Mughal and Vechiu (2009) document negative effect of FDI on tertiary school enrollment. Using data from 80 developing countries over 1980-2014, Wang and Zhuang (2021) show that inward FDI promotes primary school enrollment and completion rates for both boys and girls, has no significant impact on male secondary and tertiary enrollment, but a significantly negative effect on female secondary and tertiary enrollment. FDI from OECD countries promotes secondary and tertiary enrollment rates while non-OECD FDI does not. Rong et al. (2020) documented a positive effect of FDI on employment and human capital in China, with labor market flexibility playing a significant positive moderating role.

While structural transformation and human capital accumulation are largely studied in two separate strands of literature, they happen concomitantly with economic growth and are mutually reinforcing. Economists are increasingly interested in the intersection between structural transformation and human capital accumulation. Buera et al. (2021) found that increases in GDP per capita are associated with a systematic shift in the composition of value added to sectors that are intensive in high-skill labor, a process they labeled as skill-biased structural change. Given the interconnection of the two topics and the same underlying dataset and methodology, this paper assesses the effect of FDI on structural transformation and human capital accumulation in China together.

This paper contributes to the literature on globalization, growth, and the labor market in three ways. First, to the best of our knowledge, this paper is the first to estimate the causal effects of FDI on city level transformation and human capital accumulation in China, while previous papers mostly study the two outcomes on the national or provincial level. Second, the paper exploits China’s FDI liberalization policies and the differences in initial industry composition across regions to establish causal links between FDI inflows, structural transformation and school enrollment. While there is a growing body of literature adopting this method (Edmonds et al. 2010; Topalova 2010; Dix-Carneiro and Kovak 2017; McCaig 2011; Costa et al. 2016; Erten and Leight 2021; Kis-Katos et al. 2018; Li et al. 2019; Erten et al. 2019), almost all these studies focus on trade shocks, very limited attention has been devoted to FDI. By combining China’s population censuses, city statistical yearbooks 1990-2005, and the industrial firm censuses, the present paper assesses broader developmental impacts of FDI in Chinese local economies. Third, previous FDI-related studies often use aggregate FDI measures and are thus unable to differentiate between different types of FDI. The rich micro-level datasets in this paper allows us to shed light on the heterogenous effects of FDI by their export intensity and skill intensity, which could provide novel insights and better inform policymakers’ FDI strategies.

China offers an ideal case for this analysis: First, China experienced two waves of dramatic FDI liberalization in 1992 and 2002, with FDI inflows to China surging more than 20-fold during the study period 1990-2005. Second, since China is among the largest countries by land area and the largest country 6