year of Chinese reform and openning, there have been market segmentation
apparently, and the extent of market segmentation aggravates at first, and then for the better. On the
other hand, the index of the market segmentation has positive relevance relationship with dependence on
foreign trade, investment rate of state-owned corporations, and fiscal pressure index of local government,
but has negative relationship with size of local government.
Key words: Regional market integration; Market segmentation; Production method
1. Introduction
Chinese reform process is concerned with by many internal and external literati or researchers,
especially, after the year in which Young (2000) emited his famous article on Chinese Market
Segmentation. Young believed that in a partially economy, distortions could beget new distortions, or
segments of the economy freed from centralized control could respond to the rebt-seeking opportunities
implicit in the remaining distortions of the economy, and the reform process led to the fragmentation of
the domestic market and the distortions of regional production away from patterns of comparative
advantages. At the same time, the researchers have been discussing chinese reform, the market
segmentation, and the relationship between them (Yin Wenquan, Cai Wanru, 2001; Poncet, 2002; Zheng
Yusheng, Li Chonggao, 2003; Lin Yifu, Liu Peilin, 2004; Zhong Changbiao, 2005; Lu Ming, Chen Zhao,
2006; etc.). There are three aspects mostly concered. First, whether have marketability reform begottoen
the result of regional market segmentation in China? Second, how much is the degree of domestic
regional market segmentation now, and what is the trend of the degree. Third, what are the reasons or
factors of regional market segmentation and the public policies which promote the regional market
integration and the development. Many researchers or references have done a lot of research on Chinese
market integration among provinces, but little research on the market integration with in a province or
among regions in one province. Therefore, this paper will do the work on the base of the methords that
other researchers have used to market integration research, and take Shandong province of China an the
example. The paper will answer the degree and trend of regional market segmentation, and its factors in
one province, and so on.
This paper proceeds as follows. Section
analyzes the concept of market integration or
segmentation and its reasons. Section
analyzes the degree and the trend of Shandong Province
regional market segmentation. Section
analyzes the effect factors of Shandong Province regional
market integration by econometric analysis. Section
consludes the paper.
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Ⅴ
2. Market integration and the causes of market segmentation
2.1 Market integration or segmentation: meaning and features
Market integration and market segmentation, are a pair of relative concepts. The process of
building a unified national market, in a certain sense, is the process of eliminating local market
﹡
The paper is endowed by Doctoral Research Startup Fund of Shandong University of Finance(2007).
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segmentation gradually (Xu Xianxiang, Li Xun, 2005). The same indicators are used in this paper to
denote the degrees of market integration and market segmentation. The higher the degree of local
market segmentation is, the lower the degree of market integration is.
Generally, we can comprehend the meaning of market integration from three aspects. First, it
means the elimination of a kind of local market segmentation. There into, local market segmentation
means that some local governments within a sub-region of one country safeguard their local interests
through control tariff, technical barriers, administrative controls and other means, to limit foreign
elements and products entering the local market, or limit the flow of foreign elements and products (Yin
Wenquan, Cai Wanru, 2001). From the aspect, market integration is the continual elimination of market
segmentation. Second, it refers to a state or level, that is, in which the main players in the market of a
region in different parts are subject to the same regulations of the relationship between supply and
demand. Third, it refers to a process, that is, in which economic frontiers among localities within a
sub-region will disappear gradually. Contrariwise, market segmentation means that the main players in
the market within different parts of a region are not subjected to the same regulations of the relationship
between supply and demand. And there exist a lot of trade barriers, and economic frontiers among
localities are strengthened continually.
Unlike administrative regions, there exist economic relationships or ties among economic
sub-regions in certain region, and economic region is the performance of the market economy’s
operation. Economic region is the form of regional division of labour on space when market economy
develops to a certain stage. Regional market integration is that the local actors take cooperative actions,
and the process to form rational division of labour within one region, and the elimination of the regional
market segmentation.
