Title A comparative study of the business environment of Guangzhouand Shanghai

Author(s) Lee, Yin-yi, Joey.; .

Citation

Issued Date 2004

URL http://hdl.handle.net/10722/31989

Rights The author retains all proprietary rights, (such as patent rights)and the right to use in future works.

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Chapter 1: Introduction

1.1 Research background and objective

After the implementation of new economic reform, China has made great progress in

its economic development. With the operation of economic reform and open door policy

initiated in 1978, Chinas GDP rose by annual average of 14.4% from 1978 to 2001

(National Bureau of State Statistics of China, 2001). Chinas economic miracle not only

improves the living standard and increases the wealth among the Chinese, but also

gradually enhances her international status in the past two decades. The successful

accession to WTO in 2001 was undeniably the remarkable milestone in Chinas economic

development. In fact, the economic development of China has become a worthwhile

discussion topic in international forum for a long time. Some economists comment that her

success is mainly attributed by the openness of economy for trade and investment outside

to the world1. In order to attract the investment capital into China, the existence of

favourable business environment is definitely the necessary and essential element. To

achieve this goal, the central government is very eager to develop the potential coastal

cities with the favourable business environment which are compatible with the needs of

international investors.

Since the late 1970s, under Dengs rule, the central government has decided to

1 Lin Yifu, Cai Fong and Li Zhou, The China Miracle: Development Strategy and Economic Reform, (Hong Kong, 2003), p.198, the composition of foreign trade, domestic investment and introduction of foreign capital take the largest share (80%) for attributing Chinas Economic growth rate in 1997.

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develop Guangdong as the one-step ahead in China. Having fully benefited from the

support of the central government, Guangdong, in particular the Pearl River Delta (PRD)

region has successfully built up its favourable business environment and has enjoyed the

rapid economic growth since the 1980s. Not only that the economic growth rate in the PRD

is listed among the quickest in China2, but also the PRD became the main region in

absorbing foreign capital and creating foreign exchange earnings in the 1980s3. Among

various cities in the PRD, the provincial capital Guangzhou, has incessantly gained the

dominant position in the economic growth. Up to 2001, the total GDP of Guangzhou has

ranked first among the cities in the PRD accounting for RMB 268.576 billion. The total

general export value was also the highest in the PRD with 4.16 billion USD (Guangzhou

Statistical Bureau, 2002). The economic development of the PRD has undeniably

contributed the economic success to China. After consolidating the economic position of

southern China, the Yangtze River Delta has become another centre attention to the central

government in the national development programme since the 1990s. Through opening

Pudong and positioning Shanghai as the leader of the Yangtze River Region for attracting

domestic commerce and foreign investment, the central government intended to create the

Yangtze River Delta as another ideal business environment in China. In 1996, new district

2 Anthony Gar On Yeh & Chai Kwong Mak, Chinese cities and Chinas development, (Hong Kong, 1995) p.262, Between 1980 and 1991, the growth rates of total social output value, national income and gross industrial output value were 19.2%, 16.0% and 22.1%. 3 Ibid, p.262, in 1991, the main economic indicators, foreign capital and the total export value of exports amounted to 18.4% and 14.8% of the total national value in PRD respectively.

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of Pudong in Shanghai already attracted vast amount of foreign investment projects from

more than 60 countries in the world, which amounted to USD12.4 billion (Liu,1999). Up to

2002, the total GDP of Shanghai reached 495.084 billions RMB, which was the highest in

China (Shanghai Statistical Bureau, 2003). On the other hand, many cities and counties in

Jiangsu and Zhejiang provinces are adjusting their industrial structures and development

trends to strengthen the commercial linkage with Shanghai4. All demonstrate that the

Yangtze Delta has successfully developed its favourable environment for business activities

since the 1990s. Reviewing the twenty-year reform, the emergence of the successful

business environment in the Pearl River Delta and the Yangtze River Delta for boosting

economic and commercial activities seems to be the economic engine of the whole Chinas

economic development. As the premier cities of the Pearl River Delta and the Yangtze

River Delta respectively, the business environment of Guangzhou and Shanghai are the best

representations of the new economic direction and situation in China, thus they serve as the

worthwhile study topic in understanding Chinas development.

This research aims to examine the similarities and differences of Guangzhou and

Shanghai in terms of business environment. Throughout making the comparisons between

the two cities, this study attempts to explore the economic importance of Guangzhou and

Shanghai in Chinas development. Besides, this comparative study may provide some

4 Anthony Gar On Yeh & Chai Kwong Mak, Chinese cities and Chinas development, (Hong Kong, 1995) p.246

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insights for investors and businessmen upon the economic prospects of the two cities,

hence facilitating them to make the clear investment direction in foreseeable future.

1.2 Research questions and Hypotheses

There are 3 research questions posed on this research:

- What are the economic potencies of Guangzhou and Shanghai?

- How far does the different business environment generate different economic

directions and performances in Guangzhou and Shanghai?

- What are the comparative advantages and disadvantages of Guangzhou and Shanghai

in terms of trade or business investment?

To facilitate the investigation of the research questions identified above, three working

hypotheses are made:

- The similarities and differences between Guangzhou and Shanghai in terms of

business environment are the results of place-specific political, economic,

socio-cultural and technological conditions.

- Differences in the business environment contribute to different growth rates and

development directions in the two cities.

- The economic performance of the Pearl Delta Region and the Yangtze Delta Region

are related to the development of the business environment in Guangzhou and Shanghai

respectively.

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1.3 Study Area

The concept of business environment is the main focus in this research. This research

is based upon a macro perspective to view the business development in Shanghai and

Guangzhou, a broader context is expected in this study. Political, economic, social and

technological factors will be employed as the major criteria for assessing the business

environment of the two cities. The development of Guangzhou and Shanghai since the

1980s will be included as the main part of my research. By making the comparisons

between the two cities, some evaluations about their future development will be examined

in part of my study. In addition, some background information about the development of

the Pearl River Delta and the Yangtze River Delta will be explored as well, since these two

regions play the vital role as the source region for bringing the rise of the business

environment in Guangzhou and Shanghai. Without relying upon their hinterlands, it cannot

be assumed that the two cities develop such the successful environment for commercial and

business activities today. In short, this research is composed of three elements: the concept

of business environment, the comparisons between Guangzhou and Shanghai at different

grounds and some information about the Pearl River Delta and the Yangtze River Delta.

1.31 Why Shanghai and Guangzhou?

Existing studies have tended to put much concentration on the comparisons between

Hong Kong and Shanghai without paying the special attention to the importance of

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Guangzhou. In fact, the economic significance of Guangzhou is as crucial as Hong Kong

which should not be ignored. Guangzhou has served as the economic focal point and the

southern trade gateway of China for more than 500 years, which is even earlier than Hong

Kong. In historical perspective, to a certain extent, Guangzhou and Shanghai are the

traditional competitors of each other for business and trade since the 19th century. Despite

of the weaker economic performance today, the economic direction and development is

very similar to Shanghai.

Guangzhou and Shanghai are the central cities located in the Pearl River Delta and the

Yangtze River Delta respectively, with which these two regions are both the economic

focus under the economic reform. Unlike the situation of Hong Kong, they share the

similar political background in which they are fully under PRC sovereignty. In economic

term, both of their economic mainstreams are also based upon the trade and business sector,

the business environment is an essential component for bringing their economic success in

the past twenty years. Despite of these similarities, Guangzhou and Shanghai perform

different styles of development. The economy of Guangzhou is mainly based upon

manufacturing export trade: From 1997 to 2001, the gross industrial output value took

almost half of the total GDP in Guangzhou. With light industrial products as the major

export output, the light industrial export products occupied around a quarter of the total

export trade value, the foreign investment in manufacturing trade also took about two third

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of the total investment projects in Guangzhou(Guangzhou Statistical Bureau, 2003). All

reveal that the economic source of Guangzhou is mainly from manufacturing trade. On the

other hand, Shanghai intends to exert a pull on service trade. As Dr. Cui Gonghao claimed,

Shanghai is aiming at developing tertiary sector such as finance, information and real

estate industries in order to rest its central position in Far East5. From 1990 to 2000, the

average growth of service sector was the highest in Shanghais economy. It can be expected

that service trade will be the future development direction of Shanghai. Given various

similarities and differences, Guangzhou and Shanghai are the suitable comparative pair in

studying Chinas development, they act as the best models that represent two different

types of the new business environment in China brought by the open door policy.

