Using China’s foreign direct investment (FDI) liberalization following WTO accession as a quasi-natural experiment, we examine whether foreign direct investment can promote intergenerational occupational mobility. We find that greater exposure to FDI significantly increases upward mobility, particularly for individuals from disadvantaged family backgrounds. The results suggest that globalization can shape social mobility patterns in developing economies, beyond its well-known effects on economic growth.

Foreign direct investment (FDI) has long been considered a key driver of economic growth in developing countries. But can it also reduce social stratification and promote mobility? Our study (Deng et al. 2025), based on China’s FDI liberalization following its WTO accession, finds that FDI inflows significantly enhance intergenerational occupational mobility. We define occupational mobility as the change in an individual’s occupational rank relative to their father’s. We rank occupations by their educational intensity, measured by the average years of schooling of individuals within each occupation, which serves as a proxy for the skill requirements and social status associated with the job. The research shows that a one standard deviation increase in FDI exposure results in a 2.7% standard deviation increase in upward mobility. This effect is particularly strong for individuals from low socioeconomic status (SES) families. While these individuals have more room for upward movement, this shift is not merely mechanical. Instead, FDI actively creates the necessary “ladder” by increasing the demand for high-skilled labor and driving structural transformation from agriculture to modern sectors. Consequently, FDI not only generates economic opportunities but also plays an important role in fostering social equity in China.

Policy background: The social impact of FDI

Developing countries actively seek FDI to stimulate their economies. However, beyond its well-studied economic effects (Aitken and Harrison 1999, Javorcik 2004, Keller and Yeaple 2009, Alfaro et al. 2010, Lu et al. 2017, Fons-Rosen et al. 2021, Shi et al. 2024), a crucial yet underexplored question remains: can FDI promote social mobility?

Theoretically, the impact of FDI could go either way. On the one hand, since FDI typically targets nonagricultural sectors, it could create new labor market opportunities and provide pathways for individuals to climb the social ladder. On the other hand, it could increase demand for low-skill manufacturing jobs, encouraging children from low-income families to drop out of school for factory work, potentially hindering their long-term educational and social advancement. Understanding the true impact of FDI is essential for analyzing social changes in an era of globalization.

Data and methodology

Our study combines three key datasets. First, we identify industries liberalized for foreign investment by comparing the 1997 and 2002 versions of the Catalogue for the Guidance of Foreign Investment Industries. This regulatory change in 2002 was a direct consequence of China’s WTO accession, which required a substantial expansion in the range of sectors open to foreign capital. Second, we use the Annual Survey of Industrial Firms to establish the baseline industrial composition of each city prior to the FDI liberalization policy shock. Third, we use the 2000, 2005, and 2010 waves of the National Population Census to capture individual-level outcomes across generations, including occupational status, educational attainment, and family background.

To identify the causal effect of FDI on social mobility, our empirical strategy employs a Bartik-style shift-share instrumental variable design. The “shift” comes from the national relaxation of FDI restrictions in specific industries after WTO accession. The “share” reflects each city’s preexisting employment shares across these industries. By interacting the two, we construct a city-level measure of FDI exposure that captures how the same national policy generated heterogeneous local shocks depending on local industrial structure. This design allows us to isolate the impact of FDI from other regional economic factors and clearly identify its role in promoting social mobility.

General findings

1. FDI significantly promotes upward occupational mobility

Our study’s key finding is that FDI exposure has a significant positive effect on social mobility. Specifically, a one standard deviation increase in a city’s FDI exposure leads to a 2.7% standard deviation increase in intergenerational occupational mobility.

2. FDI benefits disadvantaged groups

Further analysis reveals that the mobility gains from FDI are not evenly distributed. The benefits disproportionately flow to individuals from low-SES families. People whose fathers have limited education, come from less developed regions, or work in the agriculture sector are especially likely to move up the occupational ladder.

3. Three key mechanisms explain the effect

Our study identifies three main mechanisms by which FDI promotes social mobility:

a) Demand side: FDI increases the demand for high-skilled labor, creating more jobs with higher educational intensity (and, therefore, higher social status).

b) Supply side: The rising skill premium encourages households to invest more in education, motivating individuals to pursue higher education. One concern is that FDI might hinder mobility by encouraging school dropouts due to the increased availability of low-skill manufacturing jobs. Our results directly refute the dropout hypothesis. We find that FDI exposure has no significant impact on dropout rates; instead, it significantly increases the probability of individuals attaining three-year college and four-year university degrees.

c) Structural transformation: FDI accelerates the shift of the labor force from agriculture to manufacturing and services, which creates significant opportunities for occupational mobility.

Conclusion

Our paper is the first to empirically demonstrate the social effects of FDI in a host country, showing that FDI is not only a driver of economic growth but also a powerful force for social mobility. The findings suggest that by attracting foreign investment, China has not only achieved economic progress but also provided more opportunities for its citizens, particularly the disadvantaged, to move up the social ladder. These findings have important policy implications for other developing countries seeking to leverage FDI for inclusive growth.

(Jianpeng Deng, Shanghai University of Finance and Economics; Zibin Huang, Shanghai University of Finance and Economics; Qing Shi, Shanghai University; Xin Zhao, Shanghai University of Finance and Economics)

References

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Alfaro, Laura, Areendam Chanda, Sebnem Kalemli-Ozcan, and Selin Sayek. 2010. “Does Foreign Direct Investment Promote Growth? Exploring the Role of Financial Markets on Linkages.” Journal of Development Economics 91 (2): 242–56. https://doi.org/10.1016/j.jdeveco.2009.09.004.

Deng, Jianpeng, Zibin Huang, Qinq Shi, and Xin Zhao. 2025. “Foreign Direct Investment and Intergenerational Occupational Mobility: Evidence from China.” Social Science Research Network Working Paper No. 5331276. https://dx.doi.org/10.2139/ssrn.5331276.

Fons-Rosen, Christian, Sebnem Kalemli-Ozcan, Bent E. Sørensen, Carolina Villegas-Sanchez, and Vadym Volosovych. 2021. “Quantifying Productivity Gains from Foreign Investment.” Journal of International Economics 131: 103456. https://doi.org/10.1016/j.jinteco.2021.103456.

Javorcik, Beata Smarzynska. 2004. “Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers through Backward Linkages.” American Economic Review 94 (3): 605–27. https://doi.org/10.1257/0002828041464605.

Keller, Wolfgang, and Stephen R. Yeaple. 2009. “Multinational Enterprises, International Trade, and Productivity Growth: Firm-Level Evidence from the United States.” Review of Economics and Statistics 91 (4): 821–31. https://doi.org/10.1162/rest.91.4.821.

Lu, Yi, Zhigang Tao, and Lianming Zhu. 2017. “Identifying FDI Spillovers.” Journal of International Economics 107: 75–90. https://doi.org/10.1016/j.jinteco.2017.01.006.

Shi, Qing, Yong Tan, Xin Zhao, and Linke Zhu. 2024. “Does Inward FDI Improve the Labour-Allocation Efficiency of Local Firms? Evidence from China.” World Economy 47 (12): 4570-4600. https://doi.org/10.1111/twec.13631.