Foreign Direct Investment in China

Foreign Direct Investment in China

CHALLENGES AND PROSPECTS FOR REGIONAL DEVELOPMENT

China in the Global Economy

«

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

Foreign Direct Investment in China

CHALLENGES AND PROSPECTS FOR REGIONAL DEVELOPMENT

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

Pursuant to Article 1 of the Convention signed in Paris on 14th December 1960, and which came intoforce on 30th 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 ofliving in Member countries, while maintaining financial stability, and thus to contribute to thedevelopment of the world economy;

– to contribute to sound economic expansion in Member as well as non-member countries in theprocess of economic development; and

– to contribute to the expansion of world trade on a multilateral, non-discriminatory basis inaccordance with international obligations.

The original Member countries of the OECD are Austria, Belgium, Canada, Denmark, France, Germany,Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden,Switzerland, Turkey, the United Kingdom and the United States. The following countries becameMembers subsequently through accession at the dates indicated hereafter: Japan (28th April 1964),Finland (28th January 1969), Australia (7th June 1971), New Zealand (29th May 1973), Mexico (18th May 1994),the Czech Republic (21st December 1995), Hungary (7th May 1996), Poland (22nd November 1996), Korea(12th December 1996) and the Slovak Republic (14th December 2000). The Commission of the EuropeanCommunities takes part in the work of the OECD (Article 13 of the 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’spolicy dialogue and co-operation with economies outside the OECD area. The OECD currently maintainspolicy co-operation with approximately 70 non-Member economies.

The essence of CCNM co-operative programmes with non-Members is to make the rich and variedassets of the OECD available 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 ofbest practices across all areas of public policy experiences among Members; on-going policy dialogueamong senior representatives from capitals, reinforced by reciprocal peer pressure; and the capacity toaddress interdisciplinary issues. All of this is supported by a rich historical database and strong analyticalcapacity within the Secretariat. Likewise, Member countries benefit from the exchange of experience withexperts and officials from non-Member economies.

The CCNM’s programmes cover the major policy areas of OECD expertise that are of mutual interestto non-Members. These include: economic monitoring, structural adjustment through sectoral policies,trade policy, international investment, financial sector reform, international taxation, environment,agriculture, labour market, education and social policy, as well as innovation and technological policydevelopment.

© OECD 2002Permission to reproduce a portion of this work for non-commercial purposes or classroom use should beobtained through the Centre français d’exploitation du droit de copie (CFC), 20, rue des Grands-Augustins, 75006 Paris,France, tel. (33-1) 44 07 47 70, fax (33-1) 46 34 67 19, for every country except the United States. In the United Statespermission should be obtained through the Copyright Clearance Center, Customer Service, (508)750-8400,222 Rosewood Drive, Danvers, MA 01923 USA, or CCC Online: www.copyright.com. All other applications for permissionto reproduce or translate all or part of this book should be made to OECD Publications, 2, rue André-Pascal, 75775 ParisCedex 16, France.

3

FOREWORD

Seiichi KondoDeputy Secretary-General, OECD

Foreign direct investment (FDI) has been one of the most significant features of China’s economicreform and opening up to the outside world. For the last two decades, China has gradually liberalisedits FDI policy regime, reduced restrictions and barriers to FDI, and improved the overall investmentenvironment. With its potentially huge and fast-growing domestic markets, relatively well-educatedpopulation and low-cost labour forces, China has become one of the most attractive destinations forFDI in the world. China’s accession to the WTO last November will accelerate the pace of FDIinflows to the Chinese economy. The share of OECD-based companies is expected to increase.

FDI has been playing an increasingly important role in China’s economy in terms of capital formation,employment creation, labour training, export promotion, technology transfer, productivity growth,competition and integration with the world economy, but its distribution among regions has been veryuneven. The relatively prosperous coastal regions have attracted the bulk of FDI to date, without anysignificant catching up by the central and western regions. The lagging central and western regions are

China’s provincial development policies

Source: Zhong guo kua shiji di qü xie tiao fa zhan zhan lüe,Development Research Center of the State Council, Beijing, Nov. 1997. Hainan

Xiamen

Xinjiang

Qinghai

Xizang

Yunnan

Sichuan

Gansu

Ningxia

Shaanxi

Shanxi

Henan

Hubei

GuizhouJiangxi

Zhejiang

Anhui

Jiangsu

Shandong

Hebei

Nei Mongol

Liaoning

Jilin

Heilongjiang

Hunan

Shenyang

Changchun

QiqiharHarbin

Hailar

Shijiazhuang

Dalian

Yantai

JinanQingdao

Hohhot Beijing

Tianjin

TaiyuanYinchuan

LanzhouXining

Zhengzhou

ShanghaiNanjing

HefeiHangzhou

Nanchang

Fuzhou

Wuhan

Guangdong

Haikou

Guangxi

Nanning

Kunming

Guiyang

Changsha

ChongqingChengdu

Xi'an

Yumen

Golmud

Lhasa

Shiqunhe

Karamay

Urumqi

Yining

Kashi

Fujian

Eastern regionLiaoning

HebeiBeijingTianjin

ShandongJiangsu

ShanghaiZhejiangFujian

GuangdongGuangxiHainan

Central regionHeilongjiang

JilinNei Mongol

ShanxiHenanAnhuiHubeiHunan

Guangxi

Western regionShaanxiGansuNingxiaSichuanYunnanGuizhouQinghaiXinjiangXizang

China’s provincial development policies

Source: Zhong guo kua shiji di qü xie tiao fa zhan zhan lüe,Development Research Center of the State Council, Beijing, Nov. 1997. Hainan

Xiamen

Xinjiang

Qinghai

Xizang

Yunnan

Sichuan

Gansu

Ningxia

Shaanxi

Shanxi

Henan

Hubei

GuizhouJiangxi

Zhejiang

Anhui

Jiangsu

Shandong

Hebei

Nei Mongol

Liaoning

Jilin

Heilongjiang

Hunan

Shenyang

Changchun

QiqiharHarbin

Hailar

Shijiazhuang

Dalian

Yantai

JinanQingdao

Hohhot Beijing

Tianjin

TaiyuanYinchuan

LanzhouXining

Zhengzhou

ShanghaiNanjing

HefeiHangzhou

Nanchang

Fuzhou

Wuhan

Guangdong

Haikou

Guangxi

Nanning

Kunming

Guiyang

Changsha

ChongqingChengdu

Xi'an

Yumen

Golmud

Lhasa

Shiqunhe

Karamay

Urumqi

Yining

Kashi

Fujian

Eastern regionLiaoning

HebeiBeijingTianjin

ShandongJiangsu

ShanghaiZhejiangFujian

GuangdongGuangxiHainan

Central regionHeilongjiang

JilinNei Mongol

ShanxiHenanAnhuiHubeiHunan

Guangxi

Western regionShaanxiGansuNingxiaSichuanYunnanGuizhouQinghaiXinjiangXizang

4

now competing actively for FDI, including new types of FDI previously excluded from the Chinesemarket.

Given the vastness of the Chinese hinterland, boosting FDI to these regions and ensuring that hostregions actually benefit from it will be a major challenge. A principal task for government at all levelswill be to increase the regions’ capacity to absorb FDI by improving the environment within whichinvestments can take place, including through incentives and conditions that will attract qualifiedindividuals to stay in the regions. The OECD has a long and productive collaboration with China inthe field of international investment and has developed a programme of co-operation and policydialogue with the Ministry of Foreign Trade and Economic Co-operation (MOFTEC). The objectivesof this programme include: reviewing the driving forces and economic effects of FDI on China’sdevelopment; supporting China's reform efforts aimed at improving the investment environmentthrough a dialogue on best FDI policies and FDI promotion practices; and addressing emerging newinvestment issues and challenges of common concern.

We have already travelled some distance in realising our common objectives. Both the OECD andMOFTEC attach high priority to the continuation of this co-operation. Our common future workcould include joint activities on mergers and acquisitions; FDI statistics; investment promotion bestpractices, and an FDI policy study of China.

We hope that the papers presented in the publication will contribute to a better understanding by Chinaand the international community of the challenges and prospects faced by China in pursuing itsregional development efforts and the role of FDI in this process.

5

PREFACE

Long YongtuVice Minister, Ministry of Foreign Trade and Economic Co-operation (MOFTEC), China

Two decades after it inaugurated reform, China has steadfastly adhered to the State policy of openingto the outside world, developed foreign trade, and actively attracted foreign direct investment (FDI).Reform and opening-up have promoted the sustained, swift and sound development of China’s nationaleconomy. As a result, China’s national economy has now taken the sixth, and its trade value theseventh place in the world. China has been, for nine consecutive years, the biggest destination of FDIamong all developing countries.

China has encountered the problem of imbalance in economic development among its differentregions. The Eastern coastal region of China, getting priority in opening up and grasping theopportunity, has made significant achievements in economic development. Compared with thesituation of the whole country, the Western region is relatively backward in terms of economicdevelopment, although it has also made some progress. Now, the Western region is gradually openingup and has achieved some success in absorbing foreign investment. By the end of 2001, more than28,000 foreign invested enterprises (FIEs) have established themselves in the Western region, and thetotal 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 if the Western regions cannot growfaster, the whole country will not be able to develop in a sustained, rapid and healthy way. It isimperative to accelerate the economic and social development of the Western region, so as to promoteeconomic restructuring of the whole nation, and to push forward social progress. The centralgovernment enforced the strategy of the Great Western Development in time to accelerate thedevelopment of the economy in the central and Western regions, promote co-ordinated development ofregional economies, rationalise economic layout across the nation, narrow the gap of developmentbetween the different regions, and pursue common prosperity.

The Western region has striking advantages and solid foundations to carry out investment and tradeco-operation. After decades of development, the region has established substantial material andtechnical foundation and ensured social stability. The system of market economy is taking shape andgrowing there. Moreover, the region is endowed with rich resources in agriculture, livestock, mineralsand tourist attractions. The vast territory and large population of Western China have also broughtabout tremendous market potential and comparatively low cost of production factors, including landand labour.

Some key cities in the West such as Chongqing, Chengdu and Xi’an, are capable of co-operating withothers since they have become important industrial bases with comprehensive sectors and centres ofscientific research and education. Ever since its enforcement, the strategy of the Great WesternDevelopment has attracted interest from both domestic and foreign investors. Driven by governmentinvestment, the development of the region experienced a fine start. The pace of infrastructure

6

construction in the region was speeded up. Ecological environment protection and construction werestrengthened. The advantage in science and education was played out, and the industrial structuringhas been evolving gradually. As we steadily push forward the strategy of the Great WesternDevelopment, this region will give full play to its advantages in resources or 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 and Western regions andfurther accelerate the economic development of these areas, since 1999, the country has unveiled aseries of preferential policies for foreign investment in central and western China, including theenlargement of open up areas, diversification of investment modes, relaxation of investmentrestrictions, preferential taxation policy for FIEs in encouraged fields, intensification of financialsupport to investment projects and the cultivation of a sound investment environment by establishingeconomic and technological development zones at national level. The incentives have already playeda positive role by giving forceful policy support to foreign investment in the area.

China has gone through a difficult journey of 15 years in order to first resume the contracting partystatus in the GATT and later to enter the WTO. Now that it has joined the WTO, China willimplement the commitments it has made and will further open, step by step, service areas such asbanking, insurance, telecommunication, foreign trade, domestic trade, and tourism, formulate uniform,standard and transparent investment access policy, intensify efforts to enact and perfect relevantforeign related laws and regulations, improve the level of administration according to law in foreignrelated economic work, and establish and perfect the foreign economic and trade regime, consistentwith the international prevailing rules and current situation in China.

The Western region of China is facing new opportunities for development. Experiences from othercountries show that less developed regions of a country could catch up with the other regions. The keyissue is that the less developed regions shall look into its real situation, learn from the experience ofthe other regions earnestly, pick the scientific development strategies, and give full play to itscompetitive advantages.

China will actively use the experiences of the other countries, including OECD member countries, forreference, to achieve a sound social and economic development in all its regions.

7

ACKNOWLEDGEMENTS

This book reflects a selection of edited papers presented to the OECD-China conference onForeign Direct Investment in China’s Regional Development, held on 11-12 October 2001 inXi’an.

It has been conceptualised and produced in the Directorate for Financial, Fiscal and EnterpriseAffairs by Mehmet Ögütçü and France Benois. Rainer Geiger and Pierre Poret provided guidance.Professor Markus Taube of Duisburg University in Germany co-edited and provided academiccounsel for this publication. Special thanks go to all who contributed papers to the book.

The OECD is particularly indebted to the Chinese Ministry of Foreign Trade and Economic Co-operation (MOFTEC) and the Xi’an local authorities, which co-organised the conference andensured the preparation of all papers presented by Chinese officials and scholars for this book.Thanks are due in particular to Long Yongtu, Vice Minister of Foreign Trade and Economic Co-operation, Zhang Wei, Vice Governor of Shaanxi Province, Liu Zuozhang, Deputy DirectorGeneral, Min Liping, Deputy Director, and Fan Wenjie, Deputy Director, of the ForeignInvestment Administration of MOFTEC.

Katherine Jones did a careful proof-reading and corrections on the text; Luz Beaty co-ordinatedthe conference preparations; and Edward Smiley and Alexandra De Miramon arranged the printingof the book.

For enquiries regarding this conference or future events in the context of OECD-China InvestmentCo-operation should be addressed to:

Mr. Mehmet ÖgütçüHeadNon-Members Liaison Group on International InvestmentOECD Directorate for Financial, Fiscal and Enterprise Affairs2, rue André Pascal75775 Paris Cedex 16, FRANCEFax: + 33 1 44 30 61 35E-mail: [email protected]

Ms. France BenoisInvestment Outreach Project Co-ordinatorOECD Directorate for Financial, Fiscal and Enterprise Affairs2, rue André Pascal75775 Paris Cedex 16, FRANCEFax: + 33 1 44 30 61 35E-mail: [email protected]

9

TABLE OF CONTENTS

INTRODUCTIONAmbassador Marino Baldi,Chairman, OECD Group on Co-operation with Non-Members,Committee on International Investment and Multinational Enterprises................................................ 13

Chapter I SETTING THE SCENE.................................................................................................... 15

Main Issues on Foreign Investment in China’s Regional Development:Prospects And Policy Challenges,Markus Taube, Professor, University of Duisburg, Germany,and Mehmet Ögütçü, Principal Administrator, OECD ................................................................... 17

The New Regional Patterns of FDI Inflow in China:Policy Orientation and Expected Performance,Professor Jiang Xiaojuan, China Academy of Social Sciences....................................................... 53

Business Perspective: Why did we Invest in China?Robert T. Dencher, General Manager, Business Development Shell (China) Ltd.......................... 71

Advantages and Investment Requirements in China’s Western Region:Particular Case of Lanzhou,Liu Yajun, Vice Mayor of Lanzhou ................................................................................................ 79

What Type of FDI for the Chinese Hinterland?Peter Kreutzberger, Counsellor, German Permanent Mission to the OECD................................... 85

Challenges for FDI in China’s Regional Development: Japanese Perspective,Hiroshi Matsumura, Directorand Akira Izumo, Assistant Chief,International Economic Affairs Division,Ministry of Economy, Trade and Industry, Japan ........................................................................... 89

Competitive Investment Environment, Rule of Law and Recipe for Success,Ann B. McConnell, Financial Economist,Office of Investment Affairs, United States Department of State................................................... 97

China’s Foreign Investment and Regional Development Strategy:Improving Comparative Advantages and Overcoming Impediments,Liu Yong, Senior Research Fellow, Development Research Center of the State Council ............ 103

10

Chapter IIINTERNATIONAL AND CHINESE EXPERIENCES ................................................................. 109

Foreign Direct Investment and Regional Development:Experience Of OECD Regions And Prospects For China,Bernard Hugonnier, Director, Territorial Development Service, OECD ...................................... 111

Foreign Direct Investment and Regional Development in Southeastern Turkey,������������� ����� ��� ��������� �������� � ���� ����������������������� ................... 121

Canadian Experience with Foreign Direct Investment and Regional Development:Some Observations,Jeff Nankivell, Counsellor, Canadian Embassy in Beijing ........................................................... 129

Lessons from Brazil’s Regional Development Policies,Alfredo Lopes Neto, Advisor for the Vice-Governor of the State of Ceará, Brazil ...................... 135

Experiences of China’s Coastal Region in FDI Attraction andLessons for Central and Western Regions,Ma Yu, Research Fellow, China Academy of Trade and Economic Co-operation....................... 145

Chapter IIIINVESTMENT PROMOTION AND LOCAL ENTERPRISE DEVELOPMENT .................... 153

Improving Investment Promotion in Western China,Andrew Proctor, Regional Manager, Asia Pacific Regional Office,Foreign Investment Advisory Service, World Bank Group .......................................................... 155

Best Practice Guidelines for Investment Promotion: Relevance to China,David Banks, Administrator,Directorate for Financial, Fiscal and Enterprise Affairs, OECD................................................... 161

The Experience of Promoting Foreign Investment in Saxony, Germany:“It’s All About People”,Güenter Metzger, President and CEO, Saxony Economic Development Corporation ................. 169

Foreign Investment Promotion in Shanghai: Lessons for Central and Western China,Chen Jianping, Assistant to the President,Shanghai Foreign Investment Development Board....................................................................... 177

Industrial Districts: An Italian Perspective,Vincenzo Del Monaco, Economic and Commercial Affairs, Italian Embassy in Beijing ............ 181

Township Enterprises in China and FDI,Zhang Tianzuo, Deputy Director,Bureau of Township Enterprises, Chinese Ministry of Agriculture.............................................. 187

11

Regional Development and Sustainable Investment:The Case for a Regional Multi-Stakeholders Forum and Observatory in West China,Philippe Bergeron, Director, Regional Institute of Environmental Technology........................... 191

Foreign Direct Investment andImportance of the “Go West” Strategy in China’s Energy Sector,Mehmet Ögütçü, Principal Administrator,Directorate for Financial, Fiscal and Enterprise Affairs, OECD................................................... 197

SYNTHESIS OF DISCUSSIONS AND CONCLUSIONS............................................................. 211

Synthesis of Discussions ............................................................................................................... 213

Conclusions and Policy Messages,Rainer Geiger, Deputy Director,Directorate for Financial, Fiscal and Enterprises Affairs, OECD............................................. 219

Liu Zuozhang, Deputy Director General,Foreign Investment Administration,Ministry of Foreign Trade and Economic Co-Operation .......................................................... 222

Annex I Author Biographies....................................................................................................... 225

Annex II Participants List ............................................................................................................ 229

13

INTRODUCTION

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 been located in the coastal areas, withoutany significant catching up by the interior – central and western – regions. We are aware that theChinese authorities are keen on redressing this growing imbalance in regional distribution of FDI.Xian, as the ancient capital of China and the gateway to the historic Silk Road, is at the heart ofChina’s ambitious regional development efforts. “The Western Development Strategy” launched lastyear and embodied in the five-year plan to 2005, is an ambitious top-down effort to steer state andprivate investment into the parts of China most in need of it but least likely to attract it on their own.

Changes in China and Growing FDI Flows

China has already undergone in a very short period of time profound transitions in its economy andsociety. These changes are putting great stress, on the individuals, the government structures and theenvironment.

China’s greater opening to the outside world, signalled by its accession to the World TradeOrganisation (WTO), will further improve the framework for its economic development including thatof its less favoured regions. In the process of globalisation, competition not only between nations butalso regions, both within and from outside China, has become stronger than ever. Local, regional andglobal issues can no longer be separated: they are converging. Regions and cities around the world areincreasingly involved in global competition for finance and investment, and they need to be highlyproactive to prosper in this new environment.

China can expect increased FDI inflows over the next five years following its WTO accession. Chinahas been a serious competitor for FDI globally because of its record on reform, its speed indevelopment (which is opening up new investment opportunities), its growing demand forinfrastructure, its increasingly sophisticated low-cost export base, and its range of sectors on offer forforeign participation where investors can expect good returns.

Worldwide FDI flows continue to expand, enlarging the role of international production in the worldeconomy. Cross-border mergers and acquisitions remain the main stimulus behind FDI, and they arestill concentrated in the developed countries. Last year Hong Kong (China) experienced anunprecedented FDI boom with inflows of about US$ 64 billion. China received US$ 41 billion, and itsoutward FDI flows increased.

14

The assumption of a strong macroeconomic environment in China over the next five years furtherimproves the prospects for FDI inflows into China. The front-end of more than 370,000 registeredforeign-funded enterprises in China (as of April 2001) – representing US$ 679 billion in contractedinvestment, US$ 360 billion in actual investment, and more than half of China's two-way trade at US$859 billion – has so far arrived in the quest for cheap labour and market access.

Regional Development and WTO Accession

The share of FDI in the total capital formation in China is quite high, especially in the coastal areas. Inthe 1990s, FDI inflows contributed to a quarter of the capital formation in Guangdong province; forFujian province, the figure was 20 %. In parts of Guangdong province such as Shenzhen, capitalinflows in the 1990s exceeded 50 % of the capital formation.

As China gains in wealth and, as a result, wages start rising, it will find it increasingly hard to retainthe interest of low-cost, labour-intensive operations. In the future, China may well lose comparativeadvantage, particularly in labour-intensive sectors, to countries like Vietnam, Bangladesh, Cambodia,and Laos. In turn, the coastal provinces are moving to the leading edge industries/technologies. Citiesin the Pearl River Delta, for example, now target capital- and skills-intensive higher technologyactivities, while labour-intensive industries are relocating inland.

Economists concerned with the effects of globalisation on China and, specifically, WTO accession,have pointed out that careful attention should be paid, as a consequence of WTO accession inparticular, to the lower income areas in China. Such areas are scattered throughout the country, andnot just in the western region. China requires a new approach to the development of its laggingregions, one that considers geography as well as natural, institutional, and human endowments indetermining appropriate responses. Otherwise, accession to the WTO could be seen in a negativerather than in a positive light when, in truth, it is just the reverse.

15

CHAPTER I:

SETTING THE SCENE

17

MAIN ISSUES ON FOREIGN INVESTMENT IN CHINA’S REGIONAL DEVELOPMENT:PROSPECTS AND POLICY CHALLENGES,

Markus Taube,Professor, University of Duisburg, Germany,

and

Mehmet Ögütçü,Principal Administrator, OECD

Introduction

Globalisation is increasingly testing the ability of regional economies to adapt and maintain theircompetitive edge. Performance gaps are widening between regions, and rapid technological change,extended markets and a greater demand for knowledge are offering new opportunities for regionaldevelopment. Yet this calls for further investment from enterprises, re-organisation of labor andproduction, upgrading skills and improvements in the local environment. Some regions with poor linksto the sources of prosperity, afflicted by environmental problems, migration, and lagging behind ininfrastructure and private investment, are finding it difficult to keep up with the general trends.

China is a country, where regional development is of a foremost priority. The population is dispersed,although unevenly, over a huge landmass, with rural regions being inhabited by more than 900 millionpeople, some two-thirds of the population. Since the launch of the economic reforms in 1978, China’sdominant development policies have gradually shifted from ones based on self-reliance to onesfavoring comparative advantage and open door policy. A large amount of existing foreign directinvestment (FDI) has been located in China’s relatively prosperous coastal regions, without anysignificant catching up by the interior central and western regions. While the eastern coastal regionaccounted for 88 % of the country’s total FDI during 1978 to 1999, the central region attracted 9 %and the western region only a minor fraction of the total US$308 billion in FDI inflows.1

Chinese authorities are keen on redressing the growing imbalance in regional distribution of FDI.Foreign investors, however, maintain that conditions are quite difficult in the western region. Theprovinces that lie inland from China's coast cover an area almost twice as big as India (56 % of thecountry's land area) and hold 23 % of its population. Their per capita gross domestic product is only60 % of the national average. But seen as a labor-intensive manufacturing base, the region is plaguedby poor transport and infrastructure that outweigh its lower cost structures. The central/westernregions may therefore not be able to copy the export-oriented development strategy of the coastalprovinces; therefore, a different development strategy would be defined and a different "type" of FDIto be attracted to the hinterland.

18

In an effort to close this economic gap, the Chinese government launched “the Western DevelopmentStrategy” (Xibu Da Kaifa) in January 2000.2 “The Western Development Strategy” constitutes acornerstone of the Tenth five-year plan (2001-2005), and is an ambitious top-down effort to steer stateinvestment, outside expertise, foreign loans and private capital into the parts of China most in need butleast likely to attract aid on their own. The area covered by this strategy includes six provinces (Gansu,Guizhou, Qinghai, Shaanxi, Sichuan, and Yunnan), five autonomous regions (Guangxi, InnerMongolia, Ningxia, Tibet, and Xinjiang), and one province-level municipality (Chongqing).3

This highly ambitious programme, however, is not undisputed. Some critics point out that increasedgovernment spending in the west will reduce the amount of money available for current socialprograms, health, education and welfare, thereby aggravating the problems at another hot spot ofChina's contemporary development process. In the perception of some foreign enterprises, theprogramme is not tackling all the main issues at stake for foreign investments in the region. Inaddition, they recognize that the benefits of westward development could take generations tomaterialize.

This paper looks at the nexus between FDI and regional development in China. Starting point is anaccount of the diverging economic development in China’s regions and the geographical patterns ofFDI-inflows to China. It is followed by some theoretical reflections on the determinants of locationchoice for FDI and the parameters of inter-regional competition for FDI inflows. The paper will thenturn to the concrete experiences of FDI attraction in two regions located in the Chinese coastal beltand the ensuing growth impulses that FDI exerted on their economic development. These two casestudies are then employed, as benchmarks against which the potential of FDI-driven growth processesin the Chinese hinterland will be discussed. It also examines the question of how far central and localgovernment might make a contribution to kick-off and promote such a process. The final section willexamine the impact of China’s accession to the World Trade organisation (WTO) and its possibleconsequences for FDI and 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 economicdevelopment process. Economic growth, however, has not been evenly distributed, for a rather limitednumber of provinces4 has been responsible for the greatest part of the enlargement of the nationaleconomy, the size of which more than quadrupled in the run of only two decades (World Bank 2000).Underlying this unbalanced growth experience is a bundle of factors, an incomplete list of whichencompasses:

− political reasons including the role a region has been attributed in the reform process, thedegree of local autonomy from central government, the degree of reform mindedness andentrepreneurial spirit of the local administrative bodies;

− historical reasons including parameters such as the involvement in former economicpolicy campaigns, the third front strategy and the resulting effects on the local industrystructures, and the emigration of parts of the population, which prospered in otherregions of the world; and

− geographical reasons including the existence of natural resources, access to the seaportsand inland waterways.

19

Table 1: Provincial Growth Dynamics and Share in National GDPGDP 1980 GDP 1999 Change

BillionYuan

currentprices

% ofnational

GDP

BillionYuan

currentprices

% ofnational

GDP

1980-99 %

Eastern Region197.919 45.03 4504.176 51.37 6.34

Beijing 13.907 3.16 217.446 2.48 -0.68Tianjin 10.352 2.35 145.006 1.65 -0.70Shanghai 31.189 7.10 403.496 4.60 -2.49Liaoning 28.100 6.39 417.169 4.76 -1.63Shandong 29.213 6.65 766.210 8.74 2.09Jiangsu 31.980 7.28 769.782 8.78 1.51Zhejiang 17.968 4.09 536.489 6.12 2.03Fujian 8.706 1.98 355.024 4.05 2.07Guangdong 24.571 5.59 846.431 9.65 4.07Hainan 1.933 0.44 47.123 0.54 0.10

Central Region168.565 38.34 3049.682 34.78 -3.56

Hebei 21.924 4.99 456.919 5.21 0.22Inner Mongolia 6.84 1.56 126.820 1.45 -0.11Shanxi 10.876 2.47 150.678 1.72 -0.76Jilin 9.859 2.24 166.956 1.90 -0.34Heilongjiang 22.104 5.03 289.741 3.30 -1.72Anhui 14.088 3.20 290.859 3.32 0.11Jiangxi 11.115 2.53 196.298 2.24 -0.29Henan 22.916 5.21 457.610 5.22 0.01Hubei 19.938 4.54 385.799 4.40 -0.14Hunan 19.172 4.36 332.675 3.79 -0.57Guangxi 9.733 2.21 195.327 2.23 0.01

Western Region73.103 16.63 1213.255 13.84 -2.79

Sichuan, incl. Chongqing 32.203 7.33 519.132 5.92 -1.41Guizhou 6.026 1.37 91.186 1.04 -0.33Yunnan 8.427 1.92 185.574 2.12 0.20Tibet 0.867 0.20 10.561 0.12 -0.08Shaanxi 9.491 2.16 148.761 1.70 -0.46Gansu 7.390 1.68 93.198 1.06 -0.62Qinghai 1.779 0.40 23.839 0.27 -0.13Ningxia 1.596 0.36 24.149 0.28 -0.09Xinjiang 5.324 1.21 116.855 1.33 0.12

Source: National Bureau of Statistics, China and own calculations.

20

Diverging Economic Development in China’s Regions

The Chinese economic growth process since 1978 has been accompanied by the evolution of a neweconomic geography5, which is characterised by a steep east-west slope of economic development. Theprovinces located in China’s eastern coast belt have experienced the most dynamic growth processeswhile the central and even more so the western provinces have been lagging behind. With the exceptionof the three traditional metropolitan centres of Beijing, Tianjin and Shanghai as well as the north easternprovince of Liaoning, all the other coastal belt provinces have experienced exceptional growth, raisingtheir share in the national GDP by more than 10 percentage points (see Table 1). In comparison, nearlyall the central and western provinces have lost in relative importance for the national economy.

Data on GDP per capita, see Table 2, may give an even better impression of the growth dynamics andwealth of the various regions. With the exception of the metropolitan centres, which have lost part oftheir 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 westernprovinces are not only markedly below the average, but have lost substantially in comparison to 1980.These results, however, have to be seen cum grano salis, as the migrant population is not adequatelyrepresented. Migrants are included in their home provinces and not their real living/working places.The result is a downward bias in the GDP per capita shown for home (e.g. Guizhou, Sichuan) and anupward bias for the host regions (e.g. Fujian, Guangdong).

To put it in a nutshell: The diverging regional growth patterns of the past two decades have led to apolarisation of the Chinese economy into two separate relative income clubs (Aziz/Duenwald 2001,13-15), i.e. the rich coastal and north-east provinces versus the poor hinterland provinces. While themembers of each of these two clusters are experiencing a convergence of per capita income in an intra-cluster comparison, the two clusters themselves show a diverging development pattern.

With respect to the coastal belt economies of Guangdong (Pearl-River Delta Region), Shanghai, Jiangsu,Zhejiang (Yangzi River Delta Region), the degree of divergence in industrial structures of these provinceswith the Central and Western Chinese provinces rose markedly during the 1990s. The only exception isHubei, a province located upstream the Yangzi River, which has been able to reduce the divergence of itsindustrial structures with those of the Yangzi River Delta, but not with those of Guangdong.

The industrial structures of the Pearl-River and the Yangzi River Delta Regions feature acomparatively high similarity, although the divergence has risen during the 1990s. This developmentmight indicate a rising complementarity between the two regions, a rising potential for labour divisionand a diminishing competitive juxtaposition on the national and international markets. Looking at thethree provinces constituting the Yangzi Delta Region a great similarity in the early 1990s can beobserved, which has since given way to higher divergence in the run of the decade. This developmentis an indication of a new pattern if intra-regional division of labour according to which Shanghai hasbeen concentrating on the tertiary industries, while translocating part of its industrial productioncapacities to the neighbouring provinces.

The patterns of China's FDI-inflows show a marked similarity to the patterns of regional developmentdescribed above, raising suspicions of some potential causal relationship between regionaldevelopment and attraction of FDI. As a matter of fact, a recent quantitative study indicates just this:there seems to exist a reinforcing effect between the inflow of FDI and industrial growth in China. FDIis a cause for industrial growth and economic development, which in turn causes the inflow of newFDI (Shan/Tian/Sun 1999). A recent IMF study comes to the conclusion that the regional disparitiesare probably primarily determined by the relative importance of FDI to the various regions (Dayal-Gulati/Husain 2000, 4).

21

Table 2: Provincial GDP per capitaGDP/capita 1980 GDP/capita 1999 Change

Yuancurrentprices

% ofnationalaverage

Yuancurrentprices

% ofnationalaverage

1980-99 %

China460 100.00 6.534 100.00 --

Eastern Region

Beijing 1 582 343.91 19 846 303.73 -40.18Tianjin 1 392 302.61 15 976 244.51 -58.10Shanghai 2 738 595.22 30 805 471.46 -123.76Liaoning 811 176.30 10 086 154.36 -21.94Shandong 402 87.39 8 673 132.74 45.35Jiangsu 541 117.61 10 665 163.22 45.61Zhejiang 470 102.17 12 037 184.22 82.05Fujian 350 76.09 10 797 165.24 89.16Guangdong 473 102.83 11 728 179.49 76.67Hainan 354 76.96 6 383 97.69 20.73

Central Region

Hebei 427 92.83 6 932 106.09 13.27Inner Mongolia 361 78.48 5 350 81.88 3.40Shanxi 442 96.09 4 727 72.34 -23.74Jilin 445 96.74 6 341 97.05 0.31Heilongjiang 694 150.87 7 660 117.23 -33.64Anhui 291 63.26 4 707 72.04 8.78Jiangxi 342 74.35 4 661 71.33 -3.01Henan 317 68.91 4 894 74.90 5.99Hubei 428 93.04 6 514 99.69 6.65Hunan 365 79.35 5 105 78.13 -1.22Guangxi 278 60.43 4 148 63.48 3.05

Western Region

Chongqing 4 826 73.86 --Sichuan 329 71.52 4 452 68.14 --Guizhou 219 47.61 2 475 37.88 -9.73Yunnan 267 58.04 4 452 68.14 10.09Tibet 471 102.39 4 262 65.23 -37.16Shaanxi 338 73.48 4 101 62.76 -10.71Gansu 388 84.35 3 668 56.14 -28.21Qinghai 473 102.83 4 662 71.35 -31.48Ningxia 433 94.13 4 473 68.46 -25.67Xinjiang 410 89.13 6 470 99.02 9.89

Source: National Bureau of Statistics and own calculations.

22

The initial legal and institutional basis for an inflow of FDI to China was established only in the late1970s and early 1980s. Since then China has taken a number of measures to intensify the flow of FDIto the country or regions thereof. Special economic zones and industrial parks have been establishedwithin which foreign invested enterprises (FIE) experience a better regulatory environment andinfrastructure facilities than in other parts of the country. They have been given tax benefits, arelatively liberal foreign-trade regime, and granted other diverse special conditions under which thebusiness activities of companies with foreign participation are subject to considerably differentconditions than businesses that are financed purely by Chinese capital (Khan 1991, Appendix 4).

But still seriously constricted by regional, sectoral restrictions and specific qualifications (concerningforex balances, local content regulations, access to the local goods and factor markets, etc.) which hadbeen motivated by ideological reservations that FIE might constitute an instrument of foreigncapitalists exploiting the country (Hsu 1991, 134-136), FDI inflows picked up only slowly in the1980s. It was not before China’s strong commitment to a market economy in the early 1990s that thecountry was able to attract truly substantial amounts of FDI. 6 Since then the development has beendramatic (see Figure 1).7

Between 1995 and 1999 China absorbed 7.5 % of global FDI flows and about one quarter of all FDIflows directed towards developing countries. In the years 1993 to 1996 China was even host to morethan one tenth of global FDI. The accumulated FDI stock of China amounted to more than 6 % of theglobal total in 1999 (UNCTAD various). The bulk of these massive FDI inflows did not stem from theworld economy’s industrial growth centres. The triad economies of the EU, Japan and USA eachaccounted for less than 10 % of all China-bound FDI, while Hong Kong, Chinese Taipei andSingapore commanded in excess of one half of all China-directed FDI flows (National Bureau ofStatistics, China and OECD 2000, 7).

Figure 1: World FDI inflows to China

Quantitative Development of Actually Realized FDI in China, 1979-2000

0

5

10

15

20

25

30

35

40

45

50

1979-1983

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Mrd. US$

Data: Guojia tongji ju [National Bureau of Statistics] various. HKTDC.

In terms of their regional distribution FDI inflows have been heavily concentrated in China's coastalprovinces (the "eastern" region), while the central and western regions have attracted only marginalshares of the national FDI inflows (Table 3).

23

Table 3: Geographical Distribution of FDI Stock in Chinain percentage

1983-1998 1980s 1990s

Eastern Region 87.8 90.0 87.6

Central Region 8.9 5.3 9.2

Western Region 3.3 4.7 3.2

See table 1 for the provinces constituting the three regions.

Source: OECD 2000, 8f.

This highly unbalanced picture is reproduced when looking at the province level. Here Guangdongseems to constitute a class of its own. During the 1980s Guangdong absorbed nearly one half of allFDI China attracted during this period. In the 1990s, when the volume of China-bound FDI roseexponentially, the province still hosted more than one quarter of the national FDI stock. Taking theperiod as a whole Guangdong has absorbed nearly one third of all FDI stock China attracted since thebeginning of the reform era (OECD 2000, 8f.).8

The next most important host provinces for FDI have been Fujian and Jiangsu with a share of about 10% of the national FDI stock each. In the central region the most attractive regions are Henan, Hubeiand Hunan, while Sichuan and Shaanxi lead the western provinces.

These relative degrees of importance and the dynamics of the last decade are also reflected in Table 4,where the provinces’ share in total FIE industrial output value and its change is documented. As can beseen, the eastern region has lost some of its importance as a production location for FIE, but has still ashare of nearly 90 %. Nearly all the losses of the eastern region have been absorbed by the centralregion, leaving the western region with a still negligible share in FIE industrial production.

Main Determinants of China-bound FDI Flows: Theoretical Considerations

Any analysis of the development of FDI inflows over time and their regional distribution mustconsider why an enterprise should engage in investment projects outside its home region. Theproduction of goods and services in a foreign country will incur additional costs arising from the needto dispatch personnel abroad, international communication and travel/transport, language and culturalbarriers, increased costs of information gathering and securing contractual security. This section willtherefore first look at the motives for FDI from a corporate perspective; and then, against thebackground of the investors’ motivation for FDI, will move on to the perspective of the prospectivehost regions. It will then try to identify the parameters with which various locations are competing forFDI inflows and the manipulation of which might influence the location choice of multinationalenterprises (MNEs).

24

Table 4: Contribution of FIE located in various provinces to national total industrial outputvalue by FIE

1999 Change to1991 in %

pointsFIE # FFE # HMT FIE

Eastern Region 88.40 86.94 90.06 -4.65Beijing 4.12 5.82 2.25 -1.05Tianjin 5.16 7.94 2.09 1.82Shanghai 14.91 19.96 9.33 -2.65Liaoning 3.21 4.70 1.56 -1.99Shandong 5.20 7.29 2.89 3.68Jiangsu 11.72 14.37 8.79 1.69Zhejiang 4.81 4.01 5.70 1.62Fujian 7.14 3.77 10.86 1.71Guangdong 31.92 18.88 46.37 -5.77Hainan 0.21 0.20 0.22 0.35

Central Region 8.98 10.08 7.77 4.08Hebei 1.73 1.53 1.95 0.32Inner Mongolia 0.23 0.19 0.29 0.06Shanxi 0.24 0.17 0.32 0.15Jilin 1.19 1.88 0.43 1.03Heilongjiang 0.59 0.65 0.52 0.26Anhui 0.79 1.05 0.51 0.47Jiangxi 0.43 0.57 0.28 0.17Henan 1.22 0.97 1.49 0.65Hubei 1.56 1.82 1.26 0.79Hunan 0.48 0.49 0.46 0.19Guangxi 0.52 0.76 0.26 -0.01

Western Region 2.61 2.97 2.17 0.57Sichuan, incl. Chongqing 1.26 1.72 0.74 0.47Guizhou 0.08 0.09 0.06 -0.24Yunnan 0.29 0.30 0.27 0.16Tibet 0.00 0.00 0.00 0.00Shaanxi 0.67 0.64 0.70 0.16Gansu 0.12 0.04 0.22 0.09Qinghai 0.02 0.00 0.04 0.02Ningxia 0.08 0.12 0.03 0.03Xinjiang 0.09 0.06 0.11 -0.12

FIE: foreign invested enterprises (comprising FFE and HMT)FFE: foreign funded enterprises excluding those with capital from Hong Kong, Macao and Chinese TaipeiHMT: enterprises with capital from Hong Kong, Macao, Chinese TaipeiSource: National Bureau of Statistics, China and own calculations.

25

The Investor’s Motivation

The theory of the MNE as developed by Hymer, Kindleberger, Heckscher, Ohlin, Casson, Vernon andothers, and integrated in Dunning’s eclectic OLI paradigm (Dunning 1981) identifies four basicmotives for FDI, a mixture of which usually determines the investment behaviour of MNEs(Stein 1991): resource seeking FDI; efficiency seeking FDI; market seeking FDI; and strategic asset /capability seeking FDI.

− Resource seeking FDI is motivated by the wish to exploit interregional factor pricedifferentials for the MNEs production process. This type of FDI usually amounts to avertical split of the MNEs production process between skill and/or capital intensiveprocesses at the headquarter, and labour intensive manufacturing abroad. As the differentfactor proportions found in the host economy often go along with low local purchasingpower, the FIE are mostly export oriented (Helpman/Krugman 1985).

− Efficiency seeking FDI follows a similar pattern. It is driven by the motivation to realiseeconomies of scale and scope, to diversify the MNEs’ risk exposure, and to takeadvantage of the different comparative cost advantages of various economies for theMNEs’ production process.

− Market seeking FDI is motivated by the intention to supply a market that until then hadbeen supplied with exports (if at all) with locally produced goods. It is not thedifferences in factor prices that lead to this move, but rather the appraisal of proximity tothe foreign market versus the advantages of concentration of the production process atone location. Whenever the advantages of proximity outweigh those of concentration,FDI will appear to be a rational choice (Markusen/Venables 1998). This type of FDI maybe classified as "horizontal" as the production process is not split, but rather duplicated atthe foreign location. Specific reasons motivating market seeking FDI may include thepotential of the foreign market, the need for complex product adaptations to local tastesand demand structures, the wish to follow important customers into the foreign market,etc. Given the existence of a reasonable market size, the willingness for market seekingFDI operations may also be prompted by the need to circumvent barriers to trade erectedby the host economy.

− Strategic asset / capability seeking FDI is based on strategic considerations with theintent to consolidate and strengthen the long-term competitiveness of the corporation.Such FDI operations may be driven by the motivation to occupy market shares andachieve learning effects in an early stage of market development, to block or inhibitbusiness activities of competitors, or to counter the move of a competitor alreadypositioning himself in the foreign market.

The Host Economy’s Perspective

Seen from the corporate perspective FDI operations are to be understood as rational managementstrategies devised to enhance corporate wealth in the context of specific environmental constraints. Atthe same time the active promotion of FDI inflows may also be the dominant strategy for localgovernments in order to promote regional economic development.9 The main positive impulses FDIinflows may exert on the host country are:

26

− an expansion of domestic capital formation beyond the degree that could be financedwith domestic savings;

− the provision of production and process technology formerly not known to the hostcountry;

− the creation of jobs;

− the training of technical and managerial personnel;

− the introduction of modern management and organisational know-how;

− the possibility to use foreign invested enterprises (FIE) as a benchmark for localenterprises with respect to various parameters like capital and labour productivity,logistics, quality control etc.

− the promotion of the domestic export-industry plus the ensuing positive effects on thetrade balance and the availability of foreign exchange.

Parameters of Locational Choice

The motivations for FDI are quite diverse. Accordingly, the demands MNEs have on a potential hosteconomy can differ considerably, depending on the main motivation for the venture. Some of theparameters determining the investment decision of a MNE are lying beyond the influence of thepotential host regions,10 others however may be created deliberately in order to attract FDI.

Factors increasing the attractiveness of a region for any type of FDI include:

− the existence of a comprehensive and transparent regulatory framework covering all FDIrespectively FIE related activities, which is also easily enforceable;

− an efficient administrative apparatus devoid of excessive red-tape and preferablyservicing FIE with one-stop approval processes;

− a coherent economic policy that allows long-term planning;

− the availability of an efficient infrastructure in terms of transportation,telecommunication and financial services;

− the presence of FIE. The larger the existing accumulated FDI stock the more positiveexternalities (i.e. the availability of human capital, complementary industries,experienced local administration etc.) new FIE can expect to benefit from;11

− the availability of local enterprises able to provide complementary business services andengage in subcontracting.12

Policies offering fiscal and/or tariff incentives to foreign investors are often mentioned as a way toattract FDI. Empirical evidence, however, indicates that the impact of such policies on the inflow ofFDI is only marginal (Wells 2001; Mintz 1990). Only in a stalemate situation, when two competing

27

regions appear to be equally attractive to an investor, might such incentives have decisive influence onthe location choice.

Resource and efficiency seeking FDI can be expected to pay special attention to the followingparameters.

− Access to local goods and factor markets. The unimpeded access to local goods andfactor markets is a precondition for any FIE engaging in manufacturing activities in agiven region. The prevalence of grey markets, where administrative bodies, old boysnetworks and other informal arrangements dominate the allocation of inputs, inhibits theestablishment of FIE.

− Labour cost. One of the most important determinants for resource seeking FDI is theavailability and price (efficiency wage rate) of unskilled labour. In terms of the intra-Chinese competition for FDI, this factor, however, may be less important than might bededuced from the literature dealing with international location choices. The efficiencywage differentials between the various regions are comparatively minor, as a perpetualstream of migrants is flooding the centres for labour intensive manufacturing at theChinese coast belt. This intra-Chinese translocation of unskilled labour is preventing thewages in the industrial growth centres from rising to prohibitive levels (Broadman/Sun1997, 348).

− Human capital. A region’s human resource endowment, however, may be regarded as animportant differentiating factor. In China skilled labor is scarce and the non-availabilityof managers, engineers or skilled technicians in a given region might prove to be highlydetrimental to the attraction of FDI.

− Natural resource endowment. The availability of abundant natural resources promotesthe attraction of FDI. This, however, applies only to a comparatively small share ofMNEs that are active in such natural resource intensive businesses.

− Access to the world market. Resource seeking FDI, which target the world market withtheir products, are dependent on an unrestricted access to the global market place.Inhibitions resulting from anti-trade bias of the host economy or trade barriers erectedagainst the host economy, such as quotas, would remove one of the central preconditionsfor the execution of such FDI. Administrative measures adding to the transaction costs oftrade activities have a negative effect on FDI attraction.13 The provision of transactioncost saving infrastructure facilities, linking the host region with the target markets of its(potential) FIE in terms of transportation as well as communication will increase aregions attractiveness for FDI.

Market seeking FDI will first of all take into consideration the size and growth perspectives of apotential investment location. GDP and per capita income are important parameters to evaluate thepotential demand of a region. They, however, show only a part of the picture, as only segments of thelocal market may be accessible. Taking into account the regional fragmentation of the Chineseeconomy and the existence of artificial barriers to intra-Chinese trade, the size of the local market(often identical to an administrative region) that can be supplied from a given location becomes afurther important parameter for the investment decision. This point is highlighted by the exorbitantcosts of intra-Chinese transportation,14 which has resulted in the duplication of transportation andlogistics networks, by MNEs already operating in China.

28

A further restriction of the relevant market size arises from restricted access to distribution channels,which may prevent FIE from realising potential business. A further parameter influencing theinvestment decisions of market seeking FDI might be seen in the degree of urbanisation, which maybe taken as a proxy for a comparatively affluent population, autonomous and increasingly marketoriented administrative bodies, and a favourable industrial fabric of private entrepreneurs, serviceorientated businesses and functioning trade mechanisms (Gipouloux 1998, 9f; Qu/Green 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 nowturn to the concrete experiences of two regions that have been the main beneficiaries of FDI inflowsduring the past two decades. The identification of the factors contributing to their extraordinarysuccess in the attraction to FDI, and their experiences in FDI induced economic development mayprovide some clues as to what could be appropriate measures to initiate a FDI-led growth process inthe Chinese hinterland.

The Case of Guangdong and the Pearl River Delta

The province Guangdong, and especially its Pearl-River Delta Region, have, since the early 1980s,gone through a tremendous growth process propelling the province to the top of China’s most affluentregions (see table 1 above). With an average real GDP growth of 14.2 % per year Guangdong not onlyby 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-off’ periods, as well (Lan1999, 210). These developments have been accompanied by an impressive accumulation of FDI in theprovince. As shown above, Guangdong absorbed nearly one half of all FDI China attracted during the1980s, and was host to more than one quarter of the national FDI inflows in the 1990s.

Various factors have come together in order to facilitate this development process:

− First of all, Guangdong has profited immensely from its long coastline facing the SouthEast Asian growth centres and its proximity to major international shipping routesproviding it with easy access to the world markets. This geographical setting hasprovided the province with a logistical advantage vis-à-vis the interior provinces.

− In historical perspective Guangdong was fortunate to be outside the focus of Beijing'seconomic policy at a time when ideological and political considerations prevailed overeconomic calculus. During the early 1960s to the mid 1970s one of the main features ofChina’s economic policy was the third front strategy (Naughton 1988). Expecting theoutbreak of a new war, the Chinese government tried to transfer the industrial backbone ofthe Chinese economy from the coastal areas to the Western hinterland, where it would bemuch better protected against war destruction and could continue to supply the Chineseforces with military equipment. Guangdong’s industrial basis was comparatively weak andtechnologically backward in the late seventies (Liao/Guan 1988, 118). Its state ownedenterprise sector was much smaller and less important for the local economy than in otherprovinces. In retrospect, however, Guangdong has been profiting from the neglect it hadexperienced during the previous decades. In contrast to other regions, whose economictake-off in the eighties was seriously burdened by industrial structures inherited from thepreceding three decades, Guangdong could enter the era of economic reform and openingwithout having to tear down a large inefficient state owned industrial sector first.15

29

− The population of Guangdong has strong ties to the global community of overseasChinese. Guangdong is the home province of a community of about 19 million overseasChinese (Zhang 2000, 130; Redding 1990, 22), a considerable number of which havecome to affluence in other parts of the world. These overseas Chinese entrepreneurs havebecome important promoters of Guangdong’s economic development (Sah/Taube 1996).Especially the population of Hong Kong has very strong ties to Guangdong. In 1981about 40 % of Hong Kong’s population was said to have been born in mainland China.And in the early 1990s about 80 % of Hong Kong’s population were either born inGuangdong or could trace its family roots to the neighbouring Chinese province (Wu1994, 16). These close (blood) ties could have been instrumentalized to create informalco-ordination mechanisms that were able to provide contractual security wherever formalregulations were missing (Ben-Porath 1980).

− Guangdong was chosen by the central government as a forerunner of the Chinese reformand open door policy (Howell 1993, 53). Not only were three of the four SpecialEconomic Zones established in 1979/80 located in Guangdong, but the provincialgovernment was also granted considerable leeway in respect to the design of itseconomic institutions as well (Huang/Zheng/Ding 1993; Taube 1997). That wayGuangdong gained substantial independence from the central government and was ableto become detached from the much slower reform process in other parts of the country.By constituting the avant-garde of the Chinese reform movement Guangdong has beenable to offer local and foreign entrepreneurs the most progressive institutional frameworkto be found in China’s transformation economy.

− The economic development of Guangdong has, to a considerable extent, been driven bythe entrepreneurial spirit of its local government cadres (Vogel 1989, 313-337), whichhave striven hard to make the best of the privileged position the province held in terms ofits geographical, historical, cultural and political situation. For a substantial period oftime Cantonese officials have been acting with a great degree of autonomy from centralgovernment and existing regulations.16 This behaviour can be regarded as an expressionof progressive forces driving the transformation progress ahead. To a considerabledegree, however, it has also contributed to macro-economic instability and to theemergence of inflation, volatile growth cycles, and the build up of industrial over-capacities on a national level.

− The most important element in Guangdong’s growth miracle, however, has probablybeen the fact that, when, in the late 1970s, the province reoriented itself towards theworld economy, it was lucky enough to find right on its doorstep an economy thatfeatured complementary industrial structures.

Whereas Guangdong disposes of an almost inexhaustible supply of cheap labour, continuallyaugmented by a permanent stream of migrant workers from the hinterland, and has also been in aposition to provide low-cost housing and land-use rights, Hong Kong’s advantages lay in havingenterprises featuring marketable products, precise knowledge of the global market, management staffwho have learnt how to hold their own in an extremely competitive environment as well as efficientfinancial and logistic sectors. These respective endowments have been ideally combined since the late1970s. Just when Hong Kong was approaching the limits of labour intensive manufacturing in theconfines of its territory, the political changes in Beijing opened the possibility to relocate theseproduction processes across the border to Guangdong.

The dominant mode of co-operation has been processing and assembling operations, with the Hong Kongside providing construction plans, raw materials and primary products to the Cantonese plant, where the

30

labour intensive value-added processes are carried out. The finished products are then distributed via theglobal distribution network established by the Hong Kong office. In this form of labour division the HongKong side is responsible for market research, product design, quality control, customer-oriented packaging,and marketing, while the Cantonese side is in charge of the actual manufacturing process.

Over the past twenty years economic development in Guangdong, especially in the Pearl-River Delta,has been in tandem with Hong Kong, which has been the leading partner in this symbiotic relationship,while Guangdong has been absorbing nearly all labour intensive segments of the value chain fromHong Kong. The economic structure of Guangdong has changed dramatically (see Table 5). FIE havebecome the dominating enterprise form in an economy that is highly outward oriented.

Table 5: Developments in the economic structure of Guangdong, 1980-19991980in %

1990in %

1999in %

‘99-‘90in %

points

‘99-‘80in %

pointsShare in National GDP 5.6 10.2 9.7 -0.5 4.1Structural Composition of GDP

Primary Sector 33.2 24.7 12.1 -12.6 -21.1Secondary Sector 41.1 39.5 50.4 10.9 9.3Tertiary Sector 25.7 35.8 37.5 1.7 11.8

Structure of Industrial Output ValueLight Industry 63.0 71.3 66.0* 3.0* -5.3*Heavy Industry 37.0 28.7 34.0* -3.0* 5.3*

Contribution to Industrial Output ValueState Owned Industry 63.1 39.3 7.6 -31.7 -55.5Collective Owned Industry 27.6 36.3 22.2 -14.1 -5.4Foreign Funded Enterprises 1.9 6.9 48.4 41.5 46.5Others 7.3 17.5 21.8 4.3 14.5

Ratio of FDI-Inflows to GDP 0.008 0.04 14.2 14.0 14.0Contribution of FIE to Investment in FixedAssets

n.a. n.a. 20.3 -- --

Composition of FDIFFE 12.6** 25.4 34.9 9.5 22.3**HMT 87.4** 74.6 65.1 -9.5 -22.3**

Ratio of Exports to GDP 15.2 34.3 76.0 41.7 60.8Composition of Exports

Primary Goods n.a. 9.8 3.9 -5.9 --Manufactured Goods n.a. 90.2 96.1 5.9 --

Share of Processing and Assembling in Exports 4.2 72.6 77.7 5.1 73.5Contribution to Total Export Value

State Owned Industry 100.0 74.9 46.0 -28.9 -54.0Collective Owned Industry n.a. n.a. 2.6 -- --Foreign Funded Enterprises 0.0 24.7 50.7 26.0 50.7Others 0.0 0.4 0.7 0.3 0.7

* Data for 1997 as in the following years a new statistical concept has been applied making a comparison overtime impossible.** Data for 1985.Source: Statistical Bureau of Guangdong and Guangdong Statistical Yearbook.

31

A closer look at Guangdong’s FIE shows that they are on average comparatively small, with over 90 %belonging to the small and medium sized enterprise sector (Zeng 1999, 111). The key to the symbioticgrowth partnership with Hong Kong has been the translocation of industrial production capacitiesfrom Hong Kong’s industrial high rise buildings to the Pearl River Delta. FDI originating in HongKong has consequentially constituted the bulk of all FDI attracted by Guangdong. FDI originating inHong Kong had a share of 82 % of total FDI-inflows to Guangdong during 1985-95. In the latter halfof the 1990s the share however dropped to about two thirds of total inflows (Guangdongsheng tongjiju [Statistical Bureau of Guangdong] various). There is a very strong concentration of industrialactivities of enterprises funded by entrepreneurs from Hong Kong, Macao and Chinese Taipei inGuangdong.

The business activities of these FIE are overwhelmingly concentrated in low-tech, labour-intensiveoutward processing activities. The contribution of these outward-processing activities to economicdevelopment of Guangdong is quite substantial, despite the fact that only a comparatively small shareof the outward processing exports constitutes value added in Guangdong. With a processing margin –which may be taken as a proxy for locally value added – of about 30 % export processing contributedone sixth to one fifth of Guangdong's GDP in the late 1990s. It is important to note that thiscontribution to GDP does not go along with any major crowding out effects, but can more or less beregarded as a net addition to the province's economic performance, as these businesses employproduction factors which had mostly been lying idle before. This applies first of all to the unskilledlabour force, which, as the local population has long since been absorbed, is now recruited from theunemployed in the intra- and extra-provincial hinterland. The opportunity costs of land and capital, onthe other hand, are comparatively small as neither factor is used extensively in outward processingbusinesses (Sung 2000, 64-66).

The impact of these enterprises on the development of the local industry, however, has to be evaluatedas being comparatively small. Due to their outward orientation with respect to their inputs as well astheir output no major interfaces with the local industrial sector exist and only minor spillover effectscan be realised (Lemoine 1998, 102). One point, however, cannot be evaluated too highly: inGuangdong's 50,000plus processing plants a new generation of Chinese managers are educated andgetting accustomed to the realities of doing business in a market environment17.

In addition, FIE have also been highly instrumental in the build up of Guangdong's infrastructure,which in turn constitutes another prerequisite for the attraction of new manufacturing FDI. This effectresults, on the one hand, from the generation of profits (tax revenues!) and accumulation of capital inthe industrial 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 numerousventures designed to improve the transportation network and other infrastructure facilities.

These self-enforcing effects have contributed to a continuous increase of FDI inflows to Guangdong.However, they have not been able to prevent a reduction in the relative importance foreign investorsare attributing to the province. The percentage of overall FDI flowing to Guangdong has shrunk just asthe share of Guangdong in national FIE industrial output (Table 5). In essence, the bulk ofGuangdong's FDI stock can be characterised as strongly export oriented resource-seeking FDI, whichhas been attracted first of all by low labour costs and a favourable geographical location (with thenecessary infrastructure having been constructed mostly parallel to the expansion of FDI operations).Highly important has been an entrepreneurial spirit in local administrations, which made the best oftheir "first mover advantage" in the national open door policy, and close relationships to the overseasChinese community. The ability to substitute missing formal regulations with spontaneously createdinformal co-ordination mechanisms has given Guangdong an edge over other regions which could nottake recourse to such informal institutions.

32

The Case of the Yangzi River Delta

While Guangdong and the Pearl River Delta had been China’s most dynamic growth centre in the1980s, the Yangzi River Delta has become the focal point of economic development during the 1990s.At the core of this newly evolving economic area of the Yangzi River Delta lies Shanghai, with thesouthern prefectures of Jiangsu province (Sunan) and the northern prefectures of Zhejiang provinceconstituting the outer rim (Chan 1998, 51-55). When China entered the reform era in the late 1970s,this region had very different starting conditions from Guangdong and consequentially features adistinctly different pattern of FDI attraction and economic development.

At the outset of the reform era, in 1978, Shanghai was China’s most important contributor to nationalincome, industrial output and revenue (Wei 2000, 127). Its GDP per capita was the highest in allChina, far above the national average (see table 2). The price for this exposed position, however, wasvery strict control by the central government and a dominating role of state owned industry. In 1978,SOE had a share of more than 91.1 % in Shanghai's industrial output – the highest ratio of all Chineseprovinces.

