Opinion

FDI flowing in even as labor costs rise

(China Daily)
Updated: 2010-08-25 11:29

Editor's note: With labor costs rising in southeastern coastal areas in China in recent years, why is foreign direct investment still flowing into these areas? Labor costs do not determine industrial relocation plans, said Yin Cunyi, vice-director of the Institute of Taiwan Studies at the School of Public Policy and Management at Tsinghua University, in an article in the People's Daily. Here are excerpts from the article.

Q: Will surging labor costs in China cause large-scale industrial relocations to neighboring countries in Southeast Asia?

A: Currently the mainland has a lot in common with Taiwan's condition in the late 1960s. At that time, Taiwan, as one of the Four Asian Tigers, faced great pressure from currency appreciation and rising environmental protection. Labor shortages continued to occur in the context of continuously surging labor costs.

With China's vast territory, large development gaps occur across different regions. We have room for structural adjustments based on such a large market.

China has obvious advantages over Southeast Asian countries in terms of labor quality, (supply) chain integrity, supporting infrastructure, government policies and standards. China's vast hinterland and market capacity will keep their obvious comparative advantages in the long term as the destination for industrial relocation. For example, Taiwan's Lucky Cement Corporation initially hesitated on making a site decision between the mainland and Vietnam earlier this year. This decision was muddled by the fact that China will limit cement industry capacity. The firm finally decided to relocate to Vietnam. Market saturation quickly followed in Vietnam, thus forcing it to again consider its development in the mainland.

In fact, there is no industrial relocation going on in coastal areas. Many enterprises in these areas have built factories in the central and western regions with their research and development bases and management headquarters still in the coastal areas. In addition, factories in the eastern regions remain open.

Q: What gaps exist between the ability to engage in new industries in the central and western regions and eastern coastal areas? What influence could this have upon industrial relocations?

A: Coastal areas are superior to central and western regions in terms of market environment, exposed to international ideas and geographic location. This has led to the long-term existence of comparative advantages for eastern coastal areas, especially for the export-oriented manufacturing and processing industries.

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A few years ago, an idea was put forward that high value-added emerging industries should take the place of traditional industries.

But if we abandon traditional industries before we profit from emerging industries, we would suffer a lot. In the process of economic restructuring, this would cause a significant economic downturn, unemployment and social instability.

That is why many eastern areas are taking measures to improve preferential policies to retain competitive labor-intensive enterprises. Currently, relocation costs in central and western regions are higher than in eastern areas.

Since the government attaches great importance to social equity and justice, many preferential policies have been implemented across the country and there are not supposed to be big discrepancies in production costs. The problem mainly stems from the efficiency levels of the local government - as many overseas businesspeople and foreign traders have indicated.