Participation in globalization and out of poverty: The opportunity provided by foreign investments

Abstract

When labor is released from agriculture, he may seek employment in manufacturing and earn a potentially higher income. This transition, however, will not occur without manufacturing demand for excessive agricultural labor. This paper examines the role of foreign direct investments in facilitating such transition. We develop a theoretical model to show that, capital (and technology embedded) provided by foreign investments is essential for released agricultural labor to be absorbed by manufacturing in developing countries. To empirically capture the causal impacts of foreign investments on manufacturing employment of transiting rural labor in China, we use shocks of natural disasters to agricultural production as instruments for the supply of rural labor, and a “leave-out-push-pull” technique to develop instruments for foreign investments. Our findings suggest that foreign investments have significant and crucial impacts on manufacturing employment of transiting rural labor, providing opportunities for them to participate in global production and rise above poverty.