Rural industry in China has played an important role in driving national economic growth and facilitating economic reform over the past two decades. One prominent feature of rural industrialization in China is its geographic concentration around urban centers. Existing literature suggests that the dynamic growth of rural industries should be examined in the context of urban agglomeration because it is an integral part of the post-reform urban expansion. This study considers three possible mechanisms: (1) capital trickle-down from state-owned enterprises in the city, (2) technology spillovers embodied in urban technical personnel moonlighting in and commuting to nearby rural firms, and (3) urban consumer market potential. Statistical analysis of a large county-level data set (1985-91) shows that cities with a large stock of technical personnel and high consumer market potential tend to foster rural nonagricultural growth in the surrounding counties, whereas cities with a high concentration of state industrial capital tend to suppress it. Concentration of state industrial capital discouraged rural industrialization because city officials who were used to milking state banks via local state firms may have drained funds out of surrounding rural counties.
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