The influence of rising labour cost on inward foreign direct investment in China

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Abstract: This study aims at examining the future of inward foreign direct

investment (IFDI) in China by looking at the influence of rising labour cost and the institutional environment. By examining the effect of rising labour cost on IFDI a contribution is made to the scientific literature since this is an under examined topic, a contribution is made to the business environment by showing the opportunities and challenges surrounding IFDI, and a contribution is made to the governmental

environment by showing the importance of labour cost in order to attract foreign direct investment (FDI).

Keywords: Inward Foreign Direct Investment, IFDI, Labour Cost, Institutional Environment, China, International Business.

Name: Stefan Roos Master Business Studies Student Number: 5877083 International Management

The influence of rising labour cost on inward foreign

direct investment in China

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3.5CONCEPTUAL MODEL ... 33 4. METHOD ... 34 4.1RESEARCH DESIGN ... 34 4.2SAMPLE ... 34 4.3MEASURES ... 36 4.3.1IFDI ... 36 4.3.2LABOUR COST ... 36 4.3.3REGULATORY INSTITUTIONS ... 37 4.3.4POLITICAL INSTITUTIONS ... 38 4.3.5FINANCIAL INSTITUTIONS ... 38 4.4METHOD OF ANALYSIS ... 39 5. RESULTS ... 41 5.1CORRELATION ... 41 5.2HYPOTHESES TESTING ... 42 6. DISCUSSION ... 47

6.1EFFECT LABOUR COST ... 47

6.2MODERATING EFFECT INSTITUTIONS ... 48

7. CONCLUSION ... 49 7.1CONCLUSION ... 49 7.2CONTRIBUTIONS ... 53 7.3LIMITATIONS ... 54 7.4FUTURE RESEARCH ... 54 8. REFERENCES ... 56

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1. Introduction

1.1 Research background

"Since starting the process of economic reform, and opening to the outside world in 1979, China has become one of the fastest growing economies in the world" (Liu, Burridge & Sinclair, p. 1433, 2002). With foreign investment inflows reaching a record high in 2013 (Gray, 2013) inward foreign direct investment (IFDI) can be seen as one of the main drivers of China's economic success (Graham & Wade, 2001).

According to Jing & Song (2003):

"FDI [Foreign Direct Investment] from developing countries aim at fully utilizing the cheap labour cost in Mainland China to develop the traditional labour-intensive industry, in which China has comparative advantages, just like assembly and processing operations" (p.4).

However, China's rapid economic development has put pressure on fixed and variable cost structures of multinational corporations (MNCs), resulting in China no longer being the "cheap" location for MNCs to produce (Mehra, 2012). With an estimated wage increase of nearly 11% in 2014 more low-cost manufacturers are driven out of the country (Panckhurst, 2014). For this reason it comes as no surprise that major

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countries like Vietnam to seek lower labour cost (Liguori, 2012). Neighbouring countries like Vietnam are operating with greater cost efficiencies and on average 4 times lower wages than China (Mehra, 2012) resulting in an attractive alternative. Therefore a continuing wage increase can have a negative effect on China's IFDI, since low labour cost is an important driver for IFDI (Kinoshita & Campos, 2003). In order to maintain the high amount of IFDI coming into the country it is important for China to focus on restructuring the investment

environment.

Institutions play an important role in establishing a business-friendly environment for further FDI promotions and therefore have a great influence upon the proportions of IFDI from different source countries (Jing & Song, 2003). This is confirmed by Pournarakis & Varsakelis (2002) who claim that "institutional factors related to investment decisions strengthen location advantages and help a country become an

attractive location for such investment" (p.77). For this reason institutions might have a moderating effect on the possible relationship between labour cost and IFDI.

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1.2 Aims and objectives

Although a lot of research has been done on the topic of FDI not a lot of research has been done on the effect of labour cost on IFDI. Since recent developments show a drastic increase in labour cost

(Panckhurst, 2014) and a declining amount of IFDI in China such research could clarify if there is a connection between these two

phenomena. However, since institutions form an important factor within the economic environment (Busse & Hefeker, 2005) and have a great influence upon the proportions of IFDI (Jing & Song, 2003) institutions have been included as a moderating factor on the possible

relationship between labour cost and IFDI.

By conducting this research a contribution is made to the research environment since this is both an under examined topic and a topic of much controversy and opposing views between the researcher who did study this topic. In addition, it contributes to the business

environment by giving a clearer overview of the opportunities and challenges surrounding IFDI in China. Having a clear overview of the opportunities and challenges surrounding IFDI in China can help

foreign managers in the managerial decision process whether to invest in China or not, and can help Chinese managers to determine the importance of labour cost and institutions in order to attract foreign

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this research highlights the importance of China's engagement in

economic reform in order to keep attracting foreign investment inflows. Therefore besides contributing to the research and business

environment a contribution to the Chinese governmental environment is made as well.

In order to examine the proposed relationships the following research question has been composed: Is there a relationship between labour cost and IFDI in China, and is this relationship influenced by the

institutional environment?

From the main research question several sub questions are derived:

1. Is there a relationship between labour cost and IFDI in China?

2. Does the institutional environment influence the relationship between labour cost and IFDI in China?

3. Which institutional factors exert the most influence on the relationship between labour cost and IFDI in China?

4. Can the influence of rising labour cost on IFDI be cancelled out by a strong institutional environment?

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1.3 Structure of the study

This research starts with a literature review, discussing the available literature relevant to the study and the proposed research questions. To gain a better understanding of the Chinese economy, the

development of the Chinese economy through recent years (starting from 1979, when China started the economic reform) and the

importance of IFDI are discussed first. Afterwards the theory behind labour cost and productivity is discussed. Thirdly, the theory behind institutions and the importance of institutions with regard to the economic environment is discussed.

Based on the literature review a theoretical framework is developed. This framework corresponds to the expectations as proposed in the hypotheses. This framework illustrates the proposed effect of labour cost on IFDI. Also, it illustratesthe proposed moderating effect of the formal institutional environment, which in turn can be explained by 3 different motivators: regulatory institutions, political institutions and financial institutions.

After the establishment of the theoretical framework the methodology is discussed. In order to test the proposed hypotheses a deductive approach has been used. This means that the proposed hypotheses

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the data a multiple regression analysis is run in order to test the hypotheses. The findings are described in the results section.

Finally a discussion is started that explains the found results and

discusses the implications and limitations of the performed study. The report ends with a conclusion and highlights areas for future research.

