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January 21, 2002 10:02
------ Industrial Organization Group, China Center for Economic Research, Peking University*
I. INTRODUCTION
Our study is a case study on the mutually beneficial advantages of foreign direct investment (FDI), which is concerned with the relationship between the KFC restaurant chain system and the local Chinese economy. Our findings suggest that the rapid growth of the KFC restaurant chain system in the 1990s has indeed had a profound impact on the Chinese economy.
To really analyze the impact of KFC on the Chinese economy scientifically, it is necessary to break down this impact into several aspects, which include:
- Impact on the demand side;
- Impact on the state of supply;
- Utilization of national (local) resources;
- Impact on the state of the market.
In turn, the above effects can be categorized in general terms into quantitatively measurable effects, and qualitative effects (e.g., increase in human quality, increase in institutional competitiveness, etc.). In this study, we focus on quantitative research, using the "input-output" table, and try to give a comprehensive quantitative estimation of the effects of KFC on domestic demand, supply, resource utilization and market conditions in China.
Since the input-output table analysis can only provide a cross-sectional static analysis, we used the 1992 input-output table to estimate the economic impact of KFC on China in 1992; and used the 1997 input-output table to analyze KFC's expenditures and their effects in 2000. The two results are then compared to give a general picture of KFC's development trends in China in the 1990s - a comparative static analysis.
This study is based on a survey conducted by KFC's China headquarters ---- Yum Brands China in June/July 2001, entitled "China Economic Impact Study".
II. METHODOLOGY
China's input-output tables for 1992 and 1997 form the basis of this study. There are currently three types of input-output tables in China: the inter-industry value flow input-output table, the direct consumption coefficient input-output table and the total consumption coefficient input-output table. This study mainly uses the second, but we also refer to the first and third when calculating data such as tax multipliers and employment multipliers. Nowadays, it is a common practice in the world to use input-output tables consisting of government statistics on various aspects of inter-industry commodity flows, final demand, and total output. As an applied method of general equilibrium economics, input-output analysis enables us to have a comprehensive understanding of inter-industry relations in the economy.
We use the 1992 and 1997 Chinese input-output tables as the basis to first calculate the direct impact of KFC on the Chinese economy. After identifying the direct impacts, we will use the China Input-Output Model to estimate the ripple response-that is, the indirect aggregate impact of the system on related economic activities. According to our model, this round-by-round expansion of spending will continue until the initial injection of funds no longer has a new impact on economic activity.
Once we have the economic impact of the initial capital injection, we can further calculate its multipliers on output, national income, employment, taxes, and profits.
III. The Direct Impact of KFC
The direct impacts obtained from the statistics of a survey conducted by Yum Brands China in June 2001 give us a comprehensive picture of the situation last year (2000). The survey included all of KFC's restaurants in China except for Xi'an. Statistics show that KFC's total annual sales for 2000 amounted to RMB 3,925.35 million (excluding indirect taxes and sales discounts). The direct tax (corporate tax) paid by KFC to the Chinese government amounted to RMB 122.97 million, while the indirect tax was more than double of the direct tax, amounting to RMB 250.35 million. This reflects the basic characteristic that indirect taxes are the mainstay of China's tax system. KFC's chicken products, 100% of the raw materials from China, in 2000 amounted to 625.8 million yuan, in the "other food" purchases, bought from China's domestic amounted to 544.66 million yuan, accounting for 73.1% of the total purchases of "other food" of 745.06 million yuan.
KFC's direct effect on China's economy consists of four main components: chicken products and other food purchases, selling expenses, site rent, and construction expenditures, which together accounted for 68.45% of the "total injected capital" in 2000. This reflects the characteristics of KFC's fast food industry, which is highly dependent on raw materials, space and construction.
