China's Foreign Trade "home Market Effect"

New Economic Geography emphasizes economies of scale as the driving force of regional and international trade, as reflected in Krugman's "Home Market Effects". Home Market Effect means that, in a world with increasing economic returns and trade costs, those countries which have larger home market demand will be the net exporters.Since from 1980, both theoretical and empirical studies about "Home Market Effect" have been widely analyzed by many famous economists. However, in China, the theory has not been emphasized. There is few literatures and documents in this field. If we can apply this theory in research of China's foreign trade, it will be of great significance to sustainable development of foreign trade.In this paper, we start from reviewing some related literature about home market effect. Then, we revised and expanded Feenstra's model (2001), and interpret each explanatory variables. By comparison of correlation coefficient between exporting country's GDP and importing country's GDP, we can measure some industry's home market effect.With Feenstra's gravity equation and export data in 2005-2008 with the main importing countries in 20 SITC four-digital industries, this paper expects to find the "Home Market Effects" in China's 15 export industries(5 industries cancelled due to lack of sufficient data). We hope to provide some reference for deeply researching trade policies and measures on expansion of our export. The results are quietly different from Feenstra's. Based on model and China's actual conditions, we make explanations from 4 aspects, especially from recent development levels of some industries in China.Finally, we raised a number of policy recommendations:firstly, to encourage product innovation and strive to create differentiated products; secondly, better use of domestic market conditions and stimulate domestic market demand; thirdly, use national policy guidance to encourage industries with the characteristic of home market effect to develop faster.