This paper examines the impact of multinational firm entry into local labor
markets on employment, productivity, and wages. It exploits a natural experiment
associated with the People’s Republic of China’s rapid 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 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.