THE LOCATION DECISIONS OF FOREIGN INVESTORS IN CHINA: UNTANGLING THE EFFECT OF WAGES USING A CONTROL FUNCTION APPROACH

Xuepeng Liu, Mary E. Lovely and Jan Ondrich

Chapter 11 in International Economic Integration and Domestic Performance, 2017, pp 191-197 from World Scientific Publishing Co. Pte. Ltd.

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.

Keywords: International Trade; Foreign Direct Investment; Environmental Standards; Labor Standards (search for similar items in EconPapers)
JEL-codes: F02 (search for similar items in EconPapers)
Date: 2017
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Related works:
Journal Article: The Location Decisions of Foreign Investors in China: Untangling the Effect of Wages Using a Control Function Approach (2010)
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