Working Papers

2006-25 | May 2008

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Did Foreign Direct Investment Put an Upward Pressure on Wages in China?

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In this paper we study the extent to which foreign direct investment (FDI) could have contributed to recent increase in wages in China. Using a World Bank survey data set of 1500 Chinese enterprises conducted in 2002, we find that the presence of FDI has both direct and indirect effects on wages of skilled workers, while it does not appear to affect wages of production workers. Moreover, we find that the indirect effect of the FDI presence on wages of skilled workers is limited to private firms. We further find that observed quality of skilled workers in state owned enterprises (SOEs) declines in the presence of FDI in the same industry and region. We discuss potential reasons for such discrepancy in the FDI effects on private firms' and SOEs' labor practices. These findings highlight the relevance of labor market institutions in determining FDI spillovers.

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