IDEAS home Printed from https://ideas.repec.org/a/ijf/ijfiec/v13y2008i1p92-107.html
   My bibliography  Save this article

FDI location choice: agglomeration vs institutions

Author

Listed:
  • Julan Du

    (Department of Economics, Chinese University of Hong Kong, Hong Kong)

  • Yi Lu

    (School of Business, University of Hong Kong, Hong Kong)

  • Zhigang Tao

    (School of Business, University of Hong Kong, Hong Kong)

Abstract

Using an extensive data set on foreign invested enterprises in China from US, EU, Japan and Korea, we explore the role of agglomeration economies (network externalities) and government institutions as well as other more traditional factors in determining the (regional) locational choice of foreign direct investment (FDI). Employing firm-level discrete choice model, we find that provinces with stronger public institutions and higher horizontal and vertical agglomerations tend to attract more foreign investments. Furthermore, we explore the interplay of institutions and agglomeration economies. We detect that foreign horizontal agglomeration can partially overcome the negative impact of weak institutions on FDI entry. However, we obtain mixed evidence regarding the interplay between institutions and domestic horizontal agglomeration or vertical agglomeration. Copyright © 2007 John Wiley & Sons, Ltd.

Suggested Citation

  • Julan Du & Yi Lu & Zhigang Tao, 2008. "FDI location choice: agglomeration vs institutions," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(1), pages 92-107.
  • Handle: RePEc:ijf:ijfiec:v:13:y:2008:i:1:p:92-107
    DOI: 10.1002/ijfe.348
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1002/ijfe.348
    File Function: Link to full text; subscription required
    Download Restriction: no

