Does a foreign degree pay? The return to foreign education in China

• DOI: http://doi.org/10.1111/rode.12550
• Author: Mengmeng Guo,Jingjing Ye,Yaxin Zhang
• Date: 01 February 2019
• Published date: 01 February 2019

REGULAR ARTICLE

Does a foreign degree pay? The return to foreign

education in China

Mengmeng Guo

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Yaxin Zhang

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Jingjing Ye

Southwestern University of Finance and

Economics, Chengdu, China

Correspondence

Mengmeng Guo, Research Institute of

Economics and Management,

Southwestern University of Finance and

Economics, Chengdu, China, 611130

Email: gmm@swufe.edu.cn

Funding information

NSFC, Grant/Award Number: 71401141,

71403220

Abstract

A large body of literature is devoted to estimating causal

effects of schooling; however, few studies have addressed

the returns on education overseas. In this paper, we focus

on the causal impact of holding a foreign education degree

on one's performance in the homeland labor market in the

context of China, the world's leading source of students

pursuing education overseas. To address the issue of endo-

geneity, we construct an instrumental variable based on the

exchange rate when the individual is about to make further

education plans to isolate the arguably exogenous cost‐side

shocks to one's education decision. Utilizing data from the

China Household Financial Survey, we find that holding a

foreign education degree has no effect on one's propensity

to join the labor market but leads to a 108.95% increase in

one's wage upon employment. Moreover, such effects dis-

play significant heterogeneity among returnees regarding

their background. Specifically, returnees earn less if they

went abroad after China joined the WTO, work in public

sectors or have rich family resources.

KEYWORDS

Foreign education degree, Wage, Instrumental variable, China

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INTRODUCTION

More than 3 million worldwide students each year receive tertiary level education outside their

home country, and this number is expected to rise to approximately 7 million by the year 2020

(World Bank, 2011).

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With the goal of acquiring knowledge and skills to give them a competitive

edge back home, many students are willing to pay the price. In China, for example, it is estimated

that international students and their families pay at least U.S.$163,000 to complete a 4‐year

DOI: 10.1111/rode.12550

Rev Dev Econ. 2019;23:415–434. wileyonlinelibrary.com/journal/rode © 2018 John Wiley & Sons Ltd

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education program in an American business university, while China's average personal saving is

only U.S.$5,100.

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Globally, the exploding number of international students has fostered a U.S.$45

billion “industry”in the higher education sector (Barrow, 2008).

Given the notable internationalization of higher education, one natural question is whether

studying abroad is worth the cost. Understanding this research question is a particularly pressing

issue for developing countries, as studying abroad offers many of the promises and fears of brain

drain. If the internationally acquired education is fairly rewarded in the domestic labor market, the

home country will invest more in its human capital and attract more returning talents in the future.

Nevertheless, most extant work focuses on students who were educated and subsequently worked

abroad, mostly because of the availability of data.

In this paper, we utilize a unique dataset to investigate the labor market performance of workers

with foreign degrees in China, which constitutes the largest and fastest‐growing source of interna-

tional students

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and also increasingly attracts them back upon graduation.

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Since China's reform

and opening, the flow of students from China to go abroad to pursue bachelor's and above degrees,

especially in developed countries, has been increasing, as displayed in Figure 1. On the other side,

China meanwhile witnessed an increasing number of students choosing to return home after study-

ing abroad (referred to as “returnees”hereafter).

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The acceleration of return migration further moti-

vated our study to investigate the labor market performance of those returnees in China.

Our estimation is complicated by at least two identification challenges. First, the decision to

acquire education outside one's home country is potentially endogenous. For instance, students

with better language skills or higher levels of motivation may be prone to seek overseas education.

If those mostly unobserved characteristics (by researchers) contribute to one's future labor market

performance, we may find a spurious correlation instead of a causal relationship between these

two variables. Second, people self‐select into whether to return to China upon the completion of

foreign education. To circumvent those issues, we borrow the idea of propensity score weighting

FIGURE 1 The trend of studying abroad of students in China (1978–2012).

Data source: The National Bureau of Statistics of China

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GUO ET AL.