Upgrading China’s Competitiveness: From Special Economic Zones to Science and Technology Clusters
Dr. Filip De Beule Em. Prof. Dr. Daniel Van Den Bulcke
Institute of Development Policy and Management University of Antwerp
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Preface
While the establishment of economic zones at the beginning of China’s open door policy were careful attempts to open China’s door to the outside world and abandon its isolationist policy, the Chinese leadership today is undoubtedly very proud of these achievements. Twenty five years after the first four Special Economic Zones (SEZ) and twenty years after the development and construction of statelevel economic and technological development zones, the China National Philatelic Corporation, which belongs to the Chinese Ministry of Posts and Telecommunications, issued a special stamp in 2004 to commemorate the establishment of the Economic and Technological Development Zones (ETDZ). An accompanying leaflet stated “This stamp was issued in commemoration of the glorious achievements of the state-level economic and technological zones in the past 20 years, highlighting the role and position of the construction of the development zones in China’s economic construction. Deng Xiaoping’s inscription is the main element in the design of the stamp, and abstract symbols are used to reflect the radiating and driving role of the development zones as windows and models.”
This report attempts to describe and evaluate the policy of China to use economic zones as vanguards of development. It is based on desk research with a focus on the studies of clusters and a field trip to China in April 2004 with visits to a number of zones in Shanghai, Chengdu, Chongqing, Beijing and Dalian and interviews with managers of the zones and some Belgian companies located in the zones. Although occasional reference is made to Belgian enterprises located in zones, the main focus is on the role of clusters and zones as instruments for development.
This study tries to bring together the use and expansion of economic and technological zones in China with the recent advances in the economic literature about clusters. Although the many forms and confusing terminology in this domain does make such a combination difficult, it is the conviction of the authors that China is gradually moving away from geographic separate zones and parks where
ii companies enjoy tax and other benefits to a more proactive cluster policy where the linkages with other firms in the zone are stimulated. For foreign investors this might mean that they have to reconsider the role of their subsidiaries in China in order not to endanger their relationship with the local and central authorities, which in China still plays a more important role than in other transition economies.
The authors thank the China Europe Management Centre for the fellowship which allowed them to study this interesting subject and are grateful both to the Belgian managers working in such zones and the Chinese managers of the development zones who granted their highly appreciated cooperation for this project.
- Filip De Beule
- Daniel Van Den Bulcke
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Table of contents
1. Introduction................................................................................1 2. Glocalization: The Paradox of Economic Space .......................6 3. Cluster around me! ..................................................................15 4. China Opens Doors..................................................................24
4.1.1 The turbulent 1980s: From Special Economic Zones to Economic and Technological Development Zones .................24 4.1.2 The booming 1990s: From Pudong New District to High-Tech Parks ......................................................................30 4.1.3 The beginning of the new century: Towards Science and Technology Clusters?........................................................34
4.2 4.3
Regional distribution and impact ....................................38 Conclusions.....................................................................44
5. A Survey of Selected Development Zones ..............................55
5.1 Pearl River Delta.............................................................55
5.1.1 Guangzhou Development District ..............................58 5.1.2 Shenzhen High-Tech Park ..........................................63
5.2.1 Shanghai Municipality................................................65 5.2.2 Jiangsu Province .........................................................83
5.3.1 Hubei Province ...........................................................92 5.3.2 Chongqing Municipality.............................................95 5.3.3 Sichuan Province ......................................................100 5.3.4 Shaanxi Province ......................................................103
5.4.1 Beijing Municipality.................................................108 5.4.2 Tianjin Municipality .................................................112 5.4.3 Liaoning Province.....................................................114 5.4.4 Shandong Province ...................................................118
6. Concluding Comments ..........................................................124
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List of Tables
Table 2-1 Cluster mapping studies in selected European countries. ..8 Table 2-2 Explanatory variables influencing the location of value added activities by MNCs in the 1970s and 1990s...........................11 Table 3-1 Various inter-firm productive systems.............................16 Table 3-2 Various agglomeration types............................................21 Table 4-1 FDI inflows in major regions in China, per cent, 1994- 2003..................................................................................................42 Table 4-2 Chinese SEZs and EPZs elsewhere: comparisons on selected aspects in the middle of the 1980s......................................45 Table 4-3 Overview of ETDZ in China, coastal and inland regions 47 Table 4-4 Overview of HTIDZ in China, coastal and inland region 49 Table 4-5 Overview of EPZs and FTZs in China, coastal and inland regions ..............................................................................................51 Table 4-6 Comparison of tax policies of four major types of development zones ...........................................................................53
List of Figures
