2011 10th International

2011 Distributed
SymposiumComputing
on Distributed
and Applications
Computing and
to Business,
Applications
Engineering
to Business,
and Science
Engineering and Science

Effects of Chinas Outward FDI on domestic Employment

Yu Chao
Management Science and Engineering
Business school, Hohai University
No.1Xikang Road Nanjing, China
chaoyu@hhu.edu.cn
Zhou Ye
Management Science and Engineering
Business school, Hohai University
No.1Xikang Road Nanjing, China
zhouye325@hhu.edu.cn

AbstractWith the improvement of economies, but also from some developing

international competitiveness of Chinese economy
and the implementation of going global strategy, economies now. Third, the degree of dependence
Chinas outward FDI has developed quickly. This on oversea supply has become higher, which
paper explores the effects of Chinas outward FDI
on domestic employment by examining the data of means our economy is more vulnerable to the
25 provinces from 2003 to 2009, and combines the changes of uncertain international trade
Cobb-Douglas production function and system
GMM estimation. The result shows that environment. Since 2008, influenced by the
preliminary labor demand and current wage global financial crisis, China's foreign trade
income have substitution effect on domestic
employment, GDP and preliminary wage income volume and foreign capital inflow have
have significantly positive effect on domestic decreased, employment pressure increased.
employment, Chinas outward FDI can promote
domestic employment, but the effect is not Under such circumstances, to invest abroad has
significant. become a good choice for many enterprises. As
Keywords: outward FDI; employment; system more and more enterprises choose to invest
GMM abroad, the impact of outward FDI on domestic
employment is taken into account by more and
I. INTRODUCTION more people.
As a developing country, China has large Since reform and opening up, China has
population and rich resources. How to alleviate enjoyed rapid economic growth, but the
employment pressure is a long-term problem we development of outward FDI is relatively slow.
have to face. Depending on labor cost advantage Until 2001, when government increases support
and huge market potential, China has achieved for enterprises engaged in overseas investment
great success in attracting foreign investment and economic cooperation, Chinas outward FDI
and expanding foreign trade Since reform and begins to show a trend of rapid development. As
opening up. The influx of foreign capital and an increasing number of firms choose to move
increasing trade can not only fill the financing production abroad, debate on the impact of such
gap in the process of economic growth but also strategies on domestic employment has greatly
promote the development of productivity and the intensified. The impact of outward FDI on the
upgrading of industrial structure. With further home economy has attracted researchers
development of economy, a series of economic attention for a couple of decades.
and social problems appear. First, the rapid
II. RELATED LITERATURE
increase of foreign exchange reserves has
exacerbated inflationary pressure. Second, trade When analyzing the effect of outward FDI on
frictions have increased. The Commerce home country employment, it is most important
Department has pointed out that the trade to distinguish the differences between horizontal
frictions China faces are not only at traditional FDI and vertical FDI. Vertical FDI is made by
competitive industries, but also at high and new enterprises that fragment their production into
technology industries; not only from developed stages, typically on the basis of exploiting lower

