China in the Global Economy
Foreign Direct Investment in China
CHALLENGES AND PROSPECTS FOR REGIONAL DEVELOPMENT
Trang 2GIN,
Gers China in the Global Economy
Foreign Direct Investment in China
Trang 3Foreign Direct
Investment in China
CHALLENGES AND PROSPECTS FOR REGIONAL DEVELOPMENT
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Trang 4ORGANISATION FOR ECONOMIC CO-OPERATION ‘AND DEVELOPMENT
Pursuant to Article tof the Convention signed in Parison Lath December 1960, and which came into force on 3th September 1961, the Organisation for Economic Co-operation and Development (OECD) ‘shall promote policies designed: ~ to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial stablty, and thus fo contribute fo the development ofthe world economy:
~ to contribute to sound economic expansion in Member as well as non-member counties in the process of economic development, and = to contribute to the expansion of world trade on @ multilateral, non-discriminatory basis In ‘ecordance with international obligations The original Member counties ofthe OECD ate Austra, Belgium, Canada, Denmark, France, Germany, Greece, Iceland, Ireland, italy, Luxembourg, the Netherlands, Norway, Portugal, Spain Sweden, ‘Suitzetland, Turkey, the United Kingdom and the United states The following countries became Members subsequently through accession at the dates indicated herealter: Japan (28th Api 1964),
Finland (25th January 1969), Australia 7th June 1971), New Zealand (29th May 1973), Mexico (18th May 191) the Czech Republic 21st December 1995), Hungary (7th May 1996), Poland (22nd November 1996), Korea [U2th December 1996) and the Slovak Republic {Ith December 2000) The Commission of the European ‘Communities takes partin the work ofthe OECD (Arle 13 ofthe OECD Convention!
OECD CENTRE FOR CO-OPERATION WITH NON-MEMBERS
‘The OECD Centre for Co-operation with Non-Members (CCNM) promotes and co-ordinates OECD'S policy dialogue and co-operation with economies outside the OECD area The OECD currentiy maintains policy co-operation with approximately 70 non-Member economies ‘The essence of CCNM co-operative programmes with non-Members isto make the rch and varied ‘assets ofthe OECD avalable beyond its current Membership to interested non’ Members, For example, the OECD's unique co-operative working methods that have been developed over many years:a stock of best practices across all areas of public policy experiences among Members: on-going policy dialogue ‘among senior representatives trom capitals, reinforced by reciprocal peer pressure; and the capacity 10 address interlisciptinary Issues Allofthiss supported by ach historical database and strong analytical ‘Capacity within the Secretariat, Likewise, Member countries benefit om the exchange of experience with ‘experts and oficial rom non-Member economies, ‘The CCNMs programmes cover the major policy areas of OECD expertise that are of mutual interest to non-Members: These Include: economic monitoring, structural adjustment through sectoral polices, trade policy, international investment, financial sector feform, intermational taxation, envionment, ‘agriculture, labour market, education and social policy, as well as innovation and technological policy ‘development
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FOREWORD Seiichi Kondo
Deputy Secretary-General, OECD
Foreign direct investment (FDI) has been one of the most significant felures of China's economic reform and opening up to the outside word For the las two decades, China has eradually liberalised its FDI policy regime, reduced restrictions and barriers to FDI, and improved the overall investment environment With its potentially huge and fast-growing domestic markets, relatively well-educated ‘population and low-cost labour forces, Cha has become one of the most attractive destinations for FDI in the world China's accession to the WTO last November will accelerate the pace of FDI inflows tothe Chinese economy The share of OBCD-based companies is expected to inerease
Trang 6now competing actively for FDI, including new types of FDI previously excluded from the Chinese market
Given the vasiness of the Chinese hinterland, Boosting FDI (0 these regions and ensuring that host vgions actually benefit from it willbe a major challenge, A principal task for government a al levels Will be to inerease the regions’ capacity to absorb FDI by improving the environment within which investments can take place, including through incentives and conditions that wil attract qualified individuals to stayin the regions The OECD has a long and productive collaboration with Chin the field of international investment and has developed a programme of co-operation and policy <lialogue with the Ministry of Foreign Trade and Eeonomic Co-operation (MOFTEC) The objectives of this programme include: reviewing the driving forces and economic effects of FDI on China’s development; supporting Chinas relorm efforts aimed at improving the investment environment through a dialogue on best FDI policies and FDI promotion practices; and addressing eme investment issues and challenges of common concer
We have already travelled some distance in realising our common objectives Both the OBCD and MOFTEC attach high priority to the continuation of this co-operation, Our common future work ‘could include joint activities on mergers and acquisitions; FDI statistics: investment promotion best practices, and an FDI policy study of China,
Trang 7PREFACE Long Yongta
Vice Minister, Ministry of Foreign Trade and Economic Co-operation (MOFTEC), China Two decades after it inaugurated reform, China has steadfastly adhered to the State poliey of opening to the outside world, developed forcign trade, and actively attracted foreign direct investment (FD) Reform and opening-up have promoted the sustained, swift and sound development of China's national economy As a result, China’ national economy has now taken the sixth, and its trade value the seventh place in the world China has been, for nine consecutive yeas, the biggest destination of FDI among all developing counties
China has encountered the problem of imbalance in economic development among its slfferent regions The Eastern coastal region of China, geting priority in opening up and grasping the ‘opportunity, has made significant achievements in economic development Compared with the situation of the whole country, the Westem region is relatively backward in terms of economic development, although it has also made some progress Now the Western region is gradually opening up and has achieved some suceess in absorbing foreign investment By the end of 2001, more than 28,000 forcign invested enterprises (FIEs) have established themselves inthe Western region, and the total actually utilised value of FDI in the region was over RMB 20 billion (1 USD = 8.3 RMB)
The Chinese government has come to the understanding that ifthe Westem regions cannot grow faster, the whole country will not be able to develop in a sustained, rapid and healthy way It is imperative to accelerate the eeonomic and social development ofthe Western tegion, so a to promote economic restructuring of the whole nation, and to push forward social progress The central ‘government enforced the strategy of the Great Westem Development in time to accelerate the development of the economy inthe entra and Westem regions, promote co-ordinated development of regional economies, rationalise economic layout across the nation, narrow the gap of development between the diferent regions, and pursue common prosperity
“The Westem region has stiking advantages and solid foundations wo cary out investment and tae co-operation After decades of development, the region has established substantial material and technical foundation and ensured social stability The system of market economy is taking shape and ‘owing there, Moreover, the region is endovked with rich resources in agrieultue, livestock, minerals 8nd tourist atraetions The vast teritory and large population of Wester China have also brought about tremendous market potential and comparatively low cost of production factors, including land and labour
Some key cities inthe West such as Chongying, Chengdu and Xi'an, ae capable of co-operating with ‘others since they have become important industrial hases with comprehensive sectors and centres of Scientific research and education Ever since its enforcement, the stategy of the Great Western Development has attracted interest from both domestic and foreign investors Driven by government investment, the development of the region experienced a fine stat The pace of infrastructure
Trang 8
construction in the epion was speeded up Ecological environment protection and construction were ‘iengthened, The advantage in science and education was played out, and the industrial structuring has been evolving gradually, As we steadily push forward the strategy of the Great Western Development, this region will give full pay to its advantages in resources oF other economic factors, and further enhance the quality and level of economic growth,
In order to encourage foreign business to intensify investment in the central andl Western regions and further accelerate the ezonomic development of these areas, since 1999, the country has unveiled a series of preferential policies for Foreign investment in central and western China, including the enlargement of open up areas, diversification of investment modes, relaxation of investment restrictions, preferential taxation policy for FIES in encouraged field, intensification of financial support to investment projects and the cultivation ofa sound investment environment by establishing ‘economic and technological development zones at national level The incentives have already played a positive role by giving foreeful policy suppor to foreign investment in the area
China has gone through a difficult journey of 15 years i order to first resume the contracting party status in the GATT and later to enter the WTO Now that it has joined the WTO, China will implement the commitments it has made and sill further open, step by step, service areas such as hanking, insurance, telecommunieation, foreign trade, domestic trade, and tourism, formulate uniform, standanl and transparent investment access policy, intensify efforts to enact and perfect relevant foreign elated laws and regulations, improve the level of administration acconling to law in foreign related economic work, and establish and perfect the foreign economic and trade regime, consistent With the international prevailing rules and curent situation in China
“The Wester region of China is facing new opportunities for development Experiences from other ‘countries show that less developed regions ofa country could catch up with the other regions, The key issue is thatthe less developed regions shall look ino its teal situation, learn from the experience of the other regions earnestly, pick the scientific development strategies, and give full play to its ‘competitive advantages
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ACKNOWLEDGEMENTS
‘This book reflects selston of eited pupsts presented tthe OECD-China conference on Foreign Digect Investment in China's Regional Development, held on 11-12 Oeober 2001 in Xi'an
It hos heen conceptualised and produce in the Directorate for Financia, Fiseal and Enterprise AfRis by Metmet Opitgh and France Bers, Riner Gciger and Pre Poel provided guidance Professor Markus Taube of Duisburg University in Germany co-died and provided academic ‘counsel or his publication, Special thanks goto all who contributed papers to the book
‘The OECD is particularly indebed to the Chinese Ministry of Foreign Trade and Economie Co- pention (MOFTEC) sad the Xi'an local authories, which cirorgiiaed the conference and ensured the preparation ofall papers presented by Chinese officials and scholars for this book ‘Thanks are due in particular to Long Yongt, Viee Minister of Foreign Trade and Economic Co- operation, Zhang Wei, Vice Governor of Shaanti Province, Lin Zuozhang, Deputy Director General Min Liping Deputy Director, and Fan Wenjis, Deputy Diseh, of thế Foreign Investment Administration of MOFTEC Katherine Jones dil a carla pront-eading and comoctions on the text Lue Beaty co-ordinated ‘he conference preparations: and Edward Siley and Alexandra De Mưamon aranaei!he printing ofthe book
‘or engi regarding tis conference or future events nthe context of OFCD-China Investment (Covopraton shouldbe addressed 1!
