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

Abstract

"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 decisions. Processing traders differ substantially from nonprocessing traders in response to changes in wage cost, level of development in infrastructure, in the processing goods trade and highly skill-intensive or research and 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."