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Does Foreign Direct Investment Catalyze Local Structural Transformation and Human CapitalAccumulation ? Evidence from China

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  • Liu,Yan-000529044

Abstract

This paper examines the effect of foreign direct investment on local structural transformationand human capital accumulation in China, exploiting variations in foreign direct investment inflows acrossmanufacturing sub-sectors caused by China’s foreign direct investment deregulation and initial sectoral compositionpatterns across China’s cities and provinces. Using a panel of city-level data from 1990 to 2005, the paper shows thatmanufacturing foreign direct investment inflows greatly accelerated city-level structural transformation and humancapital accumulation. By expanding access to the globalmarket, foreign direct investment created a huge pull factor that drew excess labor away from farms into factories andservices. Foreign direct investment has promoted high school and university enrollment by paying a higher wage premiumfor skilled workers and pushing up the skill premium. The positive effect on structural transformation is largelydriven by export-oriented foreign direct investment, while market-seeking foreign direct investment has a much largereffect on college enrollment. High-skill foreign direct investment has a larger effect on college enrollment thanlow-skill foreign direct investment.

Suggested Citation

  • Liu,Yan-000529044, 2022. "Does Foreign Direct Investment Catalyze Local Structural Transformation and Human CapitalAccumulation ? Evidence from China," Policy Research Working Paper Series 9952, The World Bank.
    • Handle: RePEc:wbk:wbrwps:9952
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