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To what extent do FDI reduce exploitation of china’s workers? Dissertation


Introduction

Background of the Study

In recent time there has been an increase in the number and frequency of complaints concerning the poor treatment of workers in most industries in China over the past few decades as compared to other nations (Aitken, 1996). The issues that have been raised include poor working conditions, meagre pay, child labour and over exertion of the workers. Gills (2002, p. 157) suggest that in the 80’s, an estimated 80% of all workers in the local and multinational garment industries in China were experiencing some form of exploitation.

These employees were faced with various challenges such as sexual harassment, poor pay and pathetic working conditions. This situation has over the years escalated to serious levels due to the government’s neglect in imposing strict labour policies in industries. This is partly due to their need to protect the profit base that comes with inward FDI.

Consequently, increased interest has been developed by policy makers towards the transformation of the rules and regulations that govern the recruitment, sustenance and protection of these workers (Blalock, 2008). There is no doubt that FDI has significantly modified China’s industrial structure.

The industrial sector is the one that has received the maximum FDI in China, which also implies that this is the sector that has used maximum number of workers on employment terms that are almost at par with developed countries because multinational companies are regulated by their home countries in treating labour in the same manner as they would in their home country.

Statement of the Problem

Statistics provided by labour institutions in China reveal that most workers in the industrial sector are often subjected to poor working conditions. In a report made by a labour institution in China, four internationally renowned garment and textile industries in the Guangdong province were red flagged for severe exploitation of their workers.

Workers were expected to work an average of 12 to 15 hours a day with an average wage of 45 cents per hour. In addition to this, new employees were not provided with insurance cover for the first year of their contract. The living standards provided were also in bad shape and no safety training was offered to the employees. On the same note, there were workers aged below 18 years working in these industries and it was also noted that there was no freedom of speech in most industries (Hsu, 2003).

Some industries also deducted a mandatory fee on the wages of new employees for at least the first three months in order to cover for working uniforms and health examinations. Ironically, these industries claim to have maintained high levels of ethical and moral standards towards their workers and their operations.

According to Alon (2008, p. 128), FDI’s mostly present workers with opportunities for better pay, good working conditions and better technology, thus improving their motivation levels that result in increased productivity. This study sets out to investigate the extent to which this statement holds true with regard to the Chinese workers.

It is now well accepted that China’s ability to absorb foreign investment forms an important reason for the country’s fundamental principles of opening up its economy to the outside world. This strategy is in keeping with the theory of Deng Xiaoping that has greatly contributed to build a socialist economy with Chinese characteristics (Coughlin, 2000).

In 1978, the third session of the 11th Central Committee of the Communist Party had affirmed its ideologies in the context of emancipation and sought practical solutions in keeping with the global environment (Huang, 2006). During this time, the Chinese government also affirmed that historical transformation was key to the economic development of China in keeping with its long-term objectives of becoming a global power.

It was at this time that the People’s Republic of China took the decision in reforming itself and opening up its economy to the outside world. The law of the country in regard to Chinese foreign equity joint ventures was introduced by the National People’s Congress and subsequently steps were initiated to neutralise foreign capital as an important source for meeting this long-term objective (Lardy, 1993).

It was after 20 years of exhaustive efforts that the extent of absorption of foreign capital began to expand and the government took additional initiatives in perfecting the procedures for foreign investments. Such initiatives have attracted businesses from across the world and paved the way for a fast and healthy development of the Chinese economy (Li, 2007).

Reardon (2001) has revealed that China needed huge amounts of capital to build up its economy and FDI has made considerable contribution in this regard. During 1993-1999, the share of FDI in China in terms of fixed domestic assets investments was about 10 per cent. Although in other countries FDI is known to have exceeded domestic capital but this pattern is not prevailing in China.

The main driving force behind the spectacular growth of FDI in China has been the bright expectation of investors about the Chinese economy, which is in keeping with the fast growth rates that commenced from the early 1990s. Such expectations were further brightened when the Chinese government adopted friendly market policies.

Technical competence was raised and the quality of labour force was improved, because of which FDI has been steadily growing in the country in tandem with domestic investments (Reardon, 2001). There is now a marked pattern whereby in manufacturing sectors almost half the FDI has been directed in industries that are labour-intensive. Capital intensive and technology intensive investments comprised of the major bulk of FDI in China. The OECD has held in this regard that:

“Because of its size, China’s open door policy launched twenty years ago constitutes a unique and vast laboratory for the study of major structural changes in China and the world economy. It also provides an opportunity to test the benefits and the shortcomings of the economic policies which have been followed by the Chinese authorities and identify the improvements that could be brought about to increase the economic positive fall-outs of Chinese economic reforms” (OECD, 2000, p.3).

A visible pattern is indicative of the fact that FDI companies are paying higher wages. In following the patterns of other countries, in China also, FDI firms pay higher compensation to workers in terms of salaries, wages, bonuses and other monetary and non-monetary incentives, which is not the case with domestic companies that have been characterised with intense exploitation of labour.

In the light of these findings it is correct to say that FDI companies had significantly reduced the exploitation of labour in China. The higher wages for workers in FDI firms is applicable in all sectors except coking and petroleum refining.

Other than the disparities in distribution of the working environment in different wage sectors, most FDI companies have recorded higher productivity of labour and also used increased capital intensity as compared to domestic firms. There are some instances where higher level of productivity has also reflected a higher capital and labour ratio (Wang, 2003).

Status of Foreign Companies in China

FDI companies are much larger than domestic firms and mostly pay higher wages than the smaller domestic companies. Sometimes foreign companies may adopt policies in buying themselves in labour markets that are not familiar and may adopt practices of attracting workers from competing firms.

There have been very few cases of labour exploitation in multinational companies in China. The major structural weaknesses that have characterised China are mostly located in technology and capital intensive goods such as textile products, engines, machinery and plastics.

China has had a major competitive advantage in some specific sectors and the comparative advantages accounted for the bulk of its exports mostly in labour intensive products. China continues to reply on labour intensive methods of production in view of its large labour force, which has often been exploited by domestic industries in the past (Segal, 2004).

Research has revealed that provinces in China that have higher GDP, high levels of FDI stock, a strong transport infrastructure, better telecommunications and high per capita income have attracted maximum influence of FDI. In areas where labour costs are high, as approximated by wage efficiency and low quality of labour, FDI inflows have been comparatively less.

According to Li (2007), the entry of China into the WTO has resulted in the significant cut in tariffs imposed on industrial goods which have further reduced from 21 per cent in 1998 to 9.45 per cent in 2006. In addition, quantitative restrictions on industrial imports have also been phased out.

Presently, foreign firms as well as domestic firms had to face the tough competition from imported goods. It is evident from the present scenario that capital intensive industries such as machinery, electronic goods and vehicles will be adversely impacted by increasing import competition. The actual impact of liberalising imports upon different firms will depend on the specific sectors’ specialisations (Broadman, 2003).

The major types of FDI in China relate to equity joint ventures, wholly owned foreign enterprises and contractual joint ventures. Initially, contractual joint ventures were the most popular form of FDI into China since the late 1970s. But from the 1980s wholly owned foreign enterprises and equity joint ventures have become more popular resulting in the proliferation of foreign owned companies.

A popular entry mood is by way of equity joint ventures, which have become quite popular because of liberal policies followed by the Chinese government. The government in China believes that the Chinese objective of foreign capital management experiences and technology is best served by equity joint ventures (Dunning, 1999).

Additionally, foreign investors can engage in joint ventures by getting assistance from local partners in domestic markets. Economists have observed that the majority of the foreign investors opt for wholly owned foreign enterprises in order to avoid regulation issues related to equity joint ventures.

