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comparative advantage. This is of course true, however, being aware that the oxymoron “Socialist Market Economy” correctly describes a country in which central planned economy and Adam Smith’s invisible hand coexist, I believe the role of Chinese central and local governmental policies should be added to the market self-regulating behaviors just presented, and this way make up for the shortcomings of the flying geese model.
Indeed, the flying geese model takes account of the fact that the state plays an active role in the economy. Akamatsu (1961, 1962), Kojima (2000), Ozawa (2002, 2004a) and Stigliz (1996), all assert that governments undertake key responsibilities for the promotion of economic growth and that their intervention is one of the factors that made the Asian miracle possible. However, what they refer to is the so-called
“selective intervention” of the developmental state whose main justification was the correction of market failure (Kasahara, 2013). Despite its ability to coordinate the investment and ensure national development, this kind of intervention could not be as far-reaching as that of a planned economy like China.
We can conclude that although the flying geese model is a powerful tool, it is not able to grasp all the different shades of the phenomenon we are studying.
Next section will present the major governmental policies that in the case of China have affected investment allocation, directing investments towards different areas of the vast Chinese territory, according to the national political and social needs.
3 GOVERNMENTAL POLICIES
3.1 Spatial development China
Planning is a central characteristic of centralized, communist economies, and five-year plans established for the whole country usually contain detailed guidelines for the economic development of all the regions. With China’s transition from a Soviet-style planned economy to a socialist market economy, these plans have gradually shifted from setting exact production targets to being a guideline for the nation’s short-term development. Despite this background, however, five-year plans together with other major policies still have a strong impact on investment allocation.
For this reason this section is dedicated to the analysis of the spatial development of China, that is the gradual development of different regions brought about the launch of national policies. These policies, at different times, directed investments towards
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different areas of the vast Chinese territory, sometimes also altering the existing comparative advantage dynamics.
3.1.1 1980s: Pearl River Delta
The roots of the Chinese economic miracle can be traced back to the late 1970s when Deng Xiaoping adopted the Four Modernizations. Facing the urgent need of economic development, Deng decided to ease off the Maoist approach to foreign trade based on the Soviet model of Foreign Trade Companies and the clear separation between the national and the international economy. In order to attract foreign investments, Deng announced an “open door” policy to the advanced countries of the world and started a series of reforms to expedite the process.
A few months before the 3rd Plenary Session of the 11th Central Committee some firms in Hong Kong were already allowed to sign export-processing contracts with Chinese firms of the Pearl River Delta and the first export-processing zone was established in January 1979 in Shekou. Later that year, the Sino-Foreign Joint ventures law was promulgated and four Special Economic Zones (SEZs) were created:
Shenzhen, Zhuhai, Shantou and Xiamen. These SEZs offered special incentives in taxation, land leases, rent and wages to attract Foreign Direct Investments. Overseas investors were provided with a wide array of preferential policies including cheap land and tax exemptions. A few years later, in April 1984, the PRC further deepened the reform by opening 14 coastal cities to overseas investment: Beihai, Dalian, Fuzhou, Guangzhou, Lianyungang, Nantong, Ningbo, Qingdao, Qinhuangdao, Shanghai, Tianjin, Wenzhou, Yantai and Zhanjiang. Also introduced during this time were the first Economic and Technological Development Zones (ETDZs), which concentrated on the development of knowledge - and technology - intensive enterprises.
Through a simple analysis of the geographical distribution of the above-mentioned economic zones, it is easy to conclude that Chinese reformers led by Deng were eager to attract investments from nearby Hong Kong, Taiwan, and the Chinese diaspora in the Southeast Asia. Given the political instability of the leadership at that time and the lack of a legislative framework that could reassure foreign investors over the safety of their investments, China was not ready yet to target the investment of the Western firms.
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The launch of the open door policy coincided with what in Ozawa’s reformulation of the Flying Geese model is called a “period of industrial upgrading”
(Ozawa 2002). Taiwan, Hong Kong, and Singapore, in accordance with the Flying Geese model, started climbing the industrial ladder in the wake of Japan, ready to themselves become the leading geese of Asian economic and industrial development.
