Impact Of Foreign Direct Investment On China’s Income Gap

With the implementation of the reform and opening up policy, China’s economy hasexperienced a glorious development. Massive foreign direct investment came to China not onlywith the capital, but also bringing a large number of advanced technology and managementexperience. They have affected our society in various aspects. As with the economy developingrapidly, the widening wage gap problem has also been criticized by the community. This paperanalyzes how the foreign direct investment affects the income gap between skilled labor andunskilled labor.This paper first sorts out the relevant documents, then discusses this issue in theoreticalfoundation, development status analysis and empirical analysis. In the part of theory analysis, thisarticle first gives a brief introduction of H-O theorem and the intermediate goods trade model.Based on those, the paper analyzes the mechanism system of FDI’s effect on income gap: themechanism of technological spillover, the mechanism of the labor market competition and themechanism of the product market competition. In the part of development status analysis, itintroduces the development of FDI in China, the income gap between skilled and unskilled labor,and the relationship between them. In the part of empirical analysis, the mechanism of labor andproduct market competition will put into the model. This paper establishes a two-equationsimultaneous model by endogenous the income gap and labor supply. Then it investigates theeffects of FDI on income gap by using the panel data of36industries during2002-2011. Theresults show that FDI can widen the income gap between skilled and unskilled labor through threemechanisms we surmised before. Finally, according to results of theoretical and empirical analysis,this paper gives some policy recommendations on the problem of widening income gap.