|
Contact Us • FAQ • Index • Search | ||
|
|
||
|
|||
|
|
|||
| ||||||||||||
|
Investment Climate in China: A
Tale of Five Cities In 2001 and 2002, with the
collaboration of the Enterprise Survey Organization of China’s Bureau of
Statistics, the World Bank surveyed 1,500 Chinese firms in five cities—Beijing, For China and other developing countries to do well, good macroeconomic and trade policies need to be complemented by a host of other institutional factors and policies that can be classified under the broad heading of the investment climate. Defining the Investment Climate The quantity and quality of investment flowing into China or any specific region depend on the returns that investors expect and the uncertainties surrounding those returns. The expectations can be categorized into the following broad, yet inter-related, components: • Macroeconomic, fiscal, monetary, trade, and exchange rate policies and political stability. In relation to trade, China has reduced its tariff rates to about one-third of what they were two decades ago, from 49.5 percent in 1982 to 16.8 percent in 1998. Partly as a result, trade increased from 15 percent of GDP in 1980 to nearly 50 percent of a much larger GDP in 2000. During the same period imports increased from about $36 billion to $192 billion (in constant 1995 dollars), while exports increased from $27 billion to $239 billion. • Efficacy of the regulatory framework. At the firm level the regulations affect entry and exit; labor relations and flexibility of labor use; efficiency and transparency of financing and taxation; and efficiency of protecting the environment, safety, health, and other legitimate public interests. Such regulations need to be designed in incentive-compatible ways, avoid adverse selection and moral hazard, serve the public interest, be implemented expeditiously without harassment and corruption, and facilitate efficient outcomes. • Quality and quantity of physical and financial infrastructure, such as power, transport, telecommunications, and banking and finance and the endowment of skills and technology. Entrepreneurs often cite infrastructure issues, such as power reliability, transport time and costs, and access to and efficiency of finance, along with the lack of skilled workers and the difficulty of access to advanced technologies, as key determinants of competitiveness and profitability. China’s success since the 1980s suggests that its investment climate incorporates many positive features, especially those related to political and macroeconomic policy stability. However, some recent changes in the structure of China’s economy require further structural reforms. China’s accession to the WTO, for instance, requires it to shift from discretion-based governance to rules-based governance, which in turn requires a reduction of the government’s role in how firms operate. For example, a vast majority of credit is provided to state-owned enterprises, which often cannot service their debts. At the same time small and medium enterprises have to rely mainly on retained earnings, personal wealth, or parent company financing to finance their investments. Another challenge is to create jobs for rural residents who have migrated to the cities and for workers laid off from state-owned enterprises. This also calls for regulatory reforms to reduce entry barriers for new small and medium enterprises, which have become the most important force behind job creation, and for financial institutions to make their credit facilities available to small and medium enterprises. China also lags behind its more developed East Asian neighbors in terms of education level and infrastructure. Within China, the investment climate is not uniform, and national indicators can mask important variations across regions. In collaboration with the Enterprise Survey Organization of China’s National Bureau of Statistics, the World Bank surveyed 1,500 Chinese firms in 2001 and 2002 in five cities (regions): Beijing, Tianjin, Shanghai, Guangzhou, and Chengdu (see Table 1). The survey asked in-depth questions related to firm performance, production, labor, governance, financing, and technology. To collect objective quantitative data, instead of asking, for example, whether red tape is an obstacle, managers were asked how much time they spend with officials to meet regulation requirements. Similarly, rather than asking them if labor laws are restrictive, the survey gathered information about the share of temporary workers and the extent to which firms have excess workers. Table 1. Population and GDP Per Capita for Five Chinese Cities, 2000
