Publication Type
Working Paper
Version
publishedVersion
Publication Date
9-2018
Abstract
This paper studies the effect of foreign direct investment (FDI) on industrial agglomeration. Using the differential effects of FDI deregulation in 2002 in China on different industries, we find that FDI actually affects industrial agglomeration negatively. This result is somewhat counter-intuitive, as the conventional wisdom tends to suggest that FDI attracts domestic firms to cluster for various agglomeration benefits, in particular technology spillovers. To reconcile our empirical findings and the conventional wisdom, we develop a theory of FDI and agglomeration based on two counter-veiling forces. Technology diffusion from FDI attracts domestic firms to cluster, but fiercer competition drives firms away. Which force dominates depends on the scale of the economy. When the economy is sufficiently large, FDI discourages agglomeration. We find various evidence on this competition mechanism.
Keywords
Industrial agglomeration, Ellison-Glaeser index, Competition, Foreign direct investment, Special economic zones, WTO, China
Discipline
Finance | Industrial Organization
Research Areas
Applied Microeconomics
First Page
1
Last Page
53
Publisher
SMU Economics and Statistics Working Paper Series, No. 16-2018
City or Country
Singapore
Citation
HSU, Wen-Tai; LU, Yi; LUO, Xuan; and ZHU, Lianming.
Does foreign direct investment lead to industrial agglomeration?. (2018). 1-53.
Available at: https://ink.library.smu.edu.sg/soe_research/2195
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.