Please note the following two categories of conceptual and measurement caliber differences: First, the "total annual sales" and "total capital injection" of the difference from the "total annual sales" minus "staff costs" and "government costs", minus "imports", and then minus the unshown profits, to form the "total injection of capital", which is the KFC's "direct injection of capital into China's economy", not only the direct injection of capital, but also the direct injection of capital. This is KFC's "direct capital injection" into the Chinese economy, and this direct injection will not only bring direct effects, but also indirect effects.
Second, please note the difference between "direct impact" and "direct injection". The direct injection refers to the $2,954.62 million injected by KFC in 2000, while the "direct impact" includes not only the "directly injected funds", but also the funds that form the payroll and government revenues.
Fourth, the economic impact of KFC on the upstream
Estimates based on the input-output table show that KFC's initial injection of 1,976.58 million yuan into the upstream industry in 2000 indirectly led to a total of 5,403.68 million yuan of new output, giving an average coefficient of injection of 2.73. This means that, for every dollar spent on intermediate goods and inputs, the average coefficient is 2.73. products and inputs spent, KFC generates 2.73 yuan of final demand for other sectors, thus increasing the total output value of the Chinese economy. For some industries, such as finance, insurance and plantation, the impact of the initial injection is very large, which indicates that finance and insurance are basic service areas and, like agriculture, are at the upstream forefront of the production chain, and that for every dollar invested by KFC in these industries, it ultimately leads to a final demand of between RMB 16.77 and RMB 55.85. For some other sectors, such as food processing and manufacturing, warehousing, beverage manufacturing, postal services, and hotels, the multiplier effect is smaller, generally between 1 and 2. However, for the 22 industrial sectors that have been restructured and consolidated, there is no sector where the multiplier is less than 1. This suggests that KFC did have an expansionary effect for each of the Chinese industries it purchased.
(1) Effect on Capital Formation
On average, the partial multiplier on capital formation (capital depreciation) from KFC's initial injection into the upstream industries is 0.138. This implies that 13.8% of KFC's average value ends up in new capital formation. The financial sector has a higher degree of capital formation, with KFC adding $2.831 in capital depreciation for every dollar invested in the upstream industry.
(2) Impact on Labor Income
About 56.6% of KFC's initial injection into the upstream ends up in wage income. Wage income accounts for the largest share of the new national income resulting from KFC's injection into the upstream. This fact suggests that Chinese laborers are the largest beneficiaries of KFC's investment in China. The following discussion of the employment component multiplier will also demonstrate this.
(3) Impact on Taxes
About 12% of KFC's new purchases from upstream industries in FY2000 formed tax payments to the government. That is, of KFC's initial investment of $1,976.58 million in upstream, about $230 million was ultimately converted into government tax years. This does not refer to the annual taxes paid by KFC to the Chinese government, because in fact KFC pays ***420.73 million dollars in taxes annually. 230 million dollars in new taxes refers to the taxes paid to the Chinese government as a result of the value of the induced output due to KFC's injection into the upstream.
(4) Impact on Profits and Other Surpluses
KFC's inputs to the upstream brought roughly $346.34 million in profits to the Chinese economy in 2000, which is equivalent to 17.5% of the volume of its inputs to the upstream, which is essentially an indirect representation of the average profitability in 2000. Among the 22 relevant upstream industries, the profit multipliers (i.e., profit margins) of the finance and insurance industries are 7.988 and 5.365, respectively, suggesting that these two industries are relatively more profitable; on the other hand, as shown in Table 4.3, none of the 22 upstream industries associated with KFC has a negative profit multiplier, suggesting that all of these industries have increased their profits as a result of the upstream injection of KFC.
(5) Impact on Employment in China
We calculate the impact of KFC's upstream injection on employment in China by using both the "average wage method" and the "adjusted average job cost method". According to the "average wage method", KFC's upstream injection of RMB 1,976.58 million in 2000 would have provided 188,544 potential jobs for Chinese workers. According to the "adjusted average job cost method", KFC's investment in the upstream industries in 2000 would have provided about 140,000 potential jobs for the Chinese economy, i.e., for every 10,000 yuan of capital injected, KFC would have created 0.7 jobs on average. Of the 22 upstream industries, planting, finance, insurance and education all have employment multipliers greater than 1, meaning that these sectors are essentially labor-intensive, and for every 10,000 yuan of purchasing capital invested in these sectors, KFC will end up creating a much larger number of jobs than in other industries.
