Abstract
► We use a large sample of firm-level data covering the period 1998–2004 to estimate differential factor returns for labor, domestic capital, and foreign capital for the coast and interior regions of China. ► The estimation results and calculations of factor returns vary significantly for the balanced and unbalanced data sets and also for the application of least squares and fixed effects estimators. ► After sorting through the issues raised by these different approaches, we conclude that the disparities between the returns to FDI in the coastal and interior regions are robust; they suggest that the returns to FDI in the interior are approximately 50 percent greater than in the coast.
In principle, returns to factors of production within single economic systems should exhibit relatively uniform returns. Notwithstanding the fact that over the past 30 years China's economy has increasingly liberalized both internally and externally, it is widely understood that wages received by industrial workers in the coast and interior have widely diverged. However, less is known about how, between China's coast and interior, relative returns to domestic capital and foreign investment have fared, although we do know that the surge of foreign direct investment in China in recent decades has been overwhelmingly concentrated in the coastal region. This paper investigates comparative factor returns within China's industrial sector as measured by the marginal productivities of labor, domestic capital, and foreign capital. Using balanced and unbalanced samples of enterprise data during 1998–2004, we find significant differences between the returns to each of these factors. This paper explores the differences in estimates of factor returns that arise from the use of balanced versus unbalanced samples and least squares versus fixed effects estimators. We conclude that while returns to labor and domestic capital are higher in China's coastal economy, returns to foreign-owned capital are higher in the interior region. Indeed, the differences are indicative of those found in the literature that estimates cross-country comparisons between OECD and developing economies, suggesting that China's economy exhibits some of the differences found between the world's more and less developed economies.
