Can Pilot Free Trade Zones Improve Local Governance Quality? Evidence from a Quasi-Natural Experiment in China

Abstract The purpose of this study is to reveal the impact of pilot free trade zones (PFTZs) on local governance quality (LGQ) to provide a reference for driving governance reforms in China. Based on provincial panel data from 2004 to 2020 in China, the impact of the establishment of PFTZs on LGQ is analyzed by employing the multi-period difference-in-difference (DID) method. The results show that the establishment of PFTZs can significantly enhance the governance quality of local governments, but there is heterogeneity in location and establishment batches. PFTZs improve LGQ through the effects of institutional spillover, factor allocation, and talent agglomeration. FDI spillover can partially substitute for promoting the effect of PFTZs on LGQ, and economic growth pressures can distort the positive effect of PFTZs on LGQ. Therefore, policymakers should clarify the functional positioning of PFTZs and leverage their effects, which are institutional spillover, factor allocation, and high-end factor agglomeration, to enhance LGQ.