The Impacts Of FDI On The Wages

As an economic phenomenon, foreign direct investment (FDI) has played a more and more important role in global economy since the 1990s. It has a great impact on the economic development of both the parent country and the host country.Attracting FDI has been a long term policy in China since the opening-up in 1978. Shanghai is a city with the greatest potential to gain FDI. Since the development of Pudong New District at early 1990s, it has become one of the hottest region in China with a large quantity of FDI converged there.FDI influences Shanghai's economy development in various ways. This paper focuses on examining what impact the inflow FDI have on the wages in Shanghai. Given the difficulties in data collecting, academic researches related is still at a primary state in China. The research undertaken by this paper would therefore be of both theoretical and empirical significances.Based on previous studies in the field, this paper discusses systematically, with both the qualitative and quantitative methodology, the following two wage impacts: first, the impact of FDI on the enlargement of wage gap between skilled workers and non-skilled workers in Shanghai. Second, the impact of FDI on the whole city wage level.The study on the impacts of wage gap enlargement is deeply explored with the evidences both from the theoretical analysis and data collected from field surveys. While the second discussions on the wage impacts will be followed by the empirical evaluation of the average city wage level in the presence of FDI from 1981 -2005. Meanwhile the realizing mechanism is also well discussed with both the empirical study and the theoretical analysis.The main findings are: first, the gap existing between the foreign firms and the domestic firms is narrowing down as the years go by. Given the situation that wage differentials are variant among industries, the author believes that the radical cause for a wage differential is the difference in labor productivity. Second, the author finds that wage differences exist mainly in skilled workers, whereas in unskilled workers, wage differences tend to disappear despite where they are working. So the author holds that the presence of FDI do enlarge the wage gap between the skilled workers and non-skilled workers. Third, the paper finds that the presence of FDI has a positive impact on the city wage level. The inflow FDI of every 10,000 Yuan would rise on average 3% of the city wage level according to empirical studies: Results gained by empirical studies also show that the primary realizing mechanism works through labor productivity boost under the influence of FDI.Based upon the findings presented above, the author suggests that Shanghai do receives social welfare from the inflow of FDI, but at the same time the income gap between the rich and the poor tends to expand. Two policy suggestions are also proposed at the end of the paper.