Foreign Direct Investment,Economic Growth,and the Human Capital Threshold: Evidence from US States*

The United States has experienced a dramatic increase in foreign direct investment (FDI) in recent years. While foreign firms bring immediate benefits of high‐paying jobs, data limitations have prevented detailed study on FDI's long‐term effects on the states receiving it. By creating a new stock measure of FDI based on employment, we are able to capture these long‐term effects. Results demonstrate that FDI has a greater impact on per capita output growth than domestic investment for US states that meet a minimum human capital threshold. Ironically, the most active states in the recruitment of FDI tend to fall below this threshold.     

THE EFFECT OF REGULATION ON WAGES AND INTERMEDIATE PRODUCT PRICES UNDER BILATERAL MONOPOLY1

This paper seeks to determine whether, under bilateral monopoly, profit rate regulation induces an input price bias in addition to the well known Averch-Johnson capital intensity bias. Using a Nash-type employer-union, fixed bargaining power model, it is found that regulation may induce lower as well as higher wage rates. Similarly, when the two parties are respectively capital equipment supplier and user, regulation of the user's profit rate has an ambiguous effect on the equipment rental rate. In both cases the input price effect is shown to depend on the elasticity of factor substitution and on how demand elasticity varies with output.     

China's Capital and ‘Hot’ Money Flows: An Empirical Investigation

We examine time‐series characteristics of China's capital flows during 1998–2014. More specifically, we employ Kalman filtering state‐space models to gauge the relative importance of permanent and transitory components in China's overall foreign direct investment (FDI), equity, bond, other investment and bank credit flows. Our results show that only in the case of FDI are both gross inflow and net flow dominated by a permanent stochastic level, suggesting that this source of capital is largely permanent. Incorporating covariates into the state‐space models, we find that a larger difference between onshore and offshore renminbi interest rates encourages capital inflows that are dominated by a transitory component. Greater global risk perception, proxied by S&P 500's volatility index, in contrast, discourages them. These covariates imply that capital control may not be effective in stemming volatile and speculative flows. Our results on bilateral capital flows between China and the USA also suggest that these flows are less persistent and more volatile during 1998–2014 than previously found based on 1988–1997 data. Our results bear important policy implications as China engages in further reforms in its domestic financial system and greater integration with the world financial system.     

THE RESPONSE OF STATE‐OWNED ENTERPRISES TO IMPORT COMPETITION: EVIDENCE FROM CHINESE MANUFACTURING FIRMS

We examine the wage and employment impact on Chinese firms of an increase in import competition associated with China's WTO accession in December 2001, with an emphasis on state‐owned enterprises (SOEs). We find that both wage and employment are negatively impacted by an increase in import competition, but firms with high state ownership cut employment less and reduce wages more than their private counterparts, suggesting that they prioritize the protection of employment over that of wages. This finding supports the notion that SOEs may have ‘multitask’ responsibilities in terms of protecting employment as well as achieving efficiency. We also find that firms with higher capital intensity reduce their wages less but cut employment more in response to intensified import competition. This provides empirical support for the efficiency wage theory.     

The effects of labor regulation on firms and exports: Evidence from Indian apparel manufacturing

We examine the impact of labor regulations on firm outcomes and explore their differential effects on exporters. Building on a conceptual framework developed from standard theory and a detailed qualitative study of India's apparel industry, our econometric analysis exploits establishment-level data on formal Indian garment manufacturers between 2009-10 and 2013-14 and interstate variation in labor laws. We find a close fit between the implications of our conceptual framework, the qualitative evidence and the data. Apparel producers in states with pro-worker labor regulations tend to replace labor with capital. This choice of technique effect is smaller for exporting firms, which are more tightly bound to norms for organizing production in global supply chains. Pro-worker labor regulations also reduce output levels more for exporters than for non-exporters, consistent with exporters being bound to international pricing norms. Labor regulations thus have a particularly adverse impact on exporters. Our findings underscore the cost of poorly-designed and implemented labor regulations in a labor-abundant country wishing to spur exports, employment and industrial activity in labor-intensive industries.     

