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

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  • Julian Donaubauer

    (Helmut Schmidt University Holstenhofweg 85 22043 Hamburg, Germany Author email: julian.donaubauer@hsu-hh.de)

  • Christian Dreger

    (German Institute for Economic Research (DIW Berlin) Mohrenstrae 58 10117 Berlin, Germany Author email: cdreger@diw.de)

Abstract

China's government has been promoting the shift toward a consumption-based economy in the past few years to arrive at a path of sustainable and socially inclusive growth. In this context, the explicit goal to significantly raise the percentage of wages in the national household income was an integral part of the 12th Five-Year Plan (201115). These changes in economic strategy are likely to affect the attractiveness of the country to foreign investors. In this paper, we raise the hypothesis that soaring relative wages negatively affect foreign direct investment (FDI) inflows to China, and alter their distribution within China. In addition, low-wage countries in the Asian region might benefit from the changed direction of FDI inflows. We utilize fixed-effects panel models with spatial spillovers for Chinese provinces and developing ASEAN countries to provide strong and robust evidence that wage increases change the allocation of FDI within China. In addition, we show that the changes in China's economic strategy improve the chances of its low-income neighbors to attract FDI.

Suggested Citation

  • Julian Donaubauer & Christian Dreger, 2018. "The End of Cheap Labor: Are Foreign Investors Leaving China?," Asian Economic Papers, MIT Press, vol. 17(2), pages 94-107, Summer.
    • Handle: RePEc:tpr:asiaec:v:17:y:2018:i:2:p:94-107
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    References listed on IDEAS

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    2. LIANG, Licheng & MATSUURA, Toshiyuki, 2023. "Adjustments of Multinational’s Production Activities in Response to the US-Sino Trade War : Evidence from Japanese affiliate-level data," Discussion Paper Series 745, Institute of Economic Research, Hitotsubashi University.
    3. Nguyen, Anh T.N. & Haug, Alfred A. & Owen, P. Dorian & Genç, Murat, 2020. "What drives bilateral foreign direct investment among Asian economies?," Economic Modelling, Elsevier, vol. 93(C), pages 125-141.
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    6. Tafadzwa Matiza & Sandra Perks, 2017. "Human Capital Reputation as an Antecedent of Foreign Direct Investment Market Entry in Zimbabwe," Journal of Economics and Behavioral Studies, AMH International, vol. 9(5), pages 185-199.

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    More about this item

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F63 - International Economics - - Economic Impacts of Globalization - - - Economic Development
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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