China’s Labor Contract Law: Must read from China Law Blog

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This lengthy, but highly detailed and informative post, from Dan Harris and Brad Luo on the impact of China’s new Labor Contract Law is an absolute must read for anyone doing business in China. There’s too much good stuff to excerpt, you really should read the whole thing, but here’s a couple of points I found interesting.

On the question of which foreign companies are moving out of China to lower labor cost countries to avoid the higher cost of labor and the new Labor Contract Law:

Though these closures and moves seem large in terms of the number of companies closing or leaving, these numbers are deceiving. Very few of the foreign companies that have closed down or left China appear to have been based in either North America or Western Europe; most were from Hong Kong, Taiwan or South Korea. The overwhelming majority of companies that have quit China of late were in very low level manufacturing (imagine a room with 30 workers and no real machinery) and were marginal or illegal operations even before the new labor law came down. Profitable Western companies are talking about expanding outside of China (the “China Plus One Strategy”), but they generally are not leaving. The reason for this is simple: China is better equipped than countries like Vietnam, Bangladesh, or Cambodia to manufacture all but the least sophisticated products.

Emphasis mine. No surprise to those of us paying attention. China’s logistics infrastructure is far superior to the countries named above and better suited to higher value products and the domestic economy.

Also, foreign direct investment (FDI) has been increasing:

Since enactment of the LCL, foreign direct investment (FDI) into China has continued to increase; China attracted $42.78 billion in FDI from January to May 2008. A recent (post-LCL) Ernst & Young survey indicated 44% of world business leaders still consider China the best destination for FDI. Many Western companies that were already meeting or exceeding the LCL requirements are pleased with the new law because it is forcing their less employee-friendly competitors (particularly domestic Chinese companies) to spend new money to meet the new LCL standards.

Lesson learned? Long term advantage goes to those companies that do things the right way, regardless of what country they are operating in.

Read the whole thing, an excellent overview of China’s new labor law.

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