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2. Literature Review

The literature review will cover the 3 key factors within our research. The review starts with describing the Chinese economic development with respect to the importance of IFDI since China started the economic reform. Secondly the theory behind labour cost and productivity is described. To conclude the importance of the institutional environment is described by looking at regulatory institutions, political institutions and financial institutions.

2.1 Chinese economic development and the importance of IFDI In 1979, after a period of nearly 30 years of isolation China decided to engage in economic reform and open its "doors" to the outside world. The transformation from a closed market economy into a market oriented trading nation has led China to be one of the fastest growing economies in the world. Since China introduced the so-called "open door policy" they achieved an annual GDP growth rate close to 10% and a foreign trade rate averaging 15% (Fu, 2000). "One of the most important elements of China's economic reform has been the

promotion of FDI inflows" (Chantasasawat, Fung, Iizaka & Siu, 2005, p. 3). When China first introduced the "open door policy" in 1979 IFDI in China was very small. However, after more than two decades China

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Therefore it should come as no surprise that China now hosts tens of thousands of industrial enterprises, including some of the biggest

multinationals in the world like Coca-Cola, IBM and General Motors (Fu, 2000). These enterprises in turn account for over half of China's import and export. IFDI thus plays an important role in the Chinese economic development and export success (e.g., "Foreign Direct Investment," 2010, para 2).

Looking at the distribution of IFDI across the various provinces an uneven distribution and concentration around the eastern coastal provinces is clearly visible. The uneven distribution and concentration of IFDI around the eastern coastal provinces stemfrom specific IFDI policies and the establishment of special economic zones around Guangdong, Fujian provinces, and to a lesser extent Beijing and

Shanghai in 1979. In 1984 another 14 coastal cities where added to this list of special economic zones. The special economic zones host

several special incentives for attracting IFDI, making them more attractive in comparison to other economic zones. In 1992 Deng

Xiaoping decided that the economic success of the coastal provinces should serve as an example for the rest of the country. For this reason Deng introduced new policies aimed at attracting even more IFDI and a more even distribution of IFDI among the various Chinese provinces (Chunlai, 2003). Although more recent numbers show that the majority

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of IFDI is still concentrated around the coastal provinces, IFDI is increasingly spreading to other regions (Figure 1)(Pan, 2011).

Figure 1. IFDI by region (% of total IFDI)(Pan, 2011).

IFDI in China can be attributed to three sectors, the primary sector (agriculture), the secondary sector (manufacturing), and the tertiary sector (service). The secondary sector is the sector with the highest amount of accumulated IFDI and received 60 percent of the total utilised IFDI between 1997 and 2008. By contrast, the tertiary sector received 27,1 percent of total utilised IFDI and the primary sector only 1,5 percent of total utilised IFDI. The high amount of IFDI in the

secondary sector can mainly be attributed to the availability of cheap 0 20000 40000 60000 80000 100000 120000 P er ce n ta ge Year

IFDI by Region

East Central West

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Before the mid-1990’s the majority of IFDI in China came from Hong Kong (over 50 percent of total IFDI in China). China’s opening up to the outside world and providing export promotion policies, cheap labour, and cheap land in combination with the closeness of the coastal provinces Guangdong and Fujian, and the sharing of the same language and culture provided for the ideal location for IFDI coming from Hong Kong. In addition Hong Kong was suffering from high domestic labour cost and was losing its competitiveness in the world market. Other Asian countries like Taiwan and Singapore, for similar reasons as Hong Kong, have had significant FDI flows going to China as well. However, after the decision made by Deng Xiaoping to expand the IFDI success of the Chinese coastal provinces to the rest of the country, IFDI coming from developed countries has developed faster thanIFDI coming from Hong Kong and Taiwan. IFDI coming from

developed countries is more technology and capital intensive. For this type of IFDI labour cost is an important factor in the decision-making process whether to invest in a country or not. However, this is gradually changing to a decision making process that accounts more value to the Chinese potential domestic market, the quality of its labour force, and its infrastructure (Pan, 2011).

Apart from improving China's trade benefits IFDI has also improved "China's economy by providing capital, technology, critical

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have had a positive impact on the Chinese economy at both the macro and micro levels" (Fu, 2000, p. 3). In addition, opening up to the outside world and permitting IFDI forced China to be competitive within the global market resulting in improved management, lower production costs and a better quality of manufactured products. However, not only did opening up to the outside world force China to be more competitive, it also resulted in government officials adopting and developing the rules and laws of a market economy. All of these changes ultimately resulted in a better economic performance. As a matter of fact in the years from 1993 until 1998 IFDI reached an

average of 5% as a share of GDP (Figure 2)("Foreign Direct Investment, net inflows" n.d.). To put this into perspective, in 1990 IFDI was no more than 1% as a share of GDP ("Foreign Direct Investment, net inflows," n.d.). 0 1 2 3 4 5 6 7 1990 1991 1992 1993 1994 1995 1996 1997 98 IF DI Year

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However, recent numbers show a decline in China's IFDI and manufacturers moving their production process to other Asian countries (Panckhurst, 2013). Since IFDI is one of the most important elements within China's economic reform a decline in IFDI can

ultimately have a negative effect on the Chinese economy as a whole (Chantasasawat, Fung, Iizaka & Siu, 2005). Figure 3 provides an

illustration of the decline in IFDI in recent years.

Figure 3. IFDI, net inflows (% of GDP) from 2005 until 2012. Retrieved from World DataBank (2014).

2.2 Labour cost and productivity

According to the OLI-paradigm described by Dunning, international activities can be explained by looking at ownership advantages, location advantages and internalization advantages. Ownership

0 1 2 3 4 5 6 2005 2006 2007 2008 2009 2010 2011 2012 IF DI Year

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advantages refer to the competitiveness of the company within the global market. Some examples of ownership advantages are

technology, production know-how and brand name. Location advantages refer to the competitive advantages possessed by the host country. Some examples are the presence of natural resources, factors of production and demand conditions. Internalization

advantages refer to the exploitation of firm specific advantages across borders (Dunning, 1988).

According to Dunning (1988) the best way to enter a foreign market with location specific advantages is by engaging in FDI. Labour cost is a good example of a location specific advantage. For this reason "labour cost is frequently considered to be among the key economic variables in the discussion of the determinants of investment location decisions of firms" (Bellak, Leibrecht & Riedl, 2008, p. 17). General

consensus with respect to the effect of labour cost on IFDI states that a high wage rate may deter IFDI. This should be particularly true for

companies that engage in labour-intensive activities and for companies that invest in less developed countries (Fung, Lizaka &

Parker, 2002). Looking at the development of the average yearly wage this should also be the case for China, since the average yearly wage has more than doubled since the beginning of 2007 (Figure 4).

