Minimum Wage and Outward FDI from China

Abstract

We construct a comprehensive manufacturing firm-level dataset to study the effects of minimum wage increase in China on firms’ probability of conducting outward foreign direct investment (outward FDI). Our baseline results show that the increase in minimum wage can explain about 32.3% of the growth in outward FDI from China over 2001–2012. We use three different strategies to address potential endogeneity concerns. First, we control for a number of local macroeconomic variables. Second, to rule out spatially-correlated confounding factors, we employ a regression design based on bordering cities across provincial borders. Lastly, we conduct a placebo test by studying the effects of minimum wage increase on FDI to tax-haven destinations. We then examine the heterogeneous effects of minimum wage increase. We find the effects on outward FDI to be stronger for more productive firms, those with foreign ownership, those in the more labor-intensive sectors, those located in the coastal region, for the years after 2004 and for production-oriented FDI projects.