This paper examines the impact of multinational firm entry into local labor
markets on employment, productivity, and wages. It exploits the People’s
Republic of China’s rapid implementation of economic reforms and
assignment of cities to special economic zone status in the 1980s and 1990s.
Using data on both firms and workers, it is found that these policies increased
foreign direct investment, which raised average labor productivity in these
labor markets. However, only modest increases in real median wage rates
across these cities are observed in the face of large increases in wage
inequality and rising local prices, limiting the benefits to most workers in
these cities. Evidence is presented that corporate profits captured most of the
increase in productivity in these areas.