Investment abroad and labour adjustment at home: evidence from UK multinational firms

Abstract. This paper provides new evidence on the effects of overseas FDI on the skill‐mix of multinational firms’ home‐country operations. The analysis exploits China's WTO accession to identify the impact of outward investment into a low‐wage economy and uses plant‐level data to investigate changes in industrial structure within firms driven by plant closures. As predicted by models of vertical FDI, the paper demonstrates that overseas investment in low‐wage economies is associated with asymmetric effects on workers in low‐ and high‐skill industries in the home economy and, in particular, with firms closing down plants in low‐skill industries. JEL classification: F2     

Rural–urban human capital disparity and skilled–unskilled wage inequality in China

This paper builds three‐sector general equilibrium models to investigate how a shrink of rural–urban human capital disparity generates an impact on skilled–unskilled wage inequality in China. In the basic model where the urban skilled sector and the urban unskilled sector have no upstream and downstream linkage, we find that the wage inequality will be narrowed down if the urban skilled sector is more capital intensive than the urban unskilled sector. To capture the characteristic of China's state capitalism, we build an extended model where the urban skilled sector acts as an upstream industry for the urban unskilled sector, and find that the wage inequality will be reduced if the substitution elasticity of unskilled labor and intermediate product in the urban unskilled sector is large enough. When we consider the factual characteristics of the Chinese economy, our models predict that a shrink of rural–urban human capital disparity will be helpful to reduce the skilled–unskilled wage inequality in China.     

The impact of foreign direct investment on innovation at domestic firms: Evidence from the deregulation of foreign investment in China

This paper studies the impact of foreign direct investment (FDI) on innovation by domestic firms in China. A difference-in-difference estimation strategy yields causal evidence by exploiting China's deregulation of FDI in 2002. Analysis of a matched firm–patent data set from 1998 to 2007 shows that both the quantity and quality of innovation by domestic firms benefited from the presence of FDI. Emphasizing the importance of knowledge spillover from FDI in similar technology domains, the authors examine the role of horizontal FDI and FDI in technologically close industries—those sharing similar technology domains. Findings show that the latter generates much more substantial positive spillover than the former. The paper also shows that knowledge spillover from FDI in similar technology domains is not driven by input–output linkages. In addition, the spillover effect is stronger in cities with higher human capital stock and firms with higher absorptive capacity.     

How China is Reorganizing the World Economy*

We analyze the impact of China's integration into the global economy on other countries, Asian countries in particular. We first examine how the growth of China's exports is affecting the exports of other countries in Asia and the rest of the world. Our innovation is to distinguish exports of capital goods, consumer goods, and intermediates and to disaggregate textiles and consumer electronics, the most visible sectors where China's presence is felt. We next look to the impact of China on direct foreign investment flows. Here our innovation is to distinguish vertical and horizontal foreign direct investment (FDI) and to consider how they are affected by supply‐chain relationships. We then look more closely at factors influencing the articulation of these supply chains, the fragmentation of production, and the emerging international division of labor, focusing on two industries, electronics and autos, that exhibit very different responses. The results suggest that countries specializing in the production and export of components and raw materials feel positive effects from China's growth, while countries specializing in the production of consumer goods feel negative effects. Similarly, countries that compete with China for horizontal FDI find it more difficult to attract foreign investment as a result of that country's emergence, while countries that are potentially attractive destinations for vertical FDI find it easier to attract foreign investment as a result of trade links, especially in components and intermediates, that allow them to take advantage of supply chains involving their large and dynamically growing neighbor.     

STRATEGIC INVESTMENT IN A LABOUR‐MANAGED DUOPOLY

Developing a Cournot two‐stage game model with strategic capital interaction, we compare two different kinds of equilibrium in a labour‐managed (LM) duopoly. An LM firm's reaction function is negatively sloped when capital and output are simultaneously determined, while the slope of its reaction function in the second stage changes in sign depending on the magnitude of its labour‐expansion elasticity. Hence, whether the LM firms employ more capital and produce greater output at the equilibria in the two‐stage game model than at the equilibria resulting from the simultaneous selection of capital and output depends on the magnitude of their labour‐expansion elasticity.     

