A Study On Employment Effect Of Manufacturing Foreign Direct Investments Withdrawing In China

China has attracted a huge scale of manufacturing foreign direct investment inflows in the process of the second round international industry transfer, owing to her abundant cheap labor. With the rising labor cost of China, the withdrawing of manufacturing foreign direct investment has been growing and has accelerated since2009. Manufacturing enterprises with foreign direct investment is an important part of China’s economy, which attract a large number of labor. How and to what extent of employment in China would be impacted, and what kind of policy would response effectively, deserve thorough study.In the context of host countries competing for foreign capital, a theoretical framework is set up to analysis the employment effect of the manufacturing FDI withdrawing, based on the theories of product’s life cycle and marginal industry transferring. The assumption that host country is foreign direct investment destination as well as sourcing, matches much better with the reality of China than the existing theory, in which host country can be the FDI destination only. The research focuses on the employment effect of foreign direct investment withdrawing, the topic of which is quite forward-looking as most existing literature focus on the employment effect of capital inflows. A computable dynamic general equilibrium model is taken in the empirical part of the research to predict the employment effect and policy effectiveness, with the facts that the manufacturing foreign direct investment came to China for cheap labor and the cost of Chinese labor is rising ever after being ascertained.The methods of computing are not based on estimation and test only. The quantitative result of the predicting is a good supplement to the existing literature merely with qualitative analysis. The main research work and conclusions of the whole study are present as follows:1) Manufacturing foreign direct investment came to China for cheap labor and has become an important part of Chinese economy. The situation of its inflowing, its importance to China and its factor preference have been statistically analyzed. For China, the proportion of foreign direct investment inflow to manufacturing declines every year since2004. There is an obvious trend of foreign capital reduction in sub-industries of manufacturing. Foreign-invested enterprises are important economy components in China that their gross output,fixed asset stock,employment take about30%of the total of manufacturing. Foreign direct investment in China concentrates in the labor-intensive sub-industries of manufacturing:from the perspective of capital-labor ratio, it has become more and more intensive in the use of labor relative to the average national level. Therefore, the most important reason that manufacturing foreign direct investment came to China, is to use the abundant and relatively cheap labor force.2) Labor cost in China is of great importance in whether the FDI in manufacturing withdrawing or not. Since2004, the labor cost of China has risen rapidly. Constrained by the low growth rate and rapid aging age structure of population, China’s supply of young low-skilled labor force,preferred by foreign-invested enterprises, is insufficient, which will inevitably lead the labor costs rising faster. FDI in manufacturing will run out of China in a faster speed.Given its importance to China, the withdrawing will certainly have a serious negative impact on the employment.3) A computable dynamic general equilibrium model is set up to simulate the employment effect of foreign direct investment withdrawing in manufacturing. If the model replicates the economic dynamics of China quite well, its prediction of employment shock is reliable. The dynamic general equilibrium model starts from the point that rational representative households and manufacturers make their optimal decisions, taking the influence of government purchase, taxations, and change in relative price of capital into consideration gradually. Parameters of the model are collaborated according to actual data, so are the exogenous variables. The simulation result fits good to the data dynamics of output per capita, investment-output ratio, labor participation rate, consumption-output ratio and capital-output ratio. The employment effect of manufacturing foreign direct investment withdrawwing is calculated based on this dynamic general equilibrium model. The withdrawing changes the total factor productivity of China directly. The counterfact experiments of various withdrawing degree show a negative shock on employment of China, greater the degree, worse the shock; the short-term adjustment has a long-lasting effect which is accumulated over time; the impact on output per capita and consumption per capita is positive, but negative on investment-output ratio.Due to the segmentation in labor market of China, the unemployment mainly exsists in city and town,which calls for policies to promote the labor capacity of urban market. 4) The effectiveness of job-promoting policies, three kinds of tax rate reduction and government purchase increasing, is calculated based on the dynamic general equilibrium model. Simulation results show that the four promoting policies are for both employment and investment. However except the capital tax rate reduction, the other three methods reduce the speed of capital deepening to some extent.Consumption tax rate reduction and government purchase increasing even sacrifice consumption per capita. There is no absoluteness of good or bad for each policy, and the policy should be chosen according to the priority of sub-target. Referring to reality, the decomposing results of policies show that China has a large policy-conducting space, which can contribute a lot to economy development. Additionally, employment promoting indexes of different industries are computed according to international industry input-out relationship, which offer the industry priority of policy conducting with limited resources.