1. Introduction
China‘s land management system, designed to ensure food security in a densely populated country with limited arable land, imposes strict controls on the supply of new urban industrial land [
1]. These administrative regulations are intended to prevent disorderly market behavior and urban sprawl [
2]. However, such non-market interventions distort land price signaling mechanisms, potentially reducing the efficiency of land allocation within cities [
3,
4].
Administrative regulation is widely recognized as a significant factor in resource misallocation [
5], and thus affects productivity [
5,
6,
7,
8,
9,
10,
11]. As a typical administrative regulation, land regulation has been shown to distort market signals and reduce productivity [
5,
7].
Conversely, decentralization offers a potential remedy to these inefficiencies by delegating decision-making authority to local governments [
12]. This shift allows local governments to better utilize their informational advantages, potentially leading to more efficient resource allocation [
13,
14,
15,
16]. Jin et al. (2023) suggest that reforms aimed at decentralizing administrative powers in China have successfully stimulated economic activity by empowering local governments [
17]. Additionally, organizational theory, as discussed by Aghion and Tirole (1997), supports the idea that aligning power with information within an organization can enhance efficiency [
13].
While the existing literature provides valuable insights into the benefits of reducing administrative regulation and the potential of decentralization [
12,
13,
14,
15,
16,
17], it often overlooks the specific impacts of decentralizing land approval processes on local public services. This gap underscores the need for further research in this area, particularly in the context of land management reforms. The objective of this paper is to examine the impact of decentralizing land approval authority on local economic growth and environmental protection. Specifically, the study seeks to address the following research questions: How does the decentralization of land approval rights influence local governments’ ability to promote economic growth? What is the effect of decentralization on environmental quality at the local level? What is the potential channel through which decentralizing land approval authority leads to economic growth and environmental improvement?
This paper uses the 2011 pilot reform of the urban industrial land approval system approved by the State Council, along with satellite data and micro-enterprise data, to identify the causal effect of the land approval management system reform on the improvement of local public services. The research framework is shown in
Figure 1. Our novel contribution lies in the use of a staggered DID approach to capture the causal effects of this reform, offering a nuanced understanding of its dual impact on economic and environmental outcomes.
Specifically, before the reform, the land use in some large cities in China needed to be approved by the State Council. Starting in 2011, some of these cities were designated as pilot cities, where provincial departments reviewed the compliance of land use applications instead of the central government. This pilot policy reduced land market regulation and increased the flexibility of local government land supply. Using this pilot policy as a quasi-natural experiment, we employ a staggered DID (Difference-in-Differences) method, which compares outcomes over time between treated and untreated groups, accounting for the staggered adoption of reforms across regions. This approach allows us to examine how the reform of industrial land approval affects two aspects of subnational service provision—economic growth and environmental protection. We find that the reform not only promotes local economic growth but also reduces pollution levels. These conclusions are supported by a series of robustness checks.
In our mechanism tests, we find that the industrial land approval reform (ILAR) significantly reduces land resource misallocation in pilot cities and promotes both total factor productivity and green total factor productivity. Furthermore, compared to the control group, the pilot cities allocate more urban industrial land to tertiary industry, facilitating industrial structure adjustment and overall industrial upgrading.
In cities with poor fiscal conditions or larger budget deficits, local officials face greater financial pressure and may be more motivated to focus on efficiency in land supply policies [
18]. The optimization effect of the pilot policy on land allocation may be stronger under such fiscal pressures [
18]. We measure the fiscal pressure faced by local governments by calculating the ratio of the budget deficit to general budget revenue one year before the policy implementation, and perform a grouped regression based on whether the fiscal pressure is greater than the sample median. The results show that the pilot policy significantly impacts cities facing high fiscal pressure. However, it does not affect cities with low fiscal pressure. This suggests that local governments under higher fiscal pressure are more likely to fully utilize land approval and allocation authority to flexibly match suitable industrial land for enterprises, thereby optimizing land allocation efficiency, promoting economic growth, and reducing environmental pollution.
This paper makes three key contributions to the literature. First, it improves understanding of the effects of land use regulation by linking industrial land approval to local service provision, specifically economic growth and environmental protection. While the existing studies often focus on the economic impacts of land use regulation [
5,
7], this paper addresses the gap by exploring how such regulations influence local service outcomes.
Second, it contributes to the literature on the socioeconomic benefits of decentralization. Although decentralization is known to impact local governance and efficiency, studies often show mixed results [
12,
13,
14,
15,
16]. This paper enriches the understanding of decentralization by specifically examining the effects of devolving industrial land approval authority on local service provision, providing new insights into its benefits.
Third, it advances the literature on local government service levels [
16,
19,
20]. By investigating how the decentralization of land approval affects local economic growth and environmental protection, this paper highlights how improving land allocation efficiency can simultaneously support industrial upgrading and environmental goals, offering a broader perspective on local governance and resource management.
The remainder of this paper is structured as follows:
Section 2 provides background information and a theoretical framework.
Section 3 presents the research design, including variables, data, and models.
Section 4 reports the baseline regression results and robustness checks.
Section 5 explores potential mechanisms.
Section 6 presents a scientific discussion. The final section is the conclusion.