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Figure 4. Average Yearly Wage. Retrieved from Trading Economics (2014).

However, despite general consensus stating that a high wage-rate may deter IFDI, this is different for the Chinese case. Past research describing the effect of labour cost on IFDI has resulted in mixed results. While some researcher find a significant effect between labour cost and IFDI, others do not (Wang, Clegg & Kafouros, 2009). An important factor in determining the effect of labour cost on IFDI and possibly one of the explanations for the mixed results of past research is productivity. While high wages can be interpreted as a sign of high labour cost, it can also be interpreted as a sign of skilled quality labour (Zhao & Zhu, 2000). Therefore a rising labour cost does not necessarily result in less IFDI, since a rise in productivity can straighten this effect. For this reason it's important to focus on both labour cost and labour cost with respect to productivity. By doing this inconsistencies in past research can be

0 5000 10000 15000 20000 25000 30000 35000 40000 45000 2007 2008 2009 2010 2011 2012 A ve ra ge Y ea rl y W age Year

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countered. China's governmental leaders recognize the importance of productivity and focus on shifting the growth pattern towards

consumption-led, efficiency-focused growth as described in the 12th five-year plan (2011-2015). In the 12th five-year plan industrial policies will give incentives to raise productivity, and increasingly penalize unproductive and wasteful companies, which will lead to increasing pressure for companies to increase their productivity (Yuan, 2012). This is highly necessary since the high capital investments in recent years have led to a decline in capital efficiency, which goes at the expense of productivity growth. Since capital driven growth is not sustainable, a rise in productivity is important in order to maintain economic growth (Yuan, 2012). This is further evident when looking at the rise in price of raw materials and wages putting pressure on profitability. Foreign investors prefer to invest in high productivity regions (Dunning, 1988) resulting in sectors facing high cost pressures to make large efforts to offset the cost pressure coming in via input prices. Therefore labour productivity in China is higher within sectors facing high cost pressures (Figure 5).

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Figure 5. Labour productivity compared to cost pressures (Kim & Kuijs, 2007).

Although the Chinese labour productivity improved a lot over the past years it is still far removed from the labour productivity of developed countries. The current Chinese economic growth model is based on increasing the number of workers involved in production. However, since the start of the economic crisis the industry has increasingly shifted from the coastal provinces to the inland, where the large reserve of rural labour resides. For this reason the past gap between demand and supply of city workers has narrowed, resulting in a

demand for higher wages, better working conditions, and therefore a tightening of the Chinese labour. This in combination with

demographic development projections (projecting aging and

declining fertility) will eventually lead to a labour-short economy (Figure -‐5 0 5 10 15 20 25 30 35 -‐10 -‐8 -‐6 -‐4 -‐2 0 2 4 6 8 10 Lab our Pr oducti vi ty

Relative Input Prices

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6). This can be a big problem with regard to the current economic growth model (Das & N'Diaye, 2013).

Figure 6. Population pressure. The core group of industrial workers (age 25-39) in China

is shrinking while the non-working-age population is growing (Das & N'Diaye, 2013).

Solutions that can slow down the problem of the tightening Chinese labour can be found in stimulating the population to move from rural areas to the cities and stimulating higher fertility rates (Das & N'Diaye, 2013). However, in order to improve the Chinese economy as a whole it is important to increase productivity. In order to achieve this goal, structural changes in the economy have to be made. An important factor within this change is the continuing lowering of market entry barriers. Lowering market entry barriers will increase competition,

0 100 200 300 400 500 600 700 Million People Year

Population Pressure

25-‐39 years old Younger than 15 and older than 64

25-‐39 years old projection

Younger than 15 and older than 64 projection

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regard to the improvement of productivity are information

technologies, research and development (R&D), human resources, mergers and acquisitions, and overseas direct investments (Yuan, 2012).

• Information technology; has the potential to improve the use of data and communication, and has a positive influence on the speed and flexibility in which new business models can be designed and implemented.

• R&D; a high R&D intensity increases R&D efficiency, which will eventually improve productivity (Zhang, Zhang & Zhao, 2003). R&D is necessary since China lags behind in this area.

• Human resources: in order to accelerate the pace of talent development and to gain knowledge about how to employ talent against the highest-value opportunities, talent

development and talent management are highly important. • Mergers and acquisitions: since the Chinese economy is highly

fragmented, industrial consolidation through M&A will probably become a major theme of investment.

• Overseas direct investment: is important in order to gain experience and import advanced technologies.

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2.3 Institutional environment

Institutions are the humanly devised constraints that structure political, economic and social interaction and are devised by human beings to create order and reduce uncertainty in exchange (North, 1991).

Institutions together with the standard constraints of economics determine transaction and production cost and are therefore of influence on the profitability and feasibility of engaging in economic activity (North, 1991). Institutions therefore play an important role in attracting FDI.

Institutions can be divided in informal and formal institutions. Informal institutions represent "the community's prevailing perceptions about the world, the accumulated wisdom of the past, and a current set of

values" (Azid, 2011, p.5). Therefore informal institutions can be referred to as the part of a community's heritage that we call culture (Azid, 2011). Formal institutions “represent structures of codified and explicit rules and standards that shape interaction among societal members” (Holmes, Miller, Hitt & Salmador, 2011, p.3). Formal rules are enforced by authoritative behavioural guidelines and bring order and stability. Therefore formal institutions can be seen as rules that are created in order to solve problems in society (Holmes, Miller, Hitt & Salmador, 2011) that are considered to be important and could hinder the ability to

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Although the institutional environment consists of several formal institutions, three types of formal institutions are considered to be important to managers. These three types of formal institutions are regulatory institutions, political institutions, and financial institutions (Holmes, Miller, Hitt & Salmador, 2011).

2.3.1 Regulatory institutions

Regulatory institutions are formal institutions that establish and enforce laws and policies that govern business activities (Holmes, Miller, Hitt & Salmador, 2011). "Regulatory institutions establish rules intended to reduce uncertainty about the activities of organizations by

standardizing practices and demanding conformance" (Holmes, Miller, Hitt & Salmador, 2011, p.5). A good regulatory framework provides a country with a legal structure and law enforcement system, which enables voluntary exchange and protects property rights (Gwartney & Lawson, 2003). In addition, regulating the activities of domestic and foreign organizations operating within a country contributes to

economic freedom and allows for achieving desirable outcomes and stimulates efficiency (Coen & Doyle, 1999). For this reason governments must "refrain from actions that interfere with personal choice, voluntary exchange, and the freedom to enter and compete in labour and product markets" (Gwartney & Lawson, 2003, p. 407).