1.32 Study period

In order to compare the business environment of Guangzhou and Shanghai more

specifically, this research is confined to the period from 1980 to 2001. Before 1978, there

were no major changes made in the basic framework of Chinas traditional economic

system6. The economic reform constituted by Dengs leadership contributed the economic

turning point in China. Under Dengs rule, China has adopted the strategy with market

system economically, but a socialist system politically7. The implementation of open door

5 Cui Gonghao, Development of Shanghai and the Yangtze Delta, Anthony Gar On Yeh & Chai Kwong Mak, Chinese cities and Chinas development, (Hong Kong, 1995) p.253 6Lin Yifu, Cai Fong and Li Zhou, The China Miracle: Development Strategy and Economic Reform, (Hong Kong, 2003), p.138 7 YM Yeung and Sung Yun-wing, Shanghai: Transformation and Modernization under Chinas Open Policy, (Hong Kong, 1996), p.98

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policy in 1979 not only marked the beginning of the formation of business environment in

China, but also paved the way for the successful economic growth in the next two decades.

Another critical point for Chinas economic development is the year 2001, in which China

successfully entered WTO. The accession not only acts as the milestone of Chinas open

door policy in international trade, but also implies the role of business and trade is

becoming more and more significant in Chinas economy. Facing such direction, China

may need to address itself to the importance of business environment in future. It is

undeniable that the successful business environment contributed by the central government

plays an influential role on contributing such the impressive economic progress in China.

Without providing such the favourable business environment, neither domestic investment

nor foreign capital would be attracted; China would not enjoy the economic success in the

past two decades as well as the complimentary economic prospect. As a result, my research

will be concentrated on such the critical period of time.

1.4 Methodology and data collection

A qualitative approach is adopted in my study. Information and materials which are

related to the background and situation of Shanghai and Guangzhou since the 1980s, such

as books, articles and journals etc., will be explored. As long as some statistical resources

are also required for identifying and analysing the patterns of the business environment of

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the two cities, the statistical data is obtained from Statistical Yearbooks of China, Shanghai

and Guangzhou. Besides, some other useful information is also obtained from some

relevant websites.

1.5 Organization and limitations of the study

This study is composed of eight chapters. The above reviewed Chapter One is the

introduction part of this research. Chapter Two is the literature review concerning the issue

of business environment. Chapter Three examines the background of the two cities as well

as the economic development of their hinterlands, the Pearl River Delta and the Yangtze

River Delta. Chapter Four attempts to examine and compare how the public policies and

the role of the government shape the business environment of the two cities. Chapter Five

looks into the current economic situation, the development of secondary and tertiary

industries and the patterns of foreign trade and investment in Guangzhou and Shanghai.

Chapter Six perceives the influence of social elements like demographic structure, living

standard and labour supply of the two cities. Chapter Seven mainly concerns about the

technological and scientific development of Guangzhou and Shanghai. Finally, Chapter

Eight is the evaluation remarks on the prospects and the positions of the two cities. Because

of the time and resource constraints, this study only covers 4 key areas that are the most

critical to the topic. Some elements like legal issue though not insignificant have to be

excluded.

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Chapter 2: Literature review

2.1 Definition of Business environment

In general, business environment is defined as the external conditions for which

businesses exist and operate 8 . There are several components involved in business

environment. These may include: economic structures, social relations, cultural values,

political institutions, technological development, legal framework, demographic structure

and global competitive environment (Morrison, 2002). These factors influence commercial

and business activities taken place in society. The components of business environment can

be subject to many changes which vary from different time and situation. In academic

perspective, business environment can be identified and assessed by the PEST analysis

(John Sloman, 1998). The following is the brief introduction of PEST analysis:

PEST indeed means:

Political environment (P)

Economic environment (E)

Social environment (S)

Technological environment (T)

1) Political environment:

The political factor is an essential element of business environment. The nature of political

system and the outbreak of political events directly affect commercial and business

8 Malcom Surridge, Tony Bushell and Philip Gunn, The Business Environment, (London, 1993), p.11

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activities in a country. The government always plays an important role on shaping the

business environment of the country. For instances, the governments involvement in the

operation of economic structure and its attempt to intervene the market and consumption

behaviour, may do the direct and/or indirect influence to business activities (Worthington,

1997). Also, various public policies and regulatory frameworks, like the context of laws,

regulations and codes, as well as imposing taxes etc, are all recognized by the government

and which act as the influential components affecting the flexibility of business

environment (Needham, 1997). Therefore, the political environment is a necessary factor in

assessing the business environment.

2) Economic environment:

Economic factor indeed can be varied from local to national to international. In general,

economic environment can be divided into two levels. i.e. microeconomic environment and

macroeconomic environment. Microeconomic environment includes all economic factors

that are related to the operation of firms in a market. The competitive market, consumers

taste and demand and rising costs etc are the key concerned elements in the

microenvironment (Sloman, 1998). Macroeconomic environment is associated with the

regional, national or international economic situation. The economic system, economic

development and current economic circumstance affect the operation of business activities

in a community. For instance, the occurrence of economic recession may generate the

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decline in business transactions in society, vice versa (Needham, 1997). The adverse

influence of Asian Financial Crisis on the economic growth in Hong Kong after 1997

serves as the paradigm for illustrating the importance of economic environment. Thus, the

economic environment is a vital factor which affects the attractiveness of business

environment.

3) Social environment:

This aspect concerns social attitudes and values in society. These include the attitudes of

labour towards working conditions, the length of working days, the equal opportunities and

the working ethnics among different groups of people. With its own social value, living

preferences and standard, a society may influence business operations in the country. The

social factor thus becomes one of the major considerations for businessmen to decide their

investment participation in the specific environment. Besides, some social trends like the

change of features of the population and the rise in consciousness of environmental

conservation can affect the business actions in society (Campbell, 1997 and Sloman, 1998),

because these tendencies can do the impacts on the demand and consumption in the market,

consequently affect the business direction and operation in the community. So, the social

factor plays the vital role on influencing business environment.

4) Technological environment:

Technological characteristics include the level of advancement of knowledge and

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equipment in society as well as the rate of development and application of such knowledge

(Needham, 1997). Investment in technology and innovation is key to the success of

business operations, and in a macro perspective, technological development is often a vital

factor in increasing the competitiveness of different countries, since it not only helps a

business to reduce the production costs and generate the better and more accurate decisions,

but also enables the business to enhance the speed of production, the productivity and the

quality of products (Campbell, 1997). It is true that the technological development

facilitates the emergence of favourable business environment (Worthington, 1997).

2.2 Empirical Studies

2.21 Global Business environment

In international yardstick, the Economist Intelligence Unit (EIU) produces a

business-ranking model in 60 countries covered by Country Forecast9 using a standard

analytical framework to measure the quality or attractiveness of business environment (See

appendix 1). It is based upon the historical and anticipated conditions in the past and next

five years. The following ten separate categories are examined in the business-ranking

model10:

- Political environment

- Macroeconomic environment

9 Country Forecast, August 1995 10 Reference to Lau Sau Man, A comparative study of the business environment of Hong Kong and Shanghai, (Hong Kong, 2003), p.24

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- Market opportunities

- Policy towards free enterprises and competition

- Policy towards foreign investment

- Foreign trade and exchange controls

- Taxes

- Financing

- Labour market

- Infrastructure

The higher ranking obtained, the higher quality of business environment is supposed to

be provided. From 1998 to 2002, western countries were mostly highly- ranked that graded

as good or very good, reflecting their very stable political and economic environment,

efficient financial sector, high quality infrastructure and well-educated labour force. Hong

Kong was ranked first before 1997, but dropped 12 places from 1998 to 2002, reflecting the

deterioration in the business environment as a result of the impact of the financial turmoil

in Asia. Comparing with Hong Kong, although China has made great progress in the past

ten years, her business environment was still graded as moderate ranking 45 among 60

countries, which reflects that Chinas business environment is still far behind Hong Kongs

or other developed countries in the international standard.

