Chinese consumers tame the multinationals? The answers we provide here provides a mixed picture. We certainly do not find what one would expect if China had enormous bargaining power that it was able to exercise in the interests of Chinese labor and communities. We would find at least some of the following: that more FDI leads to higher domestic tax revenue that can be used for development purposes; that it generates higher wages and/or significantly more employment; that the government would be able to channel more FDI
to areas that would generate technology and productivity spill overs. To be sure, we found some of these effects. But they were much smaller than would be expected if the bargaining power were able to deliver the benefits of FDI that FDI boosters claim. Instead, our econometric results suggest that the direct impacts of foreign direct investment on employment and wages are relatively modest, certainly much less powerful than the impact of investment and exports. Moreover, we provide strong evidence that FDI crowds out domestic investment, and is associated with a decline in provincial tax revenue.
In combination with the questionable results on economic growth and productivity that we discussed earlier in the paper, this research must certainly temper the cheerleading for FDI that is so prevalent in China and elsewhere in the developing world. And they suggest that the potential bargaining power provided by 1. 3 billion consumers, in the context of a highly decentralized political system that is rife with government corruption, appears far from being realized.
In countries with a fraction of the bargaining power of China, which means most developing countries in the world, China’s “success” does not offer great hope for the promise of FDI. At the same time, our results suggest that liberalization and exports have had a positive impact on wages and employment. So, it does appear that China’s policy of managed opening, combined with industrial policy and an export orientation, has had success in generating economic growth. In terms of exports, foreign direct investment has undoubtedly played an important role.
But as we have seen, this has been tempered by the growth of imports and low level of value added in these industries. Still, supported by periodic expansionary macroeconomic policies and controls of speculative capital flows, these policies resulted in significant successes in promoting economic growth in China. However, this low wage, labor intensive export orientation, funded and organized by foreign investment, is also reaching its economic and political limits. Politically, there is opposition from countries in the developed world to continued huge trade surpluses with China.
Economically, these low wage platforms hold little promise for generating high wage, high value added jobs. China’s entry into the WTO was an attempt by China’s leaders to sustain economic growth by locking in and expanding its policy of economic liberalization, thereby making it difficult for opposition forces within the country to block the next, more difficult stages as China travels down the capitalist road. As part of this plan, the leadership attempted to maintain high levels of FDI, this time with investment that would generate more technology transfer and higher value added jobs.
But, in return, China has had to promise to give full access to its market to foreign firms, to tie its hands in its ability to carry out industrial policy, and finally to pay huge costs in terms of intellectual property rights. This will severely limit China's ability to generate the technological upgrading required to generate more value added and employment. Moreover, with the financial liberalization that is very likely to follow the entry of foreign financial firms, the dismantling of credit allocation and capital controls is almost certain to follow.
In short, the major tools which the Chinese government has been able to use to manage its economy will be compromised once the WTO agreements are fully implemented. This appears to be highly problematic for the Chinese people. What about for the nature of conflict versus cooperation for workers in other parts of the globe?
China’s opening and entry into the WTO, to the extent that it will enhance the value of China as a location for foreign investment, might severely reduce investment elsewhere in Asia, and thereby increase the already intense competition for investment there. However, given the low tariffs on Chinese goods, this result is far from certain. It still might be cheaper for firms to locate in Vietnam, for example, and export to Southwest China. This will depend on how investment friendly the Vietnamese are compared with the local party officials across the border. It will also depend on the intricacies of the Multi Fiber Agreement and where quotas are available. It also will depend on the relative labor costs:
China has lower wages than most developing and developed countries, but its labor costs, taking into account productivity, is not necessarily lower. In manufacturing, for example, they are lower than many, but not all developing countries. For example, its costs are higher than Singapore, but lower than Bolivia, Chile and Mexico (UNCTAD, 2002; p. 158). Hence, the impact of China's joining the WTO will depend not only on the evolution of wages in China vs. the rest of the world, but also the evolution of productivity and regulations. There are many uncertainties in this regard.
But, still, there is no doubt that China will provide enormous competition for many developing countries. As for cooperation versus conflict with workers in the industrialized countries, this too is somewhat unclear. The export orientation of China’s development so far has certainly led to enormous potential conflicts with workers in the North. If the next phase of Chinese development involves a substantial futher export push to generate more employment, the conflict level will increase, possibly to the boiling point.
But If the next phase of China’s development will entail a much greater level of investment for the Chinese market, it is possible that some of the conflict could be reduced. Certainly, northern FDI into China might be very large; but it will likely be primarily for the Chinese market. Of course, U. S. workers are unlikely to benefit from this foreign investment, which should certainly line the pockets of the owners of Western corporations. But the level of trade competition in the U. S. market could level off.
The best outcome for both China and workers in the rest of the world, however, would be for the Chinese government to abandon its obsession with FDI and to re-orient its economic policy to economic development at home, focused first and foremost on domestic resources. (Minqi, 2002).
Expansionary macroeconomic policy, control of the financial sector, upgrading of domestic investment and production, environmental protection and the enhancement of labor's role in the economy. And unifying more democratic control over bargaining with MNC's and reducing corruption will do much to harness the enormous potential bargaining power of the Chinese people vis a vis international capital.
Aitken, Brian and Ann Harrison. 1999. “Do domestic firms benefit from foreign investment? Evidence from Venezuela. ” American Economic Review 89: 605-18. Aitken, Brian, Ann Harrison, and Robert E. Lipsey. 1995. “Wages and Foreign Ownership: a Comparative Study of Mexico, Venezuela, and the United States. ” NBER Working Paper 5102. (A later cite is 1996. Journal of International Economics (40): 345-371. )