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opportunity to accommodate not only the low-tier industries but also the low-end segments of high-tier industries, according to their wages and levels of technological sophistication. For instance, we can say that when China has a comparative advantage in the labor-intensive industries and attracts investments in the textile industry, at the same time it can host the lowest-end segments of the R&D driven industries.
2.2 Flying Geese Pattern of domestic industrial relocation
From the above presentation of the flying geese model, we have understood that the industrial upgrade of a developing country like China is a multidimensional process with three main features:
I. FDI flock into a country that enters the world economy to benefit from different comparative advantage positions. In most cases the industries that invest are those in which the investing country is losing comparative advantage while the receiving country is gaining it, or is expected to gain it.
II. The national industrial population does not remain static; conversely it is able to climb up the ladder of industrial upgrading stage by stage. This is done absorbing industrial knowledge and basic technologies at first, and then drawing upon the processes of intra-industry diversification and inter-industry pluralization in a later phase. This way the developing country will accomplish the scaling of the ladder of industry, starting from labor-intensive low-tier industries, and moving towards more capital-intensive high-tier ones.
III. The climb up of the industrial upgrading ladder is bound to change the comparative advantage dynamics of national economic scenario and will lead to investment relocation. Given the multi-layered and vertically differentiated industrial structure of a newly industrialized country, a developing country that follows behind, is going to receive not only the low-tier industries, but also the low segments of the high-tier industries that have lost comparative advantage.
Existing literature about the Flying Geese Model mainly applies these three points to the study of the pattern of industrial relocation across countries. Some scholars, however, have adopted the model to describe the phenomenon of factory relocation that is taking place within the Chinese national borders (Cai, Wang and Yue, 2009) (Qu, Cai and Zhang, 2013) (Ruan and Zhang, 2014). These studies were founded on the observation that Japan and the Asian tigers were small economies with a homogenous distribution of resources while China is a large economy with
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resources heterogeneously distributed. Given China’s continental size, significant regional differences appear naturally in geography and in natural resource endowments (Démurger, 2000). Moreover the gradualism of the Chinese reforms led to severe regional disparities in economic development (Tsui, 1995) (Kanbur and Zhang, 1999; 2005), making the differences in resource endowment among Chinese regions as substantial as those among countries.
If it is true that the regions of a big country act as independent economies, the flying geese model should be fully applicable to the process of investment relocation that is taking place within China.
Recent data about wage levels in China support this thesis.
Due to the above-mentioned regional disparities in economic development, China does not have a unified minimum wage.
Instead, the responsibility of setting minimum wage levels is left to local governments. Typically, the provincial government will announce wage “classes”
for the region and then local governments will pick the level that best suits their development.
For example, Zhejiang province set four minimum wage classes for 2013, ranging from “Class A” to “Class D”, across the province; top tier cities such as Hangzhou and Ningbo chose the “Class A”
minimum wage (1,470 RMB per month) while less developed cities such as Jiaxin and Jinhua chose the next highest wage level, “Class B”, which is 1,310 RMB per month (China Briefing, 2013). The wage levels shown in Figure 6 reveal that the high wage levels present on the eastern coast, especially in the YRD and Bohai Bay regions. The wage levels in the Central region are comparatively lower: the monthly wage in Shenzhen, the highest in the country, is 1,500 RMB per month while the monthly wage in Sichuan ranges from 800 to 1,050 RMB per month.
The same kind of disparity is found also in the levels of land price. Along with China’s real estate boom, industrial land price in some cities is even more expensive than that in the United States. For instance, industrial land costs $11.15 per square
Figure 6: Minimum wages across
China (China Briefing, 2013)
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foot in the coastal city of Ningbo, $14.49 in Nanjing, $17.29 in Shanghai, and $21 in Shenzhen. The national average is $10.22 per square foot (Sirkin, Zinser, and Hohner, 2011). For this reason we can say that labor intensive firms in China, tend to relocate to other regions to lower the expenditures and remain competitive on the market.
A major mistake made by the scholars who apply the FGM to the Chinese inland investment relocation is considering only the shift from the costal areas to the hinterland that started only few years ago. Actually, as further shown in the next sections, this is only the last step of a process that started as early as the years 1980s and that developed in three different steps during the last thirty years. If we consider this whole process we see that despite the large differences in factor endowment among Chinese regions, nevertheless, the investment relocation taking place within China has fundamental differences from that described by the original flying geese model.
For instance, Chen (2011) finds out that electronic-related agglomeration/cluster can be found both within the Yangtze River Delta and Pearl River Delta. However, despite the PRD was invested earlier, the technologies adopted by Taiwanese companies in the Shanghai area are more advanced than those adopted by industries located in the Pearl River Delta.
Fang, Wang and Yue (2009) refer to this characteristic of the Chinese industrial upgrading using the term “regional leapfrogging”. According to them, the main reason behind this phenomenon is the tight relation that in China exists between local governments and enterprises, which distorts comparative advantage dynamics.
According to them, the investment decisions of enterprises that receive assistance and subsidies are no longer imposed by the comparative advantage dynamics, rent seeking is preferred to innovation, industrial upgrading is postponed and the flying geese-type of development cannot happen.
Since in the 1990s in the Shanghai area land price and minimum wages were higher than those in the PRD, we see that the flying geese model fails also to explain why in that period many entrepreneurs, including Guo Tai Ming, decided to invest in the area.
In the last forty years, trade liberalization in developing countries brought about an increase of trade among countries that were – economically speaking – very different one from the other. As explained by the Flying Geese model, this North-South trade arose from countries’ will to take advantage of the differences in their
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comparative advantage. This is of course true, however, being aware that the oxymoron “Socialist Market Economy” correctly describes a country in which central planned economy and Adam Smith’s invisible hand coexist, I believe the role of Chinese central and local governmental policies should be added to the market self-regulating behaviors just presented, and this way make up for the shortcomings of the flying geese model.
Indeed, the flying geese model takes account of the fact that the state plays an active role in the economy. Akamatsu (1961, 1962), Kojima (2000), Ozawa (2002, 2004a) and Stigliz (1996), all assert that governments undertake key responsibilities for the promotion of economic growth and that their intervention is one of the factors that made the Asian miracle possible. However, what they refer to is the so-called
“selective intervention” of the developmental state whose main justification was the correction of market failure (Kasahara, 2013). Despite its ability to coordinate the investment and ensure national development, this kind of intervention could not be as far-reaching as that of a planned economy like China.
We can conclude that although the flying geese model is a powerful tool, it is not able to grasp all the different shades of the phenomenon we are studying.
Next section will present the major governmental policies that in the case of China have affected investment allocation, directing investments towards different areas of the vast Chinese territory, according to the national political and social needs.
3 GOVERNMENTAL POLICIES