Skip to main content
SpringerLink
Log in

Did Foreign Direct Investment Put an Upward Pressure on Wages in China?

  • Published:
IMF Economic Review Aims and scope Submit manuscript

Abstract

This paper studies the extent to which foreign direct investment (FDI) could have contributed to recent increase in wages in China. Using a World Bank survey data set of 1,500 Chinese enterprises conducted in 2001, the paper finds that the presence of FDI in the same industry and region has an indirect effect on wages of skilled workers in private firms, while it does not appear to affect wages of ordinary workers or of any workers in state-owned enterprises (SOEs). It further finds that observed quality of engineers in both SOEs and domestic private firms declines in the presence of FDI in the same industry and region, while quality of managers improves in domestic private firms. The paper discusses potential reasons for such discrepancy in the FDI effects on private and state firms’ labor practices. These findings highlight the relevance of labor market institutions in determining FDI spillovers.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Figure 1
Figure 2

Similar content being viewed by others

Notes

  1. For a critical evaluation of studies that find no or negative FDI spillovers, see Moran (2006).

  2. For a review of previous studies on FDI spillovers in China, see Hale and Long (2011a).

  3. Literature on wages in foreign invested enterprises includes Aitken, Harrison, and Lipsey (1996) study that finds that higher FDI is associated with higher wages in foreign invested firms; Almeida (2007) and Heyman, Sjöholm, and Tingvall (2007) studies that find no effects for Sweden and Portugal, respectively; Conyon and others (2002) and Girma and Görg (2007) studies that find some positive effects for unskilled wages in the U.K.; and Lipsey and Sjöholm (2004) study for Indonesia that finds positive effects of FDI on wages. Most recently, Harrison and Scorse (2009) find significantly higher wages for skilled labor in foreign invested firms in Indonesia but no such effects for unskilled labor, once education and gender are controlled for. In a related paper, Braconier, Norback, and Urban (2005) study the role of low labor costs in attracting FDI.

  4. Exceptions are Aitken, Harrison, and Lipsey (1996) study of U.S., Mexican, and Venezuelan firms that find no evidence of wage spillovers, Feenstra and Hanson (1997) study of Mexican regions that find positive spillovers of FDI on skilled wages, and Barry, Görg, and Strobl (2005) study of large Irish firms that find differential effects on exporting and non-exporting firms.

  5. See Megginson and Netter (2001) for a summary of empirical evidence showing superior performance of private firms over SOEs.

  6. Two closely related papers in this respect are Blonigen and Slaughter (2001) which, in contrast to our findings, find no increase in demand for skilled labor due to inward FDI into the United States, and Feenstra and Hanson (1997) that do find an increase in demand for skilled labor due to FDI inflows into Mexico.

  7. See Fung, Iizaka, and Tong (2004) for a detailed review of the trend, policy, and impact of FDI in China.

  8. Dollar, Hallward-Driemeier, and Mengistae (2006) show that the investment climate in China is superior to that of South Asian or Latin American countries and that this advantage helps explain large FDI inflows into China.

  9. The new Guiding Catalogue of Foreign Investment Projects published in 2002 further combined the categories into three: encouraged, prohibited, and permitted.

  10. Our World Bank data set shows the same patterns, that is greater salary dispersion in private firms than in SOEs.

  11. See the March 25, 2005, Issue of China Industry and Commerce Times, and “The Rules for Administrating CEO Compensation in SOEs in Jiangxi Province,” government document issued by the Jiangxi State Asset Supervision and Administration Commission (accessed online on July 21, 2006 at http://jiangxi:jxnews.com.cn/system/2006/07/07/002290697.shtml).

  12. See Kato and Long (2006) for a detailed discussion of executive salary policies in Chinese firms.

  13. See the “Research report on Chinese manager incentive mechanisms and policies,”cited in the January 14, 2002, issue of the Market Daily (accessed online on July 26, 2006 at http://news.xinhuanet.com/newscenter/2002-01/24/content252489.htm).

