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Foreign Direct Investment and the Chinese Economy

A Critical Assessment

Chunlai Chen

Foreign Direct Investment and the Chinese Economy provides a comprehensive overview of the impact of foreign direct investment, with extensive empirical evidence, on the Chinese economy over the last three and a half decades.
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Chapter 5: The interregional impacts of foreign direct investment on China’s inland urban–rural income inequality

A Critical Assessment

Chunlai Chen

Extract

The heavy concentration of FDI in China’s coastal provinces has attracted hundreds of millions of rural migrants from inland provinces to work in coastal provinces. Every year these workers send massive remittances back home to support their families and hence boost their home town economies. This type of resource movement associated with FDI may play an important role in income distribution in China’s inland provinces. Chapter 5 aims to investigate the interregional impacts of FDI in the coastal region on urban–rural income inequality in inland provinces of China. Through the application of a provincial-level panel dataset containing China’s 19 inland provinces over the period 1987–2014 and the fixed-effects and instrumental variable regression technique, the study finds that FDI in the coastal region contributes to the increase in urban–rural income inequality in inland provinces. The explanation is that FDI in the coastal region generates negative spillover effects on the economic growth of inland provinces. This is because FDI in the coastal region is heavily engaged in the processing trade, has fewer industrial linkages and even competes with firms in inland provinces in both factor and product markets. In addition, the interregional migration and income remittance effect associated with FDI in the coastal region tends to increase urban–rural income inequality of inland provinces due to the average remittance sent by rural migrant workers being less than the average rural household per capita net income in inland provinces.

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