PRAGUE UNIVERSITY OF ECONOMICS AND BUSINESS
BACHELOR THESIS
2021 Yixin Zhang
Prague University of Economics and Business International Business
Business and investment environment in China
Author: Yixin Zhang
Thesis instructor: doc. Ing. Ludmila Štěrbová, CSc.
Scholar year: 2020/2021
Declaration:
I hereby declare that I am the sole author of the thesis entitled “Business and investment environment in China”. I duly marked out all quotations. The used literature and sources are stated in the attached list of references.
In Prague on 30 April 2021 Signature
Yixin Zhang
Content
Introduction ... 1
1. Analysis of business and investment environment in China ... 3
1.1 The overview of business and investment environment ... 3
1.1.1 Current situation ... 3
1.1.2 Existing problems ... 6
1.2 The hard environment for business and investment in China ... 7
1.2.1 Impact of transportation infrastructure ... 7
1.2.2 The role of communication conditions ... 10
1.2.3 Energy mix opportunities ... 11
1.3 The soft environment for business and investment in China ... 12
1.3.1 Incentives for investors ... 13
1.3.2 Economic environment ... 14
2. Current development of high-technology and labor-intensive industries in China .... 16
2.1 Current status of high-tech industry development ... 16
2.1.1 Foreign high-tech development status ... 17
2.1.2 Domestic high-tech development situation ... 20
2.2 Current status of labor-intensive industry development ... 23
2.2.1 Foreign labor-intensive industry development situation ... 23
2.2.2 Domestic labor-intensive industry development situation ... 24
3. Countermeasures and recommendation ... 27
3.1 Countermeasures to optimize the business investment environment ... 27
3.2 Investment industry focus and analysis ... 28
Conclusion ... 34
Bibliography ... 36
Introduction
From the reform and opening up of China in 1978 to 2017, China's GDP grew 33.5 times in constant prices compared to 1978, with an average annual growth rate of 9.5%, much higher than the world economy's average annual growth rate of about 2.9% in the same period. 1978, China's GDP was only 367.9 billion yuan, and in 2017, it stood on a new historical stage of 80 trillion yuan for the first time. GDP per capita has been increasing: in 2017, China's GDP per capita was RMB 59,660, which is 22.8 times higher than in 1978, with an average annual real growth rate of 8.5%, after deducting price factors. In 1978, China's total economic output ranked 11th in the world; in 2010, China's economic power has surpassed Japan to become the second largest in the world. By 2017, China's GDP accounted for about 15% of the world's total economic output, an increase of about 13 percentage points from 1978, when China's foreign exchange reserves were only US$167 million, ranking 38th in the world, and the balance of foreign exchange reserves reached US$313.99 billion at the end of 2017, ranking first in the world.
China is still a developing country, simply judging and measuring the investment climate in developing countries by the standards of highly developed countries lacks scientific validity and comparability. In a horizontal comparison among developing countries, the speed and magnitude of China’s market opening is clearly at the top of the list, and it is already one of the most open developing economies. More importantly, as China develops further, it is a perfectly predictable and inevitable trend that China will open its doors even wider and its investment environment will be better. This year’s Chinese government work report points out that efforts to attract foreign investment will be stepped up. It will further liberalize market access, reduce the negative list of foreign investment access, and allow more fields to be operated by wholly foreign-owned enterprises. China’s investment environment will definitely get better, and the opportunities for enterprises of all countries to develop in China will definitely increase.
The goal of this thesis is to prove that China is a super-consumer country worthy of investment, and it is better suited to invest in high-tech industries than labor-intensive industries. The method will use PEST analysis to identify the motivation of high-tech investors and analysis based on the secondary data and real cases.
This thesis consists of three different parts. The first chapter will give an overview of the meaning, classification, advantages and disadvantages of the investment environment, and the second subchapter will analyze positive effects for investors of the hard investment environment in China in terms of transport infrastructure, communications conditions and energy supply. The third subchapter will use PEST to analyze the soft investment environment to identify the motivations of high-tech investors, especially the government policy that gives incentives for investors and economic environment, also how different regions attract investment.
The second chapter presents an objective view of the development of foreign and domestic high-tech and labor-intensive industries in China by analyzing data and comparing real cases , as well as analyzing the overall environment in China.
The third chapter will propose countermeasures to improve the existing business environment: cultivate more competitive high-tech talents, increase infrastructure investment in backward regions to balance the distribution of talents, optimize policy support for high-tech industries, improve the efficiency of government services, increase policy transparency to promote the positive development of industries, and improve the legal system related to the economy to protect the legitimate rights and interests of all parties in business activities. It is also important to liberalize competition in monopolistic markets, reduce corruption, and create a favorable investment environment.
1. Analysis of business and investment environment in China
Currently, China has attracted a large amount of foreign investment by improving its investment environment, which has contributed to the continuous development of its economy. China has now overtaken Japan as the world's second largest economy, the state of the investment environment has naturally attracted international attention. Stable economic growth, large domestic market size, low labor costs and market openness make China one of the most attractive host countries for investment. According to the data released by the Ministry of Commerce in September 2019, China established another 27,704 foreign- invested enterprises. Foreign investment utilized exceeded 600 billion yuan (about $84.81 billion).1 An objective analysis of China's business and investment environment can help optimize the domestic investment climate.
1.1 The overview of business and investment environment
Investment environment refers to the external conditions for the effective operation of capital, which is a whole system including geographical location, resources, policy influence, infrastructure conditions, economic and social and market environment. 2 It directly affect the level of the investment risk and investment efficiency, and even the economic development of the country or region.
1.1.1 Current situation
In the international and domestic context of the gloomy outlook for the world economy, the deepening freedom of trade and investment in the wave of globalization and China's accession to the WTO, countries seem to be bullish on China as an ideal investment location.
China pursues a socialist market economy and the government implements market-oriented management of the economy, with the supply of resources, goods, services and prices determined to a large extent by the market. Enterprises operate independently, and a market economy system mechanism has been initially formed, which provides a suitable production and business environment for foreign investment.