To further examine Chinas business environment thoroughly, Business Monitor

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International (BMI) has conducted an assessment on merely Chinas business environment

since the 1990s11. The assessment is mainly based upon seven criteria, which include:

- Foreign investment

- Foreign trade

- Industrial development

- Labour Market

- Infrastructure development

- Taxation

- Environmental conditions

According to the reports, undoubtedly, China remains as one of the most popular and

potentially rewarding locations for foreign investors and trade partners, but there are

numerous hurdles that place Chinas business environment still to be claimed as

unfavourable. These hurdles are often referred as the difficulties in investment approval,

final clearance and complications operating business, such as unexpected changes in key

variables like tax and tariff rules, serious payment problems and delays in the transfer of

funds. Besides, the frequent official and general corruption and the slow and inefficient

bureaucratic system are deemed as the hindrances to Chinas business environment (BMI,

1995-2001). As a result, China may have to pay more concerns to these problems so as to

11 Business Monitor International, China : Annual Report on Government, Economy, and Business Environment, Capital Markets and Industry, with Forecast, 1995-2001 (London)

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enhance the competitiveness of her business environment. Despite of those unfavourable

conditions, China is still the most popular developing country in the world for foreign trade

and investment12, and the continuous rise of her business environment can be expected in

foreseeable future, in particular after the accession to WTO in 2001.

From these findings, it seems that there is no specific definition for business

environment, the application of different definitions is just depended on different purposes

and circumstances. It is true that business environment is always an indispensable element

which affects the development of a country, whereas the flexibility and attractiveness of

business environment is also influenced by political, economic, social and technological

conditions of the country in reverse. Hence, to a certain extent, the business environment is

often an effective indicator reflecting the pace and direction of the economic development

of the country.

2.22 Shanghais Business Environment

Among different cities of China, the business environment of Shanghai seems to be

the most favourable since the 1990s. In fact, such amazing achievement is attributed by

many political, economic and social factors. EIU provides an analysis on the business

environment of Shanghai issued by Business Asia13, on which it outlines nine significant

elements for bringing the favourable business environment in Shanghai. These include:

12 National Bureau of State Statistics, China Statistical Yearbook, 2002, the total value of imports and exports reached RMB 42.1933 billion, whilst the total amount of FDI in actual utilized was USD 46.87bn and the number of FDI projects was 26140. 13 Business Asia, Nov, 17, 1997, titled China : Investing in Shanghai, p.4-7

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- Strong political and financial backing

The status of the city has greatly enhanced since the 1990s as a result of the coastal

development strategy in the YRD. With the present municipal leadership remains in

power and the great support from the central government, Shanghai has bigger

bargaining power and gains much more resources and privileges than other provinces

for creating the better business environment.

- Relatively clean bureaucracy

According to EIU, there are less bureaucratic problems in Shanghai than elsewhere in

China. The customs is relatively corruption-free. Though the municipal government

behaves rather rigid to the business rules, officials are generally business friendly.

Indeed, doing business there is a breath of fresh air for companies which prefer to

follow the rules 14.

- Sound infrastructure

Infrastructure is always an important essence of the ideal business environment. The

massive spending on roads, rails, ports and utilities etc will be important for Shanghais

future development.

- Falling property prices

Though the property price of Shanghai was hugely overpriced during the last decade,

14 Ibid, p.4

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the burst of speculative bubble has dropped down the price dramatically since the late

1990s. Together with 50% of office vacancy, Shanghais property market seems to carry

potential development and is favourable to its business environment in future.

- Expensive, but quality labour

Although Shanghais labour cost is among the highest in China, the high quality and

skilful labour is still an attractive factor in pulling the attention of businessmen.

- Emerging financial centre

The completion of the new stock-exchange building in Pudong, the licensing of foreign

banks to conduct RMB business and the presence of plenty foreign banks provide the

foundation to Shanghais financial development. Yet, EIU suggests the further

loosening of the license restrictions for reminbi banking will be significant for

establishing the more flexible business environment in future.

- Vast retail market

Potential retail market is often significant for attracting business and investment. With

the large population size of 1.3 million and the access of huge customer base

in the Yangtze River Delta, the retail sector becomes the major charisma of Shanghais

business environment.

- Good sourcing

The favourable geographical location enables Shanghai to play an excellent role on

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sourcing and allocating the resources and capital between suppliers and investors, and

which is critical for bringing the successful business environment.

- Improving life quality

In foreigners points of view, the upgrading of living environment and public facilities,

the alleviation of congestion and housing stock in recent years help enhance the quality

and attractiveness of Shanghais business environment.

2.23 Guangzhous Business Environment

In studying the business environment of Guangzhou, Zuo Zheng points out five exclusive

features which contribute the successful business environment of this provincial city (Zuo,

2003):

- Deep river-sea connected water port

The possession of the non-silted deep water port has been one of the significant factors

in facilitating the sustainable superiority in trade and business of Guangzhou for 2200

years.

- Access to Hong Kong

The great accessibility to Asian metropolis, Hong Kong, is undoubtedly favourable to

Guangzhous commercial and business development since the vicinity of the world

trade window Hong Kong can greatly facilitate the economic and trade connection of

Guangzhou with foreigners.

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- Circulation node advantage

Owing to the geographical advantage, the commercial and trade area can be easily

established in Guangzhou. The city not only serves as a storage and transfer centre for

the products of southern China, but also acts as a key node for domestic products,

capital, technology, telecommunication services and expertise to connect and access the

international market. The role as the second international circulation node after Hong

Kong is a critical element of Guangzhou in establishing the favourable business

environment for attracting foreign investors.

- Superior development in tertiary sector

With the unique function as the special circulation centre provided by the superior

geographical economic location, Guangzhou gains more favourable conditions for

developing tertiary sector than other cities. The rapid development of financial and

insurance services, catering services, transport and postal services and social services

not only facilitate the economic development of the city, but more importantly act as

the compatible components for the formation of the comprehensive business

environment of Guangzhou.

- Unique and great cultural heritage

This referred to that, as a result of the international connections and the cultural

exchange with the west, Guangzhou has absorbed superior cultural elements from the

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world and has established the unique Linnan Culture, which carries the open,

generalized and commercialised features, whilst such superior culture is conducive to

the economic development as well as the business environment of Guangzhou.

2.24 Comparative study

Although many scholars have also made their attempts on analysing the business

environment in either Shanghai or Guangzhou, a few scholars and economists have

directly compared the business environment of Shanghai and Guangzhou. Shadid Yusuf

and Weiping Wu is the exception. They compare the urban development of Shanghai,

Guangzhou and Tianjin. By analyzing the economic performance, urban growth and

development of the three cities, various findings are drawn out towards the similarities

and differences of the development direction, model and pace of the three cities15. In

terms of the similarities, they find out that the economic centre of gravity of the three

cities is in manufacturing sector. Second, all three cities carry the distinctive

geographical locations in the regional context: their coastal locations enable them to

provide large and busy ports and be well served by their hinterlands. Third, being the

typical and major industrial centres in China, the three cities have a relatively high

concentration of state-owned enterprises. Fourth, owing to the large share of

state-owned industry, the labour market in these cities was subject to much rigidity.

15 Shadid Yusuf & Weiping Wu, The dynamics of urban growth in three Chinese cities, (Oxford, 1997)

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Fifth, all three cities belong to the selected open cities that play as the super head of

Chinas opening to the outside world and the pioneers in the reform. Sixth, all three

cities receive a substantial volume of FDI and benefit from the outspread effects

radiated from their neighbouring economies (Yusuf and Wu, 1997).

