china's competitive advantages 2092 1777 1 sm

Jurnal Bisnis dan Ekonomi (JBE), September 2011, Hal. 97 103 Vol. 18, No. 2ISSN: 1412-3126

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CHINAS COMPETITIVE ADVANTAGES

Ibrahim Fatwa WijayaPesantren Al-Esaf STIE Swastamandiri Surakarta

Jl. Tejonoto I Danukusuman Surakarta 57156([email protected])

ABSTRAK

Penelitian ini bertujuan untuk menyelidiki keunggulan kompetitif dari China dan mengapa China bisa menjadisuper ekonomi negara dalam waktu singkat. Makalah ini menggunakan kajian literatur yang melibatkansejumlah jurnal, buku, dan sumber internet. Sebuah tinjauan yang terkait dengan dokumen dan artikel akademisdilakukan untuk mengumpulkan pemahaman yang mendalam tentang keunggulan kompetitif China. Keunggulankompetitif yang dimiliki oleh China tidak bisa dengan mudah diduplikasi oleh negara-negara lain. Beberapafaktor yang mendukung keunggulan kompetitif China adalah kebijakan pemerintah, dampak dari investasi asinglangsung (FDI), faktor lokasi tertentu, sistem hukou, budaya China, dan pabrik bayangan. Triangulasi berbagaisumber data dari wawancara atau kuesioner (data primer) tidak dapat dilakukan dalam penelitian ini. Studimengenai keunggulan kompetitif China perlu dilakukan karena memiliki dampak dalam perekonomian dunia.

Kata kunci China, Keunggulan Kompetitif.

ABSTRACT

This study is intended to investigate the competitive advantages of China and why China could become supereconomics country in short period. The paper uses a literature review involving a number of journals, books, andinternet sources. A review related to documents and academic articles was conducted to gather deepunderstanding about Chinas competitive advantages. The competitive advantages owned by China could not beeasily duplicated by other countries. Some factors supported Chinas competitive advantages are governmentpolicies, impact of foreign direct investment (FDI), location specific factors, hukou system, Chinas culture, andshadow factory. Triangulate multiple sources of data from interview or questionnaire (primary data) could not beconducted in this study. Study about Chinas competitive advantages need to be conducted because it has impactin the world economy.

Key words: China, competitive advantages.

INTRODUCTION, CHINA PRIOR AND POSTECONOMIC READJUSTMENT

China has shaken the world with its price.Many of goods prices from China are unbeatable.Indonesia, which is popular with its low labor cost,now facing problem with Chinas price. Some ofbig textiles companies are now closed and manypeople lost their job. Indonesia cannot competewith Chinas textiles because China has glut rawmaterial combined with its lower labor cost. InChina, the worker only paid $ 45/month with 46work hours in a week, while in Indonesia, theworker paid $ 80/month with only 40 work hours

in a week (www.indotextiles.com). In addition,government in China also gives textiles industrymany incentives. This situation also faced by someindustry all over the world, including USA. Manycompanies now shift the production to China inorder to get lower labor cost.

To start find Chinas competitive advantageswe have to look back at China before 1979. Theeconomic readjustment in China has begun in thelate 1978. China was famous of its central plannedeconomic system; the government decided what toproduce, how to produce, and how to distribute theoutput.

Ibrahim Fatwa Wijaya Jurnal Bisnis dan Ekonomi98

The state economic planning system in Chinais consisted of three levels; they are centralgovernment, provincial, and municipal level(Holton, 1987). In these levels, there are twoimportant commission related to China economy,they are planning commission and economiccommission. Each plant should report to city level,provincial, and state level. As stated above, one ofthe characteristic in the state economic planning isall of the decision making concerning withproducts to be produced, prices to be charged, orcustomers to be served is not made bymanufacturing unit but by the bureau of the state(Holton, 1987). This system lead to some problem,there are surpluses and shortages in some goodsbecause supply cannot cope with demand, lack ofinnovation and creativity manager of the plants,rarely changes in product design, manager did notget any feedback from final customers, and there isno quality control due to quota minded (Holton,1987).

The economic readjustment in China isindicated by the approval of small scale privatefirms and private enterprises establishment(Holton, 1987). After 1979, there were moredecentralized policies about the product. Theenterprise could produce the product after metgovernment order (Holton, 1987). There was moreflexibility deciding the supplier, buyer, and quotaalso. Finally, more contact with foreign buyerintroduced.

