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Abstract:FDI is crucial to macroeconomic development of a region. The paper analyzes the FDI utilization performance of the central regions in recent years. It points the adverse effects out that the local central governments regard preferential policies as the main means to attract FDI. We use static game theory and dynamic game with complete information to analyze preferential policy strategy of the central region, thus obtaining its pragmatic impacts on FDI attraction. On this basis, some policies and recommendations are given to improve the means of FDI attraction to ensure that local governments achieve mutually beneficial results.
Keywords: Central regionFDI Game analysis
1. Introduction
Since economic reform in 1978, China has formulated policies to open up the eastern coastal region, then develop the western region, and last revitalize northeastern old industrial region. The difference of regional policies has promoted China’s overall economic growth, but led to a widening wealth gap between regions. In order to promote economic development of the region, almost every local government regards the introduction of FDI as a major issue. In order to compete for the projects, central regional governments are proposing preferential policy strategy, which lowers the investment threshold and blindly disguises the performance of FDI introduction.
In recent years, FDI in the central region receive rapid development as a series of policies and measures to encourage FDI to transfer to the central regions were implemented. Many local governments in central areas regarded the introduction of FDI as a top priority. In order to introduce FDI, these governments issue a wide range of preferential policies to compete with other regions. This paper tends to reflect the pragmatic effects of preferential policies on the attraction of FDI by using the Game Analysis. Finally, we’ll make some policies recommendations and suggestions to improve the method to attract FDI in order to ensure the local government to achieve mutually beneficial results.
2. Competition analyses with game theory
Almost all the central region governments regard FDI introduction as a top prior affair. In order to introduce FDI, governments issues over a wide range of preferential policies to compete with other regions’. By building the game models, we will identify whether the competition game was rational and discover the various effects of it on economic development of the regions.
2.1 Static game analysis
It is assumed that there are two local governments of A and B. Both are endowed with the same natural resources, industrial structure and investment environment. And we then make three assumptions. First, both governments will receive 100 units of income if both of them choose cooperation, which means that both governments will implement unified preferential policies to undertake the FDI. Second, a government will lose 30 units of income if it chooses non-cooperation, which means that the government will propose more preferential policies (such as land prices cut or taxes reduction, etc.). Third, if a government chooses non-cooperation, while the other chooses cooperation, the government chooses non-cooperation will attract 50% of the FDI of the other government by its more favorable terms.
Under these assumptions, if the two governments both choose non-cooperation, each side will lose 30 units of income. If a government chooses cooperation while the other chooses non-cooperation, the government which chooses non-cooperate will receive 100 + (100 * 50%) -30 = 120 units of income, the income of the other government will be 100-100 * 50% = 50 units.
2.2 Dynamic game analysis
Here we analyze the choices from a dynamic point of view. It is assumed that both sides will choose non-cooperation after the first round of the game. It means that both governments will issue preferential policies to attract FDI and related industries. At this time, owners of FDI and related industries will still consider to benefit most from the choice they make. While the owners are considering, governments A and B will introduce new and more preferential policies in order to attract FDI to enter. We suppose that A makes a first move. A supposes that B is not the case of the new policy, and A will introduce new policies to attract FDI. Then A will get 70+70*50%-30=75 units of income and B will gain 35 units. At this time, B acts in the same way.
2.3 Results
Local governments are competing from the perspective of each income, rather than from the perspective of overall income. In the absence of effective external constraint case, the final result of the game is “prisoner's dilemma".The result of the game brings income to the government choosing cooperation, but brings more serious consequences as well.
2.3.1 Reduction of the overall interest.
China's central government implements the revenue-sharing policy at all levels of local governments, highlighting the dominant interest position of local governments. Maximum revenues and rapid local economic growth are the main objectives of local governments. In order to accelerate local economic development and promote revenue growth, local governments need to attract new investment to increase employment rate, expand regional disposable income, and promote financial performance. Therefore, governments of all levels in the central region compete to provide preferential policies for foreign investors, regardless of what policies other local governments implement. The preferential policies will gain a variety of external funding and attract FDI and foreign industry.