When investors enter a host country, market size and market potential are among the criteria they use to assess the good or bad investment environment of the host country. And the market size consists of various factors, it is closely related to the population size and gross
1 China: China to attract foreign investment with better business environment. (2019, Oct 28). Asia News Monitor Retrieved from https://search-proquest-com.zdroje.vse.cz/docview/2308908108?accountid=17203
2 Dai Yuanchen. Investment environment and its evaluation system[J]. China Social Science, 1994(01):39- 46.
domestic product (GDP). China is the most populous country in the world, which reflects the huge market potential of China is beyond doubt. China's GDP was $7551.5 billion in 2011, up 9.55% from the previous year, and has been on a steady upward trend for the next decade, with economic growth rates above 6% each year. By 2019, the total value reached
$14342.9 billion, already twice as much as a decade ago. The GDP value of China represented 11.81% of world economy.3
Figure 1.1.1; China GDP (2010-2019) US $ 1 billion
Source: World Bank. 2021. GDP (current US$) - China | Data. [online] Available at:
https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=CN
Reform and opening up has brought about sweeping changes in China, improving the living standards of the people and China's position in international affairs. Reform and opening up has become a popular demand in China, which means China will have a politically stable investment environment in the long term. Moreover, with the improved level of education and the enlargement of opening up, people's quality has been improved and their mindset has changed greatly. The differences have narrowed, in terms of language, culture and customs, creating the essential social circumstances to attract foreign investors. The market economy system was preliminarily established, while laws and regulations were progressively improved, providing a great legal system.
The key factor fueling China's economic boom over the past three decades has been a huge and low-cost labor resources. Despite the academic view that China's population dividend is dwindling at the margins, in a side-by-side comparison, China had over 800 million labor resources, ranking first in the world in 2018. Compared to India, the second most populous country, China's total population was only about 60 million more than India's, but its total
3 Tradingeconomics.com. 2020. China GDP | 1960-2019 Data | 2020-2021 Forecast | Historical | Chart | News. [online] Available at: https://tradingeconomics.com/china/gdp
6087.1
7551.5 8532.23 9570.41 10475.68 11061.55 11233.28 12310.41
13894.82 14342.9
0 2000 4000 6000 8000 10000 12000 14000 16000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
labor force was 280 million more than India's. The level of China's labor force participation rate in 2018 was 68.4%, the highest among major global countries and well above the world average of 61.8%, while India, a fellow populous country, had a labor force participation rate of 53.7%. This indicates that the huge population is likely to develop into a burden for the national economy if the demographic strength cannot be transformed into a labor force advantage. Actually, over half of China's foreign investment is focused on labor-intensive industries. Moreover, China has a significant number of well-trained, well-educated and mature workforce that can fulfil the needs of foreign investors in high-tech industries. The abundant labor force provides great opportunities for foreign investors.
Figure 1.1.1; Total size of labor resources in 2018 Million people
Source: Own collected from World Bank
The foreign investment policy is increasingly aligned with the requisites of the market economy and international regulations. Industrial policy has turned into an essential tool for regulating foreign investment in China. China has drawn up a comprehensive industrial policy for foreign investment in response to state economic and industrial development strategy, in order to direct investment in target industries. In 2002, A Catalogue of China's Most Desirable Industries for Foreign Investment was released to encourage foreign investors to turn their capital and attention to agriculture, resource development, infrastructure construction, export and high-tech industries, but also specified some industries where wholly foreign-owned enterprises are not allowed and important industries and investment areas that require Chinese ownership. According to China's WTO accession commitments, the degree of industrial liberalization had expanded significantly. For instance, the telecommunications service industry became restricted from the prohibited category, and
806.86
527.42
247.9
164.11 131.81 105.31 74.91
0 100 200 300 400 500 600 700 800 900
China India EU USA Indonesia Brazil Russia
the geographical and business areas of finance, insurance, commerce, and foreign trade industries were further expanded.4
1.1.2 Existing problems
With an improved business environment, economic growth and expanded market access, China remains an ideal destination for foreign investment, but there are some problems. First, China's leading industries are more geographically dispersed, which has an adverse effect on reducing the production costs of companies and improving the competitiveness of the industry as a whole. Industrial parks are blooming all over China, and their disorderly construction has caused internal consumption of the city's resources. These parks are characterized by sloppy land use, imperfect infrastructure, low economic efficiency, irregular management and lack of an effective investment environment. And the development of leading industries lacks unified planning and layout of industrial guidance.
Due to the low concentration, there is no industrial cluster formation, so there is no more competitiveness.
A unified, open, competitive and organized modern market system is not yet perfect. The degree of market openness is still low, the market of capital, technology, manpower and other production elements are relatively lagging behind, and the phenomenon of regional blockade and industry monopoly is still serious. And while the share of state-owned economy is larger, the traditional concept of planned economy is deep-rooted, and more enterprises are subject to administrative intervention. Non-state investment still faces discrimination, high taxes, and high costs for enterprises.
Market transparency is a fundamental activity for business survival and growth on the basis of the degree of truthfulness of information. If the information used for communication between enterprises lacks veracity and completeness, they will also not be able to trade smoothly with each other and will also dramatically increase the number of financial conflicts. The government is significantly more knowledgeable about laws and regulations than companies, and can obtain a great deal of information about them, as well as the ability to interpret them. In contrast, the government information received by enterprises in the process of economic activities is incomplete and often lacking. In addition, the government
4 Ministry of the commerce of the People’s Republic of China (MOFCOM). 2002. Guidance Catalog for Foreign Investment Industries. [online] Available at:
http://wzs.mofcom.gov.cn/article/n/200208/20020800035372.shtml
also has the phenomenon of information discrimination. Thus, if the government does not receive the same information as the business, even if the enterprise subjectively seeks to trade, it will hesitate to consider giving up because of the high transaction cost. In addition, government agencies are inefficient, with an emphasis on approval and light services, and many investment projects have complicated approval procedures.