The inclusion of Shanghai in the Chinese reform and open door policy has been a very slow process.Shanghai was not included in the pilot regions allowed to explore new modes of foreign economic co-operation. Instead of granting the local administration greater decision making powers, as was the casein Guangdong, central government was not willing to loosen its control over economic development inthe city. At the same time, when Guangdong was profiting from a very favourable system of sharingits tax revenues with the central government, which not only allowed it to keep the larger part ofrevenues in the province but also entitled it to dispose of the revenues comparatively autonomously,Shanghai was in serious fiscal distress. The central government was siphoning off the larger part of itstax revenues, leaving the city with an inadequate budget (White III 1989), seriously inhibiting urbaninfrastructure development and industrial upgrading.

These structural characteristics proved to be a serious burden for the city's economic developmentduring the 1980s and have only recently been overcome. Coinciding with a relative strengthening ofShanghai's position in the national political circles relative to Guangdong, in the early 1990s Shanghaihas been able to reverse its disadvantaged situation. The city's fiscal situation has been dramaticallyimproved and far-reaching decisions have been reached to reposition Shanghai in a national andinternational context. The implementation of the Pudong development strategy constitutes the core ofthis new development approach (Chan 1998, 49f.). See table 6 for some key indicators of thisdevelopment.

In line 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 facilities,manufacturing directed FDI picked up only in the latter half of the 1980s. During the 1990s acomprehensive intensification of FDI inflows could be observed. FIE in the tertiary industries havebeen promoted by Shanghai's pilot role in opening various service industries, most of all in thefinancial sector, to foreign investors. With respect to manufacturing oriented FDI a bipolar structurehas developed with small scale, export oriented enterprises on the one hand and large scale, localmarket oriented enterprises on the other hand. While the former are mostly ventures by Hong Kongand South East Asian investors, the latter are mostly FIE with European and US interests. A salientfeature of recent FDI inflows to Shanghai is the comparatively large share of big item projects directedin capital and skill intensive industries (Tian 1999, 168f.).

33

Table 6: Developments in the economic structure of Shanghai, 1980-19991980in %

1990in %

1999in %

‘99-‘90in %

points

‘99-‘80in %

pointsShare in National GDP 7.1 4.1 4.6 0.5 -2.5Structural Composition of GDP

Primary Sector 4.0 4.3 2.0 -2.3 -2.0Secondary Sector 77.4 63.8 48.4 -15.4 -29.0Tertiary Sector 18.6 31.9 49.6 17.7 31.0

Structure of Industrial Output ValueLight Industry 51.8* 51.5 43.1 -8.4 -8.7*Heavy Industry 48.2* 48.5 56.9 8.4 8.7*

Contribution to Industrial Output ValueState Owned Industry n.a. n.a. 23.0 -- --Collective Owned Industry n.a. n.a. 10.5 -- --Foreign Funded Enterprises n.a. n.a. 50.6 -- --Others n.a. n.a. 15.9 -- --

Ratio of FDI-Inflows to GDP 0.1 1.1 25.1 24.0 25.0Contribution of FIE to Investment in FixedAssets

n.a. 8.5*** 17.5 9.0*** --

Composition of FDIFFE n.a. n.a. 57.5 -- --HMT n.a. n.a. 42.5 -- --

Ratio of Exports to GDP 18.2* 33.6 38.6 5.0 20.4*Composition of Exports

Primary Goods n.a. n.a. 4.1 -- --Manufactured Goods n.a. n.a. 95.9 -- --

Share of Processing and Assembling in Exports 3.6** 39.1 46.2 7.1 42.6**Contribution to Total Export Value

State Owned Industry 99.4** 94.3 44.9 --49.4 -54.5**Collective Owned Industry -- -- -- -- --Foreign Funded Enterprises 0.6** 5.6 55.1 49.5 54.0**Others -- -- -- -- --

* Data for 1978. ** Data for 1985. *** Data for 1995.Source: Statistical Bureau of Shanghai and Shanghai Statistical Yearbook.

Shanghai’s FIE are on average larger and more capital and technology intensive than FIE inGuangdong. In addition much more FIE are ’market seeking’, targeting the Chinese and not the worldmarket with their products. All this implies that Shanghai’s FIE do not only have a large potential forgrowth promoting spill over effects (in terms of their technological capabilities), they are also muchmore inclined to realise these spill over effects as they are more dependent on collaborating with localenterprises.

Analysing the factors determining the inflow of FDI to Shanghai during the 1990s, a couple of pointsseem to be of foremost importance:

− The take off in the 1990s has first of all been the consequence of a new orientation ofcentral government policies towards Shanghai. This has allowed Shanghai to cast offsome of the constraints preventing a dynamic development in the preceding decade. The

34

fiscal situation improved, market mechanisms were allowed to take hold, the tertiarysector blossomed18, and Shanghai caught up with other regions in terms of its openness tothe world market.

− Shanghai has now become able to offer FIE very attractive supply side conditions.Shanghai’s role as China’s leading national financial centre guarantees comparativelyeasy access to financial services. In addition it disposes of a large labour market,attracting large numbers of unskilled labour as well as highly skilled managers, engineersand technicians from all over the country. As a consequence of a – now burst – realestate bubble even office space has lost in scarcity. All in all the city features the greatestrange and availability of complementary services, FIE can probably find in China.

− Once the microenvironment had been made more attractive for foreign investments it hasbecome possible to profit from the historical (pre-war) heritage of the city. This includesthe revitalisation of historically strong links to industrialists whose families had come toriches in Shanghai and moved to Hong Kong or Chinese Taipei during the war period.But Shanghai gained also from its former image as an 'enigmatic' Asian metropolis, in sofar as foreign experts could be quite easily attracted to the city's FIEs, while FIEs in otherregions of the country had serious problems of finding qualified expatriates.

− Shanghai features a large market for industrial goods and is possessing one of the fewconsumer markets in China with a critical mass of people equipped with substantialpurchasing power.

− Last not least the city is profiting from strong agglomeration effects. The concentrationof FIEs in Shanghai allows for intensive inter-FIE labour division and has even created alocal labour market for expatriates.

The rise of Shanghai has been complemented by developments in neighbouring Jiangsu and Zhejiangprovinces. While Shanghai was still heavily constrained by its special relationship to centralgovernment, Jiangsu and Zhejiang were striving ahead in the promotion of township villageenterprises (TVE) and private enterprises (Wei 2000, 132). These highly entrepreneurial small andmedium sized enterprises have now become one pillar of a very successful integrated top down –bottom up regional development process. On the one side is Shanghai, which in the course of its owndevelopment process translocates 'old' industries to the periphery, while on the other side a bulk ofhighly flexible small and medium sized enterprises absorbs industrial processes no longer profitable inthe metropolitan area, and complements Shanghai's industrial fabric.

The FIE located in the two provinces are taking advantage of exactly this mode of inter-regional co-operation. A large part of these ventures are resource seeking enterprises with capital from Hong Kongand Taiwan, producing mainly for the world market. The share of FIE in Jiangsu's total exports, e.g., iseven higher than in Guangdong. These FIE are on the one hand profiting from the proximity ofShanghai and its tertiary industries, and on the other hand are taking advantage of the local enterprisesector, which is filling in the complementary segments up- and downstream the value chain.

Especially during the later half of the 1990s this symbiotic growth pattern between Shanghai and itsperiphery has been strengthened. A large number of manufacturing plants has been transferred fromShanghai to the adjoining industrial districts, while the city itself has concentrated on transformingitself into a centre for tertiary industries with the financial sector at its core (Boillot/Michelon 2000,28). Shanghai is now more and more occupying a position similar to that Hong Kong has been playingfor Guangdong.

35

In general, FIE in the Yangzi River Delta region are characterised by a comparatively higherpercentage of FFE (less HMT) in FIE, which manifests itself in a smaller share of labour intensiveoutward processing in FIE business activities, and a larger scale and higher technology content ofinvestment projects on average. As outward processing businesses are less important for theiractivities, FIE are obliged to integrate more with the local economies, thereby creating more growthenhancing spill-over effects to local industry than in Guangdong. These characteristics apply most ofall to Shanghai, while the economic development process in the Yangzi River Delta Region in itsentirety is becoming more and more similar to that of Pearl River Delta, with Shanghai as the leadingservice centre and the surrounding prefectures as a manufacturing base.

Towards FDI-Led Economic Development in China’s Hinterland

It should be stressed that the locational advantages a region offers to attract FDI inflows can onlypartly be shaped by government interventions. Other variables are based on geographic and historiccircumstances and cannot be changed by politics (Knödler/Alberts-hauser 2001, 29f.). Therefore,some regions will always be advantaged or disadvantaged vis-à-vis others. There is no use in tryingthe impossible. Each region can only try to enhance its particular locational advantages and try topromote development processes corresponding to these. The hinterland provinces therefore cannot andshould not try to copy those development strategies that have been so successful in the coastal regions.A different type of FDI inflows has to be targeted. In the following paragraphs we will thereforeoutline the Western region’s starting position 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 toinduce higher FDI inflows. We will then turn to the role government may play in order to kick-startand promote such a process, before we turn to the question how to derive maximum benefit from FDIinflows.

The starting position

The latecomers in the Chinese hinterland are certainly in a disadvantaged position with respect to theirattractiveness for FDI. They are far removed from the world market, burdened with the remnants of afaltering state owned industry, handicapped by a reform and open door policy that has discriminatedagainst them for at least 15 years, and possessing only a very restricted local market. In addition therewas a substantial brain drain to be observed during recent years when the Western region’s mostskilled and entrepreneurial youth migrated to the East Coast, where it could expect higher salaries andbetter living conditions. And contrary to political will – but very much in concordance with economictheory – net-capital flows have been moving from the West to the East belt, where much higherearnings could be realised, in such a way further draining the West of important resources for its owneconomic 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 scenic spotswith touristic potential.

Strategic Choices towards FDI-led growth in China’s Hinterland

Against this sobering analysis of the West’s locational advantages and disadvantages the questionarises, which strategies might be most suitable to attract FDI to the region? Obviously the promotion

36

of direct export orientation would run counter to the regions comparative advantages. It rather seemsto be more promising to target resource-seeking FDI, which integrate the West into the value chains ofthe eastern coast’s (export) businesses. This strategy aims on the one hand at investments fromChinese enterprises and FIEs (including transplants of FIEs already established in the East) whosevalue chains contain sizeable segments which do not have to be located close to the final customer.We may think e.g. of back office activities, call centres, accounting, processing of tickets (airlines) andbills (hotels). A sine qua non, however, would be the build up of a modern IT-infrastructure in theWest and the prevention of a digital divide separating China’s West from the Coastal belt. On theother hand improvements of transport logistics and the tearing down of intra-Chinese barriers to trademight give the West a chance to substitute those natural resource and labour intensive inputs which theEastern Chinese enterprises are still importing from outside the country.19 In the longer term it mightbe feasible to locate R&D facilities in the West and make use of the skilled labour until now absorbedin state and military enterprises.

A second, complementary strategy should target market-seeking investments and therefore try tobolster local purchasing power. This approach would be trying to attract investors that intend toproduce for the local market and are therefore not predominantly looking at the local factorendowment.

As a general principle, the industries targeted by the various initiatives to attract FDI should follow asequence of increasing infrastructure requirements, starting with those industries that require onlyminor (extra) infrastructure facilities and then moving on to projects requiring more and more complexinfrastructure.

Central and Local Government as a Facilitator of FDI Attraction and Development

As there exist certain path dependencies and vicious / virtuous cycles tend to establish themselvesaccording to which FDI attracts more FDI, leaving regions with low FDI inflows in the first roundwith less and less chances to attract any as time unfolds, it seems to be necessary that governmentbecomes involved. Its role is to break the vicious cycles draining the Western region of human andfinancial capital to the East’s benefit and to boost local economic development up to a certainthreshold level from where on market forces will suffice to attract funds and human resources. Suchefforts however should be restricted to the creation of an attractive investment climate. Administrativeinterferences on the enterprise level should be ruled out. Any political promotion activities should beterminated once the targeted development threshold has been reached and market forces can take over.

In order to promote FDI inflows to and economic development in the western regions, governmentbodies both on the central as well as on the local level will have to become active. The centralgovernment is responsible for the integration of particular promotion policies in the context of themacro-economy and the national transformation process. It defines the freedom local governmentshave in creating their own microenvironment for FDI-attraction.20 In addition it can direct resourcesunder its control into the central and western provinces in order to improve the local investmentenvironment. Last not least it has to act as a mediator, aligning the diverging interests of various actorsand regions. The local governments will eventually be responsible for the creation of attractive micro-environments, providing the best possible bundles of immobile assets like infrastructure, services,supply networks, designed to complement the MNEs' mobile assets, the respective regions can offer.21

With the launch of “the Western Development Strategy” the Chinese central government has taken theinitiative in order to attract and allocate money and other resources for the development of China's poorer,and during the last two decades more neglected, western region. It has steered US$9 billion worth of state

37

investment into the region in 2000 and plans to increase that annual figure this year and next. It is clearthat support for some national-level projects will come from the central government, while a mix ofprovincial and national funds will support other projects. Support for still more projects will come fromsmall townships and municipalities. In addition to government grants, some projects will be funded byprivate or semi-government funds, such as bank loans, equity financing, and bonds. In some cases,preferential financing will come from the government via preferential interest rates or repaymentschedules. The State Development Planning Commission (SDPC) announced that the percentage offoreign preferential loans used towards western development would be increased from 60 to 70 %.22 Thismassive concentration of funds will greatly improve the physical infrastructure of the western region.

This build up of a physical infrastructure, however, will have to be complemented by an improvedinstitutional set up of the market place. Especially the banking system will have to be modernized andfreed of any “fiscal” functions it has still retained from the planned economic system. A greateravailability of RMB-loans and an improved bankability of projects would be highly instrumental toattracting foreign investors, which until now shrink back from any engagement as they do not find thesupport by the financial system they need and are used to from ventures in other regions of the world.

In a move designed to prompt local initiative the central government has given not only greaterauthority to local governments in western areas to suggest their own strategies, but also has helpedthem in other ways. For instance, Beijing recently raised the provincial-level special economic zonesof Changsha, Hunan Province; Chengdu, Sichuan Province; Guiyang, Guizhou Province; Hefei, AnhuiProvince; Kunming, Yunnan Province; Xi'an, Shaanxi Province; and Zhengzhou, Henan Province tonational-level status, allowing them to offer more generous incentives to investors. All seven locationsare viewed as strategically important to the development of China's interior.

It is also important to note that the wealthier and more developed eastern and coastal provinces are beingasked to play a major role. The government expects them to provide special subsidies and establish jointventures with western entities. They are called upon to develop new markets and bring advancedmanagement and innovative production styles to less-developed western enterprises. Eastern China, mostprominently Shanghai, has shown some commitment to funding parts of the western development programby signing 200 co-operative contracts with a total value of over RMB 10 billion (US$1.21 billion).23

While the government is encouraging such assistance, the coastal regions do have some reasons oftheir own for wanting the west to develop. Not only will the west provide markets, energy, and asupply of raw and semi-finished materials that will contribute to the east's own economicrestructuring. But the environmental and ecological programs in the upper reaches of the Yangzi Riverwill also reduce flooding in the eastern provinces. Better infrastructure will allow the east to move itsgoods more easily to the west's 300 million consumers. And improvements in electrical griddistribution and the construction of more pipelines will directly benefit the east.

In its endeavours to attract FDI to make up for remaining shortfalls, the State Council has approved the“Directory of Dominant Industries in the Middle and Western Region”, which will encourage theefficient allocation of foreign funds invested in industrial sectors. Foreign-funded projects listed on theforthcoming “Catalogue Guiding Foreign Investment in Industry” will enjoy advantageous tax rates. Forthree years after the current preferential tax policy has ended, investors in these projects will enjoy anincome tax rate as low as 15 %. Enterprises with export volume exceeding 70 % of total production maypay a rate as low as 10 %. The Chinese government is relaxing its restrictions on where foreigners mayinvest. Foreign-funded retail firms, for example, may now establish operations in the provincial capitalsof western China, and allowances for investment in telecommunications and insurance are expected tofollow. In addition Chinese financial institutions will provide more loans to foreign-invested projects.

38

These various elements of the "Develop the West" strategy are certainly making an importantcontribution to the improvement of the Western provinces’ attractiveness for FDI. This alone, however,will not be able to induce substantial FDI inflows to these provinces. Premier Zhu Rongji’s campaign tospur investment in western China is getting mixed reviews from foreign businesses. While somecompanies have taken the plunge and others are considering their options, many remain concerned aboutthe lack of roads and facilities that far inland, corruption and a lack of business savvy among localofficials. Nevertheless, some 80 multinational companies have already set up representative offices inwestern China, and 57 have invested directly, according to local media sources24. Some of the companiesleading the charge are PepsiCo Inc., Coca-Cola Co., McDonald’s Corp., Carrefour, United TechnologiesCorp., and ABB Group. Exxon Mobil Corp. and BP Amoco Plc. are considering to develop a major oiland gas pipeline in the region, while Hewlett-Packard Co., Motorola Inc., Microsoft Corp. and IntelCorp. continue to size-up potential partners in the region, as well.

While the central government has dramatically improved the macro-environment of regionaldevelopment and FDI attraction, local governments are now challenged. There seems to be stillsubstantial potential for improvements in the design of local micro-environments for foreigninvestments. These activities, however, must be part of a comprehensive strategy encompassing thebuild up of a local industrial sector, and measures to prevent local capital and skilled labour fromleaving the region – by market compatible incentives, not administrative interventions. A region thatwants to attract foreign investments has to be attractive for local investments as well. FIE need afunctional local industrial fabric to support their business activities.

An analysis of local strengths, their value for prospective FIE, and eventually ways to improve onthese strengths may be a good starting point for the formulation of local strategies for FDI attraction.Strengths that the western local governments may build on their respective microenvironments for FDIinflows include:

− About 55 % of China's idle land mass suitable for farming and 73 % of China's pasturesare located in the western region. By means of improving irrigation and introducingmodern production systems these agricultural resources might be turned into veryinteresting assets, attractive for local and foreign investors. Top quality processed foodspecialties may even become very lucrative export goods.

− The heritage of a large number of military enterprises may not only constitute a burdenon local development, but rather be turned into an locational advantage as theseenterprises' workforce is characterized by a comparatively large share of engineers andtechnical personnel. Given a preparedness to change the existing business organisationand adopt modern management systems, these enterprises might be highly interestingpartners (or takeover targets) for foreign investors.

− Provinces like Sichuan and Shaanxi have very strong research institutions and facilitiesof academic learning. These institutions have traditionally been emphasizingtechnological subjects and might be turned into interesting partners for R&D orientedFIE looking for human capital. The example of India shows clearly that a high level ofhuman capital alone can attract substantial FDI inflows.

− The western region features some of the most enthralling scenic spots in all China. Thereseems to exist a huge potential for tourism industries. FIE may be included in opening upand marketing these resources to Chinese and foreign visitors.

39

It will be impossible to substantially improve the whole region’s attractiveness for FDI at the sametime. In the first phase of “the Western Development Strategy” efforts and resources should thereforebe concentrated on the establishment of focal points of investment. Industrial districts for examplemay become the nuclei for industrial clusters thereby promoting the industrial development of a regionas a whole.

The fight against corruption should constitute a further important element in local governments'strategies to attract foreign investors. It is an established fact that the spread of crime and corruptionhas a negative impact on FDI inflows, as they not only increase the investment risk and reducetransparency, but at the same time have the effect of a tax on the FIE's operations (Wei 1997). TheRussian experience, however, shows as well that determined moves to counter corruption can increasea region’s attractiveness for FDI (Brock 1993, 353).

The failure of numerous FIE projects caused by expatriates (and their families) not being able to settledown well in the host region and come to terms with the foreign environment, highlights an importantsoft factor of FDI attraction. Today many western enterprises face the problem that they might findpersonnel willing to move to the metropolitan centers at the eastern coast. But qualified people whoare willing to move for two to five years to the central or even western regions are hard to find. Localgovernments able to create an attractive environment to skilled labor (Chinese and expatriates) willincrease the chances of their region to attract FDI.

It remains questionable in how far promotional activities like tax breaks and tax exemptions granted toforeign investors are an auspicious means to stimulate FDI inflows. Not only is their effect on thelocational choice of an MNE only marginal, but they may also be counterproductive. In so far as taxbreaks and tax exemptions leave the local governments with inadequate means for infrastructureconstruction and the fight against crime and corruption the local microenvironment will remain in asub-optimal state.25

The improvement of locational qualities alone, however, will not be sufficient to attract substantialamounts of FDI. The localities’ endeavours to attract FDI are not conducted in the context of a seller’smarket, but rather a buyer’s market (in the understanding that the localities are trying to sell their good“location”). It is therefore important that local governments not only permanently improve on theirgood “location” but take measures to attract the attention of potential investors as well. Due to theenormous information costs involved, even the largest MNEs will only test a small group of locationswhen considering a new foreign investment. Measures that raise the visibility of a region like theprovision of information, image building etc. by an Investment Promotion Agency (IPA) might be aprecondition for a region to enter the short list of a prospective investor and come under considerationfor the location of a FIE at all (Metzger 2000, UNCTAD 1999, 319).

Once FDI has been attracted to a region, the localities should strive for repeat investments. By meansof a proactive identification and satisfaction of the business development requirements of investorslong-term win / win strategies to the benefit of the FIEs and the locality may be created and thepotential for closures / translocations of local FIEs be minimised. By keeping close contact to the localenterprise sector IPA may not only play an important role in attracting FDI but also in keeping FIE ina locality and inducing repeat investments.

Linking FDI inflows with local enterprise development

The attraction of FDI will be a very difficult endeavour. But even this can only be a first step as at thesame time it has to be made sure that the host regions actually benefit from the inflowing FDI. FDI

40

inflows do not automatically benefit the host regions. Their potential for positive development andgrowth impulses to the host regions has rather to be actively explored by the regions.

One of the major structural disadvantages of the West not only making it little attractive for FDI butalso seriously inhibiting its ability to profit from actually realised FDI inflows, is the insufficientavailability of skilled labour. Due to their ability to pay higher wages, the application of modernmanagement and production techniques and, last but not least, for image reasons, FIE are usually inthe position to attract highly qualified personnel from all over the country. As a consequence, thecountry’s elite tends to become concentrated in those regions where FIE are highly concentrated,which in turn attracts even more FDI. Regions, which have been successful in attracting FDI at anearly stage of the Chinese reform era, have therefore not only been able to divert human capital fromother regions, but have also initiated an agglomeration process which reinforces their competitiveposition vis-à-vis the latecomers.

The availability of human capital, however, is crucial to gather the positive impulses originating fromFDI. As shown by Borensztein/DeGregorio/Lee (1998), the growth inducing impulses of FDI can befully effected only when the host region possesses a minimum threshold stock of human capital. Thehost region must possess the capacity to absorb the advanced technologies and management skillsmade available by FDI-inflows in order to transform the FDI-induced growth potential into economicdevelopment. A principle task for government at all levels will therefore be the improvement ofeducation and higher learning institutions and the creation of incentives and surroundings that keepqualified individuals from leaving the region.

Once the capacity of the region to absorb the positive impulses originating from FDI has beenincreased it will become of prime importance to create an environment that allows capturing the fullbenefits of FDI through linkages with local enterprise development.

FDI may lead to a crowding out of local investment and already established local enterprises, therebyreducing the positive effects of FDI to the host economy. Such an adverse effect may result from anuneven playing field, discriminating against the local enterprise sector, as FIE may have privilegedaccess to global factor and goods markets. It may also be the result of differences in the stages ofdevelopment local and foreign enterprises are in. Potentially competitive local “infant industries”might be unable to exist next to an FIE as they are forced to compete at a point in time when they aresimply not fit to do so, yet. Crowding out of such infant industries would be economically undesirableand may become a topic of economic policy measures, if (a) local enterprises would be able to matureto full competitiveness if sheltered against FIE, and (b) this process will not take so much time that thediscounted present social costs surpass the social benefits. (c) If net social costs exist, they must beoutweighed by external benefits (UNCTAD 1999, 320).

FDI, however, may cause crowding in effects, as well, inducing local investment and strengthening thelocal enterprise sector. Such crowding in effects will be most likely if FIE introduce new goods andservices to the host economy, and do not stand in direct competition with local investors. Localinvestment will be stimulated when FIE create new business opportunities in downstream or upstreamsectors, as a FIE may create new stable demand structures, that provide local investors with a certaindegree of planning security (UNCTAD 1999, 321).26

Crowding in effects are supposed to be the main channel of employment creation by FDI. While FDIthemselves create numerous jobs,27 it is the investment response of local enterprises that leads to thegreatest employment effects in the host economy (Fitzgerald/Mavrotas 1997, 46). The example ofCoca-Cola is a case in point: Coca-Cola and its bottlers directly employ about 14.000 people in China.These jobs, however, are dwarfed in comparison to the about 350.000 jobs which are said to have been

41

created in Coca-Cola’s supply chain and further 50.000 jobs being sustained by the distribution ofCoca-Cola’s products (Lawrence 2000, 50).28

With respect to the often stressed argument, that the hinterland provinces posses abundant naturalresources which might attract FDI, it might be noted that empirical evidence suggests that only minorcrowding in effects will result from mining and other raw material extraction projects as their potentialfor newly created linkages to the local enterprise sector is greatly restricted (UNCTAD 1999, 173). Itseems to be advisable, rather, to emphasise the promotion of FDI in locally underdeveloped (light)industries catering first of all for the local market. These target industries seem to offer the greatestpotential for backward and forward linkages.

The activities of the TVE and private enterprise sectors have proven to be highly responsive to marketdevelopments – much more so than the state owned enterprise sector – as documented by the rise ofthese types of enterprises in Guangdong and Jiangsu. Their promotion by means of an improvedaccess to the goods and factor markets, an uncomplicated administration etc. is therefore not onlyexpected to improve a region's capability to make the best use of the business potential arising fromFDI inflows. In addition the existence of a strong sector of highly entrepreneurial small and mediumsized enterprises will attract FIE that are looking for a vivid local industry, ready to complement theirown business activities.

Impact of WTO Accession on Regional Development

With China having become a member of the WTO, the country will complete a total about-face fromits earlier import substitution strategy to a strategy commenced in the 1980s known as the "open door"policy. It is expected that in the mid-term the WTO entry will boost economic development in China.29

Growth impulses will result first of all

− from an improvement in terms of the organisational (institutional) set up of economicinteraction in China itself and between China and the rest of the world,

− a more intense division of labour between China and the rest of the world which, inaddition, will comply much better with the comparative advantages of the economiesinvolved,

− productivity gains resulting from increased competition in the Chinese market.

These factors will lead to a substantial improvement of factor allocation in China and, therefore, amore efficient use of the resources available. At the same time the quantity of resources entering theeconomic process in China will be increased. Improved market access and a general liberalisation ofthe economic regime governing foreign invested enterprises will induce an upsurge of China-boundFDI. According to UNCTAD estimates, the FDI inflows to China may more than double to US$100billion a year in 2006 (UNCTAD 2000). Market seeking foreign enterprises can be expected toincrease their commitment to the Chinese market considerably, as the adaptation period granted toChina will probably be the last chance to position an enterprise in the Chinese market before marketshares are distributed. But once these market structures are established, latecomers will be forced tocommit disproportional higher financial and management resources, in order to establish theirpresence in the Chinese market.

The impact of China's WTO entry on economic development in the western region is not yet determined.On the one hand, the western provinces will be subjected to a severe shock as their agricultural sector aswell as the majority of their SOE will face strong competition from foreign enterprises, which until now

42

had not been allowed to penetrate the Chinese market by means of exports or FDI. On the other hand, itwill be just those sectors, which had been most protected, that will be able to achieve the greatestproductivity increases, when forced to compete with foreign enterprises.

The western provinces have a very realistic chance to profit from market seeking FDI, which in thepre-WTO era was prohibited from entering the Chinese market. Furthermore the promotion of mergersand acquisitions (M&As) involving FDI would provide the chance to substantially increase the inflowof foreign investments in the region, while at the same time finding a solution for the restructuring ofailing SOEs. (The East German experience, however, should remind all actors not to be tooenthusiastic about this strategy.)

In order to facilitate increased FDI flows to the Chinese hinterland, China plans to relax restrictions onforeign investment in infrastructure construction and permit foreign investment on a trial basis in theservice sector in central and western regions. The move is intended to attract more foreign capital andthus revitalise big and mid-size state-owned enterprises in these areas. The SDPC, the State Economicand Trade Commission (SETC), the Ministry of Foreign Trade and Economic Co-operation(MOFTEC), and the Ministry of Land and Resources are working out the specifics of these policies.30

The SDPC announced that foreign investors would be allowed to hold greater stakes in projects incentral and western areas relating to the construction and operation of branch and local railways, urbansubways and light railways, bridges, tunnels, ferry facilities, public docks, dock facilities forpetroleum, petroleum transport, gas pipelines and the mining and processing of oil and gas resources31.

However, foreign investors will not be allowed to wholly own key facilities directly affecting thenational economy and the people’s livelihood such as branch railways, local railways and bridges,tunnels and ferries. In line with agreements reached during negotiations for China’s entry into theWTO, foreign investment would be permitted on a trial basis in domestic commerce, foreign trade andtourism in central and western provincial capitals. Also, policies allowing foreigners to invest asminority partners in municipal facilities construction, public services, education and health care arebeing considered. Again, wholly foreign-owned businesses would not be permitted.

The SDPC is revising the "Provisional Regulations on Guiding Foreign Investment" and the "GuidingList of Industries Open to Foreign Investment" to meet WTO requirements. China will adhere to theagreed-upon timetable for opening its finance, insurance, tourism and telecommunications markets. Inaccordance with the "Notice on Strengthening the Assignment and Management of InfrastructureProperty Rights and Interests" issued by SDPC in 1999, foreign investors are encouraged to participatein the transfer of state-owned enterprises' stock rights and operations in central and western regions tohelp activate dead capital and restructure the state-owned economy. Provincial governments will havethe authority to examine and approve foreign investment in sectors where such investment isencouraged and shall report the investment to SDPC, SETC and MOFTEC for the record. Foreigninvestment in other areas will still have to be examined and approved in accordance with existingregulations.

Although there are many agreements under the umbrella of the WTO organisation, the four majorlegal obligations can be extrapolated from the major trade agreements, including GATT, TRIMs, andGATS: (1) Most-Favored-Nation status (MFN), (2) national treatment, (3) quantitative restrictions,and (4) transparency.32 A further major achievement of the WTO has been the institution of disputeresolution mechanisms. Members are required to engage in consultation on trade issues. In the eventof a failure to resolve outstanding differences, a member has the right to request the establishment of apanel, or a quasi-judicial committee, to adjudicate the dispute. All of the above-mentioned treaties andtreaty obligations are expected to alter the investment environment in China in a dramatic way.

43

The day-to-day business of FIE in China will probably most of all be influenced by the stipulations onnational treatment, quantitative restrictions and transparency. There are presently three major sets offoreign investment laws and regulations in China. The first is the Sino-Foreign Equity Joint VentureLaw of 1979, as amended in 1990 ("JVL"), and the regulations promulgated under this law in 1983("RJVL"). The second is the Wholly Foreign Owned Enterprises Law of 1986 ("WFOE"), and theregulations for the implementation of this law promulgated in 1990 ("RWFOE"). The third is the Sino-Foreign Co-operative Joint Venture Law ("CJVL") of 1988, and its accompanying regulations of 1995("RCJVL"). They will now be measured up against the WTO requirements with a view to adjustingseveral provisions that are inconsistent with WTO treaty obligations. Generally speaking, WTOmembers are required to publish their laws and regulations, including trade and investment measures.In many agreements, members are required to notify not only the Secretariat or various Councils of theWTO, but also other interested members of their relevant regulations. There are also variousobligations to engage in consultation and to provide information upon the request of other members.The transparency stipulations will undoubtedly be beneficial to all those conducting business in China.

Conclusion

Chinese government rightly worries about the growing disparities in per capita income between thefast growing, FDI-fuelled coastal provinces and the sluggish interior provinces. At the extreme, thesedisparities could lead to social tensions that could disrupt the generally harmonious character ofChinese society. On the other hand, in the name of preserving employment, the Chinese governmentpursues policies that arguably reinforce the already extant locational advantages held by coastalprovinces with respect to foreign investment. Foreign investment in the interior, in particular, is likely,if it is to happen at all, to be characterised more by take-over of existing enterprises and less bygreenfield investment than in the coastal areas. But, such take-over is effectively blocked and, indeed,policies are maintained that create inefficiencies in those foreign-invested enterprises that competewith incumbent domestic firms.

Premier Zhu Rongji has mentioned that the Western Development Campaign is to be a "long-term"program--one with a timeline of 20 or 30 years. This statement is likely an effort to underline that theprogram will be around for some time. This is also a realistic assessment, as China cannot afford to doeverything at once, and the rate at which projects are approved will depend upon financing, foreignand domestic. China must combine the successful practices of the past with innovative techniques ofthe future. Many people may discover that when looking forward, it is not wise to leave behind thelessons learned in its coastal belt since 1978 and elsewhere in the world.

Main Issues for Discussion

In light of the preceding analysis, participants in the Xi’an conference are encouraged to discuss thefollowing issues:

− what are the lessons to be learned from FDI in the coastal regions; how relevant couldthey be for the hinterland; what are the major similarities and dissimilarities;

− which development strategies would be necessary for the special situation in the Centraland western regions of China and what role FDI may play in these;

44

− what role government may play in order to support such a development process – casefrom China and other countries; how could different international experiences withregional development relate to China;

− what preconditions the central/western provinces will have to meet in order to attractsubstantial FDI flows (including the establishment of subsidiaries of FIE located in thecoastal belt); what are their comparative advantages;

− how best to capture the benefits of FDI through linkages with local enterprisedevelopment; what are the implications for labour migration and productivity;

− potential impact of China’s WTO accession on regional development and regionaldistribution of FDI (further impulse for diverging development?);

− what are the areas of competition and/or tension between the central government and thelocal governments; and

− what are the public policy tools and measures for the central government and theprovincial authorities to promote and facilitate investment, domestic and foreign alike, tothe less developed regions.

45

NOTES

1 This paper has been prepared at a time when data for 2000 had not been available yet. The analysisand conclusions of this main issues paper have been confirmed by recently published data for the year2000. For some data referring to the most recent developments please refer to the contribution byJiang Xiaojuan in this volume.

2 The drive westward is intended to achieve several important goals, including the expansion of inlandmarkets to relieve the country’s dependence on exports and to boost consumer spending to stimulateeconomic growth. More importantly, the government hopes that companies inspired to invest in thewest will provide employment in the future for workers laid off from flagging state-owned enterprises(SOEs).

3 Originally it was planned to promote the development of the central and western regionssimultaneously. A lack of funds, however, led to a reformulation of the strategy. The government isnow focussing its efforts on the western region and hopes that the 'sandwiched' central region will bepulled up by dynamic economic development in the eastern and western regions.

4 In this paper provinces are used as the main unity of comparison, although some considerablestructural differences can also be observed on an intra-provincial level. In the province of Guangdongfor example, can be found some of the richest as well as some of the poorest Chinese counties. Theavailability of statistical data, however, makes only an aggregated analysis feasible. See Herrmann-Pillath/Kirchert/Pan 2001.

5 Interestingly this new economic geography basically follows the patterns of the pre-PR China macro-regions (Gipouloux 1998, 8).

6 Such a wait-and-see attitude is consistent with the experience among other developing economies.Due to insufficient market information foreign investors delay their investment decisions until pioneerinvestors provide them with further insights into the market environment and the reliability of the hostcountries FDI pollicies (Huang/Shirai 1994, 19).

7 In 1992, the first year of substantial FDI inflows to China, FDI-flows to South Korea and ChineseTaipei dropped by 31 % respectively 51 %, thereby pointing at a considerable diversion effect inChina’s favor (UNCTAD various). It should also be noted that the upswing of FDI inflows to Chinacoincides with a general increase in FDI flows to developing countries. Average annual flows directedtowards developing countries in 1990-1993 were double those of 1987-1989 (UNCTAD various;Lardy 1995, 1066).

8 Bringing the analysis to the next level, one would observe that in Guangdong itself FDI have beenhighly concentrated in a few localities (i.e. the Pearl River Delta and the Shantou area) as well.

9 It is here assumed that FDI has a positive net effect on and is welcome in the host economy, withoutfurther discussing the various effects. For a discussion of this topic see Todaro 2000, 582-588.

10 These include, on the one hand, strategic decisions made against the background of the structuralconditions of the (global) product markets the MNE is engaged in, the patterns of oligopolistic

46

competition it is facing, risk diversification motives etc. On the other hand, they include peculiaritiesof a given region, that cannot be altered in the short term, like geographical location, structuralcharacteristics inherited from historical periods, etc.

11 The positive effects of such agglomerations will, of course, diminish when the agglomerationsurpasses a critical size.

12 Gipouloux (1998, 8f.) argues that SOEs are not able to provide such services, resulting in a diversionof FDI inflows to regions with a comparatively small share of SOE.

13 It should be noted that import substitution policies, local content regulations etc. may, in the short run,promote the inflow of market seeking FDI, as foreign enterprises are prohibited from supplying thelocal market by means of exports. Market seeking FIE, once established, may also lobby for traderestrictions and market entry barriers, in order to strengthen their own competitive position in the localmarket.

14 TNT Logistics is reporting that 48 % of total logistics costs in China are made up of losses anddamages (!) (Boillot/Michelon 2000, 22).

15 Most of Guangdong’s SOE have been set up only in the 1980s and 1990s. From the start they havebeen equipped with comparatively advanced technology and been led by a relatively progressivemarket-oriented management. On average, they have performed better than SOE in other provinces(Lan 1999, 221).

16 Their endeavours to promote local economic development have been characterised by Chen Yun, oneof China’s leading economic policy makers, as a " 'traffic light philosophy', which he says originatedin Guangdong, where the localities treat the centre's policies in three ways: 'When the red light is on,they make a detour and proceed as they were going; when the yellow light is on, they ignore it andkeep going at the same speed; and when the green light is on, they rush ahead at full throttle.' " (Pye1991, 459)

17 The training of young managers and engineers by FIE is also the starting point of a virtuous cyclepromoting the inflow of new FDI and the further development of the local economy. The on-the-jobtraining of managers and engineers increases the stock of locally available human capital. Thisenhanced stock of human capital, on the one hand, increases the attraction of the region for new FDIinflows and, on the other hand, enables the local economy to better absorb new technologiesintroduced by FIE.

18 It should be pointed out that the recent rise of Shanghai as a service center has not been a marketdriven process. Rather the central government's decision to concentrate the national finance industryin Shanghai has been the foundation for the dramatic growth of Shanghai's tertiary industry and thefinancial district in Pudong. Furthermore it has been strong administrative pressure that led to theconcentration of the financial industry in Shanghai's Lujiazui Finance and Trade Zone. Foreigninvestment in the financial industry was not allowed to freely chose a location in China or evenShanghai; in order to receive a license offices had to be located in Lujiazui.

19 Until today the West’s cheap unskilled labor has been migrating to the capital concentrated in thecoastal belt. Guangdong province with a native population of 80 million people e.g. hosts 12 millionmigrants. Now strategies might be conceived in order to bring the capital to the labor force and notvice versa.

20 The change in thought necessary for the successful implementation of the strategy calls for a detailedanalysis to determine which solutions have and have not worked in China over the past 20 years. The

47

central government is taking steps to ensure that local leaders do not initiate programs that areinconsistent with the strategy’s goals.

21 It should be stressed that the western regions will have to strive to provide those general factorspromoting the inflow of FDI described above in greater detail. Here, however, we do not wish torepeat these points, but rather concentrate on the specific conditions of the western regions.

22 Under this strategy, the majority of China’s government spending will shift from coastal provinces tothe west. Earlier in 2000, Zeng Peiyan, minister of SDPC, reportedly remarked that the state wouldpour 70 percent, or RMB 4.78 trillion ($580 billion) of fixed-asset investment and foreign loans in2000 into the west--a 10 percent increase over 1999. In March, SDPC announced that the firstinvestment of RMB 31 billion ($3.7 billion) would be made for infrastructure development.

23 At the same time, however, administrative bodies in Shanghai are lobbying to have electronicsproducer Changhong transfer its R&D activities from its home province Sichuan to Shanghai orotherwise make substantial investments in the city. These efforts seem on the one hand to stand instark conflict with the national aim of promoting economic development in the western provinces. Onthe other hand it might be argued that this episode documents rising competition between provincesand should therefore give the western provinces unmistakable proof that they will have to improve ontheir own localities in order to attract investment (be it local or foreign). Furthermore it might beargued that such a linkage between Sichuan and Shanghai may create an axis along which furthervalue chain linkages between the East and the West might be established.

24 Zimny, Joseph (2001): ’Go west’ campaign gets mixed reviews from foreign investors, ChinaOnlineNews, 30 May 2001.

25 Eventually tax incentives cannot be avoided, if simply to level tax incentives granted in other parts ofthe country. An inter-regional race to the bottom in terms of tax incentives etc., however, should beaverted under all circumstances. Here it might be even necessary to move in the direction of fiscalrecentralisation. With presently 27 taxes at the sole discretion of regional government, the danger ofan inefficient tax race to the bottom is real.

26 A FIE’s demand for locally produced inputs, however, may also be satisfied by “second-tier” FDI,undertaken by subcontractors / suppliers from the FIE’s home country. In this scenario, the overallvolume of FDI inflows would increase, which might raise a whole sector’s vintage of technology.Potential crowding in effects would then have to be realized further downstream. Such “second-tier”FDI may be understood as a counter-strategy to accommodate local content stipulations in the hostcountry whenever the local enterprise sector is seen as unfit to supply the required goods or qualities.

27 At the turn of the century the total number of people employed by FIE was reported to have been inexcess of 20 million (Xie 2000). This figure, however, should not be interpreted as meaning that FIEhave created 20 million new jobs on a net basis. FIE are responsible for streamlining most industries,leading to the expulsion of a considerable number of workers. But in most cases, the loss of jobsmeant the transformation of hidden unemployment into open unemployment, contributing to a moretransparent economic setting.

All in all it can be assumed that FIE did have a positive (direct) effect on the labor market, althoughthe effect has been quite different, depending on the time period and the various segments of the labormarket. FIE have certainly eased the strains on the market for unskilled labor. New ventures and thegrowth impulses originating from FIE have created new jobs (on a net basis) for an abundant pool ofworkers. With respect to qualified labor, FIE have (especially in the eighties) competed with localcompanies for scarce (human) resources and, due to their ability to pay higher wages and providesuperior working conditions, have been able to crowd out local competitors. It has been only after a

48

couple of years that, mostly by means of on-the-job training, FIE have over time also made a –considerable – contribution to the enlargement of the pool of qualified labor in the PR China.

28 The study identifying these employment effects had been commissioned by Coca-Cola and its Chinesebottlers. The net employment creation cannot be ascertained by these figures alone, as thesimultaneous destruction of jobs in competing soft-drink plants is not known.

29 In the short term, however, the economy and society at large will have to master a period of instabilityas strains on the labor market will increase and discontent of a comparatively large group of peoplewill grow, as for the first time in two decades of economic reform, they will have to suffer net-welfarelosses (i.e. individuals with earnings stemming mainly from agriculture and state-owned industries).

30 According to Zhongguo Jingji Shibao (China Economic Times), 13 October 2000.

31 “Foreign Direct Investment in China’s Energy Sector“, Mehmet Ogutcu, in ”Journal of EnergyGeopolitics”, Canada, June 2000

32 “The Impact of WTO Treaties on Investments in China”, Thomas Weishing Huang, Holland & KnightLLP (Boston), presentation delivered at the East Asian Legal Studies Program at Harvard Law Schoolon February 21, 2001.

49

REFERENCES

Aziz, Jahangir; Duenwald, Christoph (2001): China’s Provincial Growth Dynamics, IMF WorkingPaper WP/01/3, Washington.

Ben-Porath, Yoram (1980): The F-connection: Families, Friends, and Firms and the Organisation ofExchange, in: Population and Development Review, Vol. 6, pp. 1-30.

Boilot, Jean-Joseph; Michelon, Nicolas (2000): The New Economic Geography of Greater China, in:China Perspectives, Vol. 30, pp. 18-30.

Borensztein, E.; De Gregorio, J.; Lee, J.W. (1998): How does foreign direct investment affecteconomic growth?, in: Journal of International Economics, Vol. 45, pp. 115-135.

Broadman, Harry G.; Sun Xiaolun (1997): The Distribution of Foreign Direct Investment in China, in:The World Economy, Vol. 20, No. 3, pp. 339-361.

Brock, Gregory J. (1998): Foreign direct investment in Russia’s regions 1993-95. Why so little andwhere has it gone?, in: Economics of Transition, Vol. 6, No. 2, pp. 349-360.

Chan, Roger C.K. (1998): Regional Development in the Yangtze and the Zhujiang Delta Regions, in:Cheng, Joseph Y.S. (ed.) (1998): The Guangdong Development Model and Its Challenges,Hong Kong, pp. 43-79.

Dayal-Gulati, Anuradha; Husain, Aasim M. (2000): Centripetal Forces in China’s Economic Take-off,IMF Working Paper WP/00/86 Revision 1, Washington.

Dunning, J.H. (1981): International Production and the Multinational Enterprise, London.

Fitzgerald, E.V.K.; Mavrotas, G. (1997): The employment impact of external capital flows indeveloping countries, ILO Employment and Training Papers 5, Geneva.

Gipouloux, François (1998): Integration or Disintegration? The Spatial Effects of Foreign DirectInvestment in China, in: China Perspectives, Vol. 17, pp. 6-13.

Guangdongsheng tongji ju [Statistical Bureau of Guangdong] (various): Guangdong tongji nianjian[Guangdong Statistical Yearbook], Beijing.

Guojia tongji ju [National Bureau of Statistics] (various): Zhongguo tongji nianjian [StatisticalYearbook of China], Beijing.

Hansen, Wencke; Taube, Markus (1997): Migration von Arbeitskräften in der VR China. Der Beitragder im Zuge der Reformen freigesetzten ländlichen Arbeitskräfte zur wirtschaftlichenEntwicklung des Landes, in: ifo Schnelldienst, Vol. 50, No. 22, pp. 22-38.

50

Helpman E.; Krugman, P. (1985): Market Structure and Foreign Trade, Cambridge.

Henley, John; Kirkpatrick, Colin; Wilde, Georgina (1999): Foreign Direct Investment in China:Recent Trends and Current Policy Issues, in: The World Economy, Vol. 22, No. 2, pp. 223-243.

Herrmann-Pillath, Carsten; Kirchert, Daniel; Pan Jiancheng (2001): Disparities of Chinese EconomicDevelopment: Comparing Approaches on Different Levels of Aggregation, DuisburgDiscussion Papers on East Asian Economic Studies, Duisburg.

Howell, Jude (1993): China Opens Its Doors. The Politics of Economic Transition, Herfordshire-Boulder.

Hsu, Robert C. (1991): Economic theories in China, 1979-1988, Cambridge.

Huang Dongpei; Shirai Sayuri (1994): Information Externalities Affecting the Dynamic Pattern ofForeign Direct Investment: The Case of China, IMF Working Paper WP/94/44, Washington.

Huang Haichao; Zheng Fanghui; Ding Anhua (1993): Mengxiang cheng zhen. Guangdong zou xiangshichang jingji [A Dream Becomes Reality. Guangdong Moves Towards a Market Economy],Guangzhou.

Khan, Zafar Shah (1991): Patterns of Foreign Direct Investment in China, World Bank DiscussionPapers 130, Washington.

Knödler, Hermann; Albertshauser, Ulrich (2001): Globalisation, Foreign Direct Investment andRegional Development Perspectives: Empirical Results for West German Regions, HWWADiscussion Paper 117, Hamburg.

Lan Yisheng (1999): FDI and Economic Development in Guangdong, in: Wu Yanrui (ed.) (1999):Foreign Direct Investment and Economic Growth in China, Cheltenham-Northhampton, pp.209-225.

Lardy, Nicholas R. (1995): The Role of Foreign Trade and Investment in China’s EconomicTransformation, in: The China Quarterly, Vol. 144, pp. 1065-1082

Lau Pui-king (2000): Industrial Structure and Industrial Policy in Guangdong Province, in: Cheng,Joseph Y.S. (ed.) (2000): Guangdong in the Twenty-first Century: Stagnation or Second Take-off?, Hong Kong, pp. 79-101.

Lawrence, Susan V. (2000): From Villain to Hero, in: Far Eastern Economic Review, 05.10.2000, pp.50-52.

Lemoine, Françoise (1998): Trade Policy and Trade Patters during Transition: China and the CEECsCompared, in: Bouin, Olivier; Coricelli, Fabrizio; Lemoine, Françoise (eds.) (1998): DifferentPaths to a Market Economy. China and European Economies in Transition, Paris, pp.87-107.

Lemoine, Françoise (2000): FDI and the Opening Up of China’s Economy, CEPII – Document detravail no. oo-11, Paris.

Liao Jianxiang; Guan Qixue (1988): Guangdong duiwai jingji guanxi [The Foreign EconomicRelations of Guangdong], Guangzhou.

51

Markusen, J.R.; Venables, A.J. (1998): Multinational Firms and the New Trade Theory, in: Journal ofInternational Economics, Vol. 46, pp. 183-203.

Metzger, Güenter (2000): The Experience of Promoting Foreign Investment in Saxony, Germany "It'sall about People", paper presented at the OECD Conference "Foreign Direct Investment inChina", held in Xiamen on 11-12 September 2000. http://oecd.org//daf/conference/china/index.htm.

Mintz, Jack (1990): Corporate Tax Holidays and Investment, in: World Bank Economic Review, Vol.4, No. 1, pp. 81-102.

Naughton, Barry (1988): The Third Front: Defense Industrialisation in the Chinese Interior, in: TheChina Quarterly, Vol. 115, pp. 351-386.

OECD (1998): Foreign Direct Investment and Economic Development. Lessons from Six EmergingEconomies, Paris.

OECD (2000): Main Determinants and Impacts of Foreign Direct Investment on China’s Economy,OECD Working Papers on International Investment, No. 2000/4, Paris.

Ögütçü, Mehmet (2000): Foreign Direct Investment in China’s Energy Sector, in ”Journal of EnergyGeopolitics”, Canada, June 2000

Pye, Lucian W. (1991): The State and the Individual: An Overview Interpretation, in: The ChinaQuarterly, Bd. 127, pp. 443-466

Qu Tao; Green Milford B. (1997): Chinese Foreign Direct Investment. A subnational perspective onlocation, Aldershot et al.

Redding, S.G. (1990): The Spirit of Chinese Capitalism, Berlin-New York.

Sah Pai-ling; Taube, Markus (1996): Der Beitrag der Auslandschinesen zur wirtschaftlichenEntwicklung der VR China, in: ifo Schnelldienst, Vol. 49, No 36, pp. 32-40.

Shan, Jordan; Tian, Gary; Sun, Fiona (1999): Causality Between FDI and Economic Growth, in: WuYanrui (ed.) (1999): Foreign Direct Investment and Economic Growth in China, Cheltenham-Northhampton, pp. 140-154.

Stein, Ingo (1991): Die Theorien der Multinationalen Unternehmung, in: Schoppe, Siegfried G. (ed.)(1991): Kompendium der Internationalen Betriebswirtschaftslehre, München, pp. 49-151.

Sun Haishun (1998): Macroeconomic Impact of Direct Foreign Investment in China: 1979-96, in:International Economics and Trade Research, Vol. 14, No. 6, pp. 675-694.

Sung, Yun-wing (2000): Costs and Benefits of Export-Oriented Foreign Investment: The Case ofChina, in: Asian Economic Journal, Vol. 14, No. 1, pp. 55-70.

Taube, Markus (1997): Ökonomische Integration zwischen Hongkong und der Provinz Guangdong,VR China. Der chinesische Transformationsprozeß als Triebkraft grenzüberschreitenderArbeitsteilung, München-Köln-London.

52

Tian, Gary (1999): Changing Patterns of FDI in Shanghai, in: Wu Yanrui (ed.) (1999): Foreign DirectInvestment and Economic Growth in China, Cheltenham-Northhampton, pp. 157-193.

Todaro, Michael P. (2000): Economic Development, Reading et al.

UNCTAD (various): World Investment Report, New-York-Geneva.

Vogel, Ezra F (1989): One Step Ahead in China. Guangdong Under Reform, Cambridge-London.

Wei, S. (1997): How Taxing is Corruption on International Investors, NBER Working Paper, No.6030, Cambridge.

Wei, Yehua Dennis (2000): Regional Development in China. States, Globalization, and Inequality,London-New York.

Wells, Louis (2001): Using Tax Investment to Compete for Foreign Investment: Are They Worth theCosts?, World Bank Occasional Paper / Foreign Investment Advisory Service 15, Washington.

White III, Lynn T. (1989): Shanghai Shanghaied. Uneven Taxes in Reform China, Hong Kong.

World Bank (2000): World Development Report 2000/2001, Washington.

Wu Zhitang (1994): Gang Ao Tai zi, huaren qiaozi yu Guangdong jingji qifei (shang) [Capitalinvestment from Hong Kong, Macao, Chinese Taipei and Overseas Chinese and Guangdong’seconomic upswing (part 1)], in: Gang Ao jingji, Vol. 136, pp.15-18.

Xie Shusheng (2000): Nuli zuohao xiehui gonzuo wie liyong waizi fazhan jingji fuwu [Strive to makegood work in the association and serve the utilisation of foreign capital and economicdevelopment], in: Zhongguo waizi, 2/2000, pp. 7-9

Zeng, K. (1999): Retrospect and Prospects of Foreign Direct Investment Inflow: The Case ofGuangdong Province, in: Cheng, Joseph Y.S. (ed.) (1998): The Guangdong DevelopmentModel and Its Challenges, Hong Kong, pp. 103-128.

Zhang Xiaohe (2000): Determinants in Foreign Direct Investment: A Comparative Study betweenGuangdong and Beijing, in: Cheng, Joseph Y.S. (ed.) (2000): Guangdong in the Twenty-firstCentury: Stagnation or Second Take-off?, Hong Kong, pp. 129-141.

Zimny, Joseph (2001): '“the Western Development Strategy”' campaign gets mixed reviews fromforeign investors, ChinaOnline News, 30 May 2001.

53

THE NEW REGIONAL PATTERNS OF FDI INFLOW IN CHINA:POLICY ORIENTATION AND EXPECTED PERFORMANCE,

Professor Jiang Xiaojuan,China Academy of Social Sciences

The coastal areas of east China have markedly outstripped the central and western regions of China inthe rate of economic growth since the late 1970s. Scarcity of inbound foreign capital in the central andwestern regions seems to be a major reason behind this situation. Two major factors will likely affectchanges in the utilisation of foreign capital in central and western China in the coming decade. First,the efforts of central and local governments in attracting foreign investors through offering betterinvestment environments and more preferential policies. Second, with China’s accession to the WTO,the Chinese policy towards foreign investment is expected to be so liberal as to allow foreign investorsin more sectors and greater flexible modes of investment. This paper examines the impact of these twofactors first on, foreign capital utilisation in central and western China, and, secondly, on economicdevelopment of both regions as a whole.

China’s Regional Economic Pattern

Large Regional Imbalance

According to China’s administrative division, east China includes 12 coastal regions at the provinciallevel, (Liaoning, Hebei, Shandong, Jiangsu, Zhejiang, Fujian, Guangdong, Beijing, Tianjin, Shanghai,Guangxi, and Hainan). Central China refers to the nine provinces of Shanxi, Inner Mongolia, Jilin,Heilongjiang, Anhui, Jiangxi, Henan, Hubei and Hunan. West China consists of ten regions, includingSichuan, Guizhou, Yunnan, Shaanxi, Gansu, Qinghai, Tibet, Ningxia, Xinjiang and Chongqing.1

The Chinese economy is marked by uneven regional development. Judging from the level of economicdevelopment, east China is the most developed, central China comes second, and west China is trailingbehind. Of China’s GDP of 89,404 billion yuan in 2000, east China accounted for 5,753 billion yuan,central China 2,625 billion yuan, and west China a meagre 1,309 billion yuan. East China covers 13.5% of the nation’s total territory, with 42 % of the total population, but it contributes 64.3 % of thenational GDP. It is thus clear that East China holds the key to the nation’s economic growth. (SeeTable 1.)

54

Table 1: Basic Facts about East, Central and West China in 2000

Area Population GDP Per-capita GDPItem

Region Total(million

km2) %

TotalMillion %

Total(100 million

yuan) %

Total(yuan)

East China as100

East 1.30 13.5 535.95 42.3 57527 64.3 10734 100

Central 2.85 29.7 434.82 34.4 26250 29.4 6037 56.2

West 5.45. 56.8 295.06 23.3 13091 14.6 4437 41.3

Source: “China Statistical Abstract, 2001”.

The Gap Between East, Central and West China: Set to Widen

The gap between east, central and west China in economic development has been widening over thelast two decades. This tendency is reflected in Tables 2 and 3.

The growing gap between these three regions has occurred as a result of different rates of regionaleconomic growth. The national GNP registered an average annual increase of 9.8 % during the periodbetween 1979 and 1995, whereas the figures for east, central and west China were 12.8 %, 9.7 % and8.7 % respectively. The year 1999 saw the GDP grow 8.1 % in east China, 7.4 % in central China, and6.2 % in west China, and the tendency of east China ahead of central and west China in economicgrowth has remained to this day.

Table 2: Shares of East, Central and West China in National GDP ( %)

Year East Central West

1978 52.5 29.7 17.8

1992 56.6 28.6 14.8

1995 59.0 26.5 14.5

1998 56.0 29.1 14.6

2000 64.3 29.4 14.6

Source: “China Statistical Year Book”, various years, and “China Statistical Abstract, 2001”.

Table 3: Absolute and Relative Gaps between East, Central and West Chinain Per-Capita GDP (yuan)

1981 1985 1988 1991 1993 1994 1995 1998 2000

East 1602 2502 3262 3788 5235 6043 6823 9480 10734

Central and west 1099 1627 1986 2238 2782 3097 3405 4220 5390

Absolute Gap 503 875 1276 1550 2453 2946 3417 5260 5344

Central and west vis-à-vis East ( %)

68.6 65.0 60.1 59.1 53.1 51.2 49.9 44.5 49·8

Source: “China Statistical Year Book”, various years, and “China Statistical Abstract, 2001”.

55

Regional Distribution of Foreign Investment and Trade

China’s regional economic gap in the last 20 years can to a considerable extent be interpreted in termsof the degree of openness to foreign investment. East China is the major beneficiary of rising foreigntrade and investment that has stemmed from the open policy.

High FDI Density in Coastal Areas

Most of the FDI that has found its way into China is concentrated in coastal areas. In the 1980s,upwards of 90 % of such investment was made in these areas. The figure went down somewhat in the1990s, but the general trend remains the same. The coastal areas still accounts for 88 % of theaccumulated volume of FDI in China. The share of central and west regions is only 14 %. Table 6shows the Cumulative FDI in the different parts of China. Table 7 shows detailed data of eachprovince.

Table 4: Cumulative FDI in East, Central and West Parts of China as of 2000Unit: US$ billion

Locality No. Of

Project

Share

%

Contractual

Value

Share

%

Realised

Value

Share

%

East 292561 80.40 583.573 86.31 298.872 85.80

Central 44580 12.25 51.649 7.64 30.592 8.78

West 26744 7.35 40.876 6.05 18.882 5.42Source: MOFTEC: “Statistics on FDI in China 2001”.

Salient Features of FIEs in the Region

Low Share in the Total Output

Output of FIEs in central and west China accounted for only a small share of the total output of theregions, markedly lower than their counterparts in east China. The proportion of value added of theFIEs in the total output was 22 % nation-wide, 31 % in east China, 8 % in central China, and 6 % inwest China. In some coastal provinces like Fujian and Guangdong, the figure was higher than 50 %(See Table 6 and Table 7).

