Institutions, Labor Mobility, and Foreign Direct Investment in China and India Yu Zheng 1 Published online: 2 November 2015 # Springer Science+Business Media New York 2015 Abstract Why did China and India, despite their similar natural factor endowments and growth trajectories, attract different types of FDI? This article shows that microlevel institutions in China and India, particularly a set of regulations governing labor and land markets, shape their domestic labor mobility and consequently affect their FDI patterns and development paths. China’ s high labor mobility motivates foreign firms to concentrate in labor-intensive manufacturing and exploit the benefits of scale economies. India’ s low labor mobility motivates foreign firms to move away from unskilled-labor-intensive manufacturing and invest in the modern service sector where the demand for skilled labor is relatively high. Keywords China . India . Foreign direct investment . Economic development . Domestic institutions . Labor mobility The more than two decades of rapid economic growth in China and India are arguably the most important development stories since the 1980s. These two countries share a number of similarities in the history of economic development. Having struggled in the state- directed autarkic industrialization for several decades, both countries undertook economic reforms by reducing trade barriers and liberalizing domestic markets. China began its Breform and opening up^ in 1978 and further liberalized its economy in 1992. India’ s economic reform started in 1991, but its economic growth had already begun to accelerate around 1980, thanks to the government’ s shift from left-leaning, anti-capitalist rhetoric to a growth-oriented, pro-business strategy (Rodrik and Subramanian 2005; Kohli 2007). Despite their similar objectives and policies of economic reforms, China and India have demonstrated different development patterns. Labor-intensive manufacturing has been the primary driver for the Chinese economy whereas the service sector, particu- larly IT and financial services, plays a key role in the Indian economy. Both countries St Comp Int Dev (2016) 51:147–168 DOI 10.1007/s12116-015-9201-7 * Yu Zheng yzheng@fudan.edu.cn 1 Fudan University, Shanghai, China