FDI, Competitive Menace, and the Evolution of Labor Practices in China

Yan Liang

Chinese Economy, 2007, vol. 40, issue 5, 21-51

Abstract: It is often argued that labor-intensive, export-oriented, foreign direct investment contributes tremendously to employment growth in China. However, this argument is not adequately verified due to the lack of rigorous and systematic examination of the effects of foreign direct investment (FDI) on the quantity and quality of employment. This article attempts to fill the lacunae. It shows that foreign-invested enterprises have not contributed to employment to the same extent as other ownership types or as their economic prowess would seem to allow. In response to the assertion that the employment contribution by FDI goes beyond direct job creation by foreign-invested enterprises, the article constructs an econometric test to account for the possible indirect employment effects. Yet the test shows that FDI has positive but insignificant effects on employment. In addition to the quantitative effects, the impacts of FDI on the quality of employment are also analyzed. The article concurs with the argument that FDI shapes the current free-market, contract-based labor system. Employing John Commons's "competitive menace" theory, the article contends that the massive entry of FDI and the labor practices of foreign-invested enterprises invoke three levels of competitive menace in the labor market, which significantly marginalizes Chinese workers.

Date: 2007
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