Preface

With the accelerating economic globalization and regional economic integration, the fourth global gradient transfer of industries and swifter capital flow from coastline to west, China's central region is now witnessing brand new challenges and opportunities in introducing foreign capitals.

China's regional policies for future utilization of foreign investment are supposed to promote balanced inter-regional development in the spirit of building a harmonious society. Thereafter, the central region is faced with greater challenges in bringing more advanced technologies and making better use of foreign investment by unleashing its comparative advantages.

As the central region represents a key footprint in attracting foreign capital, reinforcing efforts to promote foreign investment is essential to follow up on the central government's strategic plans to facilitate the rise of central China and to improve the competitiveness and innovation of this region. The Ministry of Commerce has taken the initiative to formulate this plan for foreign investment promotion in central China, as part of the effort to set a benchmark for preparing future plans for other regions.

With the help of the World Bank's Foreign Investment Advisory Service (FIAS), Department of Foreign Investment Administration of Ministry of Commerce, Chinese Academy of International Trade and Economic Cooperation of the Ministry of Commerce, together with the foreign investment authorities of Shanxi, Anhui, Jiangxi, Henan, Hubei and Hunan provinces formed a task force and jointly launched the preparation for Central China Foreign Investment Promotion Plan (hereinafter referred to as "Plan") in the first half of 2007. The draft Plan has been prepared on the basis of extensive information-gathering, analysis and research that lasted over two years.

The Plan covers six central provinces, i.e. Shanxi, Anhui, Jiangxi, Henan, Hubei and Hunan, an area of 1.027 million square km and home to a population of 361 million. The Plan is prepared for the period between 2009 and 2014.

It is the first regional investment promotion plan jointly completed by the Ministry of Commerce of China, international organizations and local governments. As a guideline for the aforementioned six provinces in promoting foreign investment, the Plan specifies the guiding principles, objectives, tasks, development priorities and key measures for different stages, and proposes the approaches and policies for coordinated development, with a view to effectively guiding these provinces to establish and improve the mechanism for investment promotion.

I. Guiding Principles and Basic Approaches

As the global economic structure and the labor division are undergoing major changes, the central region should take the great opportunity of the new-round international industrial shift to promote coordinated regional development and further open.

To this end, the central region needs an overall strategy of investment promotion in the principle of scientific development perspective to explore innovative, professional and efficient mechanisms suited to this region for management system reform, team building, and investment promotion. The guiding principles are to further mindset open up; expand the scale and optimize the structure of external investment, and give play to the key role of investment in pushing forward independent innovation, industrial upgrade and coordinated regional growth; and to innovate the regional cooperation mechanism to allow for complementary advantages and mutual development.

Based on these guiding principles, the basic approaches for foreign investment promotion are:

(I) Strengthen advantages & circumvent disadvantages

Global foreign direct investment (FDI) will nevertheless keep on growing in the long run, despite an array of risks that will ensue due to the global financial crisis and economic recession. Two features will figure predominately in the growth of a new round FDI: for one thing, more hi-tech and high value-added manufacturing and R&D activities will be moving out of developed countries, and for the other, international capital will have a stronger preference for better government credit, policies and systems, property rights, law enforcement, technical standards, and greater cultural friendliness.

Such a trend into high value-added manufacturing and service outsourcing has offered great possibilities for the central region to develop continued advantages by participating in the work division of global industrial chain and accommodating the domestic and overseas industrial shift.

Thanks to the implementation of the Rise of Central China strategy, the investment environment in the central region has improved substantially, and development systems, policies and mentality have changed dramatically over the last two years. The market conditions for an international and domestic industrial shift are there, and the region has kicked off a good start in attracting foreign investment.

When adjusting the policies for attracting external capital, the region has to be fully aware of its comparative advantages to maximize advantages for industrial growth and economic benefits. Accounting for 10.7 percent of the total land area, 28.1 percent of the population and 19.5 percent of GDP, the central region is the economic hinterland and the transportation hub of China. With a solid foundation and enormous advantages, it plays a vital role in the overall economic and social development, with great potential yet to be tapped into.

In terms of the industrial foundation, the central region has a full assortment of industries and is a key heavy industry base, with 15 boasting absolute or relative advantages among 30 manufacturing sectors. In recent years, the electronic information, bio-pharmaceutics, new materials and other emerging industries have shown sound development momentum, and a number of distinctive hi-tech industry clusters have taken shape.