Multinational companies that were previously forming joint ventures with domestic companies have begun to establish wholly owned enterprises in order to strengthen their control over companies, to improve efficiencies and coordination in the context of corporate resources.

Yunshi and Jing (2005) have revealed that from 1984 to 2003 there was significant increase in the number of wholly owned foreign enterprises and during this period foreign investors were choosing to fund entirely almost 50 per cent of the foreign registered companies.

According to Tseng and Rodlauer (2003), the Chinese economic progress over the years has been remarkable with the country experiencing increased manufacturing and export. This has been the result of rapid technological advancement brought in by FDI, and the increased use of labour intensive techniques of production.

However, due to increased competition and high costs of production, there have been cases of workers exploitation in a bid to counter these limitations. The authors give examples of these tendencies and offers solutions and efforts that are in place to reduce the same.

Impact on Workers after 1979 Liberalization

Most of the labour intensive manufacturing facilities in China are located in Jiangsu, Zhejiang and Guangdong provinces. Most of the industrial establishments are located within the special economic zones and are largely in private hands although foreign investment is gradually becoming common.

For instance, in Guangdong province, almost 62 per cent of the factories are funded through FDI. In the Chinese textile industry alone there are about 15 million people employed and the workforce comprises mainly of women, most of them being migrant workers.

According to Oxfam, 80 per cent of workers in the garment sector are women under the age of 25 years against whom significant discrimination has been recorded by different agencies. In most industries in China, workers are employed on short term contracts between one and three years because of which labour turnover is very high (Casson, 2001).

China’s move towards a socialist market economy has considerably changed the ownership of industries from being state owned to privately or foreign owned, which has created a large number of laid off workers from the formerly state owned industries that has strongly impacted Social Security arrangements and labour relations.

The previous systems of state ownerships and controls have given way to a system of laws and regulations that have frequently weakened the condition of the labour force. For instance, the labour law in China now requires employers to give benefit of medical insurance, maternity, industrial injuries and to provide for old age, but this is usually not practised. It is understood that almost 90 per cent of Chinese companies do not comply with laws pertaining to labour (Buckley, 1999).

Changes that were introduced in the Chinese migration laws during the 1980s have prevented workers from shifting from one place to another in search of work. This resulted in higher level of poverty and under development in rural areas and created a class of migrant workers in the country.

Migrant workers in China now require a work visa and a permit before they move to a new city in search of work. In cities, workers are not entitled for welfare benefits and cannot own property or bring their families with them.

Workers have to return to their villages after the work contract is over with their employer. Such workers are more specifically exploited in view of their poverty status and their excessive dependence upon work permits. Such problems are further aggravated because of excessive supply of low skilled labour in China (Fu, 2004).

The China Labour Bulletin estimates that, by 2020 there will be about 15 million new entrants into the Chinese labour market every year, while only 8 million new jobs will be created at the present rate of growth in the country. It is thus likely that further pressures on jobs and employment will be created for Chinese workers in the coming future.

In major industrial centres such as the Guangdong province, working conditions are extremely poor and workers have started to migrate to other areas in the hope of getting better job options.

Freedom of association in China is no longer present although article 3 of China’s trade union laws provide for all workers to have the right to organise and to join trade unions. The All China Federation of Trade Unions (ACFTU) is the only trade union in the country that is officially recognized by the government but it has a great deal of monopoly in representation (Hsu, 2003).

Impact of Industrialization on Workers

Foreign owned and overseas Chinese affiliations are much bigger as compared to internal ownerships and are characterised with higher levels of capital labour intensity and are thus more capital intensive as compared to domestic industries in China. The plight of Chinese labour is evident from the fact that since 1998 there were more than 3.4 million jobs that were lost in the manufacturing sector.

Since 1999, more than 40,000 large and medium manufacturing industries have been forced to close down, which led to the loss of almost 90 per cent of jobs. Studies have confirmed an ongoing pattern of job losses in China. The International Trade Commission Model has revealed that almost 973,000 industrial jobs and 1,235,000 jobs as a whole have been displaced by way of repression of labour rights in China.

The Economic Policy Institute has estimated that about 410,000 industrial jobs were lost between 2002 and 2005 in China. Studies concluded by the US-China Economic and Security Review Commission (USCC) revealed that about 100,000 jobs are created in China every year and such numbers have been accelerating after 2001. Recent studies conducted by the Federal Reserve Bank of New York revealed that about 3.8 million jobs were displaced by US trade in the manufacturing sector in 2003 (Zhou, 2005).

China is known to have over 109 million workers in the industrial sector and most of them are migrants from rural areas and thus have no rights. The payment that they receive is very meagre and ranges between15 and $.50 per hour. Most of them are required to work many months for 70 hours per week and are not eligible for minimum wages and overtime, while safety and health and environmental laws are not made applicable for them.

A common characteristic in China pertains to the fact that child labour and forced prison labour continues to have a strong impact on Chinese industries. There are about 10 to 20 million child workers in the country, which forms1/8th to 1/4th, of the country’s factory workers.

This problem has been particularly aggravated after the AFL-CIO first petition was rejected by President Bush. It is estimated that there are between 1.75 million to more than 6 million prison labourers in the country.

In this regard, the Ministry of Justice in China has reported that there are about 1.5 million prisoners spread across the 700 prisons in the country that comprised of the official criminal justice system. However, it is also known that there are between 250,000 and 5 million prisoners that have been detained in Administration Detention Centres and under schemes relating to re-education through labour camps (RTL) (Yan, 2005).

Li (2007) has found that in 2006, China had surpassed Germany in becoming the third largest economy in the world after United States of America and Japan (Miller, 2004). About one third of China’s GDP comprises of exports and in 2005 the country’s exports had grown by 28.5 per cent.

The country has reported yearly growth rate of approximately 10% every year during the last 25 years although economists argue that the actual growth in China from 2005 has been about 15 per cent. During the 1990s, manufacturing output in China increased by 422 percent and the country’s manufacturing exports increased by 384 percent.

Starting from the late 1990s, China’s yearly growth rate in manufacturing outputs and exports has accelerated significantly. During 1999 manufacturing outputs in China had grown by 11.58%, while exports increased by 7.3%. During the last few years, manufacturing in China has grown by 91.4%, while exports pertaining to new and high-technology products have grown by 31.8% every year (Li, 2007).

China is now a world leader in manufacturing products such as computer cables, desktop computers, motorbikes, bicycles, cameras, refrigerators and televisions. It is also a leader in the manufacture of other components such as cotton textiles, cigarette lighters, cell phones, DVD players, microwave ovens and several other manufactured products (Wu, 2006).

China continues to maintain its lead at a very fast pace, which is evident from the fact that during 2005, productivity in mobile communication equipment increased by 108.2 per cent, computers by 48.9%, photocopiers by 38.5 per cent semiconductors by 36.5 per cent motor vehicles by 33 per cent, electrical instruments by 27.8%, chemical fibres by 33.8% fax machines by 33.9%, steel products by 17.4%, aluminium by 44.3% and television sets by 23% (Wu, 2006).

It is widely felt by several analysts that the creation of excess production capacity by China will continue to increase dramatically, thereby increasing competition both in global and local markets. According to Kynge (2006), capital expenditure in China is estimated at about 38% of GDP, which is almost twice the rate of countries such as Mexico, Brazil and India.

In 2003, when the AFL-CIO had filed its first petition, the overall capital spending in China had increased by 25 per cent to $660 billion. The new capital spending in 2005 in the manufacturing sector had increased by 37.6 per cent, which clearly indicates the high rate of acceleration in the country’s growth.

