In the zone

Since China’s first high-tech business park, Zhongguancun, was set up in Beijing in 1988, the number of economic development and high-tech business parks have multiplied across the country.

To attract investors into these industrial zones, the government offered reductions in industrial land prices as incentives for foreign investment.

But to ensure the credibility of these companies, Beijing requires that the registered capital be 50% of the total investments put towards setting up the facility in the business park. Once they pass the minimum registered capital level of US$300,000 per 667 square meter, foreign companies are free to reap the cost benefits of cheap land in the park.

A rising number of foreign investments in  R&D and high-tech industries is being pumped into  China as the country noticeably shifts away from traditional man powered industries toward value-added high-tech industries. In business parks, the government offers incentives to local and foreign companies to foster this growth.

Incentives for growth

Income tax incentives are offered to software companies in business parks where both foreign and domestic players are only taxed at 15% and 33%, respectively. Companies are also offered tax exemptions, depending on their profitability, in their first two years of tenancy, and are later taxed at half the rate in the following three years.

In March 2007, the National People’s Congress passed the China Income Corporate Tax Law, unifying the business tax for foreign and domestic companies at 25%, which will be effective from 2008. The government has decided to issue preferential policies to companies operating in certain business parks by maintaining tax levels at 15%.

In recent years, government incentives and the benefits of setting up facilities in business parks have created an increasing demand for property in first- and second-tier cities, pushing up commercial and industrial real estate prices.

In Shanghai, demand for office space has contributed to both high prices and overcrowding. A recent example is SOHO Buildings in the Micro Electronics Port in Zhangjiang High-Tech Park, where the prices are almost equal to that of medium- to high-end office rentals in the central business district of Lujiazui.

Industrial overcrowding is also pushing up prices for suburban office space in first-tier cities, which has led to companies setting up facilities in second-tier and emerging cities.

Generally speaking, small- and medium-sized enterprises (SMEs) prefer short-term contracts to retain their flexibility when setting up facilities in business parks. As a result, business park developers prefer companies with large revenue caps because they can afford longer-term leases, which reduce the risks of developers dealing with leasing out short-term contracts that have met their deadline.

Yet there are still suitable business parks that will fit the needs of different companies.

Investment tips

Companies looking to set up their facilities within a business park should first evaluate the business location and market potential of its client base, weighing up the costs and benefits of setting up shop in emerging, first-, or second-tier cities. For example, if a company has many Korean and Japanese clients, it would be strategically wise to set up facilities in a second-tier city like Dalian, which is geographically and logistically more suitable than first-tier Shanghai.

Other factors to consider are the human resources and the pool of available skilled labor in the area, infrastructure maturity in the accessibility of roads, metros and buses, and logistics.

The decision to buy or lease commercial property is also very important. Some SMEs may lack the resources to buy commercial property or lease long-term, but one of the advantages of having a long-term leasing operation is the convenience of having tenants make use of utilities and services that companies otherwise have to purchase.

If commercial property is purchased, the landlord serves as the intermediary to screen potential tenants, and can evict or prevent unsuitable tenants from occupying areas of the park.

Each industrial zone has different requirements that can offer a variety of benefits. A foreign enterprise looking to invest in one of these zones should check the local regulations and policies to see which area suits them the best.

There is a business park suitable for each company, and the options and incentives of setting up shop in one of China’s industrial zones are vast and abundant.