Despite of these similarities, Yusuf and Wu discovered several differences of the

three cities in terms of economic growth, industrial performance, labour workforce,

economic development direction and external competition. During the period of

1978-1993, as a result of the greater economic autonomy and a relatively smaller share

of centrally managed state industry, Guangzhou enjoyed the fastest annual economic

growth rate of 11.3%, which was above the national average, whereas Shanghai and

Tianjin grew at about 8%, which were even below the national average for more than

1%. The industrial performances were also varied among the three cities. Both

Shanghai and Tianjin have broader and stronger industrial bases than Guangzhou,

whilst Shanghai dominates Tianjin and Guangzhou in profitability and productivity

across the six industries. Shanghai and Tianjin tend to specialize in heavy and high-tech

industries but Guangzhou specializes in light manufacturing industries. In terms of

workforce, Shanghai and Tianjin are confronting the problem of aging workforce. The

population group above 50 years of age in Shanghai took 20% of the municipal

population in the 1990s, which was much higher than the average national level (12%),

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Guangzhou (14%) and Tianjin (16%). Shanghai also has the lowest birthrate among the

three cities, while Guangzhou has the highest. The ageing workforce definitely

sharpens the demand for the long-term social security system and weakens the

competitiveness and productivity of the city (Yusuf and Wu, 1997). Nevertheless,

Shanghai has gradually improved the situation by devising some welfare mechanisms

in recent years. The economic development direction of the three cities is different as

well: Shanghai has great potential to become a world-class financial centre, whereas

Guangzhou is eager to develop trade-related services, and Tianjin concentrates on

transport-induced activities. Concerning the external competition, except Shanghai

remains highly competitive in the YRD, both Tianjin and Guangzhou have experienced

the intensive regional competition from the secondary cities in their hinterlands since

the last decade. For instances, Shijizhuang is challenging Tianjin in both textiles and

clothing industries. Foshan and Dongguan are the rival competitors of Guangzhou in

clothing and electronic industries. Nonetheless, all three cities still possess advantages

in the development of large industries, such as machine building, chemicals, metallurgy

and transport equipment. In short, the similarities and differences generate Guangzhou,

Shanghai and Tianjin to develop their own uniqueness in terms of economic model and

urban development, and which also act as the new representations of Chinas

development today.

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2.3 Conceptual framework

Owing to the limited findings of the comparative study of the economic

development of Guangzhou and Shanghai, this research aims at examining the business

environment of the two cities by comparing them with a broader framework. In order to

conduct the concrete research, PEST analysis is used as the main criterion for assessing

the business environment of Guangzhou and Shanghai. Throughout comparing the

political, economic, social and technological environment, a macro-outlook on the

business environment of the two cities can be attained.

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Chapter 3 An overview of economic development

Both Shanghai and Guangzhou are economic focal cities of China and they have

experienced dramatic economic changes after 1978. Before examining 4 major elements of

the business environment and making the comparisons of the two cities, it is necessary to

review their background information and their economic positions in their hinterlands.

These can serve as the foundation of the comparative study of Shanghai and Guangzhou in

next four sections.

Map 1 Map of China

Source: http://worldatlas.com/webimage/countrys/asia/cnlarge.htm

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3.1 Background review of Shanghai

Shanghai is situated on the estuary of the Yangtze River in East China Sea and is

bordered by Jiangsu and Zhejiang provinces. It is one of the four municipalities that are

under direct jurisdictions of the central government. It has a total area of 6,341 square

kilometers and the population is 13.34 million. Shanghai is well known for its rich water

resources, with many rivers and lakes. Most rivers are tributaries of the Huangpu River.

Pinhu Oilfield is one of the precious natural resources in the southeast of Shanghai to turn

out crude oil and gas and mainly supplied to Shanghais area (Shi, Lamy and Kapp, 2003).

Historically, Shanghai is a traditionally indispensable city of China. It served as a

gateway to the world in the past two centuries. Although Shanghai only took approximately

1% of the national population, it contributed a fifth of the industrial output and handled 2/3

of the foreign trade. It was also once Asias financial and commercial center, dwarfing

Tokyo (Yusuf and Wu, 2002). Since 1949, after the communist party came to the power, its

role as a financial and commercial centre was replaced to be a key industrial city of China,

in which they concentrated on heavy industries and supplied industrial products, skilled

personnel, and huge amount of revenue to the central government. Despite of the alteration

of its economic function, the annual growth rate of Shanghais national income during the

period of 1953-1978 amounted to almost 9%, which was not only the fastest in the country,

but also higher than that of the other leading coastal provinces.

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Nonetheless, such superiority was no longer sustained after the introduction of open

door policy in the early 1980s, from which the central government largely heeded to the

economic development of Guangdong and Fujian. As a consequence, the economic

significance of Shanghai fell behind these two provinces, in particular Guangdong province.

For instances, its share in Chinas gross industrial output was cut almost by half, from 12%

in 1978 to only 5.5% in 1994. Shanghais share in the national total exports also fell

precipitously from about 30% in 1978 to mere 7.5% in 1994. After 1986, Guangdong had

already replaced Shanghai as Chinas leading exporting province (Yeung and Sung, 1996).

The turning point has fortunately appeared since the early 1990s, after Jiang Zemin and

then Zhu Rongji headed the local administration before becoming the premier leaders in the

central government, Shanghai can once again become the economic focal point of China.

With the ease of heavy control of the central government, the encouragement of massive

inflow of foreign investment, the boost of its trade and financial development, Shanghai

has regained some its lost glory. With only ten-year time development, Shanghai not only

becomes the premier city in China, but also carries the greatest potential for developing

itself as the first Asian Metropolis of China.

28

3.2 Shanghai in the Yangtze River Delta

Map 2 Map of the Yangtze River Delta

Source: Yeh and Mak, 1995, p.242

3.21 Basic Background of the Yangtze River Delta

Since Shanghai is situated on the estuary of the Yangtze River, Shanghai is well served

by its fabulous hinterland --the Yangtze River Delta (YRD). Undoubtedly, the YRD is one

of the most significant regions in China, it has a third of Chinas population and 40% of

Chinas gross domestic product (GDP). The Yangtze River Delta includes seven cities in

Jiangsu Province (Nanjing, Zhengjiang, Yangzhou, Suzhou, Wuxi, Changzhou and

Nantong), three cities in Zhejinag Province (Hangzhou, Jiaxiang and Huzhou), together

with Shanghai, totaling eleven cities and covering 62,000 square kilometers.

29

During the past four decades, the Yangtze Delta has grown into a comprehensive

industrial base characterized by the coordinated development of light and heavy industries.

The light industry generates more than 60% of the total industrial products, and takes 23%

of the national total light industrial products. Since the past two decades, the YRD has

developed the new economic direction and has concentrated on the high-tech industrial

development. So far, there are 7 national grade high technology development zones in the

Yangtze Delta, including economic technical development zones, environmental protected

industrial zones, scenic spots, some provincial grade development zones and township

industrial parks. These development zones play the positive role on attracting foreign

investment, importing technologies and rationalizing distribution in the region. There are

over 200 enterprises, 100 research institutes and colleges located in various

high-technology development zones in Suzhou, Wuxi and Changzhou (Yeh and Mak,

1995).

Apart from the industrial base, the YRD plays as an important transport hub that

connects south and north part of the country as it lies at the heart of eastern China. At

present, there are 6 open river/sea ports along the Yangtze. The comprehensive transport

network which consists of container facilities, airport and roads can be founded in the YRD

as well.

30

3.22 Economic position of Shanghai in the Yangtze River Delta

Undeniably, Shanghai occupies the leading economic position in the Yangtze River

Delta region. After the grant of preferential privileges to Shanghais Pudong since the mid

1990s, the status of Shanghai as the dragon head seems to be more evident and steady.

