FDI agglomeration change in China
| Pages | 172-184 |
| Date | 28 September 2012 |
| Published date | 28 September 2012 |
| DOI | https://doi.org/10.1108/17544401211263937 |
| Author | Mingming Pan |
| Subject Matter | Economics |
FDI agglomeration change
in China
Mingming Pan
Economics, Applied Statistics and International Business Department,
New Mexico State University, Las Cruces, New Mexico, USA
Abstract
Purpose – No previous research has considered the changing agglomeration effect of foreign direct
investment (FDI). The purpose of this paper is to fill the gap in the literature.
Design/methodology/approach – The paper uses China as the object of study and examines the
centripetal and centrifugal forces associated with FDI clustering over time.
Findings – Through studying the FDI determinants for the 29 Chinese provinces from 1993 to 2008,
the empirical analysis supports a weakening agglomeration effect of FDI over time in China and
further suggests that the effect has nearly vanished in the past few years.
Research limitations/implications – Data availability restricts the analysis to using provincial
aggregate data and so further research is called for. It would provide more accurate and insightful
information to study the FDI agglomeration effects at a finer level, using more disaggregated city-level
data by sector and by source country.
Originality/value – As the Chinese government has been making efforts to direct FDI to inland
areas, this research provides immediate policy implications. Policy-makers’ investment incentives to
direct FDI could go to waste when the agglomeration effect of FDI is too strong. The incentives should
be able to achieve a much larger effect when the agglomeration effect becomes less strong.
Keywords China, International investments,Agglomeration, Foreign Direct Investment,
National economy,Determinant, Centripetal forces,Centrifugal forces, Agglomeration effect of FDI
Paper type Research paper
1. Introduction
Industrial activities agglomerate through the mechanisms of knowledge spillovers,
specialized labor, and specialized intermediate goods suppliers. Please refer to Marshall
(1920), Krugman (1991), Fujita et al. (1999) for more on agglomeration economies. Since
the mid-1990s, the agglomeration of foreign direct investment (FDI) has received
increasing attention in the literature of locational determinants of FDI. Head and Ries
(1996) have built a model for agglomeration of foreign manufacturing investment in
China through the mechanism of specialized intermediate inputs suppliers. Using
city-level data, they found that foreign firms preferred cities where other foreign firms
were located. Information spillovers and sharing among foreign investors is another
important mechanism leading to agglomeration of FDI. Foreign investors suffer from a
condition of adverse asymmetry in information costs compared to domestic firms, and
one of the lowest information-cost areas is where more FDI has been accumulated
(Mariotti and Piscittello, 1995). Kinoshita and Mody (2001) found the importance of
privately held information in foreign investment location decisions, using survey data
on Japanese firms. Shaver et al. (1997) found that foreign firms operating in a host
country generate information spillovers that have potential value for subsequent FDI.
The benefits of specialized intermediate goods supplies and lower information costs,
along with other positive externalities generated by FDI, attract FDI inflows to areas
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1754-4408.htm
JCEFTS
5,3
172
Journal of Chinese Economic and
Foreign Trade Studies
Vol. 5 No. 3, 2012
pp. 172-184
qEmerald Group Publishing Limited
1754-4408
DOI 10.1108/17544401211263937
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