How firm heterogeneity affects foreign direct investment location choice: Micro-evidence from new foreign manufacturing firms in the Pearl River Delta

This study explores how firm heterogeneity affects the geographic agglomeration and location choice of foreign direct investment (FDI) based on micro-evidence from 3558 new foreign manufacturing firms in the Pearl River Delta, China. Kernel density and categorical multivariate linear regression are integrated to examine FDI location choices. The empirical results confirm that firm location choices are jointly influenced by location factors and firm heterogeneity. Specifically, we find that a firm's location decisions and agglomeration behavior are determined by the interaction between firm heterogeneity and location factors. Although location factors reveal a significant impact on the entry decisions of firms, the location effects are adjusted to some extent, or even change direction, when firm heterogeneity factors are taken into consideration. Investment from different origins via different entry modes and different sectoral composition in the same host location exhibits different nature of clustering, which may be interpreted as different characteristics of interaction between home and host regions in the context of the global economy. Such insights into the heterogeneity of firms with their divergent ways in choosing their locations also echo with the previous discussion on 'divergent capitalism'. We believe that a better understanding of the impact of firm heterogeneity on FDI location choices at the micro-level can help policy-makers formulate more appropriate firm-based policies. Such policies could address the specific preferences of different types of firms.