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The Chinese government maintains tight control over political expressions, speech, religion, and assembly and can therefore be characterized as a country with limited economic freedom. This was especially true in the period before the economic reform in 1979. In the years after the economic reform China has progressed significantly in order to develop the regulatory framework that is essential in a modern market economy (Fu, 2000). This has resulted in the introduction of numerous new regulations such as regulations of securities markets, consumer protection, and intellectual property rights

(Hasan, Wachtel & Zhou, 2009). However, although the development of the regulatory framework in China developed a lot over the past years the Communist Party lacks the will to undertake the fundamental restructuring of the economy that is necessary in order to achieve proper economic freedom ("e.g., "China Economic Freedom Score," 2014, para. 4). For this reason the Chinese regulatory framework still lacks behind compared to that of developed countries, making it necessary to improve the regulatory framework even more (Fan, Morck, Xu, Yeung, 2007).

2.3.2 Political institutions

Political institutions are all the "provisions and rules that guide the political decision-making process" (Börner, 2005, p.9). In other words,

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political process is composed as well as their interdependencies

(Börner, 2005). Political institutions therefore do not only show how power is distributed within the government (Henisz, 2000) but also "which individuals are allowed to participate in it, and how such rights are exercised" (Holmes, Miller, Hitt & Salmador, 2011, p.5).

When looking at political institutions they can be divided in autocratic institutions that concentrate a supreme power in the hands of one or a few individuals, and democratic institutions that distribute power

amongst multiple individuals in which all citizens participate equally (either directly or indirectly through chosen representatives). The

Chinese political system is a special case. Although the Chinese system can be characterized as an autocratic system the economy is open to trade and investment. However, regardless of the liberalization of

certain aspects of the Chinese economy, the state still controls some key industries. A political system with characteristics of both an

autocratic system and a democratic system like the Chinese political system is therefore also described as an authoritarian growth system. Such a system is a means by which a country chooses to develop economically before adopting a liberal political system (Arsenault, 2008). Whether and when such a liberal system is actually adopted in the future remains to be seen.

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2.3.3 Financial institutions

Financial institutions are "the rules and standards that shape the

availability and value of the society's financial resources, which in turn support capital investment" (Holmes, Miller, Hitt & Salmador, 2011, p.5). The main purpose of financial institutions is to oversee the operation of the financial system. By doing this financial institutions affect the

availability of finance and influence trust and confidence in the financial system. This is extremely important since confidence in the stability of the financial system contributes to economic growth

(Szpunar & Glogowski, 2013).

The current Chinese economy is continuously moving towards a

market-oriented economy and integration within the world economy, ensuring stable and non-inflationary growth is an important factor within this process. In order to maintain a sustainable economic growth process, the financial institutions and monetary policy are highly

important. Rising integration, for instance, leads to greater vulnerability to external shocks. The financial institutions and monetary policy are the first defense mechanisms against these vulnerabilities (Goodfriend & Prasad, 2006). The official objective of the Chinese monetary policy is to maintain the stability of the value of the currency. A high inflation rate will increase uncertainty, which makes it less attractive to invest in

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by establishing a fixed exchange rate of the Renminbi to the Dollar. Keeping the value of the Renminbi low makes China's export cheaper, and for that reason more attractive (Conway, Herd & Chalaux, 2010), eventually resulting in higher IFDI by attracting export-oriented

investments (Tao, 2008). However, limited exchange rate flexibility exposes the economy to risk of macroeconomic instability, therefore the Chinese government decided to change the fixed exchange rate of the Renminbi to the dollar into a currency linked to a basket of world currencies (Conway, Herd & Chalaux, 2010). The development towards a more flexible exchange rate and various other changes like the expansion of the interbank money, bond, and stock markets, opening the bank sector to more competition, and liberalization of interest rates represent some of the important changes in the monetary conditions since the economic reform in 1979 (Liao & Tapsoba, 2014).

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3. Theoretical Framework

3.1 Labour cost and IFDI

As described in the literature review the opinions with regard to the effect of labour cost on IFDI in the Chinese context are divided. While some researchers claim that a higher labour cost deters IFDI, others do not. A reason for these mixed opinions can be found by looking at the measurements used in past research. Past research studying the effect of labour cost on IFDI showed that high labour cost does not

necessarily has to be a negative factor for attracting FDI. This is due to the fact that high labour cost could also insinuate skilled labour and therefore result in a better quality of products or a higher productivity rate. For this reason the effect of labour cost on IFDI is in this research examined by looking at both labour cost and labour cost with respect to productivity.

Because of the general consensus that high labour cost results in less IFDI we expect this research to show similar results, resulting in H1a.

H1a. A rise in labour cost will have a negative effect on the proportion of IFDI in China.

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to productivity. However, even though a rise in productivity may

counter the effect of rising labour cost on IFDI we expect this rise not to be significant enough. Although China is working on improving their economic sustainability by promoting consumption-led, efficiency-focused growth we believe it still has a long way to go. This in line with the difficulties it faces with regard to the tightening of the Chinese labour, and the negative effects of the current rising Chinese labour cost (Mehra, 2012).

Because of the before named reasons we expect labour cost with respect to productivity to have a negative influence on IFDI, resulting in H1b.

H1b. A rise in labour cost with respect to productivity will have a negative effect on the proportion of IFDI in China.

3.2 The moderating role of regulatory institutions

An important factor for determining whether to invest in a country or not is the economic growth within a country. Regulatory institutions are able to contribute to this growth by establishing rules intended to

reduce uncertainty (Holmes, Miller, Hitt & Salmador, 2011), which in turn allows for achieving desirable outcomes and stimulates efficiency (Coen & Doyle, 1999). However, regulations can also take away from

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economic growth, resulting in less IFDI. A good example of such a regulation is the possible distortion of private incentives through taxes. Tax on certain activities can lead to companies not engaging in such activities anymore and move those activities to locations where

taxation is more favourable (Trostel, 2014). For this reason the influence of regulatory institutions depends to a large extend on "the laws and policies enacted and enforced and on the way firms respond"

(Holmes, Miller, Hitt & Salmador, 2011, p. 10). Altogether, the business environment is an important determinant for IFDI. A friendly business environment enabling a high amount of economic freedom lowers the cost of doing business in a foreign country, and therefore enhances the likelihood of attracting FDI. A hostile business environment exercising greater control over business activities reduces economic freedom and has a negative influence on IFDI (Anghel, 2005). General consensus in past research is also reached with respect to China, meaning that regulatory institutions are important for IFDI and the well-functioning of the Chinese market (Xu, 2014). This ultimately leads us to the next hypotheses within this research.

