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

Research output: Chapter in Book/Report/Conference proceedingChapter

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)
Title of host publicationInternational Economic Integration and Domestic Performance
PublisherWorld Scientific Publishing Co. Pte Ltd
Pages191-198
Number of pages8
ISBN (Electronic)9789813141094
ISBN (Print)9789813141087
DOIs
StatePublished - Feb 27 2017

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ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)
  • Business, Management and Accounting(all)

Cite this

Lin, X., Lovely, M. E., & Ondrich, J. (2017). The location decisions of foreign investors in China: Untangling the effect of wages using a control function approach. In International Economic Integration and Domestic Performance (pp. 191-198). World Scientific Publishing Co. Pte Ltd. https://doi.org/10.1142/9789813141094_0011