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Wages, labor quality, and FDI inflows: A new non-linear approach

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  • Hou, Lei
  • Li, Qi
  • Wang, Yanfei
  • Yang, Xintong

Abstract

Although theory predicts that locations with lower wages will attract more FDI inflows, the empirical results from traditional linear regression models are rather mixed. We consider the possible impact of labor quality, along with wages, and build a simple FDI location choice model to capture the potential nonlinear relationship among the three. Further, we propose a partially linear panel data model to investigate the wage effect on FDI location choices. Using macroeconomic province-level data from China between 1993 and 2018, we find that the marginal effect of wage is generally a decreasing function of labor quality. This implies that facing low labor quality, FDI firms prefer locations with high wages that ensure high labor quality; while facing high labor quality, their preferences for low labor costs dominate. Our nonlinear approach reconciles the mixed results in the empirical literature on how wages affect FDI inflows and the role of labor quality in attracting FDI.

Suggested Citation

  • Hou, Lei & Li, Qi & Wang, Yanfei & Yang, Xintong, 2021. "Wages, labor quality, and FDI inflows: A new non-linear approach," Economic Modelling, Elsevier, vol. 102(C).
    • Handle: RePEc:eee:ecmode:v:102:y:2021:i:c:s0264999321001462
    DOI: 10.1016/j.econmod.2021.105557
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    References listed on IDEAS

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    Cited by:

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    2. Bosede Ngozi Adeleye & Bede Uzoma Achugamonu & Tayo George & Mercy Ejovwokeoghene Ogbari & Oluyomi Ola-David, 2023. "ICT Leapfrogging Amidst Labour Force-Economic Growth Nexus in EAP and ECA Regions," Scientific Annals of Economics and Business (continues Analele Stiintifice), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 70(1), pages 17-40, March.
    3. Zhang, Hongxia & Kim, Heeho, 2022. "Institutional quality and FDI location: A threshold model," Economic Modelling, Elsevier, vol. 114(C).
    4. Feng, Ya & Wen, Junqi, 2023. "Foreign direct investment and employee income share: Firm-level evidence," Finance Research Letters, Elsevier, vol. 55(PA).
    5. Nathapornpan Uttama & Popkarn Arwatchanakarn, 2023. "How do economic complexity and productive capacities foster foreign direct investment flows? Evidence from the Asian economies," Economics Bulletin, AccessEcon, vol. 43(1), pages 629-643.
    6. Ionel Sergiu Pirju & Gabriela Marchis & Manuela Panaitescu & Nicolae Florin Prunău & Alisa Mihaela Ambrozie, 2023. "Foreign Direct Investments—A Perspective of Sustainability: Evidence from the Austrian and German Labor Market," Sustainability, MDPI, vol. 15(18), pages 1-18, September.

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    More about this item

    Keywords

    FDI; Wage; Labor quality; Partially linear regression;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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