| China has become the nation with the largest inflow of FDI among the developing nations. But the effect of FDI is much different between the macro and industrial levels. The effect of FDI on the industrial level is not optimistic. For example, high-tech industry depends on FDI seriously. Besides, industrial linkages are not strong and the root of FDI industry is not strong etc. In order to improve the quality of FDI and realize the coordination of foreign investment and domestic investment, we study the industrial effect of FDI. Through the combination of theoretical and empirical analysis and based on the foreign direct investment theories and the industrial analysis of transnational companies, we have made a deep and systematic study on the industrial effects of FDI under the assumption of incomplete industrial market. We have not only explained the mechanism of industrial effects of FDI in theory, but also analyzed the system and affecting factors of it through models. Finally, we take Jiangsu Province as the example to make empirical tests and put forward the coordinating polices to improve the industrial effects of FDI.Under the assumption of externality of FDI, incomplete market and the cluster theories, multinational companies, as the media of FDI, have shown an extent of industrial characteristics not only at the stage of enlargement of international supply chain and cluster, but also at the stage of integration. We think that the industrial effects of FDI are just the investment behavior of multinational companies. It goes through the organic inflow of capital, commodities and labor force, and changes the structure of demand and resource in host nations on the industrial levels. It influences the economic effects indirectly and such changes will penetrate into the inner industry in host nations indirectly through transmitting mechanisms. Thorough the arrangement of production and the factors flowing into the other firms and connecting industries, it can also encourage the contacts among the domestic industries, firms and international economy and improve the integrated performance of industrial effects. Because it takes some time to realize industrial growth, FDI will affect total industrial investment, industrial linkage and show some cluster characteristics in host nations during the course of capital formation and optimization on industrial structure and industrial organization. Thus, the indirect effects of FDI include industrial investment effect, industrial linkage effect and industrial cluster effect.The industrial investment effect is the course that FDI affects the domestic capital stock on the industrial level. The relationship of FDI and domestic investment on the industrial level mainly depends on the choice of production function, but the impact of FDI on domestic capital stock in any industry depends on the motive of FDI and characteristics of souring industries. Normally, market-seeking FDI is inclined to have positive effects while the cost-driving FDI can have positive and negative effects at the same time. More inelastic of the industrial demand and bigger percentage of multinational companies, the positive effects of vertical FDI will be bigger. FDI in input industry tends to have positive effects on domestic capital stock, while FDI in output industry may have double effects.The industrial linkage effects of FDI are the impacts on the upper and lower industries after its entry into host nations and induced changes at the same time, which include initial production effects after entry and feedback effects with linkages with local firms. Besides, multinational companies on upper and lower reaches usually have different performance and impact. When the foreign companies are on the lower reaches, the exporting tendency of foreign projects is bigger and the difference between the foreign project and local firms is bigger, foreign projects will use more local intermediate goods. Then the initial effects of FDI will turn bigger. When the extent of incomplete competition on upper reaches is higher, the feedback effect will be bigger. When the elasticity of products on lower reaches is bigger, the potentiality to enlarge the sale at the price of import will be bigger. The feedback effects enlarge the output deeply and improve the welfare.The industrial cluster effect of FDI is the interaction mechanism and interaction effect between FDI and cluster during the agglomeration, and mainly behaves the positive interaction between FDI and cluster. Usually, interaction mechanism is the assurance of interaction effect. Under the premise of interaction mechanism between FDI and industrial cluster, the realization of interaction effect has two steps. Firstly, industrial clusters form the attraction of FDI. Secondly, FDI strengthens the motive of industrial clusters. We can look on the upgrading of FDI cluster as the development of industrial effects, which arises the positive interaction effects between FDI and industrial clusters.Based on the above theoretical analysis, we choose Jiangsu province to make empirical analysis and have found the industrial heterogeneity of industrial effects of FDI. Moreover, the industrial linkage effects and industrial cluster effects can also affect the industrial investment effects of FDI. Finally, we put forward the coordination of FDI policy and industrial policy with objective of improving the industrial effects of FDI. On the basis of industrial effects, the adjustment of FDI policies include the introduction of foreign projects with high industrial linkages to foster domestic related industries, the encouragement of transnational merger to strengthen the backward linkages between foreign firms and local firms, the emphasis on the orientation of cluster region and industry choices, and the optimization of internal cluster structures and the guidance of development with the service function of cluster polices. Based on the industrial effects, the adjustment of industrial polices include the substation of cluster policy for traditional industrial polices and deepening the industrial cluster polices on the basis of industrial effects of FDI.
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