Investing in China's Economic Development Zones: A Managerial Guide

By Firoz, Nadeem N.; Rezvani, Farahmand et al. | International Journal of Management, June 2003 | Go to article overview

Investing in China's Economic Development Zones: A Managerial Guide


Firoz, Nadeem N., Rezvani, Farahmand, Ramin, Tagni, Abdallah, Wagdy, International Journal of Management


The Foreign Trade Zones (FTZ) appears to be gaining considerable attention among developed nations like the United States. Its many advantages make Trade Zones worth considering as a potential strategy for developing nation such as China Less developed countries seemingly have not recognized the many advantages of these zones. In the US there are more than 100 FTZs. Around the world more than 500. China currently has only five. Iran just opened its first FTZ last year Operating in a foreign trade zone offers many commercial and economic opportunities. It is something like having an overseas plant without leaving home. Although the zones are technically outside China from customs point of view, the foreign manufacturers still benefitfrom many advantages such as cheap labor, lower customs duty, tax holidays, abundance of raw materials and lower corporate tax. The focus of this paper is China's Economic Development Zones, and the purpose of this secondary research is to help educate foreign investors in knowing where these zones are and how to use them gainfully.

Introduction

China is a centrally planned (Ball & McCulloch, 2001) economy and uses protectionism to control its imports and foster its exports. China restricts foreign investment outside the designated zones. Today one can invest in the zones but not freely outside the zones. China is using the FTZ concept exceptionally to their advantage. In other words, they are maintaining protectionism (Cateora and Graham, 2001) and at the same time benefiting from tremendous foreign investment inside the zones.

China uses many different kinds of Zones to attract foreign investment. One of the oldest concepts is Free Port, and an example is Hong-Kong. After that came Export Processing Zones, which later expanded to become Foreign Trade Zones (FTZ). Currently China uses a new concept called Special Economic Zones (SEZ), and within SEZ is the Coastal Open Cities (COC). Recently, China has introduced a new idea that is Economic Trading Development Zones (ETDZ). There are also other new ones, which will be seen later in this paper. All of these zones are basically tax and custom duty havens for investors, with roots in the basic FTZ ideology. In this paper, therefore, the author will use one term FTZ, for all types of zones in China.

Exporting is the most desirable international marketing activity of a multinational corporation because it is the easiest and fastest way to expose products in a foreign market. Keegan (2000, p. 199). Exports bring in foreign exchange, create jobs, expand markets at home and abroad, contribute to profit, positively help the balance of trade and the balance of payments, Hill (2001, p. 208). However, these advantages are just one side of the coin. One country's exports are another country's imports. All the positive factors for the exporting countries may well become negative for the importing country. Negative factors include the loss of foreign exchange, possible loss of jobs, business and markets, and negative effect on balance of payment and trade. Host countries protect their interests by using various tools and techniques, such as tariff barriers and nontariff barriers. Tariff barriers include taxes or duties imposed on imports Onkvisit (1997, p. 91). Non-tariff barriers include import or export quotas, buy national product laws, health and safety standards, licenses and anti-dumping regulations Onkvisit (1997, p. 260). But other options exist for multinational companies (MNC's) to enter a host country (in China, for instance, China is the host country for a U.S. MNC) when import restrictions are imposed. Some options are licensing agreements, direct investment, joint ventures, and management contracts, Johansson (1999, p. 176). But each of these options has a built-in protectionism interest for the host country. Almost all countries on a daily basis use protectionism strategies. The nature of protectionism is based on "who needs whom". …

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