In 2006, capital spending in China had grown by 27.5 per cent in the metal industry, by 81% in general equipments, by 80 per cent in furniture production, by 44.8 per cent in electrical machineries, by 38 per cent in the textile industry, by 34 per cent in chemical products and by 47.4 per cent in apparels.

Foreign Direct Investment in China witnessed an increase by $20 billion in 2005. China has now become a global destination for FDI inflows and is the favourite and leading destination for the same. Almost 70 per cent of FDI into China goes into the manufacturing sector with maximum focus being made on advanced technology sectors and export oriented industries.

Future contractual FDI projections to China are expected to be more than double the present figures as more and more American multinational companies make a beeline to make investments in engineering and research and development. It is thus evident that FDI in China will not only increase the scope of employment for local people but can also set in motion the implementation of regulations that will deter exploitation of Labour.

There is a direct connection, in China between the cost of supply shocks and extreme exploitation of labour. This is because suppression of labour cost will attract new capital that will seek competitive advantages and enhance the shares of capital in permitting higher levels of weak investments by existing companies.

This becomes more pertinent in view of the fact that labour repression by the Chinese government reduces manufacturing wages by seven per cent to 85 per cent and also reduces the price levels of Chinese export goods by 10.5 to 43.5 per cent (Huang, 2006).

Technological, Financial and Physical Infrastructure

Major factors that determine the inflow of FDI into any country are the presence of interior transport waterways, railways and highways. Another important factor is the quality of telecommunications services because better telecommunication saves time and reduces the cost of information and communication gathering, thereby facilitating business activities.

Research as supported by empirical studies has confirmed that FDI will primarily flow into provinces that have good infrastructure. An export promotion and development strategy has been adopted by China which has proved to be a massive success and together with its export promotion policies, the Chinese government has introduced open door policies and economic reforms in promoting trade through adopting several unilateral actions and bilateral trade arrangements (Lankes, 2004).

Considerable success has been achieved by China in reducing tariff barriers whereby imports were reduced from 42 per cent in 1992, to 24 per cent in 1996 and further on to 17.6 per cent in 1998. China has also initiated and implemented a large number of preferential arrangements for encouraging international trade.

Tax exemptions on the intermediate products were provided in the production of export goods that played a major role in enhancing the country’s foreign trade (Lancaster, 2002). Such developments are very favourable for improving the working environment and will lead to the gradual removal of worker exploitation.

Literature review

Advantages of FDI for Labour

The impact of foreign ownership is increased by spreading of the knowledge base to locally owned firms by way of training that is imparted to suppliers or by initiating labour mobility. Moreover, FDI allows and encourages the flow of ideas across national borders. The possible roles of multinational companies in spreading of knowledge and thus enabling fast economic growth are very well researched by Owen et al (2003).

In addition to the paucity of conventional resources such as capital, most developing nations have to face hardships in terms of the gap in ideas that is relative with the descriptions of the use of productive processes across different nations.

By making use of cross country statistics and other supportive evidence, theorists have claimed that a nation’s performance and growth is considerably related with the use of ideas embodied in foreign direct investments instead of the accumulated capital and the level of education prevailing in the country (Blackman, 2001).

Multinational companies are known to impact domestic wages significantly. FDI enables the provision of knowledge and technology and knowledge to the host nation whereby the relative productivity of labour increases, thus allowing an upward push on wages. If such increases in wages are considerably higher, there will be a marked pattern whereby equilibrium wages will result in response to enhancement in FDI.

Moreover, in view of the wage gaps that prevail in developing nations, a number of studies have used organizational statistics that reveal higher level of wages in companies that are foreign owned in vast difference from domestically owned companies.

Aitken et al (1996) found from their studies in the context of wages and FDI that high level of foreign investments is directly associated with high wages even though unviable economic circumstances and levels of development were present. They revealed that FDI significantly raises wage levels in countries where new production facilities are set up with foreign capital.

Grossman and Helpman (1991) researched and analyzed the labour market behaviours of FDI companies and their impact by using different parameters in the context of the manufacturing sector. They found that there was considerable difference of 25 percent amongst blue collar and white collar jobs while comparing FDI and domestic companies.

It should however be kept in mind that the differences in the prices of labour pertains only to wage differentials instead of the entire compensation. Therefore in reality the differences may be greater because foreign owned companies usually pay higher levels of other compensation than local companies.

Secondly, there is need to analyse the impact of the labour market by examining if the greater number of foreign owned companies impact wages in local companies. Foreign ownership in industries or in an industry located within a region, impacts wages in local companies as also in all plants taken as a whole despite the absence of wage differentials amongst foreign and local companies (UNCTAD, 2004).

If there are large numbers of foreign owned companies in a given industry, there will be a marked pattern whereby wage levels in domestically owned companies will be higher for workers with good educational qualifications. This conclusion is made on the basis of the size of the form and the impact of energy and related inputs in the organization (Cason, 2001).

Additionally, there is a great deal of concern in regard to FDI and wage disparities amongst skilled and unskilled workers. As per the traditional trade theory, FDI in countries that are characterised with low skills raises the related demand for low skilled workers. Consequently, there is a reduction in the inequality amongst skilled and low skilled workers. But a few empirical studies conducted in different countries have revealed contradictory results.

The data of wages and employment by occupation as provided by the International Labour Organisation during the period 1985 and 1998 provides strong evidence about FDI actually resulting in reduced wage inequality in some developing countries. In some countries, FDI has resulted in enhanced wage inequality as a result of controlled domestic influences such as supply of skills and wage setting.

According to Owen and Yu (2003), in addition to provincial factors, the kind of FDI that is present impacts relative wages amongst skilled and low skilled workers. Different kinds of FDI companies such as export and import oriented foreign companies enhance the wages of low skilled workers and reduce the wages of skilled workers while lowering the skill premium at the same time. According to Ruth Domoney (2007), who researched the working condition of workers in the Chinese textile industry:

“The move towards a socialist market economy has changed garment sector ownership from mainly state owned to privately owned companies, creating high numbers of laid off workers from former State Owned Enterprises (SOEs) and impacting significantly on labour relations and social security arrangements in China.

A previous system of direct state ownership and control has been replaced by a system of laws and regulations that are currently only weakly enforced. For example, official Labour Law requires employers to provide old age, industrial injury, maternity and medical insurance, but this is not always provided in practice. It is estimated that 9 out of 10 Chinese companies do not meet national labour law standards” (Domoney, 2007, p.3).

In his article on reform and openness Gallagher (2002) asserts that the Chinese government is to blame to some extent for the increased abuse of workers in China. The government of China is seen to have effectively managed to maintain a strong grip over the workers while denying them their labour rights through polite demands and red tape measures. This has consequently resulted in exploitation of the present workers in most regions, causing suffering and distress to the workers (Bui, 2002).

However, it can still be contended that FDI has resulted in positive results as is illustrated by Blalock (2008) who asserts that the social welfare of the host country has much improved. This is mostly as a result of the technological transfer that is gained by the local suppliers which in turn improves productivity and quality all the while increasing the GDP of the host country and its ability to compete in the global scene (UNCTAD, 2004).

The exploitation of labour in China is seen as gradually diminishing after the entry of foreign companies through FDI in different phases. It was during the 1990s that FDI inflows were the maximum in China in sharp variance to the medium rate of growth during the 1980s, which is often referred to as the phase when growth began to increase significantly.

