Foreign direct investment and relative wages: The case of China

According to the conventional wisdom, foreign direct investment (FDI) can r aise relative wages of skilled labor in a host country by bringing in skill -biased technology This paper proposes an alternative hypothesis that in an economy characterized by labor market segmentation and high labor mobility costs, FDI could increase relative wages of skilled labor even without bri nging in skill-biased technology. Chinese urban household survey data are u sed to test the hypothesis. We first estimate relative wages in Chinese sta te-owned enterprises (SOEs) and foreign-invested enterprises (FIEs) by corr ecting for possible sample selectivity caused by employment choice between SOEs and FIEs. Employment choice is then examined to provide evidence of th e costs of labor mobility. The research implies that skill premium in a hos t country with labor market distortions may increase faster than when skill -biased technology is the only force for skill upgrading. (C) 2001 Elsevier Science Inc. All rights reserved.