Publication Type
Working Paper
Version
publishedVersion
Publication Date
3-2019
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.
Discipline
Finance | Industrial Organization
Research Areas
Applied Microeconomics
First Page
1
Last Page
52
Publisher
INSEAD Working Paper 2019/11/EPS
City or Country
Singapore
Embargo Period
11-10-2019
Citation
HSU, Wen-Tai; LU, Yi; LUO, Xuan; and ZHU, Lianming.
Does foreign direct investment lead to industrial agglomeration?. (2019). 1-52.
Available at: https://ink.library.smu.edu.sg/soe_research/2306
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.
Additional URL
https://ssrn.com/abstract=3361487