Lovely, Ondrich article on location decisions of foreign investors in China published in RES

Jan 31, 2010

The Location Decisions of Foreign Investors in China: Untangling the Effect of Wages Using a Control Function Approach

Xuepeng Liu, Mary E. Lovely & Jan Ondrich

The Review of Economics and Statistics, January 2010

Jan Ondrich

Mary E. Lovely

Economics Department

Center for Policy Research

China

The Review of Economics and Statistics

Jan Ondrich

Mary E. Lovely

There is almost no support for the proposition that capital is attracted to low wages from firm-level studies. The authors examine the location choices of 2,884 firms investing in China between 1993 and 1996 to offer two main contributions.

First, they 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, they find that unobserved location-specific attributes exert a downward bias on estimated wage sensitivity. Using a control function approach, the authors estimate a downward bias of 50% to 90% in wage coefficients estimated with standard techniques.