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Studies in Comparative International Development
Published in: Studies in Comparative International Development 2/2016

02-11-2015

Institutions, Labor Mobility, and Foreign Direct Investment in China and India

Author: Yu Zheng

Published in: Studies in Comparative International Development | Issue 2/2016

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Abstract

Why did China and India, despite their similar natural factor endowments and growth trajectories, attract different types of FDI? This article shows that microlevel institutions in China and India, particularly a set of regulations governing labor and land markets, shape their domestic labor mobility and consequently affect their FDI patterns and development paths. China’s high labor mobility motivates foreign firms to concentrate in labor-intensive manufacturing and exploit the benefits of scale economies. India’s low labor mobility motivates foreign firms to move away from unskilled-labor-intensive manufacturing and invest in the modern service sector where the demand for skilled labor is relatively high.
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Footnotes
1
Political risk rating sources include the World Bank’s Ease of Doing Business Index, Political and Economic Risk Consultancy, Euromoney Country Risk, and PRS Group’s International Country Risk Guide.
 
2
There are two different ways to measure the Chinese urban population. One is by hukou whereby only people with official urban registration status are included. The other is by residence—an individual is considered an urban resident if he or she has resided in the urban area for more than 6 months. China’s official definition of urban population, on which the World Bank data are based, excludes migrants and those lacking urban hukou.
 
3
In 2010, India’s total fertility rate in urban areas is 1.9 births per woman (Ministry of Home Affairs 2011) and China’s is 0.88 births per woman (Fu et al. 2013).
 
4
India’s unorganized manufacturing sector consists of manufacturing units employing fewer than 10 workers and using power or fewer than 20 workers and not using power. The data on unorganized sector are mainly from the National Sample Survey Organization (NSSO).
 
5
The narrowly defined informal employment ratio is similar to the estimation by Park and Cai (2011). Using survey data, they find that China’s urban informal workers increased from 9 % in 1995 to 36 % of total urban employment in 2005.
 
6
Prior to 2003, the National Statistical Yearbooks reported the total manufacturing employment, but Banister and Cook (2008) argue that the number is under-reported as TVE employment was not completely included in the rural manufacturing employment.
 
7
Note that China and India have different industrial classifications. China’s industrial classification consists of 29 two-digit manufacturing categories whereas India’s National Industrial Classification (NIC-2004) includes 24 two-digit manufacturing categories.
 
8
Alternatively, when we use the ratio of total labor compensation to total fixed capital (W/K) to measure labor intensity, the differences are even larger. China’s labor intensity increased by 110 % between 1999 and 2009 whereas India’s declined by 8 % between 1998 and 2007. However, it is more difficult to adjust the measure for comparability because of different definitions of fixed capital in China and India.
 
9
In 1980 China and India had similar percentage of elderly population (5 % vs 4 %). By 2030, China’s elderly population will rise to 20 % whereas India’s elderly will only increase to 8 % (Davis 2014).
 
10
The estimate for China includes manufacturing workers in urban units as well as township and village enterprises (Bureau of Labor Statistics 2011). The estimate for India includes only formal manufacturing workers (Sincavage et al. 2010).
 
11
Article 6 of the 1979 Equity Joint Venture Law and Article 13 of the 1988 Cooperative Joint Venture Law.
 
12
The number is calculated based on statistical information from Ministry of Land and Resources Annual Reports.
 
13
The Indian Ministry of Rural Development distinguishes the nonforest purposes of division into different categories. Encroachment (32 %) and defense use (11 %) were the two major categories of the total diverted forestland (Ministry of Rural Development 2009).
 
14
Starting in 2007, local governments were required to separate the earmarked government fund, a fiscal account that mainly consists of land sales revenue, from the extra-budgetary account.
 
15
For example, many local governments acquired agricultural land by signing long-term leases with farmers instead of expropriating land, a practice that did not require central approval (Xinhua News Agency 2006).
 
16
It is difficult to directly compare inequality in China and India because of different statistical approaches. China’s inequality data are based on income whereas India’s data are based on consumption expenditure (Bardham 2012).
 
17
The total compensation consists of three parts: land compensation, resettlement subsidy, and improvement and crop compensation. Land compensation is about six to ten times the value of the average production of the land in the 3 years prior to acquisition. Resettlement subsidy for each person is about four to six times the value of the average production of the land. Compensation for improvements to land and crops is left to the discretion of local governments, which normally cannot exceed thirty times the value of derived land products (Land Administration Law, Article 47).
 
18
India’s textile industry contributes 14 % of industrial production, employs 45 million people and accounts for 12 % of total exports (Ministry of Textile 2014). China’s textile industry contributes 10 % of industrial production, employs 18 million people, and accounts for 18 % of total exports.
 
19
Fifty-three percent of formal workers are unionized, whereas only 2 % of informal workers are union members (Ahn 2010).
 
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Metadata
Title
Institutions, Labor Mobility, and Foreign Direct Investment in China and India
Author
Yu Zheng
Publication date
02-11-2015
Publisher
Springer US
Published in
Studies in Comparative International Development / Issue 2/2016
Print ISSN: 0039-3606
Electronic ISSN: 1936-6167
DOI
https://doi.org/10.1007/s12116-015-9201-7

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