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.
Authors
John B. Donaldson, Christos Koulovatianos, Jian Li, Rajnish Mehra
- Acknowledgements & Disclosure
- We thank Costas Arkolakis, Espen Henriksen, Robert Lucas, Julien Penasse, and Laszlo Sandor for helpful comments. We are especially grateful to Ed Prescott for detailed feedback and suggestions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- http://dx.doi.org/10.3386/w24256
- Published in
- United States of America
