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Does foreign direct investment affect domestic firms’ social security contributions?

Author

Listed:
  • Tang, Jue
  • Tian, Liu
  • Feng, Jin
  • Zhu, Pengzhou
  • Han, Chao

Abstract

Foreign direct investments (FDI) in developing countries are found to affect local domestic firms by introducing competition and spillover effects. This study investigates the effect of FDI on domestic firms’ social security contributions. It exploits China’s 2002 FDI liberalization and applies the difference-in-differences strategy for a causal identification. Using a Chinese firm-level dataset of the manufacturing industry, the estimates show that foreign investments have a positive effect on domestic firms’ social security contributions as a share of the wage base. The estimated effects are more pronounced in private firms, higher-wage firms, and firms facing lower contribution costs. Evidence also indicates that the increase in firms’ propensity to contribute plays an important role in explaining the overall increase in social security contribution rates. The promotion of social security compliance among domestic firms by FDI inflow suggests that market competition could be an attractive and effective approach to combating non-compliance with social insurance regulations.

Suggested Citation

  • Tang, Jue & Tian, Liu & Feng, Jin & Zhu, Pengzhou & Han, Chao, 2024. "Does foreign direct investment affect domestic firms’ social security contributions?," Journal of Asian Economics, Elsevier, vol. 95(C).
    • Handle: RePEc:eee:asieco:v:95:y:2024:i:c:s1049007824000952
    DOI: 10.1016/j.asieco.2024.101800
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    More about this item

    Keywords

    Foreign direct investment; Social security contribution; Labor cost; China;
    All these keywords.

    JEL classification:

    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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