56

Table 5: FDI Distribution by Province and Municipality as of 2000Unit: US$ million

Locality No.of ProjectShare%

Contractual ValueShare%

Realised Value Share %

Total 363885 100 6760.97 100 3483.46 100Beijing 14725 4.36 307755.67 4.55 14398.43 4.13Tianjin 13029 3.75 27645.03 4.09 13274.61 3.81Hebei 9619 2.64 14127.97 2.09 6769.48 1.95Sanxi 2106 0.58 3597.55 0.53 1525.85 0.44Lnner Mongolia 1512 0.42 1703.61 0.25 640.89 0.18Liaoning 21218 5.83 37665.05 5.57 14844.50 4.26Dalian 9035 2.48 20749.80 3.07 8579.22 2.46Jilin 5964 1.64 5627.78 0.83 2921.67 0.84Heilongjiang 6198 1.70 5909.77 0.87 3663.92 1.05Shanghai 22032 6.05 64739.59 9.58 28339.79 8.14Jiangsu 40569 11.15 85287.40 12.61 43730.47 12.55Zhejiang 18369 5.05 24221.42 3.58 11187.59 3.21Ningbo 5090 1.40 8669.62 1.28 3999.44 1.15Anhui 4677 1.29 5513.84 0.82 3034.30 0.87Fujian 27766 7.63 64082.71 9.48 33510.38 9.62Xiamen 4795 1.32 17426.20 2.58 10801.39 3.10Jiangxi 5236 1.44 4677.67 0.69 2712.87 0.78Shandong 29046 7.98 41617.16 6.16 21109.10 6.06Qingdao 7602 2.09 13783.58 2.04 6547.44 1.88Henan 6325 1.74 8290.36 1.23 4317.43 1.24Hubei 8157 2.24 9799.07 1.45 6429.56 1.85Hunan 5721 1.57 7377.37 1.09 5243.40 1.51Guangdong 84237 23.15 171849.60 25.422 98192.10 28.19Shenzhen 17612 4.84 27671.97 4.09 15759.82 4.52Guangxi 7003 1.92 13387.47 1.98 6943.50 1.99Hainan 8894 2.44 11896.65 1.76 6229.78 1.79Sichuan 5404 1.49 7794.33 1.15 3178.58 0.91Chongqing 2898 0.80 4047.58 0.60 2248.86 0.65Guizhou 1423 0.39 1622.36 0.24 422.38 0.12Yunnan 1959 0.54 2820.19 0.42 969.78 0.28Tibet 20 0.01 12.63 0.00 0.03 0.00Shaanxi 3197 0.88 5852.19 0.87 3045.95 0.87Gansu 1379 0.38 1059.08 0.16 456.16 0.13Qinghai 242 0.07 368.76 0.05 19.68 0.01Ningxia 587 0.16 472.15 0.07 128.56 0.04Xinjiang 1002 0.28 1058.34 0.16 369.67 0.11Central MinistriesCommissions

1601 0.44 11196.69 1.66 8458.70 2.43

Source: MOFTEC: “Statistics on FDI in China 2001”.

57

Table 6: Share of Value Added of Industry of FIEs in Provinces (2000) (100 million)

ProvincesTotal Value Added of

IndustriesValue Added of

Industries by FIEs

Share of Value Added of FIEsin the Total

( %)National Total 21564.74 4850.92 22

Beijing 584.48 218.01 37Tianjin 490.09 178.78 36Hebei 976.62 89.46 9Sanxi 400.65 14.01 3Inner Mongolia 235.73 14.49 6Liaoning 935.84 153.11 16Jilin 412.22 72.72 18Heilongjiang 933.80 35.08 4Shanghai 1541.71 727.25 47Jiangsu 2234.58 544.12 24Zhejiang 1267.75 217.39 17Anhui 494.51 40.27 8Fujian 665.02 369.85 57Jiangxi 248.97 19.05 8Shandong 2098.80 262.28 12Henan 993.62 75.15 8Hubei 946.42 101.96 11Hunan 461.82 26.34 6Guangdong 2788.16 1504.70 54Guangxi 281.80 29.01 10Hainan 54.63 11.07 20Sichuan 239.47 30.71 13Chongqing 634.31 40.17 6Guizhou 196.04 4.05 2Yunnan 491.12 18.69 4Tibet 8.42 0.02 0.2Shaanxi 345.95 35.79 10Gansu 225.57 6.14 3Qinghai 58.32 0.92 2Ningxia 61.60 5.07 8Xinjiang 256.72 5.28 2Source: Cumulated by the data from MOFTEC: “Statistics on FDI in China 2001”, and “China Statistical Abstract,2001”.

58

Table 7: Share of Value Added of Industry of FIEs in Regions

RegionTotal Value Added

of IndustryValue Added by FIEs

Share of Value Added of FIEs inthe Total ( %)

National total 21564.74 4850.92 22East 13919.48 4305.03 31

Central 5127.74 399.07 8West 2517.52 146.84 6

Source: Cumulated by the data from MOFTEC: “Statistics on FDI in China 2001”, and “China Statistical Abstract,2001”.

High Density of Projects by Large Multinationals in Some Cities

Although central and west China compare unfavourably with the rest of the country in terms ofnumber of foreign investors and percentage of foreign capital secured, they attract relatively moreinvestment from large international companies. Our 1999 survey of 1,196 joint ventures in China withinvestment from the globe’s Top 500 indicates that these international giants have fewer investmentprojects in Guangdong and Fujian provinces than in Shanghai, Tianjin, Beijing, Shenyang and suchwestern cities as Xian, Chongqing and Chengdu.

Our survey of some of the enterprises shows that they are able to attract giant international companiesbecause of their low production costs, their proximity to their clients, the great potentials of local andperipheral markets, and their geographical closeness to ancillary firms. (See Table 8.)

Table 8: Reasons for Multinationals to Invest in the Central and West Regions (N=96)

Reasons Ratio of Enterprises pointed ( %)Low production costs 87Proximity to their clients 65Closeness to ancillary firms 63Potentials of local and peripheral markets 57

Because of the diversity of choices available, the sum total is larger than 100 %.Source: Jiang (2000A).

Low Share of Exports

The FIEs in central and west China enjoy an export percentage markedly lower than their counterpartsin east China. The proportion of exports of the FIEs in their total output is 43 % nation-wide, 46 % ineast China, 13 % in central China, and 13 % in west China. (See Table 9).

The low export percentage of FIEs in central and west China keeps their rate of contribution to localexports far below their eastern counterparts. In 2000 FIEs accounted for 48 % of the nation’s totalvolume of exports; the figure was 51 % in east China, but it was only 16 % and 16 % respectively incentral and west China. (See Table 11).

59

Table 9: Proportion of Exports of the FIEs in their Total Output by Provinces (2000)

Export of FIEsProvinces

Total Output of FIEs(US$100 mil.) (US$100mil.) (US$100 mil.)

Proportion ofexports in their

total output ( %)National 23010.8 1194.41 9913.60 43Beijing 10.340 28.71 238.29 23Tianjin 1136.0 63.79 529.46 47Hebei 381.2 10.12 84 22Sanxi 59.2 1.52 12.62 21Inner Mongolia 56.0 1.38 11.45 20Liaoning 797.4 62.45 518.34 65Jilin 312.2 3.92 32.54 10Heilongjiang 132.8 2.67 22.16 17Shanghai 3366.0 142.61 1183.66 35Jiangsu 2894.8 144.53 1199.60 41Zhejiang 1215.8 53.49 443.97 37Anhui 187.7 4.00 33.2 18Fujian 1538.7 75.97 630.55 41Jiangxi 98.3 1.63 13.53 14Shandong 1168.8 79.82 662.51 57Henan 257.7 3.09 25.65 10Hubei 352.4 4.30 35.69 10Hunan 107.5 1.82 15.11 14Guangdong 7206.5 495.10 4109.33 57Guangxi 107.9 3.41 28.30 26Hainan 43.6 3.05 25.32 58Sichuan 126.4 0.90 7.47 06Chongqing 158.4 3.42 28.39 18Guizhou 16.5 0.40 3.32 20Yunnan 57.1 0.81 6.72 12Tibet 0.1 0.04 0.33 --Shaanxi 126.2 1.16 9.63 8Gansu 31.7 0.38 3.15 10Qinghai 4.8 0.02 0.17 4Ningxia 16.8 0.43 3.57 21Xinjiang 18.8 0.91 7.55 40

Source: Cumulated by the data from MOFTEC: “Statistics on FDI in China 2001”, and “China StatisticalAbstract, 2001”.

Table 10: Proportion of Exports of the FIEs in their Total Output by Regions

Export of FIEsRegions

Total Output of FIEs(US$100 mil.) (US$100 mil.) (US$100 mil.)

Proportion ofexports in theirtotal output ( %)

National 23010.8 1194.41 9913.60 43East 20890.7 1162.51 9648.83 46

Central 1563.8 24.33 201.94 13West 556.8 8.47 70.30 13

Source: Cumulated by the data from MOFTEC: “Statistics on FDI in China 2001”, and “China StatisticalAbstract, 2001”.

60

Table 11: Contribution to Local Exports of FIEs by Provinces (2000)

ProvincesTotal Export

(US$100 mil.)Export by FIEs(US$100 mil.)

Contribution to localexports of FIEs ( %)

National 2492.1 1194.41 48Beijing 76.6 28.71 37Tianjin 76.8 63.79 83Hebei 32.8 10.12 31Sanxi 20.9 1.52 7Lnner Mongolia 11.2 1.38 12Liaoning 105.9 62.45 59Jilin 14.9 3.92 26Heilongjiang 24.2 2.67 11Shanghai 246.4 142.61 58Jiangsu 263.8 144.53 55Zhejiang 204.8 53.49 26Anhui 21.2 4.00 19Fujian 136.3 75.97 56Jiangxi 11.9 1.63 14Shandong 160.9 79.82 50Henan 15.8 3.09 20Hubei 19.0 4.30 23Hunan 16.3 1.82 11Guangdong 934.3 495.10 53Guangxi 16.4 3.41 21Hainan 6.1 3.05 50Sichuan 10.6 0.90 8Chongqing 14.3 3.42 24Guizhou 4.8 0.40 8Yunnan 10.9 0.81 7Tibet 1.1 0.04 4Shaanxi 13.3 1.16 9Gansu 4.2 0.38 9Qinghai 1.4 0.02 1Ningxia 3.5 0.43 12Xinjiang 11.5 0.91 8

Source: Cumulated by the data from MOFTEC: “Statistics on FDI in China 2001”, and “China StatisticalAbstract, 2001”.

Table 12: Contribution to Local Exports of FIEs by Regions (2000)

RegionsTotal Export

(US$ 100 mil.)Export by FIEs (US$ 100 mil.)

Contribution to localexports of FIEs ( %)

National 2492.1 1194.41 48East 2261.1 1162.51 51

Central 155.4 24.33 16West 75.6 8.47 11

Source: Cumulated by the data from MOFTEC: “Statistics on FDI in China 2001”, and “China StatisticalAbstract, 2001”.

61

Major Reasons for Central and West China Lagging Behind in FDI Inflow

There are several reasons behind the fact that central and western China are trailing way behind eastChina in attracting foreign investment.

Government Policy

The opening up of China to the outside world has proceeded gradually from one region to another.Throughout the 1980s and the first half of the 1990s most of China’s open areas were found along theseacoast, which became foreign investors’ first choices thanks to their preferential policies andfavourable investment environment.

Geographic Location

As most investors in China are engaged in export-oriented processing industries, the coastal areas areconvenient outlets for their products. Additionally, most investors are from Hong Kong, Macao andChinese Taipei. Overseas Chinese have their ancestral roots in Guangdong, Fujian and other coastalChinese areas, and they have the desire to do business in and with their native places.

Natural Conditions

The natural conditions of central and west China are harsher than those of coastal east China. WestChina, in particular, is covered by highlands, deserts and snow-clad mountains that are uninhabitableand lands that are not arable. The farming conditions there are very harsh as compared with eastChina. This is also the case with regard to development of transportation, telecommunication servicesand other infrastructure. Therefore, from a historical point of view, central and west China have allalong trailed behind east China in economic growth -- except for the first 30 post-independence yearsin which considerable central government investment had brought a relatively faster growth rate incentral and west China.

Central Government’s Investments

After the adoption of the reform policy and opening up to the outside world, China’s strategy fordevelopment long favoured the eastern coastal region. During the sixth Five-Year Plan period (1980-1985), the government positioned large numbers of major projects along the coast, boosting the shareof this region in the nation’s total volume of investment to 47 %, which was considerably larger thanthose of central and west regions. That percentage continued to grow in the following five-year period,reaching 51.7 %, while that of central and west China dropped further to 40.2 %. This tendencycontinued to grow in the first five years of the 1990s. In 2000, east China accounted for 57.8 % of thenation’s total investment, and the share of central and west China dropped to 38.7 %; see Table 13.2

The difference in the investment by the central government has brought about different investmentenvironments for the three regions. East China has acquired a relatively complete infrastructure and ahigh urbanisation level, and holds strong appeal to foreign investors. By contrast, central and westChina are less appealing to perspective investors because of inconvenient transportation, backwardtelecommunication services, and poor urban environments.

62

Table 13: Shares of East and Central China in the National Volume of Investmentin Capital Construction during Different Five-Year Plan Periods ( %)

Period EastCentral and

westCentral West

1953-1957 36.9 46.8 28.8 18.01963-1965 34.9 58.2 32.7 25.61966-1970 26.9 64.7 29.8 34.91971-1975 35.5 54.4 29.9 24.51976-1980 42.2 50.0 30.1 19.91981-1985 47.7 46.5 29.3 17.21986-1990 51.7 40.2 24.4 15.81991-1995 54.2 38.2 23.5 14.7

1997 53.3 39.3 2000 57.8 38.7 22.4 16.3

Sources: Statistics of surveys conducted in different years.Note: The percentages of east, central and west China do not add up to 100 % because some investment projects,such as those concerning the means of transportation, are not counted on a regional basis.

Resource-intensive Industries and Large Size of Enterprises

Economic development of central and west China, industrial growth in particular, depends to a largedegree on those large projects in mining, heavy and chemical industries invested in by the governmentfrom the 1950s through the 1970s. For this reason, mining and heavy and chemical industries hold ahigh proportion of the industrial structure of central and west China.

Of the 40 industries, the top 10 with the largest output values in central and west China, are: chemicalraw materials and chemical manufacturing industry; non-metal manufacturing industry; foodstuffprocessing industry; transportation equipment industry; ferrous metal metallurgical and rollingindustry; the supply of power, steam and hot water; textile industry; oil and gas industry, coal-miningindustry; and tobacco industry.

Most of these industries, with the exception of the manufacturing of transportation equipment, aretraditional industries plagued by slow growth and outdated processing techniques. The mining andchemical raw materials industries are two glaring cases in this category.

The high portion of mining, heavy and chemical industries in the industrial structure of central andwest China goes along with the fact that there are too many large enterprises in this region. For details,see Table 14.

In the past two decades, especially prior to the mid-1990s, foreign investment in China came mostlyfrom medium-sized and small investors from Hong Kong and Chinese Taipei, and most of it went toprocessing trade industries. Central and west China lacked the appeals to foreign investment becausetheir industrial structures were predicated on resource-related industries, heavy and chemicalindustries as well as large enterprises.

63

Table 14. A Comparison of Scales of Industrial Enterprises Listedas Independent Accounting Units in 1998 ( %)

Nation-wide Central and west ChinaLarge

enterprisesMedium-

Sized onesSmall

enterprisesLarge

enterprisesMedium-sized ones

Smallenterprises

Value Added 43.9 13.3 42.8 47.4 12.0 40.5Total number ofworkers

30.3 17.1 52.6 33.1 16.5 50.4

Net value of fixedassets

53.0 15.8 31.2 57.3 16.5 30.8

Total volume ofprofits and taxes

60.8 10.8 28.4 67.2 9.3 23.6

Sources: Wei Houkai: Tables 7-1, Strategy for 21st-Century Industrial Development of West China, 2000 edition,Henan People’s Publishing House.

An Overweighed State Sector

The bulk of the industry of central and west China was built after the founding of New China andunder central planning, and that is why the state sector in this region held a higher portion than in therest of the country, in the early days of reform. See Table 15. In 1980, the state sector made upupwards of 80 % of the industry of nine provinces and autonomous regions in central and west China(Heilongjiang, Guizhou, Yunnan, Tibet, Shaanxi, Gansu, Qinghai, Ningxia and Xinjiang) in terms oftotal industrial output value; the figure ran as high as 92.2 % in Heilongjiang, which meant that thestate owned almost the entire economy of that province3.

During the 1980s, when market-oriented reform was making steady headway and non-state sectorswere burgeoning in Southeast coastal areas, non-state economy also begin to sprout in central and westChina, though to a lesser degree. In 1992, when non-state sectors made up 51.5 % of the nationalindustrial output value, and reached as high as 74.1 % and 71.8 % respectively in the east Chineseprovinces of Zhejiang and Jiangsu, the figures were only 38.90 % for central China and 33.29 % forwest China; in Qinghai and Tibet it was less than 20 %.4 By 2000, the portion of non-state sectors inthe economy was 86.3 % in east China, 70.8 % in central China, and 55.2 % in west China. During theyears of reform, non-state economy has emerged as a staunch force in China’s national growth. Thetardy development of the non-state sectors has seriously hampered economic growth of central andwest China.

Table 15: Shares of Non-State Sectors in the Total Output Value ofManufacturing Industry in East, Central and West Regions ( %)

Region 1981 1989 1992 1995 1997 2000National 25.24 43.94 48.50 66.00 74.48 79.2

East 29.79 56.26 59.64 72.67 79.76 86.3Central 22.50 41.83 38.90 54.69 68.64 70.8West 15.09 31.84 33.29 45.29 52.66 55.2

Source: Data before 1997, refer to Tan (1997), data for 2000 from “China Statistical Abstract, 2001”.

Medium-sized and small firms from overseas found it hard to cooperate with state-owned enterprises,the large ones in particular. For this reason, very few foreigners were investing in central and westChina.

64

New Policy Orientation and the Key Points

Policies in General

Since 1997 the Chinese government has formulated a series of preferential policies to encouragedevelopment in central and west regions. At “The West Forum”, held in Xian in September 2001, newpolicies were released to promote western development. These policies covered the following three fields.

Increasing Government Investment in Central and Western China

Since 1997 the central government budget has markedly increased the portion of funds for central andwest China. As a result the figure rose from 41.5 % to 51.5 % during the 1993-1998 period. With anumber of large projects coming under construction in west China, in particular, the increase of centralbudgetary funds in this region has been even more impressive. In 2000, the percentage of investmentin west China in the central budget rose to 23.74 % in relation to 18.7 % in 1996. Sixty percent of the117 key state industrial construction projects announced by the State Development PlanningCommission in 1998 are located in central and west China. Construction of large projects with centralgovernment investment has triggered a flow of non-government funds into central and west China.

The new policy framework required that the central basic construction investment fund and proportionof long-term construction bonds funding the western region should be increased. The loans from thestate policy bank, international financial organisations, and foreign governmental preference loans tothe western region should be increased.

In general, however, the dominating position of the eastern region as the destination of capitalinvestment has not changed so far due to the small portion of government funds in the totalinvestment. In 2000, the share of east China region in the nation’s total investment in fixed assets was57.8 %, the central and west regions were only 22.4 % and 16.3 % respectively.

Priority for the Infrastructure Facilities

The central authorities have decided to continue to increase the portion of government investment inwest China, and give priority to west China in arranging projects in energy, transportation, resources,high and new technologies, and in shifting defence enterprises to civilian purposes, so long as theregion holds some advantages in these projects.

Increasing Fiscal Transfer Disbursement

The scale of the central fiscal transfer disbursement should be enlarged. A special fund will be set up forthe transfer disbursement to ethnic areas. Preference will be given to the western region in allocating thespecial fund for agriculture, social security, technology, education, politics and law, health, culture andrelics. The central fiscal poverty reduction fund will mainly focus on poor western areas.

Applying Land Use Preferential Policy

Whoever restores the forest and grassland from cultivated land or plants trees and grassland on barrenland will have the right to operate and use the grassland and the forest. They can obtain the land

65

utilisation power through leasing and the costs be reduced on leasing charges. The land utilisationprivilege will last for 50 years, which can be renewed, inherited and transferred after that. Theefficiency of land acquisition approval procedures should be improved.

Encourage Rational Movement of Personnel

A subsidy system should be set up for those working on border areas, burdened by central finance.Flexible policies will be applied to those working for the west. Entry and exit freedom will be given toforeign high-tech personnel, high-level managers and investors. Those with legal fixed residence,profession and income resources in cities or townships can apply for urban permanent residencepermit according to their own willingness.

Policy of Encouraging FDI in the Regions

More preferential policies concerning FDI into the regions have been put into practice.

Applying Tax Preference Policy

For foreign invested enterprises encouraged by the Government in the west, the enterprise income taxwill be reduced to 15 % for the next ten years. For minority areas, they will get more preferentialpolicies. For newly established transportation, power, water conservation, post and broadcastingenterprises in the west, their income tax will enjoy "two-year exemption and three-year reduction"policies. Foreign investment in energy high-tech, centralised-circuit and software will have the samepreferential treatment as other areas. For special production aimed at reforestation and grasslandrestoration, the agricultural special production tax will be exempted for ten years. For land acquisitionof national and provincial road construction, railway and civil aviation construction, the landacquisition tax will be exempted. These policies also apply to domestic-funded enterprises.

Expanding Areas of Foreign Investment

Expand service and trade in the west. Sectors invested by foreign investment should include resourcesdevelopment, tourism development and banking. Experiment in foreign branch banking, commercialretail enterprises and foreign trade enterprises be expanded to the western provinces, municipalitiesand autonomous regions. A foreign bank can have RMB currency business in the western region.Foreign investors can invest in telecommunications, insurance, tourism, law firms, project designcompanies, railway and road cargo transportation and municipal public facility enterprises, etc.

Extending Foreign Investment Channels

Encouraging the foreign enterprises in China to reinvest in the west, BOT pilot projects can be expandedin the west to attract more foreign funds. TOT modality will also be tested. BOT and TOT projectmanagement methods should be formulated soon. Regulations and methods for foreign-investedenterprises to be listed on the domestic or overseas stock markets, attracting foreign investment bytransferring of operation, equity and acquisition should be formulated and those existing policies shouldbe improved to respond to the needs. The preferential loans of international financial organisations andforeign governments should be utilised to soften the loan conditions of international financial institutes

66

for education, health, poverty reduction, ecological environmental protection of the western region. Weshould try to get more grants from international and bilateral organisations and give priority to theprojects of western region.

Releasing Conditions for Foreign Fund Use

The foreign equity investment percentage can be released for foreign invested western infrastructureand advantage industry projects according to different industries. For the projects encouraged by thegovernment, the percentage limitation for domestic loans will be loosened. Foreign-invested projectscan get co-financing including Renminbi currency. The proportion of a foreign preferential loan canbe increased according to the real conditions.

Preferential Policy on Mineral Resources

Foreign investors involved in mineral resources other than petroleum can enjoy related preferentialpolicies and exemption from one year of prospecting and mining privilege premium and reduction ofthat for two years. Five years reduction of mineral resources compensation charges will be applied.

Impact on FDI Inflow and the Region’s Economy

The Central government’s preferential policy, as discussed before, covers a wide range. Concerning thereality of the major aspects related to the FDI in the central and west regions, five to ten years time, theFDI inflow into the regions and the regional economic development may show the following features.

FDI Inflow and the Reform of Large SOEs in the Region

A major factor withholding economic growth in central and west China is the fact that the economiesof both regions are dominated by many large state-owned enterprises. In growth rate and efficiencylevel, however, these enterprises compare unfavourably with state or non-state enterprises of mediumor small sizes in coastal areas.

It is a consensus that state-owned enterprises in China have been allowed to withdraw from ordinarycompetitive industries and trades since the 15th National Congress of the Chinese Communist Partyheld in 1997. The 4th Plenary Session of the 15th Party Central Committee in 1999 set the guidelinesfor adjusting the state asset stocks of large and medium-sized state-owned enterprises by reducing andcashing state-owned stocks.

However, the reform of large-scale SOEs has failed to take off quickly. A major reason behind thelackadaisical progress is that very few qualified non-state investors are involved in this field. In thecoming years, China will formulate policies to encourage foreign businesses to take part in the reformof state-owned enterprises by such means as acquisitions and mergers. This will definitely speed upthe reform of large state-owned enterprises in central and west China.

To make these policies a success, however, three major problems have to be tackled: first, encouragingforeign investors to invest in state-owned enterprises through mergers and acquisitions; second,creating favourable conditions for solving these enterprises’ overstaffing problems by speeding up theestablishment of a sound social security system; third, making sensible plans to solve the enterprises’

67

debt problems. If a good job is done in solving these three major problems, then state-ownedenterprises will definitely become hot cakes for foreign investors.

Accelerating in FDI Inflow and Economic Growth in some Cities

The consensus among economists at home and abroad concerning China’s strategy for developing thewest regions is that, instead of region-wide implementation, this strategy should be first implementedin a number of cities and areas where conditions are relatively good. Despite the overall backwardnessof central and west China in economic and technological development, some of the large cities areactually in the front ranks in China in the fields of science and technology, especially in terms of thenumber of colleges, research institutes, and teachers and researchers. Xi’an (capital of ShaanxiProvince), Chengdu (capital of Sichuan Province), and Chongqing (a municipality under the directjurisdiction of the State Council), for instance, ran among the top ten cities in China with the largestnumber of colleges and research institutes. In addition west China holds some advantages inmachinery, electronics and defence industries, and thanks to the many enterprises, built during the“Third Front” construction period, also in the aircraft, aviation and chemical industries as well as themanufacturing of telecommunications devices and electronic components and equipment.

With the improvement of the investment environment and the adoption of a policy of more opennesstowards foreign investors, major cities in central and west China will become more appealing toprospective investors from at home and abroad with their powerful technological resources, goodindustrial foundations, and relatively low costs. This trend has already manifested itself in the lastcouple of years, and quite a few transnational companies have already conducted inspections orinvested in a number of central and western Chinese cities.

Acceleration of High-Tech Industries

China’s tenth Five-Year Plan (2001-2005) attaches more importance to the high-tech industries.Transnational companies, as major providers of technology and organisers of global division oflabour, enjoy a considerable competitive edge in the development of high technology.

Foreign investment has dominated Chinese new and high technology industry since the mid-1990s. In2000, foreign-invested enterprises accounted for about 55 % of the added value of the new and hightechnology industry in this country, two thirds of the total number of applications for patent rights fornew and high technology, and about four fifths of the total volume of Chinese new and high-techexports. China’s decision to speed up the high-tech industries has provided many more opportunitiesfor foreign investors.

Stronger Competitiveness of Labour-intensive Manufacturing Industry

Given the widening per-capital income gap between different regions, central and west China will beable to keep their advantage in the labour-intensive manufacturing industry for a long period of time.Lack of new technology, information about the world market, and sales channels have preventedcentral and west China to bring the advantages of local labour-intensive industries into full play. Withthe Chinese market becoming increasingly open, the advantages of central and west China in lowlabour and other costs and local markets’ large geographical coverage may eventually draw theattention of foreign investors.

68

With the adoption of the strategy to develop central and west China in a big way, the investmentenvironment in these regions will be vastly improved. Some enterprises that have lost theircompetitive edge in the coastal regions will move to central and west China in order to regain theircompetitiveness. We have ample reason to believe that traditional manufacturing industries in centraland west China will further strengthen and keep its competitive edge for a long time.

Beneficial for West China to Expand Economic Relations and Trade with Neighbouring Countries

With a long borderline, Southwest and Northwest China is bordered by quite a few south and centralAsian countries and Russia. China’s WTO entry will help boost trade and investment relations withthese neighbours and provide a great impetus for the economic development of west China.

There is great leeway for the development of trade between China and south Asian countries.According to an 1999 year-end Economist prognostication, in the first three years of the 21st century,the Chinese economic rim will lead the globe in economic development, and this will be followed bySouth Asia, where India will maintain its seven percent annual economic growth rate while Pakistan,Nepal, Sri Lanka and Bangladesh will keep a growth rate of four to five percent. Economic growthwill trigger off expansion in domestic demands.

China’s trade relations with Russia and Kazakhstan, Kirghizstan and Tadzhikistan are small in scale.There are, however, some salient characteristics in Chinese trade relations with these countries.China’s exports to these countries are basically light manufacturing goods, especially the consumptiongoods. Textiles, leather and fur and their products, shoes, hats and umbrellas, vegetables and fruitsconstitute the lion’s share of Chinese exports to Russia and the three central Asian countries. China’smajor import commodities from these countries are metals and products, chemicals, automobiles,aircraft, ships, transportation equipment, and mineral products.

In general, because the trade and investment relationship between west China and its neighbouringcountries are more mutually complementary than conflicting, once west China becomes a more openarea, it will provide the west region more opportunities to share the benefits of development of theregion with its neighbours.

Impact on the Region’s Social Stability

Increases in FDI will also have some adverse impacts on the economies of central and west China. Amajor aspect of it is that social stability will be up against more destabilising problems.Uncompetitive enterprises especially the SOEs, will be confronted with tougher competition. Somewill go bankrupt more quickly than usual, causing structural unemployment problems, bad bankaccounts, and the problem of unemployment.

These problems will have certain impact on social stability. To deal with them, local governmentshould study the experiences of other countries in maintaining social stability during the period ofopening-up to the outside world. More effective measures will be adopted to readjust the relationshipsbetween different interest groups, protect the disadvantaged members of society, do what it can toreduce the impact of the opening-up effort on the domestic scene, and ensure smooth progress ofreform and the opening-up initiative.

69

Conclusion

With further implementation of the "Go-West " Strategy, economic development of central and westChina will draw far more attention than before. Their investment environment will be vastlyimproved, and their policies will be more beneficial to those who care to come to invest. Thus theinflux of foreign capital will grow considerably. The influx of foreign capital will not only boostfinancial input in central and west China, but more importantly, it will provide a major impetus to theeconomic restructuring, technological progress, international competitiveness, and openness of bothregions, thereby putting their economies on a road of sustained and fast growth.

NOTES

1 This administrative division of east, central and west China has been in effect for many years. The“Go to West strategy ” recently adopted by authorities, however, also includes the Guangxi ZhuangAutonomous Region and the Inner Mongolia Autonomous Region. To maintain consistency ofinformation and statistics, however, the author of this paper has chosen to stick to the originaldivision.

2 The percentages of east, central and west China do not add up to 100 % because some investmentprojects, such as those concerning the means of transportation, are not counted on a regional basis

3 Refer to Tan Chenglin: A Study of Differences in the Regional Economy of China, 1997 edition,China Economic Press.

4 Ibid.

70

REFERENCES

Wang Luolin (ed) (2000): “Report on Foreign Direct Investment in China 2000”. Chinese Financialand Economic Publishing House.

Liao Yuanhe (200): “A Tentative Study of the General Strategy for Industrialisation of West China”,Reform, issue No. 4.

Chen Dongqi and others (2000): “Proposals for a Policy to Render Financial Support to Large-ScaleDevelopment of the Western Region”, Macroeconomic Research, issue No. 8.

Lin Ling and Liu Shiqing (2000): “On Discussions about the Strategy for Large-Scale Development ofWest China”, Reform, issue No. 2.

Cheng Hongyi and others (2000): “Improving the Soft Investment Environment and Expanding theUtilisation of Foreign Capital in Central and West China”, International Business Post,September NO.2.

Wei Houkai (chief editor) (2000): “Strategy for 21st-Century Industrial Development of West China”,Henan People’s Publishing House.

Chen Dongsheng, Hei Houkai and others (1996): “The Road of West China to an Economic Takeoff”,Shanghai Far-East Publishing House.

State Statistical Bureau (1997): “China’s Regional Economy during 17 Years of Reform and Openingup to the Outside World”, China Statistics Publishing House.

Tan Chenglin (1997): “A Study of Differences in the Regional Economy of China”, China EconomicsPublishing House.

Jiang Xiaojuan (2000A): ‘Investment of Large Transnational Corporations: Ist Impact on China’sIndustrial Structure, Technological Progress and Economic Internationalisation”, In WangLoulin, (2000).

Jiang Xiaojuan (2000B): “An Analysis on R&D of the FIEs in China”, Science and TechnologyReview. Vol. 9.

Jiang Xiaojuan (2000C): “Suitableness, Consistency, and the Room where Policies Function: Ananalyses of FIEs In High-tech Industries”, Management World. Vol, 3.

Jiang Xiaojuan (2001A): “Is FIEs Dominating Chinese High-tech Industries”, Chinese IndustrialEconomy. Vol.2.

Jiang Xiaojuan (2001B): “Chinese Industries in the Transition: Organisational Change, EfficiencyGains, and Growth Dynamics”, Nova Science Publishers, Inc. 2001.

Jiang Xiaojuan and others (2001): “Transnational M&A Behavior By Multinationals in China: itsSignificance, Trends, and our Strategy”. Management World, Vol. 3, 2001.

71

BUSINESS PERSPECTIVE: WHY DID WE INVEST IN CHINA?

Robert T. Dencher,General Manager, Business Development Shell (China) Ltd.

Gas & Power in China

Gas & Power is one of the five business segments of the Shell Group – the others are: Exploration andProduction - they supply the gas Shell likes to sell - Oil products, Chemicals and Renewable Energy.Renewables are the most junior of the businesses focusing on new types of energy like solar-energy.Gas & Power has some US$ 7 billion worth in assets around the world, Shell Gas & Power operates in26 countries and are involved the sales of more then 100 bcm of natural gas per year; that isapproximately four times the total of China’s natural gas consumption. Shell is also shareholder andoperator in over 10.000 km of pipeline. It is a shareholder in major marketing companies in Europeand we have gas marketing and sales operations in England as well as in the U.S.A.

It is the world leader in the business of liquefied natural gas (LNG). In this industry gas from remotelocations is liquefied and transported by ocean tankers to the markets. For example, gas fromAustralia is liquefied and transported to Japan. China is to build its first LNG terminal in Guangdong.Shell is the leader in the technology as well as in sales.

Shell also has its own Independent Power Producer (IPP), InterGen; it has a 68 % share in this jointventure with Bechtel. At present about 1 GW is operational – including a 725 MW plant in MeizouWan, Fujian Province – and some 4.7 GW is under construction. These figures seem small incomparison to the total production capacity of China but in the world of IPPs InterGen is among theleaders.

Shell has been in China for over 100 years, traditionally trading fuels and lubricants. Recently Shellhas been spending significant amounts in the upstream for Exploration and Production about US$ 800million. It is investing some US$ 300 million in downstream oil products and has spent about US$ 600million in the Initial Public Offerings (IPOs) of SinoPec and China Natural Offshore Oil Corporation(CNOOC). It has, through its affiliate InterGen, invested US$ 380 million on its participation in aMeizou Wan Fujian power plant.

Looking forward, in Guangdong, Nanhai Shell has entered into co-operation with CNOOC to build aUS$ 4 billion petrochemicals plant.

And very recently PetroChina has nominated Shell as the preferred partner in the West-East pipelineproject, an investment of some US$ 5 billion and that is for the pipeline only. Shell shall also beinvesting in the upstream – finding and producing the gas -and projects in the markets served by this

72

pipeline, for instance, gas fired power stations, gas distribution systems in cities - new or convertingtowngas to natural gas – and transmission pipelines.

Shell Gas & Power Mandate in China

Shell Gas & Power’s mandate is to participate and develop the natural gas market in China by activelyparticipating in developing infrastructure and bringing its expertise and experience to the market. Atpresent it is focussing on the East-coast area, but already it is looking at the rapidly expanding optionsin the provinces directly west of the coastal zone.

Gas and Power Value Chain

The gas is produced and depending on the distance to the market Shell transports the gas either bypipeline or LNG carrier, if by LNG carrier it will need to liquefy the gas. Once the LNG is landed –for instance in Guangdong in the future – it will need to be regasified and entered into the pipelinegrid. High-pressure applications like power stations, like to take the gas directly from the grid becauseof the gas turbines. Other applications like industry, commercials and households require distributionthrough the lower pressure systems. The final stage is the actual consumption by the end consumers.In the liberalised European and American markets there is also the aspects of competing with othersellers of gas and power, this means Shell needs marketing and trading organisations.

Shell is present in all of the parts of the chain, particularly the last two parts and need to create themarket.

All parts of the chain require large capital investment and carry significant risks. The projects alsoneed to be financed over a long period and above all the end product needs to be competitive with thealternative energy source.

The fact that Shell is involved in all parts of the chain allows it to plan and design as optimally aspossible and thereby minimising on the financial requirements and minimising the risks as much aspossible.

Natural Gas Developments in China

Why is Shell looking for investment opportunities in China? The answer is quite straightforward;China is a tremendous market with huge potential. The population in the provinces (Fujian, Zhejiang,Shanghai, Jiangsu, Hebei, Anhui and Shandong) on the map amount to some 250 million people -comparable to the USA. But if you compare the average consumption of gas and power per capita youwill notice that it is only 1/10 of what is used in Europe.

Coal is China’s main fuel and that will not change much in the future, the country has ampleresources. However, there are also significant amounts of natural gas reserves, both onshore andoffshore. Natural gas is a very efficient fuel with environmentally friendly characteristics; this is thereason for its extended use in the world, in particular in the power generation sector. In powergeneration its thermal efficiency is around 55 %, there is no sulphur in the emissions, both the carbondioxide and nitrogen oxide emissions are about half that of a modern coal plant.

73

China has recognised the benefits of natural gas and this has been reflected in the most recent five-year plan. Gas consumption is set to rise from the present 2 % - approximately 25 bcm - to 8 % in2020 of primary energy consumption, around 200 bcm per year. Investments associated with this risein natural gas consumption are estimated to be US$ 3 to 5 billion/year. As an example, the totalinvestments associated with the West East Pipeline amount to US$ 3-4 billion in the upstream, US$ 5billion in the midstream and US$ 10 to US$12 billion. in the downstream. Investments in thedownstream include medium pressure pipelines to the cities and the industrial zone, investments in thedistribution systems to the houses as well as in power generation facilities.

The present power generation capacity amounts to some 320 GW and is set to grow to 500-550 GWby 2010 and around 800 GW in 2020. In order to fulfil the growth expectations more then 1 GW permonth generation capacity needs to be installed!

It can only be concluded that in principal there are numerous opportunities for the foreign companiesto invest.

Gas & Power Investments

First of all Shell would be looking for projects that fit with its company and the principles it hasadopted, the Shell General Business Principles and Sustainable Development criteria.

Sustainable Development

Shell is publicly committed to its Business Principles and the Framework for SustainableDevelopment. For Shell Sustainable Development means that it bases its decision making on threepillars - the economics of the project, the environmental effects and the social aspects of the project -and it tries to meet the needs of today without compromising the ability of future generations to meettheir needs. Shell seeks a high performance standard and wants to balance the short-term financialrequirements of private enterprise with the long-term needs of the people and countries it operates in.Shell will be transparent to the outside world about the reasons why it has come to certain decisions.

Shell will integrate the economic, social and environmental considerations into its decisions and all ofthis against the background of the existing laws and values of the society in which it operates.

It means that Shell will engage with all people and parties involved, - the so-called stakeholders - theshareholders, the governments, the public but also the Non-Governmental Organisations (NGOs) likeGreenpeace or World Wildlife Fund.

Why should one burden itself with such a complex system? First of all because Shell believes in thelong-term solution, it wants to balance the long and short term. Second, most multinationals arecontinuously being scrutinised by the public at large and NGOs. By using this framework and inparticular by communicating with the outside world Shell learns at an early stage what the concernsare. It can start showing and discussing with them the issues involved. By doing so it has set aframework that will allow it to take some tough decisions and withstand the scrutiny of the public eye.Shell’s experience is that NGO’s realise the reality just as well as it does – there has to be a balance -and more often then not Shell, nowadays can negotiate workable solutions.

Shell’s exposure to the public – and this applies to many other multinational companies – and themedia is one of the biggest differences between the international companies operating in China and

74

Chinese companies. If Shell does not apply its international standards for projects in China then -through the media – this could cause significant damage to the company, for instance by a consumerboycott.

The principles mentioned are conditions that must be met when entering a project; they might notalways be that obvious when discussing the opportunity, but they are always there.

Gas & Power Investments

When looking at the project there are many aspects to be considered, in particular;

− the dimensions and timing; is it the right size and the right moment, does the potentialjustify the efforts and does Shell have the people to do it;

− does the proposal fit in Shell’s bigger strategy in the sector and the country;

− can Shell add value to the project through its specific technological and commercialexpertise and does that give it an opportunity to add more value to its portfolio; and

− are the risks involved in line with the reward of the project.

Shell does not reason like a bank or an institutional investor, it seeks specific opportunities because itfeels it can contribute its skills, technology and expertise to make something happen that otherwisewould have been more difficult or even impossible.

Shell wants to be fully engaged in the project and think along with the project; Shell wants to be apartner.

Risk and Reward

Shell is in the energy business, so by definition the numbers involved are big and there are risksinvolved, technical and commercial. Its shareholders know that and they have trusted Shell with theirfunds because they believe Shell can judge the risks it takes and make a good return on theirinvestments.

Risks. When considering investing funds into a project Shell will always want to get a first handfeeling for the risks involved. It will study the market, the technical aspects and the commercialaspects and only then it will make its own judgement on the risk profile. First, it will always want tolearn about the risks itself, it will not depend on others. Second, one must appreciate that such ajudgement is not pure science, will never be perfect and will be based on a fair amount of perception.For instance, who can tell when the Chinese markets will liberate and what they will look like then?Nevertheless, projects decided today will operate under such a regime for some time and it will take aneducated guess upon the effects on the project.

Shell looks at the risks like the market, the price and the project; all of these can be more or lesscaptured within the economics.

But, next to these there are two other risks, the legal / political risks and the environmental risks.

75

Legal and Political Risks

The legal / political risks concerns the uncertainties in the existing and future legislation under whichthe project will perform. Large investments in the infrastructure require predictability and stability inorder to attract foreign capital.

There is need for a sound legal and regulatory environment that allows economics to be forecasted andaccomplished with confidence. The system needs to be predictable. There needs to be a level playingfield, foreign and Chinese companies have different advantages under the current system. Someexamples:

− At present there is no clarity about the timing nor the outcome of the liberalisation of thegas and power sector, this has significant impact on the economics of a gas / powerproject as Shell has learned in the USA and Europe.

− There are doubts about the value of Take-or-Pay agreements and the effectiveness ofenforcing these in the present legal system. There are voices that claim that Take-or-Payagreements are unfair to the customer. But if Shell turns this around and asks thecustomer, “is it fair to expect the project to invest in for instance, the West-East pipelinesome US$5 bn without having legally binding Take-or-Pay commitments by thebuyers?”

− Another example would be a sales agreement between two state-entities; for instance astate gas company and a state power company. Their contractual relationship is a verysimple one as both have – in the end - the same shareholder, the state. If one of the twocompanies merges with a private company the relationship becomes more complex andthe private partner will insist upon detailed, legally binding contracts. This can cause asignificant amount of misunderstanding and friction and if not solved can lead to thewithdrawal of the private company from the project.

Environmental Risks

As stated before, natural gas has specific environmental benefits as well as very high efficiencies. Thepresent legislation does not allow gas-fired power stations to get paid for its environmentally friendlyperformance. In fact Shell understands that in some cases the polluting fuel receives a subsidy.Subsidies on polluting fuels should be removed – one could even consider to tax them in order tostimulate the usage of environmentally friendly fuels such as gas. Incentives will be needed toencourage clean technologies, for instance, tax and financial measures should apply national and cutacross provincial, municipal regulatory differences.

A mixture of legal and environmental risks is the situation whereby the gas-fired power stations areonly allowed to run at peak /mid-merit load factor while coal-fired power stations are allowed to runsignificantly longer. If the rules would allow gas-fired power plants to run baseload, the environmentwould benefit, the electricity produced by the gas power plants would be competitive, the Chineseindustry would be able to learn a new industry and the investors would be coming back. Why wouldthey come back? Because clarity has been created, risks have been lowered and the competitiveplaying field is more level.

There are also the uncertainties how future legislation will impact on projects under consideration nowor old industrial areas being used for new projects.

76

However, there are many ways of mitigating the risks and thereby improving the project for allinvolved.

It is a misconception that mitigating risks is solely something for the foreign investor to worry about.By reducing risks the project improves – financially or technically – and thereby makes it easier for allparties to have confidence in the project. By increasing confidence it will become easier to findfinancing.

Removing risks can be through extra market research. It could be by concluding better contracts – ingeneral this will force the parties to think twice about what they exactly want/can deliver. It can beabout ensuring political support or increased clarity about the legal regime in which this project willoperate during the next 25 years or more. The more clarity and predictability the better. And itcertainly is a lot about planning.

As foreign partner, Shell would like to be involved in the risk-mitigation as soon as possible. And itmust not be forgotten that it is Shell’s perception that needs to be at ease with the risks it is taking.

Project Financing

Project financing is an issue very closely related to the legal environment and risk and reward.

By using project financing Shell creates a multiplier effect. By involving the third party funds from thebanks, the local partner, and Shell, it will be able to finance a number of projects instead of the one ifit was forced to finance it on a corporate basis only.

However, involving the banks also means that they will want to know more about the project and willwant to make sure that their money is not at risk. Again, the principal of risk and reward applies. Thebanks will want to see a legal and commercial framework that will minimise the risks. The contractsneed to be as long as the loan period and the applicable legislation needs to be predictable enough tocover the financing period. The bank will also look at the environmental standards applied.

The project needs to be made “bankable”. By making a project bankable – that means lowering therisks or making it more acceptable – the interest for participating in a project or financing it increasessignificantly.

Increasing the confidence level creates a win-win situation. Again it is all about involving the differentpartners as early as possible.

Key Conclusions

China has many investment opportunities. At present the main focus is on the East Coast region, butalready this is shifting towards other regions. The growth rate for the years to come will create manyopportunities.

The MNC ’s (multinational companies) are not “bankers”, they bring more then financing and thereason why they step into certain projects is because they feel they are experts in that particular field.They can add value to your project, but you better involve MNCs as soon as possible.

77

Risks evaluation and mitigation is an underestimated area, but if approached properly and timely cancontribute very significantly to the success of the project. Once again, it is Shell’s (business)perception – i.e., the international partner and their banks. Shell and its banking partners need to feelcomfortable with the risks and the situation and conditions in China. The sooner they are involved,the sooner it can be found out what the issues are and how to address them.

All the remarks made focus on one theme: the creation of a partnership as early as possible to create awin-win situation. International companies have particular skills and experience; China should try touse them to its benefit. The relationship will lead to better understanding and by discussing the risksways will be found to deal with them, or at least many of them. And last, decision taking inmultinationals is not done in a few days but often needs considerable time. If it is a consortium theneven more time is needed. Shell will not be pushed; the amounts involved are too big.

Through partnering we will succeed in creating some of the projects China holds.

79

ADVANTAGES AND INVESTMENT REQUIREMENTS IN CHINA’S WESTERN REGION:PARTICULAR CASE OF LANZHOU,

Liu Yajun,Vice Mayor of Lanzhou

Although China’s economy has been growing fast since the reform and opening-up, the westernregion’s, economic development has lagged far behind that of eastern China due to the restraint of itsnatural, social and economic conditions. The resulting imbalance in regional economic developmenthas constituted a bottleneck in the overall progress of China’s economy and society. In order toaccelerate the development of the western region, and narrow the gap between China’s west and eastthe Chinese government has decided to implement the strategy of western development, based onencouragement of the inflow of both foreign and domestic capital into the western region. This paperattempts to elaborate on the advantages and investment requirements in the western region.

The Western Region Brings Unprecedented Opportunities.

In light of the expanding trend of the economic globalisation and the rapidly evolving knowledge-based economy the western region is expected to enjoy more opportunities to open itself to the outsideworld for the participation in the international division of labour and co-operation, as well as theabsorption of international capital and the resulting advanced expertise of production, marketing andmanagement. After 15 years of hard negotiations, China’s full membership in WTO has now become areality and this will enable the western region to realise a real, all-front opening-up, with theinvestment environment becoming more stable and predictable.

China’s “Western Development Strategy” has not only made the western region accessible to a largeamount of funds for its infrastructure construction and biological environment improvement, but alsoto a lot of preferential policies, which will greatly broaden the space for its development and arousethe enthusiasm of foreign and domestic enterprises in the western development. So, the western regionis blessed with an unprecedented golden opportunity, with which it can realise the great-leap-forwardin development.

The Strengths of the Western Region for Attracting Foreign Investment

Compared with the eastern coastal areas, the western region has some weak points, but also strongcharacteristics, which include the following:

80

Large Market

The market capacity in one area usually shrinks gradually with the local economy becomingdeveloped. However, the economic development of the western region lags relatively behind.Therefore it will leave a broad market for investors and turn the potential markets into real ones. Todevelop a new market might increase transportation cost and create some transient difficulties to beovercome, but it will often save a lot of investment cost compared with relatively sluggish markets inthose economically developed and market-saturated areas. In the beginning of reform and opening-up,most foreign investors with vision came to invest bravely in, and develop, China’s coastal areas. Theysucceeded and got high returns. Now, it is time for them to go west because the western region offershuge market capacity and an investment environment better than that of the coastal areas in the past.

Abundant Resources

The western region enjoys enormous advantages in mineral resources, energy, agricultural products,tourism, and land development. Out of over 140 discovered mineral resources in China, more than120 are located in the western region. There are some rare metals. Seven of the ten-plannedhydropower bases are located in the western region. In recent years, many large- and medium-sizedoil/gas fields have been discovered in Shaanxi, Gansu, Qinghai and Xinjiang. These rich resources areready to be explored and developed. Therefore, investment in the western region offers a promisingfuture.

Quality and Cheap Labour

The western people are straightforward, diligent, and virtuous. They ask for very little and contribute alot. Investors in the coastal areas are taking advantage by employing cheap labours migrated fromwestern regions in order to lower their production cost. Therefore, the labour cost will be furtherlowered if they directly invest in the western region and, thus, enjoy more price advantages.

Favourable Policies

In order to better implement “the Western Development Strategy” and support the western region toeffectively absorb foreign capital, the Chinese government has in recent years issued a series offavourable policies. Authorities of the western region have also promulgated a series of incentivepolicies within the framework of national laws. There is no doubt that the effective implementation ofthese policies will help attract foreign investors.

Of course, existing advantages are far from enough. The efforts of governments and people of thewestern region are required to transform these advantages to the real benefits to investors. Only bydoing so, can we truly attract better investment and promote a rapid development of the westerneconomy.

Investment Requirements in the Western Region.

Constrained by history and natural environment, the economic foundation in the western region isfragile; accumulated capital is little; and investment ability is weak. Investment by the state in thewestern region is mainly for some key infrastructure projects. We must intensify the absorption of

81

capital from home and abroad, accelerate the development of the western region throughimplementation of “The Western Development Strategy”. Proceeding from the current status ofwestern economic development, it is possible to identify the following areas for further investment:

Infrastructure Construction

Feeble infrastructure is the main hindrance constraining the development of the region. Infrastructureconstruction includes roads, railways, airports, natural gas pipelines, power grids, communications,television and radio, and water conservation.

Protection and Improvement of Ecological Environment

The deterioration of ecological environment will not only hamper the efficient exploration andutilisation of rich resources of the region, but it will also gradually damage the living conditions in thewestern and other regions. For the time being, the central and western authorities are adoptingcomprehensive measures to protect and improve ecological environment. Meanwhile, favourablepolicies are formulated to attract investment, and projects of ecological environment protection andimprovement are carried out to harness deserted mountains, hills, and beaches, to revert farmland toforests and grassland, and to address the air pollution problems.

Transformation and Upgrade of the Traditional Industries

The western region remains China’s base for petrochemical and heavy industries. However, due to lessinput in recent years, relatively backward technology, low scientific and technical content, thetraditional industries are in a disadvantageous position in market competition. They are in urgent needof fresh capital injection and advanced, applicable technology for transformation and upgrade so as toraise their competitiveness vis-à-vis foreign companies.

Development of High-Tec Industry

Western China does not only need to transform its traditional industries it should also develop thehigh-tech industries to drive its rapid development. The main cities and industrial towns in the westare clustered with scientific and technical personnel. They are equipped with integrated production andresearch facilities. This gives them a competitive edge in scientific and technical renovation. Thesecities are highly capable of comprehensive development and integration of high, new technologies.There are good conditions to develop the high-tech industries with the help of foreign investmentabsorbed in such areas as bio-medicine, information technology, software development, mechanicalelectronics, development of Chinese traditional medicines, new materials and renewable energy.

Processing of Traditional Resources Products

The industries in western China mainly produce traditional products of resource type which involvehigh transportation cost and low added value. It is necessary to make more investment in the industriesfor better development and processing to increase the scientific and technical content and added value.

82

Improving the Industrial Structure and the Industrialised Operation of Agriculture

Restrained by the geographical and weather conditions, the region’s agricultural development islimited. Agriculture suffers from irrational industrial structure, low industrialisation level andunavailability of collective advantage. Nevertheless, the western region has vast land and waterresources, which can help create a comparative advantage in developing agro-industries. So long asenough capital is injected, there will be good prospects in agricultural development, specialisedagriculture, water-saving agriculture, biological agriculture and animal husbandry, in particular.

Improving and Upgrading the Service Industries

The service industries in the west have been rapidly growing in connection with increased demand forclothing, food, residence and transportation. However there still remains much to be improved. Newsectors of the service industries such as banking, insurance, culture, education, accounting, auditing,evaluation and legal service need further development to further optimise the social service network.In addition, western China is rich in tourist resources, tours in the three plateaus, each with its owncharacteristics offer good investment opportunities.

Creating Employment Opportunities

One of China’s important policy principles is to create new employment for its growing population.We therefore welcome all labour-intensive projects that can contribute to the creation of additionalemployment opportunities, so long as they are in line with the state industrial policy.

Particular Case of Lanzhou

Having reviewed investment advantages and requirements in the western region, it might be usefulnow to focus on one particular case, that is Lanzhou, the provincial capital of Gansu. With an area of13,100 square kilometres, Lanzhou is an important commercial city and transportation centre of the“Silk Road” and the new Asia-Euro Continental Bridge it plays a significant role in linking theWestern-Chinese economy, and culture.

With the implementation of “the Western Development Strategy”, Lanzhou’s economic power hasbeen strengthened considerably. In 2000, the total GDP of the municipality reached 30.9 billion yuanmaking Lanzhou one of the 50 strongest cities in terms of capacity. The city is equipped with acomprehensive industrial system majoring in petro-chemical industries, non-ferrous metallurgy,machinery electronics and light textile industry. It is an important transportation, communication,commercial, trade and financial centre of China’s Northwest and an open inland port city connectingChina with countries in West Asia and Europe.

In “the Western Development Strategy”, Lanzhou is believed to possess five major advantages. Thefirst one is its geographic location, surrounded by Gansu, Qinghai, Xinjiang and Tibet, and facingShaanxi, Ningxia and Inner Mongolia. It is also connected with Sichuan, Guizhou and Yunan.Lanzhou has developed close economic and cultural relations with neighbouring provinces andautonomous regions and therefore is well positioned to play a bridging role to drive the developmentof its neighbours.

83

The second is its transportation and communications advantage. Lanzhou is the biggest transportationand communications hub and network centre of China’s Northwest. Four main railroads and six statelevel highways are located here. Other highways are being constructed. The Lanzhou ZhongchuanAirport has direct flights to all main cities in China, Hong Kong and Singapore. Lanzhou is among thenational leaders in terms of postal communications. The favourable transportation and communicationconditions are beneficial to Lanzhou’s connection with its neighbours.

The third advantage is its industrial strength. After years of construction since the founding of China,an industrial system with complete sectors has taken shape mainly covering; petro-chemical industry,non-ferrous metallurgy, machinery electronics, pharmacy, textile and building material. The industrialsystem is adaptable and matching the resources development in the Northwest. With the improvementof the industrial structure and the enlargement of economic scale, resource processing will create moreadded value and make Lanzhou a comprehensive resource processing base in the west.

The fourth is the scientific and technical personnel advantage. Lanzhou is one of the major scientificresearch bases of China with over 700 research institutes, nine key state research laboratories, 13universities and colleges and 200,000 scientific research people. People providing science andtechnology services in the urban area accounts for 2.11 % of Lanzhou’s 15 industries’ total which ishigher than the average figure in other western cities (1.30), cities in the whole country (1.12) and bigcities in the country (1.78). Lanzhou is among the leading group in terms of comprehensive scientificand technical strength and concentration of talented personnel.

The fifth advantage is in its distribution network. After seven years of construction of commercial andtrade centres, Lanzhou’s market network has significantly improved and the distribution service isenhanced. The movement of human resources, goods, capital and information is dynamic. A unifiedmarket has taken shape.

Lanzhou’s Investment Environment for Business

In recent years, the Lanzhou municipal government has attached great importance to the improvementand optimisation of its investment environment. It has formulated “The Regulations on ActuallyEnhancing the Investment Environment”, implementing in all levels of departments the system ofmaking public the policy measures, business procedures, service standards as well as ensuring timelyservice. This has helped to improve the efficiency and quality of its work. It organised representativesfrom enterprises and investors to conduct general assessments of the social service provided by themunicipal administrative, law enforcement and economic management departments and the relevantcounty and district authorities. It has also adopted a series of measures to actively rectify and correctthe corresponding problems.

The government has intensified its efforts to mediate and resolve disputes of various sorts. In thisprocess, the image of a clean government has been established, which in turn became a showcase forthe new outlook of Lanzhou in the reform and opening-up drive. The government has further regulatedand standardised behaviours relating to investigations and fee-collection on the enterprises, preventingthe practice of random imposition of fees and quotas and arbitrary fine-collection and investigationsby introduction of the “fee payment registration card” to enterprises with foreign capital or domesticsubsidiaries. It has also put into practice the system of joint administration featuring one-stop service”.By collectively handling applications within the set deadline, it was able to provide convenient,efficient and comprehensive services to investors.

84

This year, in order to achieve the development goal of Lanzhou’s economy, which will strive for thetop position in the province and a high ranking in the western region as outlined in the strategy ofdeveloping the west, the municipal government has carried out a campaign to improve the investmentenvironment. While pressing on with air pollution treatment, city management consolidation andacceleration of infrastructure construction, it is sparing no efforts in cultivating a sound legal, political,service, market, social, public opinion and cultural environment. At present, people from all walks oflife work hard to improve the investment environment.

The state has come up with a series of policy measures to support this region, providing solid policyguarantees for implementing the strategy of developing the west. While creating favourable conditionsfor making full use of the state policies in a flexible and effective manner, we have, formulated a hostof new policies encouraging both foreign and domestic investment under the state’s legal and politicalframework. We have also formulated specific measures to reduce investment cost, simplifymanagement procedures and improve government service.

The all-round implementation of developing the western strategy has not only brought about newopportunities for the social and economic development of the western region, but also provided newbusiness opportunities to entrepreneurs at home and from abroad. Lanzhou, with its rich resources andvast potential market, will absorb developmental factors and seek economic co-operation in an all-embracing manner by introducing innovative investment models. We encourage foreign businesses toinvest in various forms in sectors as permitted by the state and we particularly welcome transnationalcompanies to participate in the restructuring and reform of the state-owned enterprises.

In the context of China’s future economic development the western region will surely realise leap-forward-progress by relying on its strengths as a late starter. The vast number of foreign investors willenjoy great business opportunities in the western region. It is our sincere wish that entrepreneurs bothat home and abroad will be the “early birds to catch the worm”. In conclusion, I assure you thatforeign investment will be rewarded greatly by the improved market environment, efficient and honestgovernment, as well as industrious people in Lanzhou.

85

WHAT TYPE OF FDI FOR THE CHINESE HINTERLAND?

