Bargaining Power and Foreign Direct Investment in China: Can 1.3 Billion Consumers Tame the Multinationals?

PERI Working Paper No. 45

42 Pages Posted: 3 Feb 2003

See all articles by Elissa Braunstein

Elissa Braunstein

University of Massachusetts at Amherst - College of Social and Behavioral Sciences - Department of Economics

Gerald Epstein

University of Massachusetts at Amherst - College of Social and Behavioral Sciences - Department of Economics

Date Written: October 2002

Abstract

Foreign direct investment (FDI) has become a much desired commodity by nations, regions and cities throughout the world. Indeed, governments bid for FDI because it is commonly thought to be an important engine of economic growth, job creation, and technological upgrading. The People's Republic of China (PRC), the developing world's largest recipient of FDI and one of the world's fastest growing economies, is often cited as evidence for the beneficial effects of FDI. Given the PRC's size and the huge allure of its cheap labor force and customer base, one would think that if any country had the bargaining power vis a vis multinational corporations to benefit from FDI, it would be China. But does FDI really deliver these commonly perceived benefits? To answer this question, we study the impact of inward FDI on wages, job creation, investment and tax generation in the PRC from 1986-1999 by running panel regression analysis on provincial level data. An innovation of our analysis is to distinguish the impact of FDI inflows from that of economic liberalization, per se. We find that, contrary to the conventional wisdom, inward FDI has a relatively small positive impact on wages and employment, while having a negative impact on domestic investment and tax revenue. We suggest that the decentralization of the FDI bidding process in China contributes to these negative outcomes, and argue that the limitation on FDI management tools associated with China's WTO entry is likely to further reduce the benefits of FDI for Chinese workers and citizens.

Suggested Citation

Braunstein, Elissa and Epstein, Gerald, Bargaining Power and Foreign Direct Investment in China: Can 1.3 Billion Consumers Tame the Multinationals? (October 2002). PERI Working Paper No. 45, Available at SSRN: https://ssrn.com/abstract=343540 or http://dx.doi.org/10.2139/ssrn.343540

Elissa Braunstein (Contact Author)

University of Massachusetts at Amherst - College of Social and Behavioral Sciences - Department of Economics ( email )

Amherst, MA 01003
United States
(413) 545-6355 (Phone)

Gerald Epstein

University of Massachusetts at Amherst - College of Social and Behavioral Sciences - Department of Economics ( email )

Amherst, MA 01003
United States
413-545-4815 (Phone)

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