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Recent literature has been debating the performance of high-technology zones (HTZs) in developing countries. This paper contributes to this debate by examining how national HTZs in China affect allocative efficiency of resources among Chinese cities as well as China’s total factor productivity (TFP) growth. This paper finds that resource misallocation among cities reduces China’s TFP growth by 4.5% of which capital misallocation accounts for 2.4% and labour misallocation accounts for 2.1%. Moreover, we find that the establishment of national HTZs in China increases aggregate TFP by improving the allocative efficiency of capital among cities: that is, redistributing more capital from lower to higher productivity cities. In contrast, we find little evidence of TFP gain driven by technical efficiency following the establishment of HTZs. This paper thus reveals a potential positive effect of establishing HTZs in developing countries: although establishing HTZs may not improve the technical efficiency of these countries, it may nevertheless mitigate these countries’ resource misallocation and enhance their aggregate TFP.

High-technology zones, misallocation of resources among cities and aggregate productivity: evidence from China