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shipping goods to downstream customers. When inputs are far away from the market, firms’ decision to locate close to customers or suppliers is the result of a trade-off between the costs of moving raw materials and finished goods.
[…] the very closeness of their neighborhood diminishes the expense of time and effort involved in every sort of traffic between them […]
A second reason to agglomerate is to take advantage of scale economies associated with a large pool of skilled labor.
[…] a localized industry gains a great advantage from the fact that it offers a constant market for skill. Employers are apt to resort to any place where they are likely to find a good choice of workers with the special skill which they require; while men seeking employment naturally go to places where there are many employers who need such skill as theirs and where therefore it is likely to find a good market.
Finally agglomeration speeds the flow of ideas; knowledge spillovers increase the stock of knowledge available for each individual firm
The mysteries of the trade become no mysteries; but are as it were in the air, and children learn many of them unconsciously. […] if one man starts a new idea, it is taken up by others and combined with suggestions of their own; and thus it becomes the source of further new ideas.
In sum, the entrepreneurs who decided to invest following Chinese leaders’ gradual implementation of economic growth engines, could enjoy both the state driven favorable policies and the market driven agglomeration spillovers.
3.3 Local Policies
According to the economist Friedrich Hayek (1945), knowledge is not concentrated but exists exclusively as dispersed bits possessed by different individuals. For this reason, local governments that have better access to local information can put in place a kind of decentralized planning, which can provide public goods and services that better match local necessities than the central government. Such role was crucial also with respect to investment attraction.
If national policies were fundamental in establishing an investment-conducive environment, local policies played a key role in meeting the needs and solving the problems of the single industry.
Concentrating on the Foxconn experience, I will highlight some cases where the local government has helped investors by offering the company with benefits like cheap labor and other economic incentives.
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3.3.1 Provide labors
In the 1950s, the Saint Lucian economist W. Arthur Lewis argued that countries in the early stages of economic development have a dual economy with a small modern sector alongside a large traditional sector containing huge amounts of surplus labor. The existence of this surplus labor, in turn, lets the modern economic sector expand relying on an unlimited labor force at constant wage rates. The point in time when the modern sector has absorbed all the surplus labor, is called the Lewisian turning point, and signals a forthcoming improvement in the wage bill and labor scarcity (Lewis, 1954).
Studies like those of Cai (2008), Chan (2009), Knight, Deng and Li (2011) show that despite restricting migration laws and the household registration system, during the course of the reforms and openness, Chinese economic growth has been characterized by a dual economy similar to that described by Lewis. A huge reservoir of surplus agricultural labor became rural-to-urban migrant workers, which were absorbed by the growing industrial sector.
Despite the accordance over the duality of the Chinese economy, because of the coexistence of rising salaries (Zhang, Yang, and Wang, 2011) with reservoirs of under-employed workers with low income in the rural areas (Golley and Meng, 2011), scholars do not agree over China’s reach of the turning point. However if we take account of the improved living conditions in the rural areas and the recent relocation in these areas of many firms, we can understand that workers are not as willing to migrate as they were in the early 1980s. For this reason we can say that only some parts of China, mainly the coastal regions, have achieved the turning point.
In the PRD, rising salaries and labor shortages are a severe issue. A large number of entrepreneurs with production facilities in the region complain about a reversal of the relationship between labor supply and demand. While in the 1980s workers were eager to be hired at any wage, now they are able to choose the job with the best pay. Businesses with very low operating margins like Foxconn7 are constrained to offer low wages and are the first ones to suffer from labor shortages.
7 Foxconn's operating margins vary from 3.7 % in the first quarter of 2007 to 1.5% in the third quarter of 2012. In the same periods, Apple’s margins were of 18.7% and 39.3%, respectively (Ngai, Chan, and Selden, 2013).
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In such an environment, a local government that can assure the investors over its ability to provide the kind of workers the company needs – cheap, well trained or in a big number – can positively affect investment decisions.
A good example of such kind of interaction between local government and a private firm is that of the Kunshan government with Foxconn. When the company moved to the YRD, the local government eased the import of cheap migrant workers from Jiangsu, Hubei and Sichuan easily granting them resident and domicile status.
A more recent example is that of the Yantai government. When last September, Foxconn called on the local government with a problem - a shortage of 19,000 workers as the deadline on a big order was approaching, Yantai officials came to the rescue, ordering vocational high schools to send students to the plant (Horbin, 2013).
