This paper delves into the impact of within-city administrative boundary adjustments on firm productivity and local economic development. Employing a unique quasi-natural experiment conducted in China since the 1990s, our empirical analysis reveals that district border adjustments (referred to as DBAs) have a significant and positive effect on the TFP of manufacturing firms in the adjusted districts. The firms situated in the border towns of the districts reap most benefits. Further investigation into the mechanism indicates that DBAs enhance firms’ productivity by internalizing the positive externalities generated by agglomeration economies of industry clusters. By aligning the economic boundary with the administrative boundary, DBAs help improve the governance quality by removing extra administrative costs for firms and alleviating the financial constraints faced by firms in the industrial cluster. In the medium to long run, these adjustments lead to enhanced industry specialization of each urban district and strengthened up-stream and down-stream linkages between neighboring districts through spillovers. Our study also shows that DBAs have a significantly positive impact on the overall economic development of border towns, as evidenced by increased intensity of nightlights. This paper’s findings highlight the importance of reforms of the internal unban structure on local governance quality, which results in notable economic gains.