  14. Empirical studies demonstrating the importance of various factors in attracting FDI include Amiti and Smarzynska Javorcik (2008), Blomstrom and Lipsey (1991), and Kravis and Lipsey (1982) (size and access to domestic markets and suppliers); Bagchi-Sen and Wheeler (1989) (population size, population growth, and per capita sales); Coughlin, Terza, and Arromdee (1991) (tax rate and infrastructure); de Mooij and Ederveen (2003) (tax rate); Ma (2006) (access to international market). Studies on location of FDI specific to China include Cheng and Kwan (2000) and Sun, Tong, and Yu (2002).

  15. See Hale and Long (2011a) for the full description and the values of these variables for each city-industry cell.

  16. As a robustness test we instead excluded firms according to their reported legal status and obtained similar results.

  17. The remaining average differences reflect the fact that age, education, and foreign experience only measure some of the quality aspects, with many others not observed by an econometrician.

  18. Note that average education of managers in SOEs is 12.6 years—see Table 3.

  19. Quantitatively, the magnitudes of the coefficients in the IV regressions are higher than those in OLS regressions, indicating that the omitted variable bias works against us finding positive spillover effects on wages.

  20. See Hale and Long (2011a) for additional details and the tabulations of the alternative measure.

  21. We are unable to estimate the model for manufacturing sector only, because a small number of degrees of freedom is left when the sample is cut by half.

  22. www.cmst.com.cn/mileage/mileage.asp, last accessed January 29, 2007.

References

  • Aitken, B., and A. Harrison, 1999, “Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela,” American Economic Review, Vol. 89, No. 3, pp. 605–618.

    Article  Google Scholar 

  • Aitken, B., A. Harrison, and R.E. Lipsey, 1996, “Wages and Foreign Ownership: A Comparative Study of Mexico, Venezuela, and the United States,” Journal of International Economics, Vol. 40, No. 3–4, pp. 345–371.

    Article  Google Scholar 

  • Almeida, R., 2007, “The Labor Market Effects of Foreign Owned Firms,” Journal of International Economics, Vol. 72, No. 1, pp. 75–96.

    Article  Google Scholar 

  • Amiti, M., and B. Smarzynska Javorcik, 2008, “Trade Costs and Location of Foreign Firms in China,” Journal of Development Economics, Vol. 85, No. 1–2, pp. 129–149.

    Article  Google Scholar 

  • Bagchi-Sen, S., and J. Wheeler, 1989, “A Spatial and Temporal Model of Foreign Direct Investment in the United States,” Economic Geography, Vol. 65, No. 2, pp. 113–129.

    Article  Google Scholar 

  • Barry, F., H. Görg, and E. Strobl, 2005, “Foreign Direct Investment and Wages in Domestic Firms in Ireland: Productivity Spillovers versus Labour-Market Crowding Out,” International Journal of the Economics of Business, Vol. 12, No. 1, pp. 67–84.

    Article  Google Scholar 

  • Blomström, M., and R. Lipsey, 1991, “Firm Size and Foreign Operations of Multinationals,” Scandinavian Journal of Economics, Vol. 93, No. 1, pp. 101–107.

    Article  Google Scholar 

  • Blonigen, B.A., 2005, “A Review of the Empirical Literature on FDI Determinants,” NBER Working Paper, 11299.

  • Blonigen, B.A., and M.J. Slaughter, 2001, “Foreign-Affiliate Activity and U.S. Skill Upgrading,” Review of Economics and Statistics, Vol. 83, No. 2, pp. 362–376.

    Article  Google Scholar 

  • Braconier, H., P.-J. Norback, and D. Urban, (2005), “Multinational Enterprises and Wage Costs: Vertical FDI Revisited,” Journal of International Economics, Vol. 67, No. 2, pp. 446–470.

    Article  Google Scholar 

  • Cheng, L.K., and Y.K. Kwan, 2000, “What are the Determinants of the Location of Foreign Direct Investment? The Chinese Experience,” Journal of International Economics, Vol. 51, pp. 379–400.