Under the new situations of China's transformation or reform and opening up, market segmentation
has many new manifestations. First of all, the protection and blockade of the products. Local
governments use a variety non-market means to safeguard the local products on a higher status, and set
up all kinds of barriers and obstacles to limit foreign products entering the local market, which is the
most common form of market segmentation. For example, forcing local consumers consuming domestic
products, or compelling local dealers operating only local products; trying to prevent foreign products
entering the local market; prohibiting local talents, capital, raw materials and other resources flowing to
other places. Second, the protection to the local enterprises. Local governments use fiscal and taxation
policies, administrative means and even the right of approval means to protect local enterprises, and
help them occupy the local markets. Again, local governments may violate national industry and
regional policies in order to safeguard local interests. Local governments may guide the local enterprises,
even by themselves, to invest in projects with little capital and high prices and large benefits, which can
resulte in redundant construction, even giving up their comparative advantages. In addition, because
Chinese economy gradually has been the period of the buyer market, the focus of the market
segmentation has transferred from fighting resources to fighting final products, that is to say, market
segmentation focus on protecting local enterprises has new changes in forms. On the one hand, local
protection transferrs from the past temporary measures to gradually the formally institutional
arrangements (Zhong Changbiao, 2005). Local governments use the administrative power gradually to
establish some system in order to protect local enterprises and their products, such as the appraisal
system and the implementation of the protection system. On the other hand, by learning international
measures of trade protectionism, local governments may built a large number of non-rates trade barriers,
such as quality, technology, environmental protection, safety and other standards.
2.2 The causes of the local market segmentation
The causes of market segmentation are very complex. There are both natural causes and human
causes, there are both causes driven by interests and defects caused by unreasonable arrangements of
system, there are both causes from enterprises and more casuses from local governments. The causes of
market segmentation will be summarized in this paper as follows:
First, the decentralization reform, represented by the rights of finance and taxation, the rights of
investment and enterprises management, promotes every local government being a actor with
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independent interests, which lead that local government does the main work only for its interests and
does not hesitates to take market segmentation practices and measures without thinking about the overall
and other local interests. Young (2000) considered that China's decentralization reform formed many
subjects of interest such as local governments, departments, and so on, and that all the contests of
resources and product markets led to a further distortion configuration of resources. Yin Wenquan (2001)
considered that the local market segmentation is mainly the outcome of administrative decentralization
system in the process of system formation and evolution, which is a vice-product in the course of
China's system transformation.
Second, the current cadre appraisal system and political achievements evaluation system, emphasis
too much on local economy development, which led excessive intervention of local governments in the
economy. To improve local GDP growth rate, local governments use the financial rights, the permission
rights, etc, to develop high added-value industries with high finance revenue in a short-term vigorously,
leading to the structural convergence of the local industry and redundant construction, and so on.
Third, the instable fiscal and taxation system in transition leads local governments tend to take
measures of market segmentation in order to increase revenue. Since reform and opening up, Chinese
fiscal and taxation system has been in changing. First of all, implementation of the Baogan financial
system, which is a form of fiscal decentralization. The central government commited that local
governments could get more revenues if they finish the tasks of revenues, which evoked local
governments taking unscrupulous interventions for the expansion of local financial resources, especially
controlling the investments of state-owned enterprises directly, and which aggravated problems such as
redundant constructions and convergence of industry structures( Zhong Changbiao, 2005). Second, the
System Reform of Tax Distribution led to the deterioration of local government’s revenues. So local
governments were authorized rights by the central government, such as extrabudgetary income, special
funds and other rights, in order to reduce the pressure of revenues, but these informal financial income
and expenses system led to form a lot of interest groups or new government agencies, to form new
forces which support market segmentation. Once again, the building of transfer payments system was
lagged behind, especially the sub-provincial transfer payment system was imperfect, which led that local
governments could not meet the supply of the basic public services, which led to that local governments
had to take market segmentation, protect and develop high-revenue industries.
Fourth, the industrial layout created and retained under the planned economic system strengthens
the tendency of the local market segmentation. In special historical period, because the central
government asked the provinces to establish an independent industrial system, so every province has
formed a closed or systematic industrial layout relatively (Yin Wenquan, Cai Wanru, 2001). Although
the closed relatively industrial system has created Chinese industrial glory, the idea of an independent
segmentation has contributed to the redundant construction of various locals, and neglet of the regional
division of labour. Many large industrial enterprises formed special subjects of interest gradually, which
affects not only the flow of products or factors and pricing, but also the direction of public policy
decision-making and implementation, and turned into obstacles of regional market integration.