The Chinese quest for foreign money and technology fit with the need of the Asian Tigers of fragmenting the production process at home and hand off the low tiers of the industrial ladder to lower wage locations in neighboring countries. The positive conjunction of supply and demand paved the way for foreign firms landing in China.
3.1.2 1990s: Yangtze River Delta
In the 1990s, Beijing, backed up by the great success of the economic reforms in the Pearl River Delta, decided to hasten the marketization of the economy and put more efforts toward attracting foreign businesses. Through the establishment of the Shanghai Pudong New Area in 1992, the government decided to build a second economic growth engine, and make Shanghai become the center of an economic growth circles within a 600km radius. The spread effect would first affect nearby Suzhou and Kunshan, then Hangzhou and Nanjing, and finally the whole of Zhejiang and Jiangsu provinces. Being the nucleus of the regions development, Shanghai is also known as the Dragon’s Head of the YRD. Helping Shanghai become an economic center, Chinese leaders had the clairvoyance of easing the natural process of money flowing into Shanghai. In the 1840s, during the Opium War period, Shanghai was already a benchmark for neighboring cities. In the following years and especially after 1978, those cities adopted the strategy to “get close to Shanghai”
firstly to enjoy the high amount of resources poured into Shanghai during the planned economy, and then to attract investments (Zhang and Fu, 2009).
This process of agglomeration centered on Shanghai continued along the years and has made a further step in 2008 with the inauguration of the 36Km cross-sea bridge connecting Ningbo with Shanghai and the construction of many other infrastructures such as the 200km/h Nanjing-Shanghai express railway and the connection of a “three-hour city circle” highway network to connect Shanghai with sixteen major neighboring cities. With the development of a transportation network and communication facilities linked to Shanghai, more FDI were encouraged, and this in turn promoted further development and the creation of a virtuous circle.
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Unlike in the 1980, the new round of investment that flocked towards the Shanghai area did not coincide with a second period of industrial upgrading. As pointed out by Tuan and Ng (2002) in the 1990s, the Pearl River delta, from a comparative advantage point of view, was still a more favorable investment area.
Despite that, Guangdong felt the competition of the Yangtze River delta and lost a large number of investments. In this case is the establishment of the Shanghai Pudong New Area to bring momentum to regional growth and this way explain investment attraction.
3.1.3 2000s: Bohai Rim
After the Pearl River Delta and the Yangtze River Delta, China targeted the Bohai Rim as the new hotspot of economic growth. The Bohai Rim region is the Liaodong Peninsula, Shandong Peninsula, the Bohai Sea coastal economic zone, and it provides economic radiation effects to Shanxi, Liaoning, Shandong and Inner Mongolia in the East (Jin and Qi, 2010). Located in the Northeast area of the country, the Bohai region is rich of natural resources such as oil, gas, coal and minerals, and has a unique geographic position. The area enjoys proximity to Japan and Korea, the high-quality education of Beijing to provide high-quality workers, and the high number of scientific research institutes and R&D centers in Tianjin provide a knowledge spillover effect.
In 1999, backed up by the region’s great potential, Chinese central government included the creation of a Bohai industrial belt among the goals of the 9th Five-Year Plan, however the project did not take off immediately. The area was suffering from shortages in the sharing of the basic infrastructures, a non-regionally integrated industrial chain, inefficiency of the regional financial system and the lack of a leading economic center (Rong, 2012). The lack of infrastructure was solved by setting up a comprehensive network of sea-land-air transportation web that is rapid, convenient and widespread. As of today, the region hosts more than sixty ports, ten major airports, and many kilometers of high-speed railways and expressways linked into a network.
In 2003 and 2004, the Chinese Central Government Departments and the State Council further announced the so-called Northeast China Revitalization policy, and provincial leaders signed the “Bohai Sea Region Cooperative Framework Treatment”
(Rong, 2012). Finally in 2006, with the establishment of the Binhai New Area in
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Tianjin, the Bohai region was provided a leading economic center that could do what Pudong did for the YRD and Shenzhen did for the PRD. In the mid-2000s the Bohai Rim finally provided a favorable and attractive environment and started attracting many new investments.
