Question

Exam case study Foreign direct investment in China: A case study from the Yangtze Delta Basin The metropolis of Shanghai dominates the rich, fertile and low-lying plain south of the Yangtze River in China. Within a 150 kilometre radius are also located the major urban centres of Suzhou, Nanjing, Hangzhou and Ningbo. Suzhou is approximately one hour by road from Shanghai and is one of the oldest cities in the Yangtze Delta Basin, with an identifiable history stretching back 2500 years. There is a traditional Chinese saying: ‘There’s paradise in heaven, but Suzhou and Hangzhou on earth’—a reference to Suzhou’s beautiful gardens and canals. In the 1980s Deng Xiaoping’s ‘open door policy’ was adopted in China and provided preferential treatment for coastal regions to develop special economic zones. These themed reforms nurtured economic change and were in line with Deng’s wishes, enabling ‘some people to get rich’ (Isaak 2000). To persuade foreign direct investment to come to Suzhou, policies for the effective leadership of development were enacted. For example, in 1998 L Government, the Jurong Township Corporation (JTC), was appointed to manage the establishment process for what was initially called the Singapore Industrial Park (SIP). Located between Shanghai and Suzhou, SIP became a flagship project for the new generation of ETDZs. The initial investment and control was 65 per cent Singaporean and 35 per cent Chinese, and a specially set up authority managed the ETDZ. It had its own customs house, and was notable for its superior infrastructure and strict environmental controls. However, the success of the Singaporean model became awkward for the Chinese and the local Suzhou municipality. They witnessed the success of the SIP, but had limited share in the wealth being generated. This prompted a flurry of activity for the emergence of another ETDZ on the other side of Suzhou, which created direct competition with the SIP. The Suzhou new district The Suzhou New District (SND) was thus built by the local municipality. SND was first established in 1992, and was considered a ‘high-tech’ ETDZ with a science and technology theme. It promoted a ‘garden-like’ atmosphere with ‘liveable surroundings’. The infrastructure in SND was developed through establishing a banking sector and a mediumrise expatriate living area. The growth of this ETDZ was credited to the development of its infrastructure services. SND established a theme park and invested in recruiting, employment and training industries. The land quality and position of SND was superior to that of the SIP and it was located right beside the city centre of Suzhou, whereas the SIP was, at this time, somewhat more remote. Despite fierce initial rivalry, both ETDZs are now successfully established and are attracting substantial FDI; the local TVEs are booming and local private business is encouraged. Considerations for FDI in the ETDZs While Jiangsu province now boasts a number of development zones, the Suzhou New District and the Suzhou Industrial Park are the main economic and technological development zones in this region. Specific regulations vary within each zone, which provide incentives for foreign direct investment. Important considerations for the ETDZs are the infrastructure (such as water plants, sewage and gas, power supply and ISDN telecommunications) and a preferential tax policy offering favourable terms to foreign investment companies. Furthermore, housing for both expatriates and workers, along with sporting, cultural, dining and shopping precincts, enhances the quality of life for residents living in the region. For example, SND provides incentives for housing local workers and SIP has a waste management plan. The administrative authorities within the zones play an integral role in the operations of the ETDZs and in the activities of enterprises within those zones. To help the facilitation of business by making it easier to obtain the permits and licences required for registration as a foreign enterprise in China, the SIP and SND both promote their ‘one-stop set-up shops’ for foreign enterprises. Promotion portraying the convenience of the residential and recreation facilities is clearly visible. When faced with the depth of regulation, language and cultural differences, and bureaucratic delays in obtaining approvals and registrations, facilities within the ETDZs assist foreign enterprises to start up their operations in China. There are also facilities to conduct major recruitment fairs on behalf of enterprises. Each year these fairs attract graduates from all over China. As part of the process, administration checks, qualification and reference checks, along with additional training, are provided, which streamlines employment for both candidates and enterprises. Cultural differences between the international and local culture prevail. SND is located close to the old city of Suzhou, whereas there is a distinctly more international flavour in the SIP, which hosts a ‘Singapore Square’ along with a tax policy favouring foreign investment. The rapid expansion in the ETDZs also has its drawbacks for foreign direct investors. The infrastructure development has not always kept up with expansion in the zones. Access to essential services, long waiting times for operational components and minimal or reduced social and cultural activities are the consequences of rapid progress. This, in turn, has produced diverse opportunities for local entrepreneurs to seize the chance to capitalise on gaps in economic development. The ETDZs are notable for their ability to assimilate supply chains quickly. Because of the large geographical area of the ETDZs, many small townships are located within them. Township enterprises have begun producing components required by the foreign direct investors. Most of these townships were communes during the Maoist area, meaning that production is still organised along these lines. In many instances, these TVEs were single-product-based and supplied Suzhou and Shanghai with farmed fish, fresh vegetables and craft items. Now, many have changed their production to manufacturing items required further along the supply chain. For example a ‘Technology Township’ in SND designs and provides research and development, then component manufacture, to supply the larger assembly plants located in the ETDZ. Therefore, a distinct logistical chain operates between the ETDZs and Shanghai, with components being manufactured in one location and assembled in another, while sales and marketing offices are situated in Shanghai. Perry and Yeoh (2000) provide a history of the China-Singapore- Suzhou Industrial Park. The authors describe the ETDZ’s success in attracting high-technology firms in the electronics, software, mobile telecommunications and pharmaceuticals sectors, although they also highlight the absence of R&D activities in some cases.

