Agglomeration Economies, Competition Of Regional Governments And Spatial Distribution Of FDI:Theoretical Analysis And Evidence From China

For FDI in China, there are some obvious features of the distribution of space and industry. FDI is mainly concentrated in the eastern coastal regions, and comes from a small number of countries and regions such as East Asia, North America and Western Europe. And FDI is mainly focused on sub-sectors of manufacturing sector. For FDI’s spatial correlation, making use of spatial statistical indicators of global and local Moran index and Getis index, we find that FDI’s spatial concentration patterns tend to be high-high and low-low. For FDI agglomeration in the industry level, we calculate EG Index and find that the degree of agglomeration of FDI enterprises and domestic ones are both increased, but the high-agglomerated industries are significantly different for the both. If FDI is broken into two types of pollution-intensive and non-pollution intensive, the former is more agglomerated and its agglomeration speed is also more than the latter, which lies in the agglomeration type of pollution-intensive industries transfer from low-type agglomeration and moderate-type one to high-type one. Competition for FDI among regions coexists with the stylized facts of FDI agglomeration. If investigate competition for FDI with different stages, we will find that the competing policy tools vary with stages and competition becomes fierce with time along the past30years. These stylized facts imply that more intensified competition for FDI is the most important factor affecting the spatial distribution of FDI. Some scholars realize the relation and carry on some studies. In all the competing tools of local governments, fiscal policy and environment regulation are focus of research. It’s worth noting that most such studies investigate only one factor and lack comprehensive vision. In addition, previous studies almost overlook an important factor, which are agglomeration economies.Agglomeration economies considered, it’s not difficult inferring that regions with large stock of FDI can rely on agglomeration economies, but the ones with few stock of FDI depend on more preferential policy. Thus there are at least two factors affecting the spatial distribution of FDI, which are competition of local governments and agglomeration economies.The purpose of this paper is that taking into account the interaction of agglomeration economies, competition of local government and spatial distribution, appropriate mechanism is sorted out and model formed in comprehensive vision.A theoretical model is constructed to analyze the interaction between agglomeration economies and regional competition policy for FDI. The starting points of this model are:the local governments are long-lived, foreign capital is short-lived in two periods due to depreciation and other reasons. So the local governments must continue to participate in the competition for FDI. The basic logic of the model is simple. The stock of incumbent FDI can produce agglomeration economies and be helpful for attracting new FDI. At the same time, local governments’preferential policies also attract new FDI. The current agglomeration economies will affect the current preferential policies, and the current preferential policies will affect the keep or lose of agglomeration economies at the next period. Thus agglomeration economies and preferential policies form an infinite repeated interaction. We use a Markov perfect equilibrium method to deal with this indefinitely dynamic game. First, regional differences ignored, the analysis indicates:all others keep same, regions owning agglomeration economies, compared other regions owning no one, can impose a higher tax rate on foreign capital, or more broadly, can give a less preferential policy and get more tax revenue at the same time. Location advantages and agglomeration economies integrated into competitive advantage, we can include the differences in location advantages. We get the similar conclusion:regions owning competitive advantage can levy higher taxes on foreign capital, or give less preferential policies; if location advantages remain unchanged, the change of agglomeration economies will intensify or weaken the FDI competition among regions.For the existence of interaction of agglomeration economies and the policy tools of local governments, we introduce interaction terms of the two to avoid omitted variable bias in previous empirical studies and to get more robust conclusion. And taking into account of the strategic interaction among local governments and the spatial effects of agglomeration economies and market potential, we adopt spatial panel econometric models. Our empirical studies expand into three parts and two levels:(1) empirical research on the existence of tax competition for FDI among regions and the spatial relation;(2) empirical research on location, agglomeration and competition for FDI among regions based on the level of provinces and prefecture-level cities;(3) empirical research on agglomeration economies and regional environmental regulation competition for FDI. Taking into account the strategic interaction of local governments and spatial spillover effects of agglomeration economies and market potential, we adopt the spatial panel econometric models. We find that:(1) tax competition for FDI among regions do exist and its type is strategy complementary;(2) the effect of agglomeration economies attracting FDI is more obvious in the eastern region of China, and the average tax rate levied on foreign companies is higher than the one of Mid-west of China;(3) tax remains an important factor in attracting FDI, but its importance tend to diminish. FDI in central and western regions are more sensitive to tax rates, and labor costs and improved traffic conditions be more effective in attracting FDI in the Midwest;(4) the presence of agglomeration economies strengthen regional tax competition for FDI;(5) regulation intensity is more effective on the eastern non-pollution-intensive foreign companies as well as pollution-intensive foreign companies on the central and western regions. The eastern non-pollution-intensive foreign companies prefer to more stringent environmental regulation, while the mid-western pollution-intensive foreign companies prefer a more relaxed environmental regulation. For the eastern non-pollution-intensive foreign companies, agglomeration economies weaken environmental regulation competition for foreign companies. Pollution-intensive foreign companies in the central and western regions, agglomeration economies do the same.The empirical results show that eastern China and mid-western regions in attracting FDI has been at a different stage, so our policy recommendations are:(1) eastern region should strengthen the institution construction, improve the soft enviromnent and not appropriate to carry out the extensive tax price competition again, and even reduce tax incentives to improve the quality of FDI by forming a filter mechanism;(2) mid-western regions can strengthen the infrastructure and continue to keep the relatively low wages in order to undertake the migrating FDI from eastern regions. So that the whole of China can take full advantage of the different levels of FDI from high to low gradient;(3)For the operation of a filter mechanism due to environmental regulation, more stringent environmental regulation will attract the non-pollution-intensive foreign companies, while the relatively loose environmental regulation the pollution-intensive foreign companies. If a region wants to attract foreign capital for developing her economy and has to control environmental pollution, she could choose to strengthen environmental regulation.