Games Between Local Government And Foreign Direct Investors And Policy Discussion

Since the reform and open of China, foreign corporation played an important role for China, it speeded the economy, optimize the Industry, introduced into international technology and management experience. Competition of FDI lying in local government is an economic phenomenon in China. The local government attracts foreign investment through providing preferential policies, for example, tax concession, reduction and exemption of land royalty, counterpart management service for foreign program, financial guarantee and favorable interest rate. To this economic activity, the domestic scholars have different viewpoint.We studied the competition behavior of local government under the background of domestic economic reform. Basing on the analysis of the game of local purpose of the utilizing FDI in the transitional system, purpose of the paper is to clarify the formation of the game behavior of local government. As a result of the game, we can reveal how it influences the amount of FDI and economic process. We made some theoretic hypotheses for local government behavior, and with these premises employ the game approach set up a mathematical model to imitate the game activities. We expect conclusions can illustrate economic phenomena existing in the game to some extent.Our study of the game divides into three regions. First, we make the hypotheses that local government is homogeneous and preferential policy is their strategy when play the game of FDI. The conclusion is that foreign direct investors have an advantageous position in this game, because of the competition between the local governments. The investors could get the preferential policy witch they want, and local governments stand in a bad disadvantage. Then we loosen the hypotheses made previously and consider local government is different homogeneous, put forward the concept of the transaction cost, think it has determined reputation effect of the local government. Our conclusion is if reputation of local government has difference, local government with better reputation, even if the bid is obviously lower than the local government with worse reputation, will easily win the game with the foreign investor. Finally, we set up the utility functions of the local government and the society. And by comparing these two functions, we found the local governments have the motivation of excessive importation of foreign investment for raising their record. By establishing and comparing utility function of local government and society, to find local government the reason of extremely introducing FDI in order to increase government achievement in formal. Put Guangdong province as an example, we find: FDI has a"squeezing effect"for local economic development.In the end of this article, propose some advice for FDI policy at present in China on the basis of the problem found in previous analysis, including: adjust present FDI tax benefit policy, improve invest environment in local to attract FDI, abolish Super National Treatment"step by step.