The protection of fair competition in the market for all kinds of firms is one of the basic principles for the introduction of market regulations in China. Nevertheless, in China's current business climate, fair competition is only possible theoretically and legislatively, but not in practice, and may even be extremely unfair. There are various degrees of differential treatment among enterprises in different industries and ownership systems in terms of tax payment, market access, investment and financing, resulting in a certain impact on fair competition in the market. Some large or medium-sized state-owned enterprises, enterprises with certain connections with the government and well-known local enterprises often receive special attention from the government in terms of operation, and their understanding, grasp and use of policies are also more in place. By contrast, the prospects for some small businesses are not promising, not only are they less profitable but they also find it difficult to get help from the government
1.2 The hard environment for business and investment in China
The hard environment for investment mainly refers to the host country's energy supply (e.g., electricity, coal, oil, gas, water, etc.), transportation (e.g., air, rail, sea, road), communications (e.g., telephone, fax, Internet, etc.) and the corresponding infrastructure.5 1.2.1 Impact of transportation infrastructure
Transport is a fundamental, leading and strategic industry, and is an essential supporter and powerful safeguard for economic and social development. Since the reform and opening up, whether in the scale of traffic infrastructure, quality of transport services, technology and equipment, or in the development of the concept of change, institutional innovation, market- oriented development, etc., have made unprecedented achievements. In the history of world transportation, it has created the "China Speed" and "China Model" which have attracted worldwide attention. All modes of transportation have achieved rapid development, with
5 Ministry of the commerce, People’s Republic of China (MOFCOM). 2018. Hard And Soft Environment For Investment. [online] Available at:
http://tradeinservices.mofcom.gov.cn/article/zhishi/jichuzs/201805/61971.html
high-speed railroads, highways, urban railways operating mileage and the number of 10,000- ton berths in ports ranking the highest in the world, while the airports are world-leading in terms of quantity and mileage of pipelines, serving as an important pillar of socialist modernization. 6
Since 2010, the total road mileage of the country has been increasing. Up to 2019, China's total road mileage has reached 4,846,500 kilometers. As China's infrastructure investment and emphasis has increased, the construction of highways has also shown steady growth, with the total length of highways reaching 142,600 kilometers almost twice as long as in 2010. In 2017, the Beijing-Xinjiang Expressway from Beijing to Xinjiang was fully completed, with a total mileage of about 2,768 km, making it the longest expressway in the world that crosses the desert and Gobi. The national highway network of 7 capital radial lines, 9 north-south vertical lines and 18 east-west horizontal lines has been basically completed, and the technical level of national and provincial trunk highways is also being gradually upgraded. At the end of 2018, the total mileage of rural roads in China had reached 4.05 million kilometers, with 99.64% of townships and 99.47% of established villages having built hardened roads. Furthermore, China's road freight volume was estimated at 40 billion tons. 7
At the beginning of reform and opening up, the mileage of China's railroad network was only 51,700 km, and as of August 2020, the scale of China's railroad network reached 141,400 km, an increase of approximately 90,000 km. China's railways have embarked on a phase of rapid development, with the world's highest altitude Qinghai-Tibet Railway completed in 2006 and China's first high-speed railroad - Beijing-Tianjin Intercity Railway opened for operation in 2008, kicking off the era of high-speed railway in China. The Beijing-Shanghai high-speed railroad, completed and opened in 2011, is the world's highest speed and longest mileage high-speed railroad in commercial operation. It is worth mentioning that the mileage of high-speed railroad operation increased by 2.7 times from 0.97 million kilometers in 2012 to 36,000 kilometers in 2020. China's high-speed railroad
6 Ministry of Transport of the People's Republic of China. 2018. An Introduction to China's Transport Development in the 40 Years of Reform and Opening Up (Previous) - Transportation News. [online] Available at: http://www.mot.gov.cn/jiaotongyaowen/201807/t20180704_3042320.html
7 Statista. 2020. Transport Infrastructure In China - Statistics & Facts. [online] Available at:
https://www.statista.com/topics/1516/transport-infrastructure-in china/#dossierSummary__chapter1
has made the leap from nothing to the top of the world, has covered more than 65% of the million population cities.
Civil aviation in China has evolved from a military-oriented industry to a modernized and second largest air transportation system in worldwide, contributing significantly to the national economy and social progress. At the beginning of reform and opening up, China's civil aviation was subordinate to the Air Force with 78 civil airports, and after the reform of the management system in 1980, the civil aviation industry has made significant development. By the end of 2017, there were 229 civil aviation-licensed airports in China, including 228 airports with scheduled flights, 224 cities with scheduled flights, and nearly 7 million kilometers of scheduled flight routes, with civil aviation services covering 88.5% of prefecture-level cities and 76.5% of counties nationwide. By the end of 2018, the country had more than 6,000 civil aircraft and the air cargo throughput reached 7.4 million tons. As an integral part of the integrated transport system in China, air transportation has developed from a subordinate and supplementary status to a popular mode of transportation.8
As for waterways, China's inland waterways such as the Yangtze River Main Line, Beijing- Hangzhou Canal, Xijiang River and Xiangjiang River have received relatively systematic and comprehensive treatment one after another. The freight volume through the Yangtze River mainline increased from 220 million tons in 2000 to 2.31 billion tons in 2016. China's inland waterways were navigable for 127,300 km in 2019. The Yangtze River has become the world's largest and busiest navigable river in terms of volume and shipping. With the deepening of international trade, the number of ports, an important part of water transport, has maintained a gentle upward trend. In 2017, the country's ports had 2,366 berths of 10,000 tons and above, reaching 2,520 in 2019.9
Urban railways are the cornerstone of public transportation in China. By the end of 2019, there were 47 cities in China that had launched urban rail transport, and the total length of opened urban rail transit lines in mainland China was 6,730.27 kilometers, including 5187.02 km of subway, 255.40 km of light rail, 98.50 km of monorail, 715.61 km of urban express rail, modern tram 405.64 km, magnetic floating traffic 57.90 km and APM 10.20 km. Total
8 Statista. 2020. Transport Infrastructure In China - Statistics & Facts. [online] Available at:
https://www.statista.com/topics/1516/transport-infrastructure-in china/#dossierSummary__chapter1
9 China Industry Information. 2020. 2019 Analysis of Waterway Navigable Miles and Number of Ports in China. [online] Available at: https://www.chyxx.com/industry/202006/876899.html
annual passenger traffic increased from 8.7 billion passengers in 2012 to 23.71 billion passengers in 2019.
Transportation infrastructure improves the ease of investment, reduces the investment cost of infrastructure, and provides investors with multi-regional options. The Ministry of Transportation issued an industrial policy to improve three-dimensional integrated transit system of urban agglomerations, promote the infrastructure of urban agglomerations to make up for shortcomings, and improve the transportation network of city clusters such as Beijing, Tianjin, Hebei and the Yangtze River Delta. The improvement of infrastructure has led to a reduction in the basic work of urban construction, providing a better environment and foundation for high-tech industries such as maglev trains and driverless technology.
