The Game Theory Analysis On Exploiting FDI Strategy Of The Local Governments

Competition of FDI lying in local government is a universal economic phenomena in China. The local government attracts foreign investment through providing preferential policies, for example, tax concession, reduction and exemption of land royalty, counterpart funding and management service for foreign investment program, financial guarantee and favourable interest rate. To this economic activity, What most domestic scholars do is to criticize briefly, more radical scholars think especially that the transfer of preferential policies of foreign investors is only the losses of a kind of national economic benefits. There must be its rationality existing in economic phenomena, the inner link including it can be revealed through analyzing, sum up and reasoning.The local government is in the middle of central government, enterprise , resident as part of government. The vertical information among central government , enterprise , resident must pass this intermediate link of local government time and time again; Incentive-restraint mechanism which central government worked out should rely on local government to implement. Our study of the competition behavior of local government must be concentrated on the background of domestic economic reform. Basing on the analysis of the game of local government utilizing FDI in the transitional economic system, primary purpose of the paper is to clarify the formation of the game behavior of local government .As a result of the game, we can reveal how it influence the amount of FDI and economic process. By means of the interaction of the game, its result will influence the behavior of local government conversely, so it can result in the evolution of the role of local government.Because research field of this paper is a basic blank point both at home and abroad, what we do is to build several models in the perspective of local government, which is thecore of the theoretic framework. The function of model lies in building basic orientation and mode for this field and do some basic, tentative preparation. Main work lies in analysis of government behavior and definition of department layers according to public choice theory industrial organization theory, then we have made two theoretic hypotheses: economic man and limited ration. Analysis employs the game approach. So it has to set up a game model to imitate the game activities. We expect conclusions can illustrate economic phenomena existing in the game to some extent.Our study of the game divides into two steps: The first step we make the hypotheses that local government is homogeneous and preferential policy is their strategy when play the game of FDI; then we loosen the hypotheses made previously and consider local government is different homogeneous, put forward the concept of the transaction cost, think it has determined reputation effect of the local government. Our conclusion is if reputation of local government has difference, local government with better reputation, even if the bid (the favourable degree of incentive policy of investment) is obviously lower than the local government with worse reputation, will easily win the game with the foreign investor. The transaction cost is the most important factor in foreign investor's location selection in a situation that the local government has the difference. Basing on this, we analyse the strategy's trend and effect, introduce the newest achievement of the school of institutional economics, so the equilibrium will lead to evolution of the role of local government , namely from the economic management type to the public service type.