Labor Quality and Inward FDI: A Firm-Level Empirical Study in China

Abstract

This paper investigates the relationship between labor quality and inward foreign direct investment (FDI) distribution in China using a large sample of Chinese cross-sectional, firm-level data, with comprehensive information about labor quality. The paper finds that labor quality measured by education level plays an important role in deciding the distribution of inward FDI, but labor quality measured by working certificates loses its significance using non-parametric matching techniques and the instrumental variables and generalized method of moments technique.The author also finds that labor quality has a more significant impact on other foreign investments than Hong Kong invested, Macau-invested and Taiwaninvested firms. The impacts of labor quality on inward FDI are found to be strongly uneven across industries and provinces. Therefore, China should pay more attention to the education of employees in all foreign-invested firms, and invest more in education to improve labor quality, which will help China to attract more FDI, especially technology-intensive FDI.