Inter-city competition for foreign investment: Static and dynamic effects of China's incentive areas

China's ''Open Door'' policy has created a natural experiment for studying agglomeration externalities and the role of incentives designed to attract foreign direct investment. We build a model which predicts that foreign firms will prefer cities where other foreign firms are located. We estimate the model using data on 931 foreign ventures. We then use simulations to explore the effect policies favoring particular cities had on the distribution of investment. We find that ''attractive'' cities-those with good infrastructure and an established industrial base-gained most and that agglomeration effects greatly magnified the direct impact of policy. (C) 1996 Academic Press, Inc.