Over the past year, China's special economic zones have taken flak from officials who blame them for accentuating regional wealth in-equality and for becoming breeding grounds for unlawful and immoral business practices. The industrial parks and development zones have also been experiencing difficult times because of the central government's decision to phase out important preferential policies. The outlook is further blighted by the devaluation of Southeast Asian currencies which is making these countries more at-tractive locations for export processing.
These are some of the reasons why foreign investment totals are falling, both nationally and in the zones. During the first nine months of this year, contracted foreign investment in China stood at US$34.9bn ?39 per cent down on the same period in 1996.
Tianjin Economic Technological Development Area (TEDA) is one of China's most successful economic and trade development zones, but even it has not escaped the downturn. Foreign investment in TEDA between January and October 1997 was US$1.2bn, making it highly unlikely that the year-end figure will match the 1996 total of US$1.92bn.
Given the less favourable investment climate, TEDA is introducing several initiatives designed to maintain momentum. These include creating more sub-zones in partnership with foreign governments, expanding the area of TEDA and its various sub-zones within Tianjin municipality and even managing zones in other parts of China. This latter initiative is perhaps the most radical but it is well timed in that Beijing is placing great emphasis on developing interior parts of the country. Consequently, while TEDA and other coastal zones can expect their preferential privileges to be eroded in future years, inland regions are banking on an improvement in their comparative advantage.
In December 1984 TEDA became oneof the first industrial zones in China to be approved by the central government. In succeeding years this former salt plain has grown in stature.
Along with the four special economic zones, TEDA is one of the fastest-growing and largest zones in the country. Cumulative contracted investment by October 1997 was US$90bn, of which 85 per cent was utilised. Motorola is by far the biggest foreign investor, having al-ready committed US$1.2bn, but there are many other leading names including Coca-Cola, AST and Honeywell of the US and Samsung, LG, Daewoo and Hyundai of South Korea. Tingyi, the Taiwanese instant noodle-make which dominates the mainland marketplace, is one of the longest established residents while recent arrivals include General Semiconductor of the US, which hopes to employ initially around 750 workers. In total, TEDA is home to 30 of the For-tune 500 companies.
Learning from Singapore
The presence of these big names is a comfort and attraction for smaller international firms. There are now nearly 3,000 foreign enterprises in the zone but it al-ways seems to be Motorola which makes the headlines. Employing 9,500 workers in TEDA, the electronics giant has created a community of its own, even running its own newspaper and television station. "We recognise that we have become over-associated with Motorola and we are now keen to encourage more smaller and medium-sized companies," says Mr Chen Jianping, vice-director of the TEDA's economic development bureau.
Good infrastructure built up over the past 13 years, a well educated and skilled regional labour force and proximity to Tianjin port are its three main advantages. The German-Finnish company SEW Eurodrive, which makes mechanical gearboxes, spent two years .analysing possible sites for its Asia-Pacific manufacturing headquarters. It cited all three factors in its decision to choose TEDA. Foreign trade will be a centralpart of SEW's business and therefore proximity to north-east China's biggest container port was a major attraction.
Equally important to most foreign investors is TEDA's reputation for being the best managed of all the Chinese-run zones. "From the very beginning we believe we have adopted high standards here," says Zhang Dongguang of TEDA's information department. Gaining a reputation for competence and efficiency is a significant achievement for a city which is known for being conservative and located so close to the watchful eye of the central government. "TEDA management is open and efficient," says Mr Victor Zhang, general manager of SEW-Eurodrive (Tianjin). "They are always ready to give a hand to enterprises."
Not everyone is convinced that TEDA is the best managed Chinese-run zone. Mr Pierre Tabray, general manager of the French company Merlin Gerin, says there are now more dynamic areas around Beijing. This subsidiary of Schneider has been producing electrical circuit breakers in TEDA for a decade. Like others, Tabray praises a helpful management but he does have his complaints, such as an inability to find industrial buildings for rent.
