Foreign Direct Investment And Wage Of Domestic Enterprises: Theory And Empirical Research

Foreign Direct Investment (FDI) contributes to capital, techniques, and management skills, and so is considered as an important source of direct input of capital and indirect knowledge spillover. Attracting foreign capital has been one of the most important economic development strategies for many developing countries, especially for China, which in the transition-economy period. After 30 years of reforming and opening-up, China is attracting large-scale foreign capital at an accelerating rate, and the scale of actual use of foreign investment lies at the forefront of the world. With substantial inflows of foreign capital, foreign enterprises have become an important part of China's economy, having a deep impact on economic development. FDI not only improves the level of the capital stock and promotes regional economic growth, but it also brings many other effects, such as influencing the distribution of wages. Using a panel data of 12,180 micro-enterprises sample household survey data which cover 20,632 individual samples from 12 provinces and municipalities, the paper studies the effects of FDI on wages in different types of ownership enterprises from both theoretical and empirical perspectives.China has experienced 30 years of economic reform and gradually completed the transition process from a planned economy to a market-oriented economic system. However, there are enormous differences in the ownership, management, remuneration policies, and the general economic reform processes between the foreign-owned enterprises and various ownership types of Chinese-owned enterprises. Moreover, owing to persistence of the older system after the process of rapid change in the social and political fields, the labor market is segmented, which leads to enormous differences in wage distribution among different ownership enterprises. In the paper, empirical results show that between foreign-owned enterprises and domestic-owned enterprises the average wages in different industries and regions are dramatically different. Although the higher level of technology, capital intensity and enterprise scale of foreign-owned enterprises largely explain the wage gap between foreign-owned enterprises, after the control for impact of enterprises'characteristics such as technology, per capita capital investment and enterprise scale, the wage level of foreign-owned enterprises was significantly higher than domestic enterprises.Since the total annual wage is the product of working hours per year and wage per hour, this paper estimated the difference in working hours per year and wage per hour among different ownership enterprises, so as to deeply discuss the reason for the significant gap in wage between foreign-owned and domestic enterprises. The traditional neo-classical economic theory considers that wages are the reward for marginal product. In the perfectly competitive market, homogeneity of workers implies the same wage for all. However, this study shows that hourly wages of male and female labor at foreign-owned enterprises are higher than those in five domestic-owned enterprises that are inspected. In other words, foreign-owned enterprises paid a more competitive hourly wage than domestic enterprises. Further analysis showed that the characteristics of human capital and enterprise characteristics of the labor force have a significant impact on hourly wages, and"no equal pay for equal work"is mainly enabled by the difference between foreign-owned enterprises and domestic-owned enterprises in regards to the wage decision mechanism. The investigation into working hours per year among different ownership enterprises reveals that, for males, there's no significant difference between foreign-owned and domestic enterprises; for females, this conclusion also holds except that the working hours per year for state-owned holding enterprises are significantly lower than foreign-owned enterprises. This illustrates that the difference in working hours is not the main factor that leads to significant difference between foreign-owned and domestic enterprises. Furthermore, the use of Oaxaca decomposition method for the foreign-owned enterprises and enterprises with different ownership of the total wage gap shows that in addition to state-owned holding enterprises, in foreign-owned enterprises with other wage gap, there is at least 70% of the wage gap resulting from the difference in the enterprises'characteristics in human capital endowment and in the rate of return for human capital endowment.Many researches show that there's a positive technology spillover which FDI brings to host countries, thus improves the technology level and production efficiency of native enterprises. What's more, it leads to the rising of marginal output and wage rate of these enterprises. Due to the higher wage rate and their preference to hire skilled workers, a large number of skilled-labor work in foreign enterprises, which leads to the massive labor force out-flowing, and inhibits the labor supply of domestic enterprises that pay relatively lower wages. Therefore, foreign enterprises have a great impact on the labor market in the host country, especially on the wage rate of native enterprises. Based on the existing studies, this paper sets up the empirical model for the effect of foreign capital inflow on the wage in domestic enterprises in the host country. The results show that, after the entering of foreign capital, there's improvement in wages for technological workers both in foreign capital sectors and non-foreign capital sectors. Since the wages for non-technological workers in non-foreign capital sectors maintain constant, with the expansion of foreign capital scale, the whole labor market tends to have an increasing gap in wage levels among workers with different skills. In the process for improvement of wage level in domestic enterprises,"wage spillover"and"technology spillover"have significant effects.As the empirical conclusions of the model above are reached on the condition of a completely competitive market, this article then uses panel data on the enterprises to test the influence of FDI on wages in the domestic owned enterprises through technical spillovers and labor market. It is found that the influence of FDI on those domestic owned enterprises whose technical level is below the foreign owned enterprises mainly occurs among the three-digit industries, while the influence on the domestic enterprises with higher technical levels is more likely to happen among the three-digit industries in the same province. Additionally, the influence is larger on the high-tech domestic enterprises, while the influence is smaller on the enterprises with less high-tech concentrations, which behaves in the form of"U"as the rising of the technological level in domestic enterprises. By means of affecting the supply and demand of labor, FDI has significant positive influence on wages in domestic enterprises. Nevertheless, owing to the high salaries the foreign enterprises pay, the"wage spillover"effect of FDI is negative, especially to the subgroup of the three-digit industries. Further analysis shows that FDI is an important but not decisive factor in promoting increasing wages in domestic enterprises, which mainly depends on the wage spillovers of native and neighboring provinces, their own technical levels of the enterprises, and their increasing of the human capital input as well. Finally, on the basis of the analysis, the article puts forward several suggestions.