FDI, Industry Heterogeneity and Employment Elasticity in China

• Author: Bo Chen,Yao Li,Yuming Yin
• DOI: http://doi.org/10.1111/rode.12198
• Published date: 01 February 2016
• Date: 01 February 2016

FDI, Industry Heterogeneity and Employment

Elasticity in China

Bo Chen, Yao Li, and Yuming Yin*

Abstract

We investigate the different impacts of foreign direct investment (FDI) on employment elasticity with

China’s firm level data from 1998 to 2007. Our analysis shows that the inclusion of FDI does significantly

affect firms’ employment elasticity when facing wage, capital and output shocks. These effects vary dra-

matically across industries with different factor intensities and export status. Specifically, we find that non-

exporters with FDI tend to increase employment elasticity more than exporters when wage, capital input or

output changes. However, FDI firms that are engaging in labor-intensive production tend to have larger

output and capital input elasticity of employment while smaller wage elasticity of employment. Our find-

ings help to explain the contradicting results in existing literature and provide important references for

China’s policy makers to design proper industry policies towards FDI.

1. Introduction

The impact of FDI on employment has become one of the major concerns to policy

makers for years. It has also been noticed by academia since the 1970s (Frank and

Freeman, 1978). While a number of papers have underlined the importance of FDI

activities on employment, no consensus has yet emerged in this regard (Baldwin,

1995; Menon and Sanyal, 2007). For home countries, some studies show evidence that

FDI outflows increase the home countries’ job losses (McCarthy, 2002). However,

there are both theoretical and empirical studies that argue that FDI by multinational

enterprises (MNEs) may help reduce the unemployment rate in the home countries

(Mitra and Ranjan, 2010).

Views on FDI’s impact on host countries’ employment are mixed as well. Kulfas

et al. (2002) find that MNEs decreased employment in Argentina, but Karlsson et al.

(2009) find that FDI, in terms of foreign acquisition, increased employment in China.

Furthermore, compared with domestic firms, MNEs may generate greater (smaller)

employment volatility as a result of more (less) elastic labor demand. Empirical

studies have found that MNEs in developed countries tend to have higher employ-

ment elasticity and are more likely than domestic firms to respond to shocks

(Geishecker, 2008; Meriküll and Room, 2014).

The impact of FDIs on employment elasticity may be quite different in developing

host countries owing to the difference in technology, factor intensity, industry struc-

ture, as well as labor institutions and their enforcement. For example, Borga and

* Li: School of Management and Economics, University of Electronic Science and Technology of China,

2006 Xiyuan Rd., Chengdu, P. R. China, 611731. Tel: +86-135-5100-8140; Fax: +86-028-61830901; E-mail:

liyao@uestc.edu.cn. Chen: School of International Administration, Shanghai University of Finance and

Economics, Shanghai, P. R. China. Yin: School of Management and Economics, University of Electronic

Science and Technology of China, Chengdu, P. R. China. Chen is grateful for financial support from the

Natural Science Foundation of China (71103116). Li and Yin acknowledge the financial support from the

China National Social Sciences Foundation (10XJL0019) and Youth Fund of Humanities and Social Sci-

ences Project of Chinese Ministry of Education (Grant No. 11YJC790248).

Review of Development Economics, 20(1), 189–200, 2016

DOI:10.1111/rode.12198

©2015 John Wiley & Sons Ltd