Although foreign companies had begun to take interest in China after 1979, large scale FDI inflows were not experienced during the initial phase due to poor infrastructures in the country (OECD, 2000). A steady growth and comparatively larger inflows were seen during the period 1983 to 1991, as the Chinese government began to lay specific focus upon special economic zones that began to expand into several cities because of FDI incentives that were provided for in the year 1986.

This enhanced pattern reached its zenith when the inflows reached over US$110 billion by 1993. By now China had become the largest host country in the context of FDI inflows amongst developing nations and occupied the second rank in this regard in the world.

From 1994 onwards there was an adjustment period in China whereby FDI inflows slowed down although the contracted amount of capital inflow was climbing consistently, because of which the total inflows by 2001 had increased by 15%, which showed a visible rend in deviating from global patterns (Chen et al, 2003).

From 2001 onwards, labour conditions showed significant signs of improvement after China became the single nation that witnessed a continuous increase in the amount of FDI inflows.

FDI growth in China does not appear to be a part of the normal strategy of global expansion as adopted by multinational companies across the globe because China had experienced considerable growth in FDI amongst developing nations as also amongst developed nations such as the USA that had begun to witness by this time a decline in the entry of foreign capital within its economy.

This is clearly suggestive of the fact that locations played a crucial role in the FDI growth pattern in China. In fact China enjoyed exclusive advantages in comparison with other nations that were canvassing to attract FDI inflows (UNCTAD, 2003).

Status of Foreign Companies in China

By creating corporate networks, foreign companies in China are able to reduce overall cost related to operations and can thus optimize their local presence by providing extra benefits to the local workforce that were mostly exploited before foreign companies began to enter China.

Given that many multinational companies have also built research and development departments in China, there are now indications that most of such companies are to stay in China for long and will thus cater to the interests of the workforce by giving them better working environment and incentives.

Most of such companies have established their research and development centres in major industrial areas such as Guangzhou, Shanghai and Beijing, thus allowing the labour force from urban centres to seek employment with them (Yunshi and Jing, 2005).

It is known that export oriented FDI is encouraged by the availability of cheap labour and market oriented FDI is encouraged by the access to foreign markets. According to Zhang (2000), export oriented FDI is considered better by most countries that have mortgages as compared to source countries.

Hence export oriented FDI was preferred by China because it was able to offer favourable incentives and the environment that allowed foreign companies to engage cheap Chinese labour for their production activities. There are many sectors in China that have attracted FDI on the basis of local markets because the huge market size allows large number of opportunities to be realized effectively in terms of economies of scale. It is in this context that researchers have held that:

“The FDI patterns in China show a great disparity among regions: For the period from 1983 to 1998, FDI in the eastern region took up 87.8 per cent while the central region attracted 8.9 per cent and the western region recorded only 3.3 per cent. This inequality stems from the FDI policies taken by the Chinese authority.

The open door has started with the creation of special economic zones (SEZs) and preferential regimes for fourteen coastal cities. This has resulted in an overwhelming concentration of FDI in the east. With the adoption of more broadly-based economic reforms and open door policies for FDI in the 1990s, FDI inflows into China have started to spread to other provinces” (OECD, 2000, p.8).

The easy availability of cheap labour is a specific advantage enjoyed by China in attracting FDI. Wei and Liu (2001), have held that the main determinants of inflow of foreign funds into China are decided by FDI theories, which they classified into three types; Micro, macro and strategic determinant.

These theories are considerably related to the movement and availability of the workforce. Micro factors relate to the ownership of firms in relation to specific advantages pertaining to size of the firm and product differentiation that are significantly impacted by the availability of labour.

Macro factors are related in the context of FDI focusing upon the growth of the host country and the size of the market that can be measured in terms of the gross domestic product, GNP, per capita GDP; as fast economic development creates larger domestic businesses and markets.

There are other macro issues such as exchange rates, political risks and taxes. Strategic determinants in the context of FDI are related to long term factors such as diversifying activities of firms, defending existing foreign markets, gaining or maintaining a stronghold in the host country and complementing other types of investments (Dunning, 2001).

Cost and Productivity of Labour

One of the most important factors that attracted FDI into China was the advantages that occurred in a complicated productive environment because of factors such as the labour force, natural resources and land. The extent of economic development in the host country is mostly considered a very strong determinant of FDI inflow because it is directly related to its local infrastructures, education levels and domestic entrepreneurship (Henley et al, 2003).

China has the world’s largest population and has a massive labour force with relatively low wage levels. In the last few decades China has given a lot of attention in educating its people through schemes such as the nine-year universal compulsory education. Thus, Chinese workers turn out to be comparatively of better quality and there are relatively higher numbers of technical personal now. However, in some areas there is short supply of technicians, engineers and managers (Hymer, 1996).

Analysts often argue that the cost of labour should be used in ascertaining FDI flows in terms of efficiency of wage rates that are adjusted in keeping with productivity instead of absolute wages, especially when FDI is export oriented (Porter, 1996). When considering efficiency wage rates it is evident that China enjoys good advantage, which has been confirmed by empirical research efforts.

China is known to have excellent energy reserves and its production of oil, which is the major source of energy, is amongst the highest in the world despite the fact that a major part of its consumption of oil is imported (Hood, 2001).

The advantages accruing from a cheap labour force appear to have become less attractive for foreign investors because of the liberalisation of international trade, globalisation of the world economy and the massive strides in technological innovations. It is quite apparent that because of the disadvantages by way of lack of qualified labour and technological gaps, some fields could lower the speed at which the country’s growing (Hill, 1998).

It has been observed that there has been a marked change in employment patterns in China because of the increasing number of foreign companies that have begun to establish production facilities in the country. The following data reveals the employment position in the country during 2008:

Annual Average Number of Employed Persons and Fully Employed Persons in Chinese Cities, 2008

Employed Persons Fully Employed Staff and Workers
City
Total State- Urban Other Total State- Urban Other
owned Collective- Types of owned Collective- Types of
Units owned Units Ownership Units owned Units Ownership
Guangzhou 225.96 82.16 11.13 132.67 218.12 78.29 10.72 129.11
Shenzhen 201.68 41.20 1.37 159.12 199.62 40.70 1.36 157.56
Zhuhai 57.90 9.15 4.05 44.70 57.08 8.79 4.01 44.28
Shantou 31.47 16.84 6.13 8.50 30.77 16.44 6.07 8.26
Foshan 54.45 18.91 3.00 32.54 53.59 18.56 2.98 32.05
Shaoguan 28.93 14.36 1.92 12.65 28.31 14.20 1.87 12.24
Heyuan 23.56 10.50 1.65 11.41 23.13 10.40 1.62 11.11
Meizhou 22.74 16.12 1.49 5.12 22.23 15.93 1.45 4.85
Huizhou 76.87 16.13 2.67 58.06 75.82 15.91 2.63 57.29
Shanwei 14.05 9.12 1.56 3.37 13.24 8.70 1.33 3.21
Dongguan 20.98 11.52 3.98 5.48 20.50 11.08 3.96 5.46
Zhongshan 25.18 7.49 1.48 16.21 24.66 7.25 1.47 15.94
Jiangmen 40.71 13.18 3.14 24.40 40.06 12.90 3.11 24.04
Yangjiang 17.08 10.26 3.79 3.04 16.67 10.00 3.64 3.02
Zhanjiang 38.83 27.08 3.10 8.65 37.97 26.60 3.02 8.34
Maoming 30.24 20.55 3.88 5.81 29.49 19.96 3.87 5.67
Zhaoqing 26.99 13.76 1.25 11.99 26.41 13.36 1.19 11.87
Qingyuan 25.77 11.79 0.92 13.05 25.49 11.62 0.92 12.96
Chaozhou 13.03 8.33 1.45 3.25 12.59 8.04 1.42 3.13
Jieyang 20.51 14.32 2.64 3.55 20.43 14.27 2.62 3.54
Yunfu 17.13 8.31 0.50 8.32 17.03 8.26 0.49 8.28

The data reveals that in given major cities, the employment pattern has significantly shifted from state owned enterprises to other types of ownerships, which are mainly foreign companies that have established through FDI. Although state owned enterprises continue to employ a significant percentage of the workforce but it appears very soon the number of workers employed with such other types of ownership will increase consistently.

