Does inward FDI improve the labour-allocation efficiency of local firms? Evidence from China

This article estimates labour-allocation efficiency at the firm level in China and studies whether inward foreign direct investment (FDI) has contributed to its improvement. We construct a city-level FDI intensity measure and identify the causal effect of FDI entry on labour-allocation efficiency. The results indicate that when FDI increases by 10%, the average labour-allocation efficiency increases by 7.2%. The mechanism analysis further implies that the alleviation effect of FDI entry on firm-level labour-allocation efficiency prefers the agglomeration learning rather than the agglomeration matching channel, that is, firm-level labour-allocation efficiency increases only when they are more exposed to the agglomeration of foreign capital and more related industries. The heterogeneity analysis further reveals that firms located in less segmented regions, facing higher training costs, of private- or foreign-owned ownership types, having a higher ratio of high-skilled labours increase labour-allocation efficiency more upon FDI entry.