Because of the lack skill and knowledge,most product decisions are made by foreigncompanies which have subsidiaries or joint venturepartner in China (Terpstra, 1987). In the beginningof economic readjustment China still have problemregarding with its product development, branding,quality, and also warranty and service. In addition,there are some weakness that still face by companythat are outdated equipment and lack of efficientmethod (Pegels, 1987). Despite of the problemsabove, numerous non-Chinese firms still attractedworking with Chinese firm because of low laborcost in China (Pegels, 1987).

In the 1980s some multinational company(MNC) from Europe and US invest very limitednumbers or investment. This Foreign Direct

Investment (FDI) has been increased rapidly since1992. Etienne (1996) claims that the rushinvestment from Hong Kong, Japan, US, Taiwan,and Germany in 1992 is caused by three factors;they are:a. The potential of the Chinese market is enormous

and rising.b. One must take advantage of the conditions

granted by the government which are veryfavorable at present.

c. Every MNC thinks it should make haste to beatits competitors.

Nowadays, China is emerging as one of thebiggest economy players in the world. Accordingto Dicken (2007), China is now become theworlds fourth largest manufacturing producer in2005, the second largest agricultural producer in2005, the fourth largest exporter of merchandise in2004, and the worlds third largest importer in2004. During first half 2009, China overtookGermany as the largest exporter of goods in theworld (Field, 2009). Between 2000 and 2007,Germanys export only grew around 13 % andChinas export grew around 25 % a year (Field,2009).

This phenomenon is resulted from Chinalabor abundance which has encouraged by foreigndirect investment (FDI). Claro (2009) found thatFDI liberalization in China enhance theproductivity of labor which stimulates the rising ofChinas export. China also overtook United Statesas the worlds largest recipient of FDI. In 2007, netinflows of FDI amounted to US $ 83 million(Cases in The Global Business EnvironmentHandout, 2009).

Most of the FDI inflow in China focused onmanufacturing sector. There are many big MNCinvest in China to gain more advantages. WallMart, Siemens, Toyota, Volkswagen, AT&T,Gillette, and Nestle are some examples of MNCwhich are operating in China. For example, Nestlechose China for many reasons; they are quality ofnatural resources as a raw material, low labor cost,support from experts, and the consideration ofmarket demand for food products (Luo, 2000).

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Multinational CompanyAccording to Rugman and Hodgetts (2003)

there are several reasons for the firm to becomemultinational company, they are:1. Diversify themselves again the risks and

uncertainties of the business domestic cycle.2. Tap growing world market for goods and

services. China becomes more attractive forMNC because of its large population and itseconomic growth very rapidly around 10% ayear (Dicken, 2007).

3. Increased foreign competition and a desire toprotect their home market share.

4. Reduce cost. MNC will consider seriously bothwage cost and non-wage cost, such as taxes,regulatory cost, land, and energy (The GlobalBusiness Environment Handout, 2009). Chinahas been attracted many MNC because of itslow labor cost.

5. Overcome protective devices such as tariff andnon-tariff barriers by serving a foreign marketfrom within.

The Chinese policy open door for FDIhas several positive impacts. According to TheGlobal Business Environment Handout (2009)there are some impact for host country as a targetplace of MNC, they are:1. Transfer of resources. The outdated equipment

in China in the beginning 1980s could beresolve by attracting MNC which can bring theirnew resources to China.

2. Transfer of technology. One clear example ofthis reason is when China wanted Nestlestechnological equipment in order to increasemilk production and lengthen the quality of themilk produced (Luo, 2000). Through jointventure scheme, Toyota also developed skill ofthe worker with training activities (Luo, 2000).

3. Employment effect.CHINAS COMPETITIVE ADVANTAGE

There are some big issues shaping theChinas competitive advantage, they are

government policy, impact of FDI, culture, and lowlabor cost.1. Government Policy and Impact of FDI

As stated above, after economicreadjustment, Chinese government started toopen and attract direct investment from foreigncountry. China needs knowledge andtechnology to improve their competitiveness inthe world market. On the other hands, foreignfirms want Chinas low labor cost and concernabout Chinas huge market. Chinesegovernment plays pivotal role attracting FDI.According to Luo (2000), China offers greaterincentives for direct investment in high-techtechnology and in west land. China knows thatcombining high-tech industry with low laborcost will increase its competitive advantage.

