The Impact Of FDI On China's Industrial Agglomeration

Since Paul Krugman brought forward new trade theory in the mid 1990th, the impact of international economic integration on domestic spatial distribution of industries of member countries has become a very hot topic for spatial economic studies. As for China, since the reform and open, domestic industries have shown a quite obvious tendency of agglomeration, which catches the attention of both economic researchers and policy makers. However, although it has been proved by the literature that China's opening up to the outside world promoted domestic industrial agglomeration; most of the literature focused on the importance of decreasing trade costs to domestic industrial agglomeration, the importance of FDI was always ignored. As industrial agglomeration is proved to be a driving force for the national economic growth as well as worsening regional disparities, if FDI is a positive force for China's industrial agglomeration, then, how to make effective use of FDI so as to facilitate the process of industrial agglomeration and dispersion is undoubtedly an urgent issue.Therefore, this dissertation explored the mechanism through which FDI affected China's industrial agglomeration, and constructed econometric models to test the impact of FDI on China's industrial agglomeration, trying to prove both theoretically and empirically the positive effect of FDI on China's industrial agglomeration, on the basis of which policy suggestions for making effective use of FDI to facilitate China's industrial agglomeration were put forward.Firstly, on the basis of the literature on FDI and industrial agglomeration, the dissertation brought forward the mechanism through which FDI affected China's industrial agglomeration. The inflow of FDI could not only promote China's industrial agglomeration through backward/forward linkage effects, competition effects, and demonstration effects, but also facilitate China's industrial agglomeration through improving location conditions such as institutional environment, infrastructure, human capital, and technology, etc. Industrial agglomeration could affect the inflow of FDI in return. Positive agglomeration externalities such as intermediary product market effects, labor pooling, knowledge spillover, economy of scale, lowering of transactional costs, etc., could encourage the inflow of FDI. The favorable cyclic interaction between FDI and agglomeration made the promotional effect of FDI on agglomeration stronger. Negative agglomeration externalities such as crowded cost, over competition, rising labor cost, etc. could discourage the inflow of FDI.Secondly, through analyzing the trends of development of FDI and industrial agglomeration in China, the dissertation constructed econometric models to test the impact of FDI on China's industrial agglomeration.Since the reform and open, the scale, sources, industrial and regional distribution of FDI in China had gone through great changes: FDI had become the main form of foreign capital in China, and the scale of FDI had been growing rapidly; the sources of FDI had become diversified gradually, with Hongkong, Makao, Taiwan, Japan, ROK, Singapore, the U.S., EU becoming the major home countries and regions of FDI; although FDI had flowed into various industrial sectors of the national economy, manufacturing industry always owned the largest share of FDI; the regional distribution of FDI was greatly unbalanced, with the eastern region sucking in the largest proportion of FDI.Industries in China tended to be more agglomerated no matter in industrial or in regional level. In industrial level, the Gini and EG coefficients of almost 39 two-digit sectors of the secondary industry within 1988-2008 were computed. In regional level, the regional industrial densities of 30 provinces within 1980-2008 were calculated. According to the industry-level results, there was obvious agglomeration of industries in China, with most industries being modestly and highly agglomerated; although most industries tended to get dispersed in the short run of the recent two years, they showed a strong tendency to be more agglomerated in the long run; the more agglomerated industries were mainly resource-intensive, labor-intensive, and technology-intensive ones; the industries that show stronger tendency to agglomerate in recent years were primarily resource-intensive, labor-intensive, and technology-intensive ones, with labor-intensive ones taking up the largest proportion. According to the region-level results, China's industries were highly concentrated, with the eastern region becoming the center and the other regions becoming the peripheries; although most recently some industries in the eastern region had begun to transfer to the central, western and northeastern region, China's unbalanced distribution of industries among regions had not been changed substantially.According to the econometric analyses based on panel data, FDI promoted China's industrial agglomeration significantly. Through preliminary observations on the relations between FDI and industrial agglomeration in both industrial and regional level, we found that FDI and industrial agglomeration were interrelated obviously. Therefore, we summarized the factors of agglomeration in both industrial and regional level, and constructed econometric models based on panel data to test in detail FDI's significance among other factors of agglomeration. In industrial level, according to the regression results of the panel data of 36 two-digit industries within the sample period between 2001 and 2008, FDI and labor pooling were positive factors of agglomeration, while market division was a negative factor of agglomeration. In regional level, according to the regression results based on the panel data of 30 provinces during 2000-2008, FDI, local protection, market potential, crowded cost, and natural resource endowment were positive factors of agglomeration, while labor cost was a negative factor of agglomeration. Therefore, the empirical results in both regional and industrial level gave strong support to the theoretical opinion that FDI had significantly promotional effect on China's industrial agglomeration.Finally, based on the theoretical and empirical analyses, the dissertation put forward applicable suggestions for the Chinese government to make effective use of FDI to promote industrial agglomeration. First, enhance the attractiveness of the domestic economy to FDI so as to avoid the negative impact on industrial agglomeration resulted from the transference of FDI to other countries. Second, adjust the industrial and regional distribution of industries so as to let FDI play a better role in promoting China's industrial agglomeration. Third, improve the innovation capacities of domestic enterprises so as to facilitate industrial agglomeration promoted by domestic enterprises.