Me Mehanet Ogu Hess
[NomMember Liaison Group on Internationa Investment OECD Direebrst tự Einancl, Pheal and Emerpie Ahiet 2 rue Andes Pascal
4718775 Paris Codes 16, FRANCE, Faxi4 33 1443061 35
T mai: mehmetogenfusel on:
Ms France Benois Investneat Outeach Projet Co-ordinator
‘OECD Directorate for Finacial Fiscal and Enterprise AViire 2, re Andre Pasa 18775 Paris Cedex 16, FRANCE,
Fax 433 1443061 35
Trang 11‘TABLE OF CONTENTS: INTRODUCTION Ambassador Marino Bald,
(Chairman, OECD Group on Co-operation with Non-Members, ‘Committee on International Investment and Multinational Enterprises
Chapter 1 SETTING THE SCENE
‘Main Issues on Foreign Investment in China's Regional Development Prospects And Policy Challenges,
“Markus Taube, Profesor University of Duisburg, Germany ‘and Mehmet Otte, Principal Administrator, OECD ‘The New Regional Pattems of FDI Inflow in China Policy Orientation and Expected Performan
Professor iang Xiaojuan, China Academy of Social Sciences Businoss Perspect Rober T Deneher Why did we Invest in China? eral Manager, Business Development Shell (China) Lid
‘Advantages and Investment Requirements in China's Wester Region Particular Case of Lan,
Lu Yajun, Viee Mayor of Lanzhou
What Type of FDI for the Chinese Hinterland?
Peter Kreutzberger, Counsellor, German Permanent Mission 0 the OECD, Challenges for FDL in China's Regional Development: Japanese Perspective, Hiroshi Maisuanura, Director
‘and Akira ume, Assistant Chieh, International Beonomic Affairs Division,
Ministry of Economy Trade and Industry Japan
Competitive Inestment Environment, Rule of Law and Recipe for St ‘Ann B MeConnell Financial Economist,
Office of Investment Affairs, United States Department of Sta China's Foreign Investment and Regional Developaent
Improving Comparative Advantages and Overeoming Impediments,
Trang 12Chapler
INTERNATIONAL AND CHINESE EXPERIENCES 109
Foreign Direc Investment and Regional Development [Experience Of OBCD Regions And Prospects For China,
‘Bernard Hugonnier, Director, Temitrial Development Service, OCD 1 reign Diet Investment and Regional Development in Southeastem Turkey, xy Daner, President, GAP Regional Development Administration, Turkey tại Canadian Experience with Foreign Direct Investment and Regional De Some Observations,
Jeff Nankivell, Counsellor, Canadin Embassy in Bein clopmen: Lessons ftom Brazil's Regional Development Policies,
Aledo Lopes Neto, Advisor forthe Viee-Governor ofthe State of Ceard, Bra
135 Experienees of China's Coastal Region in FPL Actaeton and
[Lessons for Central ane Western Regions,
Ma Yu, Research Fellow, China Academy of Trade and Economie Co-operation " Chapter INVESTMENT PROMOTION AND LOCAL ENTERPRISE DEVELOPMENT 153
Improving Investrent Promotion in Westem Chin
‘Andiew Proctor, Regional Manager, Asia Pacific Regional Office,
Foreign Investment Advisory Service, World Bank Group, 135
‘est Practice Guidelines for Investment Promotion: Relevance to Chins, David Banks, Administrator,
Directorate for Financial, Fiseal and Enterprise Affaes, OBCD 161 The Experience of Promoting Foreign Investment in Saxony Germany: W's All About People",
Genter Metzger, President and CEO, Saxony Beonomic Development Corporation 169) Foreign Investment Promotion in Shanghai: Lessons for Cental and Western China
Chen Hianping Assistant tothe President Shanghai Forcign investment Development Board m
Industrial Districts: An Kalian Perspective,
Vincenzo Del Monaco, Economic and Commercial Affairs, talian Embassy in Beijing 81 Township Enterprises in China and FDI,
Zhang Tianzwo, Deputy Director,
Trang 13Regional Development and Sustainable Investment
“Tho Case fora Regional Muli-Stakcholders Forum and Observatory in West China,
Philippe Bergeron, Director, Regional Insitute of Environmemtal Technoloey II
Foreign Direc Investment a
Importance ofthe "Go West” Strategy in China's Enengy Sector,
Mehmet Ôaitgi Principal Administrator trate for Financial, Fiscal and Enterprise Affairs OBCD 197 SYNTHESIS OF DISCUSSIONS AND CONCLUSIONS 2H Synthesis of Discussions 213
Conetusions and Policy Messages, Rainer Geiger Deputy Director
Directorate for Financial, Fiseal and Enterprises Affairs, OECD 210 Liu Zuochang, Deputy Diteetor General,
Forign Investment Administration,
Ministry of Foreign Trade and Ezosomie Co-Operation
Anes 1 Author Biographies oer 2s
Annes 11 PanldpantsLis Sa
Trang 15INTRODUCTION Ambassador Marino Baldi,
Chairman, OECD Group on Co-operation with Non-Members, ‘Committee on International Investment and Multinational Enterprises
Foreign direct investment (FDI) in China has so far mostly boon located in the coastal ares, without any significant catching up by the interior ~ central and western — regions We are aware tha (he Chinese authorities are keen on redressing this growing imbalance in regional distibution of FDI Xian, asthe ancient capital of China and the gateway to the historic Silk Road, is at the heart of ‘Chins ambitious regional development efforts “The Western Development Strategy” launched lst year and embodied inthe five-year plan to 2005, is an ambitious top-down effort to steer state and, private investient into the parts of China most in nced of it but least ikely to attract ton their vn,
Changes in China and Growing FDI Flows
‘China has already undergone in a very shor period of time profound transitions in its economy and society These changes are pulling great stress, on the individuals, the government structures and the CChina’s greater opening (© the outside work, signalled by its accession to the World Trade Organisation (WTO), wil father improve the framework for its economic development including that ofits less favoured regions Inte process of globalisation, competition not only between nations but also regions, both within and from outside China, has become stronger than ever Local, regional and _slobal issues can no longer be separated: they are converging Regions and cities around the world are involved in global competition for finance and investment, and they need to be highly proactive to prosper inthis new environment
‘China can expect increased FDI inflows over the next five years Following its WTO accession, China has been a serious competitor for FDI globally because of its record on reform, its speed in development (which is opening up new investment oppouRiie), HS growing demand for infrastructure, its increasingly sophisticated lowcost export base, and its range of sectors on offer for foreign participation where investors ean expect good returns
Trang 16‘The assumption of a strong macroeconomic environment ia China aver the next five years further improves the prospects for FDI inflows into China The frontend of more than 370,000 registered foreign-funded enterprises in China (as of April 2001) ~ representing USS 679 bili in contracted investment, USS 360 billion in atual investment, and more than half of China's two-way trade at USS $59 billion — has so far arrived in the quest for cheap labour and market access
Regional Development and WTO Accession
The share of FDI inthe total capital formation in China is quite high, especially inthe coastal ares, In the 1990s, FDI inflows contributed to a quarter of the capital formation in Guangdong province: Tor Fujian province, the figure was 20 ‘ In parts of Guangdong province such as Shenzhen, capital inflows in the 199%s exceeded 50 4 of the capital Formation
‘As China gains in wealth and, asa result, wages start rising, i¢ will find it increasingly hard t retain the inerest of low-cost, labourintensive opetations n the future, China may well lose comparative udvantage, panicularly in lhourintensve sectors, to counties ke Vietnam, Bangladesh, Cambodia, and Laos In tum, the coastal provinees are moving to the leading edge industievteehnologies Cites in the Pearl River Delta, for example, now target capital- and skills-intensive higher t
activities, while labour-intensive indusries are relocating inland
Trang 17
CHAPTER I: SETTING
Trang 19
MAIN ISSUES ON FOREIGN INVESTMENT IN CHINA’S REGIONAL DEVELOPMEN} PROSPECTS AND POLICY CHALLENGES, Markus Taube, Professor, University of Duisburg, Germany, and Mehmet Onis, Principal Administrator, OECD Introduction
‘Globalisation is inereasingly testing the ability of regional economies to adapt and maintain their ‘competitive edge Performance gaps are widening between regions, and rapid technological change fexiended markets and a greater demand for knowledge are offering new opportunities for regional development Yet this ealls for further investment from enterprises, re-organisation of labor and production, upgrading skills and improvements inthe local environment Some regions with poor links to the saurees of prosperity, afficted by environmental problems, migration, and lagging behind in infrastructure and private investment, are finding it difficult to keep up with the genera end
‘China is a country, where regional development is ofa foremost priority The population is dispersed although unevenly over a huge landmass, with rural regions being inhabited by more than 900 milion people, some two-thirds ofthe population, Since the launch of he eeoaomie refomns in 1978, China's
dominant development polices have gradually shifted from ones based on self-reliance 10 ones favoring comparative advantage and open door policy A large ameunt of existing foreign direct investment (FD), has been Toeated in China's relatively prosperous coastal regions, without any significant catching up by the interior central and western regions While the eastern coastal region accounted for 88 4 of the county's total FDL during 1978 to 1999, the cental region arated 9 Se and the westem region only a minor fraction of the total US$308 billion in FDI inflows."
