Chen, Chinchih
(2014)
Essays on agglomeration, trade costs and foreign direct investment.
PhD thesis, London School of Economics and Political Science.
Abstract
This thesis is composed of three chapters. The first one investigates the impact of distance, market and supply access and agglomeration externalities on FDI locations. Chapter 2 studies the change in trade costs on FDI locations. Chapter 3 examines the relative effect of trade costs on horizontal and vertical FDI locations.
Chapter 1 provides empirical evidence of the effect of agglomeration with firms from the same country on other location determinants. I use data for the Taiwanese FDI projects in Chinese provinces from 1991 to 1996. In order to estimate the relative change in coefficient magnitude over time, I exploit Taiwan’s FDI policy shock in 1991. I find negative effects of the bilateral distance between the home and host country on FDI locations. Sectoral
agglomeration with firms from the same country also has significant and positive impact on FDI locations.
Chapter 2 investigates the impact of the change in trade costs on FDI locations. I study the effect on the FDI growth rate and the number of new FDI projects. Taiwan’s cross-strait direct flights policy in 2008 provides a
quasi/natural experiment on the change in trade costs, arising from the implementation of direct flights between Taiwan and China. I use difference-in-difference estimator with Taiwanese firm-level data for the period 2002 to 2011 to identify the casual effect of the change in trade costs on FDI locations. Furthermore, I decompose the effect of trade costs by identifying the transaction
and transport costs channels. Contract and unit value intensity are created to measure the relative effect of trade costs through two channels. I find that the dispersion of Taiwanese FDI after the policy shock in 2008.
Chapter 3 investigates the impact of trade costs on horizontal and vertical FDI locations. I study the relative effects of trade costs on the number of new
horizontal and vertical FDI affiliates across industries. I use Taiwanese firm level data during the period 2001 to 2011 in combination with the input-output links between the parent firm and affiliates to identify horizontal and vertical FDI as well as inter-and intra-industry vertical FDI. My findings indicate trade costs have additional negative impact on vertical FDI relative to horizontal FDI. In addition, as an increase in trade costs occurs, vertical FDI affiliates are affected relatively more than horizontal FDI through both transaction and transport costs channels.
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