H2. Regulatory institutions that convey a friendly business environment have a positive moderating effect on the relationship between rising labour cost and IFDI in China.

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3.3 The moderating role of political institutions

The general opinion about the role of political institutions in attracting FDI is inconclusive. While general consensus is reached with regard to the importance of political institutions for IFDI, the opinions are divided when it comes to the preferred governmental system. Within this

discussion the form of governance plays a major role. While some researchers claim that an autocratic form of governance provides the ideal climate for attracting FDI, others claim that a democratic form of governance provides the ideal climate for IFDI. Researchers in favour of an autocratic form of governance argue that an autocratic form of governance shields foreign capital from popular pressure for higher wages, stronger labour protection or taxation on capital (O'Donell, 1978), and provides a higher return on investment (Oneal, 1994). Researchers in favour of a democratic form of governance on the other hand, state that a democratic form of governance enables a better flow of information, a transparent decision-making process (Jensen, 2003), improves credibility through audience effects (voters will punish officials with tarnished reputations in the investor

community), and provides policy stability through institutional checks and balances (Roberts, 2006).

The described contrary views illustrate that the effect of a democratic form of governance is highly sensitive to "changes in the countries, years, and covariates included in the study” (Roberts, 2006, p.6).

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However, when studying the history behind the Chinese economy it seems that the development from a closed economy to a more open economy has resulted in a vast improvement of IFDI. For this reason we believe that democratic political institutions have a positive effect on IFDI in China. This ultimately results in the following hypotheses.

H3. Political institutions that convey a democratic business environment

have a positive moderating effect on the relationship between rising

labour cost and IFDI in China.

3.4 The moderating role of financial institutions

The stability of the financial system plays a major role in the

maintenance of a sustainable economic growth process and the attraction of FDI. Financial institutions together with the monetary conditions of a country determine the stability of the financial system and are therefore of significant importance. A financially stable economy sustains profitability and therefore positively influences the investment decision. An instable economy on the other hand causes important economic costs and discourages investment. Since the world economy has been suffering from economic turbulences the past years the financial stability of a country has become even more important (Albulescu, Briciu & Coroiu, 2010).

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The stability of the financial system can be influenced by financial institutions that convey loose or tight monetary conditions. Financial institutions that convey loose monetary conditions are usually

associated with low interest rates, both in nominal and real terms, and limit the ability of the monetary authorities to contain inflation pressures (Barrionuevo, 2005). Financial institutions that convey tight monetary conditions are usually associated with "high interest rates that could be near a cycling high, thus paving the way for rising bond prices and stable or appreciating currencies" (Barrionuevo, 2005, p. 68). A high interest rate usually attracts FDI since foreign investors who raise relatively cheap fund in the home country have higher

competitiveness over rivals in the host country (Yeo, Yoon, Lee & Lee, 2008). This eventually results in a higher return on investment and therefore higher IFDI (Osinubu & Amaghionyeodiwe, 2009). This is reinforced by the effect of a tight monetary policy on the lowering of the inflation rate. A low inflation rate represents a stable economy and stimulates IFDI (Demirhan & Masca, 2008). However, a tight monetary policy tends to appreciate the currency, resulting in a higher exchange rate (Barrionuevo, 2005). Since a high exchange rate of the host

country relative to the home country makes foreign investment more expensive this eventually results in less IFDI (Love & Lage-Hidalgo, 2000). Because of the advantages and disadvantages of loose or tight

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conditions are not too loose or too tight in order to maintain a stable financial system.

However, in case of China we expect this to be different. Because China has a relative fixed exchange rate the disadvantage of the tight monetary policy on the rise of the exchange rate is less influential. Therefore unlike countries with a floating exchange rate China has the advantages of a high interest rate and low inflation rate but not so much the disadvantage of a high exchange rate. For this reason we expect financial institutions that convey tight monetary conditions to have a positive influence on IFDI in China. This leads us to our last hypotheses described below.

H4. Financial institutions that convey tight monetary conditions have a positive moderating effect on the relationship between rising labour cost and IFDI in China.

3.5 Conceptual model

The stated hypotheses are illustrated in figure 7 as shown below.

Regulatory

Institutions Political Institutions Financial Institutions Institution

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4. Method

4.1 Research design

In order to answer the proposed research questions a deductive

research approach has been adopted. By using a deductive research approach an accurate description of the possible relationships as proposed in the hypotheses can be made (Saunders, Lewis & Thornhill, 2009). The hypotheses are prepared after carefully evaluating the available literature. After preparing the hypotheses several variables have been selected in order to test the hypotheses (the selected variables are described in more detail in chapter 4.3). Finally, a regression analysis has been performed in order to analyse the relationship between the variables, which in turn leads to the acceptation or rejection of the hypotheses.

4.2 Sample

In order to conduct this study a sample consisting of the variables labour cost, labour cost with respect to productivity (efficient labour cost), IFDI, regulatory institutions, political institutions, and financial institutions has been used with regard to China over a period of 18 years, ranging from 1995 up until 2012. Data has been collected from secondary sources including the World DataBank, Trading Economics, Heritage Foundation, and the Center for Systemic Peace (Table 1).

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Table 1. Variables, measures, definitions, and data sources.

Category Name Measure Definition Source

IFDI Inward Foreign Direct Investment Index, 0 (low) to 100 (high) Net Inflows as a Percentage of GDP World DataBank

Labour Cost Labour Cost Yuan Renminbe Absolute Average Yearly Wage

Trading Economics

Efficient Labour Cost

Yuan Renminbe Absolute Average Yearly Wage per Employee divided by Labour Productivity per Employee Trading Economics World DataBank Regulatory Institutions Economic Freedom Index Index, 0 (low) to 100 (high) Degree of Economic Freedom Within a Country Heritage Foundation Political Institutions

Polity IV Index Index, -10 (hereditary monarchy) to 10 (consolidated democracy) Democratic and Autocratic Authority in Governing Institutions Center for Systemic Peace Financial Institutions Monetary Conditions Index (MCI) Index, - (loose monetary conditions to + (tight monetary conditions) Weighted Sum of Measures of Real Interest Rates and the Real Effective Exchange Rate

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4.3 Measures

4.3.1 IFDI

IFDI data has been collected from the World DataBank and is

measured as net foreign direct investment inflows as a percentage of total GDP (Table 1). According to the World Databank (e.g., "Foreign Direct Investment, net inflows" n.d.) inward foreign direct investment represents:

The net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term

capital as shown in the balance of payments (para. 1).

