Agglomeration, Externalities And The Location Choice Of FDI

The large amount of FDI flowing into China not only has relieved the problem of capital shortage in the process of economic development in our country, but also has brought advanced technology and management experience which has made great contributions to the rapid growth of China's export-oriented economy. However, FDI's regional distribution takes on an imbalanced spatial pattern in China. The disparities of FDI may widen the economic gap among eastern, middle and western areas, and prevent China's economy from developing continuously, soundly and harmoniously. Therefore, in order to take advantage of different areas to the maximum extent, deepen the level of opening to the outside and promote the regional economy to develop in harmony, studying the differences of the factors which influence FDI's location choice in different regions and putting forward suitable policy suggestions to each region in China seems very important and meaningful.This paper firstly reviews some theoretical and relevant empirical studies of FDI's location choice.Then using the basic theories of spatial economics and viewing from externalities,the paper constructs a theoretical framework of FDI's location choice based on externalities in order to investigate the relationships among agglomeration,externalities and FDI's location choice. Actually,FDI's location choice is affected by the externalities caused by agglomeration.On the one hand, FDI's location is affected by pecuniary externalities by means of market access effect and cost of production effect which attracts FDI to flow into the cluster. Besides, path dependence and circular causation effect helps FDI to form a "self-reinforcing" mechanism.On the other hand, the mechanism by which technological externalities influence FDI's location choice is a "social learning process"in nature:firstly,MNCs can benefit from knowledge spillover through the trade with other enterprises and the mobility of human capital,which is considered as a passive learning process;secondly, MNCs can benefit from the cooperative R&D activities carried out with native R&D institutions and learning by doing in the learning network of the industry cluster,which is viewed as an active learning process.Further more, on the basis of the framework above, combining the characteristic facts of China since the open and reform policy was introduced and using the provincial panel data from 1992 to 2006,this paper analyses how the transmission mechanism of externalities influence FDI's location choice in the east, the middle and west in China. According to the empirical results, the author draws some conclusions as followed: firstly, pecuniary externalities play a positive role significantly in attracting FDI; secondly, technological externalities have no influence on FDI's laction choice;thirdly,different areas are affected by different traditional factors.Finally,according to the conclusions above,the author puts forward some policy suggestions to different regions.