NEW YORK – China’s economy is now taking its next great leap forward: parts of its manufacturing sector are now moving up the value-added chain and out of the country. The China challenge is now a global one.
The reasons are not difficult to fathom. Production costs (wages, office rents, land, capital, etc.) in China’s coastal provinces – where most of the country’s manufacturing and service production, as well as foreign direct investment, are located – have been rising fast. Since last year alone, minimum wages in nine of twelve coastal provinces (including Beijing) rose by an average of more than 21%.
At the same time, the renminbi is appreciating, making domestic production of export-oriented goods and services even more expensive. This matters, especially for labor-intensive activities (ranging from toy manufacturing to data-entry services), whether by affiliates of foreign multinational enterprises (which account for more than half of China’s exports) or by local firms, which are losing competitiveness in international markets.
To maintain its export-oriented production base, output must move up the value-added chain, toward more sophisticated products. Multinational enterprises can do that within their integrated global production networks, which allow them to organize an international intra-firm division of labor. Any part of these production chains can be located wherever it suits the firms’ international competitiveness best. And such firms have the experience to scout the globe for the right investment locations.