There are three main points to consider in discussion of the ETDZs located near Suzhou in Jiangsu province, China:

1 The area has been selected by China’s central government as region for major growth.

2 Multinational/international companies are established in, and are directly investing in, the region.

3 SMEs and TVEs have established supply chains to help facilitate supply and provide logistical channel support to FDI enterprises.

Answer 1

The "go west" idea is nothing new in China's manufacturing sector. The country's central government has been encouraging development of the interior regions for a decade now, but foreign-invested enterprises were reluctant to answer the call because of concerns about lagging infrastructure, limited access to talent, and logistics challenges. Today that situation is changing, and manufacturers are finding the western provinces of the People's Republic of China (PRC) to be conducive and even inviting locations for their businesses.

While traditional barriers such as logistics infrastructure and talent shortages are less likely to plague manufacturers, a new crop of challenges, such as provincial regulations and enforcement, may still hinder success. That is why, prior to making any decision to shift production into China's interior, a company must undertake a thorough and thoughtful due diligence that includes a detailed cost assessment and a complete supply chain assessment.

Reasons to move inland
Economic, governmental, and social factors have converged to make inland manufacturing more attractive and feasible than in the past. A shortage of labor in traditional manufacturing hubs in Eastern China is a commonly cited reason for companies to consider a shift further inland. Since 2008, an increasing number of workers who return to their hometowns for the Chinese New Year Spring Festival are not returning to work in the coastal manufacturing centers. As a result, those centers are suffering severe labor shortages. A survey conducted in Shenzhen before the 2010 Chinese New Year revealed a shortage of 800,000 people, and 90 percent of the surveyed enterprises said they would have an urgent demand for labor within the first two months following the holiday.

Further exacerbating this depletion of coastal labor resources is the combination of a lower effective tax on agricultural production and higher selling prices for agricultural products. The resulting increase in sustainable incomes for farmers has encouraged a growing number of migrant workers to return to the fields, where they also enjoy access to healthcare and education that is only available to them in their hometowns, as outlined in the Chinese Hukou (Household Registration) system.

Transportation considerations
Taken together, the rising costs and labor shortages in the coastal manufacturing centers plus the local government incentives and greater access to labor and land in the western provinces provide companies with strong reasons to consider locating production in China's hinterland. But it's important that they factor in the supply chain implications when they conduct NPV (net present value) and financial analyses of such an investment. They are likely to find that manufacturing costs will decline, but an inland move may have the opposite effect on logistics costs.

China's central government is certainly aware that it can be difficult to efficiently move goods in the nation's interior. To stimulate the inland regions' competitiveness and ability to attract investment, the National Development and Reform Commission (NDRC) channeled RMB yuan 1.09 trillion (US $160 billion) in fixed-assets funding to the western regions from January to April 2010—a 28.5-percent increase over the same period last year.

Such investment in infrastructure offers reason for optimism about the future of doing business in that part of the country. But optimism must be tempered by both an awareness of the persistent risks and an understanding of the true costs and benefits of going west. Manufacturers still need to weigh the logistical barriers against the opportunities.

The Yangtze River Delta boasts the world's second-largest port, Shanghai, and serves such strategic satellite cities as Nanjing, Hangzhou, and Ningbo (itself one of China's busiest ports). A well-developed network of expressways and railways with bridges spanning more than 32 kilometers (20 miles) makes transit times in the region a competitive differentiator. Thanks to continuing urbanization in Shanghai and the adjacent Zhejiang and Jiangsu provinces, the Yangtze River Delta is expected to enjoy faster growth than any other region.

The Bohai Bay region has experienced brisk development of such industries as automotive, pharmaceutical, electronics, and telecommunications thanks to government stimulation of local and foreign investment. Infrastructure investments in the area include high-speed rail initiatives to cut transit times by over 75 percent, a change that will improve the availability of skilled labor and access to central cities.

Additional infrastructure investment is expected to center on developing consumer-product distribution. This naturally fits with the government's "Go West" mantra and will encourage the development of inland logistics clusters, particularly around strategic waterways such as the Yangtze River.

Traveling west along the Yangtze, infrastructure investment in the following locations will support the westward migration of industry and the development of consumer markets:

Nanjing—The largest inland port in China and the largest river port in Asia, Nanjing expects annual throughput to reach 3 million TEUs by the end of 2010.

Anhui Province—Our bullish outlook on this province reflects the anticipated industrial development in the region coupled with its potential as a consumer market.