The Location Decisions of Foreign Investors in China: Untangling the Effect of Wages Using a Control Function Approach

Xuepeng Liu, Mary Lovely and Jan Ondrich
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Jan Ondrich: Syracuse University

The Review of Economics and Statistics, 2010, vol. 92, issue 1, 160-166

Abstract: There is almost no support for the proposition that capital is attracted to low wages from firm-level studies. We examine the location choices of 2,884 firms investing in China between 1993 and 1996 to offer two main contributions. First, we find that the location of labor-intensive activities is highly elastic to provincial wage differences. Generally, investors' wage sensitivity declines as the skill intensity of the industry increases. Second, we find that unobserved location-specific attributes exert a downward bias on estimated wage sensitivity. Using a control function approach, we estimate a downward bias of 50% to 90% in wage coefficients estimated with standard techniques. © 2010 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Date: 2010
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