Impact Of Foreign Direct Investment On China’s Income Gap Between Industries

FDI has a great impact on the economic development of the host country. As thescale of FDI utilization in China is expanding continuously, the economy of ourcountry has developed rapidly, while the income gap becomes wider. This paper focuson how the FDI affects the income gap between industries.This paper firstly organizes the domestic and foreign related literature. Based onthis, this paper discusses about how the FDI affect the income gap between industriessystematically, with the current situation, theory and empirical analysis methodology.In the part of theory analysis, this paper analyzes the mechanism system of FDI’sspillover effect: the mechanism of the labor market competition and mechanism oftechnological spillover. But both of these two mechanisms are subjected to someexternal factors. In the part of the current situation analysis, it introduces the currentsituation of FDI, the income gap between industries, and the way the FDI affect theincome gap. In the part of empirical analysis, the mechanism of the labor marketcompetition will be incorporated into the modeling. It establishes a two-equationsimultaneous model by endogenous the level of human capital and the income gapbetween industries. And it investigated the effects of FDI on the income gap by usingthe panel data of16industries during2003-2009. The result shows that: Althoughother factors play stronger role than the FDI, the FDI widens our country’s incomegap between industries in the mass. And this effect can be divided into two parts. First,it widens the income gap between industries with the direct effect. Second, it reducesthe income gap between industries with the indirect effect of the human capital. Thisshows that if the entry of FDI can improve the level of human capital, it can ease theincome gap between industries. Finally, according to the results of the theoretical andempirical analysis, this paper gives some suggestions on how to attract and play thepositive role of FDI and how to ease our country’s income gap between industries.