Figure 4-1 FDI Inflows in China (million USD)..............................37 Figure 4-2 FDI inflows in major regions in China, per cent, 1994- 2003..................................................................................................41 Figure 5-1 Gross Regional Product, 2003, USD billion...................56 Figure 5-2 Foreign Regional Trade, 2003, USD billion...................58 Figure 5-3 Development zones in Guangdong province ..................59 Figure 5-4 Main Cities of the Yangtze River Delta..........................65 Figure 5-5 Most important development zones in Shanghai............67 Figure 5-6 Investment projects in Zhangjiang High-Tech Park .......69 Figure 5-7 Overview of firms located in Zhangjiang High Tech Park ..........................................................................................................71 Figure 5-8 Semiconductor Industry in Shanghai..............................75 Figure 5-9 Most important development zones in Jiangsu province 84
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List of Boxes
Box 1 Vitalo Packaging GZFTZ Ltd................................................60 Box 2 Glaverbel Vertec Shenzhen....................................................63 Box 3 Bekaert Shanghai Ergang.......................................................77 Box 4 Ensysta Piping Systems Engineering (Shanghai) Co., Ltd....81 Box 5 Atlas Copco Wuxi..................................................................88 Box 6 Xi’an Thiebaut Pharmaceutical Corporation .......................106 Box 7 Xi’an Flanders Innovation Services Centre .........................107
List of Appendixes
Appendix 1 List of interviewed persons in various development zones, April 2004............................................................................130 Appendix 2 List of documents about selected zones......................138
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1. Introduction
In 1949, the Chinese communist government adopted Lenin’s view that the export of capital is a central mechanism of imperialism and that the international firm is a double parasite by exploiting both the working class of their own country as well as the labourers of less developed countries. The Cold War and Stalin’s theory of two parallel (capitalist and socialist) markets reinforced internal integration among socialist countries, that is, between Russia and China for mutual economic development. This theory argued that socialist countries should not interact with the capitalist world. In 1951, two years after its founding, the People’s Republic of China emphasized participation in the Soviet dominated socialist bloc in order to develop technological know-how. The Korean War and the ensuing US trade embargo on China further entrenched China’s ‘international’ activity within the socialist bloc (Riskin, 1987).
The sudden break-up in Sino-Soviet relations in 1960 left the country completely isolated. Afterwards China did seek to import machinery and technological support from Japan and Western Europe but these initiatives were abruptly ended by the Cultural Revolution (1966- 1976). Globally isolated, China defined its economic strategy in terms of the concept of self-reliance. Essentially, self-reliance became interpreted to mean that, first, localities should strive for self sufficiency in agriculture and industry and, second, at the national level, that China should not rely on foreign resources for economic development.
By the middle 1970s, China’s technological weakness was clearly apparent, even to its leaders. Outdated machinery, equipment and techniques that were imported during the 1950s still constituted the backbone of its industrial production, which was almost completely oriented to the so-called heavy industry. The failure of this attempted modernisation led to mounting internal criticisms and as a result more political emphasis was placed on readjustment and reform. After the death of Chairman Mao Zedong and the purge of the Gang
1of Four in 1976, China’s repudiation of the closed door policy and its intentions to more fully embrace foreign direct investment (FDI) as a vehicle to obtain advanced technology and assistance in achieving the objectives of modernisation soon became part of its national economic strategy. This new emphasis on foreign owned enterprises was explicitly recognised by the formal inclusion of the Four Modernisations (agriculture, industry, defence, and science and technology) within the Chinese Constitution in 1977 and in the Tenyear Plan (1976-1985) announced during the First Session of the Fifth National People’s Congress in 1978. The subsequent measures to facilitate the gradual entry of FDI followed directly from this plan, when the “Law of the People’s Republic of China on Joint Ventures Using Chinese and Foreign Investment” was adopted as part of its Open Door policy on 1 July 1979 during the second session of the Fifth National People’s Congress. Yet, the original insistence on joint ventures, although there was no upper limit on foreign ownership, indicated that at that time China was not yet ready to welcome wholly owned subsidiaries of foreign multinational corporations (MNCs).
Since 1979, then, the Chinese government has gradually opened up its economy and embraced FDI as a vehicle to obtain advanced technology and assistance in achieving its objectives of modernisation. While foreign direct investment has experienced a rapid growth since 1979, its expansion has been subject to certain fluctuations at particular times. Chinese policy makers have used a system of carrots and sticks to entice and curtail foreign direct investment and initially limit it to particular modes of entry, industries and regions. As such, the regulation of the flow of foreign direct investment into China has had much to do with the country’s establishment over the years of special economic zones, development zones and industrial parks and what today are regarded as ‘clusters’.
The development of FDI in China since the beginning of the 1980s has expanded enormously, reflecting the evolving changes in economic conditions, investment environments and especially government policies. On the one hand, China’s market size and growth, its natural and human resource endowments, its physical,
2financial and technological infrastructure have made China an increasingly attractive investment site for foreign owned enterprises. On the other hand, China has relied on specific requirements, such as joint ventures, export targets, local content requirements and insistence on technology transfers in order to maximize the benefits of FDI to the host economy. The Chinese government thereby systematically tried to strike a balance between the need to attract foreign direct investment in order to acquire technology, conquer export markets and earn foreign exchange, and thereby maximising the positive fall-out to the host economy; to safeguard China’s autonomous decision-making authority and to orient and control the changeover from a centrally planned to a market economy.