2.3.2 Unfair preferential policies
Benefits offer to foreign enterprises reduce operation costs of the business so that local enterprises can not compete with foreign enterprises. This practice disrupts the order of domestic market, hinder local businesses and slow down local long-term economic development. With the support of central government, a large number of weakforeign business that rely on free land, returned taxes, and uncontrolled environment may ultimately beat those business depending on charged land, taxation, and environmental protection or even expel good local businesses with advanced management, technology, resources out of the market. The phenomenon,"bad money drives good out ", emerges, therefore resulting inefficient resource allocation.
3．Conclusion and suggestion
All levels of local governments pursue FDI for the reason that FDI will bring GDP growth, taxation increase, employment enlargement and social welfare promotion. However, in the process of attracting FDI, the result of several rounds of the game is that each local government will choose non-cooperation due to various reasons. Thus, the final result is that local government will gain less after each round of the game. In this case, from the consideration of the long-term income, there should be some appropriate policies so that both sides have chosen to cooperate to achieve the mutual beneficial case with external forces.
3.1 The guidance of the central government
Central government established "restricted" or "unified" preferential policies for all levels of government. It should require FDI to be undertaken in conjunction with their own economic development, industrial base and natural resources characteristics. The local governments should introduce and develop FDI projects according to geographical environment, transportation conditions, human culture, history characteristics and other factors, rather than only the concessional policies.All levels of government should take the short-term interests and long-term interests together into account.
3.2 Optimization of competitive strategy
Central governments choose to directly cooperate or give up beneficial policy strategy at the beginning of the game, turning to provide better public goods to outside investors. Thus, it can make the government out of the Prisoner's Dilemma. Depend on the choice of other local governments, all levels of government choose to cooperate. And strategy of public goods to improve local government is the strategy can be used alone. The local government can improve the efficiency of labor and factor markets through the investment in public goods, eventually leading to the rise of social welfare. Adopting the strategy of public goods is a Pareto improvement.
References
1.Xianghua Wang and Jianghong Liu. The solutions and recommendations about FDI to promote the central regions [J].The Productivity Research 2008 (10).
2.Yumei Tang. The research about quality evaluation of FDI utilization in central regions [D].Wuhan University of Technology（2009）.
3.Zhiguo Wang. Situations and countermeasures of industry transfer relocation in the central regions [J]. Reality Research 2011(01).
Keywords: Central regionFDI Game analysis
1. Introduction
Since economic reform in 1978, China has formulated policies to open up the eastern coastal region, then develop the western region, and last revitalize northeastern old industrial region. The difference of regional policies has promoted China’s overall economic growth, but led to a widening wealth gap between regions. In order to promote economic development of the region, almost every local government regards the introduction of FDI as a major issue. In order to compete for the projects, central regional governments are proposing preferential policy strategy, which lowers the investment threshold and blindly disguises the performance of FDI introduction.
In recent years, FDI in the central region receive rapid development as a series of policies and measures to encourage FDI to transfer to the central regions were implemented. Many local governments in central areas regarded the introduction of FDI as a top priority. In order to introduce FDI, these governments issue a wide range of preferential policies to compete with other regions. This paper tends to reflect the pragmatic effects of preferential policies on the attraction of FDI by using the Game Analysis. Finally, we’ll make some policies recommendations and suggestions to improve the method to attract FDI in order to ensure the local government to achieve mutually beneficial results.
2. Competition analyses with game theory
Almost all the central region governments regard FDI introduction as a top prior affair. In order to introduce FDI, governments issues over a wide range of preferential policies to compete with other regions’. By building the game models, we will identify whether the competition game was rational and discover the various effects of it on economic development of the regions.
2.1 Static game analysis
It is assumed that there are two local governments of A and B. Both are endowed with the same natural resources, industrial structure and investment environment. And we then make three assumptions. First, both governments will receive 100 units of income if both of them choose cooperation, which means that both governments will implement unified preferential policies to undertake the FDI. Second, a government will lose 30 units of income if it chooses non-cooperation, which means that the government will propose more preferential policies (such as land prices cut or taxes reduction, etc.). Third, if a government chooses non-cooperation, while the other chooses cooperation, the government chooses non-cooperation will attract 50% of the FDI of the other government by its more favorable terms.