Chinese authorities are keen on redressing the growing imbalance in regional distribution of FDL Foreign investors, however, maintain that conditions are quite dificult in the western region, The provinces that ie inland from Chinas coast cover an area almost tie as big as India (56 % of the ‘country’s fand area) and hold 23 % of its population Their 60 4 of the national average But seen asa labor-intensive manufacturing base, the region is plagued per eapita gross domestic product is only hy poor transport and infratructute that outweigh its lower cost structures The centraliwestern regions may therefore not be able to copy the export-oriented development strategy of the coastal provinces; therefore, a different development strategy would be defined and a different “type” of FDI to be attracted to the hinterland
Trang 20
Inan effort to close this economie gap, the Chinese government launched “the Western Development Strategy” (Xibu Da Kaifa) in January 2000 “The Western Development Strategy” constiutes a ‘comerstone othe Tenth five-year plan (2001-2005), and isan ambitious top-down effon to ster state investment, ouside experise, foreign loans and private capital into the pans of China mest in need but likely to atruet aid on ther own The area covered by this strategy includes six provinces (Gansu, Guizhou, Qinghai, Shuansi, Sichuan, and Yunnan), five autonomous regions (Guangxi, Inner Mongolia, Ningxia, Tibet, and Xinjiang), and one province-level municipality (Chonggins)”
‘This highly ambitious programme, however, is not undisputed Some estes point out that inereased ‘government spending in the west will reduce the amount of money available for current social Programs, health, education and welfare, thereby ageravating the problems at another hot spot of China's contemporary development process In the perception of some forcign enterprises, the programme is aot tackling all the main issues al stake for foreign investments ia the region [a ludition, they recognize that the enefis of westward development could take generations to materialize
‘This puper looks atthe nexus between FDI and regional development in China, Stating point isan account of the diverging economic development in China’s regions and the geographical pattems of FDIinflows to China I is followed by some theoretical refletions on the determinants of location choice for FDI and the paramcters of intr-egional competition for FDI inflows The paper wil then turn to the concrete experiences of FDI attraction in wo regions located in the Chinese coastal belt and the ensuing growth impulses that FDI exerted on their economic development These two case studies ae then employed, as benchmarks against which the potential of FDI-driven growth processes in the Chinese hinterland willbe diseussed, Ic also examines the question of how far central and local ‘government might make contribution to kick-off and promote sucha process ‘The final section will ‘examine the impact of China's accession to the World Trade organisation (WTO) and its possible ‘consequences for FDI aid China's regional development
General Patterns of Regional Development and FDI-Attraction in China
Since the launch of economic reforms in 1978, China has gone through an impressive economic development process Economie growth, however, hs not een evenly disebuted, fora rather limited hnumber of provinces* has been responsible for the greatest part of the enlargement of the national ‘economy, the size of which more than quadrupled inthe run of only two decades (World Bank 2000) Underlying this unbalanced grow experience is a bundle of factors, an incomplete list of which encompasses:
— political reasons including the tole a region has been atributed in the reform process the degree of local autonomy from central government, the degre of reform mindedness and tenlrepreneurial spirit of the local administrative bodies
Trang 22Diverging Economic Development in China's Regions
‘The Chinese economic growth process since 1978 has been accompanied by the evolution of @ new ‘economic geography’, whichis characterised by'a steep east-west slope of economic development The provinees located in China’s eastem coast bet have experienced the most dynamic growth processes while the central and even more so the westem provinees have been lagging behind With the exception of the thre traditional metropolitan centres of Beijing, Tianjin aa Shanghai as well asthe northeastern province of Liaoning all the other coastal helt provinces have experienced exceptional growth, rsing their share inthe national GDP by more than 10 percentage point (see Table 1) In comparison, nearly all de central and westem provinces have losin relative importance for the national economy
Data on GDP per capita, see Table 2, may give an even better impression ofthe growth dynanes and ‘wealth of the various regions, With the exception of the metropolitan centres, which have fost part of their exceptional position, the inter provincial divergence of GDP per capita has risen dramatically While the coastal provinces feature values high above the national average, most central and western provinces are not only markedly below the average, but have lost substantially in comparison to 1980 ‘These results, however, have to be seen cum grano sais, s the migrant population is not adequately represented Migrans are ineluded in their home provinces and not thei real living/working place,
The result is a downward bias inthe GDP per capita shown for home (e.g Guizhou, Sichuan) and an upward bias forthe host regions (e.g Fujian, Guangdong)
‘To puttin a nutshell: The diverging regional growth patterns of the past two decades have led to 8 polarisation of the Chinese economy into two separate relative income clubs (Aziz/Duenwald 2001, 13.15), ie the rich coastal and northeast provinces versus the poor hinterland provinces While the members ofeach ofthese two clusters ate experiencing a convergence of per capita income i an intra: <’uster comparison the two clusters themselves show a diverging development pattern
With respect the coastal belt economies of Guangdong (Peat-River Delta Region), Shanghai, fangs, ‘aejiang (Yangzi River Deta Region), the degree of divergence in industrial structures of these provinces With the Central and Western Chinese provinces rose markedly during the 1990s The only exception is Hubei, a province located upstream the Yangzi River, which has been able o nuce the divergence of is industial souctures with those ofthe Yangzi River Det, but not with hose of Guangdong,
“The industrial structures of the PearL-River and the Yangei River Dela Regions feature a ‘comparatively high similarity, although the divergence has risen during the 1990s, This development ‘might indicate arising complementarity between the two regions, ising potential for labour division and a diminishing competitive juxtaposition on the national and international markets Looking atthe three provinces constituting the Yangzi Delta Region a great similarity in the early 1990s can be ‘observed, which has since given way to higher divergence in the run of the decade This development is an indication of a new pattern if intra-tesional division of labour aeconding to which Shanghai has heen concenteating on the tertiary industies, while tanslocating part of its industrial production ‘capacities tothe neighbouring provinces
Trang 23‘Table 2: Provincial GDP per capita
China
'GDP/eapita 1980 GDPiapital999 | Change Yuan current | national | current | national feof | Yuan | Sof | 1980-99 #
Trang 24‘The inital legal and institutional basis for an inflow of FDI to China was established only inthe late 1970s and early 1980s, Since then China has taken a number of measures to intensify the Tov of FDL to the country or regions there Special economic zones and industrial parks have been established Within which foreign invested enterprises (FIE) experience a better regulatory environment and infrastructure facilities than in other pars of the country They have been given tax benefits, a relatively liberal foreign-rade regime, and granted other diverse special conditions under which the business activities of companies with foreign participation are subject to considerably different ‘conditions than businesses that are financed purely by Chinese capital (Khan 1991, Appendix 4)
But stil seriously constricted by regional, sectoral restrictions and specifi qualifications (concerning forex halanees, local content regulations, aeeess 10 the local goods and factor markets, et.) which had Iheen motivated by ideological reservations that FIE might constitute an instrument of foreign capitalists exploiting the country (Hsu 1901, 134-136), FDI inflows picked up only slowly in the 1980s Ic was not before China's strong commitment to a market economy in Uke early 199% that the country was able to attract truly substantial amounts of FDI Since then the development has been
cdramat (see Figure 1),
Between 1995 and 1999 China absorbed 7.5 % of global FDI flows and about one quarter of all FDI flows directed towands developing counties, In the years 1993 t0 1996 China was even host to more than one tenth of global FDL The accumulated FDI stock of China amounted to more than 6 4% of the ‘lobal total in 1999 (UNCTAD various) The bulk of these massive FDI inflows did no stem from the world economy's industial growth centres The triad economies of the EU, Japan and USA each accounted for less than 10% of all China-bound FDI, while Hong Kon
ingapore commanded in excess of one half of all Chinadirected FDI flows (National Bureau of tists, China and OECD 2000, 7)
Figure 1: World FDI inflows to China
‘Quantitative Development of Actually Realized FO! in China, 1979-2000
In terms of thet regional distibution FDI inflows have been heavily concentrated in Chinas coastal provinces (the "easter" region), while the central and western regions have atracted only marginal shares of the national EDI inflow (Table 3)
