The increasing return to scale for firms located in the big cities also allows them to develop technology within the firms themselves. Large cities are, therefore, clusters of activities generating a host of synergetic effects: agglomeration and urbanization economies, which cumulatively enlarge the population and significantly influence its employment structure.
High FDI leads to higher employment levels especially in the industrial sectors, which are labour intensive in nature. China is a classic example for all the benefits mentioned above. .
Over the last 4-5 years strong rise in FDI has stimulated the Chinese economy to such an extent that apart from having a vibrant domestic market, the Chinese have emerged as one of the largest exporters in the world. The country, apart from being one of the largest consumer durables market, is also the one of the largest telecom services markets. As far as employment is concerned, according to official Chinese statistics, by the end of 2001, China was able to generate employment for additional 9.4 million citizens (Zhou, 2001).
Despite the high growth rates of China, it is suffering from huge income inequality across regions. Such inequities can cause social and political unrest and ultimately can cause damage to the economy. The Chinese government is trying hard to lure more foreign direct investments to the interior and western parts of the country. In China, more than 22% of Japanese firms picked taking advantage of lower cost'' as their main motive for undertaking FDI (Fung, 2003). A low nominal wage, other things being equal, encourages FDI, particularly for firms that engage in labour-intensive production activities. China, of course, fits this image.
Zhou found that FDI into China brought the income level up considerable. Foreign-owned investments paid higher wages than state employers, in many cases due to some jobs requiring skilled labour.