Under these assumptions, if the two governments both choose non-cooperation, each side will lose 30 units of income. If a government chooses cooperation while the other chooses non-cooperation, the government which chooses non-cooperate will receive 100 + (100 * 50%) -30 = 120 units of income, the income of the other government will be 100-100 * 50% = 50 units.
2.2 Dynamic game analysis
Here we analyze the choices from a dynamic point of view. It is assumed that both sides will choose non-cooperation after the first round of the game. It means that both governments will issue preferential policies to attract FDI and related industries. At this time, owners of FDI and related industries will still consider to benefit most from the choice they make. While the owners are considering, governments A and B will introduce new and more preferential policies in order to attract FDI to enter. We suppose that A makes a first move. A supposes that B is not the case of the new policy, and A will introduce new policies to attract FDI. Then A will get 70+70*50%-30=75 units of income and B will gain 35 units. At this time, B acts in the same way.
2.3 Results
Local governments are competing from the perspective of each income, rather than from the perspective of overall income. In the absence of effective external constraint case, the final result of the game is “prisoner's dilemma".The result of the game brings income to the government choosing cooperation, but brings more serious consequences as well.
2.3.1 Reduction of the overall interest.
China's central government implements the revenue-sharing policy at all levels of local governments, highlighting the dominant interest position of local governments. Maximum revenues and rapid local economic growth are the main objectives of local governments. In order to accelerate local economic development and promote revenue growth, local governments need to attract new investment to increase employment rate, expand regional disposable income, and promote financial performance. Therefore, governments of all levels in the central region compete to provide preferential policies for foreign investors, regardless of what policies other local governments implement. The preferential policies will gain a variety of external funding and attract FDI and foreign industry.
2.3.2 Unfair preferential policies
Benefits offer to foreign enterprises reduce operation costs of the business so that local enterprises can not compete with foreign enterprises. This practice disrupts the order of domestic market, hinder local businesses and slow down local long-term economic development. With the support of central government, a large number of weakforeign business that rely on free land, returned taxes, and uncontrolled environment may ultimately beat those business depending on charged land, taxation, and environmental protection or even expel good local businesses with advanced management, technology, resources out of the market. The phenomenon,"bad money drives good out ", emerges, therefore resulting inefficient resource allocation.
3．Conclusion and suggestion
All levels of local governments pursue FDI for the reason that FDI will bring GDP growth, taxation increase, employment enlargement and social welfare promotion. However, in the process of attracting FDI, the result of several rounds of the game is that each local government will choose non-cooperation due to various reasons. Thus, the final result is that local government will gain less after each round of the game. In this case, from the consideration of the long-term income, there should be some appropriate policies so that both sides have chosen to cooperate to achieve the mutual beneficial case with external forces.
3.1 The guidance of the central government
Central government established "restricted" or "unified" preferential policies for all levels of government. It should require FDI to be undertaken in conjunction with their own economic development, industrial base and natural resources characteristics. The local governments should introduce and develop FDI projects according to geographical environment, transportation conditions, human culture, history characteristics and other factors, rather than only the concessional policies.All levels of government should take the short-term interests and long-term interests together into account.
3.2 Optimization of competitive strategy
Central governments choose to directly cooperate or give up beneficial policy strategy at the beginning of the game, turning to provide better public goods to outside investors. Thus, it can make the government out of the Prisoner's Dilemma. Depend on the choice of other local governments, all levels of government choose to cooperate. And strategy of public goods to improve local government is the strategy can be used alone. The local government can improve the efficiency of labor and factor markets through the investment in public goods, eventually leading to the rise of social welfare. Adopting the strategy of public goods is a Pareto improvement.
References
1.Xianghua Wang and Jianghong Liu. The solutions and recommendations about FDI to promote the central regions [J].The Productivity Research 2008 (10).
2.Yumei Tang. The research about quality evaluation of FDI utilization in central regions [D].Wuhan University of Technology（2009）.
3.Zhiguo Wang. Situations and countermeasures of industry transfer relocation in the central regions [J]. Reality Research 2011(01).