Trade Costs and Location of Foreign Firms in China

This study examines the determinants of entry by foreign firms, using information on 515 Chinese industries at the provincial level during 1998-2001. The analysis is based on new economic geography theory and thus focuses on market and supplier access within and outside the province of entry, as well as production and trade costs. The results indicate that market and supplier access are the most important factors affecting foreign entry. Access to markets and suppliers in the province of entry matters more than access to the rest of China, which is consistent with market fragmentation due to underdeveloped transport infrastructure and informal trade barriers.