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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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Author Info

  • 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.

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Bibliographic Info

Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 92 (2010)
Issue (Month): 1 (February)
Pages: 160-166

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Handle: RePEc:tpr:restat:v:92:y:2010:i:1:p:160-166

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Web page: http://mitpress.mit.edu/journals/

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Cited by:
  1. Chen, Maggie Xiaoyang & Moore, Michael, 2009. "Location decision of heterogeneous multinational firms," MPRA Paper 33482, University Library of Munich, Germany.
  2. Timo Heinrich, 2011. "Communication and Reputation in Procurement Auctions – Some Empirical Evidence," Ruhr Economic Papers 0253, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  3. Corentin Trevien & Thierry Mayer, 2013. "Urban Public Transportation and Firm Location Choice Evidence from the Regional Express Rail of Paris Metropolitan area," ERSA conference papers ersa13p566, European Regional Science Association.

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