    References listed on IDEAS

    as
    1. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 1999. "The Quality of Government," Journal of Law, Economics, and Organization, Oxford University Press, vol. 15(1), pages 222-279, April.
    2. Robert E. Hall & Charles I. Jones, 1999. "Why do Some Countries Produce So Much More Output Per Worker than Others?," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 83-116.
    3. Frye, Timothy & Shleifer, Andrei, 1997. "The Invisible Hand and the Grabbing Hand," American Economic Review, American Economic Association, vol. 87(2), pages 354-358, May.
    4. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, vol. 91(5), pages 1369-1401, December.
    5. Head, Keith & Ries, John & Swenson, Deborah, 1995. "Agglomeration benefits and location choice: Evidence from Japanese manufacturing investments in the United States," Journal of International Economics, Elsevier, vol. 38(3-4), pages 223-247, May.
    6. Shang-Jin Wei, 2000. "Local Corruption and Global Capital Flows," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2), pages 303-354.
    7. Yuko Kinoshita & Nauro F. Campos, 2003. "Why Does Fdi Go Where it Goes? New Evidence From the Transition Economies," IMF Working Papers 03/228, International Monetary Fund.
    8. Paul Krugman & Anthony J. Venables, 1995. "Globalization and the Inequality of Nations," The Quarterly Journal of Economics, Oxford University Press, vol. 110(4), pages 857-880.
    9. Venables, Anthony J, 1996. "Equilibrium Locations of Vertically Linked Industries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(2), pages 341-359, May.
    10. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-499, June.
    11. Amiti, Mary & Smarzynska Javorcik, Beata, 2008. "Trade costs and location of foreign firms in China," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 129-149, February.
    12. Pranab Bardhan, 1997. "Corruption and Development: A Review of Issues," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1320-1346, September.
    13. repec:hhs:iuiwop:430 is not listed on IDEAS
    14. Head, Keith & Ries, John, 1996. "Inter-City Competition for Foreign Investment: Static and Dynamic Effects of China's Incentive Areas," Journal of Urban Economics, Elsevier, vol. 40(1), pages 38-60, July.
    15. Shang-Jin Wei, 2000. "How Taxing is Corruption on International Investors?," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 1-11, February.
    16. Alwyn Young, 2000. "The Razor's Edge: Distortions and Incremental Reform in the People's Republic of China," NBER Working Papers 7828, National Bureau of Economic Research, Inc.
    17. Daron Acemoglu & Simon Johnson & James A. Robinson, 2002. "Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1231-1294.
    18. Cheng, Leonard K. & Kwan, Yum K., 2000. "What are the determinants of the location of foreign direct investment? The Chinese experience," Journal of International Economics, Elsevier, vol. 51(2), pages 379-400, August.
    19. repec:hrv:faseco:30747160 is not listed on IDEAS
    20. repec:hrv:faseco:30725664 is not listed on IDEAS
    21. Bai, Chong-En & Du, Yingjuan & Tao, Zhigang & Tong, Sarah Y., 2004. "Local protectionism and regional specialization: evidence from China's industries," Journal of International Economics, Elsevier, vol. 63(2), pages 397-417, July.
    22. Besley, Timothy, 1995. "Property Rights and Investment Incentives: Theory and Evidence from Ghana," Journal of Political Economy, University of Chicago Press, vol. 103(5), pages 903-937, October.
    23. Alwyn Young, 2000. "The Razor's Edge: Distortions and Incremental Reform in the People's Republic of China," The Quarterly Journal of Economics, Oxford University Press, vol. 115(4), pages 1091-1135.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Frederiks, Elisha R. & Stenner, Karen & Hobman, Elizabeth V., 2015. "Household energy use: Applying behavioural economics to understand consumer decision-making and behaviour," Renewable and Sustainable Energy Reviews, Elsevier, vol. 41(C), pages 1385-1394.
    2. Rogers, Cynthia L. & Wu, Chen, 2012. "Employment by foreign firms in the U.S.: Do state incentives matter?," Regional Science and Urban Economics, Elsevier, vol. 42(4), pages 664-680.
    3. Iris Claus & Les Oxley & Siqi Zheng & Cong Sun & Ye Qi & Matthew E. Kahn, 2014. "The Evolving Geography Of China'S Industrial Production: Implications For Pollution Dynamics And Urban Quality Of Life," Journal of Economic Surveys, Wiley Blackwell, vol. 28(4), pages 709-724, September.
    4. Blanc-Brude, Frédéric & Cookson, Graham & Piesse, Jenifer & Strange, Roger, 2014. "The FDI location decision: Distance and the effects of spatial dependence," International Business Review, Elsevier, vol. 23(4), pages 797-810.
    5. repec:eee:riibaf:v:42:y:2017:i:c:p:630-644 is not listed on IDEAS
    6. Antonio Baez, 2014. "“A panel data analysis of FDI and informal labor markets”," IREA Working Papers 201404, University of Barcelona, Research Institute of Applied Economics, revised Feb 2014.
    7. Nielsen, Bo Bernhard & Asmussen, Christian Geisler & Weatherall, Cecilie Dohlmann, 2017. "The location choice of foreign direct investments: Empirical evidence and methodological challenges," Journal of World Business, Elsevier, vol. 52(1), pages 62-82.
    8. Liao, Tsai-Ju, 2015. "Local clusters of SOEs, POEs, and FIEs, international experience, and the performance of foreign firms operating in emerging economies," International Business Review, Elsevier, vol. 24(1), pages 66-76.
    9. Canfei He & Junsong Wang & Shaoming Cheng, 2011. "What attracts foreign direct investment in China’s real estate development?," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 46(2), pages 267-293, April.
    10. Zheng, Jianghuai & Gao, Yanyan & Hu, Xiaowen, 2008. "企业“扎堆”、技术升级与经济绩效 ——对中国开发区产业集聚的性质及其变迁的实证分析
      [Firm Concentration, Technology Promotion and Economic Performance: An Empirical Study on the Nature and Dynamics of Industrial Clusters in China’s Develop
      ," MPRA Paper 8917, University Library of Munich, Germany.
    11. Loretta Fung & Jin Tan Liu & Deborah L. Swenson, 2014. "Multinational Location Decisions and the Access to Imported Inputs," The Japanese Economic Review, Japanese Economic Association, vol. 65(2), pages 218-237, June.
    12. Colin Wren & Jonathan Jones, 2012. "On the Relative Importance of Intermediate and Non-Intermediate Goods for FDI Location: A New Approach," ERSA conference papers ersa12p165, European Regional Science Association.
    13. Jones, Jonathan & Wren, Colin, 2011. "On the relative importance of agglomeration economies in the location of FDI across British regions," LSE Research Online Documents on Economics 58526, London School of Economics and Political Science, LSE Library.
    14. Zheng, Jianghuai & Gao, Yanyan, 2009. "The nature of economic development zones in China:an empirical study based on data from the Yangtze River Delta," MPRA Paper 33141, University Library of Munich, Germany.
    15. repec:eee:iburev:v:27:y:2018:i:1:p:139-148 is not listed on IDEAS

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ijf:ijfiec:v:13:y:2008:i:1:p:92-107. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum). General contact details of provider: http://www.interscience.wiley.com/jpages/1076-9307/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.