Research On Foreign Direct Investment Location Choice And Evolution Based On New Economic Geography

Since the Third Session of the Eleventh Central Committee of the Party, China has deepened its open policy, and the policy on FDI location has evolved gradually. A regional route for economic opening has been shaped which extends from "special economic zone to coastal port cities to economic and technical development zone to coastal economic open zone to riverside/border area open cities and inland provincial capital cities to bonded areas and finally to mid and west area. FDI in China has experienced a drastic increase, from US$0.032 billion in 1979 to US$83.521 billion in 2007, with an average annual growth rate of 43.71%.With the deepening of the open policy, the extremely unequal distribution of FDI location has been greatly reduced, and the location Gini Coefficient has decreased from 0.9649 in 1979 to 0.7354 in 2006, with an average annual reduction rate of 1.35%.Despit all this, foreign investment enterprises still concentrate its expansion in the east area. Although the mid and west areas have taken various kinds of measures to shift its traditional attitude, improve investment environment and provide like preferential treatments as those in the east area, the extent of expansion of FDI to the west area is still very low. When treating the whole east area as just one single area, the reduction rate of national Gini coefficient is only 0.27% between 1979 and 2006, which is obviously lower than that in the east area alone. Between 1993 and 2006, although the Gini coefficient in the east area has decreased, the national Gini coefficient is still rising when treating the east area as one single area, which indicates that FDI is concentrating in the east area.Since the reform and open policy, China's economy has experienced rapid growth, particularly in the east area. Manufacturing industries mainly gather in the east area, and the investment scale of individual enterprises is expanding continuously. More and more investment in large scale equipments hence an ever increasing fixed assets investment brings about the growth of scale economy in manufacturing industry and its share in the whole economy. With the improvement of transport facilities, the transportation cost is decreasing. According to new economic geography models, the location decision of newly entering manufacturing enterprises will be determined by the original enterprises and will also concentrate on the original location. Since the east area was opened earlier, most of the foreign enterprises before 1993 gathered in this area, which will directly result in newly entering foreign enterprises flowing into this area. Sampling data from 28 provinces with the period running from 1999 to 2006, this paper estimated panel equations with different aggregating effect variables substituting one another step by step from three different perspectives:the total sample, time interval samples and regional samples. The estimation results indicate that the aggregating effect of FDI is significant in different provinces in China. The level of FDI, size of market (using GDP as an indicator), the extent of industrialization are all important factors for FDI aggregation in attracting inflow of FDI, in which the level of FDI has the largest FDI aggregating effect and it rendered the unequal distribution of FDI difficult to change. Time interval regression analysis indicates that with time going by, there is dynamic evolution of FDI aggregating effect, in other words, in a certain province, with the continuous increase of FDI hence the stock of FDI, the aggregating effect will become larger and larger. Regional sample regression estimation results indicate that the aggregating effect brought about by stock FDI plays a very important role in the eastern provinces, whereas that brought about by the flow FDI has a more significant effect in mid and west areas. House price as an economic diffusion force has just begun to show its significance. With time going by, house price has a negative relationship with FDI. Here Helpman's conclusion is empirically evidenced.Using data from 192 cities with the time span running from 1999 to 2006, panel data regression results indicate that the FDI aggregating effect is significant at the city level. The level of FDI, infrastructure, size of market and the extent of industrialization are all conditions for aggregating effect to function at the city level. However, unlike the panel data regression results at the provincial level, at the city level there does not exist the phenomenon of enlarging effect of aggregating economy on distribution of FDI location. Regional regression results indicate that when choosing cities for their investment, FDI "relies" more on former FDI in the east than they do in the west. The flowing FDI in the east has greater aggregating effect than that in the mid and west, which shows that FDI is inclined to obey the former investors'path when they choose which city to invest in.In mid and west China large and middle sized state owned enterprises have such good quality assets available as factories and equipments. Promoting mergers and acquisitions of these enterprises with foreign investors, it can, on the one hand, speed the reform of theses state owned enterprises, on the other hand, reduce fixed cost for FDI and attract FDI to flow to the mid and west, thereby finding a way out for mid and west to attract FDI.