This paper examines impacts of industrial agglomeration and foreign direct investment (FDI) on total factor productivity of Taiwanese rms. Our model of FDI decisions of heterogeneous rms with agglomeration economies suggests that rms located in more concentrated industrial agglomerations become more productive, and undertaking FDI have either positive or negative in uence on rm productivity. Using plant-level data, this paper constructs an indicator of industrial agglomeration to appraise agglomeration economies on rm productivity. Based on the data of 601 manufacturing rms and the agglomeration indicator, this paper estimates a probit model of FDI choices and a crosssectional econometric model to empirically assess the impacts of industrial agglomeration and FDI on rms' performances. The empirical results show that local industrial agglomerations provide positive contribution to rm productivity after rms' attributes are controlled, while FDI in China has positive but not always signi cant impacts on rm performance.