The Impact Of Market Potential On Several Problems In Economic Development

Market plays the core role in the economic development. After the reform and open policy in China, the effect of market in economic development comes from both domestic part and international part. According to the new geography theory, this paper uses the concept of market potential to study the effect of domestic and international market on the economic development in China. In the specific analysis, I study the effect of market potential on FDI location choice, innovation output and wage level.About the study of FDI location choice, this paper uses the panel data of Chinese276cities from1996to2008to estimate the effect of market potential on FDI location choice in China. In order to differentiate the impacts of market potential in various markets, we decompose market potential into domestic and international market potential, and the domestic market potential is divided into intra-provincial and inter-provincial parts. Our fixed effect estimation models find that both domestic and international market potential faced by a Chinese city have significantly positive effects on the city's FDI inflow and the impact of domestic market potential on FDI inflow exceeds that of international market potential. In addition, we also find the positive impact of domestic market potential on FDI comes from intra-provincial market potential while inter-provincial market potential has no significant impact on FDI inflow, which implies market segmentation in China.About the study of innovation output, this paper uses the panel data of Chinese276cities from1996to2008and the related patent data to analyze the effect of market potential on innovation by fixed effect model. The advanced technology should have positive technology spillover. However, the empirical result is not so simple. Through interact term, we argue that the effect of advanced technology on home innovation includes promotion and substitution. Until the industry foundation achieve to certain level, the advanced technology shows the promotion effect on home innovation. Then the effect of international market potential will be positive. Specifically, the effect of international market potential on city patent will be positive when the ratio of the second industry arrives to about68%.About the study of wage level, using the panel datasets of the Chinese276prefectural-level cities and39major trade partners from1996to2008, this paper examines the effects of various market potentials on wages. Considering the role of globalization in improvement of the Chinese wages, we separately estimate the impacts of domestic and international market potential on wages. In addition, we decompose domestic market potential into intra-province and inter-province market potential to analyze the wage impact of local protectionism. Our fixed-effect model estimates show that domestic market potential has the largest positive effect on cities' average wages, especially the intra-province part. However, the wage effect of inter-province market potential is not significant, which implies the presence of local protectionism. We also find the international market potential has a significant and positive effect on wage level, implying globalization plays an important role in the Chinese wage increase.The main contribution of this paper is considering the effect of market potential in economic development. Specifically, they are as follows.Firstly, we develop the domestic market potential to the international part. It is necessary for the analysis of economic development. Secondly, we divide the domestic market potential into intra-province part and inter-province part to analyze the inner structure of domestic market. Thirdly, we provide some empirical evidences for innovation theory. Fourthly, we use the city level data to increase the volume and difference of the sample.All the work provides more specific result, and they also improve our understanding on the effect of market potential in economic development.