China
The largest external investors into mainland China today are the Taiwanese. The key to understanding the investment opportunity presented by China today is to look at the evolution of Taiwan in the 1980s and 1990s.
In the 1960s and 1970s, the relationship between Taiwan and the US was a textbook First-Third World relationship. US businesses invested in Taiwan to take advantage of its low-wage manufacturing labor. Meanwhile, the best and the brightest Taiwanese engineering students came to the US for graduate education in a classic "brain drain" scenario–after finishing school, most chose to remain in the US to pursue professional opportunities. In fact, Taiwan sent more doctoral candidates in science and engineering to the US during the 1980s than any other country.
Then Morris Chang returned from the US in 1986 to pioneer the foundry model at Taiwan Semiconductor Manufacturing Corporation ("TSMC"). He accelerated the vertical fragmentation of semiconductor production and made it possible for chip designers and intellectual property producers all over the world to become part of international production networks in electronics. He completely disrupted the global structure of the entire semiconductor industry, and the new Taiwan semiconductor industry vaulted past its US competition—not just catching up but leapfrogging to a whole new level.
As TSMC became a world-class chip manufacturer, the “brain drain” went into reverse, as newly emerging opportunities in Taiwan technology companies, as well as solid success stories like TSMC, began to attract back the Taiwanese who had emigrated in prior years. Taiwan became a cutting edge developer of new technology in a number of industries. This "transnational community" provided a very rapid, flexible and responsive mechanism for long distance transfers of know-how and skill—particularly between very different business cultures and environments.
The same dynamic is now being repeated in mainland China. There have already been two observable waves of mainland Chinese returnees from overseas. In the mid- and late 1990s, a sizeable cohort of US-educated Mainlanders moved to Beijing to start telecommunications and Internet-related companies, or to run branches of US-based companies targeting the China market.
A distinct second, and much larger, wave of returnees began in 2000. This migration of highly educated Chinese from overseas followed the ramp up in investment in the mainland by Taiwanese technology companies. In the early 1990s, Taiwanese PC firms initially shifted manufacturing of only low-end components such as power supplies, mice, keyboards, cases, and monitors, to mainland China.
In addition, by the late 1990s, the Taiwanese producers of higher value-added products such as scanners, motherboards, video cards, and laptop computers began shifting activities to China as well. By 2001, it was estimated that some 250,000 Taiwanese, including the families of plant managers and engineers, were living in the greater Shanghai area. As of 2009, this number is believed to be in excess of 2 million.
This latter wave, which involves the merging of Taiwanese and Mainland Chinese transnational communities, appears to be transferring high-level PC and semiconductor-related skill, know-how and capabilities to Shanghai more rapidly than they were transferred to Taiwan in the 1980s and 1990s. The “reverse brain drain” that so energized Taiwan in the 1980s is now playing out again, this time in a much larger host—mainland China.
Almost two out of every five people on the planet are either Chinese or Indian. China alone has more people than Latin America and sub-Saharan Africa combined. The economic rise of Asia's giants is, therefore, the most important story of our age. "People used to say it was China and not India, then it was China against India - but if you look at any number of sectors the real story is more likely to be China and India," says N. Srinivasan, head of the Confederation of Indian Industry.
A study by the IMF compares China's rapid integration into the world economy with similar developments in the past, for example when growth first took off in post-war Japan, and later in the East Asian newly industrializing economies, such as South Korea or Taiwan. China has grown a little faster during the past 25 years than Japan or the East Asian newcomers during their first quarter century of boom, but these economies then maintained rapid growth for a long time. Despite hiccups along the way, South Korea and Taiwan sustained average growth rates of almost 8% for four decades.
Since the beginning of its take-off into accelerated growth, in 1978, China's GDP per capita has risen relative to that of the US in almost exactly the same way that Japan did between 1950 and 1973, Taiwan's between 1958 and the late-1980s and South Korea's between 1962 and the early 1990s. China’s GDP has in recent years grown by an average of 9.5% a year, more than three times the current rate in the United States, and faster than in any other economy. Today, China's income per capita, relative to US levels, is roughly where South Korea's was in 1972, Taiwan's in 1966 and Japan's before 1950. For China, then, these are still early days in the development process. If China replicated the ramp up experience of Japan or South Korea, relative to the US, it could continue to grow extremely rapidly for at least another three decades.
The foreign-investment boom in China was started by overseas Chinese. From 1985 to 1996, two-thirds of foreign investment in China came from Hong Kong, Macau and Taiwan. There China has, close at hand, some 30 million ethnic Chinese, many of them with close ties to the mainland. Moreover, these places specialized in labor-intensive manufacturing industries for export. Wage costs were rising fast so, in effect, they exported their trade surpluses with America to coastal China. They were made very welcome, for political as well as economic reasons, and paved the way for the big multinationals.
Many recent investment successes have come from backing Chinese entrepreneurs. Many private companies are in businesses serving China's growing middle class: insurance, consumer goods, logistics, the internet, home improvement materials, microchips. These firms—of which there may be 30 million or more—are small but growing by perhaps 20% a year, twice the pace of the economy, and currently produce 60% of GDP.
Some experts believe that China has, in recent years, absorbed too much capital too quickly, and predict a correction of some magnitude at some point in the future. There will certainly be corrections, however when one surveys the global landscape, one is hard pressed to come up with a better investment alternative than the Asian emerging markets. The problems of the American economy, such as massive and unsustainable trade deficits and the bubble in housing, are all too well known. Currently, with 5% of the global population, the American stock market still accounts for just over half of the world’s stock market capitalization. As the hyper-growing, emerging economies continue to develop, this percentage is bound to change dramatically in the developing world's favor.
