Minimum wage, foreign firm exit and export: Heterogeneity in investment motivation

Abstract

Using data from Chinese industrial firms between 2000 and 2013, we explore the varied impact of minimum wage increases on the exit behavior and export performance of foreign-owned firms, focusing on three primary motivations: labor costs, market size, and industrial linkages. The results show that foreign-owned firms driven by labor costs are more likely to exit following a minimum wage hike, while those motivated by market size and industrial linkages are less likely to be affected. We also observe similar patterns in firm exports: rising minimum wages generally reduce foreign-owned firms’ exports, with the impact being more pronounced for firms with lower domestic market shares and weaker industrial linkages. This paper highlights that deep integration of foreign-owned firms into the domestic market and industrial chain can help mitigate the exit risks associated with rising labor costs.