Trang 25Table 3: Geographical Distribution of FDI Stock in China in pereentage H§EIWB TT TNN TT TH Eism Region ‘Coniral Region Western Region ‘See table I for the provinces consti Sure: OED 2000,
‘This highly unbalanced picture is reproduced when looking at the province level Here Guangdong com to constitue a cass ofits own, During the 1980s Guangdong absorbed nearly one half of al, FDI China attracted during this period In the 1990s, when the volume of China-bound FDI rose ‘exponentially, the province sil hosted more than one quarter ofthe national FDI stock Taking the period as a whole Guangdong has absorbed nearly one thid ofall FDI stock China attracted since the heginning of the reform era (OBCD 2000, 8)"
The next most important host provinces for FDI have been Fujian and Jiangsu with share of about 10 ‘of the national FDI stock cach, Inthe central region the mst attractive regions are Henan, Hubei and Hunaa, while Sichuan and Shaan lead the westera provinces
‘These relative degrees of importance and the dynamics ofthe last decade ae also reflected in Table 4 where the provinces’ share in total FIE industrial output value and its change is documented, As can be seen, the easter region has lst some of is importance as a pduction location for FTE, but has sila share of nearly 90 % Neatly all the losses of the eastern region have heen absorbed by the central region, leaving the western region with a stil negligible share in FIE industrial production
Main Determinants of China-bound FDI Flows: Theoretical Considerations
Trang 26‘Table 4: Contribution of FIE located in various provinces to national total industrial output je by FIE 1999 Change to 1991 in points FIB #FFE #HMT FIE, Easton Region 88.40 90.06) 412 225 5.16 209 1491 321 Tấn, 9.33 S20 280 Tz 879 asia Fujian đại TH 1086 5.70 'Quangdon “Hainan 46.37 022 Central Region 898 747 Hebei Inner Mongolia 023 171 195 020 ‘Shanxi Tin 931 119 0ã? 043 Heilongjiang 059 052 0.26 ‘Anhui iangxi 079 043 028 O31 0a7 07 Henan Hubei 156 122 126 149) 065 0.79 Hunan Guangxi 048 052 046 026 EN 0.19, WestemRegion 2 Sikhuan.Inel: Chongding 014 Guizhou "Yunnan 006 0.27 000 070 0.22 Qinghai 001 Ningxia 0.03) Xinjiang oat
FE forcgn fended enterprising fone with cipal fom Hong Kong, Maca and Chinese Tip FMT: enterprises with apie frm Hong Kong Maca, Chinese Tape,
Trang 27The Investor's Motivation
“The theory ofthe MNE as developed by Hymer, Kindleberper, Heckscher, Ohln, Casson, Veron and ‘others, and integrated in Dunning’ eclectic OL paradigm (Dunning 1981) identifies four basic motives for FDI, a mixture of which usually determines the investment behaviour of MNES (Stein 1991} resource seeking ‘capability soeking FDL FDI: efficiency seeking FDI; matket seeking PDI; and strategic asset
= Resource seeking FDI is motivated by the wish to exploit interegional factor price Aiferentials for the MNEs production process This type of FDI usually amounts to a vertical split of the MNES production process hetween skill andor capital intensive processes atthe headquarter, and Iour intensive manufacturing abroad, As the different factor proportions found inthe host economy often go along with low local purchasing power, the FIE are mostly expor oriented (Helpman/Krugman 1985)
~ Efficiency seeking FDI follows a similar pattern Iti driven by the motivation wo realise eeohoiee of sale and scope, to diversify the MNES’ risk exposure, and to take advantage of the different comparative cost advantages of various economies for the MNES" production proces,
~ Marker secking FDI is motivated by the intention to supply 2 market that until then had been supplied with exports (at all) with locally produced goods It is not the Aiferences in factor prices that lead to this move, but rather the appraisal of proximity to the foreign market versus the advantages of conceattaion of the production process at fone loation Whenever the advantages of proximity outweigh those of concentration, DI will appear o be a rational choice (Markusea/ enables 1998) This type of FDI may be classified as “horizontal” asthe production process isnot split, but rather duplicated at the foreign location, Specfie reasons motivating market sscking PDI may include the Potential of the foreign market, the need for complex product adaptations to loa tastes And demand structures the wish to follow important customers into the foreign market, te Given the existence of a reasonable market size, the willingness for market seeking DI operations may also be prompted by the need t circumvent bariers to trade erected by the host economy
= Strategic asset / capability seeking FDI is based on strategic considerations with the intent to consoTidate and strengthen the long-term competitiveness of the corporation Such FDI operations may be driven by the motivation to occupy market shares and achieve learning effects in an early stage of market development, to block or inbibit business activities of competitors, or to coumter the move of a competitor already positioning himself inthe foreign market
The Host Economy's Perspective
‘Seen from the comorate perspective FDI operations are to be understood as rational management Stralegies devised to enhance corporate wealth in the context of specific envionmental constraints, At the same time the active promotion of FDI inflows may also be the dominant strategy for local ‘governments in order to promote regional economic development.” The main postive impulses FDI inflows may exert on the host country are
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— an expansion of domestic capital formation beyond the degree that could be financed ith domestic savings;
= the provision of prociction and process technology formerly not known t0 the host country: ~ the creation of jabs:
~ the training of technical and managerial personnel,
the introduction of modern management and organisational know-how:
~ the possibility 10 use foreign invested enterprises (IE) as a benchmark for local enterprises with respect to various parameters like capital and labour productivity, logistics, quality control ete
= the promotion of the domestic exportindustry plus the ensuing positive eects on the trade balance and the availability of foreign exchange Parameters of Locational Choice
“The motivations for FDI are quite diverse Acconlingly, the demands MNEs have on a potential host ‘economy can differ considerably, depending on the main motivation forthe venture Some of the Parameters determining the investment decision of a MNE are Tying beyond the influence of the Potential host regions," others however may he created deliberately in order to attract FDL
actors increas the attractiveness of a region for any typeof FDI include:
~ the existence of a comprehensive respectively FIE related activities, which is aso easily enforceable; and transparent regulatory framework covering all PDL
= an efficient administrative apparatus devoid of excessive redtape and preferably servicing FIE with one-stop approval processes; = a coherent economic policy tht allows long-term planning
— the availability of am efficient inastructure in tems of ransportation, telecommunication and financial services: = the presence of FIE, The larger the existing accumulated FDI stock the mone positive extemmlides Le, the availabilty of human capital, complementary industries,
experienced local administration ete) new FIE ean expect to benefit rom
~ the availability of lac enterprises able to provide complementary business services and engage in subcontracting Policies offering fiscal andlor tariff incentives to foreign investors are ofien mentioned as @ way to tract FDI Enpitical evidence, however, indicates that the impact of such policies on the inflow of FDI is only marginal (Wells 2001; Mintz 199), Only ina stalemate situation, when two competing
Trang 29regions appear to be equally attractive fo an investor, might such incentives have decisive influence on the loation choice
Resouree and et parameters
jency seeking FDI can be expected (0 pay special attention to the following = Access 10 local goods and factor markets The unimpeded access to lacal goods and factor markets isa precondition for any FIE engaging in manufacturing activities in a given region The prevalence of grey markets, where administrative bodies, old boys fetWorks and other informal arrangements dominate the allocation of inputs inhibits the establishment of FIE
~ Labour cost One of the most important determinants for resource seeking FDI is the availabilty and price (efciency wage rate) of unskilled labour In terms of the intra- Chinese competition for FDI, this factor, however, may be less important than might be deduced from the literature dealing with international location choices The effcieney ‘wage differentials between the various regions are comparatively minor as a perpetual stream of migrants is loading the centres for Ibour intensive manufacturing atthe Chinese coast helt, This inra-Chinese translocation of unskilled labour is preventing the ‘wages in the industrial growth centres fom rising to prohibitive levels (Broadman/Sun 1997, 348),
= Human capital A region’ human resource endowment, however, may be regarded as an ‘important differentiating factor In China skilled labor is scare andthe non-availability fof managers, engincersor skilled technicians in a given region might prove t be highly <etrimental fo the aration of FDI
= Natural resource endowment The availability of abundant natural resources promotes the attraction of FDI This however, applies only to a comparatively small share of [MNES that ate setive in sch natural resource intensive businesses