Economically, Shanghai often plays as an agent or a coordinator of the economic

development programme of the YRD. As the agent, Shanghai concentrates on tertiary

sector and provides the effective service to generate and facilitate the industrial

development of other secondary cities in the YRD. With the close co-operation, a concept

called Shops at the front and factories at the back has been formulated between Shanghai

and other cities in the YRD. Nowadays, owing to the strong trading power of Shanghai,

many cities and counties in Jiangsu and Zhejiang provinces are adjusting their industrial

structures and development trends so as to strengthen their linkages with Shanghai and

vitalize their industrial economies (Yeh and Mak, 1995). High technology, light industry,

textile industry and tourism are very important in the regions of Suzhou-Wuxi-Changzhou

and Hangzhou-Jiaxing-Huzhou, whilst heavy industries such as petroleum, metallurgy,

building materials and automobile are well developed in Nanjing, Zhejiang and Yangzhou.

Besides, Shanghai is a significant transport node that connects all cities in the YRD

and plays as the gateway of the region to the world. Almost every transport planning is

focused around Shanghai. For example, Shanghai is the nuclear point of east-west corridors,

31

which include the Shanghai-Nanjing, Shanghai-Hangzhou and Hangzhou-Ningbo

expressways, Xuzhou-Nanjing-Shanghai-Hangzhou and Hangzhou-Ningbo expressways,

Xuzhou-Nanjing-Shanghai dedicated high speed passenger railway, Shanghai-Chengdu

national highway, Nanjing-Nantong Railway and Nanjing-Xiangfan Railway(Yeh and Mak,

1995). The construction of the Pudong international Airport and the expansion of Shanghai

Hongqiao Airport in recent years are partially for catering the need of the YRD

development programme.

In addition to the role of leader and coordinator, Shanghai plays a significant role on

lubricating the economic development in the YRD. Without the promoting effort and the

encouragement of the Shanghai Municipality, the inflow of FDI would not be so

tremendous in the YRD cities (Walcott, 2003).

Despite of the economic significance, the leading position of Shanghai in the YRD is

not totally undisputable. Though Shanghai is certainly the largest city in the delta, it does

not own the best port. The leading position in seaport is greatly challenged by Ningbo port.

Besides, the rapid rise of other cities in the YRD like Chongqing and Wuhan may cause the

potential threat to Shanghais leading status in the future. Nonetheless, regardless these

hindrances, to a large extent, Shanghai still occupies the premier position in the Yangtze

River Delta region, as its economic significance is irreplaceable by any cities in the YRD.

32

3.3 Background review of Guangzhou

Situated in the Pearl River Delta near South China Sea and adjacent to Hong Kong and

Macao, Guangzhou is the capital of Guangdong province. The total area is 7434 square

kilometers whilst its water area covers for 10% of Guangzhous total area, and its

population is 7.20 million. With a sub-tropical climate and ample rainfall, Guangzhou is

suitable for year-round farming, which is also the reason for the city to be well known as

the City of flowers. Same as Shanghai, Guangzhou is also a place with rich resources.

There are 52 varieties of mineral deposits, including coal, lead, zinc, niobium, gold and

other ferrous, non-ferrous, rare and precious metals at 396 locations (Shi, Lamy and Kapp,

2003).

To trace back the economic history, Guangzhou possesses the more impressive and

profound background than Shanghai to a certain extent. Owing to its coastal geographical

location, Guangzhou is Chinas the largest and the most prosperous southern city, an

important sector for foreign trade and a famous historical and cultural city over 2000 years.

The unique position of Guangzhou became more explicit in the mid-nineteenth century-- it

was designated as the only Chinese port for trade with foreign barbarians. After the loss

of Qing in the first Opium War, Guangzhou was one of the five treaty ports established by

the Treaty of Nanjing in 1842. As Chinas foreign trade slowly expanded under the treaty

order in the late nineteenth century, Shanghai quickly replaced Guangzhou as the premier

33

trading port of China whereas the city could only maintain a distant second important place

during this period. In the early 20th century, as the treaty ports gradually developed into the

hubs of modern industrial development, Guangzhou became one of the notable industrial

centers in textile and flour-milling with the second rank importance, which came after

Shanghai. After the establishment of Peoples Republic in 1949, Guangzhou was

unfortunately perceived as a centre of foreign and capitalist contamination by the new

Communist authorities in Beijing, thus its economic significance seemed to be downgraded

in the 1950sGuangzhou not only was no longer designated as the key point for

industrial construction, but also was assigned to promote the development of provincial

agriculture and to serve the needs of agriculture in terms of Chinas national economic

requirements. The citys status could not be revived until the Great Leap Forward

Movement in 1958, from which Guangzhou was built as a modern industrial city for

national industrialization. Such superior status was sustained even during the worst years of

the Cultural Revolution, Guangzhou played the predominant role on financing, ownership

and control, and material allocations at provincial and municipal level of the country.

Guangzhou also retained its old imperial role as the window to the world (Yu, 1997).

The leading position of the city has been further consolidated by the introduction of

open door policy since 1978, the grant of preferential status to Guangdong has contributed

plenty of economic opportunities to Guangzhou, which is the provincial capital of the

34

province. With the adoption of economic reform, Guangzhou has been classified as danlie

chengshi, i.e., a city being specifically considered by the central government in its overall

economic planning, instead of being subsumed under provincial levels economic planning

(MacPherson and Cheng, 1996). Hence, Guangzhous economic development could

perform rapidly and impressively in the past 20 years.

3.4 Guangzhou in the Pearl River Delta

Map 3 Map of the Pearl River Delta

Source: http://www.cityu.edu.hk/lib/collect/prd/maps/map_prd.htm

3.41 Basic Background of the Pearl River Delta

The economic importance of Guangzhou, to a large extent, is contributed by its

hinterlandthe Pearl River Delta (PRD). This amazing hinterland is composed of the

provincial capital Guangzhou, 3 SEZs: Shenzhen, Zhongshan and Zhuhai, and 8 cities,

including Foshan, Jiangmen, Dongguan, Shunde, Nanhai, Huizhou, Zhaoqing and Panyu,

covering an area of about 20000 square kilometers. The population of the region is about

35

33.08 million, which is only 30% of the provincial total (Guangdong Statistical Bureau,

2003).

Since the early establishment of economic reform, Guangdong has been granted as

one of the preferential provinces in economic development. Being the heart of the province,

the PRD has become the focal point of economic revitalization. Thanks to the past

two-decade effort, the region is one of the most prosperous regions in China. Its economic

performance reached its peak in the 1980s. The GDP in 1988 reached RMB 65.92billion,

accounting for 59.5% of Guangdongs total. The economic growth rate in the PRD is listed

among the quickest in China. Between 1980 and 1991, the growth rates of total social

output value, national income and gross industrial output value were 19.2%, 16% and

22.1% (Yeh and Mak, 1995). All of them were higher than the national growth rates. Up

until 2002, the region still performed the outstanding economic developmentthough its

population size is only 30% of Guangdongs, it attributes 86% of FDI, 71% of GDP, 89%

of exports and 66% of retail sales to the province. The PRD economy is mainly

characterized by two elements. First is the emphasis on foreign investment and export trade.

The PRD absorbs huge foreign capital on account of cheap labour and land as well as

special policies given by the central government. It also makes full use of the advantages

formed by industrialization and urbanization to attract foreign capital. The other is

industrial-oriented feature. In the PRD, the light industry seems to be more predominant

36

than the heavy one. Before the implementation of open door policy, the industry in the

region was mainly related to agriculture, such as food processing, silk reeling, textile

industry, sugar refining, agricultural tools and chemical fertilizers. However, since the

1980s, some changes occurred in which the manufacturing of electric appliances, plastic

industry, textile and clothing industry and food processing industry have gradually become

the chief industries in the PRD.

Similar to the Yangtze River Delta, the PRD also serves as a transport axis of

Guangdong province, yet its function as a bridge connecting Hong Kong, Macau and the

mainland together seems to be more significant than the internal connection with other

provinces (Chan, Hsueh and Luk, 1996). Airport, piers, railways and superhighway can be

founded in many cities of the PRD. In sum, the PRD serves as the regional growth centre in

south China.

