The Impact Of Foreign Direct Investment On Employment In China Based On Panel Data Analysis

The role of FDI in creating job opportunities has become one of most important issues in economic development today. Foreign direct investment (FDI) can generate significant job opportunities for their host countries, serving to alleviate employment shortages, particularly in those economies that suffer from significant pressure to generate jobs due to the nature of their economic growth. As the largest developing nation in the world, both in terms of its economy and its population, China has become the most attractive market for FDI in the world, and the Chinese government has dedicated significant effort into maximizing the use of investment inflows to improve its current employment situation.However, the relationship between FDI and positive job growth in China is not clear. This thesis uses the Cobb-Douglas production function to establish an empirical model that examines the relationship between FDI and regional employment within China. It sources data from designated official provincial and national statistics’bureaus, using a research sample of28provinces traced over the period of1985to2011, and dividing China into Eastern, Central, and Western regions.Empirical testing reveals that FDI has different effects on employment in different regions. First, in Eastern China, FDI initially exerts very strong positive effects on employment, but after a lag of two or more years, FDI actually has a substitution effect on a given year’s employment. Second, in Central China, FDI from year prior has a’"crowding-out" effect on employment. However, other FDI has little impact on employment opportunities. Third, FDI manifests no "crowding-out" effect on employment in Western China, and after a two year lag, FDI of a given year has a significant generative effect on employment.Based on these results, we can make policy changes to help maximize the benefits of FDI within China. First, the government should guide the regional destination of FDI and improve the regional structure of employment. When the government accepts FDI, it should consider the conditions of the region’s economic and technological level as well as discrepancies in labor force quality. Second, given Eastern China’s good economic foundation and strong technical labor resources, it should focus on bringing in a capital-and technology-intensive high-tech industry. The less developed central and western regions should introduce FDI for labor-intensive industries to increase employment. Finally, the government should optimize industrial structure and promote regional industrial upgrading to avoid redundancies and prevent the "crowding-out" effect of FDI towards domestic capital.