Vertical And Horizontal Foreign Direct Investment And Labor Costs

In the past thirty years,China has acquired a great achievement in absorbing foreign direct investment,as well as improving the policy system of foreign investment introduction.FDI has as well played an important and essential role in Chinese economy development process.The purpose of this paper is to observe and study that whether the increase of labor cost leads to the decrease of the Chinese inwards foreign direct investment,which is crucial and significant to Chinese economy development in the new century.Based on the detail review of theoretical and empirical literature,as well as the data analysis,it shows that,as a whole,Asian economies are the major FDI sources,while the American and European countries have simply taken up an insignificant ratio of the investors of FDI.Derived from the brief summary above,this paper chooses 22 economies which cooperate and tie up tightly with China,and divides them into two groups according to their motivation of investment,namely vertical FDI and horizontal FDI.Using panel data model and the data of FDI amount into China during 1992-2007 from the major countries or regions,this paper analyzes the influence of Chinese labor cost fluctuation on the amounts of the two types of FDI.Primarily,in the sample session,with all other factors remaining the same,the increase of Chinese labor cost has a negative affection on the inflow of the vertical FDI.However,labor cost fluctuation is insensitive to the inflow of horizontal FDI,owing to potential market the aim of investment.In other words,the empirical analysis of China's situation reveals that,labor cost fluctuation has less negative affection on horizontal FDI than that on vertical FDI.The result is robust.It is not long since China started to absorb foreign direct investment.Attracting more FDI flows is still a significant theme in the China's development process.As mentioned above,some policy suggestions are raised at the end of the paper.