3.42 Economic position of Guangzhou in the Pearl River Delta

Being the provincial capital of Guangdong, most people recognize Guangzhou as the

dragon head not only in the Pearl River Delta, but also in Guangdong. Undoubtedly,

Guangzhou often plays as the pioneer of the economic development in the region. In the

beginning years of the economic reform, Guangzhou often act as a demonstrator and

carried radiation effects to other cities in the PRD. For example, in the early 1980s,

Guangzhou concentrated on light manufacturing industries. With the operation of the

37

small-scale intensive industrial model, textiles, flour and paper-making, oil refinery,

chemical and other engineering industries were flourished in the city. Such successful

development aroused many cities and counties in the region to learn from Guangzhou in

boosting their industrial development.

Like Shanghai, Guangzhou has also tried its best to develop itself as the service hub in

the PRD since the early 1990s. They put special attention on several tertiary industries like

banking, commerce and trade, information and other specialized services (Yeh and Mak,

1995). Guangzhou also strengthens its cooperation with other cities in the PRD so as to

strive for the leading position of the regional service agent and facilitate the industrial

development of the region.

Apart from the regional service agent, Guangzhou is also one of the traditional and vital

transport nodes which connects the cities in the PRD with Hong Kong. Kowloon-Canton

Railway is the earliest transport route which links Hong Kong with the mainland. In fact,

except Hong Kong, Guangzhou is also the second important international transport hub

which connects the PRD with the outside world. The Baiyun International Airport and the

Huangpu seaport of Guangzhou also carry the crucial position in international transport

sector of the PRD.

Despite of these leading advantages, the status of Guangzhou as the dragon head of

the PRD seems to be relatively unstable when comparing with Shanghai. The intensive

38

competition is the main obstacle faced by Guangzhou. Since the late 1980s, the economic

performance of Guangzhou has become less competitive when comparing with other

uprising cities and counties in the PRD. The small tigers in the region are having the

higher productivity than Guangzhou in the course of economic restructuring (Chan, Hsueh

and Luk, 1996). The industrial development of the city has been declined as well, the

percentage of the growth of output value of industry (GOVI) of Guangzhou with reference

to the Pearl River Delta dropped from 62.82% to 24.39% between 1980 and 1990. In 2002,

its GOVI even dropped to 18.95% in the PRD. Refrigerators, electric fans and washing

machines from Shunde and Zhongshan have enjoyed a comfortable share in the national

market comparing with the products produced in Guangzhou (Yusuf and Wu, 1997).

Though the city has repositioned itself as the service hub of the region, the rise of Shenzhen,

which carries the similar economic direction with Guangzhou, has become the great

challenge and threat to Guangzhou as the dragon head of the PRD.

Whether Guangzhous leading position in the PRD is disputable, it is an undeniable fact

that the city carries the indispensable economic significance in the region, yet striving for

and consolidating the dragon head status in the region is still the main goal for

Guangzhou in a long term.

After examining the background of Shanghai and Guangzhou, several similarities can

be obviously discovered in terms of geographical location, history as well as economic

39

structure and direction. More importantly, their superior economic importance in their

hinterlands contribute them to play as the most vital economic focal point in east and south

of China respectively. Providing such similar background, Shanghai and Guangzhou seem

to be the most suitable comparative pair among various cities in China.

40

Chapter 4 Political Environment

The political factor is an essential component in business environment. The nature of

political system and the outbreak of political events directly affect commercial and business

activities taken place in a community. The occurrences of economic shock in Taiwan and

USA after the outbreak of the election crisis and the 911 attack in recent years demonstrate

the influence of politics upon the economic environment of the country. In fact, the

government always plays an important role on shaping business environment. Various

influential components affecting the attractiveness of business environment, like public

policies, regulatory frameworks, taxation and construction of infrastructure, are all

responsible by the government (Worthington and Needham, 1997). In China, especially

when comparing with other capitalist countries, the role of government, no matter at

national or regional level, seems to be very influential in the business environment. As long

as both Guangzhou and Shanghai are under the same central authority in China, the role

and the public policies of the municipal government in Guangzhou and Shanghai as well as

the infrastructure of the two cities will be the main focus in the following discussion.

4.1 Role of the government in Shanghai

4.11 Support from the central government

Although Shanghai did not immediately gain the preferential treatment under the

implementation of open door policy in the 1980s, the gain of attention from the central

government has contributed a turning point to the economic development of Shanghai since

41

the 1990s, so the central government undeniably plays a critical role on the citys economic

revitalization. The success of winning the preference from the central government mainly

hinges on two reasons. First, in the 1990s, inasmuch as the central government needed to

find an economic, banking and finance centre in China, Shanghai became its ideal choice

since it can produce radiation effects on benefiting the Yangtze region and the eastern

China, and acts as a catalyst for economic development in China (Yeung and Sung, 1996).

Second, the tilt of attention from Guangdong to Shanghai was indeed partly because of the

political influence of the former Shanghai mayors, Jiang Zemin and Zhu Rongji. Thanks to

their rise in political prominence and their political quest in the central government since

the 1990s, Shanghai can gain more attention from the central government in the national

economic modernization. During the 14th Party Congress held in mid-October 1992, Jiang

Zemin pointed out that Shanghai should be built into the international economic, financial

and commercial centre as soon as possible. By granting the preferential status to the city,

the central government provides Shanghai municipal government more autonomy on its

economic planning, for instance, the authority to issue bonds, receive credits, and rights to

export and import goods were gained. Also, more resources have been channeled to

Shanghai since the last decade. Comparing with Guangzhou, Shanghai seems to have more

political bargaining power for its economic development, in particular during the period of

1990s.

42

4.12 The Municipal government as the pilot

Planning and policy making

Undoubtedly, the role of Shanghai municipal government on creating the favourable

business environment is as essential as the central government. Traditionally, Shanghai

municipal government is often business-friendly; it plays a pivotal role on the citys

economic development. Thanks to the strong central support since the 1990s, Shanghai

municipal government gains more autonomy on inheriting the favourable business setting

for the city. In order to carry out the comprehensive and well-organized development, the

Municipal Integrated Economic Leading Group has been formed to improve the macro

management and co-ordination of various departments. It serves to formulate the

development strategies on the issues of personnel, capital and materials, and to implement

economic policies of the city (Yeung and Sung, 1996). Several planning projects and

policies have been carried out for boosting its economic development. They are mainly

subject to three objectives, which include attracting and supporting investment, strategic

positioning, selective intervention and fostering competition, and efficient allocation of

resources in Shanghai (Zhang, 2003). For attracting investment, the municipal government

has contributed the greatest effort to Pudong development project during the past ten years.

In fact, the potential of Pudong was discovered by the central government. The speech of

the former president Deng Xiao Ping in 1992 serves as the best illustration of the

importance of Pudong: Development of the Pudong district will have a great impact, not

43

just on the district itself, but on all of Shanghai, which in turn will serve as a base for the

development of the Yangtze delta and the whole Yangtze Basin. So we should lose no time

in developing the Pudong district and persevere until construction is completed16. Owing

to the request of the central government, the municipal government plays as a pilot on

developing Pudong as a new centre for attracting foreign investment and capital to

Shanghai. Several development zones have been gradually established, these include:

Lujiazui Financial Area, Waigaoqiao Bonded Free Trade Zone, Jinqiao Export Processing

Zone, Sunqiao Modern Agriculture Development Zone and Zhangjiang High Tech

Industrial Park etc. In addition, the municipal government also provides nine preferential

policies to investors in Pudong17. Thanks to the planning and organizing efforts of the

municipal government, Pudongs development has been amazingly rapid during the past

ten years, it has gradually become the ideal business environment for foreign investors.

Apart from opening Pudong, the municipal government carries out a set of new policies for

16 Ibid, p.106 17 Ibid, p.277-8 Nine preferential policies for Pudong: 1.Regulations for the Administration of Financial Institutions with Foreign capital and Financial Institutions with Foreign capital and Financial Institution with Chinese and Foreign

Joint Capital in Shanghai. 2. Regulations on Reduction and Exemption of Enterprise Income Tax and Industrial and

Commercial Consolidated Tax to Encourage Foreign Investment in Shanghai Pudong New Area. 3.Customs Regulations

of the Peoples Republic of China concerning Control Over the goods, Means of Transport and Personal Articles Entering

or Leaving the Waigaoqiao Free Trade Zone of Shanghai. 4. Regulations of the Shanghai Municipality for the

Encouragement of Foreign Investment in the Pudong New Area. 5. Measures on Administration of the Waigaoqiao Free

trade Zone of Shanghai 6.Provisions of Land Administration in Shanghai Pudong New Area 7.Provisional Measures on

the Administration of Planning and Construction in Shanghai Pudong New Area. 8. Examination and Approval Measures

for Foreign-invested Enterprises in Shanghai Pudong New Area. 9. Guidelines for Industries and Investment in Shanghai

Pudong New Area.

