Abstract: The Free Trade Zone (FTZ) is a strategic platform and comprehensive experimental zone for China to further promote opening up since the implementation of reform and opening up in 1978. The Free Trade Zone emphasizes high-quality economic development driven by industrial transformation and upgrading. Improving the efficiency of capital allocation is not only an important path for high-quality economic development, but also a precondition that cannot be ignored. However, over the past 40 years of reform and opening up, while China has achieved sustained and rapid economic growth, it has also been accompanied by more serious capital mismatches. Correcting capital misallocation and improving the efficiency of capital allocation are the potential for maintaining medium-to-high-speed growth after China's economy enters the new normal. As far as the cause of capital mismatch is concerned, existing studies generally attribute it to excessive government intervention and low level of factor marketization. Since institutional distortions caused by excessive government intervention are an important cause of capital misallocation and loss of capital allocation efficiency, China’s Free Trade Zone reform experiment initiated in 2013 involves market-oriented reform and institutional innovation in government functions, legal system, finance, trade and investment, which will help to give play to the decisive role of market mechanisms in the allocation of factors, thereby enhancing the market liquidity of capital and other production factors, promoting the improvement of capital allocation efficiency and high-quality economic development.

Key words: Free Trade Zone; capital mismatch; industrial agglomeration; DID model