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The Location Decisions of Foreign Investors in China: Untangling the Effect of Wages Using a Control Function Approach


  • Xuepeng Liu

    (Kennesaw State University)

  • Mary E Lovely

    (Syracuse University)

  • Jan Ondrich

    (Syracuse University)


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.

Suggested Citation

  • Xuepeng Liu & Mary E Lovely & Jan Ondrich, 2010. "The Location Decisions of Foreign Investors in China: Untangling the Effect of Wages Using a Control Function Approach," The Review of Economics and Statistics, MIT Press, vol. 92(1), pages 160-166, February.
  • Handle: RePEc:tpr:restat:v:92:y:2010:i:1:p:160-166

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    References listed on IDEAS

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    Cited by:

    1. Andrea Ascani & Riccardo Crescenzi & Simona Iammarino, 2015. "Economic Institutions and the Location Strategies of European Multinationals in their Geographical Neighbourhood," LEQS – LSE 'Europe in Question' Discussion Paper Series 97, European Institute, LSE.
    2. Chen, Maggie Xiaoyang & Moore, Michael O., 2010. "Location decision of heterogeneous multinational firms," Journal of International Economics, Elsevier, vol. 80(2), pages 188-199, March.
    3. Che, Yi & Du, Julan & Lu, Yi & Tao, Zhigang, 2017. "Institutional Difference and FDI Location Choice: Evidence from China," MPRA Paper 77158, University Library of Munich, Germany.
    4. repec:bla:jecrev:v:68:y:2017:i:1:p:95-114 is not listed on IDEAS
    5. Bin Ni, 2016. "Are investment promotion agencies doing the right thing? evidence from China," Economics Bulletin, AccessEcon, vol. 36(3), pages 1325-1336.
    6. Ono, Arito & Miyakawa, Daisuke & Hosono, Kaoru & Uchida, Hirofumi & Uchino, Taisuke & Uesugi, Iichiro, 2014. "Transaction Partners and Firm Relocation Choice: Evidence from the Tohoku Earthquake," HIT-REFINED Working Paper Series 11, Institute of Economic Research, Hitotsubashi University.
    7. Watanabe Masahide & Kawata Yukichika, 2017. "What Extent of Welfare Loss is Caused by the Disparity between Perceived and Scientific Risks? A Case Study of Food Irradiation," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 17(1), pages 1-17, February.
    8. Heinrich, Timo, 2012. "Communication and reputation in procurement auctions — Some empirical evidence," Economics Letters, Elsevier, vol. 114(2), pages 164-167.
    9. Nathan E. Wilso, 2016. "Market Structure as a Determinant of Patient Care Quality," American Journal of Health Economics, MIT Press, vol. 2(2), pages 241-271, Spring.
    10. repec:bla:jecrev:v:68:y:2017:i:2:p:232-243 is not listed on IDEAS
    11. 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.
    12. repec:zbw:rwirep:0253 is not listed on IDEAS
    13. Bin Ni, 2013. "Are Investment Promotion Agencies Doing the Thing Right? Evidence from China," OSIPP Discussion Paper 13E004Rev., Osaka School of International Public Policy, Osaka University, revised Jan 2015.
    14. repec:eee:eneeco:v:66:y:2017:i:c:p:320-327 is not listed on IDEAS
    15. Ascani, Andrea & Crescenzi, Riccardo & Iammarino, Simona, 2016. "Economic institutions and the location strategies of European multinationals in their geographic neighborhood," LSE Research Online Documents on Economics 65496, London School of Economics and Political Science, LSE Library.
    16. 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.
    17. Dirk Holtbrügge & Carina B. Friedmann, 2016. "Does location choice affect foreign subsidiary success in India? An empirical study based on Porter's diamond model," International Journal of Business and Emerging Markets, Inderscience Enterprises Ltd, vol. 8(1), pages 3-29.

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    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration


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