Does Foreign Direct Investment Lead to Industrial Agglomeration

Wen-Tai Hsu, Yi Lu, Xuan Luo () and Lianming Zhu
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Xuan Luo: INSEAD

No 16-2018, Economics and Statistics Working Papers from Singapore Management University, School of Economics

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 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2018-09-02
New Economics Papers: this item is included in nep-cna, nep-cse, nep-geo, nep-int, nep-sbm, nep-sea, nep-tra and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:ris:smuesw:2018_016

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