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Demographics and FDI: Lessons from China's one-child policy

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Listed:
  • Donaldson, John B.
  • Koulovatianos, Christos
  • Li, Jian
  • Mehra, Rajnish

Abstract

Following the introduction of the one-child policy in China, the capital-labor (K/L) ratio of China increased relative to that of India, and, simultaneously, FDI inflows relative to GDP for China versus India declined. These observations are explained in the context of a simple neoclassical OLG paradigm. The adjustment mechanism works as follows: the reduction in the growth rate of the (urban) labor force due to the one-child policy permanently increases the capital per worker inherited from the previous generation. The resulting increase in China's (domestic K)/L thus "crowds out" the need for FDI in China relative to India. Our paper is a contribution to the nascent literature exploring demographic transitions and their effects on FDI flows.

Suggested Citation

  • Donaldson, John B. & Koulovatianos, Christos & Li, Jian & Mehra, Rajnish, 2018. "Demographics and FDI: Lessons from China's one-child policy," CFS Working Paper Series 613, Center for Financial Studies (CFS).
  • Handle: RePEc:zbw:cfswop:613
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    References listed on IDEAS

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    More about this item

    Keywords

    Lucas paradox; capital-labor ratio; FDI-intensity; one-child policy;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical

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