1.2.2 The role of communication conditions
Currently, China's communication industry is showing a trend of great change, integration and development under the influence of various internal and external factors. The rapid development of new technologies and new services has given rise to a variety of new business models. China's communication industry has built a communication network close to the world level, and the construction of the network has laid a firm foundation for building a national information infrastructure. The telecommunication network has been transformed from small capacity to large capacity, analog technology to digital technology, and single service to diversified service, and the network scale of cell phone and fixed phone ranks the first and second in the world respectively, while the Internet and data multimedia communication network have gained rapid development. As of 2018, the size of China's Internet users was 829 million, and the Internet penetration rate had reached 59.6%. Among them, the scale of cell phone Internet users has reached 98.6%, paving the way for further penetration and development of e-commerce.
By the end of February 2020, the national construction and opening of 5G base stations reached 164,000, and the user scale has increased by millions/month, with the user scale and network coverage expanding simultaneously. The deep integration of the new information technology represented by 5G with the real economy will comprehensively accelerate the networked, intelligent and digital transformation of thousands of lines and industries, and
will also effectively enhance total factor productivity.10 The Central Economic Work Conference held in December 2018, for the first time, proposed to accelerate the pace of 5G commercialization and strengthen the construction of new infrastructure such as artificial intelligence, industrial internet and internet of things. Infrastructure investment is one of the three major down-streams of fixed asset investment, accounting for more than 20% of fixed asset investment for a long time and led by government investment, so infrastructure will play a role in stabilizing and supporting the economy. New infrastructure, on the other hand, further expands the capacity for infrastructure investment. During the epidemic, high-tech industries such as telecommuting, online classroom, remote care and drug delivery robots have emerged, and the development of these new industries cannot be achieved without the support of new infrastructure such as 5G, big data, artificial intelligence and cloud computing. Therefore, new infrastructure can empower new industries and play a crucial role in their stable growth. Simultaneously, China's e-commerce environment has been over- deployed in warehousing, logistics and small and medium-sized stores. The demand for relevant practitioners (such as drivers and couriers) has basically saturated, resulting in the weakening of such labor-intensive industries, while creating new demand for intelligent robots, drones and other such high-tech industries.
1.2.3 Energy mix opportunities
China's energy structure is dominated by coal, developed in diversity and constrained by the self-sufficiency rate. At present, carbon-based energy is still the mainstay of China's energy structure, with the consumption of fossil energy accounting for more than 80%, of which coal accounts for as much as 55%. Total coal consumption control is the core of total energy control and an important issue for revolution in the energy sector, closely related to China's major national policies of green economy, low-carbon development and environmental protection. In fact, China has made initial achievements in its low-carbon transition in recent years, and by the end of 2019, China's carbon intensity had been decreased by roughly 48.1%
compared to 2005, with non-fossil energy accounting for 15.3% of energy consumption.
China is moving away from coal energy, using clean energy such as solar energy, and promoting electric vehicles on a large scale, which are actions to mitigate the climate change crisis and will also bring economic benefits. The long-term goal of coal control is to promote
10 China Industry Information. 2020. Analysis of the Current Situation and Development Prospects of 5G Base Station Construction in China in 2020. [online] Available at:
https://www.chyxx.com/industry/202006/876173.html
low-carbon green economic development and energy transition to meet the energy needs of social development and rising living standards. Energy transformation drives the shift of economic growth and structure, and new energy technologies will be the growth point of the new economic normal. 11
China used to be one of the world's largest consumers of oil, but now we are seeing a downward trend in Chinese demand for oil. Although oil demand rose 5.5% year-over-year to 11.77 million barrels in 2017, oil consumption, including gasoline and diesel, is expected to gradually decline over the next five to seven years. This is due to the growth of alternative and renewable fuels, expanded car sharing, increased availability of ethanol as a powerhouse for gasoline, and the spread of high-speed rail networks. China's shift from quantity to quality, improved energy efficiency and strict environmental controls will further limit oil consumption. Although oil consumption has not yet peaked, with gasoline and diesel still dominating the transportation sector, consumption growth has been slowing in recent years.
This further weakens China's transportation oil demand due to electric alternative fuel vehicles. Energy saving and emission reduction technologies in the transportation sector often cover multiple fields. In addition to new transportation concepts and new business models such as 'Internet plus Transportation', which contribute to energy saving and emission reduction in the transportation sector, there are currently many high-tech applications in the transportation sector, such as new battery technology for new energy vehicles, inverter technology for return or exhaust fans in transportation hubs (e.g. stations, airports, ports, etc.) to achieve energy saving in air conditioning systems, energy saving and emission reduction systems for trains, and hybrid power retrofit for transportation operation equipment.
One of China's greatest strengths and drivers for new energy development is its local demand market. In the process of China's industrialization, it has not yet developed an over- dependence on traditional energy sources, so the path of new energy development with Chinese characteristics is a low-cost and high-efficiency one, starting from China's existing needs.
1.3 The soft environment for business and investment in China
11 China Power. 2020. Analysis and forecast of global and Chinese energy structure and energy intensity status in 2020. [online] Available at: http://www.chinapower.com.cn/zx/jzqb/20200826/28667.html
The soft environment of investment mainly refers to the political factors of the host country, legal construction, investment and trade policies and financing conditions. Therefore, PEST analysis can better identify how China's investment environment can motivate high-tech investors.
1.3.1 Incentives for investors
Politics in China is a major difference from the developed capitalist countries of the West, as it has a greater influence on all aspects of national life and a stronger leadership and binding power than in these countries. As a result, changes in China's political system, political reforms, and specific administrative measures can cause dramatic changes in the economic, cultural, social, and ideological spheres. The widespread implementation of collectivism and a relatively high degree of centralization have allowed Chinese politics to have a huge and profound impact on China's economy in all aspects. Political changes and policy changes in China can stir up ripples in economic development to the point of influencing the direction of China's economic development. China's leadership fully recognizes the importance of opening up to the outside world, expanding domestic and international economic exchanges, and strengthening economic ties with other countries for China's development and progress, and has adopted a series of systems and policies that are more favorable to foreign investors than before, through legislation and related policy measures to protect their legitimate rights and interests. Meanwhile, China has a stable domestic political situation and a higher level of rule of law compared to other third world countries, which undoubtedly provides a good political environment for foreign companies to enter China.
