New Economic Geography and Tax Competition in the PRC: A Firm-Level Data Analysis with Policy Implications

Minsoo Lee
2012 Social Science Research Network  
During 2000-2006, nearly 4,000-5,000 new foreign and domestic enterprises entered the export industry of the People's Republic of China (PRC) yearly, with geographic concentration along the coastal areas. This paper empirically analyzes the spatial determinants of new entrants by applying traditional comparative advantage analysis, new economic geography of agglomeration WKHRU\ DQG WD[ FRPSHWLWLRQ WKHRU\ E\ UHVRXUFH ÀRZ PRGHO 7KH KHWHURJHQHLW\ RI ¿UP RZQHUVKLS DQG WUDGH W\SH HQKDQFHV WKH
more » ... HQKDQFHV WKH XQGHUVWDQGLQJ RI LQYHVWPHQW ORFDWLRQ decisions. Processing traders differ substantially from nonprocessing traders in response to changes in wage cost, level of development in infrastructure, DQG SUR[LPLW\ WR WKH 3DFL¿F FRDVW 7KH SUHVHQFH RI IRUHLJQLQYHVWHG HQWHUSULVHV FUHDWHV D EHDFRQ HIIHFW RQ VXEVHTXHQW IRUHLJQ DQG GRPHVWLF LQYHVWRUV 7KH SDSHU DOVR ¿QGV WKDW DJJORPHUDWLRQ SOD\V D JUHDWHU UROH IRU LQYHVWRUV VSHFLDOL]LQJ in the processing goods trade and highly skill-intensive or research and GHYHORSPHQWLQWHQVLYH SURGXFWLRQ %HQH¿WV IURP UHGXFWLRQ LQ WKH YDOXH DGGHG tax rate and corporate income tax rate play an evident role for foreign investors and Hong Kong, China and Taipei,China investors in processing trade sector. The PRC's policy makers intend to transform the "internationalization" process through attraction of foreign investment toward "localization" by reducing the processing good trading portion and by increasing the supply of domestically produced intermediate inputs for their exports. As the PRC moves up the highvalue supply chain, expands its domestic market, and exports skill-intensive goods, processing goods traders may consider new locations or business models.
doi:10.2139/ssrn.2038712 fatcat:2lie66p7lzbxzm5qtzn4ufnpby