Regulatory Framework

Another favourable impact for the workforce has been the fact that China has constantly been making efforts in introducing a transparent business environment and legal framework. It has streamlined its legal systems, especially in the context of FDI and a series of laws and regulations and provisions have been amended by introducing regulations such as Contract Law, and Joint-venture Law.

China has also relaxed some of the procedures that were restraining FDI and further liberalised policies in areas of restricted investments while placing greater focus on attracting FDI into areas that had encouraging potential. Starting from the mid-1990s, a series of programmes have been launched in the country in order to reduce and restructure state ownership in several sectors.

The government has declared that foreign participation is welcome in such a restructuring process that will introduce enhanced internal efficiencies, advanced managerial skills and global competitiveness. In understanding the need to transform the small-scale sector and while keeping in mind the weakness of the domestic capital market and the shortcomings in managerial capacities, the Chinese government has allowed FDI in the small-scale sector, which presently appears to be on right track.

However, it has to be seen how specific participation of foreign investors will be permitted. A major problem that continues to haunt the government is the poor conditions that the labour force has to go through in view of increasing unemployment and the lack of a social security net (Kamath, 2000).

Impact of FDI on China’s Economy

In view of its unique circumstances, research and the economic literature has attributed considerable economic effects on FDI. During the last two decades, the country has attracted large amounts of FDI and multinational companies have become wider elements in China’s economy.

The effect of FDI on firms and the manner in which FDI is impacting the Chinese internal economy has become a subject matter of analysis and discussion amongst analysts and policymakers as well as academic experts in China as well as in other developed countries. Several research efforts have concluded that FDI provides a very bright future for the Chinese economy, especially in view of the huge consumer market that can be tapped by multinational companies.

Additionally, the large numbers of FDI inflows provide a strong basis for such companies to employ local people and to introduce their organisational development policies in order to improve the quality of labour and to enhance the facilities available to them. Positive results in this regard had already begun to appear as more and more Chinese people are employed by these companies, resulting in better working conditions, higher wage levels and a virtual absence of labour exploitation (Krugman, 2001).

Impact of FDI on China’s International Trade

According to Swain (2003), although China has a greater structure of a developing country, its inter-sectoral trade specialisation appears to be more deeply entrenched than in any other developing nation in Asia.

This is primarily because of China’s huge natural resources and low cost labour that allow it to continue with expanding export of labour intensive products. It is true that China has considerably diversified its exports pertaining to labour intensive goods and established a competitive position in the fast expanding market, thus allowing it to have a sustained and rapid growth in exports (Sun, 2002).

FDI and Job Creation

It is also true that FDI in China has created a lot of jobs and virtually transformed the job market in the country. The most prominent impact of FDI on the Chinese economy has been to directly or indirectly create employment opportunities in the labour intensive environment, which is a major characteristic of most developing countries.

Employment in both FDI firms and urban employment have shown a marked increase. Foreign companies that have entered China through FDI employed over 5 million people in 1991 which was about 0.74 per cent of China’s total employment and 0.98% of urban employment in the same year.

Statistics have confirmed that by the year 1998 the number of people employed by FDI firms had increased by four times to 18.3 million and to 88 million workers respectively. This also implies that most of the job opportunities created by FDI were located in rural areas. This is also a strong indication that the introduction of FDI into the Chinese economy is gradually improving the condition of the workforce, not only in the urban areas but also in townships and village enterprises (Lai, 2006).

Most of the urban employment in FDI firms in China is concentrated in the eastern region that accounts for about 86 per cent of the labour force, more specifically in provinces such as Zhejiang, Liaoning, Shandong, Jiangsu, Fujian and Guangdong as also in the municipal areas of Tianjin, Beijing and Shanghai. The impact on employment of FDI in the urban areas of western and central regions has been significantly low.

Consequently, the FDI contribution in urban employment in the country has been quite low. Although FDI companies accounted for about 6.8 per cent of urban employment in the eastern region of China, they were responsible for only 1.15% and 0.64 per cent of urban employment in western and central regions respectively.

This clearly suggests that FDI has to some extent been responsible for increasing the gap in incomes between the east and the best regions of China. However this does not mean that FDI has not resulted in improvement of the working conditions of the labour force (Teece, 2003).

FDI companies in China have significantly increased the number of workers employed in the manufacturing sector. Presently FDI companies employ 9.3% of the total labour force in the manufacturing sector in China. The positive contribution of FDI has been the maximum in labour intensive industries such as fur and leather products, sports goods and fibre products (Wei et al. 2001).

FDI has significantly contributed in many technology intensive industries such as electrical equipment and machinery, instruments and meters and telecommunication equipments. The share of such industries in terms of quality of workforce has significantly improved because of the entry of FDI firms.

China needed huge amounts of capital to build up its economy and FDI has made considerable contribution in this regard. During 1993-1999, the share of FDI in China in terms of fixed domestic assets investments was about 10 per cent. Although in other countries FDI is known to have exceeded domestic capital but this pattern is not prevailing in China.

The main driving force behind the spectacular growth of FDI in China has been the bright expectation of investors about the Chinese economy, which is in keeping with the fast growth rates that commenced from the early 1990s. Such expectations were further brightened when the Chinese government adopted friendly market policies (Zhang, 2002).

FDI and Industrial performance in China

Most of the research conducted in the area of FDI has focused upon the changes that have occurred because of foreign funded companies in the competitive structure of the Chinese industrial setup. It is observed by researchers that domestic Chinese companies still occupy dominating positions in the Chinese markets, which will lead to improving labour conditions because domestic companies will have to adopt new regulation in the context of the workforce.

Such companies account for almost 85 per cent of the demand pertaining to industrial products in the country. The market share of goods produced by domestic firms was less than 70% only in sectors such as electronic equipment and instruments. It was below 80% in sectors such as machinery and transport equipment.

The entry of China into the WTO has resulted in the significant cut in tariffs imposed on industrial goods which have further reduced from 21 per cent in 1998 to 9.45 per cent in 2006. In addition, quantitative restrictions on industrial imports have also been phased out.

Presently, foreign firms as well as domestic firms had to face the tough competition from imported goods. It is evident from the present scenario that capital intensive industries such as machinery, electronic goods and vehicles will be adversely impacted by increasing import competition. The actual impact of liberalising imports upon different firms will depend on the specific sectors’ specialisations.

Methodology

The Research Method

The methodology is related to the working conditions faced by workers in Chinese industrial establishments. The National Labour Committee released a report in which harsh and illegal working conditions have been highlighted in the Jabil Circuit factory in Guangzhou.

The factory employs over 6000 workers that are mostly illegal migrant labourers that produce hi-tech products for companies such as Xerox, Siemens, Philips, Nokia, Lucent, IBM, HP and Cannon. Through evidence that comprises of photos, interviews and documents, the report highlights the inhuman conditions in which workers are made to work.

Workers have to work in twelve hour shifts throughout the week and assembly line workers are not permitted to sit during the entire shift because of which workers have frequently complained of swollen feet and stiff arms, shoulders and neck. They can use bathrooms only once during the regular eight hours shift.