Peter Kreutzberger,Counsellor, German Permanent Mission to the OECD

Introduction

What is good for China, may not necessarily be good for FDI, i.e. (potential) foreign investors. “TheWestern Development Strategy”, launched by China in 1998, which attaches a significant role to FDIin the regional development of inner China, has to be dealt with cautiously by foreign investors. Tillnow, this strategy has been a political concept with vague market orientation. But FDI is best located,where market conditions allow comparative advantages. Investment incentives for FDI, an essentialaspect of China's “Western Development Strategy”, are the expression of political will, which bearthe risk of disallocating investment funds on a non-sustainable basis.

Statistical Facts

Till 2000, according to the Chinese Statistical Yearbooks, 86 % of FDI was invested in the coastalregions; only 9 % in central China and 5 % in the western regions. Related to population this is aspread of US$ 530 : 60 : 34 or roughly 18 : 2 :1 per capita. Predictions on FDI flows after China'saccession to WTO forecast that the eastern regions will profit most from an upsurge of FDI. This willwiden the gap even bigger between the coast and inner-China.

After opening up China to FDI in 1978 we have witnessed a considerable shift of FDI along thecoastline – away from Guangdong with over 80 % and Beijing with over 10 % in the early 80s.Shanghai at that time had less than a 2 % share. With regard to the unpredictable rise in cost it mightbe questionable, whether Shanghai is the right location for FDI. But there remains a vast potential forinvestment in the coastal regions, which has not yet been utilised.

The attractiveness of the east is the disadvantage of the central and western regions. It has:

− a more liberalised and developed economy;

− better infrastructure;

− closer connection with the outside world;

− markets with purchasing power;

− higher level of scientific research and technical innovation; and

− qualified labour force.

86

Looking at this attractiveness, MOFTEC’s Deputy Minister, Long Yongtu told an OECD meeting thisyear: "It is a very big challenge to attract foreign investment to the inner part of China. ... It doesn'thave any comparative advantage to manufacturing and service projects. ... You should not expectmore FDI to your region than the coastal areas, because that is against the law of economics."

Chinese government till now have not had a coherent approach towards the development of inner-China. Even though FDI was given a crucial role for its development, neither a development conceptnor rules on implementation have so far been issued. After years of political propagation of “theWestern Development Strategy” these missing rules have been announced for the end of this year orthe beginning of 2002.

With regard to inner-China Mr. Lin JiaBin of the Development Research Centre of China’s StateCouncil (DRC) said: "We know that we first have to develop the conditions for FDI." Thanks to theAsian financial crisis and the sluggish development of global economy the Chinese government has –among other measures – invested massively into the physical infrastructure of inner-China, to giveimpetus to China's economy. This is very good for future prospects of FDI. But the gap to the eastremains wide.

One cannot develop inner-China as a whole at one time. The Chinese have followed the idea ofdeveloping some regional centres like Xian, Wuhan, Chongqing, Chengdu, etc., which eventually willlead to trickling-down and spreading-out effects.

In this Chinese context, what type of FDI may be suitable for inner-China? There might be somegeneral guidelines to be followed by foreign investors:

− Do not rely on exports! Even better: no exports at all. Concentrate on the fragmentedmarket of inner-China. Are you given the permission to sell your complete productionon the inner markets? Is the inner market you approach sufficiently large and equippedwith purchasing power for your product?

− Do not rely on foreign imports! Be close to needed raw materials or semi-fabricatedproducts.

− Keep transport short! Stay close to your branch. Stay close to your customers.

− Inner-China advertises BOT- or TOT-projects in infrastructure. Be cautious: projects areclosely monitored by state administration; prices are often subject to politicalopportunity.

− Infrastructure and projects of environmental protection are often financed bydevelopment aid and tendered internationally. Know the rules! Build up contacts withconcerned institutions.

− Mr. Long Yongtu suggested for the development of SMEs: "If some foreign enterpriseinvests in a big project in the coastal area ... then there are so many other factoriesproviding components to that big project, so the inner part of China could be part of theinvestment scheme."

− Others suggest that if conditions for mergers and acquisitions improve in China there aremany SOEs with idle fixed capital worthwhile purchasing. Be cautious: these inner-Chinese SOEs were located there because of political reasons.

87

− Perhaps services and research, as connected to ITC and less to physical infrastructure,are also possible fields for FDI in inner-China.

All this might be true – but yet, it is music for the future.

Summary

No specific FDI can be recommended for inner-China. Realised FDI operate on an ad-hoc basis as theChinese government has not yet developed a sustainable surrounding for FDI in inner-China. SomeFDI operating on an ad-hoc basis fare well. But risks remain high. Therefore while welcoming “theWestern Development Strategy”, I would advise foreign investors to be cautious!

89

CHALLENGES FOR FDI IN CHINA’S REGIONAL DEVELOPMENT:JAPANESE PERSPECTIVE,

Hiroshi Matsumura,Director

and

Akira Izumo,Assistant Chief,

International Economic Affairs Division,Ministry of Economy, Trade and Industry, Japan

Introduction

Foreign direct investment (FDI) from Japan into China increased again in 2000, and the shares ofChinese imports and exports in Japanese trade have been constantly increasing over the last decade.Many studies have shown that the Chinese accession to the WTO will strongly enhance China’s tradeliberalisation and further stimulate FDI into China. Accordingly, China and Japan are expected tofurther strengthen their relationship of interdependence through increased trade and investment.

However, there are some concerns. In the last decade, we experienced the collapse of the investmentboom from Japan to China because of some major impediments to investment. The purpose of thispresentation is to assess the reasons why Japanese investment into China collapsed in the middle of the1990s, and to propose some suggestions to improve the necessary environment to attract investment innot only developed coastal China, but also less developed inland China. Without paying closeattention to these issues, China and Japan may not be able to accomplish a successful partnership.

The Current State of Investment by Japan into China

Trends in Investment by Japan

According to the data on growth rate based on investment value, there are clearly two booms in FDIflow from Japan into China. The first boom began in the early 1990s, when the Chinese Governmentstrengthened its open door policy, but it rapidly shrank in the middle of the 1990s. Then in 2000 theinvestment value increased once again, and this can be regarded as the second boom if the upwardtrend continues (see Figure 1).

90

Figure 1: Trends in Investment by Japan into ChinaGrowth rate based on investment value, over previous year

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

1st Boom

2nd Boom(?)

(FY)

Source: Ministry of Finance (Based on FDI Reports). The fiscal year runs from April to March.

Purpose of Investment

During the first boom, the objectives of Japanese companies’ foreign affiliates located in China, inparticular in coastal and urban regions, were mainly to produce goods and export them to their parentcompanies in Japan and to other regions, such as Asia and America. In 1993, 28.4 % of the productsmade by Japanese subsidiaries in China were exported to Japan, 36.9 % exported to other areas, and34.7 % sold in the Chinese interior market (see Figure 2).

The situation, however, has been changing gradually. As the Chinese interior market developed,Japanese foreign subsidiaries in China began to sell more products to meet the domestic demand. In1998, the share of goods sold in the Chinese domestic market accounted for 48.3 %.

91

Figure 2: Trends in Sales to Each Area ( %)

48.3

21.8

30.0

34.7

28.4

36.9

0.0 10.0 20.0 30.0 40.0 50.0 60.0

Domestic Demand

To Japan

To Other Areas

FY 1993FY 1998

Source: Overseas Business Activities of Japanese Companies

Major Factors Hindering Japanese Investment

Issues Related to Japanese Side (Collapse of the First Boom)

Why did the first boom of Japanese investment into China come to an end? There are some importantfactors that hindered investment. We can indicate three major facts related to the Japanese side.

First, Japanese enterprises, which invested in China during the first boom, did not conduct sufficientfeasibility studies on the Chinese economic and legal systems, and lacked both knowledge of Chinesebusiness practices and appropriate business partners. Because they did not have adequate informationon the Chinese business environment or receive proper guidelines before extending their business intoChina, Japanese firms lost their way in the challenging new market.

Secondly, Japanese companies, especially small and medium size enterprises, tend to be lacking inlong-term investment strategy - more so than American and European companies. As the Japanesefirms, which extended their business into China without any strategic plan, experienced seriousdifficulties, many other Japanese companies hesitated to invest in China.

Additionally, the collapse of the bubble economy in Japan also helped to bring about the end of thefirst boom. Many Japanese enterprises went into the red and lost their power to make inroads intooverseas markets.

92

Issues related to the Chinese Government:Regulations, and Administrative Transparency and Coherence

The reduced levels of Japanese investment into China can also be partly attributed to insufficientChinese regulations and legal infrastructure, and the administrative customs of the ChineseGovernment.

Based on the results of the questionnaire answered by 506 Japanese companies, which invested inChina (see Figure 3), one of the strongest suggestions is the necessity of regulatory reform in thebusiness sector (45.5 %). It is essential to remove unnecessary regulations and to establish acompetitive environment in order to encourage foreign capital participants in the Chinese economy.

Figure 3: Important Factors for Investment by Japanese Companies in China(March 2000)

45.5

44.5

14.9

10.7

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%

Deregulation in Business Sector

Improvement of AdministrativeCustoms

Enhancement of Social, Financial,and Legal Infrastructure

Calling in Credit Receivable

Source: Japan-China Investment Promotion Organization. The results of questionnaires answered by 506companies

The second most popular suggestion is the improvement of administrative procedures (44.5 %).Changeable administrative customs, excessive red tape, and lack of transparency have a negativeimpact on FDI inflows, since they are regarded as investment risks. Both central and localgovernments should endeavour to improve transparency and coherence through establishing anefficient administrative apparatus, and to fight against corruption.

93

The third suggestion was to enhance social, financial, and legal infrastructure (14.9 %). Introducing amore transparent legal framework and business environment in areas such as contract law, competitionlaw, financial law, social insurance systems, public capital market, accounting, taxation, customs,foreign exchange and trade control, protection regime of intellectual property rights (IPRs), andenvironmental regulation, would add greatly to China’s attraction.

In particular, insufficient protection of intellectual property rights, namely, the lack of administrative,institutional and legal frameworks to protect IPRs, is one of the major drawbacks of investment intonot only China but also into all other developing countries. Inadequate IPR protection inhibits foreigninvestment, especially in the advanced technology sector; discourages the diffusion of technology; anddiminishes future export opportunities and economic growth. China, therefore, needs to further theefforts it has already undertaken in order to facilitate a strong regime for the protection of IPRs.

Further Suggestions for Attracting Investment

Regional Disparities in China

Figure 4: Distribution of Japanese Companies’ Foreign Affiliates by Region in China(as of the end of FY 1998)

Coastal Regions96%

Western Regions1%Central Regions

3%

Source: Overseas Business Activities of Japanese Companies. The results of questionnaires answered by 1,232companies.

As a result of the Chinese open door policy, in particular to promote FDI into the eastern and southerninshore areas of the country, regional disparities between coastal China and inland China havewidened. A large number of existing Japanese companies’ foreign affiliates have been located incoastal regions, where there are relatively more attractive incentives related to investment promotion.This imbalance in the regional distribution of FDI is significant. In 1998, according to thequestionnaire answered by 1,232 Japanese companies which had established affiliates in China, 96 %of Japanese affiliates were located in the coastal regions, while only 3 % were in central China and 1% in the western areas (see Figure 4).

94

Necessary Environment for Investment

To be effective, policies attracting FDI from abroad should be based on the essential factors thatcompanies take into account in making decisions about where to invest. In general, these are asfollows:

− Fundamental infrastructure: well-prepared land; a stable supply of gas, electricity andpurified water; a good transport system; high-quality telecommunications infrastructure;and efficient financial services.

− Human resources: low-cost labour and high productivity; highly skilled workers; goodeducation and vocational training systems; and improved labour mobility.

− Supporting industries: abundant raw materials, and the presence of other firms operatingin similar sectors of activity for the potential development of partnerships.

− Sound, safe living environment for foreigners: schools, hospitals, parks, supermarketswhere people can purchase goods and food of their home countries, and culturalamenities.

Promoting Investment into Western Regions

To encourage investment into the western regions in China, which are relatively less developed, inaddition to the general good conditions required to attract FDI, China needs to have a more ambitiousstrategy than ever before.

First, to promote investment into the western regions, the government should introduce more attractiveincentives, such as regulatory reform, taxation, and improved infrastructure, than exist in the coastalareas. If the attractiveness of western China is merely the same as that of eastern China, incentivesintroduced in the west may not be sufficient to provide investors with any advantage.

Secondly, transferring authority on investment policies from the central government to localgovernments is a major force in developing local areas. To promote FDI into rural areas, it isindispensable for local governments to be authorised to make their own policy decisions and to havetheir own original incentives.

Thirdly, establishing a distribution network to connect the western regions and the main consumerareas ought to be prioritised. The degree of availability of physical infrastructure to improve access tothe target interior market affects the selection of the place of investment.

Conclusion

China and Japan have been deepening their relationship of interdependence through trade andinvestment. The flow of FDI from Japan into China recovered in 2000, and the shares of Chineseimports and exports in Japanese trade have been steadily increasing during the last decade. (SeeFigure 5.)

95

Figure 5: Trends in the Chinese Share of Japanese Trade

0

100

200

300

400

500

600

700

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 (CY)

10billionyen

0%

2%

4%

6%

8%

10%

12%

14%

16%

Exports to China Imports from China Chinese Export Share Chinese Import Share

Chinese Exports Share

Chinese Imports Share

Source: Ministry of Finance of Japan

However, as mentioned above, to attract further FDI from Japan and to help reduce the disparitiesbetween the western and coastal regions, Chinese policy-makers should draw conclusions from theexperiences that led to the collapse of the investment boom in the 1990s, and duly consider thesuggestions that emerge from different experiences.

When the Chinese Government, at both the central and the local level, makes continuous efforts toimprove the business environment to attract FDI, the investment flow will be accelerated, andconsequently the steady partnership and sustainable development between China and Japan will beenhanced.

97

COMPETITIVE INVESTMENT ENVIRONMENT,RULE OF LAW AND RECIPE FOR SUCCESS,

Ann B. McConnell,Financial Economist, Office of Investment Affairs, United States Department of State

The objective of this paper is to introduce the philosophies supporting United States investment policy,and to contribute to new approaches in attracting foreign investment to China’s Western Region.

United States Investment Policy

The United States' open investment policy is based on the principle of national treatment: foreigninvestors should not be treated differently from domestic investors. This policy provides the means foreconomies to grow and to prosper. All countries, both sources and recipients, benefit from foreigndirect investment (FDI). The United States has a major interest in fostering open investment climates.We are committed to our open investment policy and seek to open markets abroad.

FDI stimulates growth, creates jobs, fosters competition, and facilitates the creation and exchange ofgoods, services and innovative techniques. It helps an economy maintain investment, which in turn isvital to economic performance and international competitiveness.

The U.S. policy on international investment is based on the belief that foreign investment flows, whichrespond to private market forces, will lead to more efficient international production and therebybenefit both home and host countries. We seek to reduce barriers to international investment andpromote global acceptance of the principle of non-discrimination.

United States firms bring technology transfer, expertise and management know-how as they investabroad. We promote the contribution of higher environmental, labour and social standards, and goodcorporate governance.

Pursuit of this policy requires an integrated approach to activities within multilateral institutions andbilateral relations, and includes efforts to establish high international standards via multilateral,regional and bilateral instruments.

United States Investment Policy Multilaterally, Regionally, and Bilaterally

Multilateral

In multilateral institutions the United States will:

98

− Continue discussions in the World Trade Organisation (WTO), the Organisation forEconomic Co-operation and Development (OECD), and the United Nations Conferenceon Trade and Development (UNCTAD), and other institutions to expand support for highstandards;

− Promote OECD co-operation with key emerging economies, to promote internal policyreforms that improve the enabling environment for foreign investment and private sectordevelopment;

− Encourage non-OECD countries to adhere to the OECD Declaration on Investment andMultinational Enterprises and promote the recently updated OECD Guidelines onMultinational Enterprises;

− Use the OECD Guidelines for Multinational Enterprises as a means of promoting thehigh standards of corporate social responsibility;

− Explore expanding dialogue with developing countries through the United NationsConference on Trade and Development to encourage policies to improve the enablingenvironment for foreign investment and private sector development; and

− Promote improved co-ordination between multilateral institutions with respect to theirinternational investment policy activities.

Regional

The United States:

− Continues its negotiations on an investment chapter in the Free Trade Area of theAmericas Agreement;

− Encourages countries of Southeast Europe through their participation in the InvestmentCompact to implement practical reforms to improve their investment climate; and

− Seeks ways to improve on the APEC "voluntary principles" approach to investmentpolicy reform.

Bilateral

The United States will:

− Pursue expanding its network of bilateral investment treaties while continuing to updatethe United States model treaty;

− Where bilateral investment treaties are not possible, explore other means to encourageimprovement in investment climates and achieving greater market access in importantmarkets for United States investors; and

− Expand assistance to United States investors abroad in the resolution of disputes withforeign governments.

99

China’s WTO Accession

United States Trade Representative, Robert Zoellick, welcomed the announcement on conditions toadmit China to WTO and said that China’s entry into the WTO will strengthen the global economy andthe international rule of law for trade. China has made a firm commitment to the rest of the world toopen its markets and adhere to international, market-based rules.

WTO implications for China:

− reduced tariffs

− lucrative trade opportunities

− better distribution channels fully open to foreign participation

− impartial objective tendering processes

− improved ownership structures

− adoption of international standard accounting practices

− stronger legal protection of Intellectual Property Rights (IPR)

− liberalisation of capital markets and improvements in the financial service sector,including increased foreign participation in China’s banking system, and

− accelerated restructuring of the rural sector

Developing a Competitive Investment Environment

An open and transparent investment climate is essential for sustained economic growth based ondomestically generated and foreign-origin investment.

The Business Advisory Council of the Southeast Europe Stability Pact Investment Compact identifiedthe following as crucial components to foster a favourable investment climate:

− security of investments resulting from political stability

− rule of law and fair and transparent application of laws and regulations

− low barriers to trade and investment

− improved infrastructure, and

− a skilled and educated labour force.

It is more important for governments seeking foreign investment to implement reforms that improve theoverall investment climate than to target specific investment inducements to individual foreign investors.

100

A country’s first priority should be to make progress towards eliminating barriers and obstacles toinvestment.

Transparency in Government and Rule of Law(Source: The American Chamber of Commerce - PRC 2001 White Paper)

− Establish a national codification system for all laws and circulars

− Allow business and other interested parties to comment on draft laws and regulationsbefore they are finalised

− Increase efforts to publish new circulars for immediate access to the public; make publicall laws and regulations in full detail

− Post all circulars on a consolidated government website

− Make public the reasoning used in later interpreting laws and regulations

− Streamline government approval procedures

− Make regulations consistent across administrative jurisdictions and strive to makeregulations and regulatory guidance objective and unambiguous

− Publish or eliminate internal standards

− Address the need for extensive business and financial training for Chinese judges andlawyers

− Rotate judges to help insulate them from local pressures

− Provide better pay for prosecutors and judges

− Stronger punitive action where corruption is found

− Ensure enforcement of court judgements

− Provide private rights of action as a means of redress for individuals or entities thatbelieve they have been treated by government agencies in an illegal way, and

− Establish independent working groups at provincial and central levels to monitorenforcement

Markets require a strong legal environment to function smoothly. A competitive investmentenvironment demands a transparent and consistent regulatory framework including a transparentgovernment budgetary process and tax system. Taking effective measures to combat bribery andcorruption is also essential.

101

Recipe for Success

− Progress towards firmly establishing a market-oriented economy, built on soundgovernance and an open investment climate

− Stable macro-economic environment

− Sustainable economic growth

− Independence of the judicial system and enforcement of the rule of law

− Development of open, transparent and non-discriminatory policies toward investment,domestic and foreign

− Full protection of intellectual property rights, and

− Effective measures to combat bribery and corruption

= Investor Confidence

103

CHINA’S FOREIGN INVESTMENT AND REGIONAL DEVELOPMENT STRATEGY:IMPROVING COMPARATIVE ADVANTAGES AND OVERCOMING IMPEDIMENTS,

Liu Yong,Senior Research Fellow, Development Research Center of the State Council

In the Tenth Five-Year Plan period and even longer term, economic restructuring remains the maintheme of China’s economic development strategy, and to maintain balanced development amongregions is one of the three tasks of economic restructuring. The main content of balanceddevelopment among regions is to enforce the Strategy of Developing the West. At present, theenforcement of the strategy encounters many difficulties and barriers, among them is shortage ofcapital.

Shortage of capital is an important factor blocking the development of the western area

The conclusion could be drawn from the following aspects:

First, taking the proportions of the total assets and the net value of state-owned enterprises (SOEs) andnon-state-owned scaled industrial enterprises in various areas (Table 1, Table 2), the proportions of thetotal assets and the net value of SOEs and non-state-owned scaled industrial enterprises taken by thewestern area in the year 1999 are much lower than the proportion of the area’s population in thenational population. This shows that per capita industrial enterprises assets of the western area aremuch lower than that of the eastern area.

Second, comparing the structure of GDP expenditure of the areas (Table 3), one can find that in 1998,capital formation of the western areas is just about one-third of that of the eastern area, and proportiontaken by the western area’s capital formation is much lower than the proportion of its population. Ifthe situation goes on, the gap between the west and the east will be larger and larger.

Finally, in terms of the savings of the areas, per capita saving of the western area is much lower thanthe developed western area, as shown by the proportion of the saving of the western area which ismuch lower than the population proportion. Moreover, the proportion of the savings of the westernarea has been declining in recent years. It shows that local resource of capital formation is seriouslyinsufficient.

In conclusion, the western area is seriously short of capital, which goes against the present demands ofthe western area for its development. The barriers should be removed as early as possible, otherwisethe goal of developing the west may not be assured.

104

Table 1 - Total Assets and Net Value of Fixed Assets of SOEs and non-stated-ownedScaled Industrial Enterprises, year 1999

Total Assets of the Enterprises Net Value of Fixed AssetsAbsolute Value

RMB 100 million RatioAbsolute Value

RMB 100 million Ratio

China 116968.89 100.00 47281.43 100.00Western area 20261.71 17.32 7250.80 15.34Central area 26149.80 22.36 11843.25 25.05Eastern area 70557.39 60.32 28187.38 59.62Source: China Statistical Year Book 2000, Guangxi and Inner Mongolia are included in the western area.

Table 2 - Population of the areas and their proportion in the total population, year 1999

Absolute number 10 thousand

Ratio

China 124219 100.0Western area 28771 23.2Central area 44341 35.7Eastern area 51107 41.1

Source: China Statistical Year Book 2000, Guangxi and Inner Mongolia are included in the western area.

Table 3 - Expenditure Proportion of Areas in 1998 ( % )

Ultimate Consumption Capital FormationEastern Area 50.5 58.5Central Area 28.4 24.4Western Area 21.0 17.2Southwest Area 9.4 8.7Northwest area 4.6 5.3

Source: calculated and restructured in accordance with China Statistical Year Book on Regional Economy, 2000,published by Ocean Press

Table 4 Distribution of Savings among the Areas1990 1991 1992 1993 1994 1995 1996

Total of All theProvinces(RMB 100M)

10968.90 13970.53 18624.02 22800.98 26835.44 37977.41 48537.95

Eastern Area(RMB 100M)

6390.20 8202.92 11392.70 13981.72 15920.29 23592.13 30252.42

Central Area(RMB 100M)

2828.40 3556.99 4469.71 5496.83 6783.15 8851.94 11157.34

Western Area(RMB 100M)

1750.30 2210.62 2761.61 3322.43 4132.00 5533.34 7128.19

Eastern Area(%)

58.26 58.72 61.17 61.32 59.33 62.12 62.33

Central Area(%)

25.79 25.46 24.00 24.11 25.28 23.31 22.99

Western Area(%)

15.96 15.82 14.83 14.57 15.40 14.57 14.69

Source: fixed in accordance with statistics of PBOC and information from China Economic Information website:www.cei.gov.cn

105

FDI as an important capital resource in western area development

Situation of FDI in the western area

The two-breach model of development economics indicates that the backward region must outsourcehuge amounts of capital in order to develop fast and efficiently, and to satisfy economic developmentdemands. The experience of the development of the eastern area since the economic reform andopening up can be seen as a model. At present, the proportion in foreign capital taken by the westernarea is indeed too little (Table 5, Table 6). In 1998, the actually utilised foreign capital by the westernarea was only 5.7 % of the nation’s total, and that of FDI was only 5.1 %. Most of the foreign-invested enterprises (FIEs) and nearly 100 % of foreign-invested financial institutions are located inthe eastern area. The number of foreign-invested financial institutions in the central and western areascan be counted on one’s fingers.

In 1998, industrial output value of FIEs in the western area was just about RMB 45 billion, taking 5.46% of the area’s total industrial output. If the ratio could increase to 30 %, as in the eastern area, thelevel of absorption of foreign investment in the western area would experience a qualitative change.

Table 5- Proportion of import, export and foreign capital utilisation of the areas in 1998

Export ( %) Import ( %) FDI (actually paid in value)Eastern area 89.3 90.6 85.3Central area 6.3 4.9 9.6Western area 4.5 4.5 5.1Southwestern area 1.7 1.9 2.2Northwestern area 1.4 1.7 0.8

Source: calculated and restructured in accordance with China Statistical Year Book on Regional Economy, 2000,published by Ocean Press

Table 6 - Number and proportion of FIEs and foreign-invested financial institutions inthe areas

FIEs (in 1999) Foreign-invested financial institutions in (1996)

Number Proportion Number Proportion

China 211807 100.0 627 1.00

Western area 16715 7.9 8 0.01

Central area 24203 11.4 7 0.01

Eastern area 170889 80.7 612 0.98

Table 7 - Industrial output value of SOEs and non-state-owned scaled industrialenterprises, industrial output value of FIEs in the areas (in year 1998)

Total industrialoutput value (RMB

100M)Proportion

Industrial outputvalue of FIEs(RMB 100M)

Proportion of industrial outputvalue of FIEs to thecountry/area’s total

China 67737.14 100.00 16757.60 24.74

Western area 8252.79 12.18 450.82 5.46

Central area 13429.26 19.83 1122.26 8.36

Eastern area 46055.09 67.99 15184.88 32.97

106

Capital demand in western area development

The period starting from the year 2001 to 2010 is the initial stage of the western area development. Atthis stage, the emphasis of development will be on infrastructure and eco-environment construction.According to information from the Office of the Leading Group for the Western Region Development,the total investment of the ten priority projects funded by the state in 2000 amounted to RMB100billion. The ten projects of priority were Xi’an—Hefei period of Xi’an—Nanjing Railway,Chongqing—Huaihua Railway, highway construction project of the western areas (including state-level mainline highways and roads to poor counties), airport construction of the western areas, naturalgas pipeline from Sebei in Chaidabu Basin to Lanzhou via Xining, key water-control projects ofZipingpu in Sichuan Province and Shapotou in Ningxia Autonomous Region, etc.

In 2001, the construction of twelve more key projects began, and the total investment of the projectswas estimated to reach RMB 300 billion. Among the key projects were Qinghai-Tibet Railway, theprojects carrying electricity from west to the east, the projects carrying natural gas from the west to theeast, trunk lines of state-level highway, key water-control projects at the upper reaches of the YangtzeRiver and the Yellow River, projects of developing science and education, agricultural projects withcharacteristics, and infrastructure construction in main cities, etc.

The huge demand for funds could not only be supported by government and domestic resources. Inorder to carry out the key projects, the government decided to pour 70 % of Treasury bond investment,70 % of funds allocated by the state, and 70 % of preferential loans provided by foreign governments,as well as loans from international financial organisations, into construction projects in the central andwestern regions. In addition to that, China has adopted series of preferential policies in order toinvolve foreign investment into the key projects. By now, the total amount of actually used foreigninvestment of the country has reached US$ 50 billion. If US$ 20 billion (?) of foreign investmentcould go to the western region, the urgent demand of funds in the region would be met.

The western region should absorb FDI more effectively

To give full play to the state policies

It was made clear and definite in the measures adopted by the state to carry out the Strategy ofDeveloping the West, that China will implement the following policies in order to expand opening upof the western region, and introduce foreign capital into the region:

A first measure is to broaden fields open to foreign investment. China will encourage foreigninvestment in the region’s agriculture, water control projects, ecological environment, transportation,energy, civil engineering, environment protection, mineral resources development, tourisminfrastructure construction and resource development, as well as to establish technology research anddevelopment centres. More service sectors will be opened to foreign investment. The experimentalspots of foreign banking service, commerce and distribution, foreign trade will be expanded tomunicipalities under direct administration of the central governments, provincial capitals, and capitalcities of autonomous regions. Foreign banks established in western regions will be allowed to engagein RMB business step by step. Foreign investors will be allowed to invest in telecommunications,insurance, tourism and run joint-ventures in accounting firms, law firms, engineering designcompanies, rail or road cargo transportation companies, civil engineering enterprises, and other fieldsChina has promised to open to foreign investment. Pilot projects could be launched in the westernregions in some fields newly open to foreign investment.

107

A second measure is to further broaden channels of foreign funds. Pilot BOT projects and TOTprojects will be carried out in these regions. Project financing, including that made in RMB, will beprovided to foreign-funded projects. Qualified FIEs in the western region will be encouraged to belisted in both domestic and foreign stock markets. Enterprises established in the fields allowed by thegovernment will be encouraged to absorb foreign investment through transfer of operating rights,selling of shares, merging and restructuring.

We will actively explore the possibility of introducing FDI by means of setting up joint ventureindustrial funds and venture capital funds. FIEs will be encouraged to invest in the western region,and the enterprises funded by FIEs will be treated as FIEs, so long as the foreign ownership in the totalinvestment of the enterprises is over 25 %. For infrastructure projects and projects with advantages inthe western region, restriction on equity ratio, as well as on ratio of RMB loans in fixed assetsinvestment by domestic banks, could be relaxed adequately. Some projects in the western region willbe allowed to raise the ratio taken by foreign preferential loans in the projects’ total investment. Thegovernment will give priority to the projects with advantages and foreign exchange-earning projectswhen assigning foreign loan quota. Multilateral and bilateral donations will be granted preferentiallyto projects in the western regions.

To build a sound investment environment

Many foreign investors complain that they are running at loss. There might be various reasons. One ofthe main reasons is that the investment environment is not as good as desired. The investmentenvironment is made of two parts, so-called hardware environment and software environment.

The hardware environment refers to various infrastructure and living environment. Now the countryhas spent a lot in improving economic development conditions and ecological environment conditionsof the western region. Thus we could rely on a tremendous change of the hardware environment ofthe region in the not so distant future.

To build up software environment is to establish a sound market economy operation system. Both thegovernment and the enterprises have to behave in accordance with market economy rules. On the onehand, the government is required to swab its functions. The government should interfere less and givefull play to the market mechanism. On the other hand, the government should play the role to promoteeconomic development directly and adequately at the initial period of development. To achievebalance between the two sides will be an important issue in building software environment in thewestern region.

To choose projects in advantageous industries and with characteristics and to promote the projects

According to the general requirements of the Tenth Five-year plan and the Strategy of Developing theWest, the direction of industry structure adjustment of the western region should be as follows:

− to accelerate infrastructure and ecological environment construction in the region inpriority, thus to lay a sound foundation for the industry structure adjustment;

− to develop characteristic economy based on the resource advantages of the region, so asto prolong the industrial chain of resource-related industries, shorten the gap in industrialstructure division among western, central and eastern regions, and to transform theresource advantages into economic advantages;

108

− to sharpen the competitive advantage of the region by means of fostering and perfectingmarket mechanism, standardising behaviour of players in the market and improvingmarket environment, and building a sound market credit system;

− to realise huge-step development by developing tourism vigorously, developing hightechnology industries adequately, strengthening hemopoiesis functions.

The characteristic industries of the western region include characteristic agriculture, stockbreeding,processing of agricultural and livestock products; advantageous mining resources and processing, andtourism.

Enterprises in the western region shall improve project promotion by well-drafted project promotiondocumentation, based on industrial characteristics. In order to ensure the result of promotion, thedepartments and enterprises shall invite international and foreign institutions to advise on the draftingof such documentation according to international practice.

Bring the motives of the enterprises into full play

Enterprises are the main players in the market, and they should be the main players in absorbingforeign investment. The enterprises in the eastern areas have already done so. The government in thewestern region shall encourage all kinds of enterprises, including local and foreign capital activelyparticipating in the Great Western Development. Government departments shall not be involved incompeting for capital, choosing projects and allocating resources instead of the enterprises. Thegovernment shall make efforts on improving the investment and trade environment, cultivatingproductive factors market such as capital market and operator market, and on making the westernregion more attractive to foreign capital. The government shall work on the construction of localinfrastructure while the enterprises are competing for foreign capital.

109

CHAPTER II:

INTERNATIONAL AND CHINESE EXPERIENCES

111

FOREIGN DIRECT INVESTMENT AND REGIONAL DEVELOPMENT:EXPERIENCE OF OECD REGIONS AND PROSPECTS FOR CHINA,

Bernard Hugonnier,Director, Territorial Development Service, OECD

Introduction

Foreign direct investment (FDI) is a strategic element of the development of all regions in the world.Not only can FDI bring capital, technology, know-how, jobs and exports, but it may also inducefurther investments. Thus regions face quite fierce competition, including between those of the samecountry, and a majority of regions provide potential investors with some incentives.

FDI often targets the most dynamic regions in the world, notably highly urbanised areas, and only partof this flow is directed towards peripheral areas. However, in some OECD countries, aggressivemarketing by the central government and by regional agencies, competitive tax regimes and flexiblelabour markets have in recent years enabled less advanced areas to attract a greater level of FDI thantheir contribution to national GDP.

The most difficult objective is that incoming production facilities adhere to a vertical integrationpattern and contribute to the establishment of a competitive regional environment. It is thereforeimportant that policies for attracting FDI be selective in order to reduce the volatility of outsideinvestment and increase its multiplying effect on regional economic activity.

This paper is organised in two parts: the first deals with the experience of OECD countries as far asregional development and FDI are concerned. In the second, the situation in China is discussed andsome potential alternative measures regarding FDI are proposed.

FDI and regional development: the experience of OECD regions

To be effective, policies aimed at attracting direct investment from abroad should be only based on thefactors that firms take into account in making investment location decisions. According to all studiesmade on this subject, these are as follows, ranked by order of importance: market proximity, qualityand availability of labour, sound infrastructure, quality of life, cultural affinities, informationcampaigns and the presence of other firms operating in similar sectors of activity.

More specifically concerning the availability of labour and infrastructure, the following points weremade (Christodoulou, 1996):

112

− Labour: the conditions required are the availability of labour in general, and of universitygraduates in particular; low costs and high productivity; flexible labour legislation; goodlabour relations; knowledge of other languages; and good education and vocationaltraining systems.

− Infrastructures: a good transport infrastructure system; inexpensive and accessible publicservices; available production sites and buildings; and high-quality telecommunicationsinfrastructure.

These conclusions are shared by the European Commission (1994), as well as by UNCTAD, althoughthe latter argues that an inexpensive labour force, which remains a major factor of attraction, is becomingless important since incomes ultimately rise and erode the initial advantage (UNCTAD, 1999).

Market proximity is a parameter that national and regional governments can do little to affect.However, regions can reduce the natural handicap of distance from the market by ensuring that highquality, low-cost transport and communications infrastructures are available to businesses. Totraditional infrastructure must now be added the infrastructure that makes it possible effectively to usenew information and communication technologies (ICT), which are generally lacking in rural regions(OECD, 2001). As regards the quality and availability of labour, government initiatives can also beuseful in this regard by improving education and training systems. It has recently been shown that“learning” cities and regions (those making the greatest effort to improve education and training) areparticularly attractive to FDI (OECD, 2000a).

Backward regions have succeeded in attracting FDI by adopting such policies. This has been the case,for example, in areas of Scotland and Ireland, the Porto region in Portugal, Valencia and Malaga inSpain, the Puglia region in Italy and Thessalonika in Greece (European Commission, 1993).

However, the bulk of FDI has been concentrated in the most urbanised central regions of OECDcountries, especially in the service sector, and the analysis carried out by the OECD shows that thishas widened the disparities between these regions and other regions (OECD, 1994). This has been thecase in particular in the United States, France, Spain, the Netherlands and Germany.

It has also been observed that on the whole investments in outlying regions have been aimed atestablishing production subsidiaries with limited decision-making power, mainly to take advantage oflow labour costs, while investments with high potential for innovation and initiative have primarilybeen located in central regions (Amin, 1994).

Of the 17 transition countries in Central and Eastern Europe, four are Members of the OECD:Hungary, Poland and the Czech and Slovak Republics. The first three countries are the mainbeneficiaries of FDI in the region (Collis et al., 1999). The most interesting features observed in thisregard are as follows:

− over three-quarters of FDI comes from the EU, which shows that the existence ofsignificant and solid commercial ties is a major explanatory factor;

− the other explanatory factors are a relatively large domestic market for goods andservices, a well-trained and relatively low-cost labour force, infrastructure that is beingupgraded, sound economic performance, growing purchasing power and political andeconomic stability, with Poland being the leading country in all these areas.

113

The incentives, whether they are financial, fiscal or in kind, that countries may provide to attract FDIare not among the main explanatory factors behind the location decision (see above). The most recentsummary of empirical work on the impact of incentive measures on FDI location decisions shows thatthese measures in fact play only a minor role (UNCTAD, 1996).

Nevertheless, regions that cannot naturally attract FDI on their own, such as lagging behind regions,tend to offer foreign firms subsidies to encourage them to move there. These subsidies can beconsidered as a way of offsetting these regions’ lack of attractiveness (or low competitiveness) and theextra costs that locating there will generate for the firm in comparison with a central region. If thesocial benefits that can be expected from a foreign investment and the multiplier effect that it mayhave on development are taken into account, this policy may be advantageous on the whole and maylead to a lasting investment that will attract further foreign investment.

If this proves not to be the case, there is a high risk of disinvestment, since the handicap to the firm’sdevelopment is too great, and it may be attracted by the windfall of subsidies offered by other regions.According to the OECD, great care should be taken before resorting to this type of policy, which mayultimately turn out to be a zero-sum game (the FDI created in one region means that much less inanother), with a high social cost for regions. What is more, the development derived from this kind ofpolicy can only be superficial, since the companies would not have invested in these regions withoutthe subsidies. As a result, volatility of investments and superficiality of development at a high socialcost are the main risks of this policy that must be borne in mind (OECD, 1998).

Nevertheless, multinational firms are not indifferent to the incentives that they may be offered whenthey must choose between two countries where conditions are similar. In such cases, these incentivesmay make the difference. Uncommon though they are, situations of competitive bidding must beavoided, however; they are indeed beneficial to the investor, but at taxpayers’ expense, since the firmwould have made its investment even without the incentive.

New approaches have been devised to enhance the natural attractiveness of regions for FDI. The firstconsists of promoting the development of industrial districts, and the second of taking measures tofacilitate the rapid integration of foreign firms once they have moved into the region. Theprivatisation of state-controlled enterprises and public services is another way of attracting FDI thathas also become widespread in recent years. Lastly, local development agencies that seek to attractFDI appear to be playing an increasing role.

Industrial districts

Industrial districts, which concentrate firms in the same sector or industry in a single area, help toincrease the competitiveness of participant firms through the positive externalities that they generate(OECD, 2000b). Furthermore, small and medium-sized enterprises that belong to industrial districtscan develop partnerships to undertake activities for which they would not have the necessary criticalsize or adequate financial resources (training, R&D, large-scale investments financed by poolingloans, exports, FDI, etc.).

These industrial districts are of special interest for FDI and the possibility of it being located inoutlying regions. It has been observed that many of these districts have developed in remote ruralregions without the advantages of central regions. This is the case of the Italian industrial districtslocated in the regions of Emilia-Romagna, Tuscany and the Veneto, but there are also similar districtsin the outlying regions of countries such as Mexico and Spain.

114

This means that multinational firms can be encouraged to locate their subsidiaries in regions thatalready have industrial districts so that they can benefit from the advantages that this kind ofinvestment provides, such as a labour market that is more specialised and highly developed than inisolated areas.

It has been shown that the subsidiaries of multinational firms located in industrial districts tend tohave higher value added, to be more oriented towards international activities and to be betterintegrated into their local environment than firms that are not located in such districts (Birkinshaw andHood). It has also been shown that a subsidiary of a multinational firm located in an industrial districtcan play an important role for its parent company, such as keeping it informed of practices specific tothe industrial district that may be of interest to it (Enright, 1998).

FDI retention policies

Solid and long-lasting integration into the local environment is also an important asset for the hostregion’s development. This ensures not only that greenfield investments will endure, but also thatrepeated investment may ultimately be carried out. In a world in which secondary investment nowexceeds initial investment, this aspect is essential [in the United Kingdom, according to Phelps andFuller (2001), such investment accounts for more than 50 % of all FDI].

This approach is increasingly being acknowledged as an essential win/win strategy, as it is beneficialnot only to the host region, but also to the multinational enterprise, which enjoys a higher return oninvestment. The approach can be broken down into three parts: after-sales service; actions to integrateinto the local economic, social and political fabric; and actions to foresee and limit possible closuresby a variety of different means:

− Investor monitoring for problem resolution;

− Assistance with finding suppliers and employee recruitment;

− Aid for business expansion;

− Aid for training;

− Assistance in obtaining public services and forging ties with universities and researchand technology institutes.

In effect for several years now, such policies for the retention and integration of FDI seem to havebeen particularly effective in a number of countries, including the United Kingdom (for Wales) andFrance, where it is acknowledged that “firms are sensitive to the attention that is paid to them, and,when economic conditions remain favourable, prefer relationships with territories that treat them withconsideration and keep their promises, as opposed to other regions that are more sensitive to publicrelations initiatives” (translated from Rocchi, 2001). In London, there are plans to follow this course(Clark, 2001). The OECD advocates such a policy, which fosters sustainable development insofar as itis based on a region’s own advantages, and not on contrivances to attract FDI temporarily.

115

Privatisation

In addition to the countries of Central and Eastern Europe, for which privatisation was an inevitablestepping-stone to a market economy, a large number of countries, in Europe, Asia and Latin Americaalike, undertook sometimes massive programmes in the 1990s to privatise government-ownedenterprises and public services, most notably in telecommunications.

Of course, this privatisation attracted FDI and enabled certain countries to benefit from substantialinflows of foreign capital. This was naturally the case for the Central and Eastern European economies intransition (Collis et al., 1999), but also for Latin America, where privatisation led to a more than 50 %rise in FDI flows in 1999 (from an average of US$60 billion in previous years to US$93 billion,according to ECLAC, 2001). In these countries, certain outlying areas in particular were able to benefit,as was the case in the mining sector in Chile and Peru, and in the energy sector in Chile and Argentina.

But this policy for attracting FDI entails substantial risks, and above all that a similar pace of FDIflows cannot be sustained without further privatisation. Such inflows of capital, which facilitategovernment budgeting, only defer major structural reforms. Moreover, they place large segments of acountry’s industry and its mining, energy and service sectors into the hands of foreign interests, whichin many cases would rather maximise immediate returns than invest for the long term. This policy,which the United Nations has rightly called into question (ECLAC, 2001), does not seem per se to bean appropriate instrument for attracting FDI.

Regional development agencies

In many countries, the component regions have their own agencies or other organisations dedicated topromoting and facilitating local development. In some cases, there are even agencies of this sort forcities or clusters of cities.

These agencies, which promote and market their respective regions, can play a significant role withregard to FDI, as the experience of many OECD countries has shown. The same agencies can play animportant role in the essential aim of retaining and integrating existing FDI (see above).

In addition, they can be supplemented by other agencies, which on a nation-wide level play a similarrole in attracting FDI. It can be noted, for example, that in each of the three Central and EasternEuropean transitional economies that attracted the greatest amount of FDI over the past decade(Hungary, Poland and the Czech Republic), such agencies had been created at a relatively early stage(respectively 1993, 1992 and 1990, Collis et al., 1999).

FDI and regional development in China

In order to make the best of foreign direct investment, the present policy in China needs to bereconsidered along the five following lines:

Re-orient FDI towards the Central and Western Regions

The FDI situation in China is especially polarised. The ten coastal provinces, which account for 36 % of thepopulation, in 2000 actually absorbed over 85 % of foreign direct investment inflows. Three MaritimeProvinces (Guangdong, Jiangsu, Fujian) alone account for nearly 50 % of these investment flows.

116

As one heads westward, FDI flows become increasingly rare: while central provinces may still receive 9 %of the annual flows, the proportion falls to 6 % for all of the western provinces combined. In the 21 centraland western provinces, the highest figure is 2.3 % (in Hubei), and the lowest is 0.04 % (in Ningxia).

The heavy geographic concentration of FDI in the coastal provinces can only lead to an aggravation ofeconomic and social disparities with the other provinces, and especially those in the Centre and theWest in view of the lack of sufficient industrial linkages between the provinces, the low level of inter-regional co-operation and the relatively undeveloped level of domestic economic integration haveimpeded the dissemination of the benefits of FDI in coastal areas to other parts of the country (Sun andChai, 1998). Moreover, the coastal provinces have been able to take advantage of the benefitsaccorded to inward foreign investment to build their stock of FDI. This incentive policy could onlywiden the gap with the western and Central Provinces, which naturally have fewer assets with whichto lure foreign investment.

Alternative measures must therefore be taken to enhance the attractiveness of the other provinces, inparticular by investing in infrastructure, as has been done in the coastal provinces, by developingforms of inter-regional co-operation and by fostering domestic economic integration.

Diversify the origin of FDI

Taking in about 28 % of the flows, the coastal province of Guangdong remains the most attractiveregion. Thanks to its geographical location, the province has benefited more than any other from theliberalisation of foreign investment that has taken place since the early 1980s. In fact, Hong Kong isthe leading economy of origin for foreign direct investment in China as a large number of businessesleft the territory over the past twenty years in order to relocate in Guangdong (Dunning, 1997).

Investment flows come essentially from Asia (over 65 %), with the leading investors, after HongKong, coming from Chinese Taipei, Japan, Singapore, Korea and Macao. This situation results fromthe fact that special incentives have been offered to investors from Chinese Taipei, Singapore, HongKong and Macao—a policy that has lead to a heavy concentration of FDI in southern coastal China, tothe detriment of the other provinces.

Furthermore, the present origin of investment flows has introduced a certain fragility to thedevelopment of the coastal provinces. The recent financial crisis in fact led to a slowdown of FDI fromthese economies, and the neighbouring provinces, and Guangdong in particular, have suffered. Incontrast, the northern coastal provinces, where there is more FDI from the industrialised countries,were less affected by the crisis and have seen their relative position improve (Fur et al., 1999, p. 135).A policy to diversify the origin of FDI would therefore be advisable in order to ensure a moreharmonious development of the provinces. Flows should henceforth come to a greater extent from theOECD countries, thanks to a reformed incentive policy.

Less export oriented FDI

Until now, the main purpose of FDI has been to bolster Chinese exports. FDI located in the ten coastalprovinces accounts for nearly 97 % of total exports by foreign enterprises in China (1998 data), andfor over 30 % of China’s aggregate exports. Guangdong province alone accounts for nearly half of allexports by foreign enterprises, and for over 15 % of the nation’s total exports. At the same time, bothof these export statistics are negligible for the central and western provinces (Table 1).

117

Table1: Contribution to the exports of foreign-owned enterprises (FOEs)1998

Province % of totalexports by FOEs

% ofaggregateChineseexports

Beijing 1.6 0.5Tianjin 4.7 1.5Hebei 0.8 0.2Liaoning 4.7 1.5Shanghai 10.1 3.2Jiangsu 10.0 3.1Zhejiang 3.3 1.0Fujian 6.7 2.0Shandong 6.4 1.9Guangdong 48.4 15.4Total coastal provinces 96.7 30.3Other provinces 3.3 1.1

Source: China Statistical Yearbook 1998.

To enhance the development of China, and of the central and western provinces in particular, FDIshould also aim to serve the Chinese market. Foreign direct investors could find it worthwhile tolocate in provinces other than the coastal areas on which they had been concentrating as an easier andless costly base for exports to the rest of the country.

Better exploit FDI to import technology

As in most Asian countries, and in Southeast Asia in particular, foreign investment is heavilyconcentrated in the manufacturing sector, with over 75 %, which is higher than the average fordeveloping countries (67 %) and far higher than the world-wide average (44 %, see Table 2). Theinvestment has primarily been channelled into labour-intensive export industries, textiles in particular(Dunning, 1997) and as a result subsidiaries of foreign companies have played a growing role inChinese exports.

Table 2. FDI by sector, 1998 ( % of total flows)

SectorHost countries Primary Secondary TertiaryIndustrialised 9.2 37.5 42.9Africa 10.1 28.7 39.7Asia 5.7 76.6 16.2Latin America 9.0 45.9 45.0Total developing countries 6.7 66.8 25.0World 8.6 44.0 38.9

Source: UNCTAD, 1999, Tableau A.I.16

118

In the end, the concentration of FDI in the labour-intensive export sector has given rise to relativelylimited technology transfers, with investment from Hong Kong, Chinese Taipei, Singapore and Macaogenerally involving a low technology content (Young & Lan, 1997). In contrast, FDI fromindustrialised countries generates more substantial transfers of technology. As a result, northerncoastal provinces, where such investment has been greater, exhibit more extensive development.Overall, however, it appears that China has not fully exploited FDI to import the technology, whichcould be beneficial for its economy.

Introduce new incentive measures

Finally, as noted above, new policies have been formulated in the OECD countries to stimulate FDI.Whether they involve privatisation, the development of industrial districts, measures to retain FDI orthe creation of local development agencies, these new policies, which seem to have proven theirworth, could be developed in China as well.

119

REFERENCES

Amin, A., Bradley, D., Howels, J., Tomaney, J. and Gerith, C. (1994), “Regional Incentives and theQuality of Mobile Investment in the Less Favoured Regions of the EC”, Progress in Planning,No. 41.

Birkinshaw, J.M. and Hood, N. (1998), “Roles of Foreign Subsidiaries in Industry Clusters”, Instituteof International Business, Stockholm School of Economics Working Paper.

China Statistical Yearbook, (1998), http://www.stats.gov.cn/english/index.html.

Clark, G., (2001), “Attraction and Retention in a Major City: the Case of London”, paper prepared forthe OECD Seminar on Inward Investment and Local Development, 8 June 2001, Paris.

Christodoulou, P. (1996), Inward Investment: An Overview and Guide to the Literature, London, TheBritish Library.

Dunning, J.H. (1993), Multinational Enterprises and the Global Economy, Addison Wesley.

Dunning, J.H., and Hamdani, K.A., eds., The New Globalism and Developing Countries, UnitedNations University Press, 1997.

Economic Commission for Latin America and the Caribbean (ECLAC), (2001), http://www.eclac.cl.

Enright, M.J., (1998), “Regional Clusters and Multinational Enterprises: Independence, Dependenceor Interdependence?”, University of Hong Kong, School of Business Working Paper.

European Commission (1993), New Location Factors for Mobile Investment in Europe, Brussels.

Fran, A. and Asill, J. (2001), original article published in The Guardian and reproduced in CourrierInternational, “Le tour du monde d'un jean”, No. 561, August 2001.

Fur, A., Gentelle, P., Pairault, T., Économie et régions de la Chine, Armand Colin, Paris, 1999.

Krugman, P. (1991), Geography and Trade, The MIT Press.

Loungani, P. and Assaf, R. (2001), “How Beneficial is Foreign Investment?”, IMF Finance &Development, June 2001.

OECD (1977), International Investment and Multinational Enterprises: Investment Incentives andDisincentives, Paris.

OECD (1994), Globalisation and Local and Regional Competitiveness, OECD document.

120

OECD (1998a), Inward Investment and Regional Economic Growth, working paper of the WorkingParty on Regional Development Policies. Paris.

OECD (1998b), “The Regional Policies of Central Governments in the 1990s: New Focus and NewChallenges”, document No. 2 prepared for a conference on New Challenges in RegionalPolicies, Boras, Sweden, 28-29 January 1998.

OECD (2000a), Learning Cities and Regions, Paris.

OECD (2000b), Globalisation and Competitiveness of SMEs, OECD conference, Bologna, June 2000.

OECD (2001), ICTs and Rural Development, Paris.

Phelps, N.A., and Fuller, C., (2001), “Multinationals, Intracorporate Competition, and RegionalDevelopment”, Economic Geography, Vol.76, No. 3.

Rocchi, J-F., (2001), “L’ancrage des investissements dans les régions industrielles”, paper preparedfor the OECD Seminar on Inward Investment and Local Development, 8 June 2001, Paris.

Sun, H., and Chai, J., (1998), “Direct Foreign Investment and Inter-regional Economic Disparity”,International Journal of Social Economics, Vol. 25.

UNCTAD (1996), Incentives and Foreign Direct Investment, United Nations, New York, p. 51.

UNCTAD (1999), World Investment Report 1999: Foreign Direct Investment and the Challenge ofDevelopment, United Nations, New York, 1999.

Young, S. and Lan, P., (1997), “Technology Transfer to China through Foreign Direct Investment”,Regional Studies, Vol. 31., pp. 669-679.

121

FOREIGN DIRECT INVESTMENT AND REGIONAL DEVELOPMENTIN SOUTHEASTERN TURKEY,

������������� ��President, GAP Regional Development Administration, Turkey

Introduction

Considering the fact that Turkey had started its privatization efforts well before the dismantling of theSoviet Union and had a well established private sector even then, it is quite surprising to many peoplethat Turkey attracts such a low level of FDI inflows. The amount that Turkey attracted has remainedconstant; close to a billion dollars per year, both in 1990 and 2000. Traditionally an agricultural andless developed region than other parts of the country, the Southeastern Anatolia Project or GAP regionhas drawn an even smaller share of Turkey’s FDI. The separatist terror affecting the region between1984 and 1999 did not help much to improve the situation. Now that the terror has diminished and isno longer a deterrent factor, the future looks much brighter.

The economic crisis that struck Turkey in February 2001 may turn out to be an important chance torealise the long awaited structural reforms that would also open the way for increased levels of FDI.Turkey has come a long way since February and we believe that Turkey will be the rising star of thenext decade in trade and investment as declared by the US Department of Commerce in late 1990’s.

An Overview of the GAP Region

Southeastern Anatolia faces many of the problems that are typical of other underdeveloped regions inthe world. Compared with the rest of Turkey, the region has had higher fertility rates and lowerliteracy rates, as well as lower school enrolment rates – especially among girls – and lower access toeducation, health care and sanitation. A comparative analysis has shown that the most disadvantagedregion of Turkey is Southeastern Anatolia in terms of per capita, per household minimum foodexpenditures and per capita cost of basic needs (ERDOGAN, G. (1997), “YoksullugunNeresindeyiz?”, Ekonomik Forum, 15 Nisan 1997, 4:4:26-28). Depending upon the provinceconcerned 21.8 % to 44.7 % of households in the region are below the poverty line. In terms ofranking the provinces of Turkey as per their socio-economic development levels, five of GAPRegion’s provinces fall in the last 15 provinces of Turkey. The region also experienced net outmigration – both seasonal agricultural migration and permanent rural-to-urban migration, as aresponse to high unemployment in the region, threatening valuable agricultural land.

122

Foreign finance in GAP(in US $ millions)

US Exim Bank 111Swiss Banks 468Swiss & German Banks 782European Investment Bank 104World Bank 120Council of Europe Social

Development Fund 184Government of Austria 200Government of France 34Government of Germany 15Government of Italy 85

Total 2103

The region’s economy is largely agro based but historically productivity has been low. In 1997, percapita income in the region was half of the national average. With an area of 75,000 km which isequal in size to Benelux countries combined and a population of 6 million, the region has 10 % of thecountry’s area and population, but in 1997 accounted for only 5.3 % of the GDP. This region also hasseveral urban centers that are experiencing rapid growth, and that have had problems keepinginfrastructure development in pace with rural-urban migration. In addition, women, children, and thepoor have been marginalized and previously have had little input in development decisions. Permanentsolutions to these problems require the careful use of resources to make sure that future generations aswell have the resources they will need for continued growth.

The Southeastern Anatolia Project (GAP)

In response to these disparities in the Southeast, and in recognition that strengthening this regionsocially and economically will benefit all of Turkey, the Southeastern Anatolia Project (GAP) wascreated. GAP was originally created as a water resources development package for the construction of13 main irrigation and energy projects on the Euphrates and Tigris river basins. The project includes22 dams, 19 hydropower plants, and irrigation networks to irrigate 1.7 million hectares of land. Atthis date, seven dams and four hydropower plants have been completed, and 215,080 hectares areunder irrigation.

Total public investments designated for GAP total US$ 32 billion, of which US$ 14.8 billion havebeen spent to date. Of this amount, US$ 2.1 billion have come from foreign sources such as the WorldBank and several European governments (see box above). In addition to these infrastructureinvestments, the United Nations Development Programme and international donor agencies fromcountries like the United States, Canada, France and Switzerland, have contributed about US$ 12million in grants to sustainable human development projects in the region. European Union has alsoapproved a grant totaling EURO 43.5 million to finance small business, cultural assets and ruraldevelopment projects.

GAP’s focus on sustainable human development in the region builds upon the concept of integratedregional development of the GAP Master Plan of 1989. The Master Plan mandated the creation of theGAP Regional Development Administration (GAP-RDA) to co-ordinate the implementation,

123

management, monitoring, and evaluation of development related activities, in a concerted effort torespond to the problems mentioned earlier. The subsequent Social Action Plan of 1995 was a majorstep toward a greater integration of sustainable development with socio-economic and infrastructureprojects.

Dam building is not limited to design, construction, hydrological, engineering and concrete issues butalso encompasses socio-economic, political and cultural factors, which affect the human existence inthe concerned area. While the ideological pro and anti dam debate continues, our attempt is toreconcile the dominant interventionist paradigm of development and the decentralised andparticipative one by using a balanced and sustainable strategy of generating and distributing waterresources in a just and equitable way. Therefore, the minimalist, residualist and welfarist approachesto dealing with dam building issues have given way to Rights and Risks framework which embodiesrecognition of rights, addressing of risks, informed participation by people in comprehensive policyand institutional options, equity and justice in apportionment of benefits, mitigation of risks to healthand integrity of aquatic eco-systems

The international financial involvement in the GAP Project is a reflection of internationalcommitments to sustainable development in this region. The concept of sustainable development is notnew. The general philosophy behind this concept was expounded centuries earlier. WilliamShakespeare remarked aptly in Hamlet: "Since action to the word, the word to the action; with thisspecial observance, that you overstep not the modesty of nature."

GAP-RDA experts concluded that world wide efforts over the last five decades resulted, on one hand,in new methods, techniques, pioneering technologies, rational use of resources and hence outputgrowth. On the other hand, these efforts failed to prevent greater problems in social equality,environmental destruction and the general disruption of ecological equilibrium. These conditions makeit necessary to seek alternative approaches to development in general, and to development projects inparticular. Hence, sustainable development was determined by the GAP-RDA as the conceptualisationof this new philosophical approach of the development efforts in the region.

The ultimate aim of GAP is to ensure sustainable human development in the region. It seeks to expandchoices for all people – women, men and children, current and future generations – while protectingthe natural system, which sustain life in all forms. Differentiating from a lopsided, economy centredparadigm of development, sustainable human development places people at the core and viewshumans both as a means and an end to development. It focuses on protection against exclusion andmarginalisation of weak members of the GAP Region. Therefore, GAP-RDA aims to eliminatepoverty, promote equitable opportunities to all through good governance thereby contribute tofulfilment and realisation of all human rights – economic, social, cultural, civil and political for thedowntrodden in this region.