Similarly, the Zhengzhou education department has compelled students in technical schools to serve working internships at Foxconn (Taipei Times, 2011, December 24). The same government has also launched a recruitment project with an aggressive campaign and specific recruitment quotas delegated to each of the province's 18 cities, which have in turn passed on the duty to townships and villages.
Responsible officials who do not meet their quota are reportedly penalized or even sacked (Wang and Shi, 2012, September 2).
The Henanese Yichuan county government offered a 500 yuan (US$80) bonus to each official for signing up a worker for the Foxconn Zhengzhou plant (Wang and Shi, 2012, September 2).
Another city participating in the hiring process is Chengdu.
The local government’s ability to solve a labor shortage problem is a pull factor that cannot be understated, especially for a company with such a huge appetite for workers as Foxconn.
3.3.2 Provide economic incentives
The economic reforms have given local government substantial autonomy and the power to deal with foreign companies within their jurisdictions. Since investments of a big company can positively impact a city's economy8, local governments compete with each other to seek for investment also providing economic incentives.
8 Henan party secretary Lu Zhangong estimates that with a single investment, Foxconn alone would double Henan's export value and help create half a million new jobs (He, 2010)
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Already in 1984, when the Chinese leaders were pushing for the development of the YRD, the Kunshan government established the Kunshan Economic and Technology Zone (KETZ) granted later with the national title in 1992. It granted a 15% tax rate opposed to the 24% rate applied outside the zone. Kunshan local government also helped Foxconn and other producers comply with environmental regulations, and when in 2008 the central government in Beijing applied a uniform 25% tax rate all across China, it helped investors lessen the impact of the tax change (Chen, 2008).
More recently, Zhengzhou took just a month to build a production line for Foxconn, when nobody else neither in China or abroad was willing (and maybe able) to do it in such a short time. Henan offered Foxconn free land, tax reductions and subsidies (He, 2010). In 2014, when Foxconn planned to invest to build a new plant, as an incentive to the company, the Zhengzhou government had promised to provide subsidies worth about 5 billion yuan (US$805 million) (Wong and Luk, 2015, March 25).
A good example of the competition to attract FDI at the local level is that of the rivalry between Chengdu and other cities in the late 2000s. When Chengdu local government heard that Guo Taiming was preparing new investment in China's mainland and that other cities were trying to grab them, it put a lot of effort to stand out from the Crowd. The government of the provincial capital of Sichuan dispatched high-ranking officials to promote the city, and the city's Party Secretary Li Chuncheng invited Gou to tour Chengdu (China.org, 2009, October 28). Officials have also granted Foxconn a corporate income tax rate of 15 per cent, instead of the usual rate of 25% and has committed itself to the extension of the airport runway by 400 meters to meet increasing transportation and logistical needs (China Daily, 2009, August 5).
3.4 “Push” factors
The above-mentioned policies ranging from the Open Door in 1978 to the most recent Western Development Program can be considered strong FDI attractors.
Governmental investments played a leading role in improving the investment environment and efficiency in the four different regions we have just discussed, and are the main reason behind what Wei Houkai (2009) calls the “investment watershed”, that is the hinterland diversion of the northbound firm relocation. As already stated
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above, however, at the time the open door policy was launched, the Chinese political situation was instable, and the country was lacking a legislative framework that could reassure foreign investors over the safety of their investments. This means that when Taiwanese, Singaporean and Hongkongese labor-intensive firms started relocating to China in the late 1970s, the country was not appealing enough to explain alone the relocation.
Although the importance of the open door policy was undeniable, we can safely say that what fueled firms’ relocation to China in the late 1970s was not the attractiveness of the Chinese market alone, rather the loss of profitability of labor-intensive sectors in their native land. Tremendous changes in the national labor market convinced many entrepreneurs to move toward the closest under-developed and cheap country, China.
In human migration theories, push and pull factors interact together and bring about migration and higher concentration of people into countries and cities. Since national and local policies have the same effect in regard to capitals, using a terminology proper of human migration, we can say that the policies just presented acted as pull-factors, attracting investments to a certain area of destination and convincing entrepreneurs to relocate. Like in human migrations however, capitals can migrate also when pushed by unfavorable conditions set by policies launched in their area of origin. We can call push-factors all those elements that encouraged, or in some cases forced, investors to shift their investment and relocate in different areas.