For high-tech enterprises, technology development and innovation is the core competitiveness for their survival and development. Technology innovation and R&D ultimately depend on the execution of human resources. In order to realize the strategic plan, absorb and retain talents, meet the multi-level needs of talents, stimulate the innovation motivation of human resources and solve the problems of management agency costs, high- tech enterprises often need to utilize flexible incentive policies. Moreover, China has been creating an environment for high-tech enterprises since 20 years ago, with convenient customs clearance measures by the General Administration of Customs, pilot work on equity incentives by the Ministry of Finance and Science, and the establishment of high-tech industrial development zones in quasi-first-tier cities across the country. The enterprise
income tax shall be levied at a reduced rate of 15% for the high-tech enterprises with key state support. Research and development expenses may be additionally calculated and deducted in the calculation of taxable income amount. The "additional deduction of research and development expenses" refers to the additional deduction of 50% of the research and development expenses incurred by an enterprise for the development of new technologies, new products and new processes but not recorded as intangible assets in the profits and losses of the current period on the basis of the actual deduction according to regulations; If an intangible asset is formed, it shall be amortized at 150% of the cost of the intangible asset.
If a venture capital company engages in venture capital that the State needs to support and encourage, it may deduct a taxable income as a percentage of the amount invested. 12 This certainly creates extremely favorable conditions for high-tech investors.
1.3.2 Economic environment
On the economic side, macro-regulatory policies are becoming more sophisticated. After adopting a reasonably restrictive financial and monetary policy in previous years to control inflation, China has continued to strengthen macroeconomic regulation and control in the past two years, adopting proactive fiscal and monetary policies to boost investment in fixed assets, and attaching importance to increase economic efficiency and increasing the share of investment in technological renovation. WTO accession offers an opportunity to further enhance the investment climate in China and creates favorable expectations for foreign investment. The domestic capital market also continues to improve. Nowadays, China is at the peak of its economic development. The Chinese economy has experienced accelerated and sustainable development, with an average annual growth rate of 9.8% of total GDP, and still maintains a relatively stable price inflation rate.
Since the "Eleventh Five-Year Plan", China's high-tech industrialization has achieved extraordinary results, with series of significant technical achievements in the fields of information and space, new materials, advanced manufacturing, energy, advanced transportation, etc., and the ability of independent innovation has been further improved.
National high-tech zones and industrialization bases have become important growth poles to promote regional economic development. China's high-tech industrial development zones
12 The State Council, The People's Republic of China. 2001. Notice on the Issuance of the "National High- tech Industrial Development Zone High-tech Enterprise Identification Conditions and Measures" Ministry of Science and Technology_2001 No. 11 State Council Gazette_ Chinese Government Website. [online]
Available at: http://www.gov.cn/gongbao/content/2001/content_60688.htm
are concentrated areas built on the basis of intellectual density and open environmental conditions, relying mainly on domestic scientific and technological and economic strength, fully absorbing and learning from foreign advanced scientific and technological resources, capital and management means, and realizing local optimization of the hard and soft environments through the implementation of preferential policies and various reform measures for high-tech industries to maximize the transformation of scientific and technological achievements into real productivity. The construction of high-tech industrial development zones is an outstanding achievement of China's economic and technology system innovation, which is an effective means to develop high-tech industries in line with China's national conditions.
Since the implementation of the Western Development Strategy, the state has laid out a lots of of high-tech industries and their parks in the western region through capital and policy tilting, hoping that through its technology and high knowledge content, the rational allocation of western resources, transformation of traditional industries, adjusting and optimizing the industrial structure, boosting the take-off of the western economy. Among the 13 national high-tech zones in the west, there are four first-tier cities as well as one second-tier city, and these high-tech zones form the growth pole for the development of high-tech industries in the west. And the industrial axis is located along the major cities, which can receive the most effective economic radiation from the central eastern region. On the other hand, the high-tech zones play a polarizing role as growth poles with their agglomeration effect, continuously attracting capital and talents from surrounding regions to promote their own industrial development. Furthermore, by means of enterprise exchange and product export, it has a diffusion effect and influences the regional economy outside the growth pole.
2. Current development of high-technology and labor-intensive industries in China 2.1 Current status of high-tech industry development
With the rapid development of economy and the surge of economic globalization in the world, high-tech industry is getting more significant in the national economy.
The advantages of high-tech industry, such as intelligence, innovation, strategy and less environmental pollution, are of great importance to the development of society and economy.
Since the 1980s, the vigorous development of high-tech industry has had a great impact on the world economy and opened up an unprecedented bright future for human society. High- tech industry is an essential position in the international economic and scientific and technological competition. The development of high-tech and basic industries has an irreplaceable role in promoting industrial structure upgrading, improving labor productivity and economic efficiency. The Decision of the Central Committee of the Communist Party of China and the State Council on Accelerating the Progress of Science and Technology clearly points out that the national industrial policy and development plan should give priority to the development of high-tech industries and give key support in policy. 13 This has created favorable conditions for high-tech investors.
High-tech industries are those industries that are mainly marked by substantial investment in research and development, as well as rapid technological progress. China's high-tech industries include aerospace and aircraft manufacturing, electronics and communications equipment manufacturing, electronic computer and office equipment manufacturing, pharmaceutical manufacturing, and medical equipment and instrumentation manufacturing.
China's high-tech has maintained a relatively stable trend of continuous rapid development.
Since 1988, the State Council has approved the establishment of national high-tech industrial development zones. China's high-tech industrial development zones are established in large and medium-sized cities and coastal areas where China has a high density of knowledge and technology to develop high technology. High-tech new zones are concentrated areas established based on intellectual density and open environmental conditions, relying mainly on domestic scientific and technological and economic strength, fully absorbing and learning from foreign advanced scientific and technological resources, capital and management
13 The Ministry of Science and Technology of the People's Republic of China. 1996. Decision of the Central Committee of the Communist Party of China and the State Council on Accelerating the Progress of Science and Technology.[online] Available at:
http://www.most.gov.cn/ztzl/jqzzcx/zzcxcxzzo/zzcxcxzz/zzcxgncxzz/200512/t20051230_27321.htm
means, through the implementation of preferential policies and various reform measures for high-tech industries, realizing local optimization of the hard and soft environment, and maximizing the transformation of scientific and technological achievements into real productivity.
