Foreign companies lured by more than just cheap labor

For more than two decades, cheap labor has been the main attraction for US firms looking to invest in China. Now there are more factors at play that have encouraged these companies to stay.

Thousands of skilled technicians are busy working on assembly lines at a Caterpillar factory in the city of Xuzhou in east China's Jiangsu province.

Located in the Xuzhou Economic and Technological Development Zone, the factory is able to receive almost all of the parts it needs from local suppliers, with local logistics firms helping to move the factory's products anywhere in the country within days.

With a new workshop under construction and more expansion plans underway, the factory is expected to grow into Caterpillar's biggest excavator production center in Asia by 2014.

"Although costs have increased, we will continue to make significant investments in China," said Doug Oberhelman, chairman and CEO of Caterpillar, a leading US construction equipment maker.

Persistently high inflation has encouraged the government to raise the minimum wage in recent years, a move that has also increased operational costs for some companies.

"Rising labor costs are just one more thing that we have to overcome, but all and all, I'm happy with the returns for our Chinese business, as we have a business model that serves us well here," Oberhelman said.

"The market in China for our business is big and we have a lot of room to grow. So I intend to invest in a large way inside China," he said.

Entering China in the 1970s, Caterpillar currently has 17 production facilities, four R&D centers and three logistics and parts centers in the vast country. China has become the company's second most important market after the US market.