Concentrating on the Foxconn experience, next two sections will further highlight some of the main factors that pushed many Taiwanese firms out of the island and forced them to cross the Strait in the late 1970s. These include stricter environmental regulations and higher labor costs in Taiwan. These same factors are gaining importance also in the process of relocation from the Chinese coast to the hinterland and abroad. With respect to China, a third paragraph will also touch upon agglomeration diseconomies.
3.4.1 Environmental regulations in Taiwan and China:
In the mid-1970s the Taiwanese government started taking a position against pollution and depletion of the natural environment. Between 1974 and 1975 three important acts were drafted in order to control air, ground and water pollution, maintain public health and improve the quality of life. These regulations are the
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Water Pollution Control Act, Waste Disposal Act and Air Pollution Control Act (R.O.C. Environmental Law Library, 2007) (R.O.C. Environmental Law Library, 2006) (R.O.C. Environmental Law Library, 2011). A Bureau of Environment Protection was further established in 1982 under the authority of the Ministry of Public Health and in 1987, with the creation of Taiwan’s EPA (Environmental Protection Administration) within the Executive Yuan, for the first time Taiwan had and independent ministry level organization that monitors environmental issues and regulates the environmental impact from industrial and other polluters (Environmental Protection Administration, 2010).
Presently there are 417 laws and regulations related to environmental protection. If on the one hand those laws improved the quality of life for millions of Taiwanese, on the other hand polluting factories were compelled to build treatment facilities raising the operating costs and limiting some business activities. In other words these regulations acted as strong push factor for the Taiwanese companies to relocate.
Such kind of push factors can also be found on the other side of the Taiwan Strait. In China, large-scale industrial agglomeration in the coastal regions, in about three decades, has strained land and energy supplies and reduced the sustainability of the resources. This has prompted many coastal regions to raise their taxes on industries and put in place environmental protection measures, thereby forcing local resource-intensive and labor-intensive processing firms to move.
3.4.2 Rising wages in Taiwan and China:
Taiwanese government efforts to improve the quality of life of the citizens in the 1980s also resulted in the rise in the monthly salary and the reduction of the average working hours of millions of employees. A simple analysis of the data provided by the Taiwanese National Statistics bureau (Directorate General of Budget, Accounting and Statistics, Executive Yuan, R.O.C, 2014a; 2014b), and displayed in Figure 7 and Figure 8, shows that Taiwanese employees average monthly salary rose from 15,000 NTD in 1988 to 25,000 NTD in 1993, a 70% increase in less than a decade. At the same time the average monthly working hours decreased from the 220 in the early 1980s to 200 in the 1990s and has dropped further to 180 in recent years.
This evolution of the Taiwanese employment market added additional pressures to the national entrepreneurs who were constantly seeking low-cost labor. Labor cost and
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environmental regulations are factors that pushed FDI and companies’ relocation into China.
Recently China is witnessing a similar trend. As explained in the above discussion of the Lewis turning point, when the Chinese society moved from an agricultural to an industrial economy, the balance of labor demand and supply also changed and brought about a rise of wages. As shown in Figure 6, this rise has been particularly significant on the eastern coast where the minimum salaries are among the highest in the country. A small case study by Meng and Bai (2008) investigating migrant workers employed in Guangdong shows that in the studied area, average hourly wages increased by about 6 per cent per annum between 2000 and 2004.
The comparatively higher wages on the eastern coast act as a “push” factor for firms moving into the Central region and outside the country. This is true especially for a manufacturer with a very large number of employees, and low operating margins like Foxconn.
3.4.3 Agglomeration diseconomies:
Few pages above we drew upon a simple discussion of the Marshallian externalities to show how agglomeration has a positive effect on investment attraction.
The literature about economic geography, however, also suggests that while industrial agglomeration enhances firms’ gains from trade, agglomeration diseconomies may appear if the degree of agglomeration is too high (Lin, Li, and Yang, 2011).
Such diseconomies may be caused by urban congestion, pollution, high land price and competition in the markets. Diseconomies can negatively impact on firms’
productivity, thereby pushing for plant relocation. For this reason, in some highly
Figure 7: Average monthly
salary, Taiwan Figure 8: Average monthly
working hours, Taiwan
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densely invested areas like Shenzhen or Dongguan, agglomeration might result in investment repulsion and act as push factor.