New FTZ will help boost poorer region

It's a step in the right direction, but expansion of zones to 11 in a short time span still allows room to review the details

With the recent government announcement of a further seven free trade zones across the Chinese mainland, subsequent discussion and analysis has focused very much on the eclectic nature of the industrial sectors they will cover.

But little debate appears to have taken place on the geographical dispersal of these additional zones and the overall regional coverage of what will soon be a total of 11 FTZs across Chinese mainland. Of course, the government is to be applauded for selecting geographical locations in different parts of the hinterland of the Chinese mainland, with five of the new seven situated far inland.

But has it gone far enough and are the FTZs well placed to stimulate the poorest regions?

Most would agree that West China, in particular the vast northwestern provinces starting from Shaanxi, Gansu and Qinghai and stretching to the furthest outposts of Ningxia Hui and Xinjiang autonomous region, present the greatest challenge to the sustainability and social cohesion of the Chinese economy.

So, the announcement of a new FTZ in the northwestern province of Shaanxi makes a lot of sense and will, without doubt, provide some sort of boost to the economic development of the overall western region.

But the vastness of the northwestern region, together with the sizeable poverty gap between this area and comparatively more affluent parts of China, behoves the central government to do more.

According to the recent announcement, the new Shaanxi FTZ will cover an area of 119.95 square kilometers - a respectable size. This FTZ will also be characterized by different sections with their own industrial focus, such as high-tech production, international trade and sci-tech production. All very good but, situated at the very eastern tip of this enormous region, the Shaanxi FTZ could struggle to act as any sort of regional hub of economic activity and its influence could, therefore, be quite severely limited.

The key reasoning behind this spread of new FTZs, especially the new Shaanxi FTZ, is the creation of an economic and business environment that is far more conducive to foreign direct investment. An influx in FDI that is sought in order to engage local and international business. Let's not forget that it was the establishment of China's coastal special economic zones, the consequent injection of foreign capital and arrival of international business, that ignited the Chinese economic miracle almost 40 years ago.

But geographical location is crucial. FDI and any international business relocation will only take place if the incentives are sufficient and, crucially, the regional base can facilitate wider regional growth.

In the case of the Shaanxi FTZ, the location at the eastern edge of the wider northwestern region will create equivocation among foreign investors, and subsequent investment will likely spread westward back toward the coastal provinces and first-tier cities of Beijing and Shanghai.

This may also mirror any foreign investment inflows where the new Chongqing FTZ is concerned. The chosen location here is also far from central in the wider south western area of the Chinese mainland.

And it is not just geographical centrality that is key to FTZs. It is also essential that local industry should play a full role in any FDI initiatives and work very closely with any international company that decides to relocate to the region. Doing business across China varies according to regional cultures, customs and regulations and therefore requires effective partnerships between foreign and local business.

But with the recent announcement of the new FTZs came the news that foreign companies can form a wholly-owned foreign enterprise inside an FTZ with no requirement to enter into any form of alliance with a local industry partner.

An over-reliance on foreign businesses and their brands perhaps limits further elevation of the Chinese economy more than any other factor. It is, therefore, imperative that foreign businesses that take advantage of the economic and investment incentives on offer inside China's FTZs also have to ensure they contribute to the development of local industry. Alliances and partnerships may help, if only a little, in the short term but for lasting, long term advancement of domestic Chinese companies, co-branding agreements are the only way forward.

Co-branding ensures the Chinese partner also develops, in part, a competitive brand identity in conjunction with any established foreign enterprise and this is just what is needed if Chinese industry is going to make an effective transition from reliance on low cost advantage.

Co-branding should also not deter foreign investment. Foreign companies that decide on entry to any of what will soon be a total of 11 Chinese FTZs should do so with a long-term vision and detailed plan that is much more about Chinese mainland market penetration than simply low-cost production. And in order to achieve significant and sustainable competitive advantage across China, foreign enterprises should be well aware of the need for local knowledge and learning that can only happen with a suitable local company as a co-branding partner.

Expanding China's FTZs to 11 in such a short time span is very much a step in the right direction, but there is still time to review the detail. Subtle but significant modifications are needed in geographic location, especially moving the Shaanxi FTZ closer to the geographical center of Northwest China, and in replacing "cooperation" between global and local business with "co-branding".

The author is a visiting professor at the University of International Business and Economics in Beijing and a senior lecturer at Southampton University. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 08/04/2017 page9)