Foreign Direct Investment: Globalization of Production

Globalization continues to change the way countries interact coinciding with a dramatic change in the structure of wages in advanced countries. This implies that a company from Australia seeking to have its production in the United States will have to put with high wages for highly skilled workers. As for China, the wage rate for the same job group will be lower given the status of the country’s economic advancement. The wages of the less-skilled workers take the opposite effect; they are falling in countries like the United States and gradually rising in rapidly developing countries like China.

Nevertheless, production involves many stages. A firm can have some of its highly technical production procedures in a country with highly skilled labour and then outsource most of its other products in countries with cheap less-skilled labour. For China, such a strategy can be attained by having high skill production in China, while outsourced production happens in neighbouring countries like Vietnam and Thailand. In the United States, the only option is Mexico for the low skilled processes of production that will work together with high skill processes within the United States.

The location of the economic activity is also a major factor in the success of the multinational business. Operations in the United States mainly serve the North American world market, while having operations in China will mostly serve the Asian world market. In the respective countries, shipment to the market is easy and well-coordinated under current trade routes and arrangements. Producing in China gives a company access to the ASEAN-China free trade area, whereas producing in the U.S. gives the company access to the North American Free Trade Agreement (NAFTA). Merchandise trade of U.S. and NAFTA partners amounted to $600 billion in 2014 for exports and about $500 billion for imports (Villarreal & Fergusson, 2015). In comparison, China’s trade with its ASEAN partners is expected to reach $500 billion by the end of 2015 (Xinhua, 2014). This figure shows that while the ASEAN-China region is bigger, the NAFTA region is richer, and it would offer a bigger market for the Australian company seeking a foreign direct investment location. In both China and U.S. cases, the countries are the dominant partners in the trade agreement. However, China has a better position than the United States as a manufacturing centre because of a combination of highly skilled workers’ availability and affordable low-skilled workers costs. Its economic zones provide a one-stop-shop for manufacturers compared to the United States which has to rely on outsourcing of production to low-skilled job roles in Mexico.

The United States offers a great location to produce high technology products while China fills both ends of the production demand. As compared to the U.S, China has a highly established low-technology production infrastructure, and it is rapidly moving to high technology industries (Aslam, 2012). China has a GDP of 10.38 trillion US dollars, and its GDP (purchasing power parity) was 17.62 trillion making it number one in the world. In comparison, the U.S. GDP (purchasing power parity) is 17.42 trillion and its GDP based on the official exchange rate is 17.42 trillion, which makes it a bigger domestic market than China (CIA, 2015). However, both countries have significant purchasing power and offer considerable market sizes for goods and services. In production terms, China wins over the United States, as a production location, because of its large access to both low-skilled and high-skilled labour resources.

References

Aslam, M. (2012). The impact of ASEAN-China free trade area agreement on ASEAN’s manufacturing industry. International Journal of China Studies, 3(1), 43-78.

CIA. (2015). The World Factbook. Web.

Villarreal, M. A., & Fergusson, I. F. (2015). The North American Free Trade Agreement (NAFTA). Washington, D.C.: Congressional Research Service.

Xinhua. (2014). ASEAN-China trade expected to reach 500 bln USD by 2015. Web.

"Looking for a Similar Assignment? Order now and Get a Discount!

Place New Order
It's Free, Fast & Safe

"Looking for a Similar Assignment? Order now and Get a Discount!