Hitotsubashi Institute for Advanced Study


Wage Markdowns and FDI Liberalization


This paper examines whether foreign direct investment (FDI) liberalization reduces firms’ monopsony power in labor markets. We estimate firm-level wage markdown, wage over marginal revenue of labor, from China’s production data and identify the causal effect upon its accession to the World Trade Organization. Large and productive firms, state-owned firms, exporters, and foreign firms set narrower wage markdowns. FDI liberalization widened wage markdowns and decreased labor income share in value-added. These findings are contrast to classical monopsony theory based on concentration but consistent with modern theory based on search friction.

Report No.: HIAS-E-83
Author(s): Yi Lu(a)
Yoichi Sugita(b)
Lianming Zhu(c)
Affiliation: (a) School of Economics and Management, Tsinghua University, China
(b) Graduate School of Economics, Hitotsubashi University, Japan
(c) Institute of Social and Economic Research, Osaka University, Japan
Issued Date: March 2019
Keywords: Foreign direct investment, Monopsony, Wage, Search, Firm heterogeneity