3. The level and trend of regional market integration
3.1 The measure methods of market intergration or segmentation
Inter-regional trade method, price method, production method are the most representative methods
among those which can measure the leverl and trend of the domestic market integration. First,
inter-regional trade method judges market integration extent among domestic subregions by measuring
the trade intensity among them. It’s firstly applied to analyse regional market intergration in China by
Kumar 1994 , a World Bank expert, then applied or extended by many other researchers. They hold
that trade flow’s change may reflect the condition of inter-regional market interation directly. Second,
price method expresses the market integration degree by using the price information of inter-regional
commodities and elments. Third, production method expresses regional market integration degree by
measuring the differences of industrial structure and production efficiency among different regions.
Young 2000 used production method to analyse Chinese degree and trend of regional market
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（ ）
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segmentation.
This paper attempts to measure the regional market integration in Shandong Province using the
production method. On the one hand, the data used in production method are accessible. On the other
hand, under the conditionof the buyer market, the production method can measure the leverl and trend
more accurately.
3.2 The level and trend of the regional market integration in Shandong Province
3.2.1 The description of the data
This paper attempts to test the market integration level of Shandong Province and of its coastal,
central and western regions, using the data of GDP and three industries in 17 regions of Shandong
Province from 1978 to 2005. The data comes from 2006 Shandong Statistic Yearbook and Statistic
Yearbook of 17 areas in Shandong. According to the economic geographic location, Shandong Province
is divided into eastern, central and western regions. In the paper, Qingdao, Yantai, Weihai and Rizhao
represent eastern region. Jinan, Tai’an, Laiwu and Zibo are about central. And Binzhou, Dezhou,
Liaocheng, Heze constitute western region.
3.2.2 The level and trend
The production method uses the sum of absolute deviation of three industries propotion to measure
the regional market integration level and trend. At the same time, the paper adopts three year data for
comparative analysis, that is 1978, 1993 and 2005.
3.2.2.1 The graph of the level and trend
Y1 of the sectoral output shares of different regions from the group
The sum of absolute deviation
average is given by next formula (1).
17
3
17
i =1 j =1
Respestively,
Sij
3
Y1 = ∑∑ ( Sij − S j ) 2 (i=1,2,L ,17; j=1,2,3)
Y1 = ∑∑ Sij − S j
or
i =1 j =1
(1)
denotes the share of sector j in region i’s output, S j denotes the average, across i,
S
of ij , i (=1,2,…,17) denotes one of 17 regions or districts in Shandong Province, and j(=1,2,3)
denotes first, second and third industries.
（b）Coastal region
（a） Total
140
120
100
80
60
40
20
0
700
600
500
400
300
200
100
0
1
4
7
10 13 16 19 22 25 28 31
1
509
4
7
10 13 16 19 22 25 28 31
（c）Middle region
（d）West region
200
200
150
150
100
100
50
50
0
0
1
Ⅰ
4
7
1
10 13 16 19 22 25 28 31
4
7
10 13 16 19 22 25 28 31
Figure : Convergence in the composition of output (deviatin from average production in currrent price) or Sum of
absolute deviations in Shandong Province (1978-2005)
Ⅰ
As shown in figure , total development trend of industrial structure in Shandong province is
divided into three stages. First, from 1978 to 1991, there was a trend of rapid convergence of the
industrial structure. Second, from 1992 to 2001, though with the same convergence trend, its change
slowed down. Third, from 2002 to 2005, the industrial structure maintained basically stable or had the
divergence tendency slightly. There are differences between coastal regions and west regions on the
variation rate of industrial structure and on the time, and there was more serious convergence trend in
coastal region. The industrial structure maintained basically stable and even has have the divergence
tendency in coastal regions since the middle of 1990s, while western regions have obvious convergence
trend untill now. It suggests that regional market segmentation had increased since the reform, but there
has been changes for better since the start of 21th century. And changes in coastal regions are earlier and
more fruitfully.
3.2.2.2 Comparison table of convergence trend
In order to analyse market integration process in Shandong Province more clearly, we choose
market segmentation index of three typical years seperately, 1978, 1993, and 2005. As it’s shown in
table , there’s a trend of increasing in market segmentation on the whole since the year of China’s
reform and opening. Market segmentation increased fast before 1993, and then slowed down. Generally
speaking, market segmentation was much more seriously in coastal regions than in western regions.