To their credit, TEDA zone officials are not complacent. "Recently we have been talking about doing everything to international commercial practice," says Zhang Dongguang. "We have learned a lot about foreign trade zones and export processing zones from the rest of the world." In the area of city planning, TEDA has been learning from Singapore and it is also working with a Canadian company in this area. Officials readily admit that commercial services, such as banking and logistics, have been neglected at the expense of the physical environment.
More investor choice
One of TEDA's main problems is being about 50km from the city of Tianjin, where most workers prefer to live. De-spite an expressway linking with Beijing and Tianjin, the journey is one workers resent. Motorola, for example, rents 94 buses every day to transport its staff. Discussions are taking place with the World Bank and the Canadian government to build a high-speed railway to Tianjin, although no timetable has been announced.
In order to encourage more people to live in the area, TEDA is offering subsidised housing and selling low-priced land to companies to build apartments for their employees. Motorola is currently in talks with TEDA about buying land.
TEDA has a total planned area of 33 sq km, of which 22 sq km has so far been developed. However there are plans to expand once this area has been fully utilised. "By 2000 TEDA will become a modern industrial city," says Zhang Dongguang. By then, the population is slated to have increased to 200,000 and industrial output value to Yn117bn ?equal to the current total industrial out-put value of Tianjin city.
City officials probably have mixed views about the rise of TEDA. "Tianjin is not the most advanced-minded place in China," says Tabray. "TEDA officials have difficulty getting Tianjin to move a little more. [The city] does not want it to grow too much".
There are three sub-areas.all in separate locations within Tianjin municipality a chemical industrial park, a microelectronics industrial park and Yixian scientific and industrial park. The Yixian park was formerly run by an-other county but was transferred to the control of TEDA because of shortcomings in management efficiency.
By offering different investment environments in different areas, TEDA believes companies will have more choice when it comes to investing. For example, in the microelectonics park on the edge of Tianjin city, companies can take advantage of employing workers without having to bus them long distances every day. This is particularly important for the likes of Motorola which is building a semi-conductor plant here, since this is a relatively labour-intensive sector. There are also the benefits of being located close to sup-pliers and other companies involved in similar activities. Motorola plans to achieve 65 per cent local content across all product ranges by 2000, a target which is helping to attract many of its suppliers such as British Oxygen.
During 1997, foreign investment in all China's zones has been adversely affected by a change in central government policy. "When TEDA was initiated in 1984, we were granted many preferential policies by the central government," says Zhang Dongguang. "However, recently some preferential policies have been taken away, such as the ending of customs and VAT exemption on imported capital equipment. In addition, surrounding countries have adopted a more open investment climate, in some cases offering more preferential policies than in China."
The impact has been apparent in zones right across China. Mr Robin Hu of the Singapore Economic Development Board who works at the Suzhou-Singapore Industrial Park, claims that the Suzhou zone is the only one in China to have recorded an increase in 1997 investment over 1996.
Against this background TEDA is taking a flexible approach. Because of the shift in government policy, TEDA is now targeting more domestic companies, which now account for about 35 per cent of the total investment. Officials are aware that future performance will depend more on management efficiency and services than preferential policies. This is especially true because of the central government's desire to promote internal regions of the country.
One of the current initiatives is to as-sign an area to a foreign government body which will manage the land exclusively for companies from the home country.
However, the one experiment in this area to date has not been an unqualified success. A 1.2 sq km Korean Industrial Park has been slow to progress, having so far attracted just more than 30 investors out of a target of 100. While TEDA contains many Korean investors, few have opted to locate in this park. Some blame has been apportioned to the inefficiency of the Korean Land Development Corporation, a Korean government body which manages the park.
Whatever the reason, this experience has not deterred TEDA from looking to replicate the concept with other governments. Talks have taken place with the governments of Singapore and Germany, but nothing has so far materialised.
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