Does Foreign Direct Investment Catalyze Local Structural Transformation and Human Capital Accumulation ? Evidence from China

Yan-000529044 Liu

No 9952, Policy Research Working Paper Series from The World Bank

Abstract: This paper examines the effect of foreign direct investment on local structural transformation and human capital accumulation in China, exploiting variations in foreign direct investment inflows across manufacturing sub-sectors caused by China’s foreign direct investment deregulation and initial sectoral composition patterns across China’s cities and provinces. Using a panel of city-level data from 1990 to 2005, the paper shows that manufacturing foreign direct investment inflows greatly accelerated city-level structural transformation and human capital accumulation. By expanding access to the global market, foreign direct investment created a huge pull factor that drew excess labor away from farms into factories and services. Foreign direct investment has promoted high school and university enrollment by paying a higher wage premium for skilled workers and pushing up the skill premium. The positive effect on structural transformation is largely driven by export-oriented foreign direct investment, while market-seeking foreign direct investment has a much larger effect on college enrollment. High-skill foreign direct investment has a larger effect on college enrollment than low-skill foreign direct investment.

Keywords: Food & Beverage Industry; Plastics & Rubber Industry; Business Cycles and Stabilization Policies; Textiles; Apparel & Leather Industry; Pulp & Paper Industry; Common Carriers Industry; Construction Industry; General Manufacturing; International Trade and Trade Rules; Investment and Investment Climate; Skills Development and Labor Force Training; Food Security (search for similar items in EconPapers)
Date: 2022-03-03
New Economics Papers: this item is included in nep-cna and nep-int
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