Transportation-wise, located at the gateway to the west, and the center of the huge crossing—Eurasian Continental Bridge and the golden watercourse of the Yangtze River, the region is a giant hub that connects the east with the west and the south with the north, which basically shapes a convenient land, water and air transportation network equipped with better infrastructure.

In terms of the production elements cost, this region has vast land available for industrial use, 1.4 times larger than the eastern region, and abundant technological resources, while the cost of labor force, highly skilled, is only 60 percent of that in eastern region. In the long term, the region is expected to become the country's major base for commercial grain production and efficient agriculture, resource- and labor-intensive industries. It is also expected to become an important hi-tech industry base. The central region will be a key pillar for China's sustained and rapid economic development, and an emerging growth area.

Thanks to the implementation of the Rise of Central China strategy, infrastructures, institutional structure and human resources have been improved greatly in the central region, adding to its existing advantages offered by abundant labor force, low business cost and the complete range of industries.

However, restrictions persist: first, this region has yet to open up further, as the combined exports accounted for only 4.3 percent of the national total, and the actual utilization of foreign investment was only 11.5 percent of all; second, heavy industrial and primary processed products such as manufacturing, energy and raw materials represent a significant proportion. The industrial growth is mainly dependent on high inputs and high consumption of resources, due to the lack of deep processing and hi-tech capacity; and third, the low industrialization, urbanization, and marketization level has so far proved unappealing to high-end manufacturing from the outside. As a result, this region is not closely linked with external markets; moreover, institutional reform is lagging far behind.

When it comes to attracting foreign investment, the central region is yet to establish a standard operating mechanism for investment promotion, as well as vertical and multi-layered operation networks.

Generally speaking, the central region fares better than the western region in terms of development conditions available, and the coastal area, potential-wise. The central region must pinpoint its positioning so as to play out advantages and circumvent disadvantages in attracting foreign investment.

(II) Define goals and priorities

The central region should make it its strategic goal to follow the principle of vigorous attraction and effective use of foreign investment, optimize the capital allocation, and promote technological advancement and further progress of the market economic system. Every effort should be consistent with applicable state plans and requirements, particularly those for the implementation of major strategies, and the overall trend of the international and domestic industrial shift. Problems in connection with investment promotion should be identified and addressed, so should goals and priorities.

Division of work, coordination, giving full play to local advantages and distinctiveness should be the principle of the investment promotion work in the central region. It is expected that this region will improve overall competitiveness, with a growing annual foreign capital received and a fast growing productivity. Investments from outside of the region play a greater role in the development of local economy, and serves as a driver in propelling the rise of central China.

Due to the great similarity in their industry structure, the provinces of this region will inevitably be competing with one another for investment if no precautions are taken. To avoid such a specter, the provinces should define their positioning of industrial division region-wide, and construct a mutually complimentary collaboration system consistent with the goal of coordinated development, thereby minimizing the possibility of structural overlapping and excessive rivalry among and between them. The region should work to create a competitive and unique manufacturing cluster by focusing on such factors as comparative advantage, regional industrial layout, coordination between economic and social development, and population and resources, and implementation of an industrial value-chain strategy. Foreign capital should be channeled to fund technological upgrading in key industries and enterprises, so as to help create a batch of leading and internationally competitive enterprises with greater overall performance and core competitiveness.

The six central provinces are home to seven model service outsourcing cities, 20 key zones for processing industry. The Ministry of Commerce will be establishing demonstration zones of the sort as part of the effort to support this region in the process of industrial transfer. On top of that, such provinces should also identify the key industries that are in need of investment, so that mobile capital can be utilized to improve the industrial structure and competitive edge. There should be definitive and feasible goals for key sectors, regions and methods in connection with foreign investment promotion.

(III) Innovate methods and mechanisms

Continuous innovation in market mechanism—specifically , establishing a market- and investor-oriented promotion body and a sound and efficient system—is necessary for attracting more investment and for better utilization.

It is equally important that a sound investment environment that features good government accountability, efficiency, security and business-friendliness be built and improved to provide investors with standardized and comprehensive services, and to optimize the allocation of resources. The priority should be given to standardized investment services and good investment environment with continuous improvement.

Governments at all levels should work together to set up a harmonized, orderly, standardized, competitive and market-based mechanisms for investment promotion, through integrating investment resources and strengthening communication and decision-making, so as to create synergy between national development plans, projects, industries, businesses and resources. They should also improve the working methods to improve the mechanism and management expertise. In the meantime, the promotion system that is comprised of the governments, professional bodies and local industries should also be enhanced so that intermediaries can serve as a bridge that links the government and businesses.