Box: Industrial Parks Boost China’s Economy
by Qi Xiao-Mei

China’s nonstate sector is developing rapidly, especially since the government lifted several restrictions and gave entrepreneurs more leeway for conducting business. The nonstate sector produces two-thirds of annual GDP from one-third of the total gross capital. The flourishing new industrial parks are an important engine of the country’s rapid economic development.

Zhejiang province, located on China’s southeast coast south of the Yangtze River delta, with a population of 45 million, is China’s most rapidly growing region. Last year the province’s enterprises generated revenues totaling Y 110 billion, up from Y 80 billion a year earlier (using an exchange rate of Y 8.3 to the dollar). Both in terms of GDP growth and trade surplus, Zheijang has been among the top provinces for several consecutive years. It is also the province that has the most nonstate firms, with annual sales topping Y 100 million. Nearly one-fifth of Forbes 100 wealthiest people in China are from Zhejiang.

This prosperity is driven by the nonstate industry, which is concentrated in the province’s more than 300 industrial parks, whose average annual production value exceeds Y 100 million. The parks’ average annual growth rate is about 4 percent, faster than the average growth in the province. Industrial parks account for almost two-thirds of the province’s total production and have become the main driving force in the region. Several new industrial parks are under construction in Zhejiang and elsewhere, especially along the southeast coast and the Zhujiang delta.

China’s first industrial zones, created in the early 1950s, were designed to host huge state-owned enterprises processing such basic materials as iron, steel, aluminum, and petroleum. Even today, these are mostly resource-based industrial areas. Even though many of these state-owned enterprises have been struggling with large losses for years, they still receive significant support from the government.

Thus the traditional industrial parks have preserved their dominant position, but the new privately built and managed industrial parks are becoming increasingly important. Smaller more dynamic enterprises—which are autonomous, flexible, and profit-oriented—are replacing the huge, dominant, state-owned enterprises. These new enterprises are not just saving on energy and transport costs, but are also developing horizontal and vertical ties with each other, exchanging information and knowledge in addition to commodities. Thus these industrial parks are becoming knowledge zones, providing a favorable environment for developing innovative abilities and maintaining a competitive edge over global rivals. In another departure from tradition, the parks are managed by nongovernmental business associations made up of representatives of the parks’ enterprises.

Many of the firms are small workshops responsible for an intermediate phase of manufacturing, allowing those at the finishing end of the production cycle to choose between numerous design varieties. Thousands of these small, highly specialized workshops are clustered around industrial park trading companies, which are usually major players on the international arena that can professionally market hundreds of products. This organizational pattern combines the flexibility of small enterprises with the stability and support provided by large networks. Smaller companies can focus on highly specialized production and share the costs of infrastructure investment and of various business services, such as consulting, quality control, and training. They can also save on transaction costs by keep smaller inventories and spending less on transportation.

Even though industrial parks can achieve economies of scale in production through specialization and collaboration, they cannot compete with large state-owned enterprises in the fields of research and development and finance. They are too small to build up a marketing network and brand recognition. The state-owned research and development centers are therefore extremely important: they can provide technical support and professional training, can lower the technology barrier to market entry, and can create a sustained competitive edge for the areas in which they are located. As for finance services, local governments are under pressure to support loan guarantee agencies, help enterprise credit centers, develop local finance institutions, establish local stock markets if conditions permit, and provide direct financing for medium and small enterprises.

The author is an associate professor at the School of Economics and Management, Hainan University, Haikou, China.