Once again is the launch of far-reaching national policies to bring momentum to the Bohai Sea region's rapid economic development, attracting investments that might have been directed towards different destinations. Developing Tianjin into a third economic hub (after Shenzhen and Shanghai Pudong), the government started a growth pole where the incoming money and firms become themselves attractors for more money and new firms.
3.1.4 1010s: Western Development
In 2010, the so-called socialist market economy became the largest manufacturing economy in the world, overtaking the primarily service-driven economy of the United States (Meckstroth, 2013) (UN 2013). Furthermore, in 2013 China’s GDP reached 9.95 billion US dollars (IMF, 2013) (UN, 2013) making it the world's second largest economy by nominal GDP after the United States, and starting from 2013 is also the world's largest trading nation (Monaghan, 2014).
Noting the rapid development of the economy as a whole, we must be careful not to equate the country’s GDP growth rate with per capita economic growth. As already explained, the whole of China has not benefitted equally from the economic reforms. What the 1978-2010 spatial development just presented shows that the Chinese miracle is actually an Eastern Chinese miracle, while Western and Central China have played the role of provider of cheap migrant labor.
In order to help develop the poorer central and western parts of the country that had not enjoyed the economic benefits of China's opening up to the outside world, an “Open up the west” (xibu da kaifa 西部大開發) campaign was initiated by Jiang Zemin and Zhu Rongyi in 1999 (Wallin, 2006), a milestone in the nation's economic development. Since then, more than $52 billion has been invested in major infrastructure projects in the western region, one of the biggest economic regeneration programs of all time. These included flagship projects such as the 4,000 km West-East natural gas pipeline project, the second phase of which was recently opened. It also included the Qinghai-Tibet railway, completed in 2006, which runs for almost 2,000 km. Another major project was the extension of Xianyang Airport in Xi'an.
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Companies relocating also benefit in some areas from a lower rate of corporate tax of 15 percent instead of the usual 25 percent (Moody Moody, Hu, and Ma, 2011). Given the vastness of a region that contains about 70% of Mainland China's area, the creation of a Central China growth engine can have neither district nor single city dimensions. With the creation of the Cheng-Yu Economic Zone (Chengdu-Chongqing) and in the wider West Triangle Economic Zone (Cheng-Yu plus Xian) in a multi-city and multiregional scale, western China was finally provided with its growth engine.
Just before the country’s entry into the WTO in 2011, the National Development and Reform Commission approved the creation of the triangle, proposed by Chongqing in 2009 and agreed by Chengdu and Xian. The plan aims to integrate business, especially logistics, between the cities to stimulate economic growth (Zhang, 2009).
With the further launch in 2004 of the “Rise of Central China Policy”
(Zhongbu Jueqi Jihua 中 部 崛 起 計 劃 ) and supported by development of a transportation network ranging from rivers to roads, air and rail, the previously backward and isolated Chinese hinterland has started receiving an unprecedented amount of new investments. Thanks to those infrastructures, the companies that are now willing to invest there are not only those aiming at a share of the internal market, but also those export oriented. An appropriate infrastructure that facilitates communications between provinces and with the outside world is vital to compensate for geographical constraints that impede investments. If infrastructures were essential for the Hongkongese to invest in the PRD (Tuan and Ng, 2002), they become the sine qua non for the central regions to attract FDI.
3.1.5 Growth engines
In short, what I have presented as China’s spatial development, is the creation of economic “growth engines”, which spark regional economic growth. In the 1980s Shenzhen became the first engine for the PRD when many foreign companies set up their operations there following the launch of the economic reforms. A few years later, new national policies pulled FDI northward toward the YRD, where Pudong became a second engine in the 1990s. At the beginning of the new century renewed political efforts decided to let the northeast regions develop building in Binhai the third engine.
Nowadays, thirty years after the adoption of the Open Door policy, we are finally witnessing the engineering of another masterpiece. Now that the costal economic engines are running out of fuel, namely cheap labor and cheap land, thanks to
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government’s great efforts, many FDI are now flowing toward the undeveloped inland Central China, where the West Triangle Economic Zone is becoming the fourth engine.
Many foreign companies followed China’s spatial development step by step, and relocated their plants every time new incentives were available.