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

Copyright Owner and License

Authors

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