Illegal workers are hired en-masse and pitted against regular workers. Security guards act as if they are policemen on the look out for indiscipline. About six workers are made to share one dorm and have to sleep on double level bunker beds. Majority of the workers revealed that the food is awful. They are given only nominal wages of 93 cents per hour, which is much below the subsistence level (Computer Weekly, 2010).

In this context it is pertinent to examine relevant data concerning the causes of disputes concerning labour that have arisen in China. The exploitation of labor in China is evident from the large number of labour disputes in the country, which are detailed in the following table:

Table I

Year Number of labor
Disputes
2003 12204
2004 10838
2005 14256
2006 15464
2007 19729
2008 24540

Source: Statistical yearbook of the republic of China, 2008.

It is evident that since 2003 the number of disputes concerning have been on the constant rise, which is indicative of the deplorable labour environment in the country. For instance amongst the 24540 labour disputes in 2008, 9186 pertained to disputes over wages and 8343 related to dismissals by employers. The total disputes concerning other labor rights related issues were 2486.

There is an increasing incidence of disability cases in the Chinese working environment which is evident from the following table:

Table II

Year Number of
Establishments
Total Employees Number of Disability Cases Mean Frequency of Disability
2003 7424 1248227 5365 1.91
2004 8099 1396492 6047 1.96
2005 9058 1922821 10196 2.51
2006 12457 2559502 11466 2.14
2007 13107 2646609 12246 2.21
2008 13637 2723323 11920 2.09

Source: Statistical yearbook of the republic of China, 2008.

It can be seen that there is a vast increase in the number of organizations that have established production facilities since 2003 and the number of employees have significantly increased. The extent of injuries sustained by workers while at work has drastically increased from 5365 in 2003 to 11920 in 2008, which is also indicative from the mean frequency of disability cases that has increased from 1.91 to 2.09 during the same period. Such figures are clearly indicative of the unfavourable working environment in China.

The following data is depictive of the employment characteristics of the Chinese workforce:

Table III Indications of Employed People in China

Item 2005 2006 2007 2008
Number of employed people
(10,000 people)
904.27 954.44 1001.46 1007.87
Employed in State owned units 380.19 384.78 381.00 385.14
Employed in other units 455.38 502.41 554.97 562.09
Average earnings of urban employed
(Yuan)
24,122 26400 29658 33282

Source: Statistical yearbook of the republic of China, 2008.

The data clearly reveals that the number of urban employed in units that are not state owned has been increasing consistently since 2005. It is noteworthy that the wage levels have also been consistently increasing which is indicative of the improved emoluments that urban workers are getting after the entry of foreign companies.

In the light of the given working environment, the research team made efforts to conduct a sample survey and ascertain the conditions they are made to work in and what they feel about their circumstances. The most effective tool to use in the context of measuring responses relating to the impact of FDI is to make analysis of the correlations that exist in different aspects that are presented in this research (McGuire, 2008, pp.30).

As such, the study shall use the descriptive correlation research method. This is because it seeks to identify the relationship between two variables which in this case are the FDI and labor policies in China. The data collected will consist of testimonials from some selected workers and reports from various sources related to the labour policies governing foreign and local investments in the country.

The data collected shall then be compared to data generated by other related studies to evaluate the efficacy of FDI in China in relation to their contribution in reducing exploitation of Chinese workers. To answer the questions designed for this study, the key concerns shall be established to provide guidelines for the interviews and the criteria to be used in data collection.

Data Gathering Procedure

As earlier mentioned, an evaluation methodology shall be used to design the procedures through which the purpose of this study can be realized. The participants for the interviews shall preferably be selected from industries located in the Guangdong region. Questionnaires shall be distributed among the workers and employers from various regions in order to gauge whether the situations are similar in all FDI companies.

The proposed methods shall suffice in addressing all the questions posed in this study because they provide credible data from the one on one interviews and the answers posted on the questionnaires. In addition to this, the results obtained after compiling the data, shall provide accurate information regarding the topic and the correlation shall be used to identify the causes of problems that are in the Chinese industrial sector.

The methodology primarily pertains to a survey that was carried out amongst workers and employers in the Guangdong province. This province was chosen because it provides an ideal environment with all sections of employees being represented in different industrial organisations.

A questionnaire for workers was prepared that comprised of 15 questions and for employers the questionnaire included 10 questions. Fifteen respondents were chosen from the workforce while 10 respondents were chosen amongst employers. The following questions were placed before the workers:

  1. What is your name
  2. Which provinces are from
  3. What is your age
  4. Which company are you employed with
  5. Is your employer a domestic company or a foreign company
  6. How long have you been working in this company
  7. Do you feel that your wages are at par with the qualification that you have
  8. What are the benefits that you get from your employer in addition to the wages
  9. How many hours you work in a day
  10. Does your employer provide medical benefits and sick leave
  11. Does your employer offer training facilities
  12. Do you feel that the working environment is in keeping with health regulations
  13. What are the kind of facilities that you get at work
  14. How many hours are you made to work in a day
  15. Does your employer provide adequate job security

The following questions were a part of the questionnaire that was given to the employers that were chosen as respondents for this survey.

  1. What is your name
  2. What is your role in the organisation
  3. Is your organisation domestically owned or foreign owned
  4. How many workers do you have
  5. Do you provide wages as per regulations of the government
  6. What are the extra benefits you provide workers other than wages
  7. Do you provide health care and sick leave to your employees
  8. How many hours are workers required to work in a day
  9. Is your organisation technologically advanced and do you employ people with low skills.
  10. Do you allow trade unions to exist in your organisation

Results

Responses from workers clearly indicated that there has been considerable change in conditions of workers after foreign owned companies began to establish production centres in different provinces in China. Workers in most of the foreign owned companies did not mention the existence of any kind of exploitation in the context of not being given the minimum wages.

Workers appear to be satisfied about the quality of working environment, the number of working hours, benefits such as healthcare, bonuses and sick leave. Most foreign owned companies provide a healthy working environment and allow workers to develop their skills and capabilities through a number of training and skills development programmes that are organised by most of such organisations.

Foreign firms were found to be complying with all the regulations in the context of welfare of workers who were given their due recognition and were allowed to have the status as provided by law. Some workers that were working with domestic companies responded in saying that although there is an overall improvement in the working conditions of workers, domestic companies continued to be slow in implementing the new rules and regulations that have been made applicable after the entry of foreign companies in China.

Such companies are still conservative and continue with their traditional approach of looking down upon workers instead of giving them recognition in adding to the performance of the organisation. A number of domestic companies in China that had not yet adapted to the changed liberal environment were found to be exploiting workers in a number of ways, such as low wages, lack of health care facilities and the absence of healthcare, sick leave and training.

Responses from the employers were different for foreign companies and domestic companies. Foreign companies that had entered China through FDI were represented by the top administrators such as general managers and directors that had chosen to respond to the questionnaire provided by the research team.

Respondents from foreign companies were quite positive in asserting that their basic objective was to enhance productivity and profitability of the company by making the best use of the available resources. The very purpose for them to enter China and to set up production facilities was to exploit the favourable circumstances in the country in terms of the huge natural resources and the vast availability of cheap labour.

They had no intention to exploit the local labour and have well defined goals in providing maximum facilities to skilled and unskilled labour in meeting their corporate objectives.

They asserted that their corporate policies required them to treat workers with dignity in keeping with the regulations they were bound with in their home countries. They said they were fully committed to abide by the Chinese regulations in the context of labour and were willing to take extra steps to enhance their skills and to provide them motivation to increase their productivity.