Physical structures, which are now being built, will be the basis of human development. The aim ofsustainable development will be achieved by eliminating disparities, spreading welfare, ensuringcommunity participation and developing human resources. The combination of economic growthtargets with a human development perspective envisages the transformation of the projected socialchange into participatory solutions specific to the eco-system and cultural make-up of the region. Inorder to define the scope and composition of sustainability for GAP and make this concept operationaland verifiable, a participatory approach was adapted by GAP-RDA to initiate and implement pilotprojects in the region. As an integrated project, it is not limited with the dams, hydro electric powerplants, irrigation systems only, but it also contains industries and investments for the development ofsocio-economic sectors such as agricultural, industry, urban and rural infrastructure, communication,education, health, culture, tourism and other social services in a co-ordinated way.

124

Sustainable human development strategy, as formulated by the GAP-RDA for Southeastern Anatolia,and espoused at such international conventions as the 1992 Conference on Environment andDevelopment in Rio de Janeiro, encompasses such goals as reaching the poorest, gender equity,capacity building for local institutions, and environmental protection. It is from this philosophy thatGAP-RDA derives its human-centered focus, using the momentum gained from hydropower andirrigation infrastructure projects to bring opportunities for more sustainable livelihoods to as many inthe GAP Region as possible.

The Specific Elements of the GAP Program

The following are examples of GAP’s contribution to assist people in the region in achievingsustainable livelihoods, especially targeting those who would otherwise miss the benefits of water-based resource development projects.

Gender equity. Recognizing that women and girls are a distinctly disadvantaged group in the GAPRegion, the GAP-RDA supports a grassroots program by creating community-based women’s centers,called “ÇATOM”. At these centres women and girls can receive health care services and gain skills inareas such as maternal and child health, hygiene, nutrition, home economics and income generation(such as handicrafts, computer operation, greenhouses, etc.). Literacy instruction and mobile healthcare services are also provided. The centres provide a place for women to get together, discuss theircommon problems, and develop a collective initiative to solve these problems. The participantsthemselves share in running the centre and in deciding on the programs that will be offered.

Sustainable economic development. GAP-RDA, in partnership with the United Nations DevelopmentPrograme, Chambers of Commerce and Industry (TOBB), the Turkish Development Bank, hasestablished Entrepreneurship Support and Guidance Centers (GIDEMs) to meet this need. KOSGEB(Small and Medium Size Enterprise Development Administration) later joined this partnership. Fivemajor cities in the GAP Region now have GIDEM offices where local entrepreneurs get help withmarket research, finding investors and partners, and selecting technologies. GIDEM staff also provideinformation and consulting services to potential investors from other regions in Turkey and fromabroad. The Turkish Republic is also establishing industrial zones, small industrial estates, and freezones in the Region, as well as an international airport to support the exportation of local products. Inaddition, the central government is offering state land, tax incentives and electric utility discounts toencourage investment in the region.

Participatory resettlement. GAP, together with the United Nations Development Programme,implemented a project for helping in the resettlement of almost 32,000 people of 43 villages in theHalfeti area along the Euphrates River, which were affected by the creation of the Birecik dam andreservoir. The project directly addressed the social, economic, and spatial aspects of thesecommunities, and used a participatory approach. People in the affected communities were informed ateach stage of the project and involved in the decisions to be made concerning their resettlement andwere offered support in learning new trades and adapting to new livelihoods. A training programmecovering an integrated participatory approach in resettlement with institutional framework spatial,social, environmental and economic planning supplemented by a study tour of Birecik Area designedand offered to international participants.

Protection of cultural assets. Anticipating the impact that the Birecik Dam will have on thearchaeological site of Zeugma the antique Roman outpost on the river Euphrates, GAP-RDA signed anagreement with a US-based charity organisation, the Packard Humanities Institute, to support andcomplement the efforts of the Ministry of Culture to salvage artefacts and conserve the site. There is

125

currently a multinational team of archaeologists working to salvage mosaics and other items from thesection that will be submerged, and to assist in the development of an archaeological park, expansionof the Gaziantep Museum and other conservation activities for the two-thirds of the site that willremain above water level. Other projects to preserve and restore sites of historic and culturalimportance have been underway at Hasankeyf, Mardin, Halfeti, and other sites in the GAP Region.These sites represent several different civilisations that have made their home in SoutheasternAnatolia, and include fortresses, schools, mosques and private homes.

Water user associations. Traditional farming methods for rainfed lands don’t make the best use ofirrigation, so GAP has co-ordinated a project for the training of local farmers and their organisationinto water user groups with the responsibility for planning among themselves their use of the availablewater. The pilot project using this model resulted in water savings of 11 %. Participating farmers whoproduced vegetables in rotation realised incomes five to fifteen times that of cotton growers, and cropintensity in demonstration areas increased up to 170 %.

GAP provides advice and training to local farmers who have formed local water user groups. Thesewater user groups collectively manage the end use of irrigation, collect payments for irrigationservices, and engage in other participatory activities. Recent projects that tested this managementmodel in the GAP Region showed an 11 % savings in water use and an increase of 177.5 % incropping intensity due to the shift to growing two crops per year.

Projects like these do not succeed by the efforts of government agencies alone. Sustainabledevelopment is ultimately aimed at increasing the ability of the entire society – public and privateinstitutions along with individual people – to respond to the needs of a changing environment. Thisdepends on ownership by everyone who is an actor in the region: government officials, businessmen,farmers and community leaders, as well as traditionally marginalized groups such as women, childrenand the poor.

GAP-RDA is responding to its changing environment and refining its perspective on sustainabledevelopment through its experiences over the last ten years and through its relationships in thenational and international development community.

We are currently co-ordinating a revision of the 1989 Master Plan through a participatory regionalreview. The earlier GAP Master Plan served as a guide for building inter-agency synergies forfacilitating development efforts in the region. However, in the light of new development approaches, itwas felt necessary to recast the strategy of prospective development in the region up to 2010, bypreparing a New Master Plan. This document not only aims to lay down the basic approaches andprinciples for development of the GAP Region but it also purports to be a blue print for action. Itincorporates definite strategies and programmes in various sub-sectors that need carefulimplementation in a time bound fashion for achieving the desired goal of sustainable humandevelopment in the region.

Therefore, we have delineated programmes, projects and strategies which aim at creating durablecommunity and individual assets, provide sustainable employment opportunities, reduce socio-economic disparities, empower the backward and disadvantaged communities and prepare the childrenand youth of the Region for their future roles in nation building. This will bridge the hiatus betweenphysical, spatial development and the human centred development. In short, this New Master Planwould serve not only as a tool for meeting physical progress and achievements but also as aninstrument for Social Engineering.

126

GAP and Foreign Direct Investment: As the population grows, scarce resources are spread eventhinner and the need for investment increases. The Turkish government has largely financed the GAP,however, we know that unless these investments are complemented and supplemented by productiveprivate sector investments the full benefits can not be realised. Even the infrastructure, which haslargely been under the responsibility of the government, is now open to the private sector, on BOT(Built-Operate-Transfer) or BO basis.

Due to the limitations on domestic capital growth and with the momentum of globalisation, the FDIhas gained great importance and increased more than fivefold in the world during the last decade.Many countries, including China, have benefited to a great extent from this development. However,despite many advantages, such as unique geographic location, large domestic market, high-skilledlabour, membership in the customs union with EU, state of the art telecommunications network andmost important of all a well developed private enterprise sector with high entrepreneurial skills,Turkey has attracted much less FDI than its perceived fair share. Political and economic instability aswell as administrative barriers have been the major causes for this deficiency. After all, things weremoving quite smoothly with high government spending and the decision-makers did not realise theurgent need for policy changes, until they faced the February 2001 financial crisis.

As every crisis creates its opportunities this crisis has been instrumental in causing major structuralchanges that should open the way for private sector investments including FDI. Turkey will then reachthe level of, perhaps not China but surely that of Poland and Czech Republic. GAP Region is alsoexpected to increase its FDI, which are negligible at the present. We have a lot to share in this respectwith China.

Infrastructure: As the direct result of big government investments the infrastructure is comparable tothe more developed regions of Turkey. There are STOL airports in seven of the nine provinces and a� !� ��� ��������������������� ��������������� ���"���#��$��!��%� �% � ���� ���������%���������������� ��the country. A six-lane highway is being built connecting Mersin export harbour, which is a two-hourdrive from the Region to the Iraqi border, and will be handy when the embargo is over. Two free tradezones, 15 industrial zones and 37 industrial estates are operational.

The GAP Region enjoys special incentives in addition to the general incentives provided byinvestments in Turkey. The general incentives are generally tax breaks until the investment isexhausted and exemption from taxes, duties and customs charges for capital equipment imports.Special incentives for GAP Region include free land allocation, energy subsidies and reduction insocial security payments.

These incentives and improved infrastructure as well as the stimulating effects of GAP has causedmore than 100 % increase in the number of manufacturing units employing 10 or more people duringthe 5 year period between 1995-2000, according to a survey conducted by GAP Entrepreneur Supportand Guidance Centres in 4 major provinces of the Region.

The investments were largely made by local investors with a few from other regions of Turkey andonly 3 with foreign capital. There is an ever-increasing interest on the part of potential investors fromother regions and abroad and we expect this interest will evolve into concrete investments as themacro-economic indicators improve and the administrative barriers are eradicated.

GAP was recently awarded the Millennium Award by the International Water Resources Associationin recognition of its exemplary work toward implementing modern concepts of water management,environmental conservation and women’s participation. We are proud of this honour and intend towork even harder toward our goals in this next decade.

127

As we learn from our experience and continue to interact with a wide range of stakeholders, at thelocal level, as well as at the international level, we can hope to bring even more effective, moreequitable, and more sustainable ways of bringing prosperity to the GAP Region and to Turkey.

Experiences Relevant to China

The GAP program is not only based on a multi-polar infrastructure development. It constitutes acomprehensive development effort encompassing economic as well as environmental, gender, socialand cultural issues. This approach stresses the embeddedness of economic development and institutionbuilding in the social superstructure. As a result frictions which might result from lacking acceptanceof the modernisation efforts are reduced and a “harmonious” transformation is achieved.

129

CANADIAN EXPERIENCE WITH FOREIGN DIRECT INVESTMENTAND REGIONAL DEVELOPMENT: SOME OBSERVATIONS,

Jeff Nankivell,Counsellor, Canadian Embassy in Beijing

Regional development and foreign direct investment (FDI) -- both of these topics have received agreat deal of research attention in Canada, a country of continental size with very wide regionaldisparities and a rich historical experience of foreign direct investment. This paper attempts to providea brief overview of Canadian experience and lessons learned in these areas.

Basic features of Canada:

In a nutshell, Canada’s basic characteristics could be summed up as follows:

− Canada is a federal state in which the ten provinces enjoy very substantial constitutionalautonomy. Taxing and spending powers are divided between the two main levels ofgovernment. As a result, as in Europe, any Canadian initiatives in regional developmentmust be co-ordinated among a number of governments, each of which has its ownbudgetary resources and political agenda. This co-ordination presents a major politicaland administrative challenge.

− The federal (i.e., central) government implements certain national spending programs inevery province but also plays a role in the regional redistribution of wealth. This is donethrough so-called equalisation payments, a transfer program that allows all provinces,regardless of their ability to raise revenue, to provide roughly comparable levels ofservices at roughly comparable levels of taxation. Eligibility to receive equalisationfunding is determined by an agreed-upon formula measuring each province's revenue-raising capacity against a five-province standard. Currently, seven of the ten provincesreceive equalisation payments.

− Canada has one of the world’s most open economies. It ranks number one amongindustrialised countries in terms of exports as a percentage of GDP.

− FDI has played a key role in Canada’s development, both in natural-resource-extractionand in manufacturing. Canada has been a net importer of FDI for almost all of itshistory, until very recently. The current stock of inward FDI is equal to over one-fifth ofthe annual GDP. Canada’s outward FDI stock has grown by 75 % over the past decade.

− The vast majority of FDI in Canada has been destined for the industrial heartland ofsouthern Ontario and southern Quebec.

130

Regional Development

The focus of Canadian regional development efforts has consistently been on reducing unemploymentin the more densely settled rural areas of the country, primarily in the four eastern provinces onCanada’s Atlantic Ocean coastline. In budget terms, the largest share of government investment inthis region comes in the form of transfer payments to individuals, through national social programsincluding pensions, welfare payments, job-training schemes and unemployment insurance.

Compared with transfers to individuals, only a small share of government support goes to numerousregionally targeted programs to encourage economic growth and social development1. Canada hasexperimented with virtually every approach found elsewhere in the OECD, and like other OECDcountries has moved through several stages of thinking about regional development. Some ofCanada’s programs are targeted on particular geographic regions, such as the Atlantic provincesmentioned above, while others are targeted on county-sized districts of high unemployment accordingto census data, wherever they may be throughout the country.

Starting in the 1960s, regional-development programs focused on particular industrial sectors andlarge companies, providing capital grants and tax incentives to encourage investors, especially foreigninvestors, to set up manufacturing plants in depressed regions. One problem with this approach is thatwith modern manufacturing technologies, the establishment of a particular factory does not necessarilyprovide a large number of permanent jobs, and the ratio of jobs created to public funds invested maybe quite small.

By the 1980s, governments had a greatly increased appreciation of the role played by small andmedium-sized enterprises – SMEs – as an engine of job creation and economic growth. Withoutabandoning capital support altogether, Canada’s regional-development programs began to focus moreon the needs of SMEs, especially soft loans and diverse forms of support including informationprograms, business coaching services and special services targeted at groups such as women andyouth, to encourage people to start their own businesses as an alternative to seeking large-companyemployment or being dependent on the social welfare system.

With the striking movement towards greater globalisation in 1990s, Canada’s attention shifted yetagain to focus on the importance of competitiveness. Long-term economic growth was understood tobe dependent on the ability of people, firms and institutions in a region to compete against otherregions, not just locally but around the world.

At the same time, with globalisation of production and distribution, there is a better appreciation of theways in which business depends as much on co-operation as on competition. For a region to beeconomically active internationally, its firms, institutions and people would have to make connectionsand alliances with partners abroad. A region that is competitive is one that has strong outside links tocustomers, suppliers, distributors and other business partners. Such linkages are as likely to involveoutward investment as inward investment. Underdeveloped regions tend to lack such connections.

The 1980s and 1990s also saw a variety of programs to promote community-based approaches to jobcreation in regions of high unemployment, for example through the government-led formation ofmulti-partner community development agencies with a mandate to bring together local government,the private sector, financial institutions and educational institutions to identify constraints to newbusiness growth and measures to address these constraints.

1 McNiven & Plumstead (1998), p. 71

131

All through these stages of regional development, Canada has been moving towards a more holisticapproach to job creation. It has progressed from an initial focus on particular firms and plants to amore generalised approach, building an overall environment conducive to business growth.

The current mix of government programs for regional development includes significant publicinvestments in regional infrastructure, where it can be shown that new infrastructure (such as high-speed data networks) will have a very wide application. At the same time, with changing definitionsof the appropriate role for governments in a market economy, the federal and provincial governmentshave re-focused their efforts from direct investment to the facilitation of information flows. In thecase of the Atlantic region, governments co-operate regularly to organise regional trade missions andrelated initiatives abroad, including substantial initiatives to promote the region as a destination forFDI.

A major objective of these trade missions is to project an image of unity of purpose among the variouslevels of government, a unified desire to provide a welcoming environment for investors. Anothermajor objective is to build connections, both among firms and institutions in the region itself andbetween the region and the outside world.

Today there is also a much greater emphasis on services as a source of employment, and the Atlanticprovinces in particular have been promoting the advantages of their well-educated, English-speakingworkforce as an attraction for foreign companies seeking to move various service functions fromhigher-cost environments, especially the USA.

The federal government currently operates four regional development agencies, two of which havemandates for multi-province regions. These agencies have budgets and programs of their own butwork very closely with provincial governments and other federal ministries. They participate activelyin activities to promote regional participation in foreign trade and attraction of FDI.

Investment Policy

Canada’s investment policies have also gone through an evolution over the past 40 years. For almosttwo decades, roughly between 1970 and 1990, Canada went through a period of imposing sweepingperformance requirements on foreign investors, administered by a Foreign Investment Review Agencywith powers to disallow proposed investments. By today’s standards, this agency was surprisinglynon-transparent. It was not required to explain its decisions nor to report to the public on specifictransactions. It was disbanded in the mid-1980s.

It is now doubtful that these measures had much impact on the quality of foreign investment, whilethey may have had the effect of deterring some investment.1 It should, however, be said that a largebody of empirical research strongly suggests that the key factors influencing the decision to locate aninvestment are more likely to be those things not under the direct control of governments.

Today’s investment policy environment in Canada is a very welcoming one, with ownershiprestrictions maintained in only a few sectors, notably cultural industries, financial institutions andenergy. Cross-border mergers and acquisitions are subject to normal domestic competition-policyreview. The Foreign Investment Review Agency has been replaced by an agency with a friendliername, Investment Canada, whose energies are devoted more towards attracting investments than inextracting concessions from investors. 1 Globerman & Shapiro (1998), p. 20.

132

Lessons Learned and Relevance for China

In summary, what has Canada learned that would be of particular use in a Chinese context?

− Subsidies and incentives negotiated for particular manufacturing investments may notproduce adequate benefits in terms of employment and local supply to justify the publicexpense, opportunity cost and market-distorting effects involved.

− A government which is perceived to be investing in the constant upgrading of its humancapital and its key infrastructure is more likely to be successful in attracting FDI. Mostinvestors are more interested in seeing a government invest in a well-educated, healthy,happy workforce and sound infrastructure than in particular subsidies and tax breaks. Allthe financial incentives in the world cannot compensate for poor local conditions.

− Regions are not abstract entities, nor are they best understood as territorial units. Theyare composed of individuals, households and communities. Measures to assist peopleliving in a region to raise their productivity and economic participation must addresstheir needs in all three of these dimensions. Regional-development initiatives should betailored carefully to target the appropriate dimension.

- Knowledge and skills are assets developed and maintained primarily by people asindividuals, men and women, young and old, able-bodied and with special needs.

- Because household income will determine the quality of children’s health andeducation, social welfare payments to households will be a crucial element of effortsto develop human capital.

- Creating a favourable environment for investment and private-sector development isa community-level activity, involving (among others) government, educationalinstitutions, financial institutions and professional associations.

− Major business-investment decisions are best made by businesses themselves.Government has an essential role to play fostering an environment of innovation throughinvestment in education and in playing a leadership role to mobilise diverse communityresources.

− FDI must be approached in a globalised context. Regional development depends onbuilding co-operative relationships between suppliers and producers, producers anddistributors, and producers and customers. This requires government leadership inestablishing connections and the free flow of information.

− Finally, to understand one’s own region’s comparative advantages and potentialadvantages, it is necessary to examine its human capital stock very closely. It is quitepossible that there are already under-utilised resources, the best example of which iswomen who have the skills and desire to go into business but are held back due tocultural, legal or other constraints. Canada’s experience is that there is great potential tobe tapped, at relatively low cost, by encouraging under-represented groups such aswomen, ethnic minorities and those with special needs to participate more fully in theregion’s economy.

133

REFERENCES

McNiven, J.D., and Plumstead, J.E. (1998), Comparative Perspectives on Regional Development,prepared for the Atlantic Canada Opportunities Agency (www.acoa.gc.ca).

Globerman, S., and Shapiro, D. (1998), Canadian Government Policies Toward Inward ForeignDirect Investment, Industry Canada Working Paper no. 24 (www.ic.gc.ca).

135

LESSONS FROM BRAZIL’S REGIONAL DEVELOPMENT POLICIES,

Alfredo Lopes Neto,Advisor for the Vice-Governor of the State of Ceará, Brazil

Introduction

Since the beginning of Brazil’s development process, economic growth has generated varying degreesof inequalities among regions races and genres, between rural and urban areas, between centre andperiphery. In the last few decades, income inequality has become the main brand of Brazilian society.

United Nations Program for the Development’s (UNDP) Human Development Index of 162 countriesshows that Brazil has risen from the 74th position in the world ranking in 1988, to the 69th position in2001. Even so, Brazil continues to lag behind its main South American neighbours: Argentina (34th)and Uruguay (37th). According to the report, the indicators of life improvement of the Brazilianpopulation have not changed significantly. In 2000, the social expenditures consumed 23 % of thefederal budget, but only a small part of that amount actually got to the needy people. While 9 % of thepopulation live with less than US$ 1 a day, 46.7 % of the national income is concentrated in the handsof only 10 % of the population.

The regional inequalities could be historically explained by the extractive and nomadic economiccycles from one region to another (sugar cane, gold, coffee), but the social exclusion stem mostly fromalmost four centuries of slavery and to the large numbers of Africans brought to Brazil and also to thetraditional negligence for public education.

The Brazilian experience is rich in programs and projects to diminish regional and social inequalities.Although the majority of these programs have not obtained the expected results. There are someexamples of social policies that provide a favourable impact: the minimum wage, the rural pension,the scholarship for poor students, and the agrarian reform. However, those initiatives have not been inpractice long enough to solve the inequality problems in Brazil.

This paper aims to introduce Brazil’s regional and social development policies in general and focus onthe Northeast region – the poorest one, in particular. It also puts forth some suggestions for newapproaches that can be adopted to reduce the existing national disparities.

Brazil: a Country of Continental Dimensions

In terms of territory, Brazil is the fifth largest country in the world (5.7 % of the planet’s land) and itspopulation (about 170 million people) corresponds to 2.8 % of the world’s population. The Amazonrainforest, the main biodiversity reserve on earth, covers almost half of Brazil’s territory. The largest

136

tropical country in the world, Brazil features a variety of landscapes, such as the cerrado (low brushlands), caatinga (vegetation adapted to dry lands), the Atlantic Forest and the Mato Grosso Pantanal(swamp).

According to the UNDP’s 2001 report, the Brazilian economy is the eighth largest in the world,(measured in terms of purchasing power parity) totalling, US$ 1,182 trillion. An essentiallyagricultural country for more than 450 years, Brazil has achieved in the last five decades an intenseindustrialisation process, which made the secondary sector responsible for one third of the nationalGDP. The social inequalities, however, persist and the country presents one of the highest incomeconcentrations in the world. According to the 2000 census, 81.2 % of the Brazilian population live inurban areas; it was 75.6 % in 1991.

Geographically and economically, Brazil is divided into five regions: (1) the North, with seven states,and encloses the Amazon rainforest; (2) the Northeast, with nine states, considered the poorest regionin the country, since more than 60 % of its territory is semi-arid and suffers from periodic droughts;(3) the Southeast, the most industrialised region, made up of four states, in which three of them areconsidered the most developed in Brazil; (4) the Center West, which is the last farming frontier in thecountry and with recent economic occupation, is made up of three states, and the capital of thecountry, Brasilia, Federal District; the city with the highest “per capita” income, and finally, (5) theSouth, comprising three states, with strong European influence, competitive agriculture, and the bestlife quality rates in Brazil.

Brazilian Regions and States

137

Two Brazils with Very Different Realities and Focus on the Northeast

In 1999, the National Congress, when reviewing the study produced in 1993 by a Commission ofRepresentatives and Senators, lead by Mr. Beni Veras - “The Brazilian Inter-Regional EconomicImbalance”1 divided Brazil into two separate countries: “Brazil One”, or rather, the rich Brazil, and “Brazil Two”, the poor one. The term “Brazil One” was used to identify the South and Southeastregions, and the developed part of the Center West (south of the states of Goiás and Mato Grosso doSul). Together they cover 26 % of the national territory and 63 % of the country’s population.According to data from the Brazilian Institute of Geography and Statistics (IBGE), in 1998, thecombined GDP of the Southeast and South regions represented 75.6 % of the Brazilian GDP.

The “Brazil Two” term, denominates the poor regions including the North, Northeast and the state ofMato Grosso in Center West. This area concentrates 37 % of the country’s population and represents74 % of the national territory. However, this paper will focus only on the Northeast region.

The Northeast Region

The states of Maranhão, Piauí, Ceará, Pernambuco, Rio Grande do Norte, Alagoas, Sergipe, Paraíbaand Bahia in the Northeast are known to be the poorest in the country: 50 % of its population has afamily income half of the minimum wage. The scarcity of natural resources and the high population(47 million people) are some of the causes of the prevailing poverty. The Northeastern states lead thehighest infant mortality rates in the country. According to a 1991 UNICEF survey, the 150 Braziliancities with the highest malnutrition rates are in this region. Thirty-three point six percent of thechildren under five years of age are undernourished. Life expectancy is the lowest in the country: 65.1years. Its demographic density is 28.7 % inhabitants per km2 and the majority of the population isconcentrated in the urban zones (60.6 %).

Despite this gloomy picture, the Northeastern GDP has grown to 5.6 % compared to 4.8 % at thenational level between 1970-1998. One of the reasons is the push of the industrial and services sector.Agriculture and cattle raising, however, faced an inverse situation over the past 20 years due to thelong drought periods. The Northeast is also rich in mineral resources. Petroleum and natural gas areproduced in the states of Bahia, Sergipe and Rio Grande do Norte (the latter responsible for 11 % ofthe national production in 1997, and an important oil producer in the country, second only to the stateof Rio de Janeiro). It also produces 95 % of all sea salt consumed in Brazil. The Northeast also hasmines of granite and precious and semi-precious stones. The San Francisco River provides electricitythrough several hydroelectric plants and water for irrigated fruit culture.

Another sector, which provides significant boost in the process of the region’s development, istourism. Its rapid development is due to the large number of coastal areas with beautiful beaches anda sunny climate most of the year. Many states are investing in the construction of infrastructure andthe private sector is building up aquatic parks, hotel complexes and ecotourism poles. This growth,however, favour real estate speculation, which in many cases threaten the preservation of importantecosystems, especially mangrove and sand dunes areas.

Government’s Attempts to Reduce Regional Inequalities

Addressing the regional development problem remains a key objective for all governments. Whatdifferentiates one case from the other is the level or the intensity of the phenomenon. This factdetermines different interventions. The strategy of the Central Government for regional policies had

138

begun first in 1952, with the institution of the Banco do Nordeste, (the Bank of the Northeast), incharge of “planning and carrying out a genuine development program, tied to the peculiarities of theenvironment”. In the following year, with the same conception, it established the Superintendência deValorização Econômica da Amazônia (SPVEA) (Superintendence of Economic Valorization of theAmazon) which originated the Superintendência do Desenvolvimento da Amazônia (SUDAM)(Superintendence of the Amazon Development)2. Before that time, the main interventions by theFederal Government as far as regional policies were concerned, were directly linked to the combat ofdroughts in the Northeast and to the production of rubber in the Amazon.

The Administrative Reforms

In 1967, with the Federal Administrative Reform, all regional agencies became part of the Ministry ofthe Interior, a body of the Central Government in charge of carrying out the regional developmentpolicy, including the Superintendência da Zona Franca de Manaus (SUFRAMA), (Superintendenceof Manaus Free Zone), established in the same year to generate an import and export free-trade zone inthe Amazon.

With the possible exception of SUDENE and SUDAM, all these regional bodies were popping up,over time, as isolated actions, meeting specific needs, including combating desertification, generationof electric energy, and implementation of a Free Zone in Manaus (capital of the Amazonas state).Those efforts lacked an integrated strategy.

In the seventies there was a change in the guidelines for regional policies. The status of theSuperintendences, SUDAM and SUDENE especially, changed from policy formulation to mereexecution of the regional development strategies coming from the Central Government (Brazil wasthen, under a military dictatorship). According to the inter-regional approach, a National IntegrationPlan (PIN) was conceived, which, in the Amazon and Center-West, turned to the construction of theTransamazônica and Cuiabá-Santarém highways, and in the Northeast, established a Program forLand Re-distribution and Incentive to Farming and Cattle-raising of the North/Northeast(PROTERRA). Those highways were intended to link physically and economically the Northeastregion to the Amazon region and to the Center West region, thus facilitating migration and theoccupation of the territory by the destitute Northeastern farmers. However, the ecological conditionsand diseases in the Amazon and farmers resistance to emigration contribute to the failure of thisprogram. The second Program’s main objective was to promote public irrigation in the Northeastregion and because the model was public and not private (DNOCS – National Department AgainstDroughts case) it had not succeeded. On the other hand, the CODEVASF (São Francisco ValleyDevelopment Agency) approach, based on private irrigation, achieved good results.

1980s: The Almost Lost Decade

In the beginning of the eighties another “salvation program” for the Northeast was proposed. TheNortheast Project, supported by the World Bank, involved six sectors of activity, but only one, thePrograma de Apoio ao Pequeno Produtor (PAPP), (Small Producer Support Program), was carriedout, and today it is managed by the states, and supports the semi-arid poor rural farmers organisedcommunities, providing electricity, water and other services.

Among all attempts to alleviate poverty, the most successful experience in combating the inequalitieshas been through the fiscal incentives, which have allowed the industrialisation of the Northeast andthe Amazon. It is important to emphasise that the majority of the programs were not very successful

139

because of the discontinuity, the valorisation of the means-activity in detriment of the end-activity, theshortage of resources and the excessively broad spatial dimension of the projects, which were difficultto operate.

The Regional Development and the Constitution

In institutional terms, with the promulgation of the 1988 new Federal Constitution after the return todemocracy, a more outstanding role was bestowed upon regional development, in such a manner thatthe reduction of regional inequalities is a fundamental objective of the Republic (article. 3). Theregional focus of the Constitution has been more evident in the regionalisation of the fiscal budgetsand of the investments of the state-owned companies, which would have to allocate resourcesaccording to the population criterion.

However, since they have not been regulated by Congress and most State Enterprises and banks havebeen privatised, these provisions have not been implemented, and, therefore, they do not have theexpected impact on the Brazilian regional disparities. The Banco Nacional de DesenvolvimentoEconômico e Social (BNDES) (National Bank of Economic and Social Development) has animportant role to promote the “Nordeste Competitivo”(Competitive Northeast) program.

Brazil: A Broad Experience in Implementing Tax Incentive Systems

For more than five decades, Brazil has been carrying out a set of regional development policies. Thecentral core of such policies has been the use of a set of tax incentives, through which it attempted tomake the capital build-up inexpensive, to reduce the tax burden and to facilitate imports. Besides theseincentives directed to enterprises in the periphery regions of Brazil, there are also other transfermechanisms through the States and Municipalities Participation Fund and Negotiated Transfers ofaround 4 % of the annual GDP. The North and Northeast participated in approximately 50 % of thesetransfers, which reached 2 % of the national GDP. The incentives system of Manaus Free Zone(ZFM), in the Amazon, based on a tax waiver, has a billing that reached US$ 9 billion3. The openingup of the economy has caused a serious crisis in the ZFM beginning in 1991, reflected in the fall inbilling of approximately 50 % between 1990 and 1992. The ZFM’s maintenance cost and itsartificiality bring doubts about the viability of its future, but it is considered by the militaryestablishment as having geopolitics importance.

The Role of Foreign Investment in Brazil’s Development

An analysis by Leonardo Guimarães Neto4, about industrial investment attempts by the private sectorand the official banks (BNDES, BNB, and BASA), shows that the spatially selective character of theindustrial investments can not be forgotten. This is a division of labour among the Brazilian regions:an important portion of productive segments, which define the dynamics of the national economy,tends to concentrate itself in the Southeast, while the lighter segments of industry, of smaller capitaldensity, transfer for the regions of lower development level, and certainly, of lower labour cost in theNorth, Northeast and Center West.

According to the Ministry of Development, Industry and Commerce, out of the US$ 73,4 billion of theintended investments which could be regionalised and captured, from 1995 to 2000, about 64.3 %concentrated in the Southeast (with 28.2 % in São Paulo), 17.6 % in the Northeast and 9.4 % in theSouth. The North received the equivalent of 7.5 % of all the investments foreseen for the country. In

140

the Center West, no more than 1.2 % of the total was invested. There is no doubt that, on the whole,the environment of South-Southeast areas to attract the new investments is, in quantity and quality,greater than that found in the peripheral regions. In this context, mid-sized cities from those regions,located close to transportation axes, and therefore, endowed with good accessibility conditions becomeespecially attractive.

The data from the Foreign Capital Census of the Banco Central do Brazil (Brazil’s Central Bank)(Bacen)5 clearly reflect the domination of the Southeast in attracting foreign investments. According toBacen, this region receives 87.5 % of all assets of companies with foreign participation. In the otherregions, these assets are distributed in the following pattern: 0.6 % in the Center West, 3 % in theNorth region, 4.2 % in the Northeast, and 4.7 % in the South region. It is worth to emphasise that,although the South and Northeast regions have different levels of economic development, thedifference in the concentration of enterprises with foreign participation was not very significant. Thisoccurs because the Northeast has some comparative advantages in relation to the other regions, inparticular, the low costs of labour and more fiscal incentives, thus becoming the destination oftraditional industries of intensive natural resources that generates less added value. This sametendency can be observed in relation to the enterprises with foreign controlling interest. The Southeastconcentrates 90.3 % of all assets of these enterprises, while the Center West, Northeast, North andSouth regions aggregate 0.6 %, 3 %, 2 % and 3.7 % respectively6.

According to Bacen, the total inward direct investment was US$ 9,644 million in 1996, US$ 17,879million in 1997, US$ 26,346 million in 1998, US$ 31,241 million in 1999 and US$ 33,331 million in2000. For the year 2001, the FDI in Brazil will not likely reach US$ 20 billion. In 2000 the top tencountries which invested in Brazil included Spain (US$ 9.5 billion); USA (US$ 5.3 billion); Portugal(US$ 2.5 billion); The Netherlands (US$ 2.2 billion); Cayman Islands (US$ 2.0 billion); France (US$1.9 billion); Luxembourg (US$ 1.0 billion); Sweden (US$ 0.6 billion); Italy (US$ 0.5 billion) andGreat Britain (US$ 0.4 billion).

Currently, the role of FDI in the Brazilian economy has been heatedly discussed. Some sectors of theNational Congress, for example, believe that the great majority of income originated from the FDI isnot re-invested in the country and therefore, is not earmarked to the generation of new businesses.They argue that the country could be a victim of a transfer of resources abroad – often financed by theBanco Nacional de Desenvolvimento Econômico itself. In 1999, out of the R$20 billion of its budget,BNDES earmarked R$3,5 billion so that foreign companies bought national enterprises. There are alsoconcerns about the present and future consequences of capital remittance, with serious repercussionsin the Brazilian Balance of Payments.

Authors like Reinaldo Gonçalves7 worry about the de-nationalisation of the Brazilian economy. Therelation between the FDI flow and the gross fixed capital formation increased from 2.5 % in 1995 to24.6 % in 1999. As a result, the foreign companies, which controlled 6.8 % of the fixed capital stockin the country in 1995, took control of 12.4 % in 1999. The foreign participation in the total net wealthstock increased from 5.7 % in 1995 to 9.7 % in 1999. It is still worth emphasising that the foreignparticipation in the sales value of the 550 greater companies increased by 33.3 % in 1995 to 43.5 % in1998. Even if their estimates were subject to revision, the incontestable fact is that there is a quantumjump in the Brazilian economy’s de-nationalisation as of 1995. It is important to point out that thereare appreciable sectors of the Brazilian élite however, which do not see such facts with discomfort,believing that there can be a greater transfer of technology and generation of qualified jobs in thecountry.

141

Programs for Attracting FDI in the Nineties

The Brazil in Action Program was launched in August 1996, prioritising 42 strategically selectedenterprises for the promotion of the country’s sustainable development. Out of the 42 enterprisesinitially chosen, 25 are completed with its targets achieved or outdone. From 1996 to 2000, R$70,1billion was invested, of which R$22,1 billion was in infrastructure and R$43,6 billion in the socialarea8. As of 1999, The Brazil in Action was expanded to 58 enterprises.

The selection of regional development projects has also complied with the National Axes ofIntegration and Development programme, designed in the 1996-1999 Multi-annual Plan (Brazil inAction). On the whole, the axes are expected to demand R$317,0 billion in public and privateinvestments in the 1996 - 2003 period, in integrated projects in energy, transportation,telecommunications, social development, environment, information and knowledge industry,considered essential to the growth and modernisation of all regions.

Examples of the investments carried out through this project are: a) the construction of BR-174highway, linking Manaus (state of Amazonas) to Caracas, in Venezuela, which is stimulating thegrowth of exports in the Manaus Industrial Pole and consequently in the North; b) the TourismDevelopment Program (PRODETUR), targeted at the improvement of infrastructure in the Northeast;c) the construction of the North-South transmission line and the Araguaia-Tocantins waterway, in theCenter West, which are decisive for the expansion of agribusiness in the region; d) the duplication ofthe Fernão Dias and the Mercosul highways, in the Southeast-south, which are allowing the re-distribution of the automobile industry in Porto Alegre (State of Rio Grande do Sul) to Salvador(Bahia) and the gas conducting tubes from Bolivia to Brazil.

Following the Brazil in Action Program, another new concept was developed, the Programa AvançaBrasil (Move Forward Brazil Program 2000 – 2001), which has brought changes in the federalplanning and budget system. The Government actions and resources are organised in agreement withthe objectives to be achieved. Each project has a manager responsible and an account of goals andachievements is made periodically. Coherent with the Fiscal Stabilisation Plan, the quantification ofthe programs and their actions was based on the forecast of fiscal resources for the period.

The government program, approved in the 1998 major elections, served as a strategic guidance and theNational Axes of Integration and Development have delimited the spatial organisation of the actionsand selection of the structuring enterprises, which carry to the Multi-Annual Plan the dimension of anational development project. The Government has also adopted a managing model aimed at obtainingreal results, measured by their effects on society.

The Experience to Date: Investment and Regional Development

It has been identified that most of the investments captured by the Northeast until now, were notattracted by a favourable environment to businesses or by a competitive platform which might offerunique advantages, but by the abundance of inexpensive labour and all kinds of incentives. So, theresults have not shown the generation of external agglomeration economies favourable to theformation of a more competitive industry, since, as an example, the enterprises attracted to the region,do not establish any institutional linkages with the local innovation system (universities, technicalschools).

Furthermore, it is important to emphasise the existence in the region of a few universities - noneinternationally renowned - and rare centres of scientific research. The enterprises that are

142

implemented there do not invest in research or development. The Brazil of flexibility, creativity andadaptability has not managed to change ideas into values or wealth and this leads us to conclude thatthese investments have an extractivist character, adding little to the development of the region and itsinhabitants.

The present government is trying to deal with the above-mentioned dysfunction in a more constructiveway. The significant landmark of this change was, without any doubt, the establishment of theMinistério da Integração Nacional. (Ministry of National Integration). By its own name, it is aresponse to the already mentioned fragmentation, which was occurring not only in the Northeastregion but also in the whole country. As a result of this new direction, SUDENE and SADAM havebeen closed down and changed into development agencies and they are looking for a way to providemore efficient use and effectiveness of funds.

New guidelines are under consideration to address the problem of the social and regional inequalitiesin the Northeast. However, one has to recognise the difficulties in getting the Public-PrivatePartnership to work adequately. For effective implementation, the decisions should be made at thehighest level about the permanent follow-up and directions of the Programa “Nordeste 2002 –Competitividade Auto-Sustentada (“Northeast 2002 – Self-Sustained Competitivity Program). In thisway, the so-called Comitê de Desenvolvimento do Presidente da República, (The Republic President’sDevelopment Committee) should, as suggested, at least on a quarterly basis, pay attention to thestrategic aspects of the Program and decide on its direction. There will also be established the generalguidelines to effect the articulation of all Government’s efforts directed to the Northeast, which willsubstantiate the Rede de Integração Competitiva do Nordeste (Northeast Competitive IntegrationNetwork). Linked to the Conselho de Direção do Programa (Program’s Steering Council), theInstituto da Competitividade (Competitivity Institute) would be established with the followingobjectives: (a) to conceive competitive strategies for the region; (b) to propose to the Conselho deDireção (Program’s Steering Council) the model of the system of Comunicação Social do Programa(Program Social Communication) in the region and later leading its operation.

However, it is urgent that the research culture of technological innovation should be adopted in theNortheast and be carried out within the enterprises, or rather, in the production area. Brazil has few butremarkable cases of high international competitivity boosted by innovations, for example, thePetrobrás marine oil extraction, Embraer’s regional aeroplanes, Romi’s operating machines, Weg’smotors and CBMM’s niobium. This technological “pull” finds the favourable environment to developitself within clusters. The right thing is that Brazil will only reach the objective of becomingcompetitive, if it mobilises itself now, because it is already late.

The Way Ahead: New Regional Policies for Brazil

The central axe of new development policies, proposed by Bacelar9, should be made up of, on oneside, by the equity objective, which means the reduction of the regional inequalities in income andemployment opportunity levels, and on the other side, by the efficiency through the implementation ofa productive structure capable of competing nationally and internationally.

Keep in Mind Heterogeneity and Diversification

It is necessary to establish a new National Policy of Regional Development in Brazil which takes intoconsideration its heterogeneity and diversification. Contrary to what one may think, the growinginternal differentiation among the several macro-regions in the country, should be treated as a

143

potential, and not as a problem. In this particular matter, what is proposed is that, at the national andat each macro-region level, the identification, for the development of future actions, of the degree ofeconomic development of its several different sub-regions (object of action of a regional policy).

Afterwards, those sub-regions could be classified as: (a) dynamic sub-regions, which have beencharacterised by the significant growth, by the consolidation of a modern and competitive structureand by the present or potential capacity, to compete in the more open national market and in theinternational market; (b) sub-regions in process of restructuring, which although endowed with greateconomic and competitive potential, should suffer in the short and middle term, an intense process ofchange in its productive structure, aiming at, above all, the incorporation of new technologicalprocesses; (c) sub-regions with little used potential, still marginal, are however, territories that need,above all, a deeper knowledge about the real possibilities of utilisation of its potential, in the contextof a new work division and of an increasingly greater insertion of the country into the internationaleconomy; and d) frontier sub-regions with neighbouring countries, important in the western andnorthern part of the country, because of their economic and geopolitics specificity (Bacelar).

Special Treatment According to the Region: Each Case is a Case

Just as for each disease there is a diagnosis and specific medicine, each region and sub-region havedifferent problems, with specific treatments. In order to find solutions for such a complex picture – inwhich heterogeneity is added, a process of rapid insertion of the Brazilian economy into an extremelycompetitive world market – it is necessary that the new national regional development policy takeeach case into consideration. Therefore, a set of regional development policies should be designedconsidering the different potentials, threats, problems or constraints of the regions in the interior ofeach macro-region, taking in account the degree of its insertion into the international economy and therecent dynamics of productive base already installed.

The Establishment of a National Council of Regional Policies

According to Bacelar10, “in the current context, the starting point is the urgent definition of adiscussion forum of the Brazilian Regional Issue. What is proposed, to begin with, is the establishmentof a National Council of Regional Policies, directly linked and headed by the Republic’s President.This “decision place” would be integrated by Government’s and National Parliament representatives,and would also have the participation of non-governmental representatives. In this forum the moreimportant decisions would be made concerning the treatment of the Brazilian contemporaneousregional issues”.

The Establishment of the National Regional Development Fund

In parallel, a National Regional Development Fund (FNDR) should be established, following theexample of what happens in the European Union. It is necessary to promote a survey of resourcesavailable for the establishment of new institutional arrangements which will make viable the co-operation between the three federal beings (the Union, the States and the Municipalities) for thefinancing of development, preserving the autonomy of each one and opening space for adopting newways of co-operation between the Government and the free enterprise, in compliance with thetendencies at present.

144

The Establishment of a System of Clusters

It is, in this new environment, important to adopt the Clusters Model or Local Development Systemsfor the poorer regions. However, the most significant benefit is in the process of innovation andimprovement. The enterprises gain rapid access to information, to the new ideas and to the innovationsintroduced by suppliers and centres of research and development.

The main objective of the clusters approach for the Northeast is the achievement of a profound culturalchange, since the Northeastern people keep the traditional vision of prosperity, where naturalresources and inexpensive labour are determining factors of competitivity. The idea is to engage allparticipants of clusters (enterprises, academic institutions and government, among others) in a jointwork, which enables a commitment of the different actors with new forms of action. Only so,globalisation and competition can be accepted and the innovation recognised as an important source ofwealth.

NOTES

1 See www.senado.gov.br/web/senador/beniver/desequilibrio

2 It is important to emphasise that the SUDENE/SUDAM model, in more restricted bases, was laterreproduced in other regions: in the South, with the Superintendência do Desenvolvimento doExtremo-Sul (SUDESUL) (Superintendence for the Development of the Far-South); in the CenterWest, with the Superintendência do Centro-Oeste (SUDECO) (Superintendence of the Center West);and in the Southeast, with the Secretaria Especial da Região Sudeste (SERSE), (Special Secretariat ofthe Southeast Region), all of which have been closed down.

3 As to the tax waiver volume, it is estimated at US$ 2,4 billion. Source: Veras, Beni.www.senado.gov.br Brasil, um país desigual. Senado Federal, janeiro 1999.

4 Work organised by Instituto de Pesquisa Econômica Aplicada - IPEA (www.ipea.org.br), based onthe data from the Ministry of Industry and Commerce Development – MDIC (www.mdic.gov.br)

5 For more information see Website: www.bcb.gov.br

6 There is not much difference between the distribution of data about the total of assets of thesesenterprises and those related to the Net Equity and Net Operational Income.

7 Reinaldo Gonçalves, Brazil and the International Commerce, Transformations and Outlooks Ed.Contexto 2000 – www.editoracontexto.com.br

8 Source: Federal Government. www.brasil.gov.br

9 Bacelar, Tänia: Brazilian Regional Dynamics: Toward Competitive Des-integration?, Recife, 2000.

10 Bacelar, Tänia: Brazilian Regional Dynamics: Toward Competitive Des-integration?, Recife, 2000.

145

EXPERIENCES OF CHINA’S COASTAL REGION IN FDI ATTRACTIONAND LESSONS FOR CENTRAL AND WESTERN REGIONS,

Ma Yu,Research Fellow, China Academy of Trade and Economic Co-operation

One of the basic strategies of China’s reform and opening up as well as FDI attraction has been agradual process, which started in Special Economic Zones (SEZs) and Development Zones and thenmoved to coastal cities and open areas. Now China is adjusting its opening up strategy to facilitate theopening up drive and FDI attraction to the central and western regions. Therefore, it is of vitalimportance for the decision-makers at national and regional levels to study and draw lessons from theexperiences of the coastal region in attracting FDI.

A Huge Gap Between the Central, Western and the Coastal Regions in FDI Attraction

It is a basic principle of China’s 21st century economic development strategy to maintain balancedeconomic development. The “Develop the West” strategy proposed at the beginning of the century is areflection of this principle. A review of China’s two decade long economic development and openingup might be helpful to better understand the question of how to attract foreign investment in the future.

Based on the political, economic and social development at the time, China’s opening up policy aimedat gradual progress. The eastern coastal region that opened up first enjoys the highest degree ofpreferential policies, while the central and western regions which lagged behind received lesspreferential policies. In terms of the income tax rate for foreign-invested enterprises, for example, boththe eastern and western regions enjoy the same policy of two-year exemption and three-year 50 %reduction as of the first profit year. However, the tax rate is typically 24 % in the open areas of theeastern coastal region and 15 % for high-tech and export-oriented enterprises. The income tax rate forenterprises in the SEZs and Development Zones is 15 %, which can be further lowered to 10 % if theyare engaged in state encouraged projects. In the central and western regions, however, the income taxrate for FIEs is 33 % and 24 % for those in the economic and technological development zones and 15% for those undertaking state encouraged projects. In addition, as for the open sectors, experiments arefirst initiated in the east, resulting in more open market in the east than in the central and westernregions.

At the beginning stage of opening up, there are political and ideological barriers which make it isdifficult to launch an all-sided opening up. Furthermore, economically, China is a vast country withdifferent economic development levels and resource endowments. All these factors, combined withgeological reasons, are attributable to the strategy of gradual opening up starting from the easterncoastal region. The practice over 20 years of reform and opening up has proven the correctness of thisstrategy. Nevertheless, the time lag in opening up has led to wider gaps of economic developmentbetween the central, western and eastern regions.

146

By the end of 2000, China had approved 363,885 FIEs, 292,561 of them are in the east, accounting for80.4 %; while the central region has 44,580, making up 12.25 % and 26,744 are in the west, only 7.35% of the total. The total contractual value of foreign investment is US$ 676.097 billion, among which86.31 %, or US$ 583.573 is in the east; 7.64 %, or US$ 51.649 billion in the central region and US$40.876 billion in the west, accounting for 6.05 %. In terms of actually realised value, the total figure isUS$ 348.346 billion, among which US$ 298.872 billion is in the east, making up 85.6 %. The centralregion attracted US$ 30.592 billion, 8.78 % of the country’s total and 5.42 % valuing US$ 18.882billion in the western region.

In terms of per capita value, foreign investment (based on demographic figures of 1998, and all thefollowing macroeconomic indexes are on the basis of the 1998 figure) is US$ 530 in the east, US$ 60in the central region and US$ 34 in the west. With regard to the total economic output, the easternregion contributes 58.3 % of the country’s GDP, nearly 30 percentage points lower than its foreigninvestment proportion. The central region’s GDP value is 27.8 % of the country’s total, 19 percentagepoints higher than its proportion in foreign investment and the west accounts for 13.9 % of thecountry’s GDP, 11 percentage points higher than the foreign investment figure.

In 2000, the amount of foreign investment absorbed by every 100 million RMB yuan (1 US$ = 8.22RMB) was US$ 520 in the east, US$ 117 in the central region and US$ 144 in the west. It showed thatthe eastern region enjoys a lot higher level of foreign investment attraction than the central andwestern regions.

It is commonly recognised that the difference in the degree of opening up is the major reason resultingin the widening gap in regional economic development. The inflow of foreign investment, in theproduction aspect, has increased the input in capital, technology, management and human resources,which has direct stimulating impact on economic growth. Furthermore, in the transformation processfrom planned to a market economic system, the role of foreign investment in system renovation and itsspill over effect have added dynamism into the economy more deeply and extensively. As a result oflagging behind in opening up and FDI attraction the central and western regions have sufferedrelatively backward economic development.

Therefore, as China has realised the first strategic objective of economic growth, the focus of attentionbegan to shift to co-ordinated development of the regional economies. To achieve this goal,intensifying foreign investment attraction of the central and western regions has become one of themost important strategic steps.

Potential of the Central and Western Regions in Attracting Foreign Investment

The central and western regions are expected to enjoy a higher economic growth rate than the easternregion. As of 2005, the GDP of the central and western regions may surpass 6 trillion RMB yuan. Aspart of the strategy of “Develop the West”, large-scale infrastructure construction and more liberalisedmarkets will bring more and better opportunities to foreign investors. It is easy to imagine that withinthe next 5 years, if the central and western regions reach something equal to the current level of theeast in attracting foreign investment (the amount of foreign investment absorbed by every 100 millionRMB yuan GDP is US$ 5.5 million), they would attract an additional US$ 300 billion foreigninvestment. The annual average foreign investment absorbed could rise from the present less than 5billion US dollars to 50 billion US dollars. But common sense defies this kind of jump and the simplecomparison is not wise! However, one should not shy away from speculating on the potential of thecentral and western regions in attracting foreign investment.

147

Comparably speaking, the share of foreign investment in major macroeconomic indexes is not veryhigh even for the eastern coastal region. For example, the proportions of FIEs’ contribution in bothGDP and total assets are all lower than 10 %. They only enjoy high representation in foreign trade(about 30 %) and industrial output (about 25 %). In the central and western regions, export-orientedFIEs do not have obvious comparable advantages on the one hand, but on the other, they possessgreater potential as compared with the east with regard to domestic market access, development andutilisation of natural resources, and infrastructure construction. Therefore, it might not be totallyimpossible for the west to realise high (higher than the east) growth rate and reach the present level ofthe east in absorbing foreign investment. The key is the degree of market access and developmentintensification.

There are many State-Owned Enterprises (SOEs) in the central and western regions. They have a hugeamount of capital (primarily estimated at 3 trillion RMB yuan) but very low economic efficiency. Ifpermitted, a lot of foreign investment can be attracted by means of mergers and acquisitions. Anotherexample: large-scale infrastructure construction will be carried out in the process of developing thecentral and western regions. There will be projects involving trillions of RMB yuan annually. If theparticipation of foreign investment is permitted or even encouraged, it means that trillions of USdollars’ foreign investment will be brought in, even if it is only involved in 1/10 of the projects.Moreover, in the areas of oil, natural gas, hydropower and mineral resources exploration, hugepotentials are waiting to be tapped.

The main cities in the west enjoy better conditions and opportunities for foreign investment. Theyhave a bigger market, relatively complete infrastructure, good scientific research basis and highquality human resources as well as a rich and cheaper labour supply, which are all major factors inattracting foreign investment.

Traditional industries, such as manufacturing, will certainly be important area for the west to attractforeign investment. Great attention needs to be paid on intensifying the effort in this respect in view ofits role in creating employment opportunities, promoting growth, nurturing production elements(capital and human resources) and upgrading industries. At present, every year in the central andwestern regions, there are over US$ 2 billion investment in this area. For a certain period in the future,this level can be basically maintained. There will be greater progress if the investment attractionaccording to internationally recognised practices is integrated with the strategic reorganisation of thestate asset and the transformation of SOEs.

However foreign investment directed at the domestic market is under the influence of two factors: oneis negative, i.e. the continuous sluggish domestic market and the oversupply of most manufacturingindustries. The second is positive, i.e. the relaxed investment control and the expanded opening of thedomestic market. The interaction of these two factors will directly determine the scale and speed offoreign investment input in this field. In view of the current situation, generally speaking, the marketwill gradually recover and there will be relevant measures on relaxing the investment controls andgiving greater access to the domestic market. Therefore foreign investment in this field will increase.

In the manufacturing field, foreign investment will continue to concentrate on labour-intensive,resource-intensive sectors in the central and western regions. But there is a bright prospect for somehigh-tech industries, too, such as information electronics and biological medicines. Great potentialexists in these fields but some issues, as follows, need to be addressed:

First the equity restriction. Such issues as restriction on foreign equity, insufficient capital anddifficulty in financing of the Chinese party constrain the increase of foreign investment.

148

Second, restriction on modes of foreign investment. There is no standard and open property exchangemarket making it difficult for the foreign investment input by means of mergers and acquisitionsfeaturing low cost and high efficiency;

Third, capital source restriction. Industrial capital is encouraged while financial capital is restricted.For example, a very important source of capital for the high-tech industry--venture capital--isforbidden by the existing policies, that is, it is impossible or very difficult to enter the Chinese market.Besides, there is no mechanism for future sale. If these problems cannot be resolved, there will hardlybe any breakthrough for foreign investment in the high-tech industry.

The exploration of new investment areas is a focal point of the central and western regions’ futureforeign investment attraction effort. At present since the state policy is to launch experimental openingof the key industries of trade in services sector such as banking, insurance and distribution, foreigninvestment in this sector certainly concentrates on the east. However due to the limited degree ofopening, this part of foreign investment is still small in scale with a total amount less than US$ 40 to50 billion (excluding real estate), accounting for about 2 % of the market share of the relevantindustries. Now experiments in this sector are also allowed in the main cities of the central andwestern regions. If a breakthrough can be made in market access, the growth rate of foreigninvestment in this area can go beyond all imagination.

Open the Western Region Wider Through the “Develop the West” Strategy and China’sAccession to the WTO

Accession to the WTO shows China’s attitude on further opening up in the new century wheneconomic globalisation is deepening. As an important part of China’s economic development strategyin the 21st century, accession to the WTO marks a new milestone in China’s opening up process. Chinawill surely promote the development of foreign trade and intensify FDI attraction. Develop the West isa significant strategic measure in China’s economic development in the 21st century, which will playan important role in facilitating the opening up drive and FDI attraction of the central and westernregions.

In fact, the focal point of our commitment for joining the WTO is related to liberalising markets in theservices sector, besides opening the agricultural sector and tariff reduction. It covers such issues aswhether or not foreign investment is allowed in the sector, in which ways it can enter, to what extentand how to exert standard administration.

The further opening of services sector such as banking, insurance, telecommunication and professionalservices will definitely bring about a wider space for foreign investment. If foreign-investedmanufacturing enterprises are free to set up a distributing and after-sales service network so as to havea complete chain of production and operation, it is more compatible with the rules of investment andwill be helpful for the existing FIEs in market exploration and expanding investment. In addition, itwill also attract more new foreign investment. In line with WTO rules concerning national treatmentand transparency, some laws and regulations need to be revised or adjusted. The policy and lawmaking process will be open and rule-based. The way in which government controls the economy andthe public-private relationship will be more compatible with market economic rules and internationalpractices and norms. All these will create a better environment for foreign investment, which is theproduct of market economy operating according to internationally acknowledged rules. For the long-run, it will benefit foreign investment.

149

However, all the problems cannot be resolved overnight. It needs a lot of work. As it involves somedeep-rooted issues in the existing system, the resolution of the problems will naturally lead to greatchanges in the structure of interests distribution making the task of further reform and opening upmore complex and arduous. Therefore we cannot anticipate if it will be accomplished within two orthree years. The effect on foreign investment absorption will not be seen in the short run.

It is necessary to make major strategic adjustments to all the important aspects of FDI attraction,including the open strategy, industry priority, modes of foreign investment attraction and foreigninvestment vehicles, in order to promote the opening up and FDI attraction of the central and westernregions by making reference to the experiences and lessons of the east in attracting foreign investment.

First, consider the formulation of a new opening up strategy. At the beginning stage of opening up,there is not a clear understanding on many issues, and the domestic industries and enterprises have lowcompetitiveness in the market. Therefore it is reasonable to set up the gradual opening up strategy. Thepresent situation is that after more than 20 years of reform and opening up, we have improved a lottheoretically and practically while the competitiveness of the enterprises has also been lifted. We needto design a new opening up strategy, otherwise we may miss opportunities.

Second, since the present economic and social development stage puts forward new requirements forindustrial development, it will naturally impose a fundamental impact on the selection of industrypriorities. Only if the industry priorities are shifted to the services industry and agriculture, can theforeign investment industry structure be basically changed, foreign investment scale enlarged andquality of FDI in the manufacturing field improved. Industry priorities for foreign investmentattraction in the central and western regions should also be redesigned according to the new situation.

Third, in the past, we have encouraged foreign investment, mainly industrial capital in themanufacturing sector. This is in line with the objective of attracting foreign investment at thebeginning stage of reform and opening up (introduced in technology, products, management and salesnetwork). At present the development of the high-tech industry, even traditional industries, venturecapital, fund capital and security investment are indispensable. The operational means andrequirements are quite different from those of the industrial capital. The traditional ways in attractingindustrial capital are hardly effective for financial capital. How can we better absorb financial capitalby further opening the capital market, setting up the necessary legal framework and optimising theintermediary service system? It is correct to be more cautious in opening the capital market, but if weare too slow, inevitably we may lose development opportunities when trying to avoid negative impact.

Fourth, the traditional ways can hardly meet the requirements of foreign investment. Mergers andacquisitions are the most common ways for cross-border investment. But in China they are almostforbidden because the relevant laws, management system, capital market (including stock market andproperty exchange market) and intermediary agencies cannot meet the requirements of the M&As byforeign investors. In addition, fund capital, security investment and BOT investment also have greatprospects for future development. The central and western regions need to pay attention to these newforms of FDI attraction.

Fifth, the central and western regions should also pay attention to the foreign investment vehicles.SOEs have inevitable conflicts with foreign investors in terms of operational objectives, businessphilosophy, operating mechanism and management modes. Besides they have relatively poor assets.How to make foreign investors set up joint ventures with these old SOEs? At the same time we mustnurture new vehicles for foreign investment creating conditions for strong private companies to co-operate with foreign businesses.

150

Although the government has taken note of and began to address the issue of less foreign investmentin the central and western regions, it is not enough to grant the preferential policies originally for theeast to the central and western regions due to the different conditions in resource deposits, geographyand market environment. We need to put more emphasises on the following aspects:

Greater markets access in the central and western regions.

