"Proximity-Concentration" Analysis Based On Heterogeneous Firm Model

There are two alternative ways of foreign market penetration, namely "Proximity-Concentration" analysis:one is concentration on domestic production and exporting to foreign country, the other is foreign direct investment (FDI) by proximity to foreign market."Proximity-Concentration" mainly demonstrated the questions that which way is more preferable and their affecting factors.This paper is commenced in the framework of the "Proximity-Concentration" theory and focus on this degree to discuss the Heterogeneous Enterprises Model. First, This article combs the development process of "Proximity-Concentration" issue systematically and analyze the "Proximity-Concentration" factors that might affect the option of firms on derivation of the benchmark model basis. The implication of the benchmark model is that:When transport costs or tariff barriers are higher, and Plant-level fixed costs compared to firm-level fixed costs are lower, firms will prefer FDI to export. In contrast, export will be more preferred. Second, this paper extends the "Proximity-Concentration" benchmark model by bring factor price and foreign market size in. The conclusion is larger foreign market size and smaller factor price difference will attract more FDI. Finally, this paper introduces the Heterogeneous Enterprises Model into the "Proximity-Concentration" theory and come to the conclusion that enterprises with the lowest productivity can only serve in the domestic market; enterprises with higher productivity can not only sell in domestic market, but also export to foreign markets; and the enterprises with the highest productivity can not merely serve the domestic market, but also penetrate into foreign markets through FDI.This paper, based on a summary of the "Proximity-Concentration" factors, sets up a more comprehensive empirical model compared to Brainard(1997) and Help man, Melitz and Yeaple (2004). In this model, the paper re-validates the "Proximity-Concentration" influencing factors using recent Chinese statistical data. The empirical study results show that except the difference of elements prices which empirical result is not significant, the theoretical prediction results of "Proximity-Concentration" factors—transport costs, tariff barriers, Plant-level fixed costs, firm-level fixed costs and foreign market size are supported by empirical data.