978-0-7695-4415-1/11 $26.00 2011 IEEE 137

DOI 10.1109/DCABES.2011.40
factor prices or reducing transaction costs effects of outward FDI may well be extended to
(Ekholm and Markusen 2002; Kokko 2006). It is other, non-multinational enterprises. On the one
reasonable to allocate the stages with high labor hand, local suppliers could suffer as they are
intensity to countries with low levels of labor replaced by foreign suppliers. On the other hand,
cost and the stages requiring high and new to invest abroad may create new demand for
technology to high income countries. With intermediate inputs from domestic producers. So
vertical FDI, there is a complementarity between to study the impact on all the enterprises no
outward FDI and domestic employment, because matter whether they have invested abroad or not
when one of the activities expands, it will cause will be more accurate ( Markusen, 2004; Koings
the expansion of the other activity. Horizontal and Murphy, 2006; Federico and Minerva, 2008).
FDI is made by enterprises that seek to exploit Since the analysis of the employment effect of
their existing advantages and replicate roughly outward FDI has produced mixed results, we
the same activities in many locations (Braconier will use Cobb-Douglas production model to
and Ekholm, 2001; Massom and Vahter, 2009). analyze the relations between Chinas outward
With horizontal FDI, there is a substitution FDI and domestic employment in the following.
between outward FDI and domestic employment,
III. THEORETICAL MODEL
because the major trigger of moving abroad is
the intention to reap benefits of the market In this article, the improvement of
opportunities abroad and use the economies of Cobb-Douglas production model is used as
scale effect. follows.
The question whether outward FDI Qit = Ai K it Lit
substitutes or complements domestic
employment has been discussed in many i = 1, , N t = 1, , T (1)
empirical studies, which can be divided into two Where Qit stands for GDP,
major groups. The first group finds that there is a K it and Lit denote the capital input and labor
substitution relationship between outward FDI input respectively, , denote the output
and domestic employment. Substitution occurs elasticity coefficients of capital and labor
between countries with comparable factor respectively. Ai is the efficiency index of
endowments (Braconier and Ekholm 2001,
output growth and is the share of factors
Cuyvers, 2005; Hanson, 2005). The second
which affect domestic output. The marginal
group of empirical studies has concluded that
products of labor and capital are wage and
outward FDI has a complementary effect on
cost c respectively. Assume the market is
domestic employment. Outward FDI could
increase an enterprises competitiveness, perfectly competitive, we use the
promote its use of economies of scale, and profit-maximizing equilibrium condition and get
reduce its cost, which can lead to an increase in the following.
domestic employment (Lipsey, 2000; Mariptti,
L
2003; Becker, 2005; Masso, Varblane and Vahter, Qit = Ai it it Lit

(2)
c
2009).
Though the above scholars draw different Take logarithms we can get
conclusions by analyzing the relations between
outward FDI and domestic employment, the LnLit = ( Ln Ln )
+
impact of outward FDI on non-multinational
1
enterprises has been neglected. However, the Ln(it / c) + LnQit LnAi
+ + +

