The Location Choice Of Multinational Firms In The Framework Of The New Economic Geography

This paper studies the location choice of multinational firms in the framework of the new economic geography (NEG), mainly using the international models and the initial core-periphery models (CP models) in the NEG to analyze it. After making deeply analysis of the realistic explanatory ability of the NEG models on multinational firms, it examines the overall spatial distribution of the multinational firms in the world, applying the models. Further, it considers the spatial distribution of the multinational firms in China. On this basis, it principally uses the CP models to analyze the reason why the multinational firms invest so little in western China. And it puts forward policy proposals about how to attract foreign investment in western China in the conclusion part. The whole analysis extends around the typical features, the major deductions and the policy implications of the models and presents new explanations and policy implications.The initial NEG models don't painstakingly emphasis the role of the countries. The models extend in the general two sectors and two regions economies and analyze how the different levels of transport costs influence the long-run spatial equilibria of the economic actions. Of course there should exist the manufacturing sector of increasing returns to scale. This means that the scale economies at the plant level would make each variety of products be produced by a single plant in a single region. Starting from the point that the firms evenly distribute in the two regions, the models highlight the facts that when the transport costs decline to some critical point and one region has a little more share of manufacturing than the other for historical occasional events or other reasons, the firms tend to agglomerate in the bigger region. The agglomeration self-reinforces and self-fulfills continuously under the action of home market effects and circular causality. What's more, the agglomeration of the firms produces agglomeration rents. Agglomeration rents are the loss that a firm would incur by leaving the agglomeration region and relocating to the other region. The existence of agglomeration rents attracts more firms to join and the long-run equilibrium that all of the firms agglomerate in the bigger region comes into being finally.Under the initial condition that the firms evenly distribute in the two regions, the common location of the firms' expectations that will become the center of the agglomeration would actually becomes the center with the decline of the trade costs, although the two regions are identical formerly. The process from the initial symmetrical state to the state of core-periphery structure reflects the catastrophic agglomeration and also showed the endogenous asymmetry. But all the firms would leave the former agglomeration region and forms new agglomeration in the other region if a large enough shock makes a majority of firms leave the former agglomeration region. Even the shock are temporary, it will do the job. And the effects will not be reversed when the initial shock disappears. This is called the locational hysteresis.The initial international models in the NEG are still about the single -regional firms. What's different is that the firms can select their location between countries and the labors can't. The long-run equilibrium is as well the CP structure between countries, that is, the two countries diverge completely. When the transport costs decline further, the two countries begin to converge. In reality, many multinational firms conduct the horizontal or (and) vertical productive operations in the worldwide scope. The true meaning of the international models in the NEG should be the modelization of the horizontal and vertical multinational firms. The introduction of the horizontal or vertical multinational firms into the basic CP models has great effects on the CP equilibrium outcome.The introduction of the horizontal multinational firms makes the sustain point and the break point attain at the very small trade-cost level. This means starting from the point that the firms evenly distribute in the two countries, the two countries diverge at much smaller trade-cost level than the level in the basic models with the increasing of the trade freeness. Therefore, the introduction of the horizontal multinational firms makes disperse spatial distribution of the firms stable within a large range of the transport costs by decreasing the range of trade costs for which the core-periphery outcome occurs. The NEG models of single plant and single headquarter in the same location firms predict the first divergent then convergent tendency between countries. The existence of the horizontal multinational firms weakens the tendency and reduces the possibility of the countries' divergence. The empirical research has verified the importance of the horizontal multinational firms during the past few years. While the outcome of the NEG models not only strengthens the conclusions, but also has profound significance for the policy researchers.The effects of the introduction of the vertical multinational firms are less clear. On the one hand, the location of headquarter is only determined by the relative difference of productive cost because the services of headquarter are assumed to be traded freely within the firm. On the other hand, both the relative productive cost and the market entry are important for the plant, which produces the final goods. Just as the horizontal multinational firms, the existence of the vertical multinational firms reduces the range of trade costs for which full agglomeration occurs. And the firms do not completely agglomerate in one region within a large range of trade costs. While headquarters tend to agglomerate, the symmetrical equilibrium is not stable for a certain level of trade costs. Based on a comprehensive analysis, the equilibrium outcome after the introduction of the vertical multinational firms is between the complete agglomeration and the complete symmetry. The changes of trade costs cause the equilibrium outcome to vary more gradually than those in the basic models. Although the parameters in the models are symmetrical, the long-run equilibrium outcome is very asymmetrical.Chapter 1 is introduction. It mainly deals with the background, the major purport and the significance of the research, which establishes the foundation of the following study. First, it analyzes the important influence of the location choice of the multinational firms and the development of the NEG as a new theoretical framework and the primary train of thought. Then it exposes the major purport, the significance, the possible innovation and the difficulty of the research. Among them, the significance of the study can be seen from the following aspects. (1) The decline trend of transport costs because of technical progress and integration doesn't weaken the explanatory ability of the theory. Distance, transport costs and countries' borders are still very important, even the development of information and communication technology makes economy more lack of homogeneity and increases the tendency of agglomeration. (2) The issues related to FDI need studying more deeply. Using new theory can provide new perspective and analytical framework. (3) It makes sense to use the international models in the NEG to analyze particular problems and advance policy suggestion. The possible innovation of the research include the statistical analysis