V. KFC's Downstream Economic Impact
Among the 20 downstream sectors, KFC's multiplier varies greatly from industry to industry. Among them, the output multiplier for "Road Freight Transportation" is the largest, 21.172; the output multiplier for "Arts, Culture, Radio and Television" is the second largest, 18.534; and the output multiplier for the catering industry itself is 10.194, which shows that the basic service industry in China has a strong industrial chain effect, and the development of KFC as a sub-brand of service industry has a good impact on China's economy through the industrial chain effect of the service industry. The development of KFC, as a sub-brand of the service industry, is precisely through the industrial chain effect of the service industry, which has a good effect on the Chinese economy.
(1) Effect on capital formation
In 2000, the partial multiplier of KFC's initial injection into the downstream industry on capital formation was 0.33, and the rate of capital formation in the downstream was more than double that in the upstream. It is worth noting that among the 20 industries affected by KFC, the capital formation multipliers for road freight transportation, arts and culture, radio and television, and telecommunications are all greater than 1. This suggests, on the one hand, that the multiplier effect of these basic service industries is large on its own, and on the other hand, that the rate of capital formation is relatively high in these types of service industries.
(2) Effect on Labor Income
Contrary to the situation that the downstream capital formation rate is higher than the upstream rate, the wage multiplier injected by KFC downstream is obviously smaller than that of the upstream, which is only 0.36. It is not difficult to understand the rationale behind this: if more money is injected by KFC for capital formation, it will definitely reduce the injection of wages into the labor force. However, among the 20 downstream industries, there are still two industries with a wage multiplier greater than 1. One is the road freight industry, with a wage multiplier of 7.79, and the other is the food and beverage industry, with a wage multiplier of 1.9. In the road freight industry, the wage multiplier is three times as high as the capital multiplier, and in the food and beverage industry, the wage multiplier is as high as 13 times as high as the capital multiplier. This suggests that these two industries are relatively labor-intensive.
(3) Impact on Taxes
As shown in Table 5.2, the tax multiplier generated by downstream injections is 0.12, which means that for every dollar injected by KFC into the downstream industry in 2000, it generated 0.12 yuan of yearly revenue for the Chinese government. This multiplier is exactly equal to the upstream tax multiplier. But if we look at it by sector, we will find that for every dollar KFC injected into the "road freight industry", it will ultimately generate 1.32 yuan of tax revenue for the Chinese government; in the arts, culture, broadcasting and television sector, the tax multiplier is also higher, at 0.55. However, the tax multiplier for the "public utilities" is negative, which means that in China, by the year 2000, public utilities are still a government-subsidized industry that relies on government subsidies for its survival.
(4) Impact on Profits and Other Surpluses In 2000, 19% of KFC's downstream capital injections resulted in profits, or, on average, a profit margin of 19%, which was slightly higher than that of upstream injections (17.5%).
(5) Impact on Employment in ChinaWe also use the "average wage method" and the "adjusted average job cost method" to estimate the employment effect of KFC's downstream injection.
According to the "average wage method", in the year 2000, KFC injected 765.05 million yuan into the downstream industries***, which will eventually generate an increase of 279.05 million yuan in wage income. By decomposing the increase into industries and dividing it by the average wage of each sector, we calculate that KFC can provide 38,739 more labor positions (full-time positions) downstream. . Of the 20 downstream industries, we find that every $10,000 injected into the "Highway Freight Transportation" sector ultimately creates 18 jobs, and every $10,000 injected into the "Food and Beverage" sector creates 3.47 jobs. Again, these two sectors are labor-intensive.
Measured by the Adjusted Average Job Cost method, since the adjusted job cost is greater than the Average Wage, the employment effect is compressed accordingly. Nonetheless, in 2000, the downstream injection of KFC still provided about 27,849 jobs in the Chinese economy, as measured by this latter method.
