The role of labour cost in the location choices of Japanese investors in China

Abstract

Abstract. This article attempts to reconcile previous conflicting findings about the effects of labour cost on the location decisions of foreign investors in China. A conditional logit model is calibrated with its compatible disaggregated firm‐level Japanese FDI data. It is hypothesised that previous counter‐intuitively positive relationships between labour cost and incoming FDI in China may result from the failures to properly control spatial inflation differentials, labour quality, and quality of life. A Hausman‐McFadden test is also conducted to test the robustness of the calibrated models.