We need to ardently and actively expand the present limited experimental opening-up of banking,insurance, telecommunication, retail and foreign trade to foreign investment. All in all, theseexperiments have been carried out in the east for many years. Retail and foreign trade, which shouldbe open to market competition, should be open to foreign investment. The investment decision-makingpower should be decentralised to the enterprises (foreign investors) and the supervision andadministration rights should be given to the local government. In such vitally important key sectors asbanking, insurance and telecommunication, central government’s co-ordination and approval areneeded, but the opening up step should be bigger. For example, foreign investors should be allowed topossess less than 50 % of the equity of domestic enterprises. In the 10th Five-Year Plan period, FIEs’domestic market share should be permitted to rise to 10-20 %.

Relaxing the equity control and investment control for foreign investment.

Liberalisation, i.e. total opening to foreign investment, shall be initiated first in the generalmanufacturing field, such as daily-used chemicals, food and beverage, beer, textile and garment aswell as machinery, electronics and pharmaceutical industry. As for some key industries of vitalimportance to national development and people’s livelihood, such as automobile, petrol-chemicalindustry, aviation, aerospace, large-scale integrated circuits, the government can co-ordinate theprojects, however, the equity control of no practical significance shall be relaxed as best as possible onthe basis of the government’s managing and controlling rights. Exploration and development ofmineral resources should be carried out according to state laws and regulations as well as internationalpractices. In the agricultural sector, foreign investment is encouraged in planting and animal raisingprojects and such linkages as processing, storage, transportation and sales of agricultural produce arederegulated. With regard to infrastructure projects, such as road, bridge and power generation thegovernment needs only to supervise on the service quality and price if it is not necessary to exertcontrol on the foreign equity proportion.

Offering more support to foreign investments in the central and western regions in terms oftaxation, financing and credit.

The foreign investment policies at the beginning stage of the reform and opening up mainlyconcentrate on regional preference. Later on the government began to indicate its industrialpreferences. Under the present situation, however, regional preference cannot be neglected. The onlydifference is that the focus of the preference should be the non-developed regions. There is such amisunderstanding in decision-making as only industrial preference can be implemented and regionalpreference should be abolished, otherwise it would lead to unfair competition and a distorted marketenvironment. It is actually a lop-sided view and is not in line with the development requirements. Evenin the developed countries in the world, there are preferential policies for non-developed areas. Sinceobjective and hard-to-correct deficiencies exist in the investment environment of the central andwestern regions, certain forceful investment incentives are imperative. The central and localgovernments must pay attention to it and formulate relevant measures quickly, for example, setting up

151

a West Development Fund providing foreign investors with matching fund and interest-subsidisedloans; import duty and VAT exemption treatment for foreign investment in impoverished regionswithin the total invested value; extending the income tax reduction and exemption period of FIEs inimpoverished regions.

Furthermore, efforts should also be made to strengthen the infrastructure construction, furthertransform the way of thinking and liberalise the mentality, enhance the efficiency of the governmentservice and the policy transparency and improve the market competition order.

Definitely, the most fundamental thing is to fortify system renovation and availability so as to createan appropriate system environment for foreign investment.

The movement of “Developping the West” and China’s accession to the WTO create goodopportunities for the development of the central and western regions and offer a promising prospectfor foreign investment. If the western region can take full advantage of these opportunities, they willbetter absorb more foreign investment, which will in turn stimulate their social and economicdevelopment.

153

CHAPTER III:

INVESTMENT PROMOTION AND LOCAL ENTERPRISE DEVELOPMENT

155

IMPROVING INVESTMENT PROMOTION IN WESTERN CHINA,

Andrew Proctor,Regional Manager,

Asia Pacific Regional Office, Foreign Investment Advisory Service, World Bank Group

Introduction

Unlike most countries that are not well known to international investors, China, with its vast marketpotential and rapid growth, enjoys a high visibility among international investors. For the last twodecades, a significant amount of foreign direct investment (FDI) has flowed into the country, mainlyin response to the economic opening and policy reforms pursued by the Chinese Government. Theresult has been that China has become one of the most successful countries in attracting FDI in the lasttwo decades. With a total of US$ 347 billion in actual FDI utilised by the end of 1999, it is the secondlargest FDI recipient in the world, after the United States. However, despite the large annual flows,FDI in China has been distributed unevenly across the country, with the large majority concentrated inthe eastern and southern parts of the country.

In June 1999, President Jiang Zemin declared that the State would, in the next few decades, lookincreasingly westwards. This was implicit recognition of the fact that two decades after the start ofeconomic reforms and opening up to the outside, China’s development had become geographicallyskewed. Henceforth, the President declared, the Chinese Government would attach greater priorityand devote greater resources to accelerating the development of China’s poorer western provinces.

The President’s speech was a signal of the central authorities’ determination to redress the balance ofdevelopment across the country and marked the official start of China’s “ “Western DevelopmentStrategy”. The early stages of the implementation of the policy has subsequently generated a flurry ofactivity and China’s western provinces see this as an important boost to their economic developmentambitions. Following the announcement of “the Western Development Strategy” most inlandprovinces fought hard to be included in China’s “western region”, in the hope that they would benefitfrom any preferential policies that the Central Government may give to the western region as a whole.Presently, the western region, as defined by the Central Government, includes:

− six provinces (Sichuan, Guizhou, Yunnan, Shaanxi, Gansu, and Qinghai);

− five autonomous regions (Tibet, Ningxi, Xinjiang, Guangxi, and Inner Mongolia); and

− one municipality directly under the State Council (Chongqing).

156

To oversee and set this policy in motion, a Western Development Strategy “Leading Group” has beenestablished, with Premier Zhu Rongji as its head and the State Planning and DevelopmentCommission (SPDC) as the Group’s General Office.

The Challenge for the Government on FDI

Given the location choices made by foreign investors to date within China, the Central Governmentshould be under no illusions as to the substantial challenges that it faces in its effort to attract greaterFDI flows to the Western region. Convincing new and existing foreign investors that the West is amore attractive prospect than the already well-established and more experienced coastal provinces isnot going to be easy, especially, considering the lower level of general development of the west’s“investment product” i.e. its investment environment.

What is now increasingly apparent is that, after more than twenty years of economic reform andopening to the outside by China, it is no longer sufficient for a provincial government to just open itsdoors and offer the same incentive schemes that once helped the coastal provinces attract FDI.Investment promotion today requires much more – effective strategic planning and aggressive,targeted policy actions supplemented by an appropriate organisational structure. For the WesternProvinces, however, investment promotion is currently a relatively new concept.

Responding to the challenge

As “the Western Development Strategy” gains momentum, China will need to examine theeffectiveness of its existing institutions that have responsibilities for attracting FDI, at both the centrallevel and within the western provinces. In assessing these “investment promotion agencies” (IPAs), itwill need to address issues such as:

− the appropriate functions (from the full range of possibilities) to be undertaken by theIPAs at each level of government;

− the institutional and organisational arrangements for an IPA at national level, which canfacilitate the attraction of FDI, for the country as a whole and within the context of ”“theWestern Development Strategy” particularly the location of the IPA within the nationalgovernment’s administrative structure; and

− the relationship between IPAs (and other institutions undertaking FDI related functions)at the national and local levels.

Appropriate functions

China has achieved considerable success in attracting FDI. However, to date, virtually all the focus atnational level has been on “improving the product” (as opposed to “marketing the product”, the otherway of increasing “sales”). Over the last decade, for example, the Chinese government, at both centraland local levels, has made continuous efforts to remove the barriers to investment and progress hasbeen made to improve the policy and legal regimes of foreign exchange, trade, and taxation. Inconjunction with China’s accession to the World Trade Organisation (WTO), China has also continuedto deregulate the investment environment and to develop a commercial legal infrastructure that iscloser to international standards.

157

Despite the progress achieved, however, there is still room for many improvements to be made to theinvestment “product”. Improvement of the overall business environment remains a major challenge inChina; among foreign investors, China is still reputed as a place where “shen-yi hao zuo, ban-shi nan,”“finding a business is easy, but doing it is difficult”.

By contrast, most of the countries that have been most successful in attracting FDI (e.g., in terms ofinflow per capita) have paid continuous attention to “product” improvement while operating effectivemarketing programs in parallel. Therefore, China now faces a choice in its approach to FDI,especially if it is to be successful in its “Western Development Strategy”. It must decide if it is nowappropriate to add another element to the overall strategy for attracting FDI. Specifically, the choice iswhether it should move to a dual focus of product improvement and effective marketing.

The range of functions allocated by various national governments to the IPAs they have establishedvaries considerably. A listing of all the possibilities is surprisingly extensive. While no single IPAhas a mandate that covers all the possibilities, IPAs typically undertake a combination of bothregulatory and promotional functions. IPAs that are more of the regulatory type often perform suchfunctions as project screening and licensing, approving investment incentives based on governmentcriteria and issuing other permits needed by investors (e.g., expatriate work permits, land andimport/export licenses, etc.). The more promotional IPAs, on the other hand, are more focused onimage building, investment generation and investor servicing (or facilitation).

Historically, most of the early IPAs established started out with a combination of regulatory andpromotional functions – though, in many cases, the latter were largely ignored. Over time, however,many have realised that an emphasis on regulatory functions prevents them from pursuing theirprincipal objective – promoting investment by attracting investors. Thus, as IPAs have evolved, theyhave typically focussed more on promotional functions and those succeeding in making thistransformation have become much more successful in attracting investment to their host economies.In addition, during the course of this transformation, many IPAs have played an important role ofpolicy advocacy and pushed for the necessary reforms to simplify the regulatory requirements and toreduce the administrative barriers to investors.

There remains a good deal of debate over the appropriate balance between regulatory and promotionfunctions, which are undertaken by IPAs. Many of the existing agencies in Asia were established at atime (two and three decades ago) when the regulation of FDI (and the activities of multinationalcorporations – MNCs) was considered more important than investment attraction. However, the pasttwo decades have seen competition between countries for FDI intensify, so that regulating the demandby MNCs for entry into the economy has become considerably less important. The need now is togenerate that demand. Recognition of this change has resulted in additional promotionalresponsibilities being given to many of the predominantly regulatory agencies or their existingpromotional responsibilities being given much greater emphasis.

Institutional and organisation arrangements

An appropriate organisational framework is increasingly recognised as the key to successfulimplementation of FDI related strategy and functions. Although the organisational structure andarrangements vary from country to country, a number of consistent features in the framework can bedistinguished from the experience of many countries around the world.

In virtually all cases, countries have decided to nominate a single agency, at a national level, as thevehicle dedicated to leading on and implementing FDI related functions. This lead agency, generally

158

referred to as the IPA, enables a government to centralise decisions on FDI regulation and promotion,co-ordinate other key government departments involved in FDI process and provide a focal contactpoint with private investors.1

Most IPAs that have been established have taken the form of either a government entity, or a “quasigovernment” entity, although, in a few cases, the IPA has been a private entity. Whichever form isused, however, IPAs that are relatively successful typically exhibit a number of similar characteristics:

The strong political support of and access to the senior government leader

This is critical to the success of the IPA. International experience suggests that an IPA that isseparated from regular line ministries and has the support of and reports directly to a senior level ofgovernment (e.g., the prime minister or a senior co-ordinating minister) has a significant advantage inaddressing investor problems. Without such access and support, the views of an IPA which reports toa lower level – for example, a line minister – are discounted by other line ministries with equal status.Similarly, reform – even of relatively simple matters – is much harder to bring about and the IPA isunlikely to be seen as an effective mechanism for translating government policy objectives intospecific FDI objectives. Nor can IPAs without a sufficiently senior level of support be effective indeveloping an effective promotion program in co-ordination with other relevant governmentdepartments and agencies. It is not a coincidence, therefore, that successful IPAs typically havepolitical prominence, with direct access in some cases to the Prime Minister and/or the President.

Independence from other government departments and agencies

Independence from other government agencies allows IPAs the needed degree of freedom to developan FDI strategy, deploy an FDI promotion program, take FDI related decisions and implement specificactivities. All these help ensure their operational effectiveness. A certain level of detachment of theIPA from a government’s administrative bodies also allows it to function more like a commercialentity in what is a highly competitive market. In places where IPAs are not able to exercise asufficient degree of independence, they have generally been more encumbered by bureaucraticinterference and, thus, have tended to function less effectively. In addition, investors tend to have lesstrust and confidence in such an IPAs’ ability to provide them with the necessary support to implementan investment. Equally, in places where there are too many players involved in FDI promotion onbehalf of the government, investors become confused as to which agency they should deal with andthe use of the public resources is less cost-effective.

Inter-departmental co-operation and co-ordination

Though needing to be largely independent in their formal structure, successful IPAs around the worlddepend upon the understanding and support of other relevant ministries and authorities for theiroperational effectiveness. Such interaction needs to be based on pragmatic and mutually beneficialinstitutional mechanisms.2 These mechanisms seldom permit the full delegation of the other agencies’powers to IPAs, rather relying upon them to act as good investment facilitators through effective 1 Louis T. Wells, Jr. and Alvin G. Wint, Marketing a Country: Promotion as a Tool for Attracting Foreign

Investment, (Revised Edition), 2000; Foreign Investment Advisory Service, IFC and the World Bank; pp.50-52.2 In some countries, IPAs maintain informal contact with other key players. The Singapore EDB is perhaps the best

example of this networking across government departments and agencies.

159

networking. For this purpose, many governments have resorted to a supervisory board or committeefor the IPA including representatives of key departments. Such a board can meet regularly to discussthe critical issues brought to its attention and find solutions based on inter-departmental agreement. Itcan also review, provide input to and approve the corporate plans and budgets proposed for the IPA, aswell as overseeing the latter’s performance. Thus, the key departments gain a strong understandingand a sense of ownership of the IPAs’ operation, while the IPAs gain a strong inter-departmentalsupport.

Private Sector Co-operation

Successful IPAs treat investors as clients and partners. They emphasise the maintenance of a closerelationship with the private sector through regular activities such as company surveys, factory visits,seminars and workshops. In many cases, the private sector is represented on the supervisory orconsultation boards of IPAs, so that it can assist in identifying business issues affecting differentsectors and voice investors’ needs and requirements. Ideally, an IPA should report to a board,nominally chaired by at least a senior minister, and composed of both public and private sectorrepresentatives. The IPA then has its direction set by a group, which represents a range of opinionsand perspectives – a competitive tension, which has been shown to produce the most successfuloutcomes. Moreover, successful IPAs recruit staff from the private sector as well as the public sector– wherever the budget permits – so as to bring the private sector understanding and knowledge in-house.1

National and local relationships

In countries as large and diverse as China, increased attention has been given to developing anappropriate relationship between the national IPA and the various IPAs established by local(provincial and municipal) administrations. In many cases, it is clear that the range of parallelfunctions and the resulting overlaps, which occur, can be potentially wasteful. Such duplication alsoruns the risk of inconsistency and the possibility of causing unnecessary confusion to investors.

The range and number of initiatives, related to investment promotion and undertaken at local level,especially by the western provinces, can be expected to increase rapidly over the next few years. Thismakes it important that the national IPA is structured in a way that allows the national benefit realisedfrom the efforts at all levels to be maximised. Indeed, the need to form local and regional IPAs tocomplement area development strategies, including “the Western Development Strategy”, is anexample of the importance which national/sub-national relationships will assume.

Where does Western China go now?

The current functional, organisational and relationship arrangements for FDI attraction in China are farfrom ideal. Until recently, responsibilities at national level for FDI matters were dispersed amongseveral key departments, including the Ministry of Foreign Trade and Economic Co-operation(MOFTEC), the Bureau of State Planning Commission and the Bureau of Economic and TradeCommission. Although MOFTEC was designated as the “co-ordinator” of the FDI process, it lacks anunambiguous mandate for FDI promotion.

1 Strengthening Investment Promotion Agencies: The Role of the Private Sector, an internal note by FIAS,

March 1999.

160

The overlap in responsibilities of FDI promotion at national level are also apparent at the ProvincialGovernment level, where, for example, in Shaanxi Province, the responsibilities are spread between anumber of national and provincial government agencies. On the one hand, such an arrangement – andthe psychological distance from central authority – can lead to a more “flexible” and open-mindedapproach to handling investors. This has, to date, not generally been the case in Western China, withthe result that it has, more likely, signalled to investors that FDI promotion is uncoordinated.

The need to establish a close relationship with the private sector clearly remains one of the biggestchallenges, especially at the provincial level, with which the investor has much more immediatecontact. Currently, in Shaanxi, for example, none of the Government agencies actively involved haveput enough emphasis on this. They have all been acting with a primary focus of implementing theadministrative instructions.

Consequently, their interactions with investors, particularly after an investment project has beenimplemented, have been minimal. This has largely limited their understanding of the commercialneeds and requirements of the investors when designing and implementing their promotion activities,though exceptions to this situation are evident in some of the economic and technology developmentzones within the Province. The zone authorities appear to have been more willing to respond tomarket needs than to emphasise adherence to administrative instructions and guidelines. They alsoseem to have been more proactive in interacting with investors, both during and after the investmentproject implementation process.

Finally, an overarching objective should be to address the mindset, culture and skills of allGovernment agencies and officials at the various operational levels. Although a positive attitudetowards FDI is evident at the senior level, many low-ranking officials appear somewhat ambivalent or,in some cases, negative. Many lower level officials involved in the FDI process are clearly notfamiliar with private business and many are distrustful of the motivations and culture of foreigninvestors. As a result, while Government policies officially encourage foreign investment, theimplementation process is often unpredictable and drawn out.

To succeed in a focused FDI attraction program, both the national government and the provincialgovernments of Western China need to address the three main IPA issues identified in this paper:selecting and developing appropriate functions, creating an effective organisational structure andestablishing mutually beneficial relationships between national and local institutions. The idea ofcreating a more focused national IPA, with a higher degree of independence and a clearer mandate toco-ordinate all investment promotion and facilitation activities, is worth serious consideration at bothnational and local levels. Such a framework will help to clarify and bring together the various effortsalready made across the country. It will also help the Government implement its FDI policies andstrategy more forcefully and cost-effectively.

In creating an effective national IPA, the Central Government will need to demonstrate strong politicalsupport for the concept and build a political consensus among all involved parties, including the keydepartments and the private sector. Moreover, a prerequisite for success in this area will be a majoreffort to change the mindset, behaviour and skills of executing officials at all operational levels.

161

BEST PRACTICE GUIDELINES FOR INVESTMENT PROMOTION:RELEVANCE TO CHINA,

David Banks,Administrator, Directorate for Financial, Fiscal and Enterprise Affairs, OECD

Introduction

The “best practice guidelines for investment promotion” has been developed by OECD on the basis ofthe examples of smaller OECD countries, which have been successful in attracting foreign investmentand using it as a major driver in developing a local SME sector. The guidelines focus primarily on theexperiences of smaller, peripheral countries, which nevertheless have successfully attracted foreigninvestors, which might have gone to larger more prosperous countries. The guidelines also drawextensively on the work of other international agencies such as MIGA, FIAS, UNIDO and UNCTAD

The guidelines were developed in association with, and are intended initially for use in the transitioneconomies of Southeast Europe. This region competes for foreign investment with the nearby EU, theworld’s largest single market with a combined GDP of US$8,330 billion in 1998. The guidelines drawon the experiences of countries such as Czech Republic, Estonia, Finland, Ireland and Scotland, alleconomies, which were successful in attracting foreign investment in recent decades.

The question arises as to whether this experience is relevant to the current situation between thecentral/western and the more prosperous coastal regions of China. The answer is that much of theexperience is relevant, as there is a basic similarity of position i.e. how to get investors to act againsttheir instinctive wish to invest in the largest market.

Another reason why the guidelines are relevant in this situation is that they emphasise the need to look atthe investment decision from the perspective of the investor rather than the host country or region.Understanding and responding to the investor’s requirements is fundamental to a successful FDI policy.This requires governments to concentrate above all on getting the fundamentals of the investmentclimate right (i.e. the “product”), so that investment promotion agencies are promoting an attractiveenvironment, where the investor can do business and make an profit commensurate with the risk.

The process of building an attractive investment environment requires understanding and support fromsociety, and is a long-term process requiring investment in infrastructures and reform of legal andadministrative institutions and practices, which impede legitimate foreign investment. It must also involvecontinuous feedback from private sector investors on how they perceive the attractiveness of the location.

Once the basics are in place and investors have confidence in the location, they will invest. Many willand do find their own way, but modern best practice is to actively promote the location, focussing the“message “on what the investor requires and how the location can satisfy his needs. This is similar to

162

the marketing/sales function in a private business, and requires appropriate business skills to deal withinvestors in terms they understand and relate to.

The major benefits from foreign investment arise from successful integration of the company in thelocal economy and the transfer of international management and technological skills to the localeconomy. Policy makers in successful countries look at the foreign investor as a major potential sourceof expertise and know-how, not just at their impact on employment and foreign reserves. Once again,“ best practice “ makes clear the need to focus on the requirements of the foreign investor, and theneed to develop programmes which increases their competitiveness through local linkages. Thisrequires a high degree of co-operation between local development agencies and the IPA, and the rightskills in these agencies. The focus of many of these programmes is on building local management andtechnical expertise rather than on fixed asset investment. It is really about laying the seeds for long-term growth, based on an entrepreneurial culture.

It is worth pointing out that the same principals for an attractive foreign investment climate applyequally to local enterprise. The principals require the support of society as a whole, and anunderstanding of the possibilities and limitations of a private sector economy. This often requires amajor change in cultural attitudes at all levels of society, and is a major long-term challenge forChinese policy makers.

The institutional approach to successful attraction of foreign investment needs to recognise thefundamental fact that investors decide whether to invest or not. Policy makers need to developinstitutions, which are responsive to investors’ needs. This implies clarity, confidence, simplicity,transparency and involvement of the private sector.

In developing the “best practices for investment promotion “, OECD looked at three main components,all inter-related but requiring different institutional approaches, reflecting the differing policy responsesrequired. Co-ordination is absolutely necessary. The components are: the role of government, action bythe investment promotion agencies, and maximising the benefits to the local economy.

In describing the “best practices “, this paper also offers some observations on promoting the regionsof central and western China to foreign investors in competition with the more prosperous coastalregions. The guidelines also include an implementation methodology, which helps countries comparetheir existing position with “best practice “, and outlines an implementation monitoring regime.

The role of government

The issues covered are:

− Arguing the benefits of FDI to the economy of the country

− Securing the support of main stakeholders in society

− Improving the climate for foreign investment

− Removing administrative barriers to investment

− Defining strategic policy options for FDI attraction

− Deciding on incentives

− Justifying the cost of attracting foreign investment, and

− Defining the Government mandate for investment promotion

163

Government must first decide on the role of foreign investment in the overall development of thenational economy. It must then mobilise society to pursue this goal, and make the necessary reforms inpolicies, institutions and personnel to create an attractive environment for private sector investment, beit foreign or domestic. Long term consistency in government policy is very important to investors.This is a long-term process. The first step for policy makers everywhere is to change their mindsetfrom one of looking at their own needs and hopes, to one that focuses on those of the investor.

The principal motivating factors in private sector investment decisions are Return and Risk. Indeciding on an investment location, these issues tend to reduce: market opportunity, competitive coststructure of the location and degree of risk for the investor.

In China’s case, the basic decision to welcome foreign investment was taken over two decades ago,and the results have been dramatic in terms of inflows, reaching a stock of FDI of US$348 billion bythe end of 2000. This is very encouraging but conceals some worrisome features. Firstly, despite theinflows, foreign investors still rate China quite lowly in terms of competitive position and risk ofdoing business in China (the Institute of Management Development survey of World Competitiveness,2001, the Economist Intelligence Unit assessment of Country Risk, 2000). Paradoxically, China ranksnumber two in foreign investor rankings of investment intentions (A.T.Kearney survey of FDIConfidence, 2001), The answer lies primarily in foreign investor’s perception of the growthopportunities in the enormous Chinese market.

Despite the major reforms of the past twenty years, the investor remains cautious but convinced. In thiscontext, it is little surprise that over 50 % of foreign investment comes from the overseas Chinesecommunities and is focussed mainly in the more accessible coastal provinces. This leads in turn to a viciouscircle in which the coastal provinces become more prosperous and relatively more attractive to the investor.

The first lesson for policy makers at national and provincial levels is that they must not becomecomplacent. The investor community still sees a need for major reforms to make the investmentenvironment more attractive and to reduce administrative barriers. This is an even greater challengefor the western/central provinces as they have not participated to the same degree in the benefits offoreign investment, and have been slower to make necessary changes.

A second critical issue is competitiveness, which can often be an issue of accessibility. Lack ofinfrastructure outside the coastal regions is a serious impediment. When addressing this issue, policymakers should try to identify those competitive infrastructure areas, where they might equal oroutperform the coast. Here, fortunately, technology is moving in the right direction for thewestern/central provinces. In successful countries, IPAs are focussing increasingly on knowledgeindustries, where telecommunications, human capital and air access are critical success factors. With therapid development of mobile phones in China, the universal second level education system, the universalknowledge of Mandarin and the relatively extensive air connections, policy makers could look initially atthe type of industries which utilise these factors (call centres, back offices, light electronics, andhealthcare products). Coupled with competitive labour costs and a proactive marketing campaign, thesefactors could attract investors, both from abroad and from the coastal provinces.

A further difficulty for the investor is the sheer immensity of China. Some Chinese provinces havebigger populations than France, United Kingdom or Germany. Sichuan’s population is as large as thatof Japan. In even the largest OECD countries, investors are used to dealing with relativelydecentralised government structures. Indeed, the more successful smaller countries pride themselveson ease of access for investors to decision-makers. In China, because of size and history, centralisationhas played a strong role. Policy makers need to develop structures, which allow ease of access for the

164

investor to decision-makers. Western/central provinces should focus more on decentralisation reforms,not only from the central government but also within their own provinces.

In launching “the Western Development Strategy” , the government has recognised the need torebalance the spread of foreign investment. The focus should be on encouragement rather thancoercion. This means western/central provinces must focus efforts on continuing reform of institutionsand attitudes, identification and investment in areas where competitive equality or advantage can beachieved (such as education and electronic communications), and they must seek out potentialinvestors and promote their message in an effective manner. Differentiated incentives, favouring thewestern provinces, should be considered, but only if differentiation on the basis of competitive factorscannot be clearly established.

Action by the investment promotion agencies

The issues covered are:

− Establishing and managing the investment promotion agency

− Understanding investors and the location - creating an investment promotion strategy

− Building and managing national partnerships

− Building and strengthening the image of the location

− Targeting and generating investment

− Servicing investors, and

− Monitoring and evaluating investment promotion activities

Attracting mobile foreign investment is becoming ever more competitive, as more and more countriesmove towards market-oriented systems and recognise the benefits from FDI. In “best practice“countries, the responsible organisations (IPAs) have the international business and marketing skills tointerface effectively with foreign investors. Many of the operations involved in the attraction of FDIare professional marketing activities. Nevertheless, government has an important input at differentstages, including deciding on the appropriate structure for the agency and establishing its mandate andlegal authority, budgets and senior appointments, and monitoring and evaluating the IPA’s activities.In successful countries, strong emphasis is placed on involving the private sector in IPA work, atboard and executive levels.

China’s case is complicated once again by size. In the international arena, it is better by far to haveone IPA represent a country. This avoids confusing the investor. On the other hand, the provinces needsome assurance that investment is not all channelled along the path of least resistance towards thecoastal areas. Balance is critical for long-term acceptance and support from society. Much smallercountries also face this issue, as investors will always look to the optimum location from theirperspective (often the capital city). The answer has to lie in competitive advantage and risk reduction,supported if necessary, by incentives. Central policy makers must insist on a co-ordinated approach,acceptable in terms of fairness, to both the western and the coastal provinces.

The majority of investment has come from the overseas Chinese community, presumably because theyare more comfortable investing in China. By the same token, these investors should be the least averseto investing in the interior, at least from a cultural perspective. Western/central provinces should focus

165

promotion efforts primarily on the overseas Chinese community, and in particular on those companies,which have already invested on the coast.

Maximising the benefits to the local economy

The issues covered are:

− Economic policies supporting interaction between FDI and the local economy

− Developing strategies for increasing the direct benefits of FDI to the local economy -upgrading foreign affiliates

− Promoting linkages between foreign investors and the local economy, and

− Co-ordinating capacity building

In “best practice “countries, mobile foreign investment has acted as a key driver of an enterpriseeconomy. It does this by transferring management and technical skills, by improving quality andservice standards, by encouraging links with technical research institutions, by developing suppliers ofgoods and services, and by influencing education policy on a national level. Linking foreigninvestment into the local economy strengthens the security of the investment itself, while also andcontributing to the development of an entrepreneurial indigenous sector.

Policies have to be developed and implemented to ensure these things happen and are effectively co-ordinated. It is a long and arduous process, taking many years and focussing on developing anentrepreneurial climate. Countries, which have successfully followed this route, have some policies incommon:

− Same treatment for indigenous and foreign firms (national treatment)

− Active participation by the foreign investors, based on improving the competitiveness oftheir own investment

− Investment in higher education at secondary and tertiary levels, with emphasis onmarketing, technology and language

− Encouraging entrepreneurs by eliminating unnecessary barriers and allowing them toretain the fruits of their success

− Access to development capital through equity and lending markets, and

− A co-ordinated approach by development agencies.

The “best practices” outline many programmes, which have been successful elsewhere. Localcircumstances play such a major role that the western/central provinces need to develop their ownblend from the available options.

In the “main issues paper “the authors highlight the success story of Guandong and the Pearl RiverDelta, and discuss the reasons for its comparative success. Many of these cannot of course bereplicated (coastal location, nearness to Hong Kong, overseas connections etc.), but the paper doesstress the “the entrepreneurial spirit of its local government cadres”, and the fact that “ inGuangdong’s 50,000 processing plants a new generation of Chinese managers are educated andgetting accustomed to the realities of doing business in a market environment “. Western/coastalprovinces should look closely at the examples of Chinese “best practice “ in fostering an

166

entrepreneurial climate, and they should look at developing incentive programmes to attract Chinesemanagers and their families to start-up new businesses in the interior.

Conclusion

The “best practice for foreign promotion” seeks to identify those critical areas, where successfulpolicy intervention, can result in disadvantaged countries or regions making a success of attractingforeign investment and linking it to the local economy. It provides a framework for policy analysis andsuggests how government might structure and monitor an implementation programme. The issuesraised are as pertinent in China as in those countries, which provided the examples of “best practice “.

167

REFERENCES

Country Risk Assessment, Q4 2000 – Economist Intelligence Unit

FDI confidence Index, Jan 2001 A.T.Kearney

FIAS Occasional Paper 6, World Bank (FIAS).

MIGA Investment Promotion Toolkit (2001)

OECD (2000) Guidelines for Multinational Enterprises

OECD (1996) Convention on Combating Bribery of Foreign Public Officials in International BusinessTransactions

OECD (update2001) Codes of Liberalisation of Capital Movements and Current Invisible Operations

OECD (1999) Principles of Corporate Governance

OECD (2001) The Investment Environment in the Russian Federation: Laws, Policies and Institutions.

OECD (1998) The Forum for Entrepreneurship and Enterprise Development (FEED) - A regionalapproach in a global context

OECD (1998) Taxation and FDI (Istanbul workshop)

OECD (2001) Corporate Tax incentives for FDI

OECD (2001) Foreign Investment in China’s Regional Development: Prospects and Policy Challenges

Oman, C P (2000), Policy Competition for Foreign Direct Investment, Paris: OECD

Transparency international (2000) – Corruption Index

UNCTAD (1999), World Investment Report 1999: Foreign Direct Investment and the Challenge ofDevelopment, New York and Geneva: UN.

UNCTAD (2000), World Investment Report 2000, Cross-Border Mergers and Acquisitions andDevelopment, New York and Geneva: UN.

UNIDO Secretariat (1994), Guidelines for Investment Promotion Agencies, Geneva

World Investment Report, 2000, UNCTAD

World Competitive Index, 2001 - Institute of Management Development.

2000 World Development Indicators, World Bank

169

THE EXPERIENCE OF PROMOTING FOREIGN INVESTMENT IN SAXONY, GERMANY:“IT’S ALL ABOUT PEOPLE”,

Güenter Metzger,President and CEO, Saxony Economic Development Corporation

Introduction

This paper aims to shed light on the experience of promoting foreign investment in Saxony as asuccessful case story in Germany. The Saxony Economic Development Corporation, a privatecompany established on behalf of the Saxony Government in 1991, has two business targets:

− to promote foreign investment in Saxony, and

− to help our firms gain access to the international markets.

This combination of activities has proved to be extremely useful and helpful in both areas. Saxony isone of 16 States of the Federal Republic of Germany, with about 4.5 million inhabitants. The capital isDresden. There are two other major cities, Leipzig and Chemnitz, each have a population of just underhalf a million people. We have no statistical data on foreign investment in Saxony. Recently, westarted recently to develop a database of foreign companies with activities in Saxony. We have about500 companies with foreign shareholders. Let me mention names like AMD (Advanced MicroDevices) with their processor production or Toyota/Denso in the automobile sector as very importantexamples.

This paper will focus on defining our competitors’ markets and targets; our starting point when weinitiated our activities in 1991, with all the negative and positive factors; and finally our strategy andpolicy for attracting foreign investment.

Competitors

In a globalising economy, we have many competitors for foreign investment. So after analysing whoare these competitors, it becomes necessary to define the targets for our promotion activities, namelythe type of investment that is most likely to come to Saxony, and the markets where we most probablyfind the respective investor.

Countries

As to the first question, who are the competitors, we may define the following group of countries:

170

− first of all the other new German States in the former communist East Germany,although sometimes we even compete with West Germany,

− the neighbouring countries looking for future membership in the European Union, asthere are especially Poland, the Czech Republic and Hungary and finally

− some West and Southwest European countries like Ireland, the United Kingdom,specially Scotland and Wales, northern France for the automobile industry and Portugal.

We exclude as competitors all the so called low-wage-countries as Ukraine, Romania and Bulgaria orother countries even further East since their competitiveness is in an area that is not targeted by ourpromotion efforts.

Targets

Our target is capital intensive or high technological industries. In general Saxony is competitive withindustry in which labour cost does not exceed 20 % of the overall process. When labour cost makesup more than 30 % there is almost no possibility of establishing a competitive production in Saxonyother than that locally required with no alternative location.

As to the industrial branches within our targets we define those where high industrial standards arerequired:

− the automobile industry with their suppliers,

− the machinery and equipment industry,

− the electrical, optical, telecommunication equipment and mechanical industry all as ourtraditional activities where we regained a leading position in the German industry, and

− the microelectronic industry that has begun to concentrate in Saxony or more specificallyDresden making it the European centre of this activity.

Markets

We find our past and future investors basically in the following countries:

− West Germany, this of course is not a foreign investor in the sense of the word, butdecisions of West German companies are in general taken after comparing alternativelocations including the neighbouring countries, and Saxony has to convince also theWest German investor as being the best location,

− the European Union and Switzerland,

− USA and Canada,

− in Asia first of all Japan, but also Chinese Taipei, Singapore and South Korea areprospective markets, and finally

− Israel.

171

Without forgetting the other markets we are concentrating our efforts actually on the USA with ourstrategic investor AMD and on Japan. So far, in Saxony we have the only Japanese industrial directinvestment in the new German States, namely Takata and also the Toyota group represented byToyoda Automatic Loom Works and Denso Corporation. This last group has already announced animportant enlargement of the actual investment, and we are hopeful that this example will help to getmore Japanese investment.

Starting Point

It should be taken into consideration all that Saxony has achieved in foreign direct investment hashappened only in the last eight years. The effective period of promotion is rather short and there werea number of difficulties that had to be overcome. It might be useful to analyse the negative and thepositive factors, at the start position ten years ago, when reunification of Germany took place.

Negative factors

Saxony before the Second World War had the highest income per capita in Europe and was theindustrial heart not only of Germany but to a certain degree also of Europe. But 45 years of communistrule in East Germany left this part of the country in a deplorable state:

− Practically all private enterprises were shut down or sooner or later were nationalized.This system was of much more rigor than in the other European communist states.

− Owners and entrepreneurs went to the western parts of Germany and found newenterprises, such as cameras “Zeiss Ikon” chinaware “Villeroy & Boch“ and carmanufacturers DKW, Audi.

− For 45 years – from 1945 to 1989 when the wall came down – all private initiative wasbanned out of economic life

− All potential entrepreneurs if they did not escape to the West had to accept the socialistsystem, but could not develop their specific skills, so two generations of potentialentrepreneurs were lost.

The economic situation in Saxony when the wall came down was characterized as follows:

− It was generally believed that the economy of the GDR was the 10th strongest in theworld – but in fact it was close to collapse, it was bankrupt.

− Industrial installations and buildings - apart from individual but not general exceptions –were in a situation as any equipment or building could be after 50 or more years of usewithout maintenance and reinvestment.

− Telecommunication was a problem, railways and roads were deteriorated,

− Environmental conditions were poor and in low standards.

− No private enterprise was left and economic activity organised in large conglomerateswith self-sufficient structure.

− All prices were administered by the authorities and investments decided by theauthorities, while the funds remained as debits.

172

Germany’s reputation for foreign investment has suffered during the last years. Right or wrong, it iswidely believed that labour cost is high, labour legislation inflexible, trade unions an obstacle toenterprises, taxes prohibitive, and authorities love red tape. Except for some recent half-heartedmeasures, we do not have in Germany a federal agency for foreign investment. That means that thepromotion agencies of the 16 states in Germany are left alone to promote the image of Germany as acountry for foreign investment.

Positive factors

Turning to the positive factors favouring promotion of foreign investment in Saxony. As alreadymentioned, Saxony was the berth of the German industry many years before other regions like Bavariaor North-Rhine-Westphalia developed their proper industrial activities. Saxony used to be theindustrial heart of Europe and the area with the highest per capita income. Even in socialist times theseroots did not get lost and became a most important factor in the rebirth of the Saxony economy.

Research and Development has always been popular in Saxony. Also in socialist times, thegovernment put a lot of emphasis on vocational training, university and research institutes. Today,Saxony has the highest density of research and development institutes. Even so political and economicmeasures taken before and after the reunification process were drastic and lead in the short run to acomplete breakdown of the economy. The measures consisted in:

− a total and immediate privatization of the economy,

− the extension of the DM-currency to East Germany without delay or restriction,

− the takeover of all European and German legal framework on 3 October 1990, the day ofthe reunification.

− likewise, the immediate and direct institution of authorities, administration, police andjustice according to West German standards. This is definitely a very positive factorcompared to the situation in the neighbouring countries where old and moderntendencies are still fighting each other.

Strong Arguments in favour of Saxony

We defined arguments in favour of a location in Saxony in the following five areas: market, labour,social and economic factors, infrastructure, and government support without red tape.

Market

As to the market, apart from other important arguments that deal with local and regional locationfactors in the heart of Europe or as a gateway to Eastern Europe, we put special emphasis on the factthat Saxony is a traditional industrial area. That means the new investor will find a broad spectrum ofsmall and medium sized local enterprises in all traditional and new economic activities. We help thenew investor find suppliers of all kind and of the highest standard. This creates a framework of specialattractions to most foreign investors.

173

Sometimes it gives us also some sort of consolation, when as happened some months ago, we lost aJapanese investor to our competitor in the Czech Republic. But we keep in contact while this investoris establishing business relations to our suppliers, because he cannot find the same standards in hisnew location.

Labour

The next argument is the high quality of labour in Saxony. Only 11 % is unskilled labour. 29 % has aUniversity degree and 60 % has a completed vocational training of the high standards Germany isinternationally well known for. Labour is flexible. Not only men but also women are eager to work.They travel even over large distances. Men and women are willing to work in shifts, including onweekends and public holidays. Personal time accounts make labour supply flexible according to needsof enterprise. Labour is available, since unemployment rates are still high with locally up to 25 %.Wages are about 25 to 30 % lower in Saxony compared to average standards in Germany. On top ofthat, annual working time is about 10 % longer and only 5 % shorter than in Japan. Labour isexceptionably efficient in consequence of high quality and flexibility which in combination withcomparably low wages makes labour cost highly competitive.

Social and Economic Factors

Social and economic factors as third argument are positive. Political stability in Saxony as in Germanyis high. Fiscal contributions are moderate. It is true that peak tax rates are rather high, but average taxcontribution of only 19 % is much lower than in Japan or even compared to the USA. The corporatetax reform in course will simplify and further reduce taxation in Germany. Trade unions in Saxony areweak since labour is widely not organized. So wages can be lower than in Western Germany and evenbelow tariffs negotiated with trade unions. Strikes are practically inexistent and less popular than evenin West Germany. 7

Infrastructure

The fourth argument is a completely renewed infrastructure, whereas our neighbouring countries stillhave a long way to go: Telecommunications are privatized and completely digitalised. ISDN and DSLare standard. GSM is standard in mobile telecommunication. In Germany, USTM licenses have justbeen granted to six private companies in order to go into operation in the year 2002. Roads have beenreconstructed or new built. Railways are being modernized. We have two international airports,Leipzig and Dresden.

Government Support and no Red Tape

The fifth and last argument has to do with government support.

We have developed industrial sites for the establishment of new industries all over the country. So it ispossible to identify the appropriate site for any investor fulfilling almost any requirement. Since thenew German states formed part of the European Union from the very first day of reunification, theytook advantage from the scheme of subsidies provided and authorized for the less developed regions inthe European Union like Ireland, Scotland, Portugal and other areas. Thus it was possible to grantsubsidies up to 35 % of investment. These subsidies apply also to the other regions mentioned before,

174

but not to West Germany. So subsidies constituted a very important argument for investment, but onthe other hand their application was under control of the European authorities in order to avoiddeteriorating competence. Unfortunately, this system does not apply yet to the neighbouring countrieswaiting for EU membership. It is widely believed that investment grants, tax deductions and otherdirect and indirect incentives differ substantially from what is allowed by Brussels.

Furthermore, the government has taken measures to assure all necessary training of manpower at itsown expenses but according to the investor’s requirements. The Saxony Government puts emphasis onits flexibility and ban of all type of red tape. The self-understanding of the government is to act as aservice provider and partner to private business. We have quite a number of good examples wherelocal authorities act fast and efficient. E.g. building licenses are granted in short time, normally theyare issued in 4 to 8 weeks according to the complexity whereas in Western Germany periods of up toone year or more are quite frequent. Also decisions on subsidies are practically being taken on thespot. The investor gets reliable information on the grants available for him within one or two weeks.

Last but not least, the Saxony Economic Development Corporation acts as a guide to the investor andif really something unexpected would occur will help solve problems as a true partner and in theshortest period possible.

Strategy

Strategy has changed and is constantly under discussion. Strategy of foreign direct investmentpromotion started in the early nineties with the intention of nothing else but “to put Saxony back ontothe map”. The Saxony Government, as Prime Minister Prof. Biedenkopf said, tried to put big“lighthouses” into the economy. He meant strategically important big investments like those ofVolkswagen, Siemens, or AMD giving them all the support possible and allowed by the EuropeanAuthorities.

Behind this policy was the idea to make it attractive for small and medium sized enterprises to investand develop business activities in Saxony. In the meantime and after some years, we may say now thatthe once lonely lighthouses have turned into full chains of lights with self growing strength. While itwas in the beginning relatively easy to get new German and foreign investment because of theinternational attention drawn to this new area, it has since then become much more difficult to attractforeign investment in a highly competitive global market. It was necessary to develop a properstrategy and last year we presented our new concept defining a better structured policy and with newideas without leaving behind measures whose value has been proven.

Acquisition 2000

Here is a short outline of what we called “Acquisition 2000”. We started our work recognising thatmost of the general approach to marketing Saxony got lost for two reasons:

− It is necessary to define our product, targets and markets, and

− We must be different from the others, we have to make clear to our customers, thepotential investors, what is different in Saxony, where our assets are and why theyshould come to us instead of go to our competitors.

175

In the first part of this paper, our product, targets and markets are roughly defined. We put emphasison concentrating our marketing activities as precise as possible on our targets. That means:

− We try to identify potential customers with the help of our different partners in theforeign markets.

− We take advantage of our contacts to the strategic investments already realized inSaxony in order to find out where we can find complementary firms. We are looking forso-called missing links.

− We use successful investors as testimonials.

But that is not enough. Nowadays you cannot do any successful marketing or promotion arguing withthe blue sky in Saxony, the good incentives and so on. Our competitors are at least doing the same andthe customer gets confused without receiving any valuable information.

Together with our marketing consultants we started brainstorming in order to define the UniqueSelling Proposition for Saxony or just the USP. We found the position that Saxony is the country of theentrepreneur. This statement is based on the recognition that:

“The people of Saxony are fighting for their personal economic independence out of their longindustrial and scientific tradition and this behaviour is therefore much more present thanelsewhere. Innovation is practised out of tradition. That is why also employees and civilservants act and think as entrepreneurs. This business approach of the people is a factor ofsuccess for foreign enterprises engaging in Saxony”.

Jerry Sanders, the chairman and CEO of AMD, who was responsible for the decision to build a newprocessor chip factory in Dresden, brought it to the point: “It’s all about people”. Defined this as ourUSP we have started to streamline our marketing campaign along this line. All our mottoes include thehuman touch inherent to this USP. Our sales arguments are based on the five areas: market, labour,social and economic factors, infrastructure and government support without red tape, includinghenceforward directly or indirectly this reference to Saxony as the country of the entrepreneur or moresimply: It’s all about people.

177

FOREIGN INVESTMENT PROMOTION IN SHANGHAI:LESSONS FOR CENTRAL AND WESTERN CHINA,

Chen Jianping,Assistant to the President, Shanghai Foreign Investment Development Board

This paper examines the special features and current situation of Shanghai in foreign investmentutilisation, major methods in promoting foreign investment, as well as measures taken this year inattracting foreign investment to Shanghai.

Special features and current situation of foreign investment utilisation

Shanghai has already attracted foreign businesses from 94 countries and regions around the world.From January to August 2001 Shanghai approved 1, 665 foreign-invested projects, an increase of39.45 % compared with the corresponding period in 2000. The agreed foreign investment is valued atUS$ 5.004 billion, up 59.04 % year on year. By the end of August 2001 Shanghai has altogetherapproved 23,935 foreign-invested projects with a contractual foreign investment of US$ 50.427billion.

For years, more transnational companies involved with high technical content and high rate ofinvestment return has been in Shanghai. Since 2000, Shanghai’s foreign investment attraction hasadded some new characteristics.

First, there has been a notable increase in the scale of foreign investment. Thanks to the externalconditions of sustained and stable growth of world economy and the phasing out impact of the Asianfinancial crisis, combined particularly with China’s policies encouraging foreign investment, Shanghaihas achieved significant increase in foreign investment flows. Compared with the correspondingperiod of 1999, newly approved foreign-invested projects and their committed value rose by 23.2 %and 55.7 % respectively in 2000.

Second, the strongest growth registered in foreign investment occurred in industrial projects. FromJanuary to August, Shanghai approved 954 foreign-invested industrial projects, accounting for 71.04% of the city’s total. The agreed foreign investment in these industrial projects is US$ 3.555 billion, upby 68.78 % as compared with the last corresponding period. Moreover, bigger industrial projects areon the rise. The number of industrial projects with total approved foreign investment of US$ 10million and more reached 73, which enjoy foreign committed input of US$ 2.426 billion, 48.95 % ofthe total contractual value of foreign investment in the whole municipality.

What is worth mentioning is that in recent years the foreign-invested enterprises in Shanghai generallyenjoy satisfactory operation and good economic efficiency. As the macroeconomic situation ischanging to the better and state policies encouraging foreign-invested enterprises have gradually been

178

put into place, FIEs are operating in better environment generating ever-increasing economic returns.In 2000, FIE’s industrial output increase by 46.5 times than that of 1989. The total export in 2000registered US$ 14.26 billion, 37.8 % more than the same period last year, taking up 56 % of theaggregate number of the municipality. From January to December, there was a noticeable increase ofprofit earned and taxes submitted by FIEs. They realised total profit of 18.9 billion RMB yuan, up by112.9 % year on year and paid tax 14.7 billion RMB yuan, up by 8.1 %.

The stable impressive economic return has strengthened the confidence of the FIEs, thus resulting inincreasingly expanded investment scale. Last year FIEs got the approval to expand US$ 2.3 billionworth of new investment in their existing projects, 36 % of the city’s total inflow. There were 101projects with new investment surpassing US$ 5 million, many of which were hi-tech enterprises.

Major ways of investment promotion

Shanghai has mainly taken the following steps in promoting foreign investment:

On the basis of full knowledge of the development zones, the city government makes prioritisedrecommendations. In the process of inviting foreign businesses, the city government makesrecommendations according to the different characteristics and industry orientation of differentdevelopment zones as well as the specific requirements of the foreign investor, such as: Wai Gao QiaoBonded Area, Caojing Chemical Industrial Zone, Songjiang Export Processing Zone and KangqiaoIndustrial Park.

The city government makes full use of its offices in the U.S. and Japan setting up an overseas businesspromotion network, which is closely linked with the domestic network, in order to better facilitateforeign investment inflow.

Based on study and investigation of all industries, we set up a customer database, which enables us tokeep up with the development and future trend of priority industries, such as information electronics,bio-medicine and new materials, as well as the performance of key enterprises. It lays a goodfoundation for doing appropriate work of attracting foreign investment and seeking businessopportunities.

The city government built a communication platform for both Chinese and foreign enterprises to holdall kinds of partnership consultation conferences, which has achieved very good results. This year,they organised one for one exchanges and consultations between Chinese enterprises and theircounterparts from Canada, Korean and other countries.

The city government is trying their best on receiving foreign and Chinese business people andproviding suggestions to them. They show them the whole picture of Shanghai’s investmentenvironment, policies and industrial guidelines and giving detailed answers to their questions. At therequest of their customers, they offer “Shanghai Investment Guidelines” and other promotionalmaterials concerning the development zones, which they worked out by themselves. Moreover we alsoarrange site visits if requested.

The city government actively participate in big events such as China International Fair for Investmentand Trade, APEC Yantai Investment Mart, Shanghai Industrial Exposition and East China Fair, so asto raise the profile and influence of Shanghai and the Shanghai Investment Promotion Center, thusstrengthen the exchanges and communications with their Chinese and foreign friends.

179

On the basis of the existing representative offices in the U.S. and Japan, the city government willcontinue to establish more in other priority regions and countries implementing step by step thestrategy of “Doorstep Business Promotion”.

The city government will select some key projects among the traced projects, which they will put inmore human resources in order for an effective breakthrough.

Finally, it might be useful to highlight the measures Shanghai has taken this year to attract foreigninvestment.

− According to the “Third, Second and First” industrial development guidelines ofShanghai, further expanded the areas and scope for foreign investment utilisation in thethird industry.

− Encouraging foreign investment in the development of urban industrial projects andagricultural deep-processing projects.

− Facilitating the development of some large-scaled industrial projects with foreigninvestment, such as the chemical industrial projects in Caojing Chemical Industrial Zoneand the integrated circuit projects in Zhangjiang Development Zone.

− Actively guiding flow of foreign investment to export-oriented projects.

− Earnestly introducing foreign-invested parts and components projects that are closelylinked to large projects and can supply products globally.

− Shifting the priority of business promotion to high and new technology industry andattracting investment from the information and service industry of Chinese Taipei andHong Kong.

− Attracting more MNCs to set up investment companies in Shanghai while taking steps toimprove and expand the functions of foreign-invested investment companies.

− Encourage MNCs to set up R&D centres in Shanghai through the navigating role ofpreferential policies to stimulate FIEs to strengthening their R&D and technicalinnovation efforts accelerating the development of new technology and new products.

− Expanding the scope and quality of foreign investment in the area of trade in service.Taking the opportunity of China’s accession to the WTO, Shanghai is further liberalisingsuch areas as highway transportation, commerce and trade, logistics, tourism, publichealth, scientific research, education and consulting intermediaries in an effort toimprove the overall level of its service industry making it integrated with that of theworld.

− Introducing foreign investment in the transformation of state owned enterprises (SOEs).Based on the reality of Shanghai, new ways are being developed to allow foreigninvestment participation in the asset reorganisation and technical renovation of the SOEs.Relevant policies will be improved. Some projects will be open for equity and co-operative joint ventures between SOEs and MNCs. Every effort will be made for newprogress in it.

180

− Widening the means of FDI absorption. On the basis of such modes of taking in foreigninvestment as equity joint ventures, co-operative joint ventures and whole foreign-ownedenterprises, foreign investment in Shanghai is allowed by various means such as equitypurchase, Chinese-foreign joint venture funds, merger and acquisition, exchange ofproperty rights, etc. BOT and other ways continue to be adopted to attract foreigninvestment in infrastructure projects. The construction work is quicken up in Shanghaideep-water Port and the information terminal as well as such major municipal works asthe Wai Gao Qiao Container Terminal, rail traffic, and cross-river tunnel.

Now that China has joined the WTO, Shanghai will be more active and aggressive in going global toexpand the economic and trade co-operation with all countries and regions in the world. In the processof China’s greater involvement in the world economic integration, FDI attraction will enter a newstage of development, bringing new challenges and opportunities. Shanghai is determined to meet thechallenges courageously with new thoughts and ideas. Those experiences may shed light on thedifficult process of retaining and attracting future FDI to China’s central and western regions.

181

INDUSTRIAL DISTRICTS: AN ITALIAN PERSPECTIVE,

Vincenzo Del Monaco,Economic and Commercial Affairs, Italian Embassy in Beijing

Introduction

The aim of this paper is to focus on a socio-economic reality that de facto attracts foreign anddomestic investments, that deserves more support policies from public bodies and that has proved tobe extremely valid in Italy also in remote rural areas, notably in the North East, once called theNorthern Italy Mezzogiorno, and which now combines growth with almost no unemployment.

According to different methods of research, Italian Research Institutes count between 80 and 230industrial districts spread all over the national territory, with a total turnover evaluated around 66billion USD (139.000 billion of Lit.) and an average turnover per industry of 860.000 USD (1.8 billionLit.).

Districts are an important source of labour demand: between 1998 and 1999 the highest rates of job-creation concerned industries with up to 49 workers. Moreover, considering the growth rates, in the90’s the districts registered unique performances with percentages close to 90 %. In the Region ofEmilia-Romagna, for example, there is an industry for every 12 inhabitants, the highest rate in Europe.

Small firms are very common in the Italian economic scenario, where, according to the Italian Institutefor Foreign Trade, 98 % of manufacturing firms have less than 50 workers and 83 % less than 10. It isprobably worth saying that in Italy if a small enterprise corresponds to an undertaking with around 50workers, a medium one has around 250 workers.

What is an industrial district?

A district is a local territorial area with a high concentration of small and medium enterprises, (SMEs)a special relationship between industries and local population, and a strong industrial specialisation.

Five requisites of a district:

− A factor of manufacturing industrialisation in terms of workers which must be over 30 %compared to the national level;

− A factor of entrepreneurial density of the manufacturing industry, calculated in terms oflocal units in relation to local population, which must be higher than the nationalaverage;

182

− A factor of industrial specialisation;

− The level of employment in specialised manufacturing activities must be higher than30 % compared to the level of workers in that same area in non-specialisedmanufacturing activities; and

− A quota of employment in small specialised manufacturing industries higher than 50% ofthe total number of workers of the specialised activities in the area.

Economic and social characteristics of a district

The grouping of specialised activities within districts promotes innovation of products and newworking techniques; it exalts professionalism and workers mobility within that area; and it favoursnew entrepreneurial initiatives. These advantages in the management of the enterprise and incommunication are susceptible of increasing the capability of the production to better respond to thefluctuations of demand (Antonio Fazio, Governor of Banca d’Italia).

Families are authentic milestones of districts and key vectors for the transmission of savoir-faire.

As for trade unions, they have a special role to play within a district: they do not merely representworkers; they are rather active actors in fostering job-creation and the birth of new industries.

In other terms, industrial districts are comparable to a transmission belt of skills, of workers (becauseof their great horizontal and vertical social mobility) and of information.

Thanks to market liberalisation and wider competition, bigger industries, even those with wellrenowned trade marks, have been an important source of investments, having found it moreconvenient to externalise part of their production in existing districts and, at times, having encouragedthe creation of brand-new districts as a sort of sub-supplying area for the production of highlyinnovative goods.

In districts, the relation between undertakings is twofold: co-operative at a technical level, andcompetitive at the commercial level.

Consequently, this relation of co-operation and competition among industries fosters continuousprogress in quality standards and innovation, in order to better adapt the quality of offer to demand. Itis a well-balanced mixture of potentialities and incitements granting internal cohesion and dynamismto districts.

Moreover, the strong socio-economical identity generated by all these energies, and the consequentsense of belonging, have eventually a major impact outside the district area, thus working as amagnetic pole for investments from other undertakings external to the district.

Horizontal scale economies

Major horizontal scale economies represent an important argument in favour of districts’ efficiencyand are susceptible of attracting Foreign Direct Investments. Reduction of transaction costs, extremelymarked division of labour, existence of a considerable stock of qualified workers, possibility ofaccelerating the selling off of products and co-ordination of resources are all key elements which have

183

been highlighted also in the framework of OCDE, namely by Mr. Sergio Arzeni, Director of the LocalEmployment and Economic Development Programme.

Since the productive process is decomposable in several technical phases, division of labour allowsmajor scale economies without having to renounce the flexibility and the capability to adaptproduction to market uncertainties which are all the more important in a context of shorter life ofproducts, of market segmentation and of products differentiation.

What is more, the existence of a net of specialised industries and of intermediary markets avoidmonopolies.

Small and medium enterprises can therefore compete with bigger ones thanks to the socio-economicmodel of districts, which seems to reconcile the need for flexibility with a growing demand for socialcohesion coming from our societies.

Should State guide the “invisible hand” governing economy?

Italian districts developed basically in an autonomous manner in recent years, concentrating theiractivities in specific sectors where they often had consolidated major competitive advantages.

Nonetheless, State can implement important support policies to create favourable conditions for thebirth of districts. More precisely, State is expected to provide the following essential kinds of support:

− Provide an adequate net of infrastructures and services;

− Favour a close link between industries and educational institutes: training schools,universities, so called technological parks and research centres;

− Implement a system of financial facilities and incentives (Italian districts are eligible fora national, regional and EU financing system);

− Adopt an efficient legislation on intellectual property rights and investments protection;

− Facilitate access to bank loans;

− Ease access or provide an exhaustive information on third markets; and

− Provide insurance for commercial risks

The Italian system of financial support may be described as follows:

− Financial support for the promotion of investments (in the year 2000, the amount of 2.6billion USD was allocated for 3.673 industries, for a total amount of investments of 8billion USD and 72.000 new workers engaged) and of technological innovation; a taxcredit system to favour employment, investments in less developed areas of Italy and inspecific sectors such as research and technology;

− Financial support for so called “negotiated planning”: it is an agreement among State,industries and representatives of industrial districts to carry out important projects - of at

184

least 38 million USD – with a high coefficient of innovation and that are susceptible ofincreasing employment (more than 2.5 billion USD in the period 2000-2001);

− European Union contributions, through Regional Operational Programs and NationalOperational Programs; and

− Regional autonomous funds.

Are Italy’s industrial districts an exportable model?

Italy believes that industrial districts are, mutatis mutandis, exportable. The OECD, held in Bologna inJune 2000 an interesting Conference on “Enhancing the Competitiveness of Small and MediumEnterprises in the Global Economy: Strategies and Policies”, with the participation of several Asiannon-member OECD countries. That event recognised that clusters and networking can play animportant role in stimulating innovative and competitive SMEs, thus recommending that:

− The establishment of partnerships involving private actors, non-governmentalorganisations (NGOs) and different levels and sectors of public administration in localcluster and networking development strategies be facilitated;

− The private sector lead cluster-development initiatives, with the public sector playing acatalytic role to different extent according to national approaches;

− Existing of embryonic clusters be strengthened by fostering growth of small firms andstart-ups through: facilitation of their access to accommodation and efficientcommunications and transport infrastructures; taking account of local specialisation inuniversity-industry linkages; dissemination of targeted information and promotion of theestablishment of suppliers’ networks and effective technical support services, learningcircles and other forms of collaborative undertakings made possible by the physicalproximity of such firms; and

− Local, regional and national development authorities disseminate information on existingand emerging clusters throughout the business community of a region or country with aview to facilitating investment and maximising location advantage.

