The End of Cheap Labour: Are Foreign Investors Leaving China?

21 Pages Posted: 8 Aug 2016

See all articles by Julian Donaubauer

Julian Donaubauer

University of the German Federal Armed Forces - Helmut Schmidt Universit├Ąt

Christian Dreger

European University Viadrina Frankfurt (Oder); IZA Institute of Labor Economics; Chinese Academy of Social Sciences (CASS)

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Abstract

China's government is promoting the shift towards a consumption-based economy since a few years. The explicit goal to significantly raise the percentage of wages in the national household income is integral part of the 12th Five-Year Plan (2011-15). The changes in the economic strategy are likely to affect the attractiveness of the country to foreign investors. In this paper, we raise the hypothesis that soaring wages negatively affect FDI inflows to China and alter the distribution of FDI over Chinese provinces. In addition, low-wage countries in the geographical surrounding might benefit from the changed direction of FDI inflows. By performing panel models with spatial effects for both Chinese provinces and developing ASEAN countries, regional dependencies are explicitly addressed. We provide strong and robust evidence that the wage increases change the distribution of FDI within China. In addition, we show that the changes in China's economic strategy improve the chances of its low-income neighbours to attract FDI.

Keywords: foreign direct investment, Chinese economic transformation, spatial correlation

JEL Classification: F15, F21, F63, E22

Suggested Citation

Donaubauer, Julian and Dreger, Christian, The End of Cheap Labour: Are Foreign Investors Leaving China?. IZA Discussion Paper No. 10097, Available at SSRN: https://ssrn.com/abstract=2819379

Julian Donaubauer (Contact Author)

University of the German Federal Armed Forces - Helmut Schmidt Universit├Ąt ( email )

Holstenhofweg 85
Hamburg, 22008
Germany

Christian Dreger

European University Viadrina Frankfurt (Oder) ( email )

Frankfurt (Oder)
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Chinese Academy of Social Sciences (CASS) ( email )

Beijing, 100732
China

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