Representatives of domestic companies expressed some resentment about being able to entirely follow the provided regulations in the context of treating the workforce as per provided norms.

They felt that under the given circumstances they did not have the required resources to fully comply with providing benefits to the entire workforce in view of the paucity of growth opportunities for them. Over and above the hurdles that they face, domestic companies were found to be open in having attitudes to reduce the plight of workers employed with them.

Discussion

The analysis of FDI in China has revealed that labour skills have been upgraded, which is evident from the fact that the percentage share of skilled labour has increased as compared with the total number of employed workers by FDI firms. On the basis of this criterion the research has found that the structure of employment in FDI companies in the country is almost the same as observed in other developing nations.

Workers that were employed in direct manufacturing in the year 1998 accounted for 76.7 per cent of the total labour employed by FDI companies while professionals and technicians, accounted for about 8.25 per cent. The percentage of workers employed in direct production was found to be greater in FDI companies as compared to domestic companies.

Managerial staff, administrative staff and clerical staff accounted for more 10.8, 7.5 and 6.24 per cent respectively of the total labour force in FDI companies. It is evident from the data that managerial staff and professional employees form a significant increase in the context of employment by FDI firms.

Such figures also indicate that FDI companies adopt more liberal policies and utilise greater number of technically efficient workers in productive activities because they have a tendency to utilise a greater part of the labour force in production activities instead of in non-productive administrative functions, which is the criteria served in most domestic firms in China.

Researchers also concluded that FDI firms are more particular about having better quality of labour in their production activities as compared to domestic companies in China. FDI companies have contributed a great deal in employing workers at the university and higher degrees.

It is now recognized that China’s ability to absorb foreign investment forms an important reason for the country’s fundamental principles of opening up its economy to the outside world. The Chinese government has affirmed that historical transformation was key to the economic development of China in keeping with its long-term objectives of becoming a global power.

It was at this time that the government took the decision in reforming itself and opening up its economy to the outside world. The law of the country in regard to Chinese foreign equity joint ventures was introduced by the National People’s Congress and subsequently steps were initiated to neutralise foreign capital as an important source for meeting this long-term objective.

It was after 20 years of exhaustive efforts that the extent of absorption of foreign capital began to expand and the government took additional initiatives in perfecting the procedures for foreign investments. Such initiatives have attracted businesses from across the world and paved the way for a fast and healthy development of the Chinese economy.

The most common factors that attract FDI in China are labour costs, market size and growth, cost of capital, government policies, cultural differences and geographical distance. Theory has classified FDI into two different kinds; market-oriented and export oriented. In the case of market-oriented FDI, the most significant factors that encourage FDI is the size and economic development happening in the host country.

In terms of export oriented FDI, the major focus is on cost competitiveness (Calvet, 2001). There are several other factors that apply to both kinds of FDI that are said to be characterising the Chinese economy. In terms of the size and growth of the Chinese economy and the related prospects, market-oriented FDI primarily aimed at setting up production facilities for supplying goods and services in local markets.

This kind of FDI is mostly adopted for exploiting new markets in addition to the conventional reasons of avoiding size of market, tariff barriers and the prospect of market growth including the extent of development of the host country.

The normal implications pertain to the fact that countries that have bigger market size, faster rate of economic growth and higher levels of economic development will enable better and increasing opportunities for such industries to take maximum advantage of their ownership in further attracting additional market-oriented FDI.

In the case of export oriented FDI also, the host country’s market size plays a very important role in view of the fact that a bigger economy can allow higher levels of economies of scale and others spill over impacts (Coughlin, 2000).

China’s population is more than 1.2 billion and provides massive potential for consumption. Investors who plan to bring in FDI consider the Chinese market has been the last big opportunity in terms of a huge market that has not yet been developed up in the world. The level at which the Chinese economy has been expanding over the past few decades has allowed the purchasing power of people to strengthen the fast growing markets in becoming excellent business opportunities.

Although the per capita GDP in China is not yet high, the rapid rate of economic growth and constantly increasing purchasing power has allowed China to become a very attractive market that has become the target of multinational companies and pup in more and more FDI in areas such as pharmaceuticals, electronics, automobiles, household electronic goods, drinks and basic chemicals.

Although the economic growth in China had slowed down after 1996 because of adjustments made in the overall growth phase during the beginning of the 1990s, the rate of economic growth has now more or less become stable between seven and 8%, which too, is an excellent opportunity for global companies to invest and reap the profit potential of a huge consumer base that waits to be tapped (Kuhn, 2004).

A large empirical and theoretical literature exists in the context of impact of FDI.

Although the question relating to benefits of FDI in developing nations remains uncertain; the role of FDI has been largely accepted as contributing to economic growth in developing nations. A large number of empirical research efforts in different countries have revealed that FDI has a strong and positive impact upon the host country from the perspective of labour markets.

Firstly, on the job training is considered the most important perspective in this regard. Lucas (1993) has shown that on the job training is directly linked with fast economic growth when workers move quickly into additional productive job roles. This is referred to by theorists as the quality ladder model as argued by Grossman and Helpman (2001).

Their arguments are supported by different levels of evidence that look at the relationship amongst the formations of human capital, growth in productivity and on the job training resulting from the entry of foreign companies.

They presume that the entry of foreign multinational companies enables opportunities in the context of knowledge and technology as also of transfer of knowledge. In this manner the quality of domestic human capital is enhanced because of efforts pertaining to learning by doing in the context of the domestic workforce (Wei, 2002).

A marked pattern is observed whereby FDI companies have been found to be paying higher wages. In following the patterns of other countries, in China also, FDI firms pay higher compensation to workers in terms of salaries, wages, bonuses and other monetary and non-monetary incentives, which is not the case with domestic companies that have been characterised with intense exploitation of labour. In the light of these findings it is correct to say that FDI companies had significantly reduced the exploitation of labour in China.

The higher wages for workers in FDI firms is applicable in all sectors except coking and petroleum refining. Other than the disparities in distribution of the working environment in different wage sectors, most FDI companies have recorded higher productivity of labour and also used increased capital intensity as compared to domestic firms.

There are some instances where higher level of productivity has also reflected a higher capital and labour ratio. FDI companies are much larger than domestic firms and mostly pay higher wages than the smaller domestic companies. Sometimes foreign companies may adopt policies in buying themselves in labour markets that are not familiar and may adopt practices of attracting workers from competing firms. There have been very few cases of labour exploitation in multinational companies in China.

China’s transformation into a socialist market economy has considerably changed the ownership of industries from being state owned to privately or foreign owned, which has created a large number of laid off workers from the formerly state owned industries that has strongly impacted Social Security arrangements and labour relations.

The previous systems of state ownerships and controls have given way to a system of laws and regulations that have frequently weakened the condition of the labour force. For instance, the labour law in China now requires employers to give benefit of medical insurance, maternity, industrial injuries and to provide for old age, but this is usually not practised. It is understood that almost 90 per cent of Chinese companies do not comply with laws pertaining to labour.

Other than creating direct trade benefits for workers in China, FDI companies have raised factor productivity and enhanced transfer of technology. It is quite logical to assume that when the firm invests in a foreign country it does so because it is delivered with some kind of ownership benefits such as patents and blueprints or trademarks.

Other benefits would also include intangible assets and the availability of capabilities, in the context of information and technology, marketing and entrepreneurial skills, managerial, organisation systems and accessibility to find the goods or intermediary markets. Such benefits are strong motivators that allow such firms to meet no hurdles and disadvantages associated with doing business in a foreign country.