= Access 10 the world marker, Resource seeking FDI, which target the world market with their products, are dependent on an unrestited access t0 the global market plac Inhibitions resulting from ant-trade bias of the host economy’ or tade barriers erected against the host economy, such as quotas, would remove one of the central preconditions Tor the execution of such FDI Administrative measuees adding tothe transaction costs of trade activities have a negative effect on FDI altrction.” The provision of transaction cost saving infastructure facilites, linking the host region with the target markets of its (potential) FIE in terms of transponation as well as communication will increase & ‘pions attractiveness for FDL
Market secking FDI will fist of all take into consideration the size and growth perspectives of a Potential investment location GDP and per capita income are important parameters to evahute the Potential demand of a tegion They, however, show only a part ofthe picture, as only segments ofthe local market may be accessible Taking info account the regional fragmentation of the Chinese ‘economy and the existence of artificial harriers to intra-Chinese trade, the sizeof the local marker (often identical to an administrative region) that can be supplied from a given location becomes a further important parameter forthe investment decision This point is highlighted by the exorbitant costs of intr-Chinese transpontation,* which has resulted in the duplication of transportation and Togistes networks, by MNEs already operating in China
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A further restriction of the relevant market size arises from resected access to distribution channels, Which may prevent FIE from realising potential business A further parameter influencing the investment decisions of market seeking FDI might be seen in the degree of urbanisation, which may he taken as a proxy for a comparatively affluent population, autonomous and inereasingly market oriented administrative bodies, and a favourable industrial fabric of private entrepreneurs, service ‘orientated businesses and functioning trade mechanisms (Gipouloux 1998, 9f: QuGreen 1997, 114)
“The Role of FDI in Economic Development in China’s Coastal Regions
Having outlined the main parameters determining the regional distribution of FDI, the paper will now lum tothe conerete experiences of two regions that have been the main beneficiasies of FDI inflows during the past wo decades The identification of the factors contributing to theit extraordinary sucoess in the attraction to FDI, and their experiences in FDI induced economic development may provide some elues as to what could be appropriate measures to initiate a FDHIed growth process in the Chinesehinterlam
The Case of Guangdong and the Peart River Delta
The province Guangdong, and especially its PearF-River Delta Region, have, since the early 1980s, ‘gone through a tremendous growth process propeling the province to the top of China's most regions (see table | above) With an average real GDP growth of 14.2 %e per year Guangdong not only affluent by far surpassed the national economy, which grew only by 8 %, but topped the ‘growth miracles” Hong Kong Korea, Singapore and Chinese Taipei had featured in their ‘take-ofT period, as well (Lan 1999, 210), These developments have been accompanied by an impressive accumulation of FDI in the province, As shown above, Guangdong absorbed nearly one half ofall FDI China attracted during the 10805, and was host to more than ane quarter of the national FDI inflows in the 19s,
Various factors have come together inorder to fac
te this development process:
— Firsc of all, Guangdong has profited immensely fom is long coastline facing the South [East Asian growih centres and ils proximity to major international shipping routes providing it with easy access 10 the world markets This geographical setting has provided the province with a logistical advantage vis-a-vis the interior provinees
= In historical perspective Guangdong was fortunate to be outside the focus of Beijing economic policy at a time when ideological and political considerations prevailed ove
eeonomie calculus Durïng the eafy 1960s tothe mid 19705 one of the main features of| China's economic poliey was the thind front strategy (Naughton 1988), Expecting the ‘outbreak ofa new war, dhe Chinese govemment tried to transfer the industial ackbone of the Chinese economy from the coastal areas to the Wester hinteriand, where it would be ‘much better protected against war destruction and could continue to supply the Chinese forces with military equipment, Guangdong'sindustal basis was comparatively weak and technologically backwanl in the late seventies (Liao/Guan 1988, 118) Is state owned enterprise sector was much smaller and less important for the focal economy than in other provinees, In rtospect, however, Guangdong has been profiting from the neglect it had experienced during the previous decades In contrast to other regions, whose economic eighties was seriously burdened by industrial structures inberited from the
Trang 31— The population of Guangdong has strong tes t0 the global community of overseas Chinese Guangdong is the home provinee of community of about 19 million overseas Chinese (Zhang 2000, 130; Redding 1990, 22), a considerable number of which have ome to afluence in ler pats ofthe world, These overseas Chinese entreprencis have bbecome important promoters of Guangdong's evonomic development (SalyTaube 1996) Especially the population of Hong Kong has very stong ties to Guangdong, Ia 1981 about 40 % of Hong Kong's population was said to have been born in mainand China, ‘And in the early 1900 about 80 of Hong Kong's population were either hor in Guangdong or could trace its family roots to the neighbouring Chinese province (Wu 1904, 16) These close (blood) ties could have been instrumentalized to ereate informal co-ordination mechanisms that were able to provide contractual socurity wherever formal regulations were missing (Ben-Porath 1980),
~ Guangdong was chosen by the central government as a forerunner and open door policy (Howell 1993, $3) Not only were three of the four Special of the Chinese reform Economic Zones established in 1979/80 located in Guangdong, hut the provincial government was also gramled considerable leeway in respect to the design of its evonomie institutions as well (Huang/Zheng/Ding 1993; Taube 1997) That way Guangdong gained substantial independence from the central government and was able to become detached from the much slower reform process in other pats of the country By constituting the avantgarde of the Chinese reform movement Guangdong has been able to offer lal and foreign entrepreneurs the most progressive insiutonal framework to be found in Chinas transformation economy
~The economic development of Guangdong has, toa considerable exten, en driven by the entrepreneurial sprit ofits local government cadres (Vogel 1989, 313-337), which have striven hard to make the bes of the privileged position the province held in terms of its geographical, historical, cultural and politcal situation, For a substantial period of time Cantonese officials have been acting with a great degree of autonomy from central government and existing egulations,” This behaviour can be reganded as an expression Df progressive forces driving the transformation progress ahead, To a considerable degree, however, it has also contributed to maero-seonomic instability and to the emergence of inflation, volatile growth eyeles, and the build up of industrial over- Capacities ona national level
= The most important element in Guangdone's growth miracle, however, has probably bem the fact that, when, in the late 1970s, the province reoriented itself towards the world economy it was lucky enough to find right on its doorstep an economy that featured complementary industal structures
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labour intensive value-added processes are carried out The Finished products are then distibuted via the _lobaldistibuion network established by the Hong Kong office n this form of labour division the Hong Kong sie s responsible for marke esearch, provluct design, quality cont, customer oriented packaging, and marketing, while the Cantonese side is in charge of the actual manufacturing process,
Over the past sxenty years economie development in Guangdong, especially in the Pearl-River Delta, has been in tandem with Hong Kong, which has heen the leading partner in this symbiotic relationship while Guangdong has been absorbing nearly all labour intensive segments of the value chain fom ‘Hong Kong The economic structure of Guangdong has changed dramatically (see Table 5), FIE have become the dominating enterprise form in an evonomy that is highly outward oriented ‘Table 5: Developments in the economic structure of Guangdong, 1980-1999 1980) 1990 | 199 | “99.90 199280 ing | in | ine | ine | in points points
‘Sin Nona GDP tái Composition of GDP S6| 02] 5 3 ái
Primary Sector ‘Sevondary Sector aii] 3i2|— H| Đã: s04/ 121] 1262 109) 93 “Teriary Sector 257) 35.8) 34] l7 1 ‘Siuetureof Industrial Oviput Value Light Indust S50 THẢ, 660) 305 Sất Heavy Indust 320 7] _340"[ 30") 53° ‘Contibution to Industrial Ouipat Value ‘Slate Owned Industry wa 37385 ned Ih 36.3 stt| Foreign Funded Enerprises 69) 415) 465 Others i15 43) HỆ
Ratio of FDI-Inflows © GDP 001 io) 140
Contribution of FIE w Invesiment in Fixed) Assets na.) na) 203 =| =
‘Composiion of FDI HAT Mol 95) 3
HMT 746) 65.1] -95) 22.308
Ratio of Exports to GDP ‘Composition of Exports MAI - 760/41 608
Primary Goods r og, 38 g8 =
‘Manufactured Goods nai 902) 961 39 =
‘Share of Processing and Assembling in Exports 43|[ T6 THỊ §I T5 ‘Contribution to Total Export Value State Owned Indust 100.0) TH9| 8| 289, S40
Collective Owned Industry na| nal 26
