Analysis Of The Impact Of FDI In Service Industry On Labor Share In China

Since Opening and Reforming started, China has enjoyed a thirty-year high speed growth in its economy. FDI (Foreign Direct Investment) played a very important role in this process. It helps China overcome the shortage of capital at the very beginning of the Opening and Reforming and also brings advanced technology and administration experience to China which helps China's local firms improve their productivity. In 2002, China's FDI volume outnumbered the US and became the world largest FDI hosting country for the first time. In 2013, the volume of FDI in China reached to 11.76 billion dollars. Service Industry becomes the largest hosting industry of FDI in China which counts more than 51% of the total FDI volume.With the rapid growth of economy, Income distribution has become a very important issue. As the report of the 18th national congress of the Communist Party of China mentioned, "Both in the initial income distribution and income redistribution process should we balance the relationship between efficiency and fairness. Fairness should be emphasized more during income redistribution. The share of household income in national income should be improved gradually and the share of labor income should also be improved in the initial distribution." Income distribution issue directly affected the stability of the whole society. Since FDI has become more and more important in economy growth, its influence on income distribution is hard to ignore. On the other hand, service industry grows fastest among three industries during past few years. The real GDP of service industry maintain a growing speed of 9.6% per year. In 2013, the share of service industry in total GDP reached 48.2% which passed the manufacturing industry and became the biggest industry. Working population of service industry which counted 12.2% of the total working population in 1978 now counts 36.1% of the total working population. This share will continue its growth in the future. Income distribution problem in service industry has become more and more important to the whole economy. Thus, with the rapid growth of FDI in service industry and the importance of the service industry to the whole economy, correct understanding with the impact of FDI on income distribution in service industry is very important.In this paper, we use data from 2004 to 2011 of China service industry to analyze how FOI in service industry affects labor share in service industry. Both panel data analysis and time-varying coefficient panel data model are used in this paper. The result indicates that FDI has no significant influence on non-producer service industry but significant influence on producer service industry. The direction of the influence depends on the relative power of wage effect and labor productivity effect of FDI. Furthermore, capital intense of industry, capital input of unit output and nationalization degree of industry also have significant influence on labor share. In the end, we put up some policy suggestion for handling the income distribution problem based on our empirical result.