Working Paper: NBER ID: w24256
Authors: John B. Donaldson; Christos Koulovatianos; Jian Li; Rajnish Mehra
Abstract: Following the introduction of the one-child policy in China, the capital-labor ratio of China increased relative to that of India, while FDI/GDP inflows to China vs India simultaneously declined. These observations are explained in the context of a simple neoclassical OLG paradigm. The adjustment mechanism works as follows: the reduction in the growth rate of the (urban) labor force due to the one-child policy increases the capital per worker inherited from the previous generation. The resulting increase in China’s domestic capital-labor ratio thus “crowds out” the need for FDI in China relative to India. Our paper is a contribution to the nascent literature exploring demographic transitions and their effects on FDI flows.
Keywords: Demographics; Foreign Direct Investment; China; One-Child Policy
JEL Codes: E13; F11; F12; J11; O11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| one-child policy in China (J18) | decrease in the growth rate of the urban labor force (J21) |
| decrease in the growth rate of the urban labor force (J21) | increase in capital per worker (E22) |
| increase in capital per worker (E22) | decrease in FDI inflows relative to India (F21) |
| one-child policy in China (J18) | increase in capital per worker (E22) |
| one-child policy in China (J18) | decrease in FDI inflows relative to India (F21) |