However, after 1993, market integration in the coastal regions had a quicker change for the better
compared to the western regions.
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Ⅰ
Table : Convergence in the structure of output in Shandong Province
Deviation from regional average structure:
Absolute deviation
Squared deviation
Total Coastal Middle West Total Coastal Middle West
1978
6.54
1.21
1.65
1.72 1.35
0.2
0.37
0.3
1993
3.51
0.6
0.81
1.06 0.47
0.06
0.11
0.14
2005
2.81
0.57
0.75
0.7
0.3
0.04
0.07
0.09
2005/1978 0.43
0.47
0.45
0.4
0.22
0.2
0.2
0.28
2005/1993
0.8
0.95
0.92
0.66 0.64
0.7
0.67
0.62
4. Analysis on the effect factors of regional market segmentation
It is important for eliminating market segmentation or promoting the regional economic integration
to research the various impact factors of market segmentation from the angle of positivism.
4.1 The effect factors
Market segmentation is affected by many factors, but they will be summarized to next several
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categories. First, fiscal pressure factor of local government. Under the system of fiscal decentralization,
the local governments, who have the relatively independent interests and maximize their own interests,
pursue high consumption and increase fiscal revenue effectly. In particular, a large local fiscal deficit
may lead local government take behaviors of market segmentation. We can use the ratio of local fiscal
revenue and expenditure to express the indicator of fiscal pressure.When the ratio is smaller than 1, it
means that the fiscal pressure is big, and it is more possible that the local authority adopts the behaviors
of market segmentation. But when the ratio is bigger than 1, it means that the fiscal pressure is small,
and the possibility of the local authority to adopt the segmentation behaviors will be smaller. Second,
ownership factor. The higher the proportion of private ownership in the economy is, the easier it is to
form an effective mechanism of competition, which can promote the process of market integration. But
local governments tend to protect the state-owned enterprises and industries which state-owned
enterprises have a high proportion. The higher the proportion of the state-owned enterprises is, the more
possible local governments take market segmentation behaviors (Bai Chong-en, 2004). The paper
chooses the proportion of the fixed assets investment by stated-owned enterprises to denote the indicator
of ownership factor. Third, the opening factor. In a relatively close economic and in some special period,
the enlarging international trade may reduce the trade share of domestic areas (Lu Ming, Chen Zhao,
2006). The paper uses Dependence on Foreign Trade of one region, the share of a region’s import and
export amount in the GDP, to represent the opening factor.
4.2 The econometric model and it variables
Y = c + β1 X 1 + β 2 X 2 + β 3 X 3 + β 4 X 4 + ε
(2)
According to the analysis above and concerned literatures, the paper builds a econometric model
expressed by the formula (2) to research the relationship among the variables. The dependent variable Y
which is expressed by the sum of absolute deviation represents the index of market integration or
segmentation, which is a variable without units. That Y becomes larger means that the degree of market
integration gets higher or the market segmentation gets lower. The right variables of the equation are
independent variables, and
revenue and expenditure,
X 1 represents fiscal pressure factor expressed by the rate of the local
X 2 represents the scale of a local government expressed by the proportion
X 3 represents the opening factor expressed by the share of a
of the local expenditure and local GDP,
X
4 represents the ownership factor expressed by
region’s import and export amount in the GDP, and
the proportion of the fixed assets investment by stated-owned enterprises in the investment of social
capital assets.
4.3 The data and the results
The data come from Shandong statistical yearbooks and yearbooks of every regions. Using the
statistical software SPSS13 and the method of regression analysis, the paper comes to some conclusion
expressed by table . The results are that effect factors may explain 81% of the dependent variable, the
opening factor and the ownership factor are remarkable in 1% levels, but the scale of local government
and the fiscal pressure factor is not remarkable, so the majority of the results are consistent with the
anticipated results.
Ⅱ
Table
Explained variables
Constant
（X ）
X ）
Scale of local government（
X ）
Dependence on foreign trade（
Local fiscal pressure
1
2
3
Ⅱ: Regression results table
B
-98.948
Std. Error
111.735
Beta
t
-0.886
Sig.
