The Impact Of Rising Labor Costs On Chinese Firms’ Outward Foreign Direct Investment

The abundant and cheap labor forces ever greatly promoted the development of our economy.However,with entering in twenty-first Century,China’s demographic dividend is gradually disappearing.And the rise in the average wage squeezes the profit margins.Meanwhile,the development of China’s outward foreign direct investment enters drive,which drives many domestic enterprises to seek cheap labor resources in overseas markets.Under this background,it is necessary to study the impact of rising labor costs on China’s outward foreign direct investment.This paper puts forward the theoretical hypothesis that the rising labor costs affect the OFDI of Chinese enterprises by affecting the capital-labor ratio and the level of human capital.Based on panel data of micro enterprises in China in 2004-2013,this paper conducts theoretical and empirical research on the impact of rising labor costs on China’s outward foreign direct investment and it’s internal mechanism.The empirical result shows that the rising labor cost significantly increases the probability of OFDI of Chinese enterprises,which is an important driving force for enterprises to "go out".Further investigation of the influence mechanism shows that there is a significant positive correlation between labor costs and the capital-labor ratio,while the capital-labor ratio is significantly positively correlated with the foreign direct investment.In addition,the improvement of human capital level can effectively alleviate the pressure of production cost faced by enterprises due to the rising wages,which inhibits enterprises’ OFDI behavior to some extent.These conclusions verify that the capital-labor ratio and the level of human capital are two main mechanisms by which labor costs affect enterprises’ OFDI decisions.Finally,combining with analysis results,the corresponding policy recommendations are given from two aspects of the enterprise and the government.