On whether China's labor advantage can last in absorbing foreign direct investment

FENG Wei1 PU Zhengning1 XU Kangning1

(1.School of Economics and Management, Southeast University 211189)

【Abstract】Labor is one of the key factors for foreign direct investment absorbing. This paper taking China as a research object, examines the features of labor cost advantage and labor quality to absorb FDI from two levels of labor evaluation, i.e., unit labor cost and human capital. The major findings show that there is threshold effect either in the whole country or in the coastal and inland areas of China. At the same time, the threshold in the coastal area is lower than that in the inland area, which means that labor cost advantage is much more easily lost in the coastal area. The paper also finds that there is structure effect between human capital and FDI, i.e., different kinds of human capital have different outcomes of absorbing FDI. At last, the paper gives some counter measures according to these findings.

【Keywords】 foreign direct investment; unit labor cost; human capital; panel threshold model;


【Funds】 National Social Science Fund Project for Youth (15CJL039) Humanities and Social Sciences Project for Youth by the Ministry of Education (13YJC790027)

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(Translated by CHEN Ziye)


    [1]. ① Data are from China Population and Employment Statistics Yearbook 2013 and China Statistical Abstract 2014. [^Back]

    [2]. ② It should be mentioned that this research also considered to use NERI Index of Marketization of China’s Provinces 2011 Report by Fan Gang et al. to measure marketization; however, unfortunately, the data of this index were only updated till 2009, which failed to effectively reflect the latest changes in China’s labor market and its influence on FDI. [^Back]

    [3]. ③ Based on the classification by Wan Guanghua and Zhang Yin (2008), the coastal area mainly includes provinces, autonomous regions and municipalities as Beijing, Tianjin, Hebei, Liaoning, Jiangsu, Zhejiang, Fujian, Guangdong, Hainan, Shandong and Shanghai, and the inland area encompasses Gansu, Qinghai, Shanxi, Inner Mongolia, Jilin, Heilongjiang, Anhui, Jiangxi, Hubei, Hunan, Henan, Guangxi, Sichuan (including Chongqing), Guizhou, Yunnan, Shaanxi, Ningxia and Xinjiang. [^Back]

    [4]. ④ The main reason of such a result is that, for unit labor costs, as the inland area includes more provinces, autonomous regions and direct-controlled municipalities, it has a stronger influence on the result of the whole country. Therefore, the 500 samplings lead the threshold value of the inland area to be close to the national one. Negative threshold value, such as −1.328 of the coastal area, emerged in that the unit labor cost (logULT) selected was the one after logarithm was applied. If the logarithm is removed, ULT value is positive. [^Back]

    [5]. ⑤ It should be noted that the labor cost advantage depicted by the unit labor cost (logULT) is negatively correlated with the latter, for which a detailed explanation has been presented in “2 Modeling and variable elucidation.” [^Back]

    [6]. ⑥ Data are from the China Education Online, http: //gaokao.eol.cn/ [^Back]


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This Article


CN: 11-1692/F

Vol , No. 11, Pages 132-143

November 2015


Article Outline


  • Introduction
  • 1 Literature review
  • 2 Modeling and variable elucidation
  • 3 The empirical analysis
  • 4 Conclusion
  • Footnote