The role of industrial clustering: from layoff to self-employment after the Chinese state-owned enterprise reform

It is generally agreed upon that industrial clustering can stimulate the formation of new businesses. However, the role of industrial clustering in the transition from layoff to self-employment is rarely investigated. This study exploits the Chinese State-Owned Enterprise Reform as a policy shock to employment, for examining whether laid-off workers are more inclined to be self-employed in regions with highly developed industrial clustering. The empirical results first reveal that prefectures with a higher SOE workers ratio in 1995 experienced a larger increase in the new entry of self-employed households in the following years. Following that, we further detect the heterogeneous effect of regions with and without clusters. The results illustrate that the reform increased the number of new self-employed households in regions with industrial clusters, and the effect is insignificant in prefectures without industrial clusters. This study implies adopting a cluster-based development strategy in transitioning countries could alleviate the negative effect of mass unemployment.