FDI location choice: agglomeration vs institutions

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.

What attracts foreign direct investment in China’s real estate development?

“…Regional governance mainly refers to various aspects of government institutions such as government intervention in the private sector, government protection of property rights, legal infrastructure and law enforcement (Du et al 2008). Regions with weak public institutions are typically characterized by heavy government intervention, inadequate protection of property rights and severe corruption, which may increase the expropriation risks to FDI.…”

“…Studies confirm the impacts of regional governance on the location of foreign firms in China. For instance, Du et al (2008) found that less government intervention into business, better IPR protection and less corruption attract more foreign investments from the United States. To guarantee higher returns to capital, FDIRE would particularly favor those regions with supportive and conductive institutions.…”

“…Previous studies, however, focused primarily on aggregate or manufacturing FDI in China and concluded many factors explaining the location decisions or distribution of FDI in China. Such location factors mainly include market size and potential, labor costs and quality, agglomeration economies, regional governance, institutional quality, governmental policies, transportation infrastructure (Wei et al 1999;Cheng and Kwan 2000;Cheng and Stough 2006;Cheng 2006;Du et al 2008;He 2002He , 2003He , 2006Sun et al 2002). Locations of service FDI in China remain rather under-researched although there are some studies examining foreign investment in banking and insurance, and logistics industries (Wu and Strange 2000;Hong 2007;He and Fu 2008).…”

Guided Through the 'Red Tape'? Information Sharing and Foreign Direct Investment

“…7 Consistent with this argument, Crozet et al (2004) and Du et al (2008) find that the tendency for foreign investors to cluster within a host country is strongest for investors from the same source country.…”

Allocation of foreign direct investment across brazilian states

“…Chakrabarti (2003) combined the theory of international trade under imperfect competition with the literature on the organizational strategy of multinationals to create a structural model that evaluates the role of several potential determinants on the spatial location of FDI. Du, Lu & Tao (2008), in turn, discussed the benefits of the agglomeration of firms as another important determinant of FDI, separating agglomeration into two types: vertical and horizontal. Vertical agglomeration refers to the existence of companies related to the production chain of the foreign capital enterprise (FCE), i.e., the existence of input suppliers, distributors and customers in the FCE sector.…”