Local Government Competition And Unbalanced FDI Distrubition

The introduction of foreign capital is conducive to expand investment, create jobs, increase tax revenue and promote industrial upgrading. But since the reform, the level of using foreign capital to develop among regions is very uneven. At the same time, the extensive merchants and attract investment based on the scale expansion has exposed many issues such as regional disorderly competition, pollution of the environment and regional development. Therefore, study the process and the competition of local governments to attract foreign investment is of great significance to regulate the merchants behavior of local governments, to promote the rational distribution of foreign investment in China, as well as to promote the optimization and upgrading of industrial structure.Since local government merchants and attract investment has the characteristics of bi-directional choice, decentralized decision-making and preference differences, using bilateral matching model can study the process of merchants and attract investment very well. The preference differences of the merchants and attract investment participants are the basis of bilateral matching. For investment firms, their preferences’ formation is influenced by two types of factors. One is the environment-related factors, including the market, the cost, the social environment, the basis for industrial development and the combined effect. The other is the policy-related factors, which means that local governments can change the competition strategy participating in the merchants and attract investment, mainly including preferential tax treatment, land premium concessions, financial return, lowering the investment threshold and so on, while different policies have different influences on investment manufacturers. As for the government, their preferences formation also need to consider the various attributes of investment projects, including economic, social and ecological benefits and their own quality.The study has found that:the merchants and attract investment is a decentralized matching process, but using a deferred acceptance algorithm in which the investment manufactures make a propose and the centralized matching algorithm can be realized in a decentralized matching process theoretically; the result of matching is the optimal stable matching of investment vendors, so in theory, the investment market will be relatively stable;lacking the differences of local government preferences will leads to investment project concentration, focused around too much competition, in other words, the competition around big projects is too fierce, which will result in great decline of the welfare of the local government and will make the matching results imbalance. Empirical research further shows that the geographical distribution of investment really has a highly uneven characteristic, and the foreign capital regional flow is influenced not only by environmental factors, but also by policy factors.From this study, there are two ways to improve local government merchants and attract investment. First, improve the matching mechanism, establishing a institution like central clearing institutions; Second, transform government functions, thereby reduce the preference consistency.