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Why is China so competitive? Measuring and explaining China’s competitiveness

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  1. Introduction
  2. Advantage theories
    1. The beginnings of advantage theories
    2. Ricardo's theory of competitive advantage
    3. The heckscher-ohlin (h-o) theory of factor proportions
    4. The h-o theory and the dornbusch, fisher, samuelson approach in the real world
    5. Further development of advantage theory
  3. Competitiveness theory
    1. Porter's competitive advantage approach (1990)
    2. Measuring the competitiveness and the criticism of the theory
    3. Revealed comparative advantage
    4. Exchange rate
  4. Determinants of competitiveness
    1. Revealed comparative advantage
    2. The exchange rate
    3. Labour costs
    4. Foreign direct investment
  5. Conclusion
  6. References

In the first part of our paper we will present the theoretical background of the international trade. We will begin with the description of the evolution of the comparative advantage theories, and then continue with the competitive advantage theory. On this point it is important to mention that the authors of the paper which was the basis for our paper are the opinion that the ?Chinese Miracle? can be best explained with the term competitiveness (coming from the competitive advantage theory), so in their paper they only briefly mentioned the comparative advantage theories and discuss the competitiveness more thoroughly. However, the analysis of the international trade begun with comparative advantage theories (Smith's theory of absolute advantage) and there are still many economists claiming that the development of the East Asia can be explained sufficiently enough by them. Therefore, we found it sensible to include them in our paper. We will continue with the discussion of some important factors, responsible for China's competitiveness. We will briefly stop at Balassa's comparative advantages, which are an ex-post measure, to show where China has comparative advantages. Continuing with exchange rate we'll try to argue weather it's currency is undervalued, what are the main reasons for such a belief and provide the opposite side arguing why it is not so. In pursuit of the answer we'll use different theoretical background, mainly purchasing power parity and unit value ratios. Next important factor of China's competitiveness are the labour costs, which are determined largely by the wages. After that, we will talk about Foreign Direct Investment (FDI) in China which is also used as a measure of China`s competitiveness. We will show that FDI into China has dramatically risen during recent years- a sign of growing competitiveness for our authors. But we will also assess this statement critically before we conclude.

[...] Table Labour required to produce cloth and wheat in the USA compared to the rest of the world Labour required to make? 1 bushel of wheat 1 yard of cloth USA 2.0 hours 4.0 hours Rest of the world 1.5 hours 1.0 hours Source: Pugel and Lindert, 2000; p.38 The table shows that the USA need more labour than the rest of the world to produce both of its goods, but there is a difference in the opportunity costs. If there is no international trade and if the USA want to produce an additional bushel of wheat, they have to give up 0.5 yard of cloth while the rest of the world has to give up yard of cloth if it wants to produce 1 bushel of wheat more. [...]

[...] Therefore, the governments' role is to reinforce determinants and not to create competitive advantage MEASURING THE COMPETITIVENESS AND THE CRITICISM OF THE THEORY As Porter's competitive advantage theory is quite clear, the measurements to compare international competitiveness are plentiful and different from the author to author and the organisation to organisation. This is the reason for one of the critiques of the competitiveness approach, because such large amount of potential factors (variables) weakens any predicting power of the model (0'Toole).Nevertheless, the broadly used approach to measure the international competitiveness is the one used in the World Competitiveness Yearbook published by IMD (Svetina p.5) where the competitiveness is measured according to country's performance in domestic economy, government, financial system, science and technology, inhabitants and the infrastructure. [...]

[...] First, the authors suggest that the contribution FDI made to investment and industrial output might be exaggerated because an unknown amount of FDI is money that came from China and has returned via Hong Kong so that advantage could be taken of privileges only granted to foreign investment. Second, the overvaluation of capital equipment contributed to joint ventures by foreign investors may contribute to the overestimation of FDI inflows. This overvaluation was driven by an advantage over local partners due to larger shares of dividends, lower taxes that arise because of larger capital expenditures, depreciation credits and greater management control. [...]

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