    Article  Google Scholar 

  • Conyon, S., S. Girma, S. Thompson, and P. Wrights, 2002, “The Impact of Foreign Acquisition on Wages and Productivity in the U.K,” Journal of Industrial Economics, Vol. 50, pp. 85–102.

    Article  Google Scholar 

  • Coughlin, C., J. Terza, and V. Arromdee, 1991, “State Characteristics and the Location of Foreign Direct Investment Within the United States,” Review of Economics and Statistics, Vol. 73, No. 4, pp. 675–683.

    Article  Google Scholar 

  • de Mooij, R.A., and S. Ederveen, 2003, “Taxation and Foreign Direct Investment: A Synthesis of Empirical Research,” International Tax and Public Finance, Vol. 10, No. 6, pp. 673–693.

    Article  Google Scholar 

  • Dollar, D., M. Hallward-Driemeier, and T.A. Mengistae, 2006, “Investment Climate and International Integration,” World Development, Vol. 34, No. 9, pp. 1498–1516.

    Article  Google Scholar 

  • Feenstra, R.C., and G.H. Hanson, 1997, “Foreign Direct Investment and Relative Wages: Evidence from Mexico's Maquiladoras,” Journal of International Economics, Vol. 42, No. 3–4, pp. 371–393.

    Article  Google Scholar 

  • Fung, K.C., H. Iizaka, and S.Y. Tong, 2004, “FDI in China: Policy, Recent Trend and Impact,” Global Economic Review, Vol. 32, No. 2, pp. 99–130.

    Article  Google Scholar 

  • Girma, S., and H. Görg, 2007, “Evaluating the Foreign Ownership Wage Premium Using a Difference-in-Differences Matching Approach,” Journal of International Economics, Vol. 72, No. 1, pp. 97–112.

    Article  Google Scholar 

  • Hale, G., and C. Long, 2011a, “Are there Productivity Spillovers from Foreign Direct Investment in China?” Pacific Economic Review, Vol. 16, pp. 135–153.

    Article  Google Scholar 

  • Hale, G., and C. Long, 2011b, Foreign Direct Investment in China: Winners and Losers (Singapore: World Scientific).

    Google Scholar 

  • Harrison, A., and J. Scorse, 2009, “Do Foreign-owned Firms Pay More? Evidence from the Indonesian Manufacturing Sector,” in Labor Markets and Economic Development, ed. by R. Kanbur, and J. Svejnar (London and New York, Routledge: Taylor & Francis Group).

    Google Scholar 

  • Heyman, F., F. Sjöholm, and P.G. Tingvall, 2007, “Is there Really a Foreign Ownership Wage Premium? Evidence from Matched Employer-Employee Data,” Journal of International Economics, Vol. 73, No. 2, pp. 355–376.

    Article  Google Scholar 

  • Huang, Y., 2005, Selling China: Foreign Direct Investment During the Reform Era, Cambridge Modern China Series (Cambridge; New York and Melbourne: Cambridge University Press).

    Google Scholar 

  • Kato, T., and C. Long, 2006, “Executive Compensation, Firm Performance, and Corporate Governance in China: Evidence from Firms Listed in the Shanghai and Shenzhen Stock Exchanges,” Economic Development and Cultural Change, Vol. 54, No. 4, pp. 945–983.

    Article  Google Scholar 

  • Kravis, I., and R. Lipsey, 1982, “The Location of Overseas Production and Production for Export by U.S. Multinational Firms,” Journal of International Economics, Vol. 12, No. 3/4, pp. 201–223.

    Article  Google Scholar 

  • Lipsey, R., and F. Sjöholm, 2004, “Foreign Direct Investment, Education and Wages in Indonesian Manufacturing,” Journal of Development Economics, Vol. 73, No. 1, pp. 415–422.

    Article  Google Scholar 

  • Liu, L., C. Long, and R. Jing, 2007, “Effects of Firm Ownership on Employment Compensation,” manuscript, School of Economics and Management, University of Electronic Science and Technology of China.

  • Ma, A., 2006, “Export Spillovers to Chinese Firms: Evidence from Provincial Data,” Journal of Chinese Economic and Business Studies, Vol. 4, No. 2, pp. 127–149.

