Interestingly, in parusing the past articles of economist on the subject of China, I have found the topic of talent arbitrage, which is one of the reasons that prompted me to go abroad and explore the world. This topic leads me to reflect on the ultimate competitiveness of China and the questions as to how to maintain and develop competitiveness.  Admittedly, the talent arbitrage, and on a wider sense, labour force arbitrage is a reality in China and much of the booming manufacturing in South East China is based on this arbitrage opportunity. This arbitrage is created by the artificially low currency and high investments in education by the government. Yet is this arbitrage opportunity exploited by hundreds of thousands of corporations in China a sustainable advantage? According to the market economics and the current situation of the world free market, the answer is absolutely no!

In fact the first foremost exploiter of low-cost talents is the state. With thousands of state research facilities around the country, the government has a firm grip over the brains of the China. Corporations also move or outsource to China to exploit this arbitrage opportunity ( OK, there is not only the arbitrage, there is also the market). As is put in one of the reports I have read, Western corporations has an “imperialistic” attitude towards emerging countries. They consider that these countries represent low cost labour, consumers getting more wealth and huge market. The case of WuXi Pharmaceutical of the article of economist is an example of local company acting as a broker for exploitation of low cost talents.

Yet more outsourcing demand there is, supply is limited, this will inevitably lead to higher prices. In another light, people move directly abroad to counteract this arbitrage, so there are still less and less talents. In the end, the arbitrage opportunity will disappear or reach a kind of dynamic equilibrium if barriers to free movements of talents do not disappear completely. The government is also tilting towards closing this arbitrage opportunity by gradually letting RMB to appreciate and raising people’s purchasing power by urging companies to raise salaries.

And for local companies that relay more or less on low cost labour, what is the answer to the rising labours costs and a strong currency? Innovate or Die. The scale is a first problem with Chinese corporations. The lack of innovation firepower is another. There are way too many small businesses in China, consolidation is urgently needed to exploit the economies of scale now that economies of people are beginning to wane. With respect to innovation, companies still have to innovate in the products and , by all means, in the way they are run. Interestingly, there are Mckinsey consultants who point out that China might be the center of management innovation in the business processes, especially when he points out the motorcycle manufacturers in ChongQinq and Li Feng ‘s logistic empire. I would say that this is an effort to westernize a Chinese practice and to maintain the competitive advantages that Western multinationals now enjoy over the world market. The very fact that a Mckinsey consultant has spotted the innovation and urged Western companies to face the reality and adopt the new practice is a success of the rich world. With corporate China not at all well-versed in the procedure-oriented push model of resource allocation, I would doubt that it could leapfrog into a brave new world of “dynamic specialization”. Most urgently, corporate China need a group of savvy professional managers with international exposure, who are well-versed in Western practices and who can compete on a par with Western counterparts, to support the cadre of the millions of entreprises in China. With an international vision, this group could bring product and process innovation to new hights in this land of the dragon.

For state research facilities, they face even a bigger challenge in that they are far from market and often pays modestly. Undoubtedly restructuring of these institutes is necessary in order to streamline the process and eliminate the unnecessary fat. Although the upholding of shareholder’s value is not at all the priority for researchers, heavy and wasty processes certainly won’t benefit the innovations. Much of the lean process and ERP approaches could be adapted for these institutions in the same way these applications function for the R&D departments of multinationals. Further development into the pull model is also desirable.

In examining both the private and public sector of China who relies on low cost talents, I would say that both sectors lag far behind the rich countries in the level efficiency of processes and modernization of infrastructures. If the world is going to experience another paradigm shift, destined from the birth of microprocessors and communication networks, I am not sure if the country will be left further behind. You can argue that Internet is widely spread in China, but if you look at the internet clubs in big cities, you will find that most young people are indulged in zero-sum games that creates no value what so ever: online chat, online gaming, maybe some video sharing(creates some value). If they are instead indulged in enriching a Chinese wiki, I would say China has a little more of hope. But all that the crowd needs is a visionary, a prophet, a true leader … to properly guide the energies of the people into constructive jobs. The competiveness of China lies on us, the expatriates who can bring experience, vision and capabilities to our homeland. And we will CREATE THE HISTORY.