Institutional reform, path development and firm creation: evidence from China

Abstract This paper examines whether and how government-led institutional changes can reshape regional industrial development trajectories. Using quarterly panel data from Chinese cities between 2019 and 2024, we assess the impact of reforms of the business environment on firm creation within both path creation and path dependent industries. Applying a staggered difference-in-differences approach combined with coarsened exact matching, our findings reveal that business environment reforms significantly increase firm creation in path creation industries, especially in high-tech sectors and cities with initially weaker business environments. Key mechanisms identified include enhancements in the market environment and government services, which are central to driving these effects.