Source: Urban Statistical Yearbook of China 2001. Investment Climate Indicators Those indicators that were the most significant determinants of firm performance can be classified into the following categories: • International integration. A friendly investment climate encourages foreign entry and openness to foreign-made goods. Three measures are used to capture the extent of international integration: – The first two measures are the share of foreign-ownership and the share of firms that partnered with foreign companies, including joint ventures and joint research and development, training, and marketing. In Shanghai almost 40 percent of firms have foreign partners, and foreign ownership accounts for almost a third of the value of surveyed firms. In Guangzhou roughly 28 percent of firms have foreign partners, although overall foreign ownership stands at 35 percent. Chengdu, the only inland city in the sample, is, not surprisingly, the laggard, with only 10 percent of firms having foreign partners and an even lower share of foreign ownership. Beijing and Tianjin fall between these extremes. – Market share of the firm’s main product accounted for by imports. The higher the import share, the greater the exposure or openness to international competition. Guangzhou and Shanghai have greater exposure to international competition, with the market shares accounted for by imports being 11.7 and 8.8 percent, respectively. Chengdu and Tianjin have lower openness scores, with their shares being 5.9 percent and 7.4 percent, respectively. • Private sector participation. Cities with strong private participation are likely to be more dynamic, the government intervention in firm operations would be less severe, and this should bolster the investment climate. Guangzhou is the front-runner, followed by Tianjin and Chengdu. Shanghai is the laggard. The survey differentiates between three types of private owners: managerial ownership, private individual ownership, and foreign ownership. Chengdu is characterized by the largest managerial ownership and nonmanagerial private ownership, but the lowest share of foreign ownership. Shanghai is characterized by a relatively high level of foreign ownership (ranked just behind Guangzhou), but a lackluster level of domestic private ownership. • Domestic entry and exit barriers. Both policymakers and economic researchers have noted the strong domestic barriers to entry and exit in China. Guangzhou and Shanghai have lower entry and exit barriers and Chengdu has the highest barriers, with Beijing and Tianjin falling in between. The following indexes are used to measure such barriers: – The extent to which provincial borders deter trade. To compare trade across borders with trade within borders—taking factors such as transport costs and geographical barriers into account—the index involves calculating what the tariff rate would have to be to produce the same pattern of trade if all the markets were perfectly integrated. The imputed tariff level is the border effect. The higher the border effect, the greater the trade barrier erected by a province. In 1997, the most recent year for which data are available, this measure was highest for Chengdu, followed by Beijing, Tianjin, and Shanghai. The least protectionist province was Guangzhou, at less than half Chengdu’s level. – Market share of the surveyed firm’s main product. Guangzhou firms have the lowest market share at 7.9 percent, followed by Chengdu at 11.1 percent. Firms from Beijing (16.7 percent) and Shanghai (16.5 percent) claimed the highest market share. – Costs of hiring subcontracting firms (relative to overall costs). The more flexible the market, the less need for firms to keep all their activities in-house. The availability of subcontractors indicates a greater ease of entry for firms and a greater specialization of production, and would be expected to be an attractive feature of a location. Shanghai leads on this measure, followed by Beijing. Chengdu has a much lower share of subcontracting services. – Excess capacity. Large shares of excess capacity indicate that the barriers to exit can be substantial. Chengdu and Beijing top this measure of exit barriers, with their ratios being 22.1 and 20.5 percent, respectively. Guangzhou and Shanghai are better, at 16.9 and 17.2 percent, respectively. • Labor flexibility. The survey data provide two measures of exit barriers for labor. More flexible labor markets would be characterized by higher nonpermanent labor ratios and lower overstaffing ratios. Guangzhou leads the other cities in terms of reducing exit barriers in the labor market. On average, firms in Guangzhou have laid off only 6 percent of their workers, but almost 21 percent of their workers are nonpermanent. Shanghai ranks second. Its share of nonpermanent workers is 14 percent, slightly lower than that of Tianjin (14.7 percent), but its overstaffing ratio is only 7.5 percent, more than 10 percentage points lower than in the other three cities. Chengdu is the laggard, with 12 percent of workers being nonpermanent, but a overstaffing ratio of 20 percent. Beijing and Tianjin are once again in the middle of the pack • Skills and technology. Three indexes measure skills and technology: – Share of workers with formal training. – Worker quality, which increases with the shares and schooling levels of technical, managerial, and sales personnel. – Research and development (R&D) intensity, which