138

Let 0 = ( Ln Ln ) /( + )
1 = /( + ) 2 = 1/( + )
3 = /( + ) . Then (2) can be written as
the following
LnLit = 0 + 1 Ln(it / c) + 2 LnQit + 3 LnAi
According to the basic labor demand
equation, outward FDI affects domestic labor
demand through three channels. First, outward
FDI can increase or reduce domestic output
directly; second, the change of outward FDI has
effect on domestic production efficiency; third,
outward FDI can affect the price elasticity of
production factors. The second channel will be
systematically analyzed in this article, because
of the following two aspects. On the one hand,
the continuous development of
investment produces reverse technology
spillover effect (or crowding out effect) on
domestic enterprises, which will influence the
improvement of productivity; on the other hand,
the development of outward FDI has effect on
the import and export trade, no matter whether
the effect is substitution or complementary. The
efficiency index A can be expressed as
follows.
Ti
Ai = e FDISit
Where , > 0 , FDIS is defined as the
ration between the flow of outward FDI and
domestic output, Ti is the timing variables,
then the demand equation becomes
LnLit = 0 i + 1i Ln(it / cit )
+ 2 i LnQit + iTi + i FDISit
Taking account of the dynamic adjustment
process of labor demand, the structural change
(3) of outward FDI and the time delayed impact on
domestic employment, we would add lagged
variables into the function. Because the accurate
measurement of capital price is very difficult and
timing variables such as inflation, macro-policy
adjustment will not change with industrial
character, the impact of these variables will be
neglected. Now the demand function becomes
LnLit = 0 + 1 j Lnit j + 2 j LnQit j +
j j
(4) 3j
LnFDISit j + 4 j LnLit j + i + vi + uit
j j
(7)
Where i and vi denote fixed effect
and dummy variables respectively. Random
error uit is independent identically distributed.
IV. EMPIRICAL RESEARCH
Taking account of the availability of data, we
choose the panel data of 25 provinces from 2003
foreign to 2009. The data of outward FDI comes from
Chinas Outward Foreign Direct Investment
Statistical Bulletin. To make the results more
accurate, we will convert figures in dollar terms
into RMB according to the exchange rate. The
data of exchange rate comes from Peoples Bank
of China. Other data comes from CEI Net and
China Statistical Yearbook. Considering that
preliminary outward FDI, wages and domestic
output also have effects on current labor demand
and the time span of our research is not large, we
(5)
will use first-lagged variables. The model is as
follows.
LnLit = 0 + 10 Lnit + 11 Lnit 1 + 20 LnQit
+ 21 LnQit 1 + 30 LnFDISit + 31 LnFDISit 1
+ 41 LnLit 1 + i + vi + uit
(8)
Because explanatory variables are related to
random errors (explanatory variables contain the
(6) lag of explained variables in the models) and
there are perhaps endogeneity of the variables,
the result will be biased if we use random-effect
139
 models or fixed-effect models. Differential income has significant substitute effect on
GMM estimation can effectively overcome the domestic employment. So the continuous
problems of endogeneity and heteroscedasticity , improvement of productivity and the long-time
but it can cause the lack of some sample growth of GDP can effectively promote
information and reduce the effectiveness of domestic employment. Though the increase of
instrumental variables. We will use wage income can reduce current employment
System-GMM estimation (Arellano and Bover, opportunities, it will help to increase domestic
1995; Blunder and Bond, 1998). System GMM employment rate in the future.
estimation includes the information of From table 1, we can find the impact of
differential and horizontal equations, so it is outward FDI on domestic employment is not
more efficient than differential GMM estimation. significant. Possible reasons are as following.
We will select the Sargan statistic to test the First, as a developing country, China has large
effectiveness of instrumental variables, and use enough market. Enterprises are easy to form
AR (1) and AR (2) to test the serial correlation development strategies dominated by domestic
of residual term. System GMM estimation could market, which leads to less pressure and
be classified into one-step GMM estimation and motivation to expand overseas market by invest
two-step GMM estimation. The latter will be abroad. So many enterprises concentrate on
selected, because it is less susceptible to the domestic market, and pay less attention on
interruption of heteroskedasticity. external market. Second, domestic enterprises
TABLE1 Results of System GMM are unable to make full use of the location
std. advantages of host countries and lack of
variables coefficient t-value Prob.
error
Ownership Advantage and Internalization
LnLit 1 0.857 0.081 8.258*** 0.000
Lnit 0.069 0.061 2.454** 0.047 Advantage, which has caused low technical
Lnit 1 0.195 0.076 3.864 **
0.031 content of outward investment. To reflect a
LnQit 0.564 0.061 4.007*** 0.001 countrys outward FDI level, UNCTAD has
LnQit 1 0.866 0.013 8.918*** 0.000
defined the performance index of outward
LnFDISit 0.026 0.028 0.943 0.232
LnFDISit 1 0.015 0.031 0.501 0.568 FDI--OND. OND can be defined as the
AR(1) 2.361** 0.024 following.
AR(2) 0.537 0.789
Sargen test _P 0.834 FDI i / FDIW
ONDi = (9)
Note: The table reports the results of System GMM GDPi / GDPW
regressions using Stata 10.0. The dependent variable is
domestic R&D investment. Instrumental variables are
Where FDI i refers to the FDI outflows of
two-period lagged L, Q, FDIS and . ***,**,*,denote
significant at 1, 5, 10 percent level respectively.
In the models, the Sargan statistic is not country i , and FDI W stands for the FDI

significant, which means the choice
instrumental variables is effective. The test of
AR (1) rejects the null hypothesis, but the test of
AR (2) accepts the null hypothesis, which means
the residual sequence is not correlated. The
model shows that the last issue of domestic
employment has significantly positive effects on
current labor demand. Both domestic output and
the last issue of wage income can effectively
improve domestic employment, but current wage
of outflows of the world. The average OND of
China is below 0.3 from 2003 to 2009, which is
under the average level of the world. On this
point, there is a still a big gap between China
and industrial countries, though we have made
rapid progress in the development of outward
FDI.
V. CONCLUSIONS
This paper examines the effect of outward

140
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