44

attracting foreign investment to the city, like the provision of special funds, tax rebate and

exemption, duty-free import privileges to those foreign-invested enterprises, R&D centres

and foreign technology-intensive enterprises.

Strategic positioning implies the diversification of Shanghais economic structure

through prioritizing its tertiary-sector development and supporting pillar industries. It plans

to expand a wide range of high-end service and high-tech manufacturing activities, like

car-making and new materials industries, banking, investment trusts, insurance business

and security brokerage. To re-structure its economy, the municipal government plays as a

facilitator and offers a number of incentives to investors in tertiary industries, such as tax

holidays, subsidies loans and greater operational autonomy for relevant investors and the

encouragement measures for foreign investment. In addition, the municipal government

implements various new policies for encouraging the pillar industries, including the

exemption from corporate tax and the rebate on local turnover tax in excess of designated

amounts etc.

For fostering the competition and improving the allocation of resources, the

municipal government adopts 3 prolonged strategies to local industries. These include

nurturing the pillar industries and the related corporations, strengthening well-known brand

products through the merge and re-organization, and developing the towering

conglomerates through the control of capital. Nevertheless, such strategies lead to the

45

misallocation of resources in the city. It is necessary for the municipal government to

modify the strategies for maximizing the efficiency in use of allocation.

Infrastructure development

Urban infrastructure is an extremely crucial component for Shanghai to become the

most important economic powerhouse of China or even the Asian metropolis, because it

acts as an engine that inspires the economic development of the city. In a broader

perspective, infrastructure development not only is an indicator of the level of economic

development, but also acts as a pulling element of attracting FDI and generating business

opportunities. Hence, both the central and the municipal government pay a lot of concerns

to the development of urban infrastructure of the city. They often play as the leaders who

conduct the planning, the decision-making and the implementation of infrastructure

projects of Shanghai. Since the 1990s, the municipal government has recognized the

infrastructure projects as the focus of the citys urban development. It invested over 310

billion yuan (nearly US$ 40 billion) in infrastructure improvements during the last ten

years (Walcott, 2003). By renewing and constructing new urban infrastructure, Shanghai is

eager to develop itself as the most advanced city in China.

Concerning the transportation infrastructure, the municipal government has conducted

various large construction projects so as to enhance the accessibility of the city during these

ten years. In the year 2000, 15 major projects were completed, which included the Nanpu

46

Bridge and the Yangpu Bridge across Huangpu River and 2 tunnels underneath, an

overhead inner-ring road, an outer-ring road, a six-lane north-south expressway along

Chengdu Road. The subway system and Peal Line light rail have commented their services

since 1994 and 2000 respectively. According to the 20-year blueprint, the city will

continuously construct 11 subway lines, 7 light rail lines and 3 suburban railways in future

so as to solve the transport bottleneck problem of Shanghai. In order to strengthen the

external connection with other parts of the country, superhighways and railway networks

have been built to connect the city with Beijing, Hangzhou and other cities in China.

Besides, the establishment of new Pudong international Airport in 1999, which runs regular

routes to Western Europe, US, Japan, Australia, New Zealand and Hong Kong, is served as

a big infrastructure project to relieve the immense pressure of Hongqiao International

Airport and to accommodate the future international development of the city. To cater the

rapid expansion of sea transport and to deal with the intensive competition from Ningbo

port, the municipal government not only has continuously enhanced port facilities of

Shanghais port, but also plans to develop another new deep-water port in Da Yang Shan

and Xiao Yang Shan Islands in future (Hong Kong Trade Development Council, 2001).

The telecommunication infrastructure is becoming more and more indispensable in the

business environment today. Shanghai is developing the high quality IT infrastructure,

which includes integrated information pipelines, a broadband IP urban network, a data

47

network, cable television, and a broadband information exchange center. The Info Port

Project provides a network capacity of 1500 megabytes, covering 95% of urban families in

Shanghai. Urban renewal is being achieved through the redevelopment along the famous

Nanjing Road. According to the statistics, more than 4 million square metres floor area of

old buildings were demolished from 1991 to 1993 (Yeh and Mak, 1995). There is also the

improvement on public utilities. New gas and water works have been recently completed,

along with additions to a thermal power plant. The Seven Connections (electricity, gas,

fiber optic network, highway, sewer, telecommunications, water) are all provided

adequately to the citys families.

By examining the planning and policy-making as well as the infrastructure

development, it is obvious that both the central government and the municipal government

play the leading and facilitating role on the formation of the favourable business

environment in the city. Throughout developing urban infrastructure, opening up Pudong

and carrying out the preferential policies, the government is eager to shape Shanghai as the

tertiary-oriented service centre in combination with the high-tech industry, with these two

sectors serve as the essential components of the citys business environment.

4.2 Role of the government in Guangzhou

4.21 Support from the central government

Likewise, the decision of the central government is the origin of the rise of the

economic advancement of Guangzhou. Comparing with Shanghai, Guangzhou enjoyed an

48

earlier start of the economic expansion under the open door policy. Since the early 1980s,

owing to the urge of the adoption of economic reform with market mechanisms, the central

government intended to choose the southern coastal region, which carries geographical

advantages, as the pioneer of the economic reform. Hence it granted the preferential status

to Guangdong for developing the new economic model and attracting foreign investment.

Being the provincial capital of the province, Guangzhou was able to reap enormous

benefits from the open door policy. With the endowment of the status of danlie chengshi

and sets of preferential treatments since 1984, like greater administrative autonomy and the

increase in fiscal revenue, Guangzhou can move faster and earlier than Shanghai in

pioneering the dismantling of the socialist system and in implementing market-oriented

reforms during the beginning years of the reform (Chan, Hsueh and Luk, 1996). The

preference of the central government in Guangdong is undeniably significant as it has

paved the way for the flourish economic development of Guangzhou since the 1980s.

4.22 Role of the municipal government and the provincial government

Planning and policy making in the 1980s

Different from the direct municipal level of Shanghai, the economic development of

Guangzhou is highly subject to both the provincial government and the municipal

government take in-charge of. Yet, the provincial government mainly plays as a supervisor

and a facilitator whilst the municipal government serves as a director and an implementer

on the economic reform of the city. Despite the fact that the municipal government is

49

subject to the authority of the provincial government, Guangzhou municipal government

still enjoys great autonomy on its economic development policies. Thus, to a certain extent,

the municipal government plays as a pilot on leading the citys economic development. In

order to accommodate the economic transformation of the country and attract FDI for

boosting its economy, the municipal government has established a series of policies and

planning projects during the past two decades. In the 1980s, the policy direction was

mainly based upon four perspectives (Zuo, 2003). First was to strengthen the radiation

function of the city. With the implementation of the economic reform, the municipal

government encouraged the city to play as a pioneer of the commercialization of products

at both regional and international level, by which enhanced the market development of

various products. Second was to re-vitalize the superiority of the light industry of

Guangzhou. With the need of industrial structural adjustment, the municipal government

intended to boost the development of sixteen light industrial focal products so as to

consolidate the dominant position of the light industry in the citys economy. Third was to

enhance the development of the external-oriented economy of the city. Throughout

granting various preferential treatments like tax reduction and organizing the international

trade fairs every two years, the municipal government was eager to attract FDI and external

trade transactions so as to gain more foreign capital for the citys economic development.

Fourth was to strengthen the urban function of the city. By enhancing the development of

50

infrastructure, the municipal government intended to adjust the economic structure

indirectly and to modernize the city with secondary and tertiary oriented economy so as to

provide the favourable business environment to foreign investors.

