Spatial agglomeration, FDI, and regional growth in China: Locality of local and foreign manufacturing investments

While China remains as the largest foreign direct investment (FDI) host country among all developing nations, the nearby Hong Kong and Taiwan are the two dominating sources of manufacturing FDI among all FDI origins. FDI absorption in the case of China could be well explained by Krugman [Krugman, P. (1991a). Increasing returns and economic geography. Journal of Political Economy, 99, 483-499] core (Hong Kong)-periphery (Guangdong, China) system and the critical role of spatial agglomeration in directing foreign investments. This paper aims at understanding the “spatial dimension” of firm concentration and its economic interactions with growth in China as well as how firm locality is related to institutional factors, such as regional policy on FDI, investment source, gravity of the core city, and natural geographic aspects. The effects of spatial agglomeration and FDI on regional output growth and their structural relations with endogenous FDI are addressed. Using a micro-(firm) level data consisting of 55,348 local Chinese and foreign manufacturing firms investing in Guangdong, China, research results show that other than institutional forces, spatial agglomeration and their synergies as well as gravity have directed the patterns of inward FDI and further, induced regional GDP growth.