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The Location Decisions of Foreign Investors in China: Untangling the Effect of Wages Using a Control Function Approach

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  • Xuepeng Liu

    (Kennesaw State University)

  • Mary E Lovely

    (Syracuse University)

  • Jan Ondrich

    (Syracuse University)

Abstract

There is almost no support for the proposition that capital is attracted to low wages from firm-level studies. We examine the location choices of 2,884 firms investing in China between 1993 and 1996 to offer two main contributions. First, we find that the location of labor-intensive activities is highly elastic to provincial wage differences. Generally, investors' wage sensitivity declines as the skill intensity of the industry increases. Second, we find that unobserved location-specific attributes exert a downward bias on estimated wage sensitivity. Using a control function approach, we estimate a downward bias of 50% to 90% in wage coefficients estimated with standard techniques. © 2010 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Xuepeng Liu & Mary E Lovely & Jan Ondrich, 2010. "The Location Decisions of Foreign Investors in China: Untangling the Effect of Wages Using a Control Function Approach," The Review of Economics and Statistics, MIT Press, vol. 92(1), pages 160-166, February.
    • Handle: RePEc:tpr:restat:v:92:y:2010:i:1:p:160-166
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    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration

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