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

46 Pages Posted: 16 Dec 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)

Multiple version iconThere are 2 versions of this paper

Date Written: November 24, 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.

Keywords: Lucas paradox, capital-labor ratio, FDI-intensity, one-child policy

JEL Classification: F11, F21, J11, O11, E13

Suggested Citation

Donaldson, John B. and Koulovatianos, Christos and Li, Jian and Mehra, Rajnish, Demographics and FDI: Lessons from China's One-Child Policy (November 24, 2018). Center for Financial Studies Working Paper No. 613. Available at SSRN: https://ssrn.com/abstract=3289940 or http://dx.doi.org/10.2139/ssrn.3289940

John B. Donaldson

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Christos Koulovatianos (Contact Author)

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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