Thus, if we look at the "upstream effect" and the "downstream effect" together, we find that in 2000, the effect of KFC on the Chinese economy was:
a. a. a direct injection of 2,741.63 million yuan;
b. a creation of induced demand of 7,116.66 million yuan;
c. a total multiplier of 2.6;
d. a direct injection of 2,741.63 million yuan; andd. Capital depreciation from the capital injection is $524.87 million, which is equivalent to 19% of the initial capital injection;
e. Approximately $1,397.42 million of the initial injection is generated in payroll, which would potentially provide between 168,330 and 237,283 possible jobs, which is equivalent to the number of employees employed by KFC in 2000 (hourly workers at 0.5 percent). This is more than 10 times the 17,231 employees (hourly workers at a weight of 0.5) employed by KFC in 2000.
f. From a tax perspective, in addition to the $420 million in taxes that KFC pays directly to the government, its injection of capital into upstream and downstream operations ultimately generates another $325.41 million in induced taxes. Therefore, in 2000, KFC's direct and indirect contributions to China's finances amounted to 745.41 million dollars.
VI. KFC's Direct and Indirect Effects on China's Economy in 1992
In order to reveal the development trend of KFC in China and the dynamics of its impact on China's economy, we estimated the direct and indirect effects of KFC in 1992.
(1) Direct effect
In 1992, KFC's total annual sales in China amounted to 70.82 million yuan. Of this amount, only 48.12 million yuan was directly injected. Since we were not able to get the data of salary expenses in that year, we roughly guessed that the sum of salary and profit in that year was about 20 million dollars. Of this, the productive, administrative and capital expenditures of course constitute the direct injection of that year, which will have a direct effect on the Chinese economy, while the 5.67 million dollars of tax itself is also part of the direct effect of that year.
(2) Indirect effects
According to the 1992 input-output table of China, in 1992, KFC's initial injection of 48.12 million yuan led to 121 million yuan of demand, with an output multiplier of 2.52. The output multipliers for public utilities, finance, and insurance were 30.71, 16.38, and 8.92, indicating that as early as in the early 1990s, these basic industries in China had a significant impact on China's economy.
In the early 1990s, the linkage effect of these basic industries in China was quite large.
Of the $48.12 million injected by KFC in 1992, $10.18 million of capital depreciation was ultimately generated, with a depreciation multiplier of 0.21; and the depreciation multiplier for utilities was 1.3. This ultimately led to an increase in payroll of $20.17 million, with a wage multiplier averaging 0.42, with wage multipliers greater than 1 in utilities, education, and insurance. The tax multiplier is 0.1, which suggests that the new injection of $48.12 million into the KFC system in 1992 would have induced another $4.8 million or so in tax revenues to the Chinese government. The profit multiplier is 0.27, which is much higher than the profit multiplier in 2000, suggesting that the average profitability of the Chinese economy has slipped quite a bit over the past 10 years, and that this slippage has been reflected in the effect of KFC on the Chinese economy. However, the gas industry had a negative profit multiplier in 1992 as a result of the price system in that year. The employment multiplier was 1.55, which was calculated using the "average wage method". On average, for every 10,000 dollars invested by KFC in 1992, 1.55 jobs were potentially created in the Chinese economy. And, of all the 19 KFC-related industries, utilities had the highest employment multiplier of 18.73.
VII. Comparison of the effects in 2000 and 1992
Let's compare the effects of KFC on China's economy in 1992 with those in 2000, and see the momentum of its development in the comparison.
The potential increase in employment provided by KFC in 2000 was 31.88 times (using the average wage method) or 22.62 times (using the adjusted average job cost method) that of 1992, while KFC's capital injection into the Chinese economy in 2000 was equivalent to 56.98 times that of 1992. The fact that such a large leap in magnitude and growth rate occurred in just eight years does reflect KFC's rapidly growing performance in China.