    Article  Google Scholar 

  • Megginson, W.L., and J.M. Netter, 2001, “From State to Market: A Survey of Empirical Studies on Privatization,” Journal of Economic Literature, Vol. 39, pp. 321–389.

    Article  Google Scholar 

  • Moran, T.H., 2006, Harnessing Foreign Direct Investment for Development: Policies for Developed and Developing Countries (Washington DC: Center for Global Development).

    Google Scholar 

  • Sun, Q., W. Tong, and Q. Yu, 2002, “Determinants of Foreign Direct Investment Across China,” Journal of International Money and Finance, Vol. 21, pp. 79–113.

    Article  Google Scholar 

  • Zhao, Y., 2001, “Foreign Direct Investment and Relative Wages: The Case of China,” China Economic Review, Vol. 12, No. 1, pp. 40–57.

    Article  Google Scholar 

Download references

Authors
  1. Galina Hale
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Cheryl Long
    View author publications

    You can also search for this author in PubMed Google Scholar

Additional information

*Galina Hale is a senior economist at the Federal Reserve Bank of San Francisco. Cheryl Long is an associate professor of economics at Colgate University. Hale is grateful to Stanford Center for International Development for financial support and hospitality during work on this project. Parts of this draft were previously circulated under the title “Labor Market Imperfections and the Effects of FDI Presence in China.” Long thanks Hoover Institution for financial support and hospitality during work on this project. The authors thank Pierre-Olivier Gourinchas, two anonymous referees, Michele Cavallo, Robert Deckle, Bob Hall, James Harrigan, Wei Li, Tali Regev, and the participants of the SITE 2006 workshop and NBER October 2007 China working group meeting for insightful comments. All errors are the authors'. The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of San Francisco or any other person associated with the Federal Reserve System.

Appendix

Appendix

Variables Used in This Study

In this study, we use a small portion of the survey that gives information on firms’ input, output, as well as foreign ownership. In particular, we use the following variables directly or constructed from the survey, with all values referring to year 2000 unless indicated otherwise:

Capital input::

Value of fixed assets in year 2000 RMB, used in logs.

Labor input::

Number of employees in the firm, used in logs.

Capital/Labor::

Capital intensity of the firm, measured as the ratio between capital input and labor input.

Firm age::

Firm's age.

Average education::

Average education level of ordinary workers, engineering, and managerial personnel in the firm, in years of schooling.

Average age::

Average age of ordinary workers, engineering, and managerial personnel in the firm, in years.

Average foreign experience::

Average foreign experience of engineering and managerial personnel in the firm, in years.

Transportation cost::

Transportation expenses divided by sales.

Industry::

Industry sector of the firm, a categorical variable 1, 2, …, 10.

City::

City where the firm is located, a categorical variable 1, 2, …, 5.

Largest foreign partner share::

The share of the largest foreign partner in firm's ownership in 1999.

Private ownership share::

Total share of private ownership, including portfolio investment in 1999.

Share of foreign sales::

Foreign sales divided by total sales in 1999.

Transportation cost of supplies::

Share of transportation cost in the total cost of supplies purchased in 1999.

We use the following variables from outside of our survey data to construct instruments for FDI presence:

Port berth::

The total number of berths (including both productive and nonproductive) in the port located by the city (valued at 0 if the city has no port), obtained from Chinese Statistical Yearbook 2001, National Bureau of Statistics.

Distance between cities::

The distance between the capital city of each province or autonomous region and the cities in our sample, obtained from the official website of the China National Materials, Storage and Transportation Corporation.Footnote 22

Provincial population::

The population of each province or autonomous region, obtained from Chinese Statistical Yearbook 2001, National Bureau of Statistics.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Hale, G., Long, C. Did Foreign Direct Investment Put an Upward Pressure on Wages in China?. IMF Econ Rev 59, 404–430 (2011). https://doi.org/10.1057/imfer.2011.14

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/imfer.2011.14

JEL Classifications

Search

Navigation