Winners and Losers of Multinational Firm Entry into Developing Countries: Evidence from the Special Economic Zones of the People's Republic of China

Article excerpt

This paper examines the impact of multinational firm entry into local labor markets on employment, productivity, and wages. It exploits the People's Republic of China's rapid implementation of economic reforms and assignment of cities to special economic zone status in the 1980s and 1990s. Using data on both firms and workers, it is found that these policies increased foreign direct investment, which raised average labor productivity in these labor markets. However, only modest increases in real median wage rates across these cities are observed in the face of large increases in wage inequality and rising local prices, limiting the benefits to most workers in these cities. Evidence is presented that corporate profits captured most of the increase in productivity in these areas.

JEL classification: F13, F16

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I. INTRODUCTION

In 1978, the People's Republic of China's (PRC) premier Deng Xiao Ping launched the country's efforts to open its doors to the world. Since the changes that he envisioned were drastic, he initiated a policy in which key strategic cities would be chosen as experimental zones with privileged status. The special economic zones (SEZs) and closely related free trade zones (FTZs) were spectacularly successful and attracted foreign direct investment (FDI), as 11 as an agglomeration of domestic firms hoping to do business with multinational corporations. While the strategies used to attract investment were extremely successful, little is known as to the success of the policy's intention of foreign investment inducing productivity improvement in domestic PRC firms. It is even less clear whether foreign investment has translated into wage increases for Chinese workers, especially those with low skill levels.

Has the PRCs phenomenal growth created a tide that "lifted all ships"? Many fear that corporate profits have captured the bulk of the surplus generated by lower costs of production in the PRC, leaving labor with a smaller share of an albeit larger pie. If wage increases for workers are modest, rising average price levels may leave many workers worse off as a result of trade, in terms of purchasing power. Examining the PRC experience in these tax-privileged zones is important for evaluating the potential of globalization to reduce poverty in developing countries, as the PRC experience has been hailed as a model. It has been used to encourage other countries to pursue similar development strategies, although in some countries such as India, local groups have blocked the implementation of SEZs due to concern about their impact on the local economy. Thus, an accurate assessment of the economic impact of these policies on such factors as employment, wages, and income inequality is of significance both in the PRC and in developing countries around the world.

This study exploits the phased rollout of the PRCs SEZs, and closely related FTZs l , to assess the impact of multinational activity on local labor markets, and the welfare of workers in these cities. A key challenge in the analysis is that these areas were chosen endogenously, as the majority of these areas were in coastal areas that may have benefited from the PRCs growth in the absence of special treatment. The study exploits a quasi-experiment associated with Deng Xiao Ping's famous "southern tour" in 1992. His visit and policy statements in favor of economic liberalization provided political impetus for expanding the number of cities with special status, and increasing autonomy within the existing SEZs.

This paper examines a panel of PRC cities - its firms, workers, and whether the cities are tax-privileged each year. The sample period for firms (1951-2002) and for workers (1988-2002) was characterized by large increases in FDI to the PRC, with much of the increase occurring in the SEZs. Since the timing of the establishment of the zones varied across cities, it is possible to estimate models that exploit variation within a city in terms of FDI and other outcomes of interest such as labor productivity (proxied by valued added per worker) and average wage levels. …