To a large extent, the municipal government contributed the fabulous economic

development to Guangzhou in the 1980s, no matter in developing Guangzhou as the

commercial radiation centre or industrial development centre, the city often enjoyed the

leading status in the PRD. For instance, the city successfully attracted 27452 FDI projects

with a total amount of USD 3.133 billion during the period of 1979-1989. Such massive

inflow of foreign capital was conducive to the economic development and act as a vital

symbol of the favourable business environment of Guangzhou. Nonetheless, owing to the

problem of gradual saturation occurred in the citys development and the fierce competition

from Shanghais Pudong and other cities in the PRD, its policy direction has undergone

some changes since the 1990s.

Policy making and planning in the 1990s

As a result of the lower competitiveness of the city, and, to a certain extent, because of

the emergence of the energetic leader, like the former Mayor Li Ziliu in Guangzhou since

the 1990s, the municipal government has been eager to play a leading role on reforming the

economic development of Guangzhou. As Mr. Li claimed, further expanding the reform

51

and open policy is their way to survive the economic austerity programme 18 in the region,

so it is necessary to transform Guangzhou into a prosperous, stable and modern central city,

an international trade center, a national shopping center, and the nexus in finance,

information, science and technology, transportation and communications, as well as culture

and entertainment, in south China. In order to consolidate the leading status as the dragon

head in the Pearl River Delta, the municipal government has announced Guangzhous

Development Proposal to Achieve Basic Modernization in Fifteen years for building

Guangzhou into a modern metropolis by the year of 2005. Several development strategies

are included in the proposal (Zuo, 2003).

First, rather than emphasizing old themes, such as upgrading Guangzhous light textile

industry, or promoting both domestic and external trade in general, the Proposal suggests

that the city should further boost its financial development. Throughout opening the

financial market, establishing new financial organizations, improving the management of

brokerage market, strengthening the linkage between Guangzhou and the international

financial market and training the financial professional personnel, the city attempts to

position itself as the financial centre of southern China. Second, the municipal government

determines to develop the capital-intensive and high-tech industry for enhancing its

economic superiority in the region. In order to achieve the goal, the Guangzhou Economic

18 Stewart MacPherson and Cheng YS Joseph, Economic and Social development in South China, (Cheltenham, 1996) p.126-8

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Technological Development Zone (GETDZ) and Nansha Economic Development

Technological Zone have been established; automobile industry and electrical industry are

identified as key areas for investment in the coming years. Third, the Proposal suggests the

re-adjustment of economic structure. By transforming the city from the industrial

manufacturing oriented to the tertiary service emphasis, Guangzhou can gradually develop

itself as the regional service centre in the PRD, by which specializing in R&D,

management, consultation and technological service. Fourth, the municipal government

emphasizes the market mechanism in Guangzhou. Specific measures include the building

of financial market, real estate market, technology market, labour market, producer goods

market, and consumer goods market. Related policy measures such as the regulatory

framework and the encouragement of market-related services, such as accounting and legal

services are also proposed. Fifth, the Proposal points out the need of a new approach to

urban planning. In particular, the developed area within the urban core of Guangzhou will

be drastically expanded from the existing 187 sqkm to 335 sqkm. The municipal

government intends to move the citys commercial centre from the crowded Dongshan

district to the eastern district of Tianhe, by which it can facilitate the expansion of the citys

tertiary industry. Sixth, restructuring enterprises is another key element. The emphasis is on

the strengthening of eight enterprise conglomerates, including famous corporations as

Wanbao Electrical Appliances, Guangzhou Beiyunshan Enterprise Group, and Nanfang

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Department Store Group as well as the promotion of rural enterprises in the suburban areas

and nearby counties.

Externally, the Proposal suggests further accelerating the development of external

economies. In order to further attract the productivity of foreign investment, the city

organizes various promotion events, like the conference of multinationals in Guangzhou.

Besides, the municipal government intends to enhance the communication and compromise

between exporters, customs, tax bureau, quarantine, foreign exchange control and banking

sector as well as continue the implementation of multi-faceted export strategies like, tax

redemption, entire export registration system and the expansion of export production

franchise, so as to attract new investors from Latin-America, Africa, Soviet Union, Eastern

Europe, Middle East and Central Asia, US, EU, Japan, Korea and Taiwan. After Chinas

accession to WTO in 2001, Guangzhou has abolished various inflexible regional policies,

laws and regulations that are incompatible with international situation, whilst increasing the

degree of coalition and transparency of policies for catering the WTO requirements (Zuo,

2003).

Infrastructure development

Since the 1990s, the urban development direction of Guangzhou has been similar to

Shanghais. As a result of the awareness of the significance of transportation infrastructure

for the economic competitiveness of the city, the municipal government decides to highly

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develop the logistics sector and regards it as an essential engine for the future economic

growth of Guangzhou. It boosts the infrastructure construction of air transport in Huadu,

railway transport in Fangcun, sea transport in Huangpu and logistics in Nansha. For air

transport, instead of expanding facilities of the existing Baiyun International Airport, the

municipal government has concentrated on the construction of another new international

airport in Huadu, which serves as the crucial international infrastructure not only for

Guangzhou, but also for the entire south China since the late 1990s. Owing to the close tie

of Guangzhou with other cities in the PRD, the provincial government makes a lot of

efforts on providing highways which serve as the major transport links of the region. The

Guangzhou-Shenzhen Superhighway, Guangzhou-Panyu and Guangzhou-Zhuhai

Superhighway are major land routes in Guangzhou, which link up the city with different

cities in the PRD, like Shenzhen, Zhuhai, Foshan and Huizhou etc. In addition, Guangzhou

is also well connected with Hong Kong and Beijing by the comprehensive railway network.

In order to attract the greater volume of international marine traffic, Guangzhou

government allocated RMB 2 billion to dredge the 12 metres river channels in Guangzhou

Port and Huangpu Port in 2002. Chinas first container route between Guangzhou and

Shanghai was inaugurated in November 1993 so as to develop the more intimate economic

linkage with YRD region (Hong Kong Trade Development Council, 2001). Thanks to the

efforts of the government, the comprehensive transportation infrastructure helps

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consolidate the citys status as the regional transportation centre in south China and

strengthens the economic competitiveness of Guangzhou.

4.3 Conclusion

By examining the political environment of Shanghai and Guangzhou, it is easy to

find out that both of their economic development is highly influenced by the

government. The central government is the key for opening the economy of the two

cities. Without the grant of the preferential status for attracting foreign trade and

investment, both Shanghai and Guangzhou could not perform such the flourish

economic development. Undeniably, both of the municipal government of Shanghai

and Guangzhou play the influential role on directing and shaping the economy of the

two cities. To a large extent, both of them are also business-friendly and proactive in

attracting FDI into the cities. In respect of the development direction, both Shanghai

government and Guangzhou government also intend to shape their own city as the

tertiary-oriented service centre in combination with the high-tech manufacturing

industry. Despite of these similarities, some differences are necessary to be pinpointed.

Although the central government perceives both Shanghai and Guangzhou as the

significant economic cities of China, the central government seems to pay more

attention and do more influence to Shanghais economy. Apart from the eagerness in

shaping Shanghai as Chinas international economic centre, the central government also

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pays much concern to the opening of Pudong. Relatively, Guangzhou has yet enjoyed

such favourable attention from the central government. Such difference is indeed

mainly attributed by different political backgrounds and administrative levels of the two

cities. Because of the greater political bargaining power contributed by the Former

mayor, Jiang and Zhu, and the higher administrative level as the direct municipality,

Shanghai is able to gain more attention from the central government than Guangzhou.

Also, inasmuch as Guangzhou is under the authority of Guangdong government, a

certain degree of restrictions on the policy making and the policy implementation are

unavoidable, though the city enjoys the high administrative autonomy.

There are some differences in policy direction between Guangzhou and Shanghai

municipal government as well. The policy direction of Guangzhou seems to be less

consistent and less clear-cut than Shanghais. Owing to the fierce competition from

other cities i