Abstract: The local market fragmentation is in essence the fact that the local government takes various administrative measures to intervene market so as to protect local enterprises and market. It has produced in some relatively independent economic areas some economic system foundations which have resulted in China’s preference for foreign capital. It has fomented local government officials’ promotion incentives. It has led to a situation in which local enterprises have become uncompetitive and foreign enterprises have improved their bargaining ability so that they can enter a host country with more competitiveness than local enterprises. It has intensified local government’s corporateoriented behavior to strive for external resources and develop an “exportoriented strategy”.