Military investment and the rise of industrial clusters: Evidence from China’s self-strengthening movement

This paper investigates the short- and long-term impact of large-scale military investment on civilian industrial growth by focusing on China’s first attempt to modernize its military sector between 1861 and 1894. Panel data from 1858 to 1937 suggest that the program generated positive effects on civilian firm entry, but these effects appeared only after the government relaxed constraints on the entry of private firms. Long-term analysis shows that counties that received more military investment through the program, driven by plausibly exogenous ex ante political connections, had greater output in civilian industries in the 1930s. Analysis of the mechanisms suggest that the program boosted local economies through input–output linkages, human capital accumulation, and the rise of modern banks.