Demographics and FDI: Lessons from China's One-Child Policy

43 Pages Posted: 29 Jan 2018

See all articles by John B. Donaldson

John B. Donaldson

Columbia Business School - Finance and Economics

Christos Koulovatianos

Department of Finance, University of Luxembourg

Jian Li

Universite du Luxembourg

Rajnish Mehra

Arizona State University (ASU) - W.P Carey School of Business, Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: January 2018

Abstract

Following the introduction of the one-child policy in China, the capital-labor (K/L) ratio of China increased relative to that of India, and, simultaneously, FDI inflows relative to GDP for China versus India declined. These observations are explained in the context of a simple neoclassical OLG paradigm. The adjustment mechanism works as follows: the reduction in the growth rate of the (urban) labor force due to the one-child policy permanently increases the capital per worker inherited from the previous generation. The resulting increase in China’s (domestic K)/L thus ‘crowds out’ the need for FDI in China relative to India. Our paper is a contribution to the nascent literature exploring demographic transitions and their effects on FDI flows.

Suggested Citation

Donaldson, John B. and Koulovatianos, Christos and Li, Jian and Mehra, Rajnish, Demographics and FDI: Lessons from China's One-Child Policy (January 2018). NBER Working Paper No. w24256. Available at SSRN: https://ssrn.com/abstract=3112043

John B. Donaldson (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Christos Koulovatianos

Department of Finance, University of Luxembourg ( email )

4 Rue Albert Borschette
Luxembourg, L-1246
Luxembourg

Jian Li

Universite du Luxembourg ( email )

L-1511 Luxembourg
Luxembourg

Rajnish Mehra

Arizona State University (ASU) - W.P Carey School of Business, Department of Economics ( email )

Tempe, AZ 85287-3806
United States
480 965 6335 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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