There is almost no support for the proposition that capital is attracted to low wages from firm-level studies. We examine the location choices of 2,884 firms investing in China between 1993 and 1996 to offer two main contributions. First, we find that the location of labor-intensive activities is highly elastic to provincial wage differences. Generally, investors' wage sensitivity declines as the skill intensity of the industry increases. Second, we find that unobserved location-specific attributes exert a downward bias on estimated wage sensitivity. Using a control function approach, we estimate a downward bias of 50% to 90% in wage coefficients estimated with standard techniques.
Review of Economics and Statistics
Digital Object Identifier (DOI)
Liu, Xuepeng, Mary E. Lovely, and Jan Ondrich. "The Location Decisions of Foreign Investors in China: Untangling the Effect of Wages Using a Control Function Approach." Review of Economics and Statistics 92.1 (2010): 160-166.