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

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Author Info
Gerald Epstein
Elissa Braunstein

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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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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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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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). [Downloadable!]
    Other versions:
  2. Seguino, Stephanie, 2003. "Taking gender differences in bargaining power seriously: Equity, labor standards, and living wages
    [Gender Equality through Labor Standards and Living Wages: An Exploration of the Issues for Asian     ," MPRA Paper 6508, University Library of Munich, Germany, revised Oct 2003. [Downloadable!]
  3. 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. [Downloadable!]
  4. 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. [Downloadable!]
  5. Stephanie Seguino, 2005. "Is More Mobility Good? Firm Mobility and the Low Wage-Low Productivity Trap," International Trade 0505008, EconWPA. [Downloadable!]
    Other versions:
  6. Krug, B. & Hendrischke, H., 2006. "Institution Building and Change in China," Research Paper ERS-2006-008-ORG Revision, 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. [Downloadable!]
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