The “push and pull” factors in firm location choices: Financial regulations and headquarters in China

Firms are unevenly distributed across space in China due to the place-based push and pull factors. Firms are attracted by regions with developed economies or close connections to the political center. Meanwhile, regulatory arbitrage suggests that firms could be driven away by stringent regulations. To further the understanding of the push and pull factors in China, this research empirically investigates the geographical relationship between local-level financial regulations and the new headquarters of publicly listed firms in China using city-level panel data. Results show that conforming with previous studies, firms react to regulations by locating to jurisdictions with less stringent regulations. However, this relationship suggests an inverted U-shape. Under the threshold limit, financial regulation improves the local financial environment thus pulling firms. Over the threshold limit, financial regulation pushes new firms away because it prohibits firms' aggressive behaviors toward higher profitability. Such relationships are more evident in the coastal region than in the middle and western regions. With these insights, this research bridges firm location studies in China with the global literature and provides important insights for policymaking regarding local financial environments and economic development.