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

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  • Gerald Epstein
  • Elissa Braunstein

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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Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp45.

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Date of creation: 2002
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Handle: RePEc:uma:periwp:wp45

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Citations

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Cited by:
  1. Yalta, A. Yasemin, 2013. "Revisiting the FDI-led growth Hypothesis: The case of China," Economic Modelling, Elsevier, vol. 31(C), pages 335-343.
  2. Diego E. Vacaflores, 2011. "Was Latin America Correct In Relying In Foreign Direct Investment To Improve Employment Rates?," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 11(2).
  3. Stephanie Seguino, 2005. "Is More Mobility Good? Firm Mobility and the Low Wage-Low Productivity Trap," International Trade, EconWPA 0505008, EconWPA.
  4. Helga Kristjánsdóttir, 2005. "The Knowledge-Capital Model and Small Countries," EPRU Working Paper Series, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics 05-09, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  5. 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.
  6. Sumei Tang & E. A. Selvanathan & S. Selvanathan, 2008. "Foreign Direct Investment, Domestic Investment and Economic Growth in China: A Time Series Analysis," The World Economy, Wiley Blackwell, vol. 31(10), pages 1292-1309, October.
  7. Chan Sok GEE & Mohd Zaini Abd KARIM, 2011. "Fdi´S Country Of Origin And Output Growth: The Case Of Malaysia?S Manufacturing Sector, 1991-2006," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 11(1).
  8. Gerald Epstein, 2002. "Employment-Oriented Central Bank Policy in an Integrated World Economy: A Reform Proposal for South Africa," Working Papers, Political Economy Research Institute, University of Massachusetts at Amherst wp39, Political Economy Research Institute, University of Massachusetts at Amherst.
  9. Milberg, William, 2004. "The changing structure of international trade linked to global production systems : what are the policy implications?," ILO Working Papers 370120, International Labour Organization.
  10. Schmerer, Hans-Jörg, 2012. "FDI, skill-specific unemployment, and institutional spillover effects," Economics Discussion Papers 2012-2, Kiel Institute for the World Economy.
  11. Krug, B. & Hendrischke, H., 2006. "Institution Building and Change in China," ERIM Report Series Research in Management, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasm 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 University Rotterdam.
  12. 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.
  13. A. Yasemin Yalta, 2011. "New Evidence on FDI-Led Growth: The Case of China," Working Papers, TOBB University of Economics and Technology, Department of Economics 1107, TOBB University of Economics and Technology, Department of Economics.

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