Chinese high-tech and electronics companies are outgrowing the domestic market, improving their productivity, and forcefully defending the domestic consumer and corporate markets against foreign challengers. But our research also shows that most of these companies will have difficulty replicating these gains in other countries, where they must cater to very different customers; attract global talent; and confront higher development, sales and marketing, and labor costs.

In an ongoing project with Tsinghua University, in Beijing, we examined the productivity and financial performance of 43,000 state-owned, domestic private-sector, and foreign companies in China across ten technology sectors—aerospace, consumer electronics, enterprise computing, industrial electronics and automation, medical equipment, power equipment, semiconductors, services and software, telecom equipment, and transportation. Despite reports that Chinese manufacturing has lost some of its shine to rising labor costs, our analysis shows that its productivity in these technology sectors rose 11 percent a year from 2001 to 2006, outpacing labor cost increases of 10 percent a year. Productivity measured against unit labor costs remains competitively high compared with that of other low-cost countries, to say nothing of developed ones (Exhibit 1). As long as productivity grows more rapidly than labor costs, China should remain an attractive location for technology...