Trang 33‘A closer Iook at Guangdong’s FIE shows that they aw on average comparatively small, with over 90 % belonging tothe small and medium sized enterprise sector (Zeng 1999, 111 The key to the symbiotic ‘erowth partnership with Hong Kong has heen the translocation of industrial production capacities from Hong Kong's industrial high rise buildings to the Pear! River Delta FDI originating in Hong Kong has consequentially constituted the bulk of all EDI attriced by Guangdong FDI originating ia Hong Kong had a share of §2 & of total FDL-inflows to Guangdong during 1985-95, Inthe later half ‘of the 1990s the share however deopped to about two thinds of total inflows (Guangdongsheng longii Ju [Statistical Bureau of Guangdong} various) There is a very sttong concentration of industrial activities of entesprises funded by entrepreneurs from Hong Kong, Macao and Chinese Taipei in
‘Guangdong
“The business activities of these FIE are overwhelmingly concentrated in low-tech, labour-intensive ‘outward processing activities, The contribution of these outward-processing activites to economic development of Guangdong is quite substantial, despite the Fact that only a comparatively small share ‘of the outward processing exports constitutes value added in Guangdong With a processing main — which may be taken as a proxy For ocaly value added ~ of about 30 % export processing contebuted ‘one sixth to one fifth of Guangdong’s GDP in the late 1990s, It is important to note that this contribution to GDP does not go along with any major crowding out effets, but ean more oF less be regarded as a net addition to the province's economic performance, as these businesses employ production factors which had mostly been Iying ile before This applies fst of al to the unskilled Tabour fore, whieh, as the local population has long since been absorbed, is now recruited from the "unemployed in the inra- and exta-provineial hinterland The opportunity costs of land and capital, | the other hand, are comparatively small as neither Factor is used extensively in outward processing husinesses (Sung 2000, 64-66)
The impact of these entegprises onthe development of the local industry, however, has tobe evaluated as being comparatively small Due to ther outa orientation with respect to thee inputs as well as their output no major interfaces with the local instil sector exist and only minor spillover effets can be realised (Lemoine 1998, 102) One point, however, cannot be evaluated too highly: in ‘Guangdone’s 50,000plus processing plants a new generation of Chinese managers are educated and {getting accustomed to the realities of doing business in a market environment”
In addition, FIE have also been highly instrumental in the build up of Guangdong’s infrastructure, ‘which in turn constiutes another prerequisite for the attraction of new manufacturing FDI Ths effect results, on the one hand, from the generation of profits (lax revenues!) and accumulation of eapital in the indussial sector, which enables the localities to improve the local infrastructure (Lau 2000, 99; ‘Chan 1998, 62) On the other hand, substantial amounts of FDI have been directed into numerous ‘ventures designed to improve the transportation network and other infrastructure Facilites,
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The Case ofthe Vangzi River Delta
While Guangdong and the Peatl River Delta had been China’ most dynamic growth centre in the 1980s, the Yanga River Delta has become the focal point of economic development during the 1990s AA the core of this newly evolving economic area of the Yangri River Delta lies Shanghai, with the southern prefectures of Fiangsu province (Suman) and the northem prefectures of Zhejiang province constituting the outer sim (Chan 1998, 51-55) When China entered the reform era in the late 1970s, this resion had very different starting conditions from Guangdong and consequentally features & <istinetly different pattern of FDI attaction and economic development
At the outset of the reform era in 1978, Shanghai was China's most important contributor to national income, industrial output and revenue (Wei 2000, 127), ls GDP per capita was the highest in al ‘China, far above the national average (see table 2) The price for this exposed position, however, was very strict control by the central government and a dominating role of slate owned industry In 1978, SOE had a share of more than 91.1% provinces ia Shanghai's industrial output ~ the highest ratio ofall Chinese ‘The inclusion Shanghai was not included in the pilot regions allowed to explore new modes of foreign economic co- of Shanghai inthe Chinese reform and open dooe policy has been a very slow process ‘operation Instead of granting the local administration greater decision making powers, as was the case in Guangdong, central government was not willing to loosen its control aver economic development in the city At the same time, when Guangdong was profiting from a very favourable system of sharing its tax revenues with the central govemment, which not only allowed it to keep the larger part of revenues in the province but also entitled itt dispose of the revenues comparatively autonomously, Shanghai was in serious fiscal distress The central govemment was siphoning off the larger part of is tax revenues, leaving the ity with an inadequate budget (White IT 1989), seriously inhibiting urban infrastructure development andl induscsial upgraing
These structural characteristics proved to be a serious burden for the city’s economic development during the 1980s and have only recently heen overcome, Coinciding with a relative strengthening of Shanghai's position in the national political eicles relative to Guangdong, in the early 1990s Shanghai has been able to roverse its disadvantaged situation, The city’ fiscal situation has been dramatically improved and far-eaching decisions have been reached 10 reposition Shanghai in a nat this new development approach (Chan 1998, development
Inline with these developments various stages of FDI attraction can be distinguished in Shanghai While during the 1980s FDI concentrated mainly in hotels and other tourism related facilites, ‘manufacturing directed FDI picked up only in the later half of the 1980s, During the 1990s a ‘comprehensive intensification of FDI inflows could be observed FIE in the tertiary industies have been promoted by Shanghai's pilot role in opening various service industies, most of all in the financial sector, to foreign investors, With respect to manufacturing oriented FDI a bipolar structure has developed with small sale, export oriented enterprises on the one hand and large scale, local market oriented enterprises on the oer hand, While the former are mostly ventures by Hong Kong: and South East Asian investors, the later are mostly FIE with European and US interests 4 salient feature of recent FDI inflows to Shanghai isthe comparatively large share of big item projects directed in capital and skill intensive industries (Tian 1999, 168)
Trang 35‘Table 6: Developments in the economic structure 1980) 1990 | 1999 of Shangh: ing | ing | ine in poinls - poims “Shanin Naional GDP Structural Composition of GDP Tả #4 36 0ã, 25 Primary Sector 30 _43|_30[ 23 20 Secondary Sector THAỊ 638] 484| 15.4200 “Teriary Sector 186/ 319/496) 17.7, 310 “mg of Industial Ouiput Value SE sis) B oa) aT dg2)) H85, S69, T84 8P
‘Coniibution ie Owned Industry — to Industrial Ouipat Value mal wal 2A0 =
Collective Owned Indusiny Foreign Funded Enterprises nai na) nai ni 306 105 = =
Others na[na| l59 =f
Ratio of FDI Inflows o GDP, 0| 11] 35.1) 280) 350
Contibution of FIE to Investment in Fixed) Asses na.) 85") 175) 09% ‘Composition of FDI I FFE, nal 575 = = HMT na.) 335 = = Ratio of Exports to GDP (336) 386) 50, 3m4 nal aa đi = = na | 959) 30.1 zi) ae
‘Slate Owned Industry 545] S44 49] a9 | SES
Collective Owned Industry Foreign Funded Enterprises Oa | = 36 S81[ = - wos) SEO = =
Others [=I ¬ =
“BaafaridiE ` s = Dae
Source: Salsa! Gutes of Shanghal and Shangha latsea Yearbook
‘Shanghai's FIE are on average larger and more capital and technology intensive than FIE in ‘Guangdong In addition much more FIE ae ‘market seeking’ targeting the Chinese and not the world ‘market with their procicts AI this implies that Shanghai's FIE do not only have a large potential for ‘roth promoting spill over effets (in terms of theit technological capabilities), they are aso much ‘more inclined 1 realise these spill over effects as they are more dependent on collaborating with local enterprises,
‘Analysing the factors determining the inflow of FDI 10 Shanghai during the 1990s, a couple of points ‘seem to be of foremost importance:
= The take off in the 1990s hạ first ofall boon the consequence of a new orientation of| central government policies towards Shanghai This has allowed Shanghai to cast olf some of the eonstrants preventing a dynamic development inthe preceding decade The
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fiscal situation improved, market mechanisms were allowed to take hold, the tertiary sector blossomed”, and] Shanghai caught up with other regions in tems ofits openness to the world market = Shanghai has now become able to offer FIE very attractive supply side conditions Shanghai's role as Chinas leading national financial centre guarantees comparatively easy access to financial services, In addition it disposes of a large labour market atracting large numbers of unskilled Ibour as well a highly skilled managers, engineers And technicians from all over the country As a consequence of a — now burst ~ real estate bubble even oice space has lest in Seacity Allin all he city features the greatest range and availability of complementary services, FIE can probably find in China
~ Once the microenvironment ad been made more attractive for foreign investments it has become possible to profit from the historical (pre-war) heritage of the city Tis includes the revitalisation of historically song links to industrialists whose families had come to riches in Shanghai ane! moved to Hong Kong or Chinese Taipei during the war period ‘But Shanghai gained also from is former image as an ‘enigmatic’ Asian meteopolis, i s0 far as foreign experts could be quite easly attracted to the city’s PIES, while FIES in other ‘of the country had serious problems of Finding qualified expatriates