2.1.1 Foreign high-tech development status
Currently, under the new normal of China's economy, the central and local governments are actively promoting industrial transformation and upgrading, encouraging innovation, further expanding openness, liberalizing foreign market access and continuously optimizing the business environment. Simultaneously, foreign technology-based enterprises are facing a more favorable business environment for investment in China, including policy support, consumer upgrading recognition and market potential.
In 2017, IBM completed their transformation in China. Oriented towards cloud computing, big data, mobile, social, security, blockchain, IoT direction layout. Nowadays, IBM has established two IBM China Cloud Computing Centers in Beijing and Wuxi respectively.
Intel, which has been in China since 1998, has set up its own investment firm and, as a PE, has invested in more than 140 companies in China, totaling more than $1.9 billion. It also increased its presence in the cloud and artificial intelligence markets, adding 12 new startups to its portfolio in May 2018, three of which are in China, to drive the development of artificial intelligence, cloud, IoT and chip technologies. Previously, Intel Capital, a wholly owned subsidiary of Intel, invested $67 million in eight Chinese startups in the areas of smart devices, robotics, the Internet of Things, cloud services, big data and data analytics. Intel Capital said it chose to invest in these eight Chinese companies because they all occupy the high ground of Chinese technology and their technological advantages will make Intel's investment guaranteed. The establishment of incubators is also a new role for foreign companies in China. Arm, the world's leading semiconductor intellectual property (IP) provider, announced in 2015 that it had set up the "Anchor Space Accelerator" with CSTC.
On June 21, 2018, Anchor Growth Camp completed its fifth Demo Day roadshow, where 16 startups presented their R&D achievements, covering IoT, chips, robotics, blockchain and other fields. 14
14 Economic Observer. 2018. The big trend behind Tesla's arrival in China. [online] Available at:
<http://finance.eastmoney.com/news/1373,20180715906847124.html>
Technology-based foreign-invested enterprises and the Chinese side to strengthen joint venture cooperation is conducive to mutual assistance and win-win situation. For the Chinese side, it can gain more opportunities for close learning, which helps to update ideas, understand the dynamics of international advanced technology and standards, and even enter the global market and R&D center network of multinational companies by taking orders. For MNCs, cooperation with the Chinese side helps them understand the Chinese business environment more quickly, including consumer market demand preferences, the use of Chinese marketing channels and human resources, etc. Technology foreign enterprises are more likely to choose joint ventures and cooperation, because the incentive policy of local governments is to attract investment as a way to promote industrial upgrading of local enterprises.
China's investment environment continues to improve, and the current high-tech talent in China is also an important factor in attracting the layout of foreign investment. In 2019, 11 policies were released, such as supporting the innovative development of the financial industry in the new zone of China (Shanghai) Pilot Development Zone Lingang, supporting the introduction of foreign talents in the field of high-tech innovation, and increasing efforts to introduce foreign talents in line with the direction of industrial development in the new zone, etc. And for foreign talents in the field of high technology who intend to work in the new area for a long time and are employed by units in line with the direction of industrial development, not only ease the restrictions on age, education and work experience, but also give a one-time work permit of more than 2 years. Shanghai has established a green channel for foreign talents to work and start their own business. For foreign high-level talents with significant innovative technologies and who register their enterprises in the new zone in the form of technology shareholding, the processing procedures and application materials will be further simplified. Furthermore, outstanding foreign graduates who have obtained undergraduate degree or above in high-level universities abroad can work directly in the new zone. In 2019, the Administrative Committee of Lingang New Area of China (Shanghai) Pilot Development Zone released 16 policies to promote industrial development and a total of 40 support measures to cluster the development of four key industries which are integrated circuit, artificial intelligence, biomedicine and aerospace. This will vigorously promote the concentration of major projects and platforms in the new area. The policy supports the priority layout of key projects in the new area in the fields of integrated circuits, artificial intelligence, biomedicine, aerospace, new energy and intelligent network-connected
vehicles, intelligent manufacturing, and high-end equipment. In addition, for enterprises in the new zone that are qualified to engage in the research and development of key areas such as integrated circuits, artificial intelligence, biomedicine, civil aviation, etc., enterprise income tax is levied at a reduced rate of 15% for five years from the date of establishment.
In 2018, Tesla signed an agreement with the Shanghai Planning and Land Resources Administration to build a car factory on 1,297.32 acres of land in Shanghai Lingang for 973 million yuan. It became the site of U.S. automaker Tesla's first super factory outside the United States. Tesla sold 14,883 vehicles in China in 2017, accounting for just 3% of electric vehicle sales in China and ranking as the 10th largest brand in the segment. In contrast, the Chinese market accounted for 17% of Tesla's total revenue in 2017. Under the dual impact of the new tariff policy and the new subsidy policy, as long as Tesla cars are manufactured in China, it will enable prospective owners to reduce the purchase cost by about 55%
(currently 40% for Tesla tariffs and about 15% for subsidies for domestic electric cars), significantly lowering the threshold for buying Tesla cars, which is crucial for Tesla to capture China, the world's largest electric car market.
As the predecessor of the new energy vehicle industry, its innovations and breakthroughs are shocking. According to Tesla's plan, the capacity of the new Shanghai plant is expected to initially reach about 250,000 units per year and will gradually grow to 500,000 units per year. The person in charge of Tesla said that Tesla's Shanghai plant will take about 2 years from construction to production, and after that it will take 2 to 3 years to reach the projected production target. In terms of battery, Tesla's battery pack has a powerful range and superior technology, giving customers maximum safety from the battery configuration; secondly, the technicality of Tesla's battery management system is also unprecedented, which can rigorously calculate the proper power for use. From innovative technology, Tesla has even achieved the maximum range under limited power conditions. Production in China allows it to further optimize its price. The Model Y electric SUV sold in the Chinese market is about ten percent less expensive than a fuel-fired vehicle with the same performance. It has also capitalized on China's policy environment of energy efficiency and consumption reduction to successfully penetrate the market.
Tesla settled in Shanghai is not only the global layout of Tesla, but also the layout of Shanghai for advanced manufacturing industry. Shanghai attracts high-tech industries and
advanced manufacturing industries through land transfer orientation and land policy, and Tesla is just one of the key cases in Shanghai's entire "Made in Shanghai" layout. Shanghai has always been an important city for technology development, but over the years it may have been overshadowed by the booming financial and high-end service industries.
