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Bargaining Power and Foreign Direct Investment in China: Can 1.3 Billion Consumers Tame the Multinationals?

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Abstract

Foreign direct investment (FDI) has become a much desired commodity by nations, regions and cities throughout the world. Indeed, governments bid for FDI because it is commonly thought to be an important engine of economic growth, job creation, and technological upgrading. The People’s Republic of China (PRC), the developing world’s largest recipient of FDI and one of the world’s fastest growing economies, is often cited as evidence for the beneficial effects of FDI. Given the PRC’s size and the huge allure of its cheap labor force and customer base, one would think that if any country had the bargaining power vis a vis multinational corporations to benefit from FDI, it would be China. But does FDI really deliver these commonly perceived benefits? To answer this question, we study the impact of inward FDI on wages, job creation, investment and tax generation in the PRC from 1986-1999 by running panel regression analysis on provincial level data. An innovation of our analysis is to distinguish the impact of FDI inflows from that of economic liberalization, per se. We find that, contrary to the conventional wisdom, inward FDI has a relatively small positive impact on wages and employment, while having a negative impact on domestic investment and tax revenue. We suggest that the decentralization of the FDI bidding process in China contributes to these negative outcomes, and argue that the limitation on FDI management tools associated with China’s WTO entry is likely to further reduce the benefits of FDI for Chinese workers and citizens.

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Bibliographic Info

Paper provided by Schwartz Center for Economic Policy Analysis (SCEPA), The New School in its series SCEPA Working Papers with number 2002-13.

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Length: 45 pages
Date of creation: Aug 2002
Date of revision:
Handle: RePEc:epa:cepawp:2002-13

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Citations

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Cited by:
  1. Seguino, Stephanie, 2007. "Is more mobility good?: Firm mobility and the low wage-low productivity trap," Structural Change and Economic Dynamics, Elsevier, vol. 18(1), pages 27-51, March.
  2. Tang, Sumei & Selvanathan, E.A. & Selvanathan, S., 2008. "Foreign Direct Investment, Domestic Investment, and Economic Growth in China: A Time Series Analysis," Working Papers RP2008/19, World Institute for Development Economic Research (UNU-WIDER).
  3. Seguino, Stephanie, 2003. "Taking gender differences in bargaining power seriously: Equity, labor standards, and living wages," MPRA Paper 6508, University Library of Munich, Germany, revised Oct 2003.
  4. Palanca, Ellen, 2004. "China's WTO Entry: Effects on Its Economy and Implications for the Philippines," Discussion Papers DP 2004-41, Philippine Institute for Development Studies.
  5. Palanca, Ellen, . "China's WTO Entry: Effects on Its Economy and Implications for the Philippines," Philippine Journal of Development, Philippine Institute for Development Studies.
  6. A. Yasemin Yalta, 2011. "New Evidence on FDI-Led Growth: The Case of China," Working Papers 1107, TOBB University of Economics and Technology, Department of Economics.
  7. Gerald Epstein, 2002. "Employment-Oriented Central Bank Policy in an Integrated World Economy: A Reform Proposal for South Africa," Working Papers wp39, Political Economy Research Institute, University of Massachusetts at Amherst.
  8. Krug, B. & Hendrischke, H., 2006. "Institution Building and Change in China," Research Paper ERS-2006-008-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.

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