‘Shanghai features a large market for industial goods and is possessing one of the few consumer markets in China with a critical mass of people equipped with substancial purchasing power
~ Last not least the city is profiting from strong agglomeration of FIES in Shanghai allows for intensive iter-FIE abou division and has even created & effects The concentration local labour market for expatriates,
‘The rise of Shanghai has been complemented by developments in neighbouring Fangsu and Zhejiang provinces While Shanghai was still heavily condrdinel by ils special relaionship 10 central government, Jiangsu and Zhejiang were striving ahead in the promotion of township village ‘enteprises (TVE) and private enterprises (Wei 2000, 132) These highly enteprencurial small and medium sized enteeprises have now become one pillar of a very successful integrated top down ~ hottom up regional development process On the one side is Shanghai, which inthe course of its own, development process translocates ‘old industies to the periphery, while on the other side a bulk of "iehly Mleaible small and medium sized enterprises absorbs industrial processes no longer profitable ia ‘the metropolitan area, ae complements Shanghai's industrial fabric
‘The FE focated in the two provinces are taking advantage of exactly this mode of iner-repional co ‘operation A large part ofthese ventures are resouree secking enterprises with capital from Hong Kong and Taiwan, producing mainly for the world market The share of FIE in Jiangsus total expons, 8 is ‘even higher than in Guangdong These FIE are on the one hand profiting from the proximity” of ‘Shanghai and its tertiary industries, and on the other hand are taking advantage of the local enterprise sector, which is filing inthe complementary segments up- and downstream the value chain,
[Especially during the later half of the 1990s this symbiotic growth pattem between Shanghal and is periphery has been strengthened A large numiber of manufacturing plants has been transferred ftom Shanghai to the adjoining industrial districts, while the city itself has concentrated on transforming, itself into a centre for tertiary industries with the financial sector at its core (BoilloUMichelon 2000, 28), Shanghai is ow more and more cecupying a postion similar o that Hong Kong has been playing
for Guangdong,
Trang 37In general, FIE in the Yangzi River Delta region are characterised by a comparatively higher Pereentage of FFE (less HMT) in FIE, which manifests itself in a smaller share of Iabour intensive ‘outward processing in FIE business activities, and a larger scale and higher technology’ content of investment projects on average As outward processing businesses are less important for thei activities, FIE are obliged to integrate more with the lacal economies, dhereby creating more growth ‘enhancing spillover effects to local industry than in Guangdong These characteristics apply most of all to Shanghai, while the economic development process in the Yangzi River Delta Region in its ‘emiery is hecomiing more and more similar to that of Peart River Delta, with Shanghai asthe leading servie centre andthe surrounding prefectures as a manufacturing base
‘Towards FDI-Led Economic Development in China’s Hinterland,
It should be stressed that the Tocational advantages a region offers to atract FDI inflows ean only’ partly he shaped by government interventions Other variables are based on geographic and historic circumstances and cannot he changed by polities (Knidler/Alhers-hauser 2001, 294) Therefore, some regions will always be advantaged or disadvantaged vis-i-vis others There is no use in trying the impossible Each region can only ty to enhunce its particular locational advantages and ty to promote development processes corresponding to these The hinterland provinces therefore eannot and should not try to copy those development strategies that have been so successful inthe coastal regions A different type of EDI inflows has to he targeted In the following paragraphs we will therefore ‘outline the Western region's starting positon in terms of locational advantages and disadvantages Based on this knowledge we will then try to sketch some strategic choices the West has got in order to induce higher FDI inflows We will hen um to the role government may play in onler to kick-start and promote such a process, before we tum to the question how to derive maximum benefit fom FDI inflows
The starting position
‘The latecomers inthe Chinese hinterland are certainly in a disadvantaged postion with respect to their attractiveness for FDI They are far removed from the world marke, burdened withthe remnants of a faltering state owned industry handicapped by’ reform and open door policy that has discriminated ‘against them for at least 1S years and possessing ony a very restricted local market In addition there ‘vas a substanial brain drain to be observed during recent years when the Wester region's most Skilled and entrepreneurial youth migrated to the Fast Coast, where it could expect higher salaries and better living conditions And contrary to political will —but very much in concordance with economic theory ~ net-eapital flows have been moving from the West to the East belt, where much higher ‘earings could he realised, in uch a way further draining the West of important resources for its own ‘economic development
In comparison, locational advantages may be identified with respect to abundant natural resources, strong agricultural foundations, a reservoir of skilled labor in former military managed enterprises research institutes and universities, a huge mass of cheap unskilled labor, and numerous seenie spots with touristic potenti
Strategic Choices towards PDI-ed growth in China's Hinterland
Against this sobering analysis of the West's locational advantages and disadvantages the question arises, which strategies might be most suitable to attract FDI to the egion? Obviously the promotion
Trang 38‘of dirt expom orientation would run counter to the regions comparative advantages It rather seems to be more promising to target resouree-secking FDI, which integrate the West into the valve chains of the eastem coasts (expor) businesses, This stray aims on the one hand at investments from ‘Chinese enterprises and FIEs (including transplants of FIES already established in the East) whose ‘value chains contain sizeable segments which do not have to be located close tthe final customer We may think c of hack office actives, call centes, accounting, processing of tickets (attnes) and Dills (hotels) A sine qua non, however, would West and the prevention of a digital divide separating China's West from the Coastal belt, On the be the build up of & modera [infrastructure inthe ‘other hand improvements of transport logistics and the tearing down of intra-Chinese barriers to trade might give the West a chance o substitute those natural resource and labour intensive inputs which the Eastem Chinese enterprises are sill importing from outside the country.” I the longer term it might he Feasible to locate R&D Facilities inthe West and make use ofthe skilled labour until now absorbed in state and military enterprises
[A second, complementary strategy should target market-seeking investments and therefore try 10 holster local purchasing power This approach would he trying to atract investors that intend 10 produce for the local market and are therefore not predominantly ooking at the local factor
endowment
‘As a general principle, the industries targeted by the various initiatives to attract FDI should follow a Sequence of increasing infrastructure requirements, starting with those industies that require only ‘minor (extra) infrastructure Facilites and then moving onto projects requiring mote and more complex infrastructure
Central and Local Government as a Faciliator of FDI Attraction and Development
As there exist certain path dependencies and vicious / virtuous eyeles tend to establish themselves according to which FDI attaets more FDI, leaving regions with low FDI inflows in the first round With less and less chances to atract any as time unfold, it seems 10 be necessary that government hecomes involved Its ole is to break the vicious eyeles draining the Westem region of human and financial capital to the East's benefit and to boost local economic development up t0 a cenasin thyeshold level from where on market forces will suffice to attract funds and human resources, Such efforts however should be restricted to the creation ofan atractve investment climate, Administrative interferences on the enterprise level should be ruled out, Any politcal promotion activities should be ‘terminated once the targeted development threshold has been reaches! and market forces can take over,
In onder to promote FDI inflows to and economic development in the western regions, government hodies both on the central as well as on the local level will have to become active The central ‘government is responsible forthe integration of particular promotion policies in the context of the mgero-economy and the national transformation process It defines the freedom local governments have in ewating their own microenvironment for FDEattraction” In addition it can direct sources under its contro into the central and western provinees in order to improve the local investment ‘environment Last not least it has to act a8 a metator, aligning the diverging interests of various actors and regions The local governments will eventually be responsible forthe creation of attractive miro= ‘environments, providing the best possible bundles of immobile assets like infrastructure, services, supply networks, designed to complement the MNES’ mobile assets, the respective regions ean offer.”
