NATIONAL BUREAU OF ECONOMIC RESEARCH
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Demographics and FDI: Lessons from China's One-Child Policy

John B. Donaldson, Christos Koulovatianos, Jian Li, Rajnish Mehra

NBER Working Paper No. 24256
Issued in January 2018, Revised in November 2018
NBER Program(s):The Development Economics Program, The Economic Fluctuations and Growth Program, The International Trade and Investment Program

Following the introduction of the one-child policy in China, the capital-labor (K/L) ratio of China increased relative to that of India, and, simultaneously, FDI inflows relative to GDP for China versus India 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 permanently increases the capital per worker inherited from the previous generation. The resulting increase in China’s (domestic K)/L 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.

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Document Object Identifier (DOI): 10.3386/w24256

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