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Reasons for Foreign Investment into China

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China is currently ranked number one in the world top destination attracting foreign direct investment (FDI) with the total amount of $128 billion, according to BBC (2015). While leading the world inflow FDI, China is also considered by investors as the second most famous country for offshoring after India (Jain, 2006 cited in Johansson & Reischl, 2009). This essay will inspect different factors that lead foreign companies to invest in China by evaluating the use of comparative advantage theory and others related to it, and the potential political problems caused by distribution of gains from free trade regarding trade with China.

Comparative advantage theory was developed by David Ricardo in 1817 and is defined by Peng (2014) as “the relative (not absolute) advantage in one economic activity that one nation enjoys in comparison with other nations”. The theory can be applied to the case of China, which includes the ability to manufacture good quality export products and the capability of the highly proficient administration to ensure that low-skilled workers can produce efficiently while meeting the quality standards (Rugman & Collinson, 2009). China took advantage of its large number of people by focusing on its labor-intensive industries and light industries (Lin, Cai & Li, 2003). China Internet Information Center (2001) restated a claim of Jiagui that China has a unique position in advancing its labor-intensive industries. China experienced a very fast improvement turning the country into one of the top manufacturers and suppliers of consumer products. Manufacturing, therefore, plays an important role in Chinese economy since the percentage of the total GDP it accounted for only reduced from 35% in 2001 to 31% in 2013 (World Bank, 2015).

Another comparative advantage of China can be related to the theory developed by Heckscher and Ohlin in the early of the 20th century. The ideology is called “Factor endowment theory” and defined by Peng (2014) as “the extent to which different countries possess various factors of production such as labor, land, and technology” and “nations will develop comparative advantage based on their locally abundant factors”. One of the most notable elements you can see in China is population, which was ranked number one and estimated to reach 1.3 billion in the middle of 2014 (CIA, 2015). Moreover, its labor cost is lower than other industrialized countries (cost advantage). A research carried out by The Bureau of Labor Statistics of the USA (2013) conducted a table of “Average hourly compensation costs of manufacturing employees in China” in USD from 2002 to 2009 (see appendix 1). Data from the table indicated that Chinese average cost, which was only $1.74 in 2009, was much lower compared to developed countries such as United States ($128.6), Germany ($171.7) and Japan (129.8) (U.S. Department of Labor, 2012). However, Chinese cost advantage is eroding as the labor cost of China is increasing rapidly, for example: the hourly wage in 2009 ($1.74) increased by three times since 2002 ($0.60). One of the reasons behind this surge is the increment in minimum wage. Ministry of Human Resources and Society Security reported that 25 provinces had boosted minimum wage up by nearly 20.2% in 2012 and the number of regions along with the minimal payment increased to 27 and 17% respectively in 2013 (cited in China Labor Bulletin, 2013). While the manufacturing workers have their salary increased, highly skilled labors and top managers experienced this escalation at a much higher speed. Hong Kong Institute of Human Resource Management (HKIHRM) made a comparison between the “2012 Average Annual Base Salary” of the top management in three countries including China, Hong Kong and Singapore (see appendix 2). Moreover, all companies and manufacturer are required to pay a considerable sum of money monthly on employees’ social security. When this cost is included, the annual wage of the top management exceeds that of Hong Kong and nearly reaches the level of Singapore (see appendix 3). Nevertheless, China does not lose its advantage because the minimum wage of most inland regions remains lower than that in the coastal provinces. The lowest wage (approximately $166) was in Guizhou, which is in the southwestern part of China, and the highest (approximately $293) was in Shanghai, according to the CLB (2013). HKIHRM (2013) reported that the government in China began to mobilize its workers to advance to making higher quality products and forsake the low-end assembly. They also stated the increase in minimum wage as a “significant step” toward the path of transforming into the service industry.

In 2006, Chinese government started to reorient parts of its current industries to “high-tech and higher value-added industries that are based-on independent intellectual property rights and innovative capacity” (cited in Wang & Mei, 2009). Duhigg and Bradsher (2012) mentioned when Apple changed the iPhone screen and the new design came to the Chinese manufacturer at the middle of the night. At that moment, the executive instantly summoned 8000 workers from the dormitories to start equip the new frames with the glass. Over 4 days the factory had manufactured more than 40000 iPhones. This example shows not only Chinese advantage of being the country with the highest number of people but also the flexibility and ability to adapt to new technology of its workforce. When the government of China concentrated on improving the innovative capability of the industry, it also created a

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Appendix 1:

Table 2. Average hourly compensation costs of manufacturing employees in China, U.S. Dollars, 2002-2009

 

Hourly Compensation per Employee

 

All firms

Urban

Rural (TVE)

 

2002

0.60

0.95

0.41

 

2003

0.68

1.09

0.46

 

2004

0.74

1.23

0.50

 

2005

0.83

1.35

0.57

 

2006

0.95

1.56

0.64

 

2007

1.21

1.96

0.80

 

2008

1.59

2.58

1.06

 

2009

1.74

2.85

1.15

 

Note: TVE refers to town and village enterprises. Source: U.S. Bureau of Labor Statistics, International Labor Comparisons.

 
 
         

Appendix 2:

Appendix 3:


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