Included in the Bologna Charter is an Italian proposal for the creation of an International Network forSmall and Medium Enterprises (INSMEs) to improve the availability of existing networks, to extendexisting networks and to enhance the development of new networks with a multiplier effect. Inparticular, the Italian proposal aims at achieving the following objectives:

− “To enhance and extend the use of existing networks and structures in the field ofinformation and support (as regards to technology, marketing, design, quality, and accessto financial resources) and to foster the internationalisation and integration of suchservices; and

− To provide opportunities of partnership and co-operation between companies,intermediary bodies, governmental associations and institutions through appropriateinformation exchanges and company-to-company matching, as well as the promotion ofa systematic exchange of experiences and best practices among SMEs, intermediarybodies, territorial systems”.

185

REFERENCES

I distretti industriali: normative, scenario, incentivi allo sviluppo, Banco di Napoli, Le pubblicazionidella Collana “Economia e Credito”, giugno 2001, www.bancodinapoli.it

Districts industriels: un modèle de production efficient et equitable, by Sergio Arzeni, Révue duMarché commun et de l’Unione européenne, n. 409, jiun 1997, p. 407

Focus on Clusters, by the Italian Institute for Foreign Trade, The Economist promotional supplementFebruary 5-11, 2000

Le miracle du Pô, by Sergio Arzeni, Figaro Magazine, 3 mai 1997

187

TOWNSHIP ENTERPRISES IN CHINA AND FDI,

Zhang Tianzuo,Deputy Director, Bureau of Township Enterprises, Chinese Ministry of Agriculture

Township enterprises are a new phenomenon emerging from China’s adoption of Reform and Openingpolicy, and from a great initiative of Chinese farmers. Township enterprises cover all enterpriseswhich take the investments of rural collective economic organisation or farmers as core, and which areowned by townships and villages with the obligation to support agriculture. Since the adoption of thereform and opening policy, township enterprises have flourished and become an essential element ofthe Chinese rural economy. Chinese rural economy accounts for half of the whole industrial economyand is considered one of the important supports for national economy in a series of policies by theChinese government. In 2000, the added value completed by township enterprises reached some US$320 billion, covering 64 % of the total rural social added value and 30 % of the national GDP.

These enterprises also provided employment opportunities for 128 million labours and paid salaries ofabout US$ 8.5 billion. One third of the net income of farmers came from township enterprises.Furthermore, the value of exports by these enterprises reached about US$ 84 billion, representing onethird of the total national exports in foreign trade, with RMB 200 billion yuan levied in tax, accountingfor 16 % of the national total. The growth and expansion of township enterprises have not onlybrought great change to the rural economy and national economy as whole, but have also paved asuccessful way for such an agriculture-predominant country to gradually realise modernisation inagriculture and rural area, to speed up the process of national industrialisation, to facilitate the reformand opening up, and to promote sustainable economic development.

Undoubtedly, the introduction of foreign funds has played a key role in driving the development oftownship enterprises. Over 90 % of small and medium enterprises in China are township enterprises.Due to the fact that township enterprises are a product of the market economy in China with thecharacteristics of a flexible and new mechanism, they are uniquely placed to absorb foreign funds. Inparticular, with their rapid development since the adoption of the reform and opening policy, theyhave attracted more and more attention from foreign traders. By 2000, the number of joint venturesand co-operated township enterprises with foreign business reached 25,600, with cumulative use ofUS$ 30.7 billion in foreign funds, and an added value of US$ 16.5 billion produced in 2000.

Stable growth of foreign fund use by township enterprises

The absorption of foreign funds by township enterprises gradually started with reform and opening,and the development and expansion of such enterprises. In 1986, only 2,400 township enterprisesworked in co-operation with foreign traders in joint ventures, absorbing US$ 400 million in foreignfunds. But by 1990, the number of joint ventures and co-operated enterprises had risen to 7000 with ayearly absorption of US$ 1.5 billion foreign funds and a cumulative introduction of US$ 4.2 billion.

188

During the period of the Eighth Five-year National Plan, the absorption of foreign funds by theseenterprises grew in a stable way with an annual utilisation of US$ 2.6 billion.

In 1995, the number of such enterprises went up to 28,000, with a cumulative use of US$ 17.4 billionin foreign funds. During the period of the Ninth Five-year National Plan, and due to the influence ofthe Asian Financial Crisis, the absorption of foreign funds by these enterprises decreased in 1997 forthree successive years after a high growth in 1996, but still remained at a certain level. In 1999, theabsorption of foreign funds was close to US$ 3.5 billion and rose to US$ 3.7 billion in 2000. Withfurther development of the Chinese economy and China’s entry into the WTO, there will be broaderspace for involvement of these enterprises in more areas and for higher level of international economicco-operation.

Absorption of foreign funds to facilitate further development of township enterprises

Township enterprises, through absorption of foreign funds, will not only supplement their capital, butalso upgrade themselves to promote their sustainable development.

− At first, the introduction of foreign funds expands the strength of the enterprises so as tomake them rapidly develop within a short time. In recent years, one tenth of the fixedassets of township collective-owned enterprises came from investment of foreign fundsin fixed assets.

− Secondly, the absorption of foreign funds brings a new model of management for theimprovement of township enterprises. Because of the locational relationship of townshipenterprises, most of their management staff is shifted from farmers to managers ofenterprises, who mostly adopt traditional management methods. Through theintroduction of foreign funds, township enterprises will introduce new concepts andmethods of management to the enterprises, thus upgrading them and advancing them to anew stage.

− Third, the absorption of foreign funds will improve product quality and grade, as well assustainable development of township enterprises.

− Fourth, the utilisation of foreign funds brings more opportunities for enterprises’involvement in more areas and for higher level of international economic co-operation.With the introduction of foreign funds, township enterprises will directly turn towardsthe international market. This will also widen the field of enterprises’ vision and co-operation.

Introduction of foreign funds and development of township enterprises in central and Westernregions

For historical reasons, the development of township enterprises in the central and Western regions isrelatively small in the country. Currently, the added value of township enterprises in the central andWestern regions is only a little above 40 % of the national total, with labor productivity only aroundhalf of the national total, and farmer’s percentage added value of the township enterprises only over 30% of that in the Eastern region. The Chinese government has fully recognized the backwardness indeveloping township enterprises in the central and Western regions as compared to the Easterndeveloped region.

189

At present, the township enterprises which have introduced foreign funds are mostly concentrated inthe Eastern developed region. Among the foreign funds introduced by township enterprises, theEastern region accounts for 95 %, the central for 4.5 % and the Western only for 0.5 %. The Chinesegovernment is to adopt necessary measures to support and speed up the development of townshipenterprises in the central and Western regions and to promote opening of the enterprises in this regionto the outside. With the large territory and rich natural and labor resources of the Western region, weearnestly look forward to more implication of foreign enterprises in the township enterprises of theWestern region in order to jointly promote economic development, with an opportunity of WesternDevelopment and co-operation on a mutually beneficial basis.

Introduction of foreign funds by township enterprises with broad space of development

Currently, the township enterprises in China are at the stage of adjustment of industrial and productstructure. They will make efforts to implement a program for the development of their enterprisethrough science and technology, with an objective of quality so as to upgrade their industry andproducts. Undoubtedly, there is a need to introduce funds, technology and intelligence resources fromforeign countries to back up the growth of these township enterprises.

The Ministry of Agriculture, as an administrative department for township enterprises, will be active,in co-operation with other departments concerned, in introducing foreign funds for townshipenterprises. In accordance with the national “Industrial Catalogue for Foreign Investment”, we are toprepare a “Catalogue of Key Projects for Joint Venture and Cooperation Between TownshipEnterprises and Foreign Traders” in the country., This aims to encourage foreign investment in highand new technology, environmental protection, agricultural-product processing industry, etc, and tocreate a better environment for the introduction of foreign funds both in soft and hard environment.

China’s entry into the WTO will bring a broader space for the development of township enterprisesand for these enterprises to play a more and more important role in the economic development ofChina. The Chinese township enterprises have a bright future as does the development of the Westernregion.

191

REGIONAL DEVELOPMENT AND SUSTAINABLE INVESTMENT:THE CASE FOR A REGIONAL MULTI-STAKEHOLDERS FORUM

AND OBSERVATORY IN WEST CHINA,

Philippe Bergeron,Director, Regional Institute of Environmental Technology

Development finance for developing countries comes from three main sources: net export earningfrom international trade (currently around US$ 1,500 bn/year according to recent UN sources), foreigndirect investments (FDI) (US$ 200 bn/year) and from official development assistance (ODA) (US$ 50bn/year). If international trade is the most important source of financial resources for development,FDI through its capacity to build local professional competence, transfer know-how, createemployment and impact on the quality of future production and products, may be a more powerfulinstrument to advance and leverage sustainable development. ODA is increasingly dwarfed by the twoother sources of funding and there is little evidence to believe that this trend could be reversed.

Although trade and investment are two sides of the same coin, it is investment and often FDI that is atthe heartbeat of economic development. More than trade it is investment that enables sustainedemployment, capacity building, productivity growth, technology transfer and access to know-how andmarkets. Countries with an open and pro-active international investment regime tend to have higherrate of growth and more rapid decline of poverty.

Why the Focus on Investment?

An investment is not only a financial process (in fact most FDI include significant in kind assettransfers), it is an economic transformation function with important social and environmentalimplications. An investment has always border-crossing dimensions and significant leveraging andintegrating capacity. Any decision to invest (or not to invest) automatically integrate a multitude ofelements such as aspects of geography, culture, social condition, governance, policy, competition,finance, technology and science. Discussion between investors and policy makers why investment isor not made can teach a lot about the availability and richness of the surrounding social capital andpublic good infrastructure and how to improve them.

Investment, domestic or foreign, falls into four generic categories:

− Resource seeking investment that extracts natural resources (oil, gas, and mining) and /or targets other locally available factors of production.

− Market seeking investment that aims at lowering transaction cost to serve a neighbouringlocal market.

− Efficiency seeking investment that helps build economy of scale and lower productioncosts, and

192

− Asset seeking portfolio investment in which the investor is not interested in operativemanagement but look at the acquisition of participation in local companies and portfolioconstruction especially Foreign Portfolio Investment (FPI) in stock markets.

Of these various kinds, resource seeking and market seeking investments, and especially FDI, tend to bea more stable source of economic development compared to other forms of international capital flow.

In the perspective of “sustainable development”, a Sustainable Investment (S.I.) is an investment thathelps meet people’s “essential” needs. An S.I. is also an opportunity to harness a private interest forprofit for the benefit of the public good. S.I. are made in an infinite variety of sectors. More commonlyS.I. are found in health food, clean water, clean air, bio-diversity, mobility, clean energy, health care,built environment, closed-loop industry, learning, leisure, and communication.

Significantly promoting S.I. helps reach out to a broader base of potential consumers and reduceproject waste, inefficiency and risk. It can also help alleviate poverty and reduce social inequality.

The difficulty resides in defining S.I. It cannot be prescribed by a set fixed criteria. It is a perpetuallymoving target with characteristics that depend on the level of economic development, socio-culturalvalues and evolving “sustainability” risks as perceived by stakeholders. Defining sustainableinvestment requires a relentless engagement and debate with all the stakeholders who share benefitsand losses from it to ensure that a triple bottom line (economic prosperity, environmentalsustainability and social equity) is sustained. In fact an investment can win and keep a “sustainability”label when through periodic multi-stakeholders scrutiny and monitoring it succeeds to maintain abalance between economic, environmental and local community aspects and impacts.

The value of branding S.I. is multi-faceted. Three dimensions stand out.

− In the financial domain, S.I. that target a triple bottom line have unique longer-termfundamentals with excellent prospects of higher future profitability as shown in thecurrent good relative performance of SRI funds and SI stock index appearing on variousstock markets.

− In the market domain, S.I. can enhance reputation and brand name with suppliers,consumers, clients and competitors.

− In the public domain, a S.I. label is nothing less than a social license to operate thatheighten project attractiveness by local community, non-governmental organisations(NGOs), media, pressure groups, employees, and authorities.

As the large western institutional investors (pension funds, insurance, and banks) are under growingregulatory pressure to publicly document the “sustainability” aspects and impacts of their investmentpolicies, it is expected that the demand for S.I. will grow significantly in the future. This is expected toaffect the way global investors search for project opportunities and seek funding and finance. It also willaffect how investors design, document, develop and ultimately monitor the performance of investment.

What is an Asia e3 INVEST Forum?

Essentially a new networking tool for government, business and finance to foster together with civilsociety and academia, border-crossing dialogue on investment opportunity and track knowledge aboutS.I. development. Such a networking tool can be applied at the Asian region level, at a country level oreven at a provincial or local level. INVEST stands for International Network for Vibrant and

193

Empowering Sustainable Transformation. e3 reflects the need to consider and sustain a triple bottomline (economic prosperity, ecological sustainability and social equity).

Asia e3 INVEST can fulfil various tasks. It can:

− act as a periodic international workshop for best practice information dissemination,project exchange and mediation between the international investor community and aregion;

− operate as a think tank to provide research and insight on evolving S.I. criteria, riskassessment and facilitating mechanisms adapted to local concerns and constraints;

− be an observatory of investments in a region and their alignment with evolvingsustainability and triple bottom line indicators;

− train decision-makers on S.I. development, management and governance practices;

− support sectoral triple bottom line local bench-marking against global best practices;

− and publish S.I. guidebooks, project opportunity, directories, self-help manuals and bestpractices pamphlets.

To fulfil its mandate as S.I. facilitator and broker in a particular geographic region, an Asia e3 INVESTforum needs to mobilise the support and participation of five key categories of partners at the highestlevel of the decision making process.

− Public authorities, governmental development agencies, investment facilitating agencies,productivity boards, and local government,

− Finance and investors, banks, funds and fund managers, and export credit agencies,

− Industry and their federations, business, companies, and chambers of commerce inmanufacturing, engineering and services in all types of economic sectors relevant for thatparticular region,

− Civil society and their representatives such as NGOs, trade unions, and electedParliamentarians, and

− Research, academia, innovation centres, technology developers, rating agencies, andpolicy think tanks.

Beyond stakeholders from the region understanding local issues and constraints, any Asia e3 INVESTforum needs to include international participants also coming from the five key categories above.

The benefits of fertilising S.I. uptake in a region through an Asia e3 INVEST forum can be farreaching. It can assist a region understand how to leapfrog economically through more efficientdomestic and foreign direct investments. It can provide an attractive channel to tackle Asian povertyand social sustainability issues and help provide a region with an alternative road map on how toredress severe triple bottom line imbalances.

By focusing attention on investment especially foreign investment for which most Asian countriesaggressively compete, an Asia e3 INVEST forum can help mobilise government, business, academiaand civil society at the highest level of the economic development policy. Due to the cross-border andcross-fertilising character of investment, it helps attract intellectual leadership on key issues ofeconomic development (innovation, productivity, entrepreneur-ship, risk, finance, governance, andsocial responsibility).

194

Being international an Asia e3 INVEST forum helps nurture intra-regional and internationalnetworking and strategic links toward sustainable international trade and investment opportunitybetween the region and the wider world.

Finally, because of its capacity to address broader levers of behavioural and system-level changes(climate change, poverty alleviation, and governance) an Asia e3 INVEST forum should be able toenlist international institutional support from advanced countries.

For investors and finance an Asia e3 INVEST forum helps deliver credible information that investorscan interpret on regional investment climate and “sustainability” opportunity of local investment. Itcan also offer a better understanding of the links between FDI risk, return and sustainability. Thislowers uncertainty for business, diminishes risks for investors and reduces the transaction costs forproject proponents on the supply or demand side of S.I.

Research projects undertaken under an Asia e3 INVEST forum umbrella could help explore newfinancing mechanisms and intermediaries especially for medium size projects (typically between 2 to20 million US$) that are traditionally too small to be really attractive for consideration by manyinternational main street banks. An Asia e3 INVEST forum can also help address the potential formicro-finance to reach out to the Asian poor and facilitate the mobilisation of domestic financialresources needed to attract and leverage international and foreign capital.

For governments and academics an Asia e3 INVEST initiative enables informal networking ofprofessionals and stakeholders and provides a source of inspiration for intellectual leadership on manytopics at the edge of attracting and facilitating investment.

For NGOs, especially advocacy NGOs, an Asia e3 INVEST forum offers the possibility to addresstheir own triple bottom line short-comings which lays in their limited capacity or willingness topromote, engage and contribute to economic development.

For local industrialists and business people, an Asia e3 INVEST forum provides a vehicle to winaccess to sectoral (triple bottom line) investment best practices and benchmark indicators. It serves asan access channel to an international marketing network for investment with outreach to a wide groupof providers and users on the supply and demand side of investment. It can help mediate businesspartnership opportunities and facilitate access to consultant services (management, legal, accountingand technology) specialised on facilitating quality investment.

The Case for Central and West China

Central and West China are typical regions where the establishment of an Asia e3 INVEST forumwould be desirable and value adding.

Both regions suffer from major economic, environmental and social imbalances that need to beaddressed. According to 2000 statistics Central China attracts only 10 % of FDI into China, theWestern region only 4 % with 86 % going to the economically vibrant coastal region in the East. Interms of per capita GDP, Central and Western China are also well behind the rich coastal areas;around 70 to 90 % (of the national average) for the central provinces, 35 to 70 % for Western Chinaagainst 150 to 400 % for the coastal Eastern provinces. More critical recent growth patterns seem toindicate a further economic divergence between the rich coastal areas and the poor hinterlandprovinces. This triple bottom line imbalance is clearly unsustainable. The excessive resource, land andenvironmental pressures along the Eastern coast as well as the growing poverty and social inequity in

195

the West act as negative drags on the capacity of Eastern China (and therefore China as a whole) togrow socio-economically in the future.

An Asia e3 INVEST forum would provide a tool for dialogue and a vehicle for project fertilisation andmediation between stakeholders from abroad, the rich Eastern provinces and the poor Westernhinterland. With the support of international counterparts in the five key stakeholder categories, itcould explore desirable policy for institutional, industrial and financial restructuring that could helpbuild physical and social infrastructures needed to profile Western China as an attractive investmentproposition and business partner for coastal China investors and FDI.

It could help industrialists from East and West China together with foreign partners in the globalsupply chain to reflect under which conditions and with what kind of incentives, internationallycompetitive product value chains could be created and nurtured between the resource rich Westernprovinces and the exporting Eastern coast.

Using experience from other countries that have mastered comparable regional industrial restructuring,it could also help identify critical education, training and research capability gaps that would need tobe filled to uplift Chinese hinterland workforce capability to international productivity requirementrequested in the global supply chain. These education and training needs could in turn representinvestment opportunities by themselves that could be opened and made attractive to foreign investors.

The forum could further help brainstorm and facilitate the emergence of institutional frameworks,business models and financial and incentives schemes needed to mobilise the interest of investorscapable to develop quality utilities (water, energy and communication but also regional and inter-region mobility infrastructure) that are preconditions for industrial investment.

The forum could also help research and understand the growing triple bottom line risks, that thediverging economic imbalance between the Eastern and Western provinces represent especially for therich Eastern coastal regions. It could also try to envision and document the mutual economic benefitsthat could derive from converging economic progress between Eastern and Western China. This couldhelp raise the interest of industrialists in the Eastern region to be more attentive and pro-active inseeking value adding economic partnership and investment in Western China.

In conclusion the fact remains that “everything else being equal”, capital and investment are alwaysinterested to flow where they are most urgently needed because it is where the prospect of a higherreturn are. Central and Western China is such a place. It has a desperate and urgent need and interestfor both. The best role of an Asia e3 INVEST forum for Central and Western China would be toaddress all that “everything else” especially the weak social capital, the degraded environmentalcommons and the missing public good infrastructure, that currently conspire to keep Western China anunattractive place to invest in.

197

FOREIGN DIRECT INVESTMENT AND IMPORTANCE OF THE “GO WEST”STRATEGY IN CHINA’S ENERGY SECTOR,

Mehmet Ögütçü,Principal Administrator, Directorate for Financial, Fiscal and Enterprise Affairs, OECD1

Introduction

China has grown into a “global energy power” as it consumes one-tenth of annual global energyoutput (second only to the United States) and ranks third in energy production (behind the US andRussia). Its market also is seen to have the greatest potential for developing energy products, services,and technologies. In the coming decades, how China plans to satisfy its ever-increasing demand forenergy will definitely have a significant impact on both global energy production and supply. AndChina’s energy-rich western region is likely to play an increasingly important role in energydevelopment.

With Gross Domestic Product (GDP) growing at an average rate of 9.5 percent for the last fifteenyears, China has the world’s fastest growing economy. This rapid pace of growth and industrialisationhas caused economic strain, which is particularly noticeable in the inability of Chinese commercialfuel production to keep pace with demand. If China allows its commercial energy supply to fall muchfurther behind demand, massive energy imports will be necessary in order to avoid severe bottlenecksin industrial production. Such an energy shortage could impact world energy markets, and possiblyaffect the worldwide energy security if China decides to balance the excess of demand over supplywith imports.

In terms of overall energy supply, China has the resources to meet rapid economic growth with onlymodest efficiency gains. However, there will be major disconnects between available and requiredfuels. Specifically, there will be severe shortages of petroleum and an over-abundance of coal. ShouldChina adopt measures to encourage fuel substitution, the fuel imbalances force a dilemma. If importsare restricted to allow domestic prices to reflect the scarcity of oil, the ensuing market dislocations willhurt development; if imports are allowed, the cost will drastically reduce China’s ability to financebadly needed energy infrastructure projects. However the energy supply problems are resolved, energydemand will continue to grow rapidly, led by the industrial sector.

Geography and geology shape China’s energy system fundamentally2. Coal has accounted for roughly75 percent of China's primary energy mix for the past quarter-century. Oil accounts for about 20percent, hydro (5 percent), natural gas (2 percent) and nuclear (1 percent). China's largest and fastest-growing energy demand is in the southern and eastern coastal provinces, but its energy endowmentsare located in the North and West. These geographical facts have reinforced decentralisation trends inChina’s economy and shape its energy options.

198

In terms of available energy resources, the problems China faces are not from extraction ordevelopment, but distribution. The lack of infrastructure is further inhibiting the development of newpetroleum resources, particularly in western China. There is only one railway into the region, makingdelivery of both supplies and personnel difficult at best. Unless these infrastructure problems areresolved quickly, increases in resource production will be essentially meaningless because the Chinesewill be unable to get the fuels to consumers.

While predicting what China will look like in the next five years is a daunting undertaking, every twoyears OECD’s International Energy Agency (IEA) makes an effort to project China’s energy futureover the two subsequent decades. IEA’s latest projections show China, including Hong Kong SAR,accounting for 23 percent of world primary energy demand increase between 1995 and 2020. Thisleaves about half the increase for the rest of the world. Meeting such a huge demand requires massiveinvestments, as well as policy adjustments to facilitate these investments. The World Bank estimatedthe cost of demand infrastructure, over a 10-year period too 2004, at US$1.5 trillion, of whichtransport accounts for US$600 bn and energy for US$490 bn.

After many years of neglect China’s investment in infrastructure has been picking up3. Chinese leadershave grasped the plain reality that massive energy infrastructure investments needed to produce andtransport increasing energy cannot be realised unless adequate foreign investment and technology aremobilised4. The government has made significant strides over the past few years towards opening itsenergy sectors to foreign capital, technology assistance and global trade. The scope for foreign directinvestment in the petroleum industries is vast.

An Overview of China’s Oil and Natural Gas Industries

China is facing a widening gap in its oil supply and demand. Oil production stagnated during the1990s, as rising output from offshore fields has offset declines in a number of important eastern oilfields. However, demand continues to rise, particularly for transport fuels, resulting in a continuingincrease in imports of both crude oil and petroleum products. By the end of 1999, China’s externaldependency for oil had risen to 26 percent. At this level of import dependency, the domestic markethas become increasingly affected by changes in the international market, leading to severe disruptionsin early 1998, when international oil prices collapsed.

China’s total oil reserve estimates are uncertain. The IEA projections are based on reserve estimates of29.5 billion barrels. This matches a conservative view of the development of Chinese oil production.Production grows till around 2010 and then declines to about 2 million barrels per day (mbd) by 2020.The Figure below compares expected oil production and demand. The gap between domesticproduction and demand widens, especially after 2010. It is projected that China will be importingmore than 8 mbd by 2020, making it a major importer in the world oil markets. In comparison,projected net imports of the OECD Pacific region by 2020 are just at 7.6 mbd.

199

Domestic Supply and Net Oil Import in China

-101

2345

6789

1011

1980 1996 2010 2020

mbd

Net imports Supply

China’s natural gas production has been gradually rising since the mid-1990s, as new fields come online, particularly offshore fields, and new pipelines are built. Despite the recent growth, natural gasstill accounts for only about 2 percent of the nation’s energy mix, the same as in 1980, and significantgrowth requires long-term investments in development of new resources and infrastructure forimports. Current output is about 23 billion cubic meters (bcm) per year, but China has targetedexpansion of combined onshore and offshore output to 30 bcm in 2005 and 50 bcm in 2010. Output in2010 is to be supplemented by annual imports of 50 bcm, but this assumes optimistically that aplanned 3 million tons LNG terminal in Guangdong and several cross-border pipeline projects goforward. China also plans to produce up to 10 bcm per year of coalbed methane by 2010, but this willrequire significant investment to raise it from its current level of 500 mcm.

China has made clear its intention to encourage the use of natural gas, in particular to boost itsutilisation in the power generation and the residential sectors – both sectors in which gas is stillmarginal. Used for power generation, natural gas has less unit capacity investment costs, shorterbuilding periods, more operating flexibility, and reaches higher energy efficiencies than any othersource of energy. It is in this sector that gas is expected to grow fastest, making it the largest sector forgas by 2010. However, gas in power will increase mainly with economic growth and the need formore power generation, less by displacing coal fired power units. Its growth will thus most likely beconcentrated in the coastal areas and in the large cities, since these will be the centres of economicgrowth5.

Even in the short term, despite China’s large gas reserves, gas imports are inevitable. For the coastalareas, many of China’s fields are too distant for the gas to be piped to market economically. Optionsunder review include imports of liquefied natural gas as early as 2002. In addition to LNG imports,long-distance pipeline gas imports from Russia and/or Central Asia are being discussed. Preliminarydiscussions with Russia include plans for a pipeline that could eventually extend to Japan via theKorean peninsula. But the costs involved with such LNG or long-distance pipeline projects represent aconsiderable challenge. The realisation of such projects will depend on their economical viability, andthus on whether policy makers and potential investors – national and foreign – can rely on an adequateeconomic and regulatory framework.

200

The government has made investment in natural gas more attractive by adjusting domestic pricescloser to internationally comparable levels. However, gas pricing varies substantially from city to cityand in the absence of a national pipeline network, a true market for natural gas does not yet exist.Potential demand for natural gas in China is likely to be as large as any potential supplies, at least inthe short term. There is currently very little natural gas-fired power generation in China, but thecountry would benefit enormously by replacing coal-fired power plants (particularly small ones) withgas turbines. As a result, growth in natural gas consumption in the next few years will likely be moreaffected by supply constraints than the level of general economic activity, even if overall energyconsumption continues to decline.

Foreign Investment in China’s Energy Sector

China faces two urgent pressures: to develop its domestic energy system rapidly and massively asdemand swells with growth; and to establish secure access to energy from abroad to satisfy risingimport demand. These goals, coupled with the pressing need to build physical infrastructure, will bedifficult to achieve without private foreign investment and technology.

Securing finance and investment to modernise the energy infrastructure is clearly a central priority forthe Chinese government. Although the energy sector is still dominated by state-owned enterprises(SOEs), foreign investor participation is being encouraged with the aim of expanding infrastructureand introducing new technology. The government has recognised the importance of liberalisation andopenness to FDI as demonstrated by growing Chinese joint ventures with multinational corporationssuch as Shell, BP Amoco, Enron and invitations to foreign investors to participate in internationalinitial public offerings (IPOs) of PetroChina, CNOOC and SINOPEC. These measures are designed toattract the capital and management expertise to transform inefficient state-dominated economies, whileeasing the burden of this transformation on the public budget.

Before 1990, no effort was made to attract foreign investors to China’s public utilities and energysector. This was in contrast to the rest of the China’s economy, which has become the world’s secondlargest destination for direct investment inflows since reforms began more than two decades ago.Official hesitation to open the sector manifested itself in heavy state intervention, long andcomplicated approval processes and the lack of an institutional and legal framework comfortable forinvestors. The investors continue to criticise this lack, especially the ambiguous separation ofinstitutional responsibilities between the central and lower-level governments. Permission to investstill requires approval from both the government authorities and the SOEs involved; the SOEs can facea clear conflict of interest as they seek to protect their own market positions. The partial movestowards market pricing also are problematic.

Nevertheless, the situation clearly has improved since 1990. Chinese authorities have overcome muchof their reluctance to accept a foreign presence in the sector considered “strategic”. Recent energy-market reforms, expanded capital markets, the deregulation that has occurred and state-sponsoredinitiatives have all spurred both FDI and foreign portfolio financing in China’s energy sector. TheSOEs themselves participate in and seek ventures with foreign investors much more frequently thanbefore. Yet, the pace of foreign energy investment, especially in relation to China’s needs, still doesnot match its buoyancy elsewhere in the economy, but much change has occurred. Much more mustoccur if China wishes to meet the financing and technology requirements of its domestic energyinvestment targets.

China's state-controlled oil industry began to selectively open to foreign investment since 1982, firston offshore oil exploration in the East China Sea and the South China Sea, and later in the Tarim

201

Basin. Chinese officials have had high hopes that the Tarim Basin would become their version ofKuwait, and estimated Tarim oil and gas reserves as high as 150 billion barrels of oil6. A number ofexploration blocks in Tarim were given to Western and Japanese investors, but thus far, they haveproduced only less than 9 percent of the total Chinese production. While Tarim may have largepotential reserves, the terrain is hostile: oil is in deep wells and isolated, hard to extract. Moreover thelack of infrastructure requires investment in roads and telecommunications to develop any oilresources, and nearly 4,000-km long pipelines to get it to markets.

Similarly, despite extensive exploration by Western firms in the East and South China Seas, onlysmall pockets of oil have been found, many not commercially exploitable. One focus of currentexploration activity is the Bohai Sea area off the coast of Tianjin, which may have more than 1.5billion barrels of reserves. While modest new offshore finds are probable in the future, they will havelittle impact on Chinese oil balance. It is frequently reported (and widely assumed) that territorialdisputes between China and six ASEAN states over the Spratly islands in the South China Sea, as wellas the Sino-Japanese dispute over the uninhabited Senkaku/Diaoyutai islands in the East China Searevolve largely around massive oil and gas resources.

In petroleum exploration and development, the Chinese government permits foreign companies tooperate only in specific regions approved by the State Council in conjunction with CNPC, which hasexclusive charge of the activities. Policy favours the central and western regions with concreteimprovements in their investment climate, including recent removal of mandatory export performancerequirements, so that foreigners may now sell their energy products without hindrance in the domesticmarket. CNPC has signed 48 exploration and production contracts with foreign companies. Thesecontracts have lured actual foreign investment of around US$580 million out of a contracted US$1.12billion as of end-1999, in concessions with a total area of over 25,000 square kilometres.

In downstream operations—refining and petrochemicals—the focus is shifting from CNPC toSINOPEC and CNOOC as the chief deal-makers with foreign investors, although CNPC is not absentfrom these businesses. SINOPEC is upgrading existing refineries (foreigners are welcome), and hasallowed Total of France to finish its new Dalian refinery, with projected production of 100,000 b/d.Plans for several foreign and joint-venture refinery projects linked with SINOPEC, however, havegone on ice.

Shell was and is the first and biggest foreign investor in China’s energy scene. In early 1998, ShellChemicals and CNOOC signed a framework agreement for the next phase of a US$4.5 billion joint-venture petrochemical complex—the largest of its type in China—in Guangdong Province. Theproject has a complex history, illustrative of the long lead times of such investments. Projectconception goes back to the late 1980s; China approved its registration in 1991; the feasibility studycame forth in 1994, for a combined refinery and petrochemical complex. In 1997 the partners (Shelland CNOOC holding 50 % and 40 %, respectively) submitted an amendment to the SDPC thatproposed constructing the petrochemicals complex before the refinery. The joint venture’s physicaloperations would begin in 20037.

Consistent with the policy of many Middle East oil exporters to invest in downstream facilities of theircustomers in exchange for long-term import contracts, Saudi Aramco plans a US$1.5 billion deal toinvest in and supply oil to joint venture refineries in China that would both sell output bothdomestically and as exports. Currently, Saudi Aramco’s negotiations centre on expanding andupgrading the Thalin refinery at Qindao in Shandong Province as well as allowing for some Saudipresence at the Maoming refinery in Guangdong8.

202

China’s offshore oil production development has depended from the start on heavy participation offoreign companies in exploration and development. In fact, the offshore sub-sector offers the notableexception to China’s reluctance until the present decade to open its territory to internationalinvestment. China opened the South China Sea to foreign firms in 1980 and the East China Sea(including Bohai Bay) in 1992. CNOOC has tried hard to adopt standard international investmentpractices, and it has benefited greatly from an array of joint-venture operations. As a result, offshorework has gained a much higher profile, as the older onshore fields demand ever-increasing effort tomaintain production, and as the Tarim basin has still uncertain prospects.

To date, CNOOC has signed about 126 contracts and agreements with 67 companies from 18 countriesand areas. They involve US$5.38 billion in foreign capital, some 58 percent of the total investment inoffshore oil exploration and development. The situation continues to evolve, and reports of newventures appear regularly in the trade press. Meanwhile, the joint statement issued by China andVietnam in early March 1999 provided a boost to oil and gas development in the Beibu Gulf by thetwo neighbouring countries9. Both sides agreed to resolve the existing border and territorial issues andplan to resolve the issue of the demarcation of the Beibu Gulf before the end of 2000.

The development of a large natural gas industry requires the participation of a large number ofindustrial players. Each is required to make substantial investments. The potential risks and rewardsassociated with their investments must be clarified by the national and local gas policies, andsupported by the relevant institutional structure. The most important question facing the upstreaminvestors (exploration, development and high-pressure transport) is whether the wholesaler or largecustomer has the ability to pay for the gas supply for a period of ten to twenty years. In a simple linearmarket with one supplier and one major consumer linked by a pipe (or a LNG tanker) the credit ratingof the buyer is relatively easy to establish. In a large country such as China, where a nation-wide gasmarket may emerge, which is to some extent integrated with overseas markets and where substantialresources of alternative forms of energy exist, this question assumes a far greater importance.

Another fundamental issue is how natural gas will be priced at the wholesale and retail levels, and howtransit tariffs will be established and regulated. Natural gas in China will be in three types ofcompetition: with “dirty” fuels such as coal and oil; with other “clean” fuels such as renewable energyand LPG; and between imported and domestically-produced gas. The nature of this competition willvary across the country. Substantial investments in natural gas production or transportation areunlikely to proceed until the ground rules for these different forms of competition are clarified; and thesystem for the pricing of gas is crucial. The incentives must not only be clear, but they must bebroadly the same for all players; or failing this, the competitive part of the market must be protectedfrom encroachment by the monopolist10.

FDI in China’s gas sector is increasing, particularly in exploration and production, LNG receivingterminal construction, domestic and cross-border pipelines and gas-fired power plans.11 Enron isoperating a gas-fired plant in Hainan Island. Chevron has expressed interest in natural gas explorationand production efforts in Bohai Bay, the South China Sea and Shengli Basin12. The largest foreignparticipant in China’s onshore gas sector is Shell. In September 1999, Shell signed a US$3 billioncontract with CNPC to jointly explore and develop gas resources in Ordos basin. In 1999, Enron andCNPC undertook a separate plan to build a 503-km pipeline to move 3bcm a year of gas from Sichuanto Hubei province. Enron took a 45 percent share of the 1.9-bn Yuan project, expected to be completedin 2000. Further proposals have been made to pipe gas from Russia’s Sakhalin region to Beijing andother Northeastern Chinese industrial centres.

Early this year, CNPC signed a natural gas exploration contract with Italian Oil Company Agip13,allowing Agip to be the sole operator of a 7,000-square-kilometer onshore concession block in

203

Qinghai province. The block has a possible reserve of 500 bcm of natural gas. If the field turnscommercial, CNPC has the right to become a joint developer holding up to 51 percent. Any eventualgas production would most probably be piped to east China through a 950-km pipeline from Qaidamto Lanzhou, which CNPC will start building this year.

IPOs to Bring Foreign Finance to Petroleum Companies

Chinese reform passed a milestone when its petroleum companies were allowed to offer stocks tointernational equity investors in Hong Kong, London and New York in search for additional foreignfinance. China has accepted being subjected to the high standards of international capital markets,including requirements that investment bankers research their financial records under strict guidelines.

While some Chinese enterprises already have successfully secured public listings abroad, including onstock exchanges in Hong Kong, the US, Singapore, Canada and the UK14, only six Chinese companiesmade it to the Fortune 500 list in 1999. They won admission not because of their performance, butmainly because of the size of their employees. According to the Chinese government’s own figures,the average assets and sales of the country’s top 500 companies are 0.9 percent and 1.7 percentrespectively of those of the average Fortune 500 company. In 1998 China’s top 100 firms hadoverseas investments of a mere US$2.6 billion.

Anxious to raise capital for its oil and gas industries, China is pushing forward its plans to launchinitial public offerings (IPOs) of shares in its national petroleum companies. The first attempt tookplace in October 1999 with the launch of an IPO for CNOOC, the most sophisticated and market-oriented of China's energy companies. The offer had to be quickly cancelled, partly because themarkets were jittery and partly because the price had been set too high15. There were also questionsover CNOOC’s reported intentions to use part of the funds raised to pay off retiring and redundantemployees. Whatever the real reasons, the withdrawal of the CNOOC IPO has raised questions overthe IPOs planned for the much larger CNPC and Sinopec.

PetroChina was created as a joint stock company in November 1999 and holds most of CNPC's assets,liabilities and interests in domestic exploration and production, refining and marketing, chemicals andnatural gas businesses. PetroChina operates 29 refineries throughout China, 17 chemical plants. Thecompany also owns and operates about 11,100-km of pipelines, most of which are used for naturalgas. It had about 480,000 employees as of September 199916. PetroChina's capital expenditure plansinclude the construction of eight natural gas pipelines, many in central China but also feed Shanghaiand Beijing. PetroChina offered its shares in the New York and Hong Kong Stock Exchanges in earlyApril 200017 in the hope of raising as much as US$5 billion18. After the dust settles, Sinopec, thesecond largest oil company, also is preparing to go public, perhaps in the second quarter of this year.The vehicle, China Petrochemical Co Ltd., will be fully integrated, with business ranging from oilexploration and refining to the production and marketing of oil and petrochemical products19.

These IPOs are aimed at easing financial constraints for new investments20 and promoting reformprocess. Ironically, the potential success of the IPOs relies, in large measure, on a perception byforeign investors that substantial further reform is unlikely in the short term. Regardless of theirsuccess, the important point is that they are looking to the market rather than China's state-ownedbanks to finance future operations. CNPC, Sinopec and to a lesser extent, CNOOC are currentlyworking hard to reach commercial viability. The combination of financial pressure from the reformsand new competitive pressures after China’s entry into the WTO may put to the test their ability tobecome competitive multinationals over the coming decade.

204

China’s Investments in Foreign Energy

With its entry into the volatile global energy bazaar as an importer, China quickly learned the hazardsof relying solely on purchase policies in open markets. In May 1997, former Premier Li Peng blessedChinese involvement in the exploration and development of international oil and gas resources andtied such projects specifically to the objective of securing stable, long-term supplies of oil and gas21.CNPC’s overseas investment forays include, so far, several Middle Eastern countries, plus Argentina,Bangladesh, Canada, Colombia, Ecuador, Indonesia, Kazakhstan, Malaysia, Mexico, Mongolia,Nigeria, Pakistan, Papua New Guinea, Peru, Russia, Iran, Sudan, Thailand, Turkmenistan, Venezuelaand the US. CNOOC has investments in Indonesia and the Gulf of Mexico, and plans new ventures inthe Middle East (especially Iran), Central Asia, Myanmar and other parts of Asia.

By the end of 1997, CNPC had pledged more than US$8 billion for oil concessions in Sudan,Venezuela, Iraq and Kazakhstan, plus another US$12.5 billion to lay four immense (but still far fromreal) oil and gas pipelines from Russia and Central Asia to China. The oil projects in Iraq, Kazakhstan,Sudan and Venezuela are large-scale.

Clearly, geopolitics is also a factor in China's overseas oil and gas activities, particularly in the MiddleEast and former Soviet Union. Beijing is very sensitive about the stability of Xinjiang province, wherethe ethnic Turkic Uyghur minority has been increasingly restive. CNPC’s entry into Kazakhstan laiddown a marker of some importance in Central Asia, where Chinese presence had previously beenminimal. The solid parts of this activity involve an investment of US$4.3 billion over 20 years inKazakhstan’s state-owned Aktyubinsk oil company, plus a 60 % stake, worth US$1.3 billion to beinvested through 2002, in a joint venture with the Kazakh firm Uzenmunigas, to develop the Uzenfield on the east Caspian Sea coast. Uzen is estimated to hold 130-200 Mt of oil, with near-termproduction at 8 Mt per year through 200222.

Under a separate 1997 oil-swap deal with Iran, Uzen oil produced by CNPC will move across theCaspian and to a refinery near Teheran, with China receiving an equivalent amount of Iranian crudeexported from Iran’s Gulf coast. Beyond that, two pipelines would carry oil and gas eastward intoXinjiang. The 3,000-km oil line would connect Kazakhstan’s western producing regions withrefineries in its north and south, then extend into western China. The extension would make little senseunless CNPC can use it to revive official interest in a long, internal pipeline from Tarim to the marketsin central and eastern China. The gas line (5,800 km from eastern Turkmenistan through China) facessimilar objections and represents an even more distant prospect. The Chinese enthusiasm for the“Energy Silk Road” seems to have cooled down recently, with the realisation that this project wouldbe uneconomical, at least in present circumstances.

Meanwhile, Moscow and Beijing have negotiated a number of joint energy projects including anuclear power plant, natural gas and oil pipelines from Siberia. High grade East Siberian oil may soonbe transported to the Transneft trunkline via a planned pipeline system to be completed in a three stageprocess, ultimately delivering 170 million barrels of oil to China per year from 2004. Although theexact route of the pipeline has yet to be decided, and shorter routes exist, the Chinese favour a longer,4,000-km route to circumvent both Mongolia and the seismically active Lake Baikal region.Completion of the pipeline from Eastern Siberia to Beijing is scheduled for 2004.

205

FDI in China’s “Go West” Strategy

The "Grand Western Development" Project encompasses two million square miles and 300 millionpeople spread across eleven provinces and autonomous regions: Guangxi Zhuang, Xinjiang Uyghur,Ningxia Muslim, Tibet Autonomous Regions, and Yunnan, Sichuan, Shaanxi, Guizhou, Gansu, andQinghai provinces, as well as Chongqing Municipality in the west. President Jiang declared thedevelopment plan crucial to China’s stability and development/ According to government sources, theso-called China’s second opening to the outside world calls for building 35,000 kilometres of newroads, including a Sichuan-to-Guangxi expressway, and 4,000 kilometres of new railway over the nextdecade. The project also includes construction of a US$14 bn pipeline linking Xinjiang’s natural gasfields to Shanghai.

The government was expected to provide US$45.5 bn in 2000 to develop the West, US$8.4 billionfrom Treasury bond to boost infrastructure and US$37.1 bn in subsidies for local governments. At thesame time, a large part of the central government’s efforts lies in cajoling better-off provinces, andstate banks, to help with its western plans. Chinese domestic banks have been asked to ensure thatmuch of their portfolios also go to borrowers in the hinterland. The Industrial and Commercial Bankof China, one of the four first tier banks in China, has already responded by increasing the proportionof its loans to western provinces. However, domestic finance and technology will not suffice toundertake such a colossal task. Foreign investors and even banks are now actively being courted.

Of the more than US$400 bn in foreign direct investment that China has drawn since 1978, only asmall proportion had gone into the west. With the western development plan, the government is nowoffering low taxes and land-use fees to lure Chinese and foreign companies that invest. Thegovernment also said that it would set up four western special economic zones that will give investorsthe same preferential treatment, as do similar zones on the coast. After China’s WTO accession andtrade barriers have begun to fall, however, such zones may not have as much appeal as when China'seconomy was more closed.

The major petroleum fields in Northeast China have seen zero percent growth since 1985 despite thecontinuous addition of new wells. Recently, the Chinese have begun to develop potential oil resourcesin the western region, specifically a basin the size of France called Tarim. However, despite Chineseoptimism, the production potential of the region is unproven. In 2001 the Tarim basin was expected tomore than double its petroleum output, but still contribute less than 3 percent to the national petroleumproduction total. Even China’s small offshore industry can produce almost double the Tarim amount.

The Chinese authorities have given CNPC the go-ahead to offer to foreign investors at least 20 newpetroleum blocks in the country’s petroleum-rich provinces23, including unexplored and producingareas in the Tarim and Turphan-Hami basins in Xinjiang, Qaidam Basin in Qinghai province andErdos Basin in Shaanxi Province. Blocks would also be offered in currently producing basins in theNortheast, which accounts for nearly two thirds of CNPC's oil production. These new concessionsmight offer better prospects for success. Moreover, the corporate tax on oil and gas companiesoperating in central and western China has been cut to 15 percent, effective 1 January 2000, from 33percent. The tax cut was one of a number of government incentives to draw more investment to theseregions in the next five years. For high-cost commercial discoveries, China also contemplates taking a25 to 35 percent stake in joint development, rather than the 51 percent set by previous contracts.

The State Council also has approved the construction of the country’s biggest natural gas pipeline atan estimated cost of more than US$40 bn. The project is next only to the Three Gorges Project inscale. Premier Zhu Rongji says that foreign companies and investors are welcome to cooperate or co-invest in this project. CNPC has finalized the routing of the 4,212-km pipeline linking the Tarim basin

206

in Xinjiang to Shanghai through 15 major cities. Recent prospecting indicates that the natural gasreserves in the Tarim basin reach 8.39 trillion cubic meters and the geological reserves accumulate494.1 billion cubic meters (bcm). Twelve billion cubic meters of gas can be transferred to the YangtzeRiver delta area and along the pipeline area every year and the supply should remain steady for 30years. The Yangtze River delta area is suffering from a resource shortage and market demand for highquality clean natural gas is high.

The pipeline starts from the west and goes east, passing through nine provinces, Xinjiang, Gansu,Ningxia, Shaanxi, Shanxi, Henan, Anhui, Jiangsu and Shanghai24. There is an estimated eight to tenyears of return terms and a 12 % rate of return. The pipeline, when completed by 2007, will have adesign capacity of 20 bcm a year25. The whole project of transferring gas from western China toeastern China, as a symbol of China’s western development, will be available to foreign investors.Foreign investors will enjoy incentives, can hold a majority of shares and can be involved in municipalnatural gas network construction26.

According to the State Development Planning Commission, foreign investors are fully able tocooperate with the Chinese in this gas transfer project. Its pipeline construction as well as constructionand renovation of the lower reaches of the municipal pipeline network can be done and operated byforeign investors. The gas transfer project is not a wholly state-owned project. Foreign investors canalso hold a majority of shares and are not limited in how much they can invest. Finally, there is nolimitation on what form the co-operation should take. Equity joint venture, contractual joint venture orother forms of co-operation are all acceptable.

The existing Chinese policy states that the Chinese must hold the majority of shares in a joint ventureor have the dominant position in pipeline construction and operation involved in the development ofstrategic resources, e.g. petroleum and natural gas. In addition, municipal gas pipeline construction islisted in the fourth project category, prohibited projects for foreign investment, in the currentCatalogue for the Guidance of Foreign Investment Industries. Thus, the changes made to the abovetwo policies embody the Chinese government’s determination to continue opening up in accordancewith the WTO requirements.

The construction of the trans-China gas pipeline will not only improve the energy source compositionin the east, but will also give a strong impetus to the development of related industries. The latentdevelopment potential of steel, cement, civil engineering and installation, and machine building andelectronics industries alongside the pipeline will be activated and a new economic growth belt willemerge. Gas from the west will also be able to supply fuel to 850 million households in the east, whichwill spur the development of the local mechanical engineering industry and the civil engineering andinstallation industry. At present, in Shanghai, Jiangsu and Zhejiang alone, there are 170 millionhouseholds that use gas in daily life. In the next ten years, the number of gas-using households will beincreased to 340 million and the emergence of a mechanical equipment market and civil engineeringand installation market worth RMB 80 billion27.

The New Institutional Setting and Policies in China’s Energy Sector

If China is to realise its ambitious energy plans with support from foreign investors, it needs totransform its energy sector management both in government and industries. This process gainedmomentum after the March 1998 reforms,28 when the government announced a re-organisation andstreamlining of government, and the restructuring of certain state energy companies. By this move, itappears – at least on paper -- that the Beijing government has wrested management of different partsof the energy system from competing ministries and agencies. However, one objective—to introduce

207

competition by separating the commercial operators from the policy makers and regulators—as yetshows few signs of being realised. Characteristics typical of “command and control” systems stilldominate the energy sector, despite serious moves towards more market-based practices.

In broad terms, China's reforms have meant significant decentralisation of authority, with provincialand local governments assuming more financial responsibility -- for unemployment, education,healthcare, pensions and other social services. This has generally meant more fiscal responsibility andautonomy for local authorities, as well as less tax receipts sent to Beijing. Not infrequently, it hasmeant competition between different levels of government. Three trends lock in the trajectory ofreform: the construction of dense networks of contractual and ownership ties between Chineseenterprises to internalise both market costs and political risks; a withering away of the centralgovernment's capacity to monitor the gradual privatisation of Chinese companies; and the risingeconomic authority of fiscally autonomous local governments that compete with each other to providemarket environments suitable for investment 29.

Multilateral Links in Internationalisation of China’s Energy

The process of restructuring china’s energy SOEs has not been painless. But there is more to come inthe post-WTO period. China is aware of the need to overhaul its energy industries before droppingtariffs and opening up to potentially less expensive imports. WTO membership will, in the long term,have positive effects on China's economy by promoting transparency, helping to create a “rule-based”economy, and strengthening the confidence of foreign investors. It will also open up the energy sectorto greater foreign investment.

Under WTO rules, China will lift restrictions on petroleum distribution, including wholesale, directsupply, retail30, maintenance and transportation. Also, tariff cuts would require Chinese companies toreduce production costs for their products to compete with imports. Oil market opening is likely to belimited and gradual. Tariff cuts mean that Chinese companies will have to reduce production costs fortheir products to compete with imports. Current trade barriers include a quota system for certain oilproducts, state import monopoly of crude, oil products and fertilisers.

Within the timeframe for lifting the import quotas, China will increase the quota by 15 percent a yearon top of the volume of the initial year. The timetable for lifting quotas is 2004 for oil products. Chinaretains its import monopoly on crude, oil products and fertilisers. No elimination timetable is set forthat yet.

The key to a free-competing market is quality and cost-effectiveness. In both aspects Chinese oilmonopolies have already begun streamlining their corporate structure, racing against each other inlaunching IPOs for capital injection and patching up their incomplete sales network. Although bothCNPC and SINOPEC ask for state protection from foreign competitors (i.e. through qualityspecifications, import-export monopoly, complicated import procedures, government purchase, strictimport qualification system, etc), competition will sooner or later arrive as a result of WTO entry andbroader globalisation process.

China’s membership in the APEC is another component of its increasing internationalisation. Apartfrom APEC’s goal of free and open trade and investment in the region by 2020, key APECrecommendations such as those related to natural gas and electricity have the potential to significantlyfacilitate energy investment and trade in the region. Much of China’s energy industries’ futuretherefore depends on whether or not they can adapt to new international rules of play within the next3-4 years of transition period.

208

In the energy sector, policy direction, i.e., degree of foreign involvement and major nationalinfrastructure investments, generally emanates from Beijing, as does final approval on other keydecisions -- with the People’s Liberation Army and Politburo weighing in with national securityconsiderations. But energy decisions are the result of an inter-active process, or less charitably, ofcase-by-case, closed-door bargaining process between various levels of authority. This processfrequently is pushed from the bottom up, at the local and provincial level, seeking approval at thenational level, with numerous actors in the process including local firms, subsidiaries of larger SOEs.Not infrequently, decisions made in localities or provinces distant from Beijing are made that arecontrary to existing policies, or create de facto new policies that are only later formalised by thepolitical hierarchy.

Conclusions

The reform in China’s petroleum sector requires a strong legal and institutional framework in order tominimize conflicts of interest, to promote transparency of decision-making, to reduce the chances forcollusion and to prevent the abuse of monopoly power. This type of framework not only provides abasis for industrial reform, it also enhances the probability that any mistakes made during therestructuring of the SOEs can be corrected. The restructuring of a state-dominated energy industry andthe introduction of market principles requires a well-defined vision, decisive government and a clearallocation of government tasks.

China’s increasing internationalisation is forcing its leaders to address major issues confrontingdeveloped and developing countries alike: how to cope with strengthening global competition, rapidlychanging technology, blurred economic borders and controls, and increasingly demandinginternational responsibilities and obligations. China’s response to these challenges will undoubtedlyhave a major impact on the performance of its energy industries in the 21st century. It is also evidentthat the country’s vast size, its poverty, and its legacy of a command economy should be borne inmind in guessing how swiftly and how smoothly free markets and reforms can be introduced to theenergy sector—and how the interests of the central government and the varied periphery can bereconciled.

The Chinese government has already taken steps in the right direction. The five-year plan (2001-2005)provides further precision to government departments, energy industries and foreign investors. Theplan stipulates a greater role for foreign investment, particularly in the less developed Western regions,to play in providing China’s rapidly growing economy with sustainable, cleaner and secure energies.The country’s steady foreign investment policy liberalisation over the past two decades augurs well forcontinued FDI inflows to the energy sector, particularly to the petroleum and power industries.

At this juncture, China does not need to introduce a special foreign investment policy for energy.Rather, it needs an effective and comprehensive national energy policy, which is based on a relianceon market forces and which embrace a broader set of policies including competition, taxation,environment, good public governance, and regional development goals. Such a policy will by itselfhelp attract greater inflows of foreign direct investment and help China to cope with its increasinglydifficult energy challenges at national and regional levels.

209

NOTES

1 Head of Non-Members Liaison Group and OECD Global Forum on International Investment, DAFCMIS. He can be contacted at [email protected]. This paper draws primarily on China’sQuest for Energy Security Worldwide (Paris, 2000, IEA) of which he is the main author. The viewsexpressed in this paper are his own personal and do not necessarily reflect those of the OECD/IEAand its Member countries.

2 Whether it is gas-rich Sichuan, oil-rich Heilongjiang, coal-rich Shanxi or energy resource-poorGuangdong, each province has its own unique energy imperatives, its own economic logic and senseof self-aggrandisement, and its own set of ideas of how to utilise and/or obtain resources to meet itscurrent and anticipated needs.

3 Across the economy, it averages around 6.5 % of GDP, well above the developing-country average of4 % and not far from the World Bank’s recommended level of 7 %. In March 1999, Finance MinisterXiang Huaicheng announced a 14.7 % rise in budget expenditures, largely on infrastructure.

4 See for further details “China’s Worldwide Quest for Energy Security”, IEA, Paris, 2000.

5 New gas-fired power generation will provide the anchor for new gas supply projects. Once the anchoris established, distribution systems can be developed to expand the supply of gas to surroundingindustry, commercial enterprises and households.

6 However, the highest-end estimate of potential reserves in Tarim cited by the IEA is 80 billion barrels.

7 Shell has other ventures as well. They include a petrochemical plant in Hainan; a possible pipelinebetween Guangzhou and Hainan; a lubricant blender under construction in Zhejiang’s Zhapu port; anda recently agreed petrochemical joint venture with a SINOPEC company in Nanjing, JiangsuProvince, to which Shell will bring advanced technology and in which it will hold 60 percent of theequity.

8 As China continues to import increasing quantities of Middle Eastern crude oil, it must modify andupgrade its refineries to deal with it. This falls under refinery investments, which involves jointventures with its Middle Eastern crude oil suppliers.

9 China Daily, 7 March 1999, Xiao Zhao, p.1.

10 Policy, Institutional and Regulatory Requirements for the Development of a Natural Gas Market InChina, Philip Andrews-Speed and Stephen Dow, University of Dundee, IEA-China Natural GasConference, November 1999, Beijing.

11 Kalicki, Jan, Counselor to the Department of Commerce, “Regional Energy Development &Transportation: the Commercial Dimension”, presented a US/China Oil and Gas Industry Forum,sponsored by US DOE November 2-4, 1998.

12 “China-Foreign funds flow into natural gas”, China Daily, June 6, 1999.

13 China CNPC To Sign Exploration Contract with AGIP, Singapore, February 24, 2000, Reuters.

14 “China: The Favourite Asian Destination of Foreign Investors”, Express China News, Issue No: 96-10, October 1996.

210

15 CNOOC dropped the offer price by one-third to $18 a share and still found no takes. Yet CNOOCplans to refloat a smaller issue (about $1 billion) in 2000.

16 SINOPEC Global Stock Offer Gets Ready to Boil, Shanghai, 28 February 2000, Reuters.

17 China International Capital Corporation and Goldman Sachs Asia LLC are the joint global co-ordinators and bookrunners. Bear, Stearns & Co. Inc., Credit Suisse First Boston and Donaldson,Lufkin & Jenrette are other underwriters for the IPO.

18 PetroChina Files for U.S. IPO, 29 February 2000, Reuters.

19 The other nine companies formerly under Sinopec, which were transferred to the vehicle, list sharesfor domestic investors on the Shanghai or Shenzhen stock exchanges. The Shanghai-listed companiesare Hubei Xinghua Co and Qilu Petrochemical Co. The Shenzhen-listed firms are Wuhan Phoenix Co,Shengli Oil Field Daming Group Co, Shijiazhuang Petrochemical Co, Shandong TaishanPetrochemical Co, Wuhan Petroleum (Group) Co, Yangzi Petrochemical Co and ZhongyuanPetroleum Co.

20 One should note that China has excess domestic savings that can be channelled to infrastructureinvestments if attracted wisely by secure high rates of return. The gross domestic savings rate hoveraround 40 percent since 1993. Reflecting this large amount of savings is the $750 billion of householdsaving deposits in the banking system, which continues to grow.

21 According to official statistics, CNPC’s overseas projects produced a total of 3.25 Mt of crude oil and852 mcm of natural gas in 1998. CNPC obtained 1.89 Mt of crude oil and 501 mcm of natural gas asits share of total production, generating $117 million of sales revenue. At of the end of 1998, CNPC’soverseas projects had acquired a total of 601 Mt of recoverable reserves, of which CNPC’s sharetotaled 400 Mt.

22 To get the deal, then Premier Li Peng competed with Vice President Al Gore in lobbying the Kazakhs.In addition, to close the deal, China agree to build a pipeline from western Kazakhstan to its Xinjiangprovince (estimated cost: $4.5 million) and a shorter pipeline from Kazakhstan to Iran. One impetusfor this shopping spree appears to have been a need to spend the cash or have it returned to Beijing’sgovernment coffers.

23 China’s CNPC To Offer New Oil, Gas Blocks In 2000 , Beijing, Feb 28, 2000, Reuters

24 The gas transfer project construction is divided into two phases. The first phase will beginconstruction of a pipeline from Jingbian, Shannxi to Shanghai, in 2001 and will complete gas transferin 2003. The second phase will begin construction of a pipeline starting from Tarim to Jingbian in2002 and will connect to the first phase pipeline in 2004. Annual gas supply capability is required toreach 12 billion cubic meters by 2005.

