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
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.
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