4.3.2 Labour cost

Labour cost (LC) is measured in two different ways. The first measure of labour cost is the average yearly wage earned by Chinese employees. The data consistent with this variable are collected from Trading

Economics. The other measure of labour cost is the average yearly wage with respect to productivity. This variable is called efficient labour cost and is calculated by using the following formula:

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EWj =

Wj

Πj

"where EWj is the average efficient wage in developing host country j, Wj is the absolute wage rate in developing host country j, and Πj is the average productivity of labour in developing host country j" (Chunlai, 1997, p. 31). The data necessary for this formula are collected from Trading Economics and the World DataBank.

4.3.3 Regulatory institutions

Regulatory institutions (RI) data have been collected from the Heritage Foundation and is measured by the economic freedom index. The economic freedom index is composed of the variables property rights, freedom from corruption, fiscal freedom, government spending,

business freedom, labour freedom, monetary freedom, trade freedom, investment freedom, and financial freedom. The index is measured on a scale from 0 to 100 in which 0 indicates low economic freedom and 100 high economic freedom (e.g. "About The Index," n.d., para. 3). Since economic freedom is determined by governmental regulations the economic freedom index is a good measure for regulatory

institutions. This is confirmed by Holmes, Miller, Hitt & Salmador (2011) who also use the economic freedom index as a measure for regulatory

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4.3.4 Political institutions

Political institutions (PI) data have been collected from the Center for Systemic Peace, and are measured by the Polity IV index. The Polity IV index measures the authority characteristics of states in the world system for purposes of comparative, quantitative analysis, and is the most widely used resource for monitoring regime change and studying the effect of regime authority. Within this index polity is defined as a political or governmental organization; a society or institution with an organized government; state; body politic (Marshall, Gurr & Jaggers, 2012). The Polity IV index consist of 6 component measures that record key qualities of executive recruitment, constraints on executive

authority, and political competition and is measured on a 21-point scale ranging from -10 representing a hereditary monarchy to +10 representing a consolidated democracy (Marshall, Gurr & Jaggers, 2012).

4.3.5 Financial institutions

Financial institutions (FI) are measured by calculating the narrow monetary conditions index (MCI), by using the following formula:

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𝑁𝑎𝑟𝑟𝑜𝑤 𝑀𝐶𝐼 = 𝑟 + 0.275 ∆𝑟𝑒𝑒𝑟

where r is the real interest rate, and reer the real effective exchange rate (Peng & Leung, 2005). The data necessary for this formula is collected from the World DataBank.

4.4 Method of analysis

In order to conduct this research a multiple regression analysis using a fixed effect model has been used. A fixed effect model has been used because of the assumption that there is "one true effect size that

underlies all the studies in the analysis and that all differences in observed effects are due to sampling error" (Borenstein, Hedges, Higgins & Rothstein, 2010, p. 97). Within this study labour cost, efficient labour cost, regulatory institutions, political institutions, and financial institutions have been used as independent variables and IFDI has been used as the dependent variable. The independent variables regulatory institutions, political institutions, and financial institutions serve as the moderator variables.

In order to measure the moderating effect of the institutional variables on the effect between labour cost and IFDI three additional variables

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are created. These moderator variables are compiled according to the following formula:

𝑀 = 𝑀𝑒𝑎𝑛 𝐶𝑒𝑛𝑡𝑒𝑟𝑒𝑑 𝑋 ∗ 𝑀𝑒𝑎𝑛 𝐶𝑒𝑛𝑡𝑒𝑟𝑒𝑑 𝐿𝑎𝑏𝑜𝑢𝑟 𝐶𝑜𝑠𝑡

where M is the moderator variable, and X the independent variable (e.g., "Moderator Analyse," n.d., para. 1).

The formula corresponding to the described variables looks accordingly:

𝐼𝐹𝐷𝐼

_!"

= (𝛽

_!

+ 𝛽

_!

∗ 𝐿𝐶

_!!

+ 𝛽

_!

∗ 𝐸𝐿𝐶

_!!

+ 𝛽

_!

∗ 𝑅𝐼

_!!

+ 𝛽

_!

∗ 𝑃𝐼

_!!

+ 𝛽

_!

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5. Results

5.1 Correlation

In order to investigate the strength and relationship between the

variables a Spearmans correlation matrix has been produced (table 2).

Table 2. Descriptive results and correlation matrix.

Mean SD IFDI LC ELC RI PI FI IFDI 3.855 .048 1 LC 17062.8333 11728.393 -.317 1 ELC .602 .703 -.663** .409 1 RI 52.750 0.000 -.103 -.021 .244 1 PI -7.000 1.329 . . . . 1 FI 3.302 3.314 .017 -.332 -.384 -.122 . 1

**. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed).

None of the items produce extremely high results, therefore there is no indication of multicollinearity. As expected, labour cost negatively correlates with IFDI, however, the correlation is non-significant. The efficient labour cost on the other hand shows a significant negative correlation (Sig. < 0.01 level). This could indicate the importance of productivity in order to measure the effect between labour cost and IFDI. Regulatory institutions positively correlates with IFDI but is non-significant. Financial institutions also shows a positive correlation with

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data it is visible that the political institutions data do not show enough variance in order to be included in the correlation matrix. For this

reason political institutions data has been excluded from the regression analysis. However, although it is not possible to measure the effect of change in political institutions on IFDI, it does provide some valuable information. A lack in variance in the political institutions data illustrates that the Chinese political system has not developed from an

autocratic political system towards a more democratic political system. Therefore it can be concluded that a change in IFDI cannot be

attributed to the Chinese political institutions within our chosen timespan, since the political system has remained constant. The

question whether a more democratic political system would moderate the effect between labour cost and IFDI cannot be answered. For this reason we find no support for hypotheses 3.

5.2 Hypotheses Testing

To test the proposed hypotheses four models have been composed. The first model tests the effect of labour cost on IFDI with the control variables regulatory institutions and financial institutions. The second model tests the effect of efficient labour cost on IFDI. The third model tests the moderating effect of regulatory institutions on the effect between the efficient labour cost and IFDI. And the fourth model tests

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the moderating effect of financial institutions on the effect between efficient labour cost and IFDI (table 3).

Table 3. Results of the various multiple regression analysis (dependent variable = IFDI).

