|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.