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Special> China International Fair For Investment & Trade> Beijing Review Exclusive> Investment
UPDATED: July 12, 2009 NO. 28 JULY 16, 2009
A Headquarters Economy
Chinese city managers are trying to attract more company headquarters


HOME BASE: Shanghai is home to more than 200 regional headquarters of multinational companies. Top-grade office buildings along the Huangpu River are one of the choices for multinational companies to locate their offices (ZHANG MING)

On June 29, Beijing launched a policy designed to encourage multinational companies to establish headquarters in the Chinese capital, saying that multinational companies that establish their corporate or regional headquarters there will receive a maximum subsidy of 10 million yuan ($1.46 million). Senior managers are qualified for household registration in Beijing and company leaders will receive a maximum bonus of 1 million yuan ($146,413).

Zhao Hong, Director of the China Center for Headquarters Economy Research under the Beijing Academy of Social Sciences, said that this policy illustrates the position of the Beijing Municipal Government—that is, Beijing managers hope the city will develop into a cluster of multinational company headquarters.

According to the Beijing Municipal Government, Beijing has so far approved the establishment of regional headquarters for 164 foreign-invested companies, most of which are among the world's top 500. Of the total, 41 are confirmed as regional headquarters.

But Beijing is not the Chinese city housing the most headquarters of multinational companies. That distinction belongs to Shanghai, where 612 foreign-invested companies have established regional headquarters, of which 191 are recognized regional headquarters.

In addition to Shanghai, Beijing is also competing with Guangzhou, Shenzhen, Tianjin, Wuhan and Chengdu—all central cities that are cultivating a headquarters economy.

Multiple benefits

Headquarters economy means that an area uses its special resource advantages to attract a cluster of corporate headquarters and thus wields significant influence on the economic development of the region.

In others' eyes, multinational companies choose to establish headquarters in China because the country as a whole is developing quickly, not because one particular Chinese city offers unique advantages. But Beijing and other Chinese cities see it differently. In their opinion, developing a headquarters economy can bring them huge benefits, and this is the major reason they lobby multinational companies to establish headquarters in their cities.

The first benefit is increased tax revenue. As independent economic entities, headquarters of multinational companies must pay a certain amount in local taxes. In the meantime, since most employees at corporate headquarters are senior white-collar workers, they pay income tax on their high individual incomes.

Among the foreign-invested companies in Beijing, only 1 percent have established regional headquarters in the city, but they contribute 23 percent to the total sales revenue generated by foreign-invested companies. Their net profits and the taxes they pay account for 32 percent and 22 percent of the total among all foreign-invested companies.

In cities with a cluster of headquarters, a host of related service industries also benefit, including information services and financial services.

According to Zhao, when a multinational company moves its headquarters to a region, closely related knowledge-based service companies will move there as well.

The investment in office buildings and real estate associated with a headquarters economy also contributes a lot to the city's economic growth because it props up the demand for quality office buildings.

Figures released by the Beijing Municipal Government show that in recent years, the vacancy rate of grade-A office buildings in Beijing has been steadily declining, with inadequate supply but high demand. Because the vacancy rate of quality office buildings has stayed low, rent and selling prices are increasing. On the East Second Ring Road where headquarters of multinational companies crowd, the annual rent increase for office buildings has been higher than the average level for Beijing. The highest annual growth rate was 15 percent, twice the average level.

A headquarters economy also stimulates local consumption. Companies' commercial activities and research and development spending, along with individual daily consumption by senior white-collar workers and their families in areas such as housing, transport, education, fitness and shopping, play an important role in promoting the city's economic development.

A headquarters economy utilizes human resources in the region and creates opportunities for skilled workers. It provides further job opportunities by stimulating development of the tertiary industry, including knowledge-based service industries and ordinary service industries.

In Zhao's opinion, what is more important is the "social capital effect" brought by a headquarters economy. If a region can attract a large number of corporate headquarters, it indicates a good commercial environment, which enhances the region's reputation, popularity and international position and promotes the appreciation of real estate. At the same time, a headquarters economy accelerates the nurturing and concentration of knowledge-based talents, multicultural fusion and interaction and the city's international progress.

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