of the newest data that is available, the explanation from the NEG perspective and the novel policy suggestion for the western China to attract foreign investment. And the elementary structure of this paper is summarized at last.Chapter 2 is the review of the research on the location choice of multinational firms in the framework of the NEG The survey is extended according to the development of the theoretical models and the main aspects of the empirical research. In the section of the theoretical models, the emphasis is to review the development of the international models of the NEG including the improvements and expands, based on the survey of the initial CP models. The overview of the empirical research focuses on the primary aspects and conclusions including the influencing factors of the location choice of the multinationals and the effects on the host countries. Because the research results yield mostly in the foreign countries, the domestic field is almost blank. It only gives a simply overview of the latter. China as a particular case of the developing countries has a large domestic market and now is one of the major host countries of receiving the manufacturing transfer from the developed countries. It can offer abundant first-hand materials to the NEG research.The emphasis of chapter 3 is to analyze the realistic explanatory ability of the multinational-firm models. Although many influencing elements can't be brought into one uniform model due to the limitation of modeling, the most important is the primary train of thought of the models. This chapter is aimed at analyzing the realistic explanatory ability of the models using the primary train of thought of the models. It expands the contents the models contain. The most important contribution of the modeling is the endogenous changes of the transport costs and to bring the influencing factors from the host countries into the analytical framework. In the theoretical analysis of the conditions of horizontal and vertical transnational production and the possible equilibria, it adds more influencing factors that haven't been included in the models. Finally, it analyzes the more realization of the deductions of the multinational models.Based on the chapter 3, chapter 4 mainly deals with the overall spatial distribution of the multinational firms in the world. It compares the flows and stocks of multinational investment and absorption from the spatial and geographical viewpoint of the developing and developed countries after the statistical analysis of data. The surveys show that the developed countries are dominant no matter in flows or stocks. Further, it analyzes the phenomena from the two aspects of the developed and developing countries in NEG's perspective. The developed countries are dominant in the horizontal FDI and mostly are out of the transport-cost consideration. The vertical FDI is also carried out between developed countries. The form of vertical specialization divisions has transformed from the industry-level divisions to the segmentation of productive phases within the multinational firms, but the secondary position of the developing countries has not changed fundamentally. For most developing countries, both the overseas investment and the absorption of foreign investment are obvious little because of the low level of industrial agglomeration and so on according to the backward economic development.Chapter 5 considers the spatial distribution of the multinational firms in China. The greenfield investment is the major pattern in the absorption of FDI in China. Therefore, the location choice of the multinational firms plays a particularly important role in the formation and evolution of economic geography in China's mainland. At the same time, China's absorption of FDI greatly exceeds the overseas direct investment (ODI). The quantity of absorption is close to that of the developed countries, while the relative proportion of the quantity of FDI to that of ODI is lower than the average of the developing countries. The quantity of absorption and the role of FDI to drive economic growth are both on the upward trend. Seen from the perspective of the international models in the NEG, multinational firms choose to invest in China's mainland may be out of the following considerations. (1) the advantage of low costs; (2) the influences of transport costs; (3) the forwards and backwards linkages of production; (4) the influences of international industry-transfer trend; (5) the price rising of immobile factors, congestion and other external diseconomy; (6) policy and institution elements; (7) the influences of other multinational firms or demonstration effects and so on. Further more, it analyzes the concrete regional distribution of multinational firms in China's mainland from two viewpoints of macro regions and multinational firms. And a common feature is that the multinational firms invest little in western China.Chapter 6 examines the reason why the multinational firms invest so little in western China principally using the CP models as analysis tools. The reasons are as follows. (1) Because of the remote geographic location and high transport costs, it's inconvenient to enter the world market. (2) The level of industrial agglomeration is low. (3) The accumulation of human capital is small. (4) The policies towards attracting FDI have not achieved the desired effects. (5) The institutional involvement of multinational firms is difficult. (6) The present residence registration policy in cities and towns limits the scale of industrial agglomeration and obstructs indirectly the investment of multinational firms.Chapter 7 puts forward policy proposals about how to attract foreign investment in western China based on the summary of the main conclusions. The first nature of geography is the principal basis of regional policies, while the implementation of the policies may intensify or weaken regional disparity. The western China should consider the following policies and measures in order to attract more multinational firms. (1) It should select the policy regions rationally and makes clear first of all which regions and cities need attracting more investment. (2) It should be cautious to choose policies and pays attention to the regional side-effects of policies and tries to avoid the conflicting effects among policies. (3) The threshold effects of policies must be faced up to and persistent policies should be chosen according to the regional developing goals. (4) The common expectations of the firms may be directed by policies and the rational location choice of one firm is also the location he thinks other firms may choose. (5) The strategic location policy among the local governments in western China should be coordinated because of the selection effects of policies. (6) It should identify the target firms of policies and attracts selectively the most possible multinational firms that may invest in the western China due to the existence of heterogeneous firms. (7) It should establish channels of information communication and improve the infrastructure and so on to cut down expenses in transport costs in broad sense. (8) When the primary policies targets are determined, it should selectively institute the detailed incentive policies for multinational firms, lies emphasis on the track of industrial development and the establishment of industrial linkages, pay attention to attracting the foreign investment of the key technological sectors and offer special preferential policies to the leading firms.