China. U.S. Corporations

After all, the point of attracting capital in the first place is to increase economic well-being. As an example, China has been quite successful at attracting capital, in large part because of low real wages. As the country has become more prosperous, real wages have risen. A BusinessWeek article, commenting on the increasing wages in the country, observed the following: “The wage issue has started to affect how companies operate in China. U.S. corporations and their suppliers are starting to rethink where to locate facilities, whether deeper into the interior (where salaries and land values are smaller), or even farther afield, to lower-cost countries such as Vietnam or Indonesia. Already, higher labor costs are beginning to price some manufacturers out of more developed Chinese cities such as Shanghai and Suzhou.” [5] In other words, increasing real wages are making China less competitive. But this tells us that China is getting richer, and workers in China are able to enjoy improvements in their standard of living. This is a good thing, not a problem. What we really want are policies that will increase both competitiveness and real wages at the same time. The only way to do this is by increasing the stocks of human capital, knowledge, and social infrastructure (there is little a country can do to increase its stock of natural resources). There are no easy or quick ways to increase any of these. Still, important policy options include the following:

 Invest in education and training. Overall economic performance depends to a great

degree on the education and skills of the workforce. This is one reason why countries throughout the world recognize the need to provide basic education to their citizens. It is worthwhile for countries to build up their stock of human capital just as it is worthwhile for them to build up their stocks of physical capital.

 Invest in research and development (R&D). The overall knowledge in an economy is advanced by new inventions and innovations. The romantic vision of invention is that some brilliant person comes up with a completely new idea. There are celebrated examples of this throughout human history, starting perhaps with the cave dweller who had the idea of cracking a nut with a stone and including the individual insights of scientists like Louis Pasteur, Marie Curie, and Albert Einstein. But the reality of invention in the modern economy is more mundane. Inventions and innovations today almost always originate from teams of researchers—sometimes in universities or think tanks or sometimes in the R&D departments of firms. Governments often judge it worthwhile to subsidize such research to help increase the stock of knowledge. R&D expenditures in the United States and other rich countries are substantial; in the United States they amount to about 2 percent of GDP.

 Encourage technology transfer. Firms in developed countries tend to have access to state-of-the-art knowledge and techniques. To increase their stock of knowledge, such countries must advance the overall knowledge of the world. For poorer countries in the world, however, there is another possibility. Factories in poor countries typically do not use the most advanced production techniques or have the most modern machinery. These countries can improve their stock of knowledge by importing the latest techniques from other countries. In practice, governments often do this by encouraging multinational firms from rich countries to build factories in their countries. Technology transfer within a country is also important. Researchers have found that, even with a country, there can be big differences in the productivity of different factories within an industry. [6] So countries may be able to increase real GDP by providing incentives for knowledge sharing across plants.