FDI agglomeration change in China

No previous research has considered the changing agglomeration effect of foreign direct investment (FDI). The purpose of this paper is to fill the gap in the literature.

The paper uses China as the object of study and examines the centripetal and centrifugal forces associated with FDI clustering over time.

Through studying the FDI determinants for the 29 Chinese provinces from 1993 to 2008, the empirical analysis supports a weakening agglomeration effect of FDI over time in China and further suggests that the effect has nearly vanished in the past few years.

Data availability restricts the analysis to using provincial aggregate data and so further research is called for. It would provide more accurate and insightful information to study the FDI agglomeration effects at a finer level, using more disaggregated city‐level data by sector and by source country.

As the Chinese government has been making efforts to direct FDI to inland areas, this research provides immediate policy implications. Policy‐makers' investment incentives to direct FDI could go to waste when the agglomeration effect of FDI is too strong. The incentives should be able to achieve a much larger effect when the agglomeration effect becomes less strong.