To upgrade or to relocate? Explaining heterogeneous responses of Chinese light manufacturing firms to rising labor costs

Abstract This paper studies the heterogeneous responses of Chinese light manufacturing firms to rising labor costs from the perspective of New Structural Economics. Using the first-hand pilot survey data, we find that rising labor costs have been the number one challenge facing firms, and that despite the dominant strategy of technological upgrading, there is a substantial difference in responses across different firms. In addition, we discover that industrial and firm-specific labor intensity are key determinants of the heterogeneous strategies across firms in response to rising labor costs. We conclude that intrinsically more labor-intensive industries and firms are more likely to choose relocation instead of upgrading as a strategy to cope with the rising labor costs.