China first opened its doors to foreign investment in the 1980s with the establishment of the first Special Economic Zones in Shenzhen, Zhuhai, Shantou and Xiamen. Since then many other SEZs have been opened, and a number of other designations have been created to encourage different types of investment. Today there are approximately 189 Special Zones at a national level including Special Economic Zones, Open Cities, Economic and Technological Development Zones (see below), High Tech Development Zones, Free Trade Zones, Border Economic Cooperation Zones, Export Processing Zones, Software Development Parks and University Science Parks. All of these do not even include provincial and municipal level Special Zones. This mire of regulations can be difficult to navigate, to say the least. However, they should not defer foreign investors altogether, who stand to reap many benefits.
HOW TO CHOOSE THE BEST AREA TO INVEST IN
The key thing to keep in mind is that China is not an undifferentiated mass of 1.3 billion customers. Different parts of the country differ markedly in both the legalities associated with entry and in the way that locals respond to foreign companies. Its necessary first to define your objectives and then to do some research into which region would be the best place to meet those objectives. China's macro-regions are described below in brief:
a) South China: The first Special Economic Zones were created almost thirty years ago in South China, so this area is used to the presence of foreign companies. People there have an entrepreneurial mentality, the number of potential consumers is high and their income is also quite high in comparison to the national average.
b) East China: Like South China, incomes are high on the Eastern seaboard and the area is already "old" from an investment point of view. People living there have a high predisposition to follow Western life-styles. The East is highly developed, especially industrially, but also agriculturally. This makes investment convenient, because infrastructure is highly developed, but be aware that prices and salaries in this area are on the rise.
c) North China: This area can be defined as emerging, though its still attracting a high amount of Foreign Direct Investment (FDI). Its important to note that traditional values and cultural norms are stronger here, and this has a number of effects on consumption patterns and style. Traditional values are stronger here, therefore the consumption style is different.
d) Central China: The economy of central China is mostly agricultural, but its industrial base is developing. A common entrance strategy is to test a product by first introducing it in the less competitive markets of Central Chinese cities before introducing it to larger markets like Beijing or Shanghai.
e) Southwest China: Southwest China is densely populated but the market is slow and still emerging. As an emerging market, it is an interesting area to invest in, but it requires a good deal of patience.
f) Northcentral and Northwest China: These are the most underdeveloped parts of China. The Northeast is characterised by the presence of many State Owned Enterprises (SOEs), many of which are now in crisis, especially those in the mining and automotive sectors. The Northwest is dominated by sparsely populated desert, still quite isolated from the highly developed East. Since these areas are so under-developed they are in some ways a potential El Dorado for the far-seeing entrepreneur.
BENEFITS OF INVESTING IN A SPECIAL ZONE
Prior to its entry into the World Trade Organization (WTO) in 2001, Foreign Enterprises (Fes) enjoyed a number of very generous tax breaks and refunds. However, since 2001 China has been under some pressure to change these regulations, because the WTO emphasises non-discrimination between foreign and local enterprises in its member nations.
In response to that pressure, the National People's Congress promulgated a new Corporate Income Tax Law on March 16, 2007, to take effect January 1, 2008. The law erases taxation disparities between foreign and domestic companies and sets a new rate of 25% across the board. For those companies now enjoying a taxation rate lower than 25%, the law allows a five year adjustment period.
The law also addresses tax incentives, and the good news is that they are not all being done away with. The new tax incentive policy details incentives for “encouraged enterprises”, defined by both geographic location and business sector. Incentives will be awarded to those who invest in less-developed areas, such as the West, and in the high-tech sector.
As of this writing, the law is just a framework, and the specific regulations for implementation have not been promulgated.
CONCLUSIONS: WHERE TO LOOK FOR THE FUTURE
China's economic growth has been explosive over the past few decades, but it has also been uneven. The new tax policies are designed to help reduce the development gap between the coast and the interior, the cities and the countryside. Investment in under-developed areas requires a certain amount of courage because of the lack of infrastructure and specialized workforce, but the hope is that tax incentives will help these things develop. In short, those who are willing to invest the time necessary to understand China's emerging markets and have the courage to invest in them, stand to gain much.
References
Pay close attention to whether or not these areas have the appropriate permissions from the central government. In a 2003 investigation, the Central Government found several thousand illegal areas. A crackdown soon followed. www.usembassy-china.org.cn/fcs/china%20pulse/regional_dftz_may.doc
http://www.strategy-business.com/press/16635507/13455
"Competere e radicarsi in Cina", Musso-Bartolucci-Pagano, Franco Angeli 2005, based on the essay "Regional Market Segments of China: opportunities and barriers in a big emerging market" in "Journal of Consumer Marketing", vol. 17 n°1 55-72 of Cui G. and Liu Q.
"Myths about doing business in China", Harold Chee-Chris West, Palgrave McMillan, 2004. McMillan gives food as one example, asserting that Northern people prefer sweet things while Southern people prefer bitter.
http://www.cbbc.org/market_intelligence/presense/trade_zone.html
http://www.pwccn.com/home/eng/chinatax_news_mar2007_6.html
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