The research contained in this report covers 1995-2003-preliminary analysis of firm-level data through 2005 suggests that the competitive restructuring of Chinese firms is continuing at a rapid pace. The Conference Board issued the report through its China Center for Economics and Business based in Beijing.
The report finds that the pace of restructuring and the resulting rise in the productivity of Chinese firms should be a caution to multinational businesses that regard China solely as an untapped market opportunity. Chinese firms, including many of the lumbering and seemingly hopelessly out-dated and inefficient State Owned Enterprises (SOEs) are beginning to compete effectively with even the most advanced global companies. U.S. International Trade Commission analysis from 2007 shows that private Chinese domestic firms have taken the lead from foreign firms as exporters to the rest of the world of "made in China" products.
It is clear that the productivity gains from restructuring and reallocation in China reflect a shift towards joint venture, private- and foreign-owned firms, but also downsizing and productivity growth among surviving State-Owned Enterprises. Interestingly, while foreign firms have high average productivity, domestic private Chinese firms and joint ventures exhibit productivity growth that outpaces foreign firms. This is consistent with foreign firms creating operations with state of the art technology that makes it difficult to push the productivity frontier rapidly while Chinese firms enjoy substantial restructuring benefits as they adopt new technology and processes.
CHINA HAS OTHER COMPETITIVE ADVANTAGES
While China's competitive landscape clearly does not yet mimic that of the U.S., the changing structure of its markets is permitting its vast resources to be used more productively and efficiently while providing entrepreneurs with incentives to seek out market opportunities both within China and in the global marketplace.
In advanced economies, as well as emerging and transition economies, competitiveness and flexibility are critical for improving productivity levels and growth rates. Flexibility at the firm level permits more productive firms to increase their market shares and to be more likely to survive and expand than less productive firms.
While much is often made about manufacturing jobs being off-shored from the U.S. to lower-wage countries such as China, in reality, the loss of manufacturing jobs was taking place in both countries simultaneously. On average during each year of the study, China lost 1.3 million jobs out of 30.8 million workers in large and medium production firms while the U.S. lost 263,000 jobs out of 18 million. Cumulatively, China lost 10 million workers in those firms over 9 years-which means a loss of more than five times the size of the total manufacturing job loss in the United States over that period.
More than one in four industrial jobs were either destroyed or created over an average one-year interval for China, while roughly one-in-five manufacturing jobs was reallocated in the U.S. This indicates enormous job shuffling and resource shifts associated with China's reform process.
"The high pace of restructuring is not surprising in a country undergoing such rapid reforms to its market structure," says John Haltiwanger, Professor of Economics and one of the authors of the report. "But China is so large that such massive restructuring has huge implications for China and the rest of the world, especially since the restructuring has been so productivity enhancing."
In the early years of the study period, large-and medium-sized domestic private firms were virtually non-existent. Even as late as 1999, employment in these enterprises was still less than one percent of the total. By 2003, they accounted for 4.9 percent. The rapid growth of private firms reflects the prosperous development of private enterprises induced by a more market-driven economy.
In 1995, SOEs and collectives contributed 75.7 percent of China's total industrial output. While their employment share was dropping, so was their contribution to the national accounts. As SOEs and collective firms were losing some 20.2 million workers, their output contribution to the industrial sector dropped 48 percentage points to 28.2 percent in 2003.
