Wages, labor quality, and FDI inflows: A new non-linear approach

Lei Hou, Qi Li, Yanfei Wang and Xintong Yang

Economic Modelling, 2021, vol. 102, issue C

Abstract: Although theory predicts that locations with lower wages will attract more FDI inflows, the empirical results from traditional linear regression models are rather mixed. We consider the possible impact of labor quality, along with wages, and build a simple FDI location choice model to capture the potential nonlinear relationship among the three. Further, we propose a partially linear panel data model to investigate the wage effect on FDI location choices. Using macroeconomic province-level data from China between 1993 and 2018, we find that the marginal effect of wage is generally a decreasing function of labor quality. This implies that facing low labor quality, FDI firms prefer locations with high wages that ensure high labor quality; while facing high labor quality, their preferences for low labor costs dominate. Our nonlinear approach reconciles the mixed results in the empirical literature on how wages affect FDI inflows and the role of labor quality in attracting FDI.

Keywords: FDI; Wage; Labor quality; Partially linear regression (search for similar items in EconPapers)
JEL-codes: F21 J31 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:102:y:2021:i:c:s0264999321001462

DOI: 10.1016/j.econmod.2021.105557

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