In the case of China, there is clear evidence that managerial skills and technology have been transferred by multinational companies that entered the country through FDI option. Such conclusions have been made after evidence was found in the context of capital and physical intensities introduced by FDI firms in China.

The major issues concerning FDI in China relate to the manufacturing sector, which comprised of about 60 per cent of the total FDI till the year 1998. Other sectors that had been tapped by FDI are real estate that had a share of about 25 per cent, while sectors such as retailing, wholesale and transport accounted for about 6%.

The construction sector accounts for about 3.1 per cent of the FDI that has entered the country. Primary industries comprising of fishing, forestry and agriculture account for about 1.8 per cent of FDI in China.

It is anticipated that in the future, telecommunications, service trade and wholesale commerce will comprise major part the FDI inflows into China in view of the large shares that will be commanded because of liberalisation and China’s accession to the WTO. Investment liberalisation is also expected to take place in conventional industries because expansion of FDI in the agricultural sector will be dependent upon the extent to which it will be open to the market circulation of agricultural products (Kynge, 2006).

The size of any company is measured by the total assets that it holds. The size of an FDI company in China is mostly found to be at least hundred per cent larger than domestic companies. FDI firms have been found to be labour intensive in excess of 170 per cent, 125 per cent bigger in terms of technology intensive industries and 40 per cent larger in terms of capital intensive industries as compared to domestic companies in China.

Such figures lead to the conclusion that FDI companies in China are more technically efficient in their production activities and get greater benefits by way of economies of scale. In terms of the ownership advantages such companies mostly make use of greater capital and labour ratios than domestic companies in China.

On an average basis, FDI firms have a capital to labour ratio that is 140% greater than domestic companies. The disparity in physical capital intensities is quite large and technology intensive companies are followed by capital intensive and then by labour intensive industries.

Such conditions imply that FDI companies have better ownership benefits and thus employed higher technology and better production techniques as compared to domestic firms in China. This also implies that workers employed with such companies are given better benefits and wages as compared to domestic firms.

It is interesting to note that ratios of skilled labour in China such as managerial personnel, professionals and technicians as compared to the total labour in FDI companies was only about one per cent higher as compared with domestic companies in the year 1998. Such issues are almost the same in labour intensive industries although in capital and technology intensive industries FDI companies demonstrated higher ratios in human capital intensities as compared to domestic firms.

This is suggestive of the fact that FDI firms make use of better technology and skills in their production processes. The moderate performance of labour intensive industries is because foreign investors in such sectors mainly operate in the final stages of production while maintaining their research and development activities in the home country.

There is no doubt that FDI has significantly modified China’s industrial structure. The industrial sector is the one that has received the maximum FDI in China, which also implies that this is the sector that has used maximum number of workers on employment terms that are almost at par with developed countries because multinational companies are regulated by their home countries in treating labour in the same manner as they would in their home country.

The services sector in China is characterised with a large number of barriers to entry, which explains the relatively low level of FDI in the sector. Nevertheless there is significant potential of FDI in this sector and it is anticipated that with China’s accession to WTO, the service sector will also be opened up in giving a strong boost to FDI in the country.

As per statistics provided by the Third National Industrial Census of China, the textile industry and the electronics and telecommunications sector have accounted for the maximum FDI in the country, which is to the extent of 8.6 and 11.3 per cent respectively of the total foreign funded assets.

Large amounts of foreign investments have also been made in the transport equipment sector, metallic and non metallic mineral products, electrical equipment and machinery, chemical industry and the fibre products industry. A steady growth and comparatively larger inflows were seen during the period 1983 to 1991, as the Chinese government began to lay specific focus upon special economic zones that began to expand into several cities because of FDI incentives that were provided for in the year 1986.

This enhanced pattern reached its zenith when the inflows reached over US$110 billion by 1993. By now China had become the largest host country in the context of FDI inflows amongst developing nations and occupied the second rank in this regard in the world.

From 1994 onwards there was an adjustment period in China whereby FDI inflows slowed down although the contracted amount of capital inflow was climbing consistently, because of which the total inflows by 2001 had increased by 15%, which showed a visible rend in deviating from global patterns.

Given that China has ratified the United Nations covenants on economic, social and cultural rights; although with reservations about extending right to organise trade unions, it is imperative for policymakers in the country to ensure that labour rights are protected and workers are not exploited.

China has not consented to the freedom of association and the right to collectively bargain as required by the International Labour Organisation.

However, sooner or later it will have to do so because the Declaration on Fundamental Principles and Rights at Work as provided by the International Labour Organisation requires all members to abide by its principles irrespective of whether they have ratified the convention, but China has ignored the same so far. The Labour Dispute Mechanism in China allows for disputes to be settled within the regulatory framework through mediation and arbitration.

Conclusion

The Chinese government understands that the competitiveness of its industry is greatly dependent upon its efficiency and its ability to provide solutions at short notice. In this context, the major knock out effects pertain to long working hours and workers being required to work overtime at short notice.

Research by Oxfam has reported that women have to often work more than 150 hours overtime every month although 60 per cent among them did not have any contract in writing and 90% did not have access to social insurance. For instance, the standard working hours in most domestic companies range between 10 and 12 hours and sometimes the working hours are known to cross 15 to 16 hours per day.

Many domestic firms do not make payment in time and workers are made to suffer in terms of adverse health and safety conditions that include exposure to toxic chemicals, high risk of industrial accidents and fire hazards. Many workers are not covered for maternity pay and wages can be held up for several months. Such issues usually give rise to disputes that are often not resolved for long periods. It is quite common in many domestic industries for wages being below the minimum levels.

Large numbers of migrant workers are unable to have a completed status in terms of their work permit because of which they become vulnerable to exploitation. Because such workers do not have complete residency permits in cities that they approach for employment, they are often denied the basic amenities that are due to them under the law.

Limited access to properties and limited income for these workers implies that most of them have to live in employer provided dorms where living conditions are bad. Because of high cost of job permits many employers pay for them in advance, implying that workers come under debt the moment they start with their employment contracts.

Many employers require that workers pay deposits and hand over their identity documents while commencing employment with them, which literally bonds them in further creating conditions for their exploitation. The creation of such economic bondage for many workers allows employers to exploit them in terms of excessive overtime and flexibility of working hours. Most of such workers do not have an understanding of the rights available to them and thus continue to work under such conditions.

It is also known that workers that organise and become prone to strikes and protests in China do so at immense personal risk and often face repression, violence and imprisonment. Labour activists have been known to be imprisoned after facing criminal trials that are not conducted as per international standards. Although such imprisonment cannot exceed three years, in practice it is extended at will by the authorities.

Labour disputes in China have been consistently increasing since the 1990s. During the last ten years, considerable amount of research has been done in the context of what could result in enhancing of awareness by social organisations that are interested in China. China is characterised by a restrictive legal system whereby worker issues relate to the implementation of rules of conduct and finding solutions in opening up laws towards labour organisation.

With the entry of foreign companies that have entered the country through FDI, many such organisations have begun to focus on training workers to enhance democracy at the workplace and to allow them access to legal rights. There are now a number of multi-stakeholder initiatives that are presently coordinating with businesses to create better ways of working. There has been considerable progress in this regard in most provinces in the country.

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IvyPanda. "To what extent do FDI reduce exploitation of china’s workers?" June 13, 2019. https://ivypanda.com/essays/to-what-extent-do-fdi-reduce-exploitation-of-chinas-workers-dissertation/.

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IvyPanda. 2019. "To what extent do FDI reduce exploitation of china’s workers?" June 13, 2019. https://ivypanda.com/essays/to-what-extent-do-fdi-reduce-exploitation-of-chinas-workers-dissertation/.

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