As I read a recent article in the Wall Street Journal (excerpted for free in Thanh Nien News) about declining rates for foreign direct investment (FDI) in the Chinese manufacturing sector, I could not help but think about how China must become more competitive in the world market to maintain a sustainable growth rate, offering more than just low cost labor to entice capital inflows. According to the article, "Foreign investment in China's manufacturing sector has started to slowly decline after years of strong gains, suggesting the country is losing some of its luster as a base for inexpensive production … Given that China's economy is continuing to expand at a rate of about 10% annually, the size of foreign investment as a proportion of the whole economy is shrinking even faster." The article goes on to note that the situation is not dire, but that early mainland Chinese investors such as Taiwanese entrepreneurs are now looking to new areas such as Vietnam to exploit lower cost labor and operating expenses, where costs can be 35% lower than in China. Earlier today, I posted some additional thoughts on Vietnam, which was profiled in last week's Economist.
With lower cost labor to the South, and a more highly educated, English-speaking workforce to the West -- in the form of India -- China needs to decide how it is going to compete in the coming decades once its low cost advantage is dissolved. As I've noted before, it will be critical for China to implement stronger intellectual property protections to provide incentive for local manufacturers to invest in innovation. After all, if your neighbor can knock off your idea in a matter of weeks with no consequences, what is the incentive to invest in new product innovation? Overall, these needs point to the fact that China must become more competitive by offering a complete package that goes beyond unit cost. Some might argue China is starting down this path already. For example, its East Coast infrastructure build-out is an example of how China will be able to stay ahead of its smaller neighbors as well as India from a transportation and global shipping perspective, getting product on the water that much more quickly for shipment.