China remains a 'workbench' economy
By Michael Hennigan, Founder and Editor of Finfacts
Apr 27, 2011 - 3:37 AM

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Prof. Theodore H. Moran

China remains a 'workbench' economy - - a low value-added assembler of more sophisticated inputs imported from abroad - - according to an economics paper published on Monday.

Theodore H. Moran, nonresident senior fellow at the Peterson Institute for International Economics in Washington DC and the holder of the Marcus Wallenberg chair at the School of Foreign Service in Georgetown University, says in his paper, Foreign Manufacturing Multinationals and the Transformation of the Chinese Economy: New Measurements, New Perspectives, (pdf), that China has been remarkably successful in designing industrial policies, joint venture requirements, and technology transfer pressures to use FDI (foreign direct investment) to create indigenous national champions in a handful of prominent sectors: high speed rail transport, information technology, auto assembly, and an emerging civil aviation sector.

He says that leading North American, European, Japanese, and Korean manufacturing multinationals (MNCs) rightly fear that they may find themselves launching rivals to their own market position when they weigh access to the vast Chinese market against technology acquisition and management imitation on the part of Chinese partners and other indigenous competitors. Bringing in new technology to gain access to the Chinese market - - whether for domestic market penetration or as a base for exports - - may therefore often appear to individual foreign multinationals as making a Faustian bargain with the devil.

However, Prof. Moran says what is striking in the aggregate data is how relatively thin the layer of horizontal and vertical spillovers from foreign manufacturing multinationals to indigenous Chinese firms - - and consequent export externalities - - has proven to be.

Prof. Moran says that in 1992, the low skill-intensive sectors in China accounted for 55% of China’s exports. By 2005 these same low skill-intensive sectors’ share had fallen to 33%. The composition of exports had shifted from a predominance of agriculture, apparel, textiles, footwear, and toys into machinery and transport products. He says the strongest export growth has been machinery, and within this broad classification telecom equipment, electrical machinery, and office machines constitute the largest shares. These more sophisticated sectors are dominated by processing trade, an arrangement in which imports are allowed into the country duty free where they are assembled for export. Processing trade exports of machinery and electrical products grew from $9bn in 1992 to $323bn in 2006, from 22% to 63% of all exports.

The millions of units of Apple Commuter's popular products sold each quarter, such as the iPhone and iPad, are assembled in China by a Taiwanese company and most of the value added remains in the US. In 2007, Finfacts reported on an analysis of the value-added makeup of Apple's iPod  --  research which Prof. Moran cites in his paper.

In 1992, foreign multinationals accounted for 5% of exports in ordinary trade and 45% of processing exports. By 2006, foreign multinationals account for 28% of ordinary exports, but 84% of processing exports. So today foreign multinationals occupy a predominant place in processing trade, while maintaining a substantial presence in ordinary trade, too. For electronic devices, processing exports as a share of industry exports was 89.7%, with foreign firms accounting for 87.5% of industry exports. For telecommunications equipment, processing exports as a share of industry exports was 91.2%, with foreign firms accounting for 88.4% of industry exports. For computers, processing exports as a share of industry exports was 99.1%, with foreign firms accounting for 99.4% of industry exports.

Prof. Moran concludes that while foreign manufacturing MNCs may build plants in China, the largest impact from deployment of worldwide earnings is to bolster production, employment, R&D, and local purchases in their home markets. For example, the most recent data show that US-headquartered MNCs have 70% of their operations, make 89% of their purchases, spend 87% of their R&D dollars, and locate more than half of their workforce within the US economy. Home markets are where most of the earnings from FDI in China are delivered.

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