‘With the launch of “the Western Development Stratesy inative in order to atract and allocate money and other resources for the development of China's poorer ann during te lst wo decades more neplected, westem region I has steered USS9 billion worth of stale
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investment into the egion in 2000 and plans to increase that annual figure this year and next, Itis clear ‘hat suppon for some national-level projets will come fom the central government, while a mix of provincial and national Funds wil support other projects Support for sill more projects will come fom sina townships and municipalities In addition to government grants, some projects will be funded by private or semi-government funds, such as bank loans, equity financing, and bonds In some eases, preferential financing will come from the government via preferential interest rues oF repayment Schedules The Stale Development Planning Commission (SDPC) announced that the percentage of forvign preferential loans used towards western development would he increased from 60 10 70 = This massive concentration of funds will retly improve the physical infrastructure ofthe westem region,
‘This build up of a physical infrastructure, however, will have to be complemented by an improved institutional set up ofthe market place Especially the banking system will ave to be modernized and freed of any “fiscal” functions it has sill retained fom the planed economic system A greater availability of RMB-loans and an improved bankability of projets would be highly instrumental to acting foreign investors, which until now shrink back from any engagement as they do not find the suppor by the financial system they nee! andl are used to from ventures in otber regions ofthe world
In-a move designed to prompt local initiative the central govemment has given not only greater authority to eal governments in western areas to suggest their own strategies, hut also has helped them in other ways For instance, Bejing recently raised the provinclal-level special economic zones ‘of Changsha, Hunan Province; Chengdu, Sichuan Province; Guiyang, Guizhou Provinee: Hefei, Anhui Province: Kunming, Yunnan Province: Xian, Shaanxi Province: and Zhengzhou, Henan Province to national-level status, allowing them to offer more generous incentives to investors Al seven locations ate viewed as strategically important tothe development of China’ interior,
Its also important to note thatthe weather and more developed eastem and coastal provinces are being asked to play a major roe, The government expects them to provide special subsidies and establish join ‘ventures with western entities, They are called upon lo develop new markets and bring advanced ‘management and innovative production styles to less-developed western enters Faster China, most promincnlly Shanghai, has shown some commitment to fading pars ofthe westem development program hy signing 200 co-operative contracts witha ttl value of over RMB 10 bilo (USS1.21bilion)
While the government is encouraging such assistance, the coastal regions do have some reasons of their own for wanting the west 10 develop, Not only will the west provide markets, energy, and a supply of raw and semi-finished materials that will contribute to the eas's own economic restructuring But the environmental and ecological programs inthe upper teaches ofthe Yangzi River will also reduce looding in the eastern provinces Better infrastructure wil allow the eas! to move its ‘goods more easily t0 the west’s 300 million consumers And improvements in electical grid <istbution and the construction of more pipelines will directly benefit the eas
Inits endeavours o attract FDI 1 make up for temaining shonfalls, the State Council has approved the "Directory of Dominant Industries in the Mille and Wester Region”, which will encourage the ffcient allocation of foreign funds invested in industrial sectors Foeign-funded projects listed on the forthcoming “Catalogue Guiding Foreign Investment in Industry” will enjoy advantageous tax rites For thee years afer the current preferential tax policy has ended, investors in these projects will enjoy an income tx rte as low as 15 % Enterprises with export volume exceeding 70‘ of total production may pay arate as Tow as 10 % ‘The Chinese government is relaxing its restitions on where foreigners may invest Foreign-funsed retail fins, for example, may now establish operations in the provincial capitals ‘of western China, and allowances for investment in telecommunications and insurance are expected 19 follow In adtion Chinese financial institutions will provide more loans to foreign-invested projects
Trang 40‘These various elements of the "Develop the West" strategy are certainly’ making an important contribution to the improvement of the Wester provinces’ attractiveness for FDL This alone, however, Will not he able to induce substantial FDL inflows to these provinces, Premier Zhu Rongii’s campaign t0 spur investment in westem China is geting mixed reviews from foreign businesses, While some ‘companies have taken the plunge and others the lack of roads and facilites that far inland, comuption and are considering thei options, many remain concerned about a lack of business savvy among local officials Nevertheless, some 80 multinational companies have already set up representative offices ester China, and 57 have invested directly, according to local media sourees Some ofthe companies leading the charge ae PepsiCo Ine, Coca-Cola Co., MeDonald's Comp, Carrefour, United Technologies Corp, and ABB Group, Exxon Mohil Corp and BP Amoco Ple are considering fo develop @ major oil and gas pipeline in the region, while Hewlt-Packard Co., Motorola Inc, Microsoft Corp an Intl Corp continue to size-up potential partners in the region, a Well
While the central government has dramatically improved the macro-environment of regional development and FDI attraction, local governments are now challenged, There seems to be sil substantial potential for improvements in the design of local micro-environments for foreign investments, These activities, however, must be part of a comprehensive strategy encompassing the huild up of a local industrial ssetor, and measures to prevent local capital and skilled labour from leaving the region — by market compatible incentives, not administrative interventions A region that Wants to allract foreign investments has to be altractive for local investments as well FIE need functional local industrial fabric to support their business activities
{An analysis of local stengths, thei value for prospective FIE, and eventually ways 10 improve on these strengths may’ be a gond staring point forthe formulation of local strategies for FDL attraction, Strengths that the ester oeal governments may build on their respective microenvironments for FDL inflows include:
About 55 6 of Chinas idle land mass suitable for farming and 73 % of Chinas pastures are located in the western region, By means of improving irrigation and inteoducing ‘modem production systems these agricultural resourees might be tured into very inoresting assets, atractve for local and foreign investors, Top quality processed food specialties may even become very lucrative export goods
~The heritage of a large number of military enterprises may not only constitute fon local development, but rather be tmed into an locational advantage as these a burden enterprises’ workforce is characterized by a comparatively lage share of engineers and technical personnel, Given a preparedness to change the existing business organisation and adopt modem management systems, these enterprises might be highly interesting parmners (or takeover targets) fr foreign investors
~ Provinces like Sichuan and Shaanxi have very song research institutions fof academic leaming These institutions have tradonaly been emphasizing and facilities technological subjects and might be tured into interesting partners for R&D oriented FTE looking for human capital, The example of India shows clearly that a high Tevel of human capital alone ean attract substantial FDI inflows,