Demographics and FDI: Lessons from China’s One-Child Policy

Rajnish Mehra, John Donaldson, Christos Koulovatianos and Jian Li
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John Donaldson: Columbia Business School, Columbia University
Jian Li: Department of Economics, University of Luxembourg

No 112, NCAER Working Papers from National Council of Applied Economic Research

Abstract: Lucas (1990) argues that the neoclassical adjustment process fails to explain the relative paucity of FDI inflows from rich to poor countries. In this paper we consider a natural experiment: using China as the treated country and India as the control, we show that the dynamics of the relative FDI flows subsequent to the implementation of China’s one-child policy, as seen in the data, are consistent with neoclassical fundamentals. In particular, following the introduction of the one-child policy in China, the capital-labor (K/L) ratio of China increased relative to that of India, and, simultaneously, relative FDI inflows into China vs. India declined. These observations are explained in the context of a simple neoclassical OLG paradigm. The adjustment mechanism works as follows: the reduction in the (urban) labor force due to the one-child policy increases the savings per capita. This increases the K/L ratio and reduces the marginal product of capital (MPK). The reduction in MPK (relative to India) reduces the relative attractiveness of investment in China and is thus associated with lower FDI/GDP ratios. Our paper contributes to the nascent literature exploring demographic transitions and their effects on FDI flows.

Keywords: Lucas paradox; capital-labor ratio; FDI-intensity; one-child policy (search for similar items in EconPapers)
JEL-codes: E13 F11 F21 J11 O11 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2018-01
New Economics Papers: this item is included in nep-mac and nep-tra
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Related works:
Journal Article: Demographics and FDI: lessons from China’s one-child policy (2025)
Working Paper: Demographics and FDI: Lessons from China's One-Child Policy (2018)
Working Paper: Demographics and FDI: Lessons from China's one-child policy (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:nca:ncaerw:112

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