2.1.2 Domestic high-tech development situation
High-tech enterprises are knowledge-intensive and technology-intensive economic entities, which are one of the important subjects to promote national industrial transformation and scientific and technological innovation. Since 2010-2019, the number of high-tech enterprises in China has been growing, especially in the "13th Five-Year Plan" period, the number of growth rate of more than 25%, private enterprises and private enterprises are the most important main body in the development of high-tech enterprises in China. In terms of operation, the main business indicators have been growing steadily, and the overall development of high- tech enterprises has been positive.
In 2017, the national high-tech zone had 46,000 high-tech enterprises, accounting for 39.4%
of the country, an increase of 18.6% year-on-year. The ratio of R&D expenditure of enterprises in national high-tech zones to the gross domestic product of the zones was 7.09%, which was 3.3 times of the national ratio of R&D expenditure to the gross domestic product, and accounted for 47.1% of the national enterprise R&D investment. The number of invention patent applications and authorizations accounted for 18.2% of the national invention patent applications and authorizations, and 270 valid invention patents per 10,000 employees, which is more than 27 times of the national average (9.8). 96 of the top 100 Internet companies and 53 of the top 100 biomedical companies are in the National High- Tech Zone.
The National High-Tech Zone has nurtured a number of era-leading technology enterprises such as Huawei, Tencent, Alibaba, Baidu, Lenovo, Xiaomi and Fiber home Technology, and formed a number of innovative industrial clusters such as Zhong guancun New Generation Information Technology, Wuhan East Lake Optoelectronics, Shenzhen Communication, Hangzhou Internet and Intelligent Security. In 2017, the national high-tech manufacturing industry accounted for more than 35% of the national share of the main business income;
Wuhan East Lake High-tech Zone fiber optic cable, laser industry output value represents more than 50% of the country; Shanghai Zhang jiang High-tech Zone integrated circuit
industry output value accounted for about 35% of the country; Tianjin High-tech Zone wind energy industry output value amounted to nearly 30% of the country.
Figure 2.1.2: Number of 5G standard technical contributions by company worldwide
Source: Statista. 2019. Infographic: Huawei is Leading the Race to Develop 5G. [online] Available at:
https://www.statista.com/chart/17536/mobile-network-standards/
As can be seen from the graph, Huawei has surpassed Sweden's Ericsson, adding the largest technical contribution to the 5G standard, which reached 11,423. In recent years, Huawei and other Chinese companies have gradually emerged on the world stage, and more and more countries tend to use Huawei as the final choice to adopt Huawei technology in major projects. 2In 2019, Huawei's revenue was $858.8 billion, increasing 19.1% year-on- year, while R&D expenses were $131.7 billion, increasing to 15.3% of the total revenue. From 2016 to 2019, R&D expenses accumulated to $458.9 billion, accounting for 14.8% of total revenue in the same period. As of February 2021, Huawei has signed 91 commercial 5G contracts worldwide. With a 31.4% market share in the fourth quarter of 2020, Huawei overtook Ericsson's 28.9% market share to maintain its first position in the global 5G communications equipment market in terms of shipments. Through the unremitting efforts of Huawei and other Chinese enterprises, China's 5G technology can also reach the first echelon in the world. By the end of 2020, China had built the world's largest 5G network, with more than 718,000 5G base stations opened. And all cities above the prefecture level have achieved full 5G network coverage, with more than 200 million 5G terminal connections.
In 2020, Trump claimed that Huawei was very dangerous from a security perspective and military perspective of what they were doing. As a result, the U.S. Department of Commerce announced that Huawei and its 70 subsidiaries, were added to the list of export control entities, prohibiting U.S. companies from selling products and technology to Huawei without approval. In 2021, the UK government said it would allow China's Huawei to participate in the UK 5G network on a limited basis - limiting Huawei to no more than 35% market share in 5G infrastructure and excluding Huawei equipment at the core of sensitive networks. In January, the EU also published 5G security guidelines, making it clear that it does not recommend member states to ban any company from participating in 5G construction. In February, French Economy and Finance Minister Le Maire said that Huawei would not be excluded from being a supplier of equipment for France's 5G network, but that restrictions existed to protect France's sovereign interests in developing a 5G network. This means that Huawei has become one of the key leaders in the global mobile infrastructure setup market and has established a force to be reckoned with in global mobile communications.
ZTE and China Telecom jointly released three 5G innovative terminals for vertical industries such as industrial IoT, automotive networking, security inspection, and broadcasting video, all of which have "end-network-cloud convergence" vertical solutions matching cloud network capabilities and application services. As a key infrastructure to support the digitalization, networking and intelligent transformation of the economy and society, 5G has become the top priority of the new infrastructure, bringing new development momentum to various vertical industries. In the industrial park of Sany Heavy Industry, when front-line personnel encounter difficult problems, they use AR glasses to call back-end experts and get remote HD audio and video real-time support guidance through 5G network with their hands free. In Xin'an Chemical's plant, thousands of data collection points have been established for hydraulic monitoring, air leak monitoring, pressure control, gate control, etc. The data collection terminals are converged through the central control PLC and connected to Zhejiang Mobile's 5G network. Whenever the control platform finds data abnormalities, an alarm is instantly triggered and the reverse control system is immediately activated to ensure safe production. In Shandong Lingong's intelligent mine comprehensive experimental base, the excavator is connected to the remote control room through 5G network, and the control room can synchronize the high-definition panoramic video of the real operation scene and control the unmanned excavator located in the mine in real time, making the previously dangerous and difficult mine mining safe and efficient. In Baiyangdian, a variety of tools
such as intelligent water management buoys, unmanned inspection boats, drones, etc. All constitute a "future network" through the 5G network for disaster prevention and warning, governance, law enforcement, emergency response and other multi-system linkage processing, allowing water quality monitoring costs to be reduced by 40%, the detection cycle to be shortened by 70%, and the on-site restoration and foreign object identification rate to be increased from 80% to 95%.15
The National High-tech Zone insists on gathering all kinds of innovation elements and continuously optimizing the environment for innovation and entrepreneurship. At present, the National High-tech Zone has gathered half of the incubators and crowdsourcing spaces in China, as well as 4,971 venture capital institutions and 3,127 science and technology financial service institutions, and is the most active area for angel investment and venture capital in China. The spirit of "rewarding the country with science and technology and industry" and the cultural atmosphere of "encouraging innovation and tolerating failure"
have been formed.16
2.2 Current status of labor-intensive industry development
With the decreasing labor force of the 21st century and the continuous increase of the average social wage, the labor shortage phenomenon is becoming more and more prominent.
