Impacts of Rising Cost of Generalized Factors on China's Manufacturing Industry and Policy Options

By Fengfei, Research Department of Industrial Economy

June 1, 2013

Introduction

Since the launching of reform and opening-up, China has taken full advantage of low cost to build a manufacturing industry with a global scale. However, with an improved productivity rate and changing economic and trade ties both at home and abroad, the conditions and environment for industrial development have also undergone constant changes. In recent years, the rising cost of generalized factors, including the cost of labor, capital, land, raw materials, energy, environment and logistics as well as business cost and administration cost, has had a great impact on China's industrial growth, the import and export of products, industrial performance and sustainability. The impact of the global financial crisis, in particular, has made it difficult for China to sustain its industrial development model, which is featured by high input, high energy consumption, low labor cost, low environment cost, low technological content and low price-based competition. The next two decades will be a key stage for China's industrial development and its transformation from comparative advantage to competitive advantage. Therefore, it is an urgent task to explore a path of modern industrialization in a period when the cost of factors is soaring. Globally speaking, developed countries have all gone through the development stages respectively driven by resource, factor, capital and innovation. Against the backdrop of the increasingly rising cost of factors, China, while experiencing the transformation mode of development, could draw relevant reference from Germany, Japan and South Korea that have completed industrialization fueled by industrial development. In the course of the transition from a factor-driven stage to a capital- and innovation-driven one, new economic factors including knowledge, technology and human resources have become key driving forces for industrial growth. In its latest 2011 research report The Source of New Factors for Industrial Growth: Intangible Assets, OECD explicitly defined intangible assets like R&D, employee skills, software, design and marketing as the source for economic growth, and proved through research that OECD countries are stepping up their investment intensity in intangible assets. How to draw on the experience of developed countries and accelerate the cultivation of advanced factors to spur the transformation and upgrading of China's industry and promote industrial development and forge new competitiveness indeed merit our extensive deliberation. Under the above-mentioned background, this book, footed on theories and empirical studies both at home and abroad as well as a good grasp of the mechanism of how rising factor cost affects industrial competitiveness, gives an in-depth analysis of the impact that rising factor cost might bring to China's industrial spatial layout, industrial transfer and industrial clustering, as well as to the competitiveness of different types of industries, including labor-intensive, resource-intensive, capital intensive and technology-intensive ones. Based on the successful experience of foreign countries, it puts forward relevant measures and policy options relating to ways for keeping and promoting China's industrial competitiveness in light of rising factor cost and for boosting China's innovative model of industrial development to a new high.