Nevertheless China R&D expenditure isvery low. Therefore government started looking fortransfer of technology that is bringing in by directinvestment. To attract the investment, governmentgives reduction in national and income taxes, landfees, and import and export duties. In addition, ifforeign investor reinvesting their profit in China,they will get 40% cash back on tax paid, thegovernment even give 100% refund forreinvestment in high technology or export-oriented(Luo, 2000).

Before 1990, China only export simplegoods with low quality, but after FDI booming in1992 (Etienne, 1996), China start to serve homemarket of country that set up subsidiaries or jointventure in China (Adams et al., 2004). In order tomeet world market specifications, China shouldproduce high quality and design of products withtechnological content inside the products.Therefore, FDI should supply technology andprovide managerial skill to China (Adams et al.,2004). These supplies of technology andmanagerial skill improve China awareness onproduct quality and finally increase its competitiveadvantage in world market. In addition, Claro(2009) also found that FDI increase laborproductivities.


2. Location-specific factorsLocation-specific factors, which consist of

country and cluster factors, are shaping Chinascompetitive advantages. Country-specific factorsare those that are available to all of the firms of aparticular industry in a country, such as low-costlabor (Porter, 1990 in Li and Qian, 2009). Cluster-specific factors are defined as the factors that areavailable to a particular cluster that is located in aparticular region (Porter, 1998 in Li and Qian,2009).

Other developing countries and Westerncountry have difficulties to duplicate Chinas firmstrategies and also to compete with Chinas firmbecause Chinas location specific factor. In order tomaintain its cost advantage in labor intensiveindustry, China rely on country specific advantageand clustered specific advantages (Li and Qian,2009). Li and Qian (2009) analyzed that there arethree stages of firms development in China. Thefirst stage is founding stage. In this stage, theeffectiveness of company is very low due to lack ofexperience and knowledge. The firm only relies oncountry-specific factors; they are low-labor costadvantages, cheap land in rural areas, and cheapraw material. These factors also combined withChinese command culture, that is one leader inorganization could force the worker to accept lowwages, minimum working environment, and longerwork hours (Scarborough, 1998 in Li and Qian,2009). Another advantage is the weakness of patentor copyright rules in China (Li and Qian, 2009).Company in founding stage does not need spendmuch money to do R&D because they canduplicate or imitate other products easily.Therefore, despite company in founding stage, theycan still compete in domestic market and worldmarket because of Chinas country-specific factors.

The second stage is growth stage. In thisstage company that enjoys country specific factorsstart to look cluster specific factors in order toenhance its market competitiveness (Li and Qian,2009). Companies in coastal region get benefitsmore than Westland in communication, banking,and also transportation. Many FDI are located incoastal area. This FDI gives managerial andtechnological skill to subsidiaries or through jointventure scheme. Therefore, companies in growth

stage which are located in cluster region can learneffective and efficient production. Adams et al.(2004) also notes that cluster region makecompany easier compare its product with othercompany that serves world market. Anotheradvantage of cluster region is cafeteria effect.The exchange of knowledge and information couldbe achieved among the workers that go to thecafeteria together in the same area (The GlobalBusiness Environment Handout, 2009). In addition,consider that country specific factors like rawmaterial and labor cost combine with clusterspecific factors, it support each other and thencould make China more competitive. If onecompany buy raw material cheaper from supplierin the same cluster, spend transportation costcheaper, and pay its worker cheaper, it make totalcost lower.

In mature stage, company beginsdifferentiate than others companies in the samecluster (Li and Qian, 2009). In this stage, Chinesefirms start to produce to their own market, developglobal distribution channel, and make their productavailable through all over the world. Thecombination of country specific and clusterspecific factors with own company strategy makeother country difficult to duplicate the Chinesefirms strategy. In addition, competitor shouldcompete not only with one firm but they shouldcompete with the entire production chain.3. Low-Labor Cost

Perhaps, among others Chinascompetitive advantage factors, low-labor cost isthe main advantage. There are some factorsaffecting China low-labor cost.

a. Hukou systemAccording to Chan (2006) there are three

factors that Chinese wage can be kept socompetitive, one of them is Hukou system. Hukouis household registration system, which is used byChinese government to control population(Jianmin, 2008). Jianmin (2008) noticed that thereare two hukou types; they are city hukou andagricultural hukou.

Due to industry booming in coastal region,many migrant from rural areas enter urban areas.


