On Foreign Direct Investment Impact On The Income Gap In China

For 30 years of the Reform and Opening, China has been transforming from a planned economy to the market economy system, from a low-income country to a middle-income nation. China's economy has achieved remarkable growth speed continuely, and the overall level of the people's income has also increased dramatically. However, besides the economy as well as the average income growed in a level of high-speed, the income ineqaulity in China has also been widening rapidly. Almost all the indicators to measure the income gap, in these 30 years, have showed a continuous rising trend, so that income inequality has gradually entered into the vision of China's economics research, and has increasingly become a focus by the common concern of the entire society.There are a number of factors that cause China's income gap to rise. In the previous study, the income gap was explained from the point of view of the economic transition, government policies, and also from the perspective of social and human studies. In this paper, the concern is focus on the impact of Foreign Direct Investment to China's income gap. FDI, as an important phenomenon since China's economic reform and openness, not only played as foreign capital involved in social production, but has also brought broad and profound impacts on China's economic structure, industrial layout, institution transition, and human capital accumulation. And so, FDI would certainly be an important variable that affects the income inequality of our country.The income gap is a very broad concept, including regional disparity, the gap between urban and rural areas, the gap between the individual residents, industry gap, the gap between departments, and so on. According to the characteristics of FDI in China and its effect channels on income distribution, this study focused on the following three aspects: 1, FDI's impact on China's regional income gap; 2, FDI's impact on the income gap between the different types of labor (high skilled labour and low-skilled labour) in China; 3, the mechanism of FDI's impacts on China's income gap in the long run.This article will first conduct relevant research literature review, and then introduce the main income inequality measuring indicators, and the main interpretations of the income gap. Based on the above, we will measure and evaluate the income gaps in current China, list several categories of factors that affect China'sincome gap, and then introduce the important variable------FDI. The next will be themain part of this paper.The study on FDI and China's regional income gap will commence like the following: First, construct the income decision function, and FDI will be contained in this function as a variable. Then, based on the income decision function, we can decompose the regional income gap among factors, verify the relationship between FDI and income gap among the regions, and quantitatively analize the relative impact intensity of FDI on the regional income gap. Finally, this paper will discuss the mechanism of FDI's impact on China's income gap, the process is: the imbalance of FDI's distribution among China's different regions cause the inequality of employment opportunities among the regions, which then led to regional income inequalities. Specifically, the mechanism made effects in two ways: First, the Direct Effect, which is manifested mainly in FDI's accumulation in Eastern regions of China, and so cause the imbalance of the employment opportunities among regions. Second, the Indirect Effect, which is manifested mainly as FDI's profound indirect impacts on one region by accelerating the process of economic globalization, pushing forward regional import and export trade, widening the gap between regional economic development, and promoting regional industrial structural adjustment and upgrading.In the study of FDI's impacts on income gap between different types of labor in China, this paper introduce the concept of "the stratification of labor market" considering about the dual economic structure in China. Using of inter-provincial panel data in regression analysis on the income growth function, we verify and explain how FDI has caused the stratification of labour market under China's special economic conditions, resulting in strengthening the wage difference between the high-skilled labour and low-skilled labour, thereby exacerbating the income gap among different individuals.In order to discuss the long-term relationship between FDI and China's income gap, according to the needs of studying income disparity, this paper redefines the "Spillover Effects" of FDI in three categories: Technology Spillover, Institutional Spillover and Knowledge Spillover. Through specific analysis of mechanisms of the three spillover effects on the income gap, as well as the conditions required to narrow the income gap (or lower the widening rate of the income gap), the paper summed up an "Inverted U Relation" between FDI's spillover effect and the income gap------in the short-term, FDI's spillover effect will exacerbate income inequality, and in. the long-term such effect will act in the opposite direction.Finally, in accordance with the preceding analysis, this paper presents some policy proposals on narrowing the income gap of China (or lower the widening speed of the income gap), including: increase the education and training efforts on Nongmingong and other low-skilled labour; enhance the ability and level of attracting FDI and learning advanced technology from FDI in the Central and Western regions of China, while regconizing the importance of introduction of domestic capital; further deepen the Reform, strengthen the market institutions building, promoting the full use of the FDI's spillover effect.Through these efforts, I hope this peper may clarify the mechanism of FDI's impacts on China's income gap, deepen our understanding of the causes of the income gap, so that develop fairer and more equitable development strategy in the future, and let us implement the national policy of opening much better.