Foreign direct investment, in its classic definition is defined as a company from one country making a physical investment into building a factory in another country (Jeffrey P. Graham 2004). Over the last 30 years, China has seen a great increase in the amounts of FDI in the country, improving its economy and commercial profits. This essay will look into a range of reasons for why China has had such attraction for investors. Once this has been clearly established, the likelihood of this continuing in China will also be acknowledged, and if its reign may be coming to an end.
One of the general motivations for FDI is market seeking. Creating a production line close to target customers means that transportation of goods is more practical and a lot cheaper than shipping from a home economy. China fulfills this greatly due to a high number of Chinese products being exported to neighbouring country Japan. Japan is China’s highest export market for agricultural products. China exported over $7. 9 billion worth of agricultural goods to Japan in 2005, accounting for 29. 2% of China’s total exports of agricultural products.
The China-Japan liaison is compelled by the deeply integrated complementarity in economic structures and the multilateral settings. Linked with the market seeking motivation for FDI is the by-passing of high tariff barriers, and the combat of adverse exchange rates. This may be a reason for attraction on investment into China. Their tariff rates have dropped substantially over the past 20 years, under an applied, simple mean tariff rate of manufactured products (%), dropping from 40. 75 in 1992, to 7.
69 in 2010 (World Bank estimates using World Integrated Trade Solution system based on data from UN conference). This is the unweighted average of effectively applied rates for all products subject to tariffs calculated for all traded goods. Another general motivation for foreign direct investment is effective resource seeking, relating to cheap labouring costs. Cheap labour is a wide attraction for industries looking into overseas investment, because this will ultimately result in higher profit margins due to low resource costs to compensate for.
This point also shows the attraction into Chinese investment, because for the past decade or so, they have had one of the lowest average hourly labour rates, with a slow increase. Contending BRIC country India, also has low hourly wage rates, and a few decades ago used to be the main attractive country for FDI, but was rapidly overcome by China. The gap in labour costs had been widening between the Chinese and Indian manufacturing sectors.
According to Oxford Economic Forecasting data (2004), the average Indian hourly labour costs rose 25% between 2001 and 2003, being a steeper increase against the 20% increase in Chinese labour costs. However, the China manufacturing sector’s low costs may be a result of the Chinese governments extension of sponsored benefits for the working class including funded accommodation, and therefore may not be entirely comparable to the Indian rates. China is also the worlds most populated country, with a population recorded at 1’289 million in 2003 with a 0.
6% rate of increase (World Population Data Sheet (Washington D. C. : Population Reference Bureau, 2003)). In 2010 China was recorded holding a population of over 1’330 million (Internet World Stats 2012 Miniwatts Marketing Group) remaining the worlds largest populated country. With this in mind, it is easy to see the labouring capabilities China has to offer. With 513 million aged under-25 recorded in 2010, China has a large offering of a young rearing work force, being the second largest in the world to India, who could well be a future threat for FDI in China.
With such a large labour pool, it is flexible enough to accommodate for industries season specific, to create Christmas lights or toys for example. Also, according to the New York Times, a Chinese factory manufacturing iPhones in response to a sudden demand was able to station eight thousand workers from their factory residence and put them on the assembly line at midnight the same day, whereas other countries wouldn’t be able to accommodate for such executions. Strategic considerations will also be set in place when choosing where to use your FDI.
When looking for a country with low exchange costs and low shipping costs, somewhere with coastal manufacturing abilities would stand out due to it actually being cheaper to ship from across the Pacific Ocean that across inland. This is also where China comes in as a widely attractive place for FDI. It would be cheaper to ship from Shanghai to New York than it would be moving good from China’s interior to its coast. Guangdong is a coastal province, situated in the southernmost part of China, with exports worth over $400 billion (data from: CEIC 2011), including main manufacturing sectors, Hong Kong and Shenzhen.
Another of Chinas industrial cluster coastal provinces, Shanghai, has between $300-400 billion worth of exports, proving a strong country to invest in for the sheer quantities at which they export, for the cheap prices due to location. At present, China is the world’s largest manufacturing power. Its output of electronics, including smartphones, TV’s and other good surpassed America’s in 2010. China now accounts for a fifth of overall global manufacturing, due to the fact that their factories have produced so much with such little costs.
However, it is thought that this era may be drawing close to its final days. This is because of the sudden soar in costs in China, starting in the coastal provinces where factories have started to cluster. In March 2012 it was evident that labour costs had already risen by 10% since the start of the year, based on data from an investment bank, Standard Chartered. At the beginning of the year, Foxconn, a contract manufacturer that produces iPads for Apple, increased salaries by up to 25%.
Taking these figures into account, it is clear that many multinationals may now be looking further than China when considering their use of FDI, as it is evident that it may become too costly in the next few years. Companies may contemplate moving their resources into cheaper countries such as Vietnam and Indonesia, who have substantially cheaper labouring costs. The USD p/hour in 2008 was recorded at 0. 15 in Indonesia and 0. 23 in Vietnam, as against the ever-rising 0. 40 figure recorded in China (According to US bureau of Labour Statistics).
Previously mentioned, Japan is one of Chinas largest export markets, which is a fundamental reason behind companies FDI into China. However, when looking to by-pass high tariff costs, Japan hinders these expectations greatly. Japans tariff rates on agricultural, Chinas largest export market to Japan, and marine products are remarkably high. Japans obligation of high tariff on agricultural products creates an obstruction for shipping of the relevant Chinese products to Japan. Over 80% of fishery and farm produce are subject to custom duties, mostly at more than 15%.
With tariff escalation also in mind, particularly apparent on agricultural produce, it is difficult to overcome the motive for market seeking for FDI into China, and alternatives may be considered to by-pass this. Recently, China has been exploited in the public eye for its poor working conditions and terrible labouring methods, with many cases of worker abuse being identified. An organization has been put into place, which has been exploiting Chinese firms for their appalling labouring settings. Founded in 2000, the Chinese Labour Watch (CLW) is an independent non-profitable organization.
In the past decade, the CLW has collaborated with labour organizations, unions and the media to conduct a series of in-depth assessments of factories in China that produce a variety of goods including electronics, toys, shoes, clothing and furniture for some of the world’s largest companies. Reports from these investigations are made to educate the international community on supply chain labour issues, and pressure corporations to improve conditions for workers. The CLW has recently discovered ‘severe labour abuses’ at eight factories owned by top electronics corporation, Samsung.
It was found that the employees were subject to various abuses, including having to work forced excessive overtime, unpaid labour, and physical and verbal abuse. Most workers were forced to stand for up 12 hours at a time, and many of them faced various discriminations, based on their appearance, age and gender. With these kind of allegations rising in numbers in Chinese factories, alongside the rise in labouring costs, it is easy to assume that these factors are more than likely to be taken into future consideration of those looking to invest into overseas corporations.
Seeing these opportunities, other places will start to build improved roads with better supply chains, and coastal ports for manufacturing and global shipping abilities. This will eventually become a challenge for the Chinese coastal provinces basic manufacturing, so if they wish to maintain their reputations, it’s manufacturers must attempt a move up the value chain, by creating their own ideas for design rather than engineering products from designs taken from elsewhere.
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