Trends in employment and the employment elasticity in manufacturing, 1971-92: an international comparison

Employment growth in manufacturing is limited by output growthin this sector, but the elasticity of employment with respectto output has varied widely in different regions and economies.This paper focuses attention on the idea that a major determinantof employment elasticity is the way the fruits of output growthare divided between employment growth and wage growth. But beforewe are able to determine the quantitative dimension of the trade-off,we have to allow for two other factors which affect the sizeof the cake available to labour in real terms. These are: (i)the elasticity of the wage bill with respect to output, whichdetermines the trend in the share of labour; and (ii) the priceeffect, depending partly on the rate of inflation and partlyon the movements of producer prices relative to consumer prices.A simple decomposition procedure is outlined in the paper whichallows us to quantify the relative importance of these factors,and hence give a clearer idea of the labour market outcome leaningto one or other of the two interests, employment growth andreal wage growth. The empirical analysis for different regionsof the world is carried out on time series data for the manufacturingsector collected by UNIDO from the national surveys of membercountries for the decades of the 1970s and the 1980s.     

Outsourcing and the Heckscher–Ohlin Model

The purpose of this paper is to incorporate the currently mushrooming phenomenon of outsourcing into the standard two‐sector, two‐factor Heckscher–Ohlin model of international trade. We first show how outsourcing modifies a firm's production function, and then demonstrate that outsourcing generally raises the return to capital and lowers the real wage, although the nation's GDP rises in proportion to the value‐added in the outsourcing industry. Furthermore, the output of the outsourcing sector may actually fall even though its unit cost goes down; the output of the other sector then rises. By contrast, employment in the outsourcing sector may actually rise.     

RISING WAGES: HAS CHINA LOST ITS GLOBAL LABOR ADVANTAGE?

We document dramatic rising wages in China for the period 1978–2007 based on multiple sources of aggregate statistics. Although real wages increased seven‐fold during the period, growth was uneven across ownership types, industries and regions. Over the past decade, the wages of state‐owned enterprises have increased rapidly and wage disparities between skill‐intensive and labour‐intensive industries have widened. Comparisons of international data show that China's manufacturing wage has already converged to that of Asian emerging markets, but China still enjoys enormous labour cost advantages over its neighbouring developed economies. Our analysis suggests that China's wage growth will stabilize to a moderate pace in the near future.     

Competing to Outsource in the South

This paper analyzes foreign direct investment (FDI) competition in a three‐country framework: two Northern countries and one Southern country. We have in mind the competition of Airbus and Boeing in a developing country. The host‐country government endogenizes tariffs, while Airbus and Boeing choose domestic output and FDI. Wages and employment in the home countries are negotiated. We find that in the unique equilibrium, both Airbus and Boeing compete to undertake FDI in the developing country. This arises because the host country can play off the multinationals, which in turn stems from three factors: (a) oligopolistic rivalry; (b) quid pro quo FDI; (c) strategic outsourcing—FDI drives down the union wages at home if the host‐country wage is sufficiently low. However, if the host‐country wage is sufficiently high, the union wage increases under FDI. In such cases, FDI competition benefits the multinationals, the labor unions, as well as the host country.     

Foreign direct investment, regional market conditions and regional development

This paper uses regional panel data to investigate the mechanism whereby foreign direct investment (FDI) has contributed to China's regional development through quantifying regional marketization levels. It is found that FDI inflow generates a demonstration effect in identifying regional market conditions for investment in fixed assets and hence affects industrial location. In addition, its effects on regional export and regional income growth have varied across east, central and west China since the second half of the 1990s, depending on differences in FDI orientation between different regions. In east China, geographical advantage in exports attracts FDI inflow and FDI promotes exports. In addition, the rise of the FDI–GDP ratio increases east China's share in national industrial value added. These effects contribute positively to regional income growth in east China although there is a direct crowding‐out effect between FDI and domestic investment (as input) in growth. In contrast, the negative impact of FDI inflow on regional export orientation in central China weakens its contribution to regional income growth. Furthermore, the contribution of the improvement in the market mechanism to regional development is evidenced in attracting FDI, in promoting export and directly contributing to regional income growth.     