The traditional labor-intensive industries with high dependence on labor and low value- added products are no longer suitable for the economic development and market demand in the new era. Therefore, with the development of science and technology and the use of advanced equipment, it is inevitable to replace manpower with technology for industrial upgrading. Thereby promoting the upgrading of industrialization, so that labor-intensive industries are gradually forwarded to technology-intensive and capital-intensive industries.
2.2.1 Foreign labor-intensive industry development situation
Labor-intensive foreign investment withdrawal is a trend. The cost of labor in China has been rising rapidly since eight years ago. In 2017, the minimum wage in Cambodia is $153 per month, which is more than $200 per month counting all benefits, which translates into about 1,300 yuan. But in China's Pearl River Delta and Yangtze River Delta, the same workers need more than 3,000 yuan per month, which is a difference of about 2,000 yuan a
15China Today. 2020. How well is 5G developing in China. [online] Available at:
<http://www.elecfans.com/tongxin/202005221221165.html>
16 The State Council of the People's Republic of China. 2018. Quality and efficiency in the development of a new high tech zone. [online] Available at: <http://www.gov.cn/xinwen/2018-07/12/content_5305795.htm>
month, and that is pretty competitive for labor-intensive industries. In the 1980s, Nike and other sports brands moved from Japan, South Korea and Taiwan, China, to the industrial areas of China's eastern coast represented by the Pearl River Delta and Yangtze River Delta.
The first one is Taiwan's Baocheng Industrial, the world's largest sports and casual footwear foundry. In 2019, its revenue was up to 72.83 billion RMB . In 2015, Mainland China, Vietnam and Indonesia accounted for 25%, 42% and 32% of the total production respectively. By 2019, the proportion of production in mainland China has dropped to 13%.
In short, in recent years, Nike, Adidas and other foreign-funded sports shoes have been mainly shifted to Vietnam for manufacturing. The second iconic company, South Korea's Samsung, closed its Tianjin cell phone manufacturing plant in 2018, while its Huizhou cell phone manufacturing plant ceased operations in 2019, thus completely ending Samsung's cell phone manufacturing in China. And in 2017, the Huizhou Samsung factory accounted for 17% of Samsung's global cell phone production capacity. At the same time, Samsung invested heavily in Vietnam and India. At present, Samsung's cell phone production capacity in Vietnam accounts for about 50% of the global.
To sum up, when China's demographic dividend has faced an inflection point in the last two or three years, with rising labor costs and industrial upgrading. These industries will either transform in China, or move towards places where mainland China still has relative advantages, or move to regions with richer demographic dividends and cheaper labor costs, such as Southeast Asia, South Asia or even Africa.
2.2.2 Domestic labor-intensive industry development situation
After the reform and opening up, China jumped from poverty and backwardness to become the second largest economy in the world. The fundamental reason for the rapid economic development is the successful exploitation of the labor advantage brought by the population.
All industries have been integrated into the global industrial chain and participated in the international division of labor, eventually becoming the world factory. In 2019, China's manufacturing value added reached 26.9 trillion yuan, accounting for 28.1% of the global proportion, maintaining the world's first manufacturing power status for ten consecutive years. However, the labor shortage in the domestic manufacturing industry is increasing year by year because the demographic dividend has created a dependence on low-cost labor in low-end industries, while younger Chinese groups are no longer satisfied with the meager
income of traditional manufacturing workers. With the rapid development of mobile internet, they turn to seek new social demand occupations such as couriers and taxi driver. In order to recruit more workers, Chinese factories have to raise their salaries. The rising cost of labor has further led to the migration of manufacturing to Southeast Asian countries where labor costs are lower.
Intelligence in the production and operation process plays an important role in upgrading and replacing labor-intensive industries. Through the Internet, big data, cloud computing and other modern information and communication technologies combined with advanced automation, digital manufacturing technology, based on intelligent manufacturing equipment, intelligent manufacturing systems, intelligent manufacturing services, to achieve automation and intelligence of the whole process of production, supply and service within and between enterprises, to truly achieve human-machine integration, to be able to provide a higher degree of accuracy in production, to promote the implementation of manufacturing Standardization, modularization and serialization, etc. Taking "machine for human" as the carrier, the traditional repetitive output by intensive labor is given to automation, digitalization and intelligent robots to complete. For example, through the implementation of the "machine for people" program in Zhejiang Province, the total reduction of general labor workers from 2013 to 2015 is nearly 2 million.
Foxconn is the world's largest electronics manufacturer and Apple's largest foundry. Over the past 20 years, Foxconn has established factories in Chinese cities that have greatly contributed to the development of the cities and brought many jobs. It is an indisputable fact that Foxconn's global industrial layout is reducing its share of production in the Chinese market. Step by step, Foxconn is reducing its production in factories in mainland China, with overseas markets accounting for 30% of Foxconn's production capacity. For Foxconn to slowly shift production in mainland China, one factor is the rise of BYD and Lixun Precision in the Chinese market, Foxconn's market share is reduced, although China has a complete industrial chain, but Foxconn in order to find cheap labor to move factories out of China.
With average annual wage increases of 10% to 20% for companies on the eastern coast of China, rising labor costs have become the number one challenge for most companies. Rising input costs for raw materials and shrinking demand for products are also squeezing their profit margins. This makes China's labor-intensive light manufacturing industry is losing its
competitive edge.17 Therefore the factory, with the support of IoT, big data and other technologies, can achieve further optimization of production efficiency and cost through the transformation and construction of the traditional production line digitalization. This is not only a local factory solution, but also a necessary change of production methods taken in the process of promoting the development of China's manufacturing industry.
China's labor-intensive industries, which once had an overwhelming advantage in processing, assembly and low-end manufacturing, are now moving out of the country at an accelerated pace. This could lead to a threat to the integrity of China's industrial chain in the long run.
Therefore, the necessary labor-intensive industries should ensure some development in terms of the integrity of China’s industrial chain and the creation of overall industrial advantage.
17 First Financial. 2018. Labor-intensive manufacturing "going global": Southeast Asia establishes a preferred position. [online] Available at:
https://baijiahao.baidu.com/s?id=1589036361301649084&wfr=spider&for=pc
