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that produce for the export market to operate at international prices. Machinery and equipment that goes into foreign joint ventures and wholly foreign-owned firms is entirely exempt from import duties. And the foreign-sourced parts and components that are assembled into finished goods are also exempt from all import duties when they are re-exported in the form of finished goods. Moreover, manufacturers are eligible for a rebate of almost all domestic value-added taxes they have paid for any content in their exported goods that is sourced from within China. 187

Relatively stable political situation

If a company located in an economy with high labor costs wishes to move its manufacturing operations to a lower-cost environment, why would it choose China? Many other poor countries have extremely low costs of labor as well. But many developing or poor countries are not attractive because they have unstable political, economic, and financial situations. China is not a perfect manufacturing environment by any means, but there is relatively low terrorist risk, civil unrest does not destabilize the economy, there are few public safety concerns for multinationals’ property and personnel, and the economy and financial system are functioning—-not supremely well but at least adequately. Multinational firms are thought to allocate their investment among countries so as to maximize their risk-adjusted profit.188 China compares rather well with other less developed countries when both risk and costs of production are considered.

What hampers China’s competitiveness in manufacturing?

From an international perspective, China is very competitive in producing most manufactured products. However, certain aspects of conditions in China deter some companies from moving their manufacturing to China or induce companies to put their production operations elsewhere instead. One reason is that labor costs are rising in China, especially in the cities, as discussed earlier, leaving some other developing countries with lower manufacturing labor compensation than China today. Some other such considerations are as follows:

China is easy to enter but very difficult to leave

China’s policies attract foreign companies to enter and invest there, but sometimes make it hard to succeed in China and even harder to back out again. China’s legal system is very slow and ineffective at enforcing legal contracts; it is also subject to corruption and arbitrary rulings. China has been found wanting with regard to creditor rights and credit information; China has no private credit bureaus and the existing public credit registry covers only about 3 potential borrowers per 1,000. Therefore, entrepreneurs, first-time borrowers, and repeat borrowers with good credit history cannot prove their credit- worthiness and borrow for business development. Bankruptcy proceedings are slow. China has the least flexibility in the Asia/Pacific region with regard to firing workers; therefore, laying off redundant workers and streamlining operations is still difficult. 189


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