The Institute for Economic and Social Research (IESR) SEMINAR, NO.66

Topic： FDI and Agglomeration: Evidence from FDI Deregulation in China and an Explanation

Speaker：Wen-Tai Hsu

Date：October 27, 2017

Time: 13:30-14:45

Venue: Conference Room 106B, Zhonghui Building

Sponsor：The Institute for Economic and Social Research

Introduction to Wen-tai Hsu：

en-Tai Hsu is an Associate Professor of Economics in the School of Economics at the Singapore Management University (SMU). He holds a Ph.D. in Economics from the University of Minnesota (2008). Prior to SMU, he has taught at the Chinese University of Hong Kong and the National University of Singapore. He is generally interested in applied micro theory, and focuses on topics in international, urban, and regional economics. His research topics include heterogeneous firms in international and regional trade, agglomeration, central place theory, transportation policy, urban growth, income inequality and economic growth. He was awarded the Austin Robinson Memorial Prize for his paper on city size distribution published in the Economic Journal in 2012. He is an associate editor of Academia Economic Papers since 2015, and served a guest editor for the special issue on international, regional, and urban economics in the same journal. He is also on the editorial board of the Journal of Economic Geography since 2017.

Abstract:

This paper studies the effect of foreign direct investment (FDI) on industrial agglomeration. Using the differential effects of FDI deregulation in 2002 in China on different industries, and using both the Ellison-Glaeser index and geographic Gini as measures of industrial agglomeration, we find that there is FDI actually negatively affects agglomeration. This result is somewhat counter-intuitive, as the conventional wisdom tends to think that FDI capital/firms attract domestic firms to cluster around them for various agglomeration benefits and technological spillover, in particular. To comprehend this result, we develop a theory of FDI and agglomeration based on two counter-veiling force. On the one hand, technology diffusion from FDI does attract domestic firms to be around them; on the other hand, fiercer competition drives firms away. Our theory indicates that which force dominates depends on the scale of the economy. When the scale of the economy is small, FDI promotes agglomeration because competition is not fierce; otherwise, FDI promotes dispersion. Our evidence also shows that the FDI deregulation also leads to lower firm profits and markups, supporting the mechanism of the theory.