Scandinavian Working Papers in Economics

Stockholm School of Economics Asia Working Paper Series,
Stockholm School of Economics, Stockholm China Economic Research Institute

No 2017-45: Foreign Direct Investment and Urban Inequality: Evidence from Chinese Cities

Anders C. Johansson (), Dan Liu () and Maosheng Zhen
Additional contact information
Anders C. Johansson: Stockholm China Economic Research Institute, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden
Dan Liu: Shanghai University of Finance and Economics
Maosheng Zhen: Shanghai University of Finance and Economics

Abstract: In this paper we examine the impact of foreign direct investment (FDI) on local urban wage inequality in China. We find that the within-city college premium is larger for cities characterized by a higher degree of FDI penetration. We then try to establish the causal impact of FDI penetration on city inequality using historical Christian influence as an instrumental variable. In addition, firm-level evidence shows that FDI has amplified both between-firm inequality and within-firm inequality. FDI firms do not only hire relatively more high-skilled workers but also provide relatively higher wages to high-skilled workers compared to domestic firms. Finally, an individual-level analysis shows that FDI has a spillover effect on low-skilled workers, but the magnitude of that effect is much smaller than the effect on high-skilled workers.

Keywords: foreign direct investment; skill premium; inequality; China

JEL-codes: F21; I30; R11

42 pages, November 15, 2017

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