Trade, Multinational Sales, and FDI in a Three-factor Model

The overwhelming importance of multinational activities as well as the coexistence of exporters and multinationals within the developed countries demand for theoretical models which provide a convincing explanation of simultaneous two‐way trade and horizontal multinational activities. We present a model with three factors of production to disentangle the two‐fold role of headquarters for their affiliates into a know‐how (headquarters services) and a capital‐serving part (FDI). We simulate the model to derive predictions about the impact of trade costs, plant set‐up costs, fixed multinational network costs, relative country size and factor endowments on exports, multinational sales and FDI. The effects are not uniform for multinational sales and FDI. Whereas exports and affiliate sales increase with the similarity in country size, FDI is more likely to increase monotonously with the sending country's size.     

Do Scarring Effects of Low‐Wage Employment and Non‐Employment Differ BETWEEN Levels of Qualification?

This study investigates how the effects of low‐wage employment and non‐employment on wage prospects vary depending on qualification. Based on theories on signalling effects, human capital and job search, we discuss why there may be heterogeneity in state dependence in both labour market states. We find that episodes of low‐wage employment incur a significantly lower risk of future non‐employment than episodes of non‐employment for low‐qualified workers. In contrast, for workers with a middle or high level of qualification the risk of non‐employment is not significantly different when being low‐paid instead of not employed.     

Labour market effects of public capital stock: evidence for the Spanish private sector

This paper provides a new rationale for the positive effect of public capital stock on employment and wages. We show that higher levels of public capital reduce wages along the wage equation and enhance employment due to the resulting larger elasticity of labour demand with respect to wages. The estimation of a structural model for the Spanish private sector reveals that this wage channel is empirically relevant. We use the estimated parameters to simulate the recent incidence of the ratio of public to private capital stock on the private sector economic performance. We find (i) sizeable effects on employment, capital stock and gross domestic product, and (ii) that the wage channel is particularly important for employment.     

The PRC's long-run growth through the lens of the export-led growth model

We explain China's remarkable growth performance over the last three decades through an export-led growth (ELG) model, where countries need to export to pay for their imports. We show that China's actual long-run growth rate is well approximated by its balance-of-payments equilibrium (BOPE) growth rate, defined as the long-run growth rate consistent with current account equilibrium. This growth rate is given by the ratio of the growth rate of exports to the income elasticity of imports. We estimate the latter using the Kalman filter, which allows us to obtain a time-varying estimate of China's BOPE growth rate. We find that the average value of China's BOPE growth rate during 1981–2016 was about 11 percent but fluctuated significantly over time and declined notably after 2007. It is estimated to be 5.9 percent in 2015. We then discuss the determinants of China's BOPE growth rate and of the income elasticity of imports, with the help of the Bayesian Model Averaging technique. The analysis highlights the role of the composition of aggregate demand as the main driving force, both for its direct effects on the income elasticity of imports, and for the indirect effects on export growth via capital accumulation, in particular fixed asset investment. Our analysis has important implications to understand China's transition to a “New Normal” of a lower growth rate and the effects of the external and internal rebalancing strategy pursued from the early 2000s.     

Technological and Organizational Change and the Employment of Women: Early Twentieth-Century Evidence from the Ohio Manufacturing Sector

Abstract

Using a data set that tracks the employment and wages of male and female production and clerical workers in Ohio from 1914 to 1937, this study finds that among manufacturing establishments, female employment and real wages rose rapidly throughout this period, particularly within clerical occupations. There were also substantial increases in the proportion of women in Ohio's manufacturing workforce, and women's wage increases kept pace with those of men. After matching the employment and wage data to input and output data from Ohio's manufacturing census, the study estimates the parameters for industry group translog production functions. The estimates indicate that Ohio's manufacturers adopted new organizational structures and technologies that favored an increasingly intensive use of female clerical labor. The study performs a counterfactual exercise that illustrates the extent to which non-neutral technological and organizational changes over this period explain the observed increases in the employment and remuneration of female clerical workers.