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The End of Cheap Labour: Are Foreign Investors Leaving China?

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  • Christian Dreger
  • Julian Donaubauer

Abstract

China’s government is promoting the shift towards a consumption-based economy since a few years. The explicit goal to significantly raise the percentage of wages in the national household income is integral part of the 12th Five-Year Plan (2011-15). The changes in the economic strategy are likely to affect the attractiveness of the country to foreign investors. In this paper, we raise the hypothesis that soaring wages negatively affect FDI inflows to China and alter the distribution of FDI over Chinese provinces. In addition, low-wage countries in the geographical surrounding might benefit from the changed direction of FDI inflows. By performing panel models with spatial effects for both Chinese provinces and developing ASEAN countries, regional dependencies are explicitly addressed. We provide strong and robust evidence that the wage increases change the distribution of FDI within China. In addition, we show that the changes in China’s economic strategy improve the chances of its low-income neighbours to attract FDI.

Suggested Citation

  • Christian Dreger & Julian Donaubauer, 2016. "The End of Cheap Labour: Are Foreign Investors Leaving China?," Working Papers id:11277, eSocialSciences.
    • Handle: RePEc:ess:wpaper:id:11277
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    Cited by:

    1. LIANG, Licheng & MATSUURA, Toshiyuki, 2023. "Adjustments of Multinational’s Production Activities in Response to the US-Sino Trade War : Evidence from Japanese affiliate-level data," Discussion Paper Series 745, Institute of Economic Research, Hitotsubashi University.
    2. Nguyen, Anh T.N. & Haug, Alfred A. & Owen, P. Dorian & Genç, Murat, 2020. "What drives bilateral foreign direct investment among Asian economies?," Economic Modelling, Elsevier, vol. 93(C), pages 125-141.
    3. Krummel, Daniel & Siegfried, Patrick, 2021. "Child Labour Ethics through the Prism of Utilitarianism and Deontology," MPRA Paper 111403, University Library of Munich, Germany.
    4. Yuting Li & Karsten Mau & Mingzhi Xu, 2023. "Rising Wages and Intra-Country Industry Relocation: Evidence from China," Open Economies Review, Springer, vol. 34(3), pages 579-615, July.
    5. Tadashi Ito & Toshiyuki Matsuura & Chih-Hai Yang, 2020. "Revisiting Complementarity between Japanese FDI and the Import of Intermediate Goods: Agglomeration Effects and Parent-firm Heterogeneity," Asian Economic Papers, MIT Press, vol. 19(3), pages 90-106, Fall.
    6. Tafadzwa Matiza & Sandra Perks, 2017. "Human Capital Reputation as an Antecedent of Foreign Direct Investment Market Entry in Zimbabwe," Journal of Economics and Behavioral Studies, AMH International, vol. 9(5), pages 185-199.

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    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F63 - International Economics - - Economic Impacts of Globalization - - - Economic Development
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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