The Dynamic Relationship between FDI and Wages: Evidence from the People’s Republic of China.

The objective of this paper is to evaluate the relationship between FDI and wage rates using the wellestablished Granger causality method but with a panel data setting. The paper considers the dynamic relationship between these two variables for 27 provinces over the 1985 – 2000 period. We also distinguish between the coastal and inland provinces. Results indicate that Granger causality runs from FDI to wages for the coastal provinces but no significant relationships are found for the inland provinces. These results imply that FDI is a contributing factor for increasing wage rates in China. In particular, our findings show that the “cheap labour” hypothesis does not apply for China. It further indicates that increasing inflow of FDI into the coastal provinces relative to the inland provinces exacerbate the unequal distribution of wealth between the regions.