reflects the R&D expenditure per worker, the ratio of R&D staff to all staff, and the reliance on outside R&D services. Shanghai, Beijing, and Chengdu appear to be significantly stronger in terms of skills and technology endowment. In contrast, even though Guangzhou has the highest ratio of trained staff, it ranks lowest in staff quality and R&D intensity. This may reflect the high ratio of migrants among Guangzhou’s workers and the low-tech nature of firms in Guangzhou. Tianjin exhibits the lowest ratio of trained staff, the lowest intensity of R&D, and the second lowest quality of staff. • Financial services. The financial services availability index indicates the availability of external financing, such as t foreign loans, bank financing, parent company financing, and the availability and amount of trade credit. The index decreases with the extent that the firm has to rely on its own retained earning or family financing. Shanghai is clearly the leader, Guangzhou is second, Beijing and Chengdu fall in the middle, and Tianjin lags behind. • Government effectiveness. An economy is expected to function better if the state ensures a level playing field, if bureaucrats are more interested in enforcing efficient rules than in maximizing bureaucratic budgets, and if the government provides sufficient resources to set up an environment characterized by an adequate supply of public goods (public safety, infrastructure, and so on). Three indexes measure the effectiveness with which the government provides public goods and plays the role of "helping hand" rather than "grabbing hand": – Informal payment, the share of sales spent on gifts or bribes to officials of government and regulatory agencies. Cities with relatively lower levels of informal payments to government regulators are Shanghai, Guangzhou, and Beijing. – The costs to firms in terms of the share of time that senior managers spend meeting with government officials. The lowest costs are in Chengdu, Guangzhou, and Shanghai. – The share of shipments lost because of theft, breakage, or spoilage. Public safety and ports are largely a government responsibility. Beijing, Guangzhou, and Chengdu suffered the most losses. Main Findings and Policy Recommendations Guangzhou and Shanghai are clearly leaders as concerns their investment climate, while Chengdu and Tianjin lag the farthest behind. Beijing falls in between. The investment climate shows large variations across the five cities as follows: • Shanghai is characterized by the best international integration, financial services, entry and exit conditions, and labor market flexibility, but has the lowest level of domestic private sector participation. Its top issues for reform should be to improve its domestic private sector participation, and to enhance flexibility in the use of temporary workers. • Guangzhou does not produce products that are as sophisticated as those produced in Shanghai, but it nonetheless uses its advantages to claim the highest sales growth rate and investment rate. It has the most flexible labor market, fluidity of entry and exit, government efficiency, and private sector participation. Its international integration is also reasonably strong. The top reform issues for the city to consider are upgrading skills and finance. • Beijing has no especially strong advantages or disadvantages. It could benefit from some focus on greater labor market flexibility, entry and exit, and international integration. • Tianjin is good in relation to private sector participation, falls in the middle in terms of entry and exit fluidity and labor market flexibility, is poor in international integration and government efficiency, and worst in skills and technology and financial services. Therefore improvements primarily in skills and technology, but also in international integration and government efficiency, should dominate the reform agenda. • Chengdu, the only inland city the survey covered, lags the farthest in most performance measures and investment climate indicators; however, it does have a good level of private sector participation, with reasonable skills, especially in technology. The top priorities for reform should be to foster greater international integration and to lower entry and exit barriers. Enhancing the investment climate could result in substantial growth. Improvements in the investment climate could spur investment, sales growth, and productivity. For instance, if Chengdu could attain investment climate indicators identical to those in Guangzhou or Shanghai, the productivity of its firms could increase by about 30 percent, the investment rate of its firms could rise from 14 to 19 percent, and sales growth could increase up to 50 percent. David Dollar is director, Development Economics Vice Presidency (DECVP), and Mary Hallward-Driemeier, Shuilin Wang, and Lixin Colin Xu are senior economists at the World Bank. Anqing Shi is a World Bank research analyst. Scott Wallsten is a resident fellow at the American Enterprise Institute. |
| ||||||||||