25 CEDIGAZ News Report no: 12, 23 March 2000.

26 China’s Gas Transfer Project is Open to Foreign Investors, Zhong Qing, in www.ultraChina.com, 8April 2000.

27 See for further details ww.ultrachina.com/english/doc.cfm?OID=197

28 Gas Matters, November 1999, p4

29 See Steven W. Lewis, "Privatizing China’s Oil Companies, " Working Paper of Baker Institute, RiceUniversity study on China and Ling-Range Energy Security, April 1999.

30 The US is pressing for the retail right for US firms in 2002 and the wholesale right in 2003. In thefinal terms of WTO, China might accede to open the retail market of oil products and fertilisers within3 years and the wholesale market two years after that.

211

SYNTHESIS OF DISCUSSIONS AND CONCLUSIONS

213

SYNTHESIS OF DISCUSSIONS

Introduction

The conference’s primary objective was to exchange views and experiences with China’s seniorcentral and provincial government officials on the changing patterns of regional development inChina, and the role of best FDI policy and promotion practices in this process. Participants also sharedvaried relevant international experiences and highlighted the significance of policy tools and goodgovernance structures in maximising benefits of FDI for regional development.

This conference brought together more than 120 representatives of OECD and non-OECD countries,central and provincial government officials and experts from China. Also attending wererepresentatives of other multilateral organisations that provide technical assistance and loans forregional development projects in China, among which the World Bank and the Asian DevelopmentBank, as well as the European Commission and the United Nations Industrial DevelopmentOrganisation. Private sector representatives, including interested members of the Business andIndustry Advisory Committee to the OECD, also took active part in this conference.

The two-day discussions focused, on the first day, on the issue of regional development and the role ofFDI, examining the challenges laying ahead in China, and sharing international experiences in thisfield, and, on the second day, on the means to attract FDI into China’s regions, concentrating oneffective promotion of FDI, and building links with local enterprises.

The main points which emerged from the presentations and discussions are summarised as follows.

Regional Development and Foreign Direct Investment

As FDI flows worldwide increase, performance gaps are widening between regions, and rapidtechnological change, extended markets and a greater demand for knowledge are offering newopportunities for regional development.

China is a country, where regional development is of a foremost priority. The launch of the economicreforms in 1978 and the shift in China’s dominant development policies from ones based on self-reliance to ones favoring comparative advantage and open door policy have attracted large inflows ofFDI, placing China among the top ten non-OECD recipients of FDI. However, these flows have notbeen equally shared: a large amount of existing foreign direct investment has been located in China’srelatively prosperous coastal regions (88 % of the country’s total FDI from 1978 to 1999), without anysignificant catching up by the interior central and western regions (approximately 10 % of total FDIflows to China in that period).

In an effort to narrow this economic gap, the Chinese government launched the “Great WesternDevelopment Strategy” (or “Go West” policy) in January 2000, aimed at redressing the growingregional imbalance and attracting greater investment flows to China’s hinterland.

214

Challenges for China’s Regional Development

Participants stressed that any analysis of the development of FDI flows over time, as well as theirregional distribution, had to take into account what factors attract enterprises to invest in hostcountries.

A factor identified by investors as fundamental concerns the regulatory framework covering all FDI-related activities in China. Establishing a competitive business environment through removal ofunnecessary regulations was considered essential by many companies, according to a survey in Japan.An efficient administrative apparatus, devoid of excessive red tape, corruption, and striving to improvetransparency and coherence, was also identified by participants as a factor likely to increaseattractiveness of Chinese regions wishing to attract FDI.

Speakers also underlined the importance of developing an adequate protection regime of intellectualproperty rights, which would contribute greatly to enhancing China’s attraction. In this respect, severalparticipants suggested that transferring authority on investment policies from the central to the localgovernments would be a major step in the development of rural areas.

Access to fundamental infrastructures was also stressed as a factor highly taken into consideration byenterprises considering investment abroad. This includes supplying stable resources of gas, electricity,and water, good transport systems, telecommunications, as well as the provision of efficient financialservices.

Attraction of FDI can also be increased through availability of natural resources. Resource seekingFDI, in particular, will be motivated by the wish to exploit interregional factor price differentials forthe multinational enterprises’ production process, a factor which could be exploited in the Western andCentral regions of China. Authorities from Western China stressed the abundance of mineralresources, energy, agricultural products, and land development available in their region.

Speakers underlined the human capital aspect in promoting FDI flows to a region. Low-labour costcan be determinant in attracting FDI to a particular region. Regarding China, however, this factor maybe considered less important, since the wage difference between regions is minor, as migrants continueto arrive in the Chinese coastal areas, thus preventing the wages in those industrial centres from risingexcessively. In addition, China’s Western and Central regions may be at a disadvantage as skilledlabour is scarce and the non-availability of managers, technicians or engineers may be highlydetrimental to the attraction of FDI. Hence, it was suggested to improve and encourage labourmobility to those regions, and speakers stressed the importance of improving education andprofessional training.

The importance of the presence of other foreign invested enterprises and existing accumulated FDIstock was also broached during the discussions. The presence of other firms and supporting industriesoperating in similar sectors of activity, for the potential development of partnerships, was quoted as anessential factor that companies take into account in making decisions on where to invest. This subjectof industrial districts was further evoked during the following day’s discussions (see part II B below).

Finally, investors stressed the importance of an attractive environment for skilled labour (Chinese andexpatriates). Local governments able to create such an environment, including schools, hospitals,parks, etc… will increase the chances of their region to attract FDI.

The “Go West” strategy was identified by participants as a positive step towards improving theattractiveness of China’s hinterland for FDI. Special emphasis was put on improving market access in

215

the Central and Western regions, relaxing equity and investment control for FDI, improvinginfrastructures, protecting the ecological environment, improving and upgrading the services sector,and developing in particular the high-tech industry.

The question of the effectiveness of investment incentives as a means of attracting FDI was alsodiscussed. Both investors and academics underlined that incentives were not critical in choosing alocation for investment abroad. Rather, enterprises tend to look at business opportunity andcompetitiveness, or study the risk profile (legal and political risk, environmental risks) of the region.This point was further discussed during the afternoon’s session (see below).

Finally, many participants underlined that the accession of China to the WTO could also improve thesituation for China’s Central and Western regions, offering lucrative trade opportunities, and theapplication of market-based rules, thus offering a safer investment environment for businesses(notably through application of international standard accounting practices, and stronger legalprotection of intellectual property rights). Furthermore, the promotion of mergers and acquisitionsinvolving FDI would provide a chance to substantially increase the inflow of foreign investment in theregion, providing, simultaneously, a solution for the restructuring of ailing state-owned enterprises.

These points were further underlined during the second session, during which different countriesexposed their own experience regarding the role of FDI in regional development, and how it could betransposed to China.

Sharing Country Experiences

Speakers outlined the necessary policies aimed at attracting foreign direct investment from abroad,which, they stressed, should essentially be based on factors taken into account by firms in makinginvestment location decisions. Since major business-investment decisions are made by businessesthemselves, the role of governments lies mainly in fostering a competitive business environment.Several lessons were drawn from OECD and non-OECD countries’ experiences presented to theconference.

It was argued by business representatives that Investment incentives, be they financial, fiscal or inkind, were not among the main factors of location decisions for their enterprises. Moreover, they maybe detrimental in terms of employment and local supply. Nonetheless, where incentives or subsidiescan be seen as counter-balancing a region’s lack of attractiveness, and where social benefits areexpected from foreign direct investment, such policies may be justified and advantageous, leading tolasting investment, attracting, in turn, further investment.

The creation of local development agencies was also mentioned by several speakers as a useful tool inpromoting FDI in regions. The aim of these agencies is not only to promote and market theirrespective regions, but also to retain and integrate existing FDI. Their role can even be furtherextended to ensure sustainable development in the region they represent. Such is the case of the South-Eastern Anatolia Project (GAP), created in Turkey, and which was presented by one speaker as anadministration whose aim is to co-ordinate the implementation, management, and evaluation of alldevelopment-related activities in the region, in an effort to respond to the problems that typically facesuch underdeveloped regions (low access to education, health care, high unemployment, etc.). Thisissue of investment promotion agencies was also evoked during the discussions of the second day,when considering effective ways to promote FDI in China’s regions (see II A below).

216

The importance of FDI retention policies was also underlined as an important aspect contributing tothe sustainable development of regions. This ensures not only that greenfield investment will endure,but also that repeated investment may ultimately be carried out. Representatives of the businesscommunity pointed out that they felt this played for a mutually beneficial situation, not only for thehost region, but also for the enterprise, which is likely to enjoy higher returns on its investments.Countries such as the United-Kingdom and France acknowledged that such policies had indeed beeneffective, and the OECD advocates such policies.

Most participants were of the view that retaining FDI could not be accomplished by the sole efforts ofgovernment agencies, but through the involvement of all stakeholders. They felt that FDI should beapproached in a globalised context, and, in that respect, recommended that linkages be establishedbetween government authorities, businesses, educational institutions, financial institutions,professional institutions, as well as the local community.

In order to make the best of FDI in China, several suggestions were put forward by conferenceparticipants:

The first suggestion was to re-orient FDI towards China’s Central and Western regions. This was feltas essential to avoid an aggravation of economic and social disparities among the different provinces.Enhancing the attractiveness of China’s hinterland by investing in infrastructures, developing forms ofinter-regional co-operation, and fostering domestic economic integration was suggested.

Diversifying the sources for FDI was also felt important. Current investment flows come essentiallyfrom Asia, which made for a fragile situation in view of the recent financial crisis in the region.Diversifying the sources for FDI (including from OECD countries) would help ensure a moreharmonious development and a more stable situation. Moreover, FDI from industrialised countrieshave been shown to generate more substantial transfers of technology.

Some speakers also suggested that China should turn to a less export-oriented FDI. Currently, exportstatistics are negligible for the Central and Western provinces of China, and their development couldbe enhanced through FDI aiming to serve the Chinese market.

Bringing Foreign Direct Investment to China’s Regions

The second day’s discussions further explored effective ways of promoting FDI in China’s regions,and focused on the importance of local capacity building.

Promoting FDI in China’s Regions: Issues and Challenges

The main reasons for the lagging behind in China’s Central and Western regions with regard to FDIflows include several factors. One speaker identified them as follows: government policies, whichfavoured the opening up of coastal areas throughout the 1980s and the first half of the 1990s; the morefavourable geographical location of the coastal areas for export-oriented industries; the harsher naturalconditions in China’s hinterland; the greater central government’s investments in the coastal regions inthe period from 1980 to 1985 (Sixth Five-Year Plan); the resource-intensive and large size of theindustries located in the Central and Western provinces, traditionally plagued by slow growth andoutdated processing techniques; and the overweighed state sector, which holds a higher portion inthose provinces.

217

The “Go West” campaign formulates a series of preferential policies to promote development in thoseregions. These include increasing government investment in the Central and Western regions of China.It also prioritises the construction of infrastructure facilities in energy, transportation, resources, highand new technologies, etc. Fiscal measures are also part of this plan, enlarging central fiscal transferdisbursement, and giving priority to China’s Central and Western regions for the allocation of specialfunds. Another essential policy consists in encouraging rational movement of personnel towards thoseregions, notably for skilled labour.

Other preferential policies have also been put into practice. Preferential fiscal treatment is beinggranted to enterprises locating in the poorer regions. Similarly, foreign equity investment percentagewill be broadened for foreign invested firms in the Central and Western provinces. Other advantagesare also applicable to foreign enterprises investing in those regions, in order to expand the areas andchannels for foreign investment.

Shanghai was discussed as an example of a Chinese region attracting large FDI inflows. Based on thisand other examples, further suggestions for promoting FDI in those regions of China that most need itwere put forward by participants.

The reform of the large state-owned enterprises (SOEs) was pointed out as an important step towardsincreasing FDI inflows and maximising their benefits for the Central and Western regions. As pointedout earlier on in the discussions, the large presence of SOEs in those regions is a major factorwithholding economic growth. Thus far, the reform of those SOEs has failed to take off quickly. Onespeaker even cautioned investors regarding investing in those enterprises.

Other participants, on the other hand, felt that SOEs could be made attractive to foreign investors,provided certain issues were taken seriously into consideration: encouraging foreign investment inthose enterprises through mergers and acquisitions; creating favourable conditions to solve theoverstaffing problems of many SOEs, notably by putting in place a sound social security system; andelaborating sensible plans to solve SOEs’ debt problems. Some speakers warned that without sucheffective policies, uncompetitive enterprises like the SOEs were likely to go bankrupt, thus causingstructural unemployment and financial problems, which would have an impact on the regions’ socialstability

Participants widely agreed that the Chinese hinterland could not be developed as a whole at one time.Rather, they suggested that development policies focus on certain cities and areas where conditionsappear more favourable. The idea would be to put forward the existing advantages of certain cities,boasting, for instance, a large number of research institutes, or electronics industries, to attract foreigninvestors.

The further development of investment promotion agencies was also underlined as a major means ofeffectively promoting FDI in China’s regions. Three main points were identified as essential for theeffective functioning of investment promotion agencies: selecting and developing appropriatefunctions, creating and effective organisational structure, and establishing mutually beneficialrelationships between national and local institutions.

Investment promotion agencies are also considered highly important in the context of the “bestpractice guidelines for investment promotion”, developed by the OECD on the basis of the examplesof smaller OECD countries. These Guidelines also define a role for government, as well as how tomaximise the benefits to the local economy. Although initially intended for use in the transitioneconomies of Southeast Europe, the Guidelines are largely relevant to the situation in China, in as faras there is a similar concern regarding how to attract investors to those regions.

218

Building Links with Local Enterprises

As discussed in previous sessions, attracting FDI can be a difficult endeavour. Yet, participantsunderlined that this was just a first step, and that once the capacity of a region to attract FDI had beenincreased, it was of prime importance to create an environment which would allow capturing the fullbenefits of FDI through linkages with local enterprise development.

It was stressed that FDI inflows were not automatically beneficial for the host regions, and could, inparticular, lead to a crowding-out of local investment and already established local enterprises. Thisgenerally comes as a result of an uneven playing field, favouring foreign-invested enterprises withregard to global factor and goods market access. Where local and foreign enterprises are at differentstages of development, this may also be detrimental to the local industries, forced to compete with themultinational enterprises at a point in time when they are not ready to do so.

Other participants dwelled on the crowding-in effects of FDI, inducing local investment andstrengthening the local enterprise sector. This is most likely to be the case where foreign-investedenterprises do not compete directly with the local industry, but rather introduce new goods andservices to the local community, thus creating new business opportunities both down and upstream,and creating large employment opportunities. One speaker quoted the case of a beverage companyinvesting in China. The company and its bottlers directly employed 14.000 people in China, but350.000 job were said to have been created in the supply chain, and a further 50.000 in the distributionsector.

In this regard, several speakers underlined that an important role could be played by the township andvillage enterprises (TVEs). Usually relatively independent from powerful local and administrativeentities, they tend to be more responsive to market developments than the large, state-ownedenterprises. In addition, a strong sector of highly entrepreneurial small and medium sized enterprisestends to attract foreign investors looking for a vivid local industry, ready to complement and reinforcetheir own business activities.

Further illustration of this attraction was provided by other speakers presenting the situation ofindustrial districts (or clusters). One participant describe industrial districts as local territorial areaswith a high concentration of small and medium sized enterprises, a strong industrial specialisation, andspecial linkage between the industries and the local population. Indeed, such districts are usuallycharacterised by a higher entrepreneurial density than the national average, a similarly high-level ofspecialised workforce, and a factor of industrial specialisation.

Participants underlined that the advantages brought about by these clusters included the developmentof innovation of products and working techniques, favoured workers mobility within the area, and,moreover, acted as a magnetic pole for investment from other enterprises, exterior to the district. Therole of governments in creating favourable conditions for the establishment of such districts was alsodiscussed.

As in previous discussions, the recommendations covered such areas as the provision of adequateinfrastructures and services, favouring links between industries and educational institutions, adoptingan efficient legislation on investment and intellectual property rights protection, facilitating access tothird markets, providing insurance for commercial risks, and possibly implementing a system offinancial facilities and incentives.

219

CONCLUSIONS AND POLICY MESSAGES,

Rainer Geiger,Deputy Director,

Directorate for Financial, Fiscal and Enterprises Affairs, OECD

The OECD-China conference on Foreign Direct Investment in China’s Regional Development:Prospects and Challenges was held on 11-12 October 2001 in Xian. The conference was opened byVice-Governor Zhang Wei of Shaanxi Province, Vice-Minister Long Yongtu of the Ministry ofForeign Trade and Economic Cooperation (MOFTEC) and Ambassador Marino Baldi of Switzerlandrepresenting the OECD Committee on International Investment and Multinational Enterprises.

Overview

Globalization demands more rapid adjustment and strategic positioning of not only countries but alsoregions, so that they are not left to lag behind or decline in the process. In the new economicenvironment, policy-makers are helping build dynamic and flexible regions and cities. They also assistthe transition from individual closed local economic systems to a new, open global system. To do thisproperly, it is important to “think globally and act locally”.

FDI has a role to play, particularly in terms of local economies’ establishing and enhancing links withthe world economy. Not only can FDI bring capital, technology, know-how, jobs and exports, but italso induces further domestic investments. Today, countries and regions within countries face strongcompetition for attracting FDI. Foreign investment often targets the most dynamic regions in theworld, notably highly urbanized areas so that only part of this flow is directed towards peripheralareas. Investments in outlying regions generally aim at establishing production subsidiaries mainly totake advantage of low labour costs, while investments with higher potential for research andinnovation have primarily been located in urbanized regions.

China’s impressive growth over the past two decades has been greatly assisted by FDI inflows.Although the volume of FDI is already high (at US$ 41 billion in 2000), there are a number ofmeasures that can be taken to attract additional flows and extend the impact of foreign investment inChina. The composition of FDI is shifting from investments undertaken by overseas Chinesecompanies (mainly Hong Kong-, Macao- and Chinese Taipei-based) to investments by large andmedium sized OECD-based corporations.

China’s economic development is characterized by wide geographic disparities between the coastalregions and the central/western regions. Two thirds of China’s population, or around 900 millionpeople, live in rural regions that are largely under-developed and have received very little in the wayof FDI inflows. As a result of the substantial changes in the national investment environment and in

220

light of China’s World Trade Organisation (WTO) accession, regions are expected to face newchallenges and opportunities.

With a view to redressing the growing regional imbalance and attracting greater investment flows, theChinese government has taken a series of measures to help improve the investment environment andprospects in the country’s less favoured regions. Regions should be able to benefit from larger FDIparticipation in infrastructure development and a number of pilot projects of this kind have alreadybeen undertaken in several provinces and autonomous Regions. China is also encouraging andfacilitating the participation of multinational enterprises in domestic state-owned enterprise reformthrough mergers and acquisitions.

Key Policy Messages

Participants at the Xian conference considered a number of follow-up actions by the ChineseGovernment, the OECD, other local and international partners on the following ppolicy messages thathave emerged from conference deliberations and that are relevant in reaping the full benefits of FDI inChina’s regional development:

− Enhance the attractiveness of China's central and western regions, in particular byinvesting selectively in infrastructure where competitive advantage can be realisticallyestablished as has been done in the coastal provinces. Identify sectors and industries withcomparative advantages and analyse the regions' strengths and weaknesses. Base FDIpolicies to attract investors on the factors that firms consider in making investmentlocation decisions.

− Develop an integrated approach that addresses broader policy areas affecting regionaldevelopment: competition, taxation, financial markets, environment, technology, labourmarket, trade, capacity building. Combine actions in economic, social and environmentalsectors and between different bodies at local, regional, national and international level.Develop effective mechanisms for consultation among key stakeholders in the strategicphases of design, implementation and evaluation of these policies.

− Develop a set of policy criteria by which to judge the investment environment and FDIattraction performances in each region.

− Remove administrative barriers, improve transparency, and promote coherence betweencentral and provincial policies. Reduced transparency provides opportunities forcorruption, creates an investment risk and has the effect of a tax on foreign companies'operations.

− Carefully consider the costs and benefits of incentives in light of the available evidencewhether they are financial, fiscal or in kind. Such incentives can be costly in terms ofgovernment revenues without having much of an impact on investors' decisions.

− Put emphasis on the presence of a reliable and transparent legal and regulatoryenvironment. What is important in the long run is that firms with different ownership cancompete on a level playing field under fair competition rules. Ensure greater coherencebetween national/provincial tax rules and policies.

221

− Promote domestic market-oriented FDI. Foreign direct investors could find it worthwhileto locate in provinces other than the coastal areas on which they have until now beenconcentrating as an easier and less costly base for exports to the rest of the country.

− Promote stronger linkages of FDI with the local economy. Encourage investments thatbuild on local resources and initiative, while taking account of the opportunities affordedby globalisation in trade, technologies and finance. Foster public-private partnershipsand small-firm networks as the most expeditious path to a dynamic small and mediumsize enterprise (SME) sector. Improve financial support services to SMEs and townshipand village enterprises (TVEs) including access to equity funding.

− Encourage industrial districts. Mobilise domestic capital and overseas Chinese businesscommunities, as they will have less concern about the risk of investing in the interior.

− Create effective investment promotion agencies (IPAs). Focus on effective strategicplanning and targeted policy actions supplemented by an appropriate organisationalstructure. Reconsider the relationship between IPAs and other institutions undertakingFDI related functions at the national and local levels.

Follow-up Actions

− Dissemination by MOFTEC of the foregoing key messages widely to regional and localgovernments across China;

− Publication of the selected papers from the conference in English by OECD and inChinese by MOFTEC by mid 2002;

− Further work on investment promotion in regions, on the basis of OECD’s best practicesmanual;

− Further work on tax treatment of foreign investment and on fiscal federalism;

− Organisation of an expert workshop on “Re-industrialisation of the Western and CentralRegions of China”, Chongqing, Spring 2002;

− Possible OECD evaluation of regional development in a particular province, similar tothe OECD territorial development policy reviews;

− Review of progress in national and regional investment promotion schemes at theplanned Xiamen Investment Fair, September 2002.

222

Liu Zuozhang,Deputy Director General,

Foreign Investment Administration, Ministry of Foreign Trade and Economic Co-operation

For many reasons the western region is lagging behind in China’s economic development. As regardsthe opening up to the world, especially on the scale and level of economic development, the westernregion is very different from the eastern region. We are well aware of these differences. We alsobelieve the difference can be a potential power and strong motivational force for development. In thepast two decades, the western region has witnessed a relatively rapid development.

With the enforcement of the Great Western Development strategy, infrastructure and investmentenvironment has significantly improved in the western region. More areas have been opened to foreignand domestic investment in the region, and the procedures for investment project approval has beensimplified. The government has adopted a series of policies in particular to encourage foreigninvestment in the region. To be specific, the major policies include:

− FDI projects under “The Catalogue of Advantageous Sectors and Advantageous Projectswith Foreign Capital Utilisation” are eligible for policies implemented for encouragedprojects in the “Guiding Catalogue of Sectors for Foreign Investment”. The import ofself-use equipment, matching technologies, fittings and spare parts are offered some taxexemptions. “The Catalogue” is focused on encouraging processing of agricultural andanimal husbandry products, construction of transportation, energy, infrastructure,development of mineral and tourist resources. The ”Catalogue” also encourages FDI insectors such as forestation, rational development and protection of water resources,improving ecological environment, transformation of the existing capacities, renovationand manufacturing of new types of electrical parts and components.

− Encouraged FIEs set up in the region can enjoy 15 % income tax rate for another threeyears after the currently applied tax holidays.

− Widen channels of FDI, expanding trial BOT as a form of FDI and start TOT on pilotbasis.

− In encouraged and permitted industries, attract FDI by transfer of operating rights,selling equities, restructuring, and mergers and acquisitions.

− FIEs reinvesting in the central and western region shall enjoy treatment as FIEs ifforeign ownership is over 25 % of the total investment.

− Expanding areas open to FDI. Encouraging FDI in the region in agriculture, waterconservancy, ecology, transportation and energy, municipal utilities, environmentalprotection, mining, tourist, infrastructure construction, exploration and development ofresources and establishment of technical and research centres. To further open servicetrades to FDI, opening areas and pilot projects that the state allows on a pilot basis willbe implemented in the central and western regions at the same time. Upon approval by

223

the state, provincial cities can open domestic commerce, foreign trade and travelagencies to foreign investment on a pilot basis.

− FIEs located in coastal areas are allowed to take over management from FIEs anddomestic enterprises located in the central and western region on a contractual basis.

− Allowing each capital city of the provinces and autonomous regions to set up one state-level economic and technology development zone based on an established developmentzone.

As China is already a full member of the WTO, we will adhere to our commitment and further improvethe investment environment. The western regions will face even more opportunities for developmentwhile China is pushing forward for a comprehensive opening-up at all levels and in all sectors.

We are also interested in the topics regarding entrepreneurship and enterprise clustering. Institutioninnovation is crucial to the development of both enterprises and economies. Economic theories as wellas experiences of many countries demonstrate that appropriate clustering of enterprises is greatlyhelpful to the growth of enterprises and industries. In this regard, the government shall provide relativeconditions to the clustering, when the enterprises make the demand.

Governments at all levels attach great importance to investment promotion. By now, many investmentpromotion agencies have been established in provinces and municipalities, and they play importantroles in promoting linkages between enterprises and governments and transferring information.Foreign investors cannot only obtain information and assistance from IPAs, but they can also go to thegovernment departments for help if they need to. Apart from setting up local IPAs, we have alsoestablished bilateral investment promotion mechanisms with major OECD countries, such as Japan,the United Kingdom, Germany, Korea, etc. With the help of these bilateral mechanisms, we couldfurther promote investment from those countries and help investors to solve their problems.

As a developing country, we still lack experience in investment promotion and welcome internationalorganisations and IPAs from other countries to show our IPAs the latest and most effective investmentpromotion practices so that our IPAs can better serve the investors and enterprises.

China will continue its efforts to further improve its FDI policies. In accordance with its commitmentsunder the WTO, China is quickening the amendments to and formulation of relevant laws andregulations to attract FDI, and perfecting its foreign related economic legal system. We arestrengthening protection of intellectual property rights and safeguarding the legitimate rights andinterests of foreign invested enterprises. Governmental functions are being transformed at a higherspeed, with the sense of administration according to law built up and administrative efficiency raised.

A uniform, standard and open foreign investment access system is being set up, and the examinationand approval of projects will be simplified. The government departments will improve their service toenterprises and we have complaint centres for foreign invested enterprises to accept and hear cases,and to protect the legitimate rights and interests of foreign funded enterprises according to law.Through all these efforts, we will create a complete and well-established legal environment, a uniform,transparent and predictable policy environment, a clean, highly effective, fair and standardadministrative environment, and a fair and open market environment for investors.

The steady, fast and healthy economic growth of China and its entry into the WTO provide greatopportunities for the development of western regions. We warmly welcome foreign investors to carryout investment projects in the western regions, and international organisations to provide help in thedevelopment of the region.

225

ANNEX I

AUTHOR BIOGRAPHIES

Marino BALDI an Economist and Lawyer, has been working for the Swiss Government since 1975,mostly in the areas of international economic relations. He was appointed Ambassador in 1989 and iscurrently a member of the Executive Board of the Swiss State Secretariat for Economic Affairs, incharge i.a. of Economic Strategies and Special Trade Negotiations. He has represented his country innumerous international negotiations and has chaired important international fora (i.a. Chairman of theOECD Committee on International Investment and Multinational Enterprises). He is also a member ofthe Swiss Competition Authority and teaches International Law at the University of Zurich.

David BANKS, Consultant, worked as an Administrator in the Directorate for Financial, Fiscal andEnterprise Affairs, OECD, specialising in the promotion of foreign direct investment in transitioneconomies. He previously worked in the private sector and in the Industrial Development Agency inIreland. He is an Engineer by profession.

Philippe BERGERON, Director, Regional Institute of Environmental Technology, Singapore. Withprofessional experience in 45 countries including 18 in Asia, Dr. Bergeron’s speciality isenvironmental business development, industrial environmental management and environmentalpolicing, planning and financing. Prior to his current assignment, Dr. Bergeron was director of theAsian division of a large German consultancy group. He was involved in many strategic studies andexpert missions for the planning, programming and auditing of environmental projects for the privatesector, IBRD in Washington, ADB in Manila, EIB in Luxembourg and the EC in Brussels.

Vincenzo DEL MONACO is Second Secretary for Economy and Trade at the Italian Embassy inBeijing, China. He began his diplomatic career in 1997, working at the Diplomatic Institute of theItalian Foreign Affairs Ministry, then at the Directorate General for European Integration, EU ExternalRelations Bureau (Italian Foreign Affairs Ministry). Mr. Del Monaco holds a law degree from LaSapienza University, in Rome, and a LL.M. in European Law from the College of Europe, in Bruges,Belgium. He has also studied International Law at The Hague Academy of International Law, and is agraduate of the French ENA (National School of Administration).

Robert T. DENCHER, General Manager, Business Development Shell (China) Ltd. Robert Denchergraduated from Delft University of Technology in 1977. Since joining Shell in 1981 he has spent some5 years in Metals and Oil Products and 15 years in Natural Gas. He has worked in The Netherlands,UK, Sweden on many aspects of the Natural Gas business and has been posted to Beijing since early2001 as General Manager Business Development.

Rainer GEIGER joined the OECD in 1977. He was appointed Deputy Director for Financial, Fiscaland Enterprise Affairs in 1989. Previously, he held positions as Head of Division on Enterprise andConsumer Affairs (1981-1989) and Principal Administrator on international investment. Mr. Geigerserved as Secretary of the Commission on Financial Affairs for the Conference on International

226

Economic Co-operation (CIEC) in Paris from 1976-1977. He has also served as Counsellor of tradepolicy and economic development, respectively, at the Federal Ministries of Economy and EconomicCo-operation of Germany from 1972 to 1976. Mr. Geiger holds law, economic and political sciencesdegrees from the Universities of Heidelberg and Berlin. He received his Doctor of Law (Dr. jur.)degree from the University of Heidelberg in 1971. He studied Comparative and Public Law at theUniversity of Lyon, France and International Economic Law at Columbia University (1971-1972). Heobtained his LL.M. from Columbia University in 1972. Mr. Geiger has published extensively on issuesof law and international economics. He is an Associate Professor in International Economic Law at theUniversity of Paris I (Panthéon/Sorbonne).

Bernard HUGONNIER, Director, Territorial Development Services, OECD since 1999. He heldprevious positions as Deputy Director of the Public Affairs and Communications Directorate (1997-1999), Head of the Publications Service (1989-1997), Deputy to the Director of GeneralAdministration and Personnel (1987-1989), Head of the Restructuring and Management Group (1985-1987) and Senior Economist in the Capital Movements and Invisible Transactions Division (1979-1985). Before joining the OECD Mr. Hugonnier held a university teaching position and carried outconsultancy work. Mr. Hugonnier holds a Ph.D. in Economics from the University of Paris (1975), aMaster of Arts in public finance, econometrics and international economics, from the PittsburghUniversity (1973), and a Master of Arts in Economics, University of Paris (1972).

Akira IZUMO, Assistant Chief, International Economic Affairs Division, Trade Policy Bureau,Ministry of Economy, Trade and Industry (METI) Japan. Mr. Izumo serves as an Assistant Chiefresponsible for researching international economic issues such as cross-border industrial restructuringand organisational change at the company level, and corporate governance. He studied BusinessManagement at Kyushu University, graduating in 1991. In 1999-2000 he studied Economics atSouthern Illinois University Edwardsville as an Exchange Fellow from METI.

Chen JIANPING, Assistant to President, Shanghai Foreign Investment Development Board,Shanghai Overseas Investment Development Board.

Peter KREUTZBERGER has specialised in foreign trade and investment impact on Chineseeconomic development. From 1994 to 1998 he was Head of the Trade and Investment PromotionOffice at the German Embassy in Beijing. He now follows the dialogue between OECD and Chinawithin the German Permanent Mission to OECD.

Alfredo LOPES NETO is a Specialist in Public Policies. Former Secretary of Agriculture for his stateof origin – Ceara – Brazil, he has been an Advisor to the Presidency of Republic, National Congress andaccomplished many missions abroad. He has written books on Brazilian development problems.

Hiroshi MATSUMURA, Director, International Economic Affairs Division, Trade Policy Bureau,Ministry of Economy, Trade and Industry (METI) Japan. Mr. Matsumura, Director of the InternationalEconomic Affairs Division, is responsible for supervising the division’s activities related tointernational economic issues. He studied Economics at Tokyo University, graduating in 1977. In1983-1986 he studied Public Administration at the J. F. Kennedy School of Government, HarvardUniversity, being honoured with the Lucius N. Littauer Fellowship from the school.

Ann BARROWS MCCONNELL is a career officer in the Foreign Service of the United States ofAmerica. She currently serves as a Financial Economist in the Department of State’s Office ofInvestment Affairs. Her prior assignments include Desk Officer in the Department’s Office of Chineseand Mongolian Affairs; Economic Officer at the Embassy of the United States of America, Riyadh,Saudi Arabia; and Consular Officer at the Embassy of the United States of America, Beijing, China.

227

Güenter METZGER, President and CEO, Saxony Economics Development Corporation.

Jeff NANKIVELL, Counsellor (Development) Canadian Embassy, Beijing, China. representing theCanadian International Development Agency (CIDA). In 14 years with CIDA, Mr. Nankivell hasserved twice in Beijing (1991-95 and 2000-present) and has also worked in multilateral programs asSenior Program Manager responsible for the World Bank Group (1998-2000) and in the Central andEastern Europe Program as Country Analyst for Russia (1995-98). He holds an M.Sc. (PoliticalSociology) from the London School of Economics and a B.A. (International Relations) from theUniversity of Toronto.

Mehmet ÖGÜTCÜ, Principal Administrator, responsible for OECD’s relations with non-membereconomies and other stakeholders in the field of international investment and multinationalenterprises. He is also the manager for the recently established OECD Global Forum on InternationalInvestment. A graduate of Turkey’s “Mülkiye”, the London School of Economics and the College ofEurope, he has written extensively on Turkey, China, South East Europe, Asia-Pacific and Eurasiancountries, with a focus on foreign investment, energy security and geo-politics, economic and tradediplomacy. Prior to joining the OECD in 1994, Mr. Ögütçü was with the Turkish diplomatic service inAnkara, Beijing, Brussels and Paris.

Andrew PROCTOR, an Australian, is currently Regional Manager for Asia and the Pacific for theForeign Investment Advisory Service, a joint service of the International Finance Corporation and theWorld Bank. He is based in Sydney, where FIAS opened a regional office in April 1995. Prior tojoining FIAS, Mr. Proctor was a Director with Coopers & Lybrand’s International ConsultingDivision, based, over a twelve-year period, in the UK, Kenya, the West Indies, Australia and the US.Prior to this, he served in the Asian Development Bank for a number of years in the late 1970’s and,earlier, with the Australian Government in Canberra.

Markus TAUBE, is Professor for Economics at the Gerhard Mercator University of Duisburg,Germany. His major areas of research are the theory of economic order and new institutionaleconomics as well as the economics of multinational enterprises and foreign direct investment, with aregional focus on China and Southeast Asia. Prior to joining Gerhard Mercator University he has beena Senior Researcher at the Ifo Institute for Economic Research, Munich. His work on economicintegration in southern China was awarded with the Walter-Eucken Prize 1998.

Zhang TIANZUO, Deputy Director, Bureau of Township Enterprises, Ministry of Agriculture, ThePeople’s Republic of China.

I. H. Olcay UNVER, President, Turkey’s Southeastern Anatolia Project (GAP) RegionalDevelopment Administration. He also holds many duties in national and international organisations(Black Sea Economic Co-operation Foundation of the USA, Agricultural Energy and MechanisationFoundation of Turkey…), and water organisations (World Water Council, the International WaterResources Association…). Before joining the GAP, he worked as Project Engineer and WaterResources Engineer, joining the GAP in 1988 as Water Resources Specialist, and was appointed� ���������� ������$��% ��������"���#��$������� �

Jiang XIAOJUAN has been working at the Chinese Academy of Social Sciences since 1989, whereshe graduated with a doctorate in Economics from the Academy's Graduate School. She isconcurrently Secretary-General of the International Investment Research Center of the ChineseAcademy of Social Sciences. Her major research fields are: multinationals, industrial organisation,technology innovation, and industrial policy. Ms. Xiajuan is a three-time winner of the Sun YefangPrize for Economic Science, the top honour in the Chinese economic circles. She has participated in

228

the drafting of a number of major central government documents concerning China’s economicrestructuring and development, and she works on the advisory or experts’ committees of some centralgovernment departments and provinces. She is also a trustee of a number of listed companies andhigh-tech enterprises.

Liu YAJUN, Vice Mayor of Lanzhou Municipality, Gansu Province, The People’s Republic of China.

Liu YONG, Senior Research Fellow, Department of Development Strategy & Regional Economy,Development Research Center of the State Council.

Long YONGTU, Vice Minister of Foreign Trade and Economic Co-operation, and ChiefRepresentative for Trade Negotiations, People’s Republic of China, since 1997. He led the firstChinese delegation to the OECD in Paris in January 1995 and established the relationship of dialoguepartner with the Organisation. Apart from his official duties, Mr. Long is the Vice-Chairman of theBoard of Directors of the University of International Business and Economics, and visiting professorof the Beijing University and the Nankai University. Mr. Long received his BA Degree of British andAmerican Literature in the Guizhou University in 1965 and his post graduate study in economics at theLondon School of Economics in 1974. He joined the Ministry in 1965 and served as a diplomat in thePermanent Mission of China to the United Nations in New York from 1978 to 1980. In 1980 heworked in the United Nations Development Programme (UNDP), first in the New York headquarters,then in the Democratic People’s Republic of Korea as Deputy Resident Representative of the UNDPOffice. He was appointed Deputy Director-General of the China International Center for Economicand Technical Exchanges in 1986. In 1992, he was appointed Director General of the Department ofInternational trade and Economic Affairs of MOFTEC, and in 1994, he was appointed AssistantMinister of MOFTEC.

Ma YU, Senior Research Fellow, Institute of International Trade and Economic Co-operation,Ministry of Foreign Trade and Economic Co-operation, The People’s Republic of China. Mr. Mastudied in Beijing University from 1981 to 1985, majoring in International Politics, and received a BAin Law. As a Senior Research Fellow of the CAITEC, Mr. Ma is the author of more than one hundredresearch papers and books, among which many were awarded prizes within the country and werereported in the media, both domestic and foreign, and made notable impacts in the research field offoreign investment and trade. Mr. Ma also studied at the University of Illinois from August 1993 toFebruary 1994, and received training from the UNDP Training Center in Beijing from September1992 to January 1993.

Liu ZUOZHANG, Deputy Director General, Foreign Investment Administration, Ministry of ForeignTrade and Economic Co-operation, The People’s Republic of China.

229

ANNEX II

PARTICIPANTS LIST

China

Mr. Long YongtuVice Minister of Foreign Trade and EconomicCooperationThe People’s Republic of China2,, Dong Chang An JieBeijing, China 100731

Mr. Zhang WeiVice Governor of Shaanxi ProvinceX’ian, China

Mr. Liu ZuozhangDeputy Director GeneralForeign Investment AdministrationMinistry of Foreign Trade and EconomicCooperation2,, Dong Chang An JieBeijing, China 100731

Mr. Liu AjinDeputy Director GeneralCommission of Foreign Trade and EconomicCooperation of Shaanxi ProvinceX’ian, ChinaTel: 86-29-7291520Fax: 86-29-7291618 5395730

Mr. Wang XiangDeputy Director-GeneralOpening Affairs Office of Shaanxi ProvinceXinchengnei, Xi’an,P.R.China 710006Tel: 86-29-7291499Fax: 86-29-7291618 5395730

Mr. Zhao AiDeputy Director GeneralGeneral Office of the Leading Group forWestern Area Development under the StateCouncilTel: 86-10-68504105Fax: 86-10-68504115Add: 38, S. Yuetan Str., Beijing 100824 China

Mr. Zhang Tian ZuoDeputy DirectorBureau of Township EnterprisesMinistry of AgricultureNo.11 Nongzhanguan Nanli Beijing, 100026ChinaTel: 86-10-64192722 64192790Fax: 86-10-64192761

Mr. Liu YajunVice Mayor of Lanzhou MunicipalityGansu ProvinceChinaTel: 86-931-8833511 8772411Fax: 86-931-8848333Add: 509 Binhe Donglu, Lanzhou, GansuChina 730030

Ms. Jiang XiaojuanGeneral SecretaryTransnational Investment StudiesChinese Academy of Social SciencesBeijing, ChinaNo. 2 Yuetan Beixiaojie,Beijing, China 100836Tel:86-10-68042830Fax:86-10-68032440E-mail: [email protected]

230

Mr. Ma YuSenior Research Fellow Chinese Academy of International Trade andEconomic CooperationMinistry of Foreign Trade & EconomicCooperationThe People’s Republic of China22, Donghouxiang, An Ding Men Wai,Beijing 100710, ChinaTel: 86-10-64259597Fax: 86-10 64212175E-mail:[email protected]

Mr. Liu YongSenior Research FellowDepartment of Development Strategy &Regional EconomyDevelopment Research Centre of the StateCouncilTel: 86-10-65276662Fax: 86-10-65236060E-mail: [email protected]

Mr. Chen JianpingAssistant to PresidentShanghai Foreign Investment DevelopmentBoardShanghai Overseas Investment DevelopmentBoard15 Fnew Town Center83 Loushanguan Road200336 Shanghai,ChinaTel: 86-21-62368800-213 86-21-662368601Fax: 86-21-62368026E-mail:[email protected]

Ms. Min LipingDeputy DirectorForeign Investment AdministrationMinistry of Foreign Trade & EconomicCooperationThe People’s Republic of China2,Dong Chang An JieBeijing,China 100731Tel: 86-10-65197886Fax: 86-10 65197322E-mail:[email protected]

Ms. Fan WenjieDeputy DirectorForeign Investment AdministrationMinistry of Foreign Trade & EconomicCooperationThe People’s Republic of China2,Dong Chang An JieBeijing,China 100731Tel: 86-10-65197397Fax: 86-10 65197332E-mail:[email protected]

Mr. Wang XiaochengForeign Investment AdministrationMinistry of Foreign Trade & EconomicCooperationThe People’s Republic of China2 Dong Chang An JieBeijing,China 100731Tel: 86-10-65197334Fax: 86-10-65197332

Ms. Xi GelianInterpreter, MOFTEC

Ms. Xiong YanInterpreter, MOFTEC

Ms. Di JunDirectorSection of Investment PromotionOpening Affairs Office of Shaanxi ProvinceBureau of Foreign Trade and EconomicCooperation of Shaanxi ProvinceOffice Hall 710068Xincheng X’ian Territory 710006, ChinaTel: (29) 729.1520Fax: (29) 729.1618

Ms. Yuan DaxiangDirectorSection of Investment PromotionOpening Affairs Office of Shaanxi ProvinceBureau of Foreign Trade and EconomicCooperation of Shaanxi ProvinceOffice Hall 710068Xincheng X’ian Territory 710006, ChinaTel: (29) 7291665Fax: (29) 7291618

231

Mr. Wu ShaobaiDeputy DirectorInvestment Promotion ServiceShaanxi Provincial Opening Affairs OfficeZhengwudatingNO.14 Chang’an BeiluXi’an China 710061Tel: 029-5391863 5393179Fax: 029-7297618E-mail: [email protected]

Ms. Sun YuanyuanSection of Investment PromotionOpening Affairs Office of Shaanxi ProvinceXinchengnei, Xi’an,P.R.China 710006Tel: 86-29-7291437 5391856Fax: 86-29-7291618 5395730E-mail: [email protected]

Mr. Han JinSection of Investment PromotionOpening Affairs Office of Shaanxi ProvinceXinchengnei, Xi’an,P.R.China 710006Tel: 86-29-7291437 5391856Fax: 86-29-7291618 5395730

Ms. Luo XiufangAssistant InspectorSichuan Provincial Department of ForeignTrade & Economic CooperationChenghua Str., Chengdu Sichuan, ChinaTel:86-28-3331370Fax:86-28-3334675 3337610E-mail: [email protected]

Ms. Huang HongxiDeputy Division ChiefSichuan Provincial Department of ForeignTrade & Economic CooperationChenghua Str., Chengdu Sichuan, ChinaTel:86-28-3331294Fax:86-28-3334675 3337610E-mail: [email protected]

Mr. Xian BaDeputy Division ChiefForeign Trade & Economic CooperationBureau of Qinghai69 Xi Dajie, Xining, Qinghai, China 810000Tel: 86-971-8176806Fax:86-971-9176805

Mr. Zhou JianxinDeputy DirectorGansu Department of Foreign Trade &Economic Cooperation386, Dingxi Road, Lanzhou, China 730000Tel:86-931-8619189Fax:86-931-8618083

Ms. Gao JinGansu Department of Foreign Trade &Economic Cooperation386, Dingxi Road, Lanzhou, China 730000Tel:86-931-8619189Fax:86-931-8618083

Mr. Yang Xiao LinDeputy DirectorForeign Investment DepartmentBureau of Foreign Trade and Economic Co-operation of XinJiangProduction and Construction GroupCorporationNo. 67 Minzhu Rd. – Great Foreign TradeBuildingUrungi, Xinjiang, China 830002Tel: (991) 2826427

Ms. Jian PinglanDeputy Director GeneralHubei Provincial Department of Foreign Tradeand Economic CooperationTel: (027) 85773932

Mr. Tang BingDeputy DirectorHubei Provincial Department of Foreign Tradeand Economic CooperationTel: (027) 85773916

232

Mr. Li JunDeputy Director GeneralBureau of Foreign Trade and EconomicCooperation of Ningxia Hui AutonomousRegion

Mr. Guo XiangdongDeputy Division chiefForeign Investment Management DivisionBureau of Foreign Trade and EconomicCooperation of Ningxia Hui AutonomousRegion119, Jiefang XijieYinchuan, NingXia, China 750001Tel: 0951-5044952Fax: 0951-5044239E-mail: [email protected];[email protected]

Mr. Zhang JianDeputy DirectorSenior EngineerHenan Foreign Trade & EconomicCooperation BureauNo.115 Wenhua RoadZhengzhou Henan, China 450003Tel: +86-371-3942975 3576338 Tel(Home):Fax: +86-371-3945422E-mail: [email protected]:www.trade.henan.gov.cn

Mr. Guo HaiyanDeputy ChiefDepartment of Foreign InvestmentAdministrationHenan Provincial Bureau of Foreign Trade &Economic CooperationNo.115 Wenhua Road, Zhengzhou,Henan, China 450003Tel: (0371) 3576219 3576179Fax: (0371) 3945422E-mail: [email protected]://www.trade.henan.gov.cn

Mr. Wu JunminDeputy DirectorSector of Investment AdministrationBureau of Foreign Trade and EconomicCooperation of Jilin Province

Mr. Yu WenchunDeputy Director GeneralBureau of Trade & Economic Cooperation ofGuizhou Province164 Zhonghua North RoadGuiyang, GuizhouP.R.China 550004Tel: 86-851-6901172(0)Fax: 86-851-6901109

Mr. Liu WanjuDirectorBureau of Trade & Economic Cooperation ofGuizhou Province.Foreign Investment Administration Division164 North Zhonghua Road,Guiyang, Guizhou, P.R.China.Tel: (0851) 6901320Fax: (0851) 6901154E-mail: [email protected]

Mr. Jia Ding HaiDirectorInvestment Promotion & Liaison DivisionHunan Provincial Department of ForeignTrade & Economic Cooperation80 Wuyi Road (E.)Changsha, China 410001Tel: 0731-2288189Fax: 0731-2284442E-mail: [email protected]://www.hninvest.gov.cn

Mr. Zhu YuanfaDeputy DirectorForeign Investment Division of JiangxiProvincialForeign Trade and Economic CooperationDepartmentZhanqian Road.NanchangJiangxi, China 330002Tel: (0791)6246243Fax: (0791)6213145

233

Ms. Sheng HuameiAssistant CounselDepartment of Foreign Trade and EconomicCooperation of HeilongjiangNo.173, Heping Road,Harbin, China 150040Tel: 0086-0451-2632335Fax: 0086-0451-2623585E-mail: [email protected]

Mr. Yu ZhibinDeputy Director of Policy Study RoomDepartment of Foreign Trade and EconomicCooperation of HeilongjiangNo173, Peale RoadHarbin P.R.China 2300601Tel: 0086-0451-2624672Fax: 0086-0451-2623585

Mr. Tang WeiShenyang Economic & TechnologicalDevelopment Zone Administration CommitteeHuahai Road, Shenyang, 110141 ChinaTel: (024)25812750Fax: (024)25812748E-mail: [email protected]://www.sydz.gov.cn

Mr. Fu HaibinDeputy DirectorShibagang Southern SuburbsHefei Anhui, China 230601Tel: (0551)3811070 3811107Fax: (0551)3812940E-mail: [email protected]: www.hetac.com

Mr. Hou Ding BianAttorney – Deputy DirectorAdministration Committee of KunmingNation-ClassEconomic & Technological DevelopmentZone1 Jingkal Rd.Kunming Nation-Class Economic& Technological Development Zone,Kunming, Yunnan, China, 650217Tel: 86-871-7275139Fax: 86-871-7275003E-mail: [email protected]://www.ketdz.gov.cn

Mr. Huang ChaoAdministrative Commission of KunmingEconomic and TechnologicalDevelopment Zone

Mr. Wang HaowenChief EngineerThe Economic & Trade Committee of ShaanxiProvinceRoom 4020 Xincheng Bldg Xian, China 710006Tel: 029-7292453Fax: 029-7292472

Mr. Xu GangDeputy DirectorYan’an Economic & TechnologicalCooperation OfficeTel: (0911)2113190Fax: (0911)2117099E-mail:XuGang@yan an.gov.cn

Mr. Liang JianyinDeputy DirectorAdminisrative Commitee of Hefei Economic& Technological Development ZoneShibagangSouthern Suburbs of Hefei, China 3811686Post Code: 230601Tel: (0551) 3811886Fax: (0551) 3811889E-mail: [email protected]

Mr. Duan Xian DeDirector - Deputy PresidentShanxi Tongchuan Foreign Trade AndEconomic Cooperation BureauChina International Trade Promotion CouncilTongchuan BranchChina Chamber of International CommerceTongchuan ChamberYu Hua Road TongchuanShanxi, China 717000Tel: (0919)2183216 2182882Fax: (0919)2169551

234

Mr. Zhang Zhi XiangDivision Chief EngineerForeign Economic DepartmentXi’an Municipal Bureau of Foreign Trade &Economic Cooperation6Xi Xin StreetXi’an, ChinaTel: (029)7285343Fax: (029)7219186E-mail: [email protected]

Mr. Mason Li YunmaiActing DirectorShenyang Economic & TechnologicalDevelopment ZoneKunminghu Street,China 11014Tel: (86 24) 2581 9825 2536 2466-501Fax: (8624) 2581 3487E-mail: [email protected]:www.sydz.gov.cn

Mr. Zhao XingnanDeputy Chief of BureauThe Bureau of Foreign Trade and EconomicCooperation Of Weinan Shaanxi Province10 Zhanbei Road,WeinanShaanXi, ChinaTel: 0913-2013841 2013322Fax: 0913-2011881

Mr. Jin HuiDeputy DirectorThe Chinese Science & Technology IndustrialPark of APECXi’an National Hi-tech Industrial DevelopmentZoneInvestment Promotion Bureau3/F Torch Building,Gaoxin Rd.,Xi’an, China 710075Tel: (029)8211744 8210489Fax: (029)8244367 8210481http://www.xdz.com

Mr. Qian Zhi ChouDirectorForeign Economy & Trade Section of ShaanxiEconomy & Trade CommitteeRoom 3070 Xincheng BLDGXian Shaanxi, China 710004Tel: 029-7292565Fax: 029-7292472

OECD Member Countries

AUSTRIA

Mr. Wolfgang LanzCommercial Counsellor at the AustrianEmbassy in Beijing2280 Beijing Sunflower TowerNo. 37 Maizidian Street Chaoyang DistrictBeijing 100026Tel: +86/10/8527 5050Fax: +86/10/8527 5049E-Mail: [email protected]

CANADA

Mr. Jeff NankivellCounsellor (Development)Canadian EmbassyBeijing, ChinaTel. +86-10 6532-3536 ext 3472Fax +86-10 6532-3167E-mail: [email protected]

235

FINLAND

Mr. Pekka KaihilahtiSecond SecretaryEmbassy of FinlandKerry Center, South Tower Level 26Guanghua Lu 1Beijing, China 100020Tel: (8610) 8529.8541

FRANCE

Mr. Jean Louis GaudinRegional Manager for Hong Kong andSingaporeInvest in France AgencyAdmiralty Centre, Tower II, 25/F18 Harcourt RoadHong KongTel: (852) 2529.4316Fax: (852) 2861.0019E-mail: [email protected]

GERMANY

Mr. Peter KreutzbergerCounsellorTrade, Competition, AgricultureGerman Delegation to the OECD9, rue Maspero75016 Paris, FranceTel: 331.55.74.57.09

ITALY

Mr. Vincenzo Del MonacoDeuxième Secrétaire Economique etCommercial AttacheAmbassade d’ItalieBeijing, ChinaTel. 008610.65322519Fax. 008610.65321378E.mail : [email protected]

JAPAN

Mr. Hiroshi MatsumuraDirector of International Economic AffairsDivisionTrade Policy BureauMinistry of Economy, Trade and Industry(METI), Japane-mail: [email protected]

Mr. Akira IzumoAssistant ChiefInternational Economic Affairs DivisionTrade Policy BureauMinistry of Economy, Trade and Industry(METI)- Tokyo, Japane-mail: [email protected]

SPAIN

Mr. Néstor Sánchez MaríaTrade and Investments OfficerEmbassy of SpainBeijing, ChinaTel. +86 10 65322072 ext.118E-mail: [email protected]

SWITZERLAND

Ambassador Marino BaldiDeputy Secretary of StateOffice fédéral des affaires économiquesextérieuresEffingerstrasse 1CH - 3003 Berne, SwitzerlandTel: (4131) 324.0755Fax: (4131) 323.0333E-mail: [email protected]

Mr. Chung Tech KhovDivision on International InvestmentsState Secretariat for Economic AffairsEffingerstrasse 1CH - 3003 BerneTel. +41 31 323 95 81Fax +41 31 323 03 33

236

UNITED STATES

Ms. Ann Barrows McConnellOffice of Investment Affairs,US Department of StateEB/IFD/OIA Room 4820Washington, DC - U.S.A.Fax: (1202) 736-4274E-mail: [email protected]

EUROPEAN COMMISSION

Mr. Uwe WissenbachFirst SecretaryEuropean Commission Delegation in Beijing15 Dongzhimenwai DajieSanlitum, 100600 Beijingm, ChinaTel: (8610) 6532.4443 X288Fax: (8610) 6532.4342E-mail: [email protected]

Private Sector/ Research Centres

Mr. Michael BarrowSenior Vice PresidentStructured Finance, AsiaSumitomo Mitsui Banking Corporation3 Temasek Avenue#06-01 Centennial TowerSingapore 039190Tel.: +65 882 0215Fax: +65 333 5709E-mail: [email protected]

Mr. Philippe BergeronDirectorRegional Institute of EnvironmentalTechnology,PSB Science Park Annex#04/08 3 Science Park DriveSingapore 118223Tel: (65) 777.2685Fax: (65) 773.2800E-mail: [email protected]

Mr. Robert DencherGeneral ManagerBusiness and DevelopmentShell Greater ChinaE-mail: [email protected]

Dr. Klaus GrimmDelegation of German Industry & CommerceShanghai29F POS Plaza, 480 Pu Dian Lu, PudongShanghai 200122Tel.: 0086-21-5081 2266Fax: 0086-21-5081 2009Email: [email protected] site: www.ahk-china.orgwww.ahksha.com.cn

Dr. Klaus ReitzeConsultant, Lawyer, Doctor at Law,Senior EconomistMember of the German Association for theMedium-Sized IndustryXi’an Municipal GovernmentBureau of Foreign Trade and Economic Co-operation (MUNOFTEC)3/F Torch Building Gaoxin Rd.710075 Xi’an, ChinaTel.: 0086-29-824 4367, 821 0489Fax: 0086-29-824 4367, 821 0481E-mail: [email protected];[email protected]

Dr. Markus TaubeUniversity of Duisburg, GermanyDepartment of EconomicsMülheimer Straße 21247048 Duisburg, GermanyTel: (49203) 379.4188Fax: (49203) 379.4157E-mail: [email protected]

237

International Organisations

ASIAN DEVELOPMENT BANK

Mr. Hong WeiBeijing International Financial Building156 Fuxingmennei Dajie (Avenue)Xicheng District, Beijing 100031People’s Republic of ChinaTel. (86-10) 6642-6603/05/07Fax. (86-10) 6642-6601E-mail: [email protected]

UNIDO

Mr. Elias AntonakakisDeputy HeadUnited Nations Industrial DevelopmentOrganisationInvestment and Technology Promotion7, Stadiou Str.105 62 Athens, GreeceTel: +30-1-3248303 / 319 / 367Fax:+30-1-3248778Mobile:+30-977-095035E-mail: [email protected]

WORLD BANK

Mr. Andrew ProctorDirectorForeign Investment Advisory Service (FIAS)Asia-Pacific Regional OfficeLevel 18, 14 Martin PlaceSydney NSW 2000, AustraliaTel.: + 61-2-9235-6513Fax: + 61-2-9223-7152E-mail: [email protected]

Media

Mr. Peter WonacottWall Street Journal, Asian Wall Street JournalSuite 2001-2004, Tower A, Full Link PlazaNo. 18, Chaoyangmenwai AvenueBeijing 100020, ChinaTel: (8610) 6588-5848 ext 203Fax: (8610) 6588-6044E-mail: [email protected]

238

OECD Secretariat

Mr. Rainer GeigerDeputy DirectorDirectorate for Financial, Fiscal and EnterpriseAffairsOrganisation for Economic Co-operation andDevelopmentTel: (331) 45.24.91.03Fax: (331) 45.24.91.51E-mail: [email protected]. Bernard HugonnierDirectorTerritorial Development ServiceOrganisation for Economic Co-operation andDevelopment2 rue André Pascal75016 Paris - FranceTel: (331) 45.24.1620Fax: (331) 45.24.16.08E-mail: [email protected]

Mr. Mehmet OgutcuPrincipal AdministratorNon-Members and Global Forum onInternational InvestmentDirectorate for Financial, Fiscal and EnterpriseAffairsOrganisation for Economic Co-operation andDevelopmentTel: (331) 45.24.93.95Fax: (331) 45.24.78.52E-mail: [email protected]

Mr. David BanksAdministratorEnterprise Development UnitDirectorate for Financial, Fiscal and EnterpriseAffairsOrganisation for Economic Co-operation andDevelopmentTel: (331) 45.24.17.04Fax: (331) 45.24.78.52E-mail: [email protected]

Ms. France BenoisProject Co-ordinatorNon-Members and Global Forum onInternational InvestmentDirectorate for Financial, Fiscal and EnterpriseAffairsOrganisation for Economic Co-operation andDevelopmentTel: (331) 45.24.78.36Fax: (331) 44 30 61 35E-mail: [email protected]

Ms. Luz Curiel BeatyMeeting CoordinatorDirectorate for Financial, Fiscal and EnterpriseAffairsOrganisation for Economic Co-operation andDevelopment2 rue Andre Pascal75016 Paris, FranceTel: (331) 45.24.91.04Fax: (331) 45.24.91.51

OECD PUBLICATIONS, 2, rue André-Pascal, 75775 PARIS CEDEX 16

PRINTED IN FRANCE

(14 2002 07 1 P) ISBN 92-64-19780-X – No. 52517 2002