Impact Of Rising Labor Costs On FDI Inflows

Since the reform and opening up,China has formed locally optimized investment environment by its low labor cost and embedded in global value chain(GVC)dominated by western developed countries,thus promoting economic development.In 2010,China's GDP surpassed that of Japan and became the second in the world.In 2014,China's FDI exceeded that of the United States for the first time,becoming the world's largest country of attracting FDI.But as the domestic economy grows,labor costs are rising,especially in the east.Compared with Southeast Asian countries such as Vietnam,China's cost advantage is losing,and there has been a trend of capital transfer from the east to the middle and the west in China,which lead to great concern and worry about lower FDI on account of increasing labor cost.This article studies the impact of rising labor costs on FDI inflows through qualitative and quantitative analysis.Firstly,the state of labor cost in China is expounded according to the average wage level and unit labor cost in terms of the overall and regional aspects,and then the overall situation and structural characteristics of the utilization of foreign capital in China are analyzed based on factual data.It also proposes specific mechanisms for the impact of rising labor costs on FDI,including investment cost,labor productivity and the proportion of high-skill labor.Finally,this paper uses fixed-effect model to perform 2SLS regression to explore the relationship between China's rising labor costs and FDI inflows based on the 2001-2016 city-level panel data,trying to verify the effect of rising labor costs on China's FDI from the overall and sub-regional levels.And a variety of methods are used to test the robustness to ensure the reliability of the conclusion.In addition,this paper uses the intermediary effect model to verify the labor productivity mechanism.Various test results show that from the overall sample regression results,there is a significant positive correlation between the rise in labor costs and FDI in China;from the group regression results,the opening levels of eastern,central and western China are very different,indicating that the positive correlation between the rising labor costs in the central region and FDI inflows is significantly better than that in the eastern and western regions.The results indicate that labor cost and quality across regions in China are at different levels,indicating difference of attracting FDI.And finally,this paper puts forward the relevant policy suggestions from the three aspects: adjusting the goal of utilization of foreign capital,promoting the rational flow,competition and sharing of regional resource elements,and improving the quality of workers and corresponding skills,based on the conclusions of the study as well as empirical results.