The geographical distribution of FDI in China is highly uneven and mostly concentrated in eastern China ,which shows a core-periphery pattern . This is actually a macro outcome of the micro location and subsequent investment decisions of multinational corporations . The decisions of multinational corporations are not only subject to their types and strategic objectives ,but also depend on the location advantage in each region ,especially depend on various incentives provided by local governments . The empirical studies on FDI in China mostly regard the spatial agglomeration of FDI as a result ,based on which they have researched on the reasons behind the agglomeration ,like market potential ,tax incentives ,infrastructure ,labor costs ,human capital ,FDI stock etc . Owning to higher productivity and greater mobility of multinational enterprises compared with domesticcounterparts ,local governments under fiscal decentralization has launched acomprehensive fiscal competition topursue FDI ,which ranges from tax incentives competition to competition in fiscal spending for productivity-enhancement .From this perspective ,FDI agglomeration can be seen as the outcome of a multi-game among multinational corporations and the local governments . However ,the spatial agglomeration of FDI ,is not only an outcome of this game ,but also affects the intermediate process of this game . In short ,FDI agglomeration itself can generate agglomeration economies and attract the follow-up FDI .Thus ,regions with larger amount of FDI stock (or larger agglomerationeconomies) may take advantage of this to set higher tax rate or provide lower subsidies .So far there is little theoretical and empirical research on how agglomeration economies affect the competitive strategy of local government in chasing FDI . Local governments can neither control the types and purposes of foreign investors ,nor can they change the location advantages which are generated spontaneously . However ,they can manipulate taxes ,subsidies ,structure and quantities of fiscal expenditures . Considering the operability ,taxes and subsidies become the most preferred policy tools for local governments competing for FDI . To some extent subsidies can be regarded as negative taxes ,so taxes and subsidies ,in theory ,can both be treated as taxes . Relying on the Markov perfect equilibrium framework ,we construct a model to analyze how the agglomeration economies and location advantages affect the tax competition equilibrium . Considering the strategic interaction among regions and other spatial linkages in FDI competition ,we have adopted a spatial panel econometric model . Using the panel data of China's 29 provinces from1993 to 2009 ,our empirical analysis indicates that : (1) Regional tax competition do exist ,and taxation is still an important factor affecting spatial distribution of FDI but its role has been weakened along the time;(2) Western provinces rely on tax competition more heavily and attract more elementary FDI which are more sensitive to tax incentives;(3) Eastern provinces with advantages of location and agglomeration economies could levy higher taxes on FDI toclaim the rent of agglomeration;(4) The existence of agglomeration weaken the tax competition among provinces ,and the average tax rates for FDI in the eastern and western provinces are both increasing with time .