This phenomenon results two social groups inChina that are a floating population and nongmingong, the farmer proletariats, the rural worker butdo not hold city hukou (Jianmin, 2008). Jiangmin(2008) also stated that rural worker do not gain thesame right and treatment as city hukou people.They do not get the same income, education, socialsecurity, and medicare.

Chan (2006) provides strong evidence abouthukou system which constrains the geographicalmobility of workers, drive down the wages andlabor standards. The government can control theneeds of cheap labor by hukou system. If there isexcess limit of labor, the government can sendback the rural worker to rural areas, especially forthe rural worker that feels too old or havingindustrial accident that cannot do the job anymore.Chan (2006) also stated that the large volume ofpeople looking for low-end jobs drives downwages and work conditions and allows them to beexploited by employers, who can pay them at thelowest possible wages. There is supply and demandmatch between rural worker who need job and thecompany which need low labor cost.

Government clearly gets a lot a benefit fromrural worker. In order to increase tax revenue,government should attract foreign investmentthrough providing low-labor cost (Chan, 2006).Chan and Buckingham (2008) argue that hukousystem is the central to the current system ofsustaining low-labor cost in the internationalmarket.b. Culture

Rural worker is become the fuel of Chinaseconomy growth. Rural worker come to urbanareas to find any job and earn more money(Harney, 2009). In China, people are hard workerand love work overtime, especially the ruralworker. They come to urban areas to work forseveral years and then come back to their home tobuild small business. As a hard worker, people inChina are usual to live in low standard. One clearexample is middle manager in China usually goesto factory with their bicycle (Blackman, 1997).

Command culture also play pivotal rule inconstructing low-labor cost. Command culturemeans one leader in organization could force theworker to accept low wages, minimum workingenvironment, and longer work hours (Scarborough,1998 in Li and Qian, 2009).

Despite the government limits work hourin a week, the company and the worker know thatthey need each other. The company should producethe product as a fast as possible, due to order,especially for fast changing style product and theworker need money.c. Shadow Factory

Harney (2009) analyzed that there are twokind of factory in China; they are five-starfactories and shadow factories. Five starfactories functioned as a demonstration factoryonly. In real business, the factories subcontract itsorder to shadow factories, which are unregisteredto government, in order to get cheaper price.Shadow factories provide the cheaper pricebecause they provide lowest standard workingcondition for worker, pay the worker daily, forceovertime work hour and there is no insurance coverfor worker. Harney (2009) also argues that ifcompanies in China have to maintain its standardas stated in law, the price of goods would not be ascheap as now. Therefore, among the factories thereis race to the bottom, provide the lowest pricethat customers can get, force the factoriessubcontract its order. The growth of shadowfactories is supported by hukou system, with thissystem, shadow factories can get or sack easilyrural worker.CONCLUSION

Nowadays China becomes a main player ofthe economy in the world. Semi-finished goods andfinished goods can be produced in China to serveworld market with lower cost but meet worldrequirements. The company which has subsidiariesor joint venture scheme with Chinas firm cansupply its subsidiaries or joint venture partner rawmaterial that needed for production. This explainswhy China becomes the third world largestimporter in the world in 2004 (Dicken, 2007).


China also becomes platform for export. Thecompany assembly their product in China, and thenexport the products to all over the world.

Another role of China in global value chainis the largest population in the world with higheconomic growth could become the potentialmarket. Therefore, besides serve the world market,company in China also serves the domestic market.

Chinas competitive advantages clearlycannot duplicate by other firms in recent the world.Many factors related each other to create the lowprice of goods. This competitiveness could bestronger than before if China can combine thehigh-tech industry with low labor cost. Anotherpoint is if China can make R&D portion biggerthan before, in the future, it could become newpowerful country in the world.

Other potential factors that can be used byChina are their population and their huge land inthe west side. There are many farmers who work inthe agriculture that can be transferred to theindustry that only need low skill. In addition, manyChinese youth that has been studied in foreigncountry will comeback with new knowledge.

Despite of its fantastic economic growth andother achievements, China has some problems inlow labor standards and environmental issues.Shadow factories clearly cannot comply with rulesand ethical standards. On the other hand, if shadowfactories are eliminated, the five star factoriesshould produce products in a standard way, itsmean the cost is increase. In addition, if Chinashould comply with environmental standards toreduce the pollution, its mean the cost is alsoincrease.REFERENCES____________ , 2007, China World Textile Market

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china's competitive advantages 2092 1777 1 sm

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