6. Discussion
Our findings align with the perspectives of Hsieh and Klenow (2009) and Restuccia and Rogerson (2017) on the positive impact of efficient resource allocation on productivity growth in both developed and developing countries [
5,
6]. This paper further focuses on land resource allocation, supporting the views of Duranton et al. (2015) on the relationship between land resource misallocation and productivity [
48]. Unlike them, we extend the impact of land resource misallocation caused by land resource regulation to industrial upgrading, economic growth, and environmental quality. Specifically, unlike most literature that focuses on the productivity channel, we have discovered a new channel through which land resource allocation affects economic growth—industrial upgrading [
7,
18,
43,
48]. This paper also responds to the literature on the impact of decentralization theory. Based on the government attention allocation theory, Li et al. (2021) found that decentralization promotes economic development, but the government neglects environmental protection [
16]. In contrast, our study shows that the decentralization of industrial land approval rights in China has promoted local economic growth while reducing pollution. This indicates that, by promoting economic and environmental outcomes, industrial land allocation reform (ILAR) can provide a more balanced approach to decentralization. Our conclusion implies that the delegation of a single right can effectively avoid the government’s attention allocation issues brought about by complex decentralization. In addition, our research results also support the Porter hypothesis [
54,
55], indicating that economic growth and environmental protection can be achieved simultaneously [
54,
55,
56]. Unlike previous studies, this paper proposes that the effective allocation of land resources is an effective means to achieve a common development of economic growth and environmental quality.
Our research conclusions have broad policy implications. Although there are differences in land ownership among different countries, almost all countries have their own land use planning [
5,
57]. Even developed countries that advocate a free economy and have abundant land resources are no exception. For example, the Canadian federal government implements land use control measures such as the establishment of the “Land Zoning Management Act”, land parcel control, land development plan control, and the change of agricultural land grade restrictions to control urban land and agricultural land use [
58], through legal requirements for local governments to delineate urban growth lines, develop in phases and batches, and control the total amount of building permits according to the local economic development status and the current land use situation, to control the scale of urban development and protect high-quality arable land [
59]. According to an OECD report, there are more than 100,000 land use regulations and related laws and regulations in the 32 surveyed OECD countries [
57]. Our conclusion shows that for these countries with land use approval and planning, delegating this approval power to more efficient local governments will help promote local economic development and the improvement of environmental quality.
First, the success of ILAR in stimulating local economic growth and reducing pollution suggests that similar land use reforms should be expanded and adapted to other regions, especially those with significant industrial activities. Second, to further optimize resource allocation, local governments should be granted greater flexibility in land approval processes, particularly in areas facing high fiscal pressure. This might involve decentralizing more administrative powers to local governments, allowing them to better align land use with regional economic and environmental priorities. Lastly, policies that encourage the allocation of more land to the tertiary sector could be promoted to facilitate industrial upgrading and sustainable urban development across China.
One limitation of our study is the time frame of the data. Due to data availability, our sample period is confined to the years 2008 to 2014. This limitation prevents us from analyzing the long-term effects of ILAR. Future research with a more extended data period could provide further insights into the sustained impacts of this reform. Our research is based on a single country. However, as we mentioned, land use regulation is a widespread phenomenon globally, and future research can also be further tested using data from other countries or transnational comparisons.
7. Conclusions
This study investigates the impact of ILAR on environmental protection and economic growth. By utilizing a DID model and a comprehensive dataset covering multiple Chinese cities, we provide robust empirical evidence on the causal effects of devolving industrial land approval authority from the central government to provincial governments.
Our baseline regression results demonstrate that ILAR significantly reduces PM2.5 concentration and increases nighttime light intensity, indicating simultaneous improvements in environmental quality and economic growth. Specifically, our findings show that ILAR decreases PM2.5 concentrations by approximately 3% and increases nighttime light intensity by about 26% relative to the control group.
Mechanism analyses reveal that ILAR effectively reduces land misallocation within cities, as evidenced by a 37% decrease in land resource misallocation. Furthermore, ILAR enhances TFP and GTFP in pilot cities, contributing to economic growth and environmental quality. The positive impacts on TFP and GTFP align with our baseline results, indicating that the economic benefits of ILAR outweigh the environmental gains. We also find that ILAR promotes industrial upgrading by favoring land allocation to the tertiary sector, which significantly boosts local economic transformation and development. This shift from secondary to tertiary sector land use underscores ILAR’s role in facilitating structural economic changes.
Lastly, our results highlight the role of fiscal incentives in the effectiveness of ILAR. Cities with higher fiscal pressure exhibit more significant positive effects from the reform, suggesting that local governments with greater fiscal stress are more motivated to optimize land allocation for economic and environmental gains.
In conclusion, this study provides comprehensive evidence that devolving industrial land approval authority to provincial governments through ILAR not only fosters economic growth but also enhances environmental protection. These findings underscore the importance of local governance and fiscal incentives in the successful implementation of land reform policies. Future research could further explore the long-term impacts of ILAR and other decentralization policies on sustainable urban development. Based on these findings, we recommend that policymakers sustain decentralization efforts and consider further incentives for cities under fiscal stress.