Variables Model 1 Model 2 Model 3 Model 4

LC -2.111E05 (0.206) ELC -11.420*** (0.002) -10.612*** (0.005) -11.063*** (0.002) RI * ELC 1.778 (0.587) FI * ELC -.823 (0.421) RI -.058 (0.670) .028 (0.785) .053 (0.628) .041 (0.692) FI -.240 (0.678) -.059 (0.194) -.059 (0.203) -.063 (0.178) Adjusted R2 _-.067 (0.601) .403** (0.017) .517* (0.054) .537*** (0.007)

P-values: ***. Sig. < 0.01 level, **. Sig. < 0.05 level, *. Sig. < 0.10 level. N = 18.

The adjusted R2 _{of the first model is -.067 and is non-significant. This} could indicate that the used data is too narrow or that the used data fits the model poorly. Since the used data are rather limited it is

plausible to believe that the used data are too narrow. In order to test if a larger dataset produces different results the dataset has been expanded by adding 14 years, resulting in a dataset ranging from 1982

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data are not available for that period of time. Rerunning the regression produces a significant model (Sig. < 0.05 level) and shows an adjusted R2_{of .158, this means that 15,8% of the variation in IFDI is explained by} the variables in model 1. The results of the analysis further indicate that labour cost has a non-significant positive effect on inward FDI (β = 3.862E-5, t = 1.439, p = 0.161). For this reason no support is found for hypotheses 1a.

Since, the other models in the study are significant and explain an average to high percent of the variance in IFDI the original dataset has been used for the other models. This also partly due to the fact that regulatory institutions cannot be included in the extended dataset but can be included in the original dataset.

Model 2 shows an adjusted R2_{of .403 and is significant (Sig. < 0.05} level). Efficient labour cost has a highly significant negative effect on inward FDI (β = -11.420, t = -3.762, p = 0.002). These results give support for hypotheses 1b, meaning that a higher efficient labour cost deters IFDI.

Model 3 is significant (Sig. < 0.05 level) and has an adjusted R2_{of .517.} Regulatory institutions positively moderate the effect of efficient labour cost on IFDI (β = 1.778). Looking at the plot of the results from the

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expectation, regulatory institutions that convey a high amount of economic freedom positively influence IFDI in case of average and high efficient labour cost. However, the results are non-significant, (t = 0.557, p = 0.587), therefore we find no support for hypotheses 2.

Figure 8. Moderating effect of regulatory institutions on the effect between efficient

labour cost and IFDI. Retrieved from the data analysis.

Model 4 is highly significant (Sig. < 0.01 level) and has an adjusted R2_of .537. Financial institutions negatively moderate the effect of efficient labour cost on IFDI (β = -.823). Looking at the plot of the results from the regression analysis (figure 9) it is visible that in contrast to our

expectation, financial institutions that convey tight monetary conditions negatively influence IFDI. However, the results are

non-0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

Low RI Average RI High RI

IF DI Regulatory Institutions

Regulatory Institutions

Low ELC Average ELC High ELC

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conclusion from the found results. No support has been found for hypotheses 4.

Figure 9. Moderating effect of financial institutions on the effect between efficient

labour cost and IFDI. Retrieved from the data analysis.

Table 4 presents an overview of the hypotheses and if they are accepted or rejected.

Table 4. Results on the Hypotheses

Hypotheses Predicted Effect on IFDI Found Effect in Model 1 - 4

Accepted/Rejected

LC Negative Non-significant N/A

ELC Negative Significant Accepted

RI * ELC Positive Non-significant N/A

PI * ELC Positive - N/A

FI * ELC Positive Non-significant N/A 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

Low FI Average FI High FI

IF DI Financial Institutions

Financial Institutions

Low ELC Average ELC High ELC

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6. Discussion

6.1 Effect Labour Cost

General consensus with respect to the effect of labour cost on

attracting FDI states that a higher labour cost deters IFDI (Fung, Lizaka & Parker, 2002). However, research about the effect of labour cost on the attraction of FDI in China is inconclusive. While some researchers find a significant effect between labour cost and IFDI, others do not (Wang, Clegg & Kafouros, 2009). As presented in hypothesis 1a we expected a rise in labour cost to have a negative effect on IFDI.

Although we found a negative effect of labour cost on IFDI, this effect was irrelevantly small and non-significant. Extending the data sample by 17 years resulted in a positive non-significant effect of labour cost on IFDI.

As described in the literature review the mixed results of the effect between labour cost and IFDI can be caused by the influence of productivity. Although general consensus states that a higher labour cost deters IFDI, this can be countered by a rise in productivity. When looking at the results it is visible that productivity is an important factor within this analysis. This is due to the fact that including productivity in the analysis has resulted in a significant negative effect of labour cost

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context, it does show support for hypothesis 1b. As expected, a rise in efficient labour cost negatively influences IFDI.

6.2 Moderating effect institutions

The goal of including institutional factors as moderating variables was to measure if a negative effect between rising labour cost and IFDI can be countered by a good institutional environment. When looking at the results of hypothesis 2, stating that regulatory institutions that convey a friendly business environment can moderate the effect between labour cost and IFDI, we find no support for this assumption. Although the results show that regulatory institutions that convey a friendly business environment positively influence IFDI in case of average and high labour cost, these results are non significant. Therefore it cannot be concluded that the effect between labour cost and IFDI can be positively moderated by regulatory institutions in the Chinese case.

This is also the case when looking at the moderating role of political institutions. Although we expected democratic political institutions to positively moderate the effect between labour cost and IFDI, no significant effect was found to confirm this expectation. Therefore no support has been found for hypothesis 3. However, although no

support has been found for hypothesis 3 it is possible to conclude that political institutions have not attributed to a change in IFDI and have

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not attributed to the negative effect between labour cost and IFDI. This due to the fact that the Chinese political system has not changed towards a more democratic system but stayed on the same level of autocracy. For this reason a variance in IFDI cannot be caused by the political institutions.

When looking at the financial institutions it is visible that unlike what we expected, financial institutions that convey tight monetary conditions negatively influence the effect between labour cost and IFDI.

However, these results are non-significant and therefore hypothesis 4 is not supported.

7. Conclusion

7.1 Conclusion

Since the Chinese economic reform in 1979 China has become one of the fastest growing economies in the world (Liu, Burridge & Sinclair, 2002). This is mainly due to the high amount of IFDI China is receiving (Graham & Wade, 2001). However, China's rapid economic

development has lead to an increase in labour cost, resulting in China no longer being the cheap location as it once was (Mehra, 2012). When looking at the most recent economic developments it is visible that IFDI in China is decreasing. Since a decrease in IFDI can have a

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negative effect on the Chinese economy it is important to study this topic.

