The location decisions of foreign investors in china: Untangling the effect of wages using a control function approach

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Abstract

There is almost no support for the proposition that capital is attracted to low wages from firm-level studies. We examine the location choices of 2,884 firms investing in China between 1993 and 1996 to offer two main contributions. First, we find that the location of labor-intensive activities is highly elastic to provincial wage differences. Generally, investors' wage sensitivity declines as the skill intensity of the industry increases. Second, we find that unobserved location-specific attributes exert a downward bias on estimated wage sensitivity. Using a control function approach, we estimate a downward bias of 50% to 90% in wage coefficients estimated with standard techniques.

Original languageEnglish (US)
Pages (from-to)160-166
Number of pages7
JournalReview of Economics and Statistics
Volume92
Issue number1
DOIs
StatePublished - Feb 2010

ASJC Scopus subject areas

  • Social Sciences (miscellaneous)
  • Economics and Econometrics

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