A Study On Relative Labor Costs Change In Asian Emerging Countries And Its Impacts On Foreign Direct Investment

In the process of labor globalization, which Asian emerging countries fully participate in the global system of labor division, unlimited labor supply leads to an intensified alternative competition. The FDIs in Asian emerging countries mainly focus on labor-intensive industries. With the relative changes in labor costs, changes will occur in the reallocation of labor-intensive-industry-FDI in these countries, under the impacts of sub-prime crisis.In order to measure changes in relative international competitiveness between Asian emerging countries, we choose relative labor cost parity as the theoretical foundation, and compare the real exchange rate changes between China and other Asian emerging countries, which include ASEAN 4 (Indonesia, Malaysia, Philippines and Thailand) and India. A series of researches have done to find the relative labor cost parity, real exchange rate changes, and relative labor cost changes during 1991 and 2008,using the US as a benchmark.The results have shown that, China had comparative labor cost advantages before Asian Financial Crisis, but after that, China's labor cost advantages started to decline. After current sub-prime crisis, China's labor costs advantages continue to deteriorate. Compared to other Asian emerging countries, China does not have comparative labor cost advantages, and labor cost advantages appear a continuing downward trend.On this basis, we use the gravity model to assess the possibility of reallocation of the FDI in Asian emerging countries. Our FDI location choice model chooses Japan and the US as representatives of advanced economies. The empirical results have shown that, the labor costs do not have significant negative impacts to the FDI; the host country's domestic markets and the skill level of workers do an important role in the decision making. Besides, different investors follow different patterns of investment:the American investors mainly take host countries as manufacturing places and target markets for labor-intensive products, while Japanese investors focus more on the skilled workers in host countries.According to the empirical results, we believe that, although labor costs in Asian emerging countries have increased, they remain low compared to developed economies. And because of good investment prospects in these countries, large-scale FDI withdrawal in this region will not happen. Although relative labor cost in China increases, large domestic markets and skilled workers will still attract considerable FDI. In the end, this paper proposes some policy recommendations on maintaining China's international competitiveness, attracting FDI, and optimizing the labor-intensive industries'allocations.