Although Chinese administrators have since the outset tried to attract high technological activities to their country in line with their modernization policy, this has not always been as successful as anticipated. Yet, it has to be admitted that China has, however, gone more quickly than most countries through the investment development path (IDP) (Zhang and Van Den Bulcke, 1996; Dunning and Narula, 2004), which states that there exists a systematic relationship between the degree of internationalization of an economy (as measured by inward and outward direct investment) and its degree of economic development (as measured by gross domestic product per capita) (Dunning, 1993).
The first stage in the IDP is typified by a modest amount of inward FDI because of the limited exploitation of indigenous resources and capabilities and/or markets, and the absence of any significant outward FDI. During this initial IDP stage, exports only consist of resource and/or low-skilled, labour-intensive products, while imports are mainly made up of fairly standardized manufactured goods. Government policy is confined to providing the basic legal and commercial infrastructure and incentives (or protection) to local producers and foreign investors.
During the next stage market-seeking FDI is attracted into the country, particularly that of an import-substituting kind, while, as a result of an improved institutional infrastructure and the upgrading of
3indigenous capabilities, there is likely to be the take-off of exportoriented inward FDI, mainly of processed primary products or technology and light manufactures. Government policy is normally concentrated on upgrading the quality of labour and capabilities; on creating an active capital market and an effective (and accountable) banking system; and on ensuring a favourable business environment for both domestic and foreign investors.
Stage three is currently perhaps the most interesting one and, taken together with stage four (for at least parts of the economy), likely to be the most relevant one for the future of the Chinese economy, particularly in the larger cities and coastal areas. A growing and domestic market draws in market-seeking FDI to supply those products for which the investing countries earlier on had a comparative advantage to supply them. At the same time, there is an increasing tendency of foreign firms to engage in higher-value stages of export-oriented activities. Because of the upgrading of domestic resources and capabilities, indigenous firms are now beginning to exploit their foreign markets by outbound FDI and/or cross-border cooperative ventures, as well as seeking new outlets for increasing their own competitive advantages. An increasing proportion of exports now consist of medium to high technology-intensive goods and services. There is likely to be increasing regional specialization of economic activities, with agglomerations or networks of related activities. In stage four, too, there is likely to be a sharp increase in innovation-related activities. Often foreign-owned firms play a critical role in fostering such activities, particularly as part of their global or regional strategies. But this can and is also achieved by national and regional governments, partly by their willingness to upgrade the supporting infrastructure for higher-value activities, partly by the framing of a positive FDI policy, and partly by offering the appropriate tax and other incentives for their indigenous firms to be more innovative and seek out new markets, and for individuals to be more entrepreneurial and to upgrade their native skills.
From being regarded as the world’s assembly factory, China is now becoming an attractive location for higher value-added activities. A vast and growing economy, China is increasingly becoming a partner
4to foreign companies big and small. The country beckons and foreign businesses listen, wondering how, or if, they will manage to capitalize on China’s combination of growth, political stability, investment, market demand and its quest for still more advanced technology. While China has certainly not arrived yet in stage four of the IDP, in which outward FDI typically surpasses incoming FDI, the emergence of Chinese MNCs with investments in many parts of the world, illustrates that China is fast progressing towards an economic power base.
This study of the evolution of economic and technological development zones provides interesting insights into China’s evolving economic and foreign direct investment policy and the way the foreign owned companies have been enticed to locate within these development poles. The second part of the report stresses the contradicting pressures that push firms to globalize while at the same time having to take into account the local situation. In the third part, the economic literature about clusters is analysed. In part four an overview is presented of China’s evolving policy towards FDI with special attention to the geographical dimension. Part five surveys in greater detail a number of well organized zones in the major areas that have been particularly successful in attracting foreign owned firms. Finally, in part six, a short evaluation is given of Chinese policy to use economic and technological zones as a tool to transform their economy and some thoughts are presented about possible future developments.
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2. Glocalization: The Paradox of
Economic Space
Since the 1980s, both the country- and firm-specific factors influencing foreign direct investment have changed significantly. On the one hand, countries adopted a much more welcoming stance towards inbound investment and increasingly see it as a means of upgrading the competitiveness of their indigenous resources and capabilities. Multinational corporations, on the other hand, are increasingly taking a more systemic approach to their global activities and are pursuing more integrated production and marketing strategies.
The last two decades have also witnessed a gradual movement towards a world economy in which intellectual capital has emerged as the key wealth creating asset. In the 1990s, the market value of industrial corporations has been variously calculated at between two and a half and five times the value of their tangible assets, compared with one and a half times in 1982 (Handy, 1989; Blair, 1995; Edvinsson, 1997). The annual capital expenditure on information technology now exceeds the amount spent on production technology. The knowledge component of the output of manufacturing goods is estimated to have risen from 20 per cent in the 1950s to 70 per cent in 1995 (Stewart, 1997), while white collar workers increased their share of the labour force from 40 per cent in the 1960s to more than 60 per cent by 2000.
