Overcoming the agglomeration paradox: skill-dependent FDI and urbanization in China

Abstract: The influx of foreign capital into cities in developing countries creates new labor demands, triggering significant internal migration as workers move for opportunities. But this mobilization creates a management problem for local governments. How do local officials manage competing interests in developing their labor market while preventing governance problems from excessive demand on public resources? Using the highly institutionalized case of China, I argue that local governments encourage long-term migration of “desirable” migrants by integrating them into social services while keeping others out. Variation in locally invested FDI skill dependence drives variation in inclusivity towards internal migrants. Policies that facilitate the integration of internal migrants into local urban welfare systems correlate with investment in firms with greater dependence on high-skilled workers, especially when investment flows to firms established more than one year previously. These trends are strongest in eastern municipalities where market forces play a larger role in local development policies.