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

Aufsätze referiert extern - Web of Science 2 / 2018

Julian Donaubauer, Christian Dreger

In: Asian Economic Papers 17 (2018) 2, S. 94-107

Abstract

China's government has been promoting the shift toward a consumption-based economy in the past few years to arrive at a path of sustainable and socially inclusive growth. In this context, the explicit goal to significantly raise the percentage ofwages in the national household income was an integral part of the 12th Five-Year Plan (2011–15). These changes in economic strategy are likely to affect the attractiveness of the country to foreign investors. In this paper, we raise the hypothesis that soaring relative wages negatively affect foreign direct investment (FDI) inflows to China, and alter their distribution within China. In addition, low-wage countries in the Asian region might benefit from the changed direction of FDI inflows. We utilize fixed-effects panel models with spatial spillovers for Chinese provinces and developing ASEAN countries to provide strong and robust evidence that wage increases change the allocation of FDI within China. In addition, we show that the changes in China's economic strategy improve the chances of its low-income neighbors to attract FDI.

Christian Dreger

Forschungsdirektor in der Abteilung Makroökonomie