Since I’ve spent the last week hanging out with intellectual property lawyers, I think it’s only fitting that I dive back into the china/divide with another note on innovation policy. As I’ve noticed over the past few days, the Foxconn suicide/attempted suicide stories have been coming in an unending stream.
Charlie and Kai have covered the basics and more, so I will not rehash. Moreover, I will probably revisit the general topic once more and let you know my take on the issue (i.e., who I think should be blamed, if anyone). At the moment, I have IP on the brain and thought I would respond to this interesting discussion about economic policy. A bit boring for a Sunday, perhaps, so I’ve dressed up the post with some very nice Lefty artwork – enjoy.
Most of the commentary and analysis I’ve read has focused on the Foxconn facilities and their treatment of their workers. This is of course appropriate, but I was waiting for this story to get stale and for someone to use these unfortunate incidents to make a larger policy argument.
I can always count on China Daily, which published an editorial on the subject of Foxconn and China’s economic policy.
The first sentence contains a concise thesis statement:
The string of suicides at Foxconn highlight the urgent need for China to adjust its mode of economic growth.
So let’s take a brief look at this contention. Half of the article contains information about how much low end processing trade sucks.
With 800,000 employees on the Chinese mainland, the Taiwan-owned company’s exports totaled 55.6 billion U.S. dollars in 2008, accounting for 3.9 percent of the mainland’s total exports.
Foxconn epitomizes China’s traditional export-driven development pattern: investment and cheap labor combining to produce low value-added products.
Processing trade accounts for 50 percent of China’s total trade volume, and it contributes much to the nation’s trade surplus. But it is at the low end of the world production chain.
Sure, this is low value added work, but I don’t think the government was complaining too much about this as millions of folks walked off the family farm and found gainful employment. I don’t think anyone was too upset (except for the manufacturers) as wages in areas like Shenzhen and Dongguan steadily climbed for many years.
Now the author decides to play the victim card:
Foxconn is the biggest manufacturer of Apple’s iPad. The U.S. market research firm iSuppli has estimates the material cost of the low-end version of the iPad is around 260 U.S. dollars, far less than its retail price of 499 U.S. dollars.
The display panel, supplied by LG Display and the most expensive part of the iPad, is priced at 65 U.S. dollars while the device’s manufacturing cost is 9 U.S dollars, according to iSuppli.
Apple takes the lion’s share of the profits with design, while the company of the Republic of Korea makes a big profit with its patented technology. But the mainland-based companies manufacturing it make comparatively little.
One could do this all day with a variety of products. The author’s purpose here is to show that the owners of the technology are the ones that make the most money, and in turn screw over the poor folks who put the stuff together.
So here is the conclusion on this kind of work done by Foxconn and why it is sorely lacking:
The export-oriented processing model can make products, boost GDP, and employ people, but it cannot create brands, develop advanced technology, generate high profits or pay high salaries.
Despite its fast economic growth over past decades, Chinese labor income relative to GDP has dropped — from 49.49 percent in 1993 to 39.74 percent in 2007.
Only through innovation can Chinese companies break away from the traditional growth model and upgrade its business model.
All right, this sounds very straightforward, so you might wonder what the hell my problem is here. Let me unpack some of the inferences in the above language.
First, there is no doubt that this low margin work can not sustain high wages, and certainly this is not the kind of business model that encourages high-end innovation, at least the kind that will result in intellectual property that can generate license fees.
Second, China wants to move up the value chain and has been actively trying to do so for years. Part of that shift in emphasis is to support innovation policies.
Third, China’s income inequality has worsened over the past few years.
All of this is true, but the author has failed to tie up these points and relate all this to the original point: the Foxconn suicides. Let’s take the income inequality issue and low wages. What is the evidence that these workers’ actions were motivated by low pay? Moreover, what is the evidence that these workers’ economic situations were made worse by taking Foxconn jobs? I suspect that many of them saw a rise in income after working at Foxconn.
A lot of the discussion of the Foxconn deaths has covered working conditions, as opposed to wage levels. As a motivating factor for suicide, this to me makes a great deal more sense than talking about low wages per se. For some reason, the author does not take this rhetorical opportunity.
At the end of all this, I’m left with one question: how do we know that China’s innovation policies will work, and will this suggested economic plan necessarily lead to a narrowing of the income gap?
I would answer “Probably yes, but not necessarily.” In the knowledge economy, he who owns valuable ideas (and can protect them!) gets the spoils. In the aggregate, this can lead to higher GDP growth rates and, more importantly, higher GDP per capita, which is the big prize China has been seeking for many years.
But let’s not pretend that GDP per capita is anything but an aggregate number. Just because a big pharmaceutical company owns a fabulously valuable patent portfolio, for example, this does not mean that the average guy out there is going to benefit from that.
Someone still needs to assemble that widget, and until China completely transforms economically, which will still take quite a few years, whether the IP is owned by a foreign or domestic owner will have no effect on labor conditions. I believe the 20th century philosopher Townshend explained best how conditions may not necessarily change with new management.1
All we need to do is look at income inequality figures, the most common metric being the Geni Coefficient. In 2009, China and the U.S. were not that far apart. America is a wealthy country and a leading innovator, while China is still developing.
To be fair, among developed countries, the U.S. is a bit of an outlier in this regard. Most other innovators have less inequality. I would argue, however, that this has more to do with domestic policy (e.g. tax, labor, business regulation, social insurance) as opposed to how much a nation innovates.
To sum up: nations can grow their way out of recessions, but they can’t grow their way out of income inequality. The Foxconn suicides might tell us something about labor conditions, but not much about the income gap. These deaths certainly do not suggest an economic policy fix. Substituting a local patent owner for Apple will not necessarily make the life of that poor factory worker any better.