When compared with 1992, the output multiplier in 2000 was comparable to that of 1992, while the wage multiplier and capital formation multiplier were roughly similar (after averaging up and down). However, the tax multiplier was higher in 2000 than in 1992, being 1.21 times higher than in 1992. On the other hand, the profit multiplier declined in 2000 from 1992, being about 2/3 of its 1992 level. The increase in the tax multiplier reflects the increase in tax collection by the Chinese government, while the decrease in the profit multiplier reflects the decrease in the profitability of China's national economy.
The employment multipliers for 2000 are both much lower than those for 1992, due to the fact that the average wage of Chinese workers (and thus the average job cost of workers) has risen considerably over the past eight years, thus reducing the number of jobs available for an initial injection of $10,000 to about 1/3. However, since KFC's initial injection was as much as 56 times greater in 2000 than it was in 1992, KFC provided at least 22 times as many potential jobs for Chinese workers in 2000 as it did in 1992.
The corresponding increase in the tax multiplier, coupled with the substantial increase in the initial capital infusion by KFC, leads us to believe that the increase in tax revenue induced by the KFC infusion in 2000 will be substantially higher than the incremental induced tax revenue in 1992. In fact, while the incremental tax revenue induced in 1992 was $4.79 million, that figure rose to $325 million in 2000, an increase of nearly 80 times.
In terms of capital formation, 2000 was also much higher than 1992, with capital depreciation from the initial injection of $10.18 million in 1992 rising to $524.87 million in 2000, a 50-fold increase.
Turning to the increase in profits, although the profit multiplier in 2000 was smaller than the profit multiplier in 1992, the increase in the value of induced profits in 2000 was $491.78 million, 38 times the increase in the value of induced profits in 1992 ($12.9682 million), because the initial injection in 2000 was much larger than the initial injection in 1992.
VIII. Conclusion
Our findings show that, analyzing just in terms of quantity, at constant 1997 prices, in 2000, KFC's direct contribution to China's economy was:
(a) 2.74 billion yuan of direct injections into upstream and downstream industry sectors, generating initial demand;
(b) KFC itself directly provided jobs for 5201 regular workers and 24,060 temporary workers;
(c) KFC directly provided $420 million in tax revenue to the Chinese government.
In terms of indirect impacts, KFC's impacts on the Chinese economy also include:
(d) Indirectly, KFC has provided between 160,000 and 230,000 jobs. This is equivalent to more than 10 times the number of employees employed by KFC itself (hourly workers are discounted at 0.5).
(e) Indirectly, it raises $325 million in tax revenue for the Chinese government. Together with the direct taxes paid, KFC has added 745 million dollars to the Chinese government's coffers.
(f) The overall output multiplier in 2000 was 2.6, which is equivalent to saying that for every dollar that KFC injected into the Chinese economy in 2000, it would end up creating 2.6 dollars of demand. This also contributes to the expansion of domestic demand in China from one perspective. If we take the 2000 data and compare it with the multiplier effect in 1992, then we also find that:
(g) KFC's initial injection into the Chinese economy in 2000 was 56 times that of 1992;
(h) the increase in jobs induced by KFC's initial injection in 2000 was at least 22 times that of 1992;
(i ) The government taxes paid directly by KFC versus those indirectly induced were 71 times higher in 2000 than in 1992;
(j) The initial injection of KFC added 520 million yuan to China's capital formation in 2000, which is equivalent to 50 times the amount in 1992;
(k) The initial input of KFC in 2000 added profits to the Chinese economy of 491 million dollars, which is 38 times as much as in 1992.
Finally, it should be emphasized that the multiplier results estimated in this paper should be treated with caution because the information on the industrial linkages that we use as the basis of the model is from 1992 versus 1997, and the initial injections are calculated using the 1997 price system. In addition, assuming that China is a closed economy may also lead to bias in the estimates. In summary, these calculations would be more accurate if we had more detailed information, more recent input-output tables, and a more basic social accounting matrix system.