0.389
48.326
113.748
0.072
0.425
0.677
-0.025
0.172
-0.018
-0.143
0.888
5446.942
1609.084
0.506
3.385 ***
511
（ ）
0.004
Investment Proportion of
（ ）
658.776
X4
state-owned enterprises
R Square = 0.810
Ps: (***) express the significant level of 1%.
148.476
0.634
4.437(***
）
0.000
Adjusted R Square = 0.763
First, the dependence rate of foreign trade has the positive relevance relationship remarkably with
the index of market segmentation. On the one hand, in the initial period of reform and opening,
improvementof the reform to the economy is bigger than that of the trade far. Although the foreign trade
grew very quickly, the dependence on foreign trade declined. On the other hand, the technology level of
domestic products is poor, the international competitiveness of enterprises is very low, so local products
were selled in domestic region or foreign region with low prices, which could aggravate the competition
among domestic enterprises and the segmentation among local governments. But in-depth stage of
reform and opening, especially after entering WTO, dependence on foreign trade and the regional
integration increase constantly. In a word, opening is beneficial to the development of regional market
integration.
Second, the investment rate of national corporations has the positive relevance relationship with the
index of market segmentation, that is to say the extent of regional market segmentation aggravated along
with the rate decreasing of national corporation.With the reform of ownership, the proportion of
state-owned enterprises decreased. But in the process of state-owned enterprise reform, many
inappropriate measures were adopted, such as the contractor system, only selling, La Lang Pei or
mandatory merger, and other crude measures. There were some management and social problems. At the
same time, local governments could control the restructured enterprises through a more subtle protection
measures, and expend their controlling types of enterprises and the intensity. So the form of state-owned
enterprises are not successful enough.
In addition, the size of local government has the negative relevance relationship with the extent of
market segmentation, i.e. with the strengthening of government intervention in economy, the extent of
regional market segmentation increases. The fiscal pressure has the positive relevance relationship with
the index of market segmentation, i.e. facing the growing fiscal pressure, the local governments have to
adopt segmentation behaviors to raise revenue. However, the two pairs of correlation is not significant,
the causes may be that the majority of market segmentation taken by local governments have been
regulations and other system control since reform and opening, not revene and expenditure.
5. Conclusion
Based on a case study of Shandong Province, the paper analyzes the trend of regional market
integration and its effect factors. The conclusion is induced as follows. First, the dependence rate of
foreign trade has the positive relevance relationship with the index of market segmentation, i.e. opening
is beneficial to the development of regional market integration. Second, the investment rate of national
corporations has the positive relevance relationship with the index of market segmentation, i.e. along
with the rate decreasing of national corporation, the extent of regional market segmentation will
aggravate. Third, the size of local government has the negative relevance relationship with the extent of
market segmentation, i.e. with the strengthening of government intervention in economy, the extent of
regional market segmentation will increase. Fourth, the fiscal pressure of local government has the
positive relevance relationship with the index of market segmentation, i.e. facing the growing fiscal
pressure, the local government has to adopt the behaviors of market segmentation to raise fiscal revenue.
However, there exist many causes of market segmentation, and the most important one is system
innovation. To improve the execution of anti-monopoly and the policy construction of local and central
government, and to establish an effective interregional cooperative mechanism, so as to maintain the
interregional cooperation and gradually establish a labor-division system and industrial structure which
benefits to exert regional comparative advantages, are crucially important, which are the emphasises and
noduses of policy innovation. In conclusion, research in the future should gradually deepen into the
fields of interregional cooperative mechanism or policy construction from governments to
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non-government organizations.
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Author in brief: Zhao Baoting(1976-), PHD of Economics, vice professor of Shandong University
of Finance, specializes in Public Economics and Regional Economics. Liu Qinglin(1963-), professor of
Shandong University, specializes in International Economics. He Qingsong (1969-), PHD of Economics,
vice professor of Haerbin University of Technology, specializes in Industry Economics.
Contact information: address: Shungeng Road 40, School of Public Finance & Tax, Shandong
University of Finance, Jinan, China, Post Code: 250014, Tel:13616402878, Zhao Baoting’s e-mail:
[email protected], Liu Qinglin’s e-mail: [email protected], He Qingsong’s e-mail:
heqingsong2006@ 163.com.
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