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Foreign Direct Investment and Industrial Agglomeration: Evidence from China

Author

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  • Wen-Tai Hsu

    (School of Economics, Singapore Management University)

  • Yi Lu

    (Tsinghua University)

  • Xuan Luo

    (INSEAD)

  • Lianming Zhu

    (Osaka University)

Abstract

This paper studies the effect of foreign direct investment (FDI) on industrial ag-glomeration. Using the differential effects of FDI deregulation in 2002 in China on different industries, we find that FDI actually affects industrial agglomeration neg-atively. As FDI brings technological spillovers and various agglomeration benefits, other forces must be at work to drive our empirical finding. We propose a simple theory that FDI may discourage industrial agglomeration due to fiercer competition pressure. We find various evidence on this competition mechanism. We also examine an alternative theory based on spatial political competition, but find no evidence sup-porting it. On industrial growth, we find that FDI deregulation is conducive, but the dispersion induced by FDI deregulation reduces the positive effect of FDI on growth rate by 16 to 19%.

Suggested Citation

  • Wen-Tai Hsu & Yi Lu & Xuan Luo & Lianming Zhu, 2020. "Foreign Direct Investment and Industrial Agglomeration: Evidence from China," Economics and Statistics Working Papers 11-2020, Singapore Management University, School of Economics.
    • Handle: RePEc:ris:smuesw:2020_011
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    Cited by:

    1. Erten, Bilge & Leight, Jessica & Zhu, Lianming, 2023. "The Effects of FDI Liberalization on Structural Transformation and Demographic Change: Evidence from China," IZA Discussion Papers 16094, IZA Network @ LISER.
    2. Dan Zhou & Xue Li & Yao Yao & George S. Chen, 2025. "“If you build it, will they come?”—Did city commercial bank development shape the spatial evolution of foreign direct investment in China?," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 74(2), pages 1-30, June.
    3. Zhang, Yinze & Ruan, Jianqing & Zhang, Yuwei, 2025. "Industrial policies and development of grain clusters: Evidence from China's policy in major grain-producing areas," China Economic Review, Elsevier, vol. 93(C).
    4. Hayato Kato & Toshihiro Okubo, 2022. "The Resilience of FDI to Natural Disasters Through Industrial Linkages," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 82(1), pages 177-225, May.
    5. Lyu, Wenyi & Yang, Jian & Yu, Leng, 2025. "Place-based policies, pro-competitive effects, and allocative efficiency: Evidence from China’s economic zones," World Development, Elsevier, vol. 191(C).
    6. Yu, Li & Zhao, Siyuan & Liu, Chen & Chen, Fenglan, 2025. "The acceleration and attenuation: Internet infrastructure and employment adjustment patterns," Structural Change and Economic Dynamics, Elsevier, vol. 75(C), pages 726-743.
    7. Xiang, Xunyong & Liu, Ruier & Luo, Wenjie, 2024. "Pollution haven or pollution halo? Testing direct and spillover effects of FDI," China Economic Review, Elsevier, vol. 88(C).
    8. Zhao, Wei & Wei, Xiangyu & Li, Yunong, 2024. "Foreign M&A and inventory adjustment: Evidence from Chinese manufacturers," Journal of Asian Economics, Elsevier, vol. 90(C).
    9. Nádia Campos Pereira Bruhn & Marco Túlio Dinali Viglioni & Cristina Lelis Leal Calegario & Claure Morrone Parfitt, 2025. "Foreign Direct Investment, Industry Agglomeration, and Regional Innovation in Brazil," Journal of Industry, Competition and Trade, Springer, vol. 25(1), pages 1-22, December.
    10. Huang, Xiaodi & Chen, Xiaoxiong & Liang, Zuming & Wu, Hongjie & Kang, Siyang, 2025. "Fair competition and investment behavior of foreign-invested firms—Evidence from a quasi-natural experiment in China," Economic Analysis and Policy, Elsevier, vol. 85(C), pages 2234-2246.
    11. Li Li & Hui Yong & Zhenhua Zhang, 2025. "The impact of two-way foreign direct investment on industrial green development: perspective of international cooperation on production capacity in China," Economic Change and Restructuring, Springer, vol. 58(2), pages 1-25, April.
    12. Wang, Xiaotong & Wang, Yuezhu & Li, Gujie, 2025. "The impact of FDI on the development of China's low-carbon economy in the context of the “Dual Circulation” policy," Economic Analysis and Policy, Elsevier, vol. 86(C), pages 321-335.
    13. Wei Wei & Qiyuan Li & Qianqiu Jin & Chunyan Huang, 2025. "Unleashing the Impact of Outward Foreign Direct Investment on the High-Quality Development of High-Tech Manufacturing Industry: Evidence from China," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 16(3), pages 13080-13097, September.

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