This research aimed to investigate the relationship between labour cost and IFDI. Because of the fact that institutions form an important factor within the economic environment and are believed to be of

importance in order to attract FDI, the Chinese institutional

environment has been included in this research. In order to conduct this research the following main question was created: Is there a relationship between labour cost and IFDI in China, and is this relationship influenced by the institutional environment? In order to answer the main question the following sub questions were created: (1) Is there a relationship between labour cost and IFDI in China? (2) Does the institutional environment influence the relationship between labour cost and IFDI in China? (3) Which institutional factors exert the most influence on the relationship between labour cost and IFDI in China? (4) And, can the influence of rising labour cost on IFDI be cancelled out by a strong institutional environment?

1. As for answering sub question 1, the results indicate that there is a relationship between labour cost and IFDI. Although it is not

possible to say that there is a significant relationship between nominal labour cost and IFDI, it is possible to say that there is a significant relationship between efficient labour cost and IFDI.

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The results show that a rising efficient labour cost has a significant negative effect on IFDI.

2. Sub question 2 was aimed at finding out if the institutional environment influences the relationship between labour cost and IFDI. Looking at the results we can conclude that the political institutional environment did not play a role in the relationship between labour cost and IFDI in our chosen timespan. This is because there was no change in the level of autocracy in the Chinese political system. However, no

significant effects were found that a more democratic political system moderates the effect between labour cost and IFDI. Therefore this question cannot be answered. The same applies for the regulatory and financial institutions. Although the results did show an effect, this effect was not significant.

3. Since no support has been found for the moderating effect of institutions on the effect between labour coast and IFDI it is not possible to make this distinction.

4. Although this might be possible, no support has been found for the moderating effect of institutions on the effect between

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As for the main question, there is a strong relationship between labour cost and IFDI. Although no support has been found for the effect of nominal labour cost on IFDI, support has been found for the effect of efficient labour cost on IFDI. A rising efficient labour cost has a strong negative effect on IFDI. For this reason it can be concluded that

efficient labour cost is an important factor in order to attract FDI. Since IFDI is an important factor within the Chinese economy, the Chinese government should be aware of the negative influence of rising efficient labour cost on IFDI, and in turn the Chinese economy. Since the highest amount of accumulated IFDI goes to the secondary sector (manufacturing) (Liu & Daly, 2011) the main focus should go to this sector. Especially since the high amount of IFDI in this sector can mainly be attributed to the availability of cheap labour and low cost of

materials (Liu & Daly, 2011). In addition, IFDI is increasingly coming from developed countries, which also focus on labour cost (Pan, 2011). An important factor underlying the problem of rising labour cost is the tightening of the Chinese labour market. Although the Chinese

economic growth model is based on increasing the number of workers involved in production, the industry has increasingly shifted from the coastal provinces to the inland, where the large reserve of rural labour resides. This has resulted in the narrowing of the gap between demand and supply of city workers, and in turn a demand for higher wages and better working conditions (Das & N'Diaye, 2013). In order to counter the negative effect of the before described rise in labour cost on IFDI this

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study aimed to investigate the moderating relationship of the

institutional environment. However, although support has been found for the effect of efficient labour cost on IFDI, no support has been found for the moderating effect of the institutional environment.

7.2 Contributions

This study contributes to the research environment in the sense that this is an under examined topic and a topic of much controversy and opposing views between the researcher who did study this topic. Also, by highlighting the importance of the efficient labour cost on IFDI a valuable contribution is made to the Chinese governmental and business environment. Knowing the importance of the efficient labour cost for the attraction of FDI allows the Chinese government to engage in economic reform if necessary. This is especially important in view of the recent developments that indicate a decline in IFDI, which can have a negative effect on the Chinese economy. Knowing the

importance of the efficient labour cost for the attraction of FDI allows Chinese managers to anticipate on the negative effect of rising labour cost, which can help in order to maintain a profitable business. In

addition, this study contributes to the business environment by giving a clearer overview of the opportunities and challenges surrounding FDI in China. Having a clear overview of the opportunities and challenges

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surrounding FDI in China can help foreign managers in the managerial decision process whether to invest in China or not.

7.3 Limitations

The results from the analysis showed insignificant results for the

moderating effect of the institutional environment. For this reason it was not possible to explain if the institutional environment is able to

moderate the negative effect between a rising efficient labour cost and IFDI. A larger dataset might have resulted in significant results, which would have allowed for describing the moderating effect of the institutional environment. However, this was not possible due to the lack of available data. For this reason a dataset of 18 years was the maximum timeframe that could be examined.

7.4 Future research

Although this study highlights the importance of efficient labour cost for the attraction of IFDI, the outcomes of the moderating role of the

institutional environment remained inconclusive. Future research is needed in order to understand the moderating role of the institutional environment. Understanding the moderating role of the institutional environment might provide a solution for the problem of rising labour cost within the Chinese economy.

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Future research could also build on this study by investigating within country differences. Although this study broadly describes the regional differences between the coastal provinces and the inland a more extensive research could provide valuable knowledge. This also applies to the different sectors, since this research shows that labour cost is especially important within the manufacturing sector.

To conclude, future research could investigate the found results in a context other than the Chinese setting. Since the Chinese economy is substantially different from other countries the outcomes of this study might not be generalizable to other countries. Although we believe efficient labour cost to have a negative effect on IFDI in most settings, this cannot be said with certainty.

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Anghel, B. (2005). Do Institutions Affect Foreign Direct Investment? (Doctoral dissertation). Retrieved from

http://idea.uab.es/abrindusa/research/paper_FDI_and_institutions. pdf

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Bellak, C., Leibrecht, M., & Riedl, A. (2008). Labour costs and FDI flows into Central and Eastern European Countries: A survey of the literature and empirical evidence. Structural Change and

Economic Dynamics, 19(1), 17–37. doi:10.1016/j.strueco.2007.03.001 Borenstein, M., Hedges, L. V., Higgins, J. P. T., & Rothstein, H. R. (2010). A

basic introduction to fixed-effect and random-effects models for meta-analysis. Research Synthesis Methods, 1(2), 97–111. doi: 10.1002/jrsm.12

Börner, K. A. (2005). Political Institutions and Incentives for Economic Reforms (Doctoral dissertation). Retrieved from http://edoc.ub.uni-muenchen.de/3165/1/Boerner_Kira_Astrid.pdf