Institutions, Labor Mobility, and Foreign Direct Investment in China and India

Why did China and India, despite their similar natural factor endowments and growth trajectories, attract different types of FDI? This article shows that microlevel institutions in China and India, particularly a set of regulations governing labor and land markets, shape their domestic labor mobility and consequently affect their FDI patterns and development paths. China’s high labor mobility motivates foreign firms to concentrate in labor-intensive manufacturing and exploit the benefits of scale economies. India’s low labor mobility motivates foreign firms to move away from unskilled-labor-intensive manufacturing and invest in the modern service sector where the demand for skilled labor is relatively high.