Three Essays on International Trade and Industrial Policies

This dissertation consists of three chapters related to trade and industrial policies. The first chapter finds that FDI affects China’s industrial agglomeration negatively by utilizing the differential effects of FDI deregulation in 2002 in China on different industries. We develop a theory of FDI and agglomeration based on two counter-veiling forces of competition and technology diffusion to explain the results. The second chapter assesses the efficiency of subsidy policy to correct for distortions confronting Chinese firms. Based on the Chinese Annual Survey of Industrial Firms from year 1998 to 2007, we study the patterns of subsidies. We build a general equilibrium model to quantify the welfare loss by comparing the optimal and actual subsidy policies. The third chapter establishes that international trade and the market size affect institutional quality positively. I adopt an incomplete-contract approach to model institutions. Due to contract incompleteness, a firm may hold up its suppliers and distort production. With greater market potential, benevolent governments have incentive to improve institutional quality to facilitate production to meet the larger market demand. I also provide empirical evidence for the model.