Local Government and Investment Promotion in China

Transcription

1 Local Government and Investment Promotion in China Andrea Hampton December 2006 Centre for the Future State INSTITUTE OF DEVELOPMENT STUDIES Brighton, Sussex BN1 9RE ENGLAND

2 Andrea Hampton holds an MA in Governance and Development from the Institute of Development Studies, University of Sussex (2005). She now works as a Public Finance Management Advisor on Trade Facilitation for the Crown Agents for Overseas Governments and Administration. She can be contacted at: a.hampton@alumni.ids.ac.uk This paper was produced for the Research Programme Public Action and Private Investment of the Centre of the Future State, hosted by the Institute of Development Studies, University of Sussex, Brighton BN1 9RE, UK Telephone: +44 (0) Fax: +44 (0) ii

3 Summary This paper asks how public action can induce private investment and draws on the Chinese experience for this purpose. It is well known that China has been extraordinarily successful in attracting foreign direct investment. It is less well known that there are enormous differences in investment levels within the country, even within the coastal region. Such internal differences can be found in many countries but satisfactory explanations rarely exist. This paper experiments with a political approach to explaining such differences. The fact that China stands outside the best practice for attracting FDI (in areas such as securing property rights and positive governance indicators) adds reason to seek answers beyond the current discourse. The insights provided in this paper come from a comparison of two neighbouring localities, one that has been very successful in attracting foreign direct investment and that has not. The comparison suggests that the critical success factors are: first the construction of common interests between officials of the local investment promotion agency and the private investors, second the access which the local officials have to higher levels in government and the Party. The paper emphasises the experimental nature of the investigation, both conceptually and empirically, but suggests that the approach might be relevant also in other contexts. iii

4 Table of Contents List of Tables and Figures...v Acknowledgments...vi Abbreviations...vii 1. Introduction Literature Review The Investment Climate Literature In General On China The Investment Promotion Literature In General On China Theoretical Framework for this Study The IPA as an Institution China s Transitional Institutions Alignment of Interests Accounting for Differences: Position in the Political System Methodology The Chinese Context China s Opening The First phase The Second Phase The Third Phase The Fourth Phase The Fifth Phase Intra-Governmental Relationships in China The Central-Local Relationship Party-Government Relationships TEDA and DEDA Background of Tianjin TEDA DEDA Difference in Performance Explaining the Difference Constructing Alignment TEDA as Bridge-builder DEDA as Bridge-builder Behind the Bridge-Building and Aligning of Interests TEDA s Position within the Political System DEDA s Position within the Political System Conclusion...55 References...57 Interviews:...62 Appendices...64 Appendix 1: Foreign Investors in TEDA...64 Appendix 2: Foreign Investors in DEDA...66 Appendix 3: Provisions of the State Council on the Encouragement of FDI...67 iv

5 List of Tables and Figures Figures Figure 2.1: The Investment Climate in China - Firms Concerns... 9 Figure 2.2: Determining Interests Figure 4.1: FDI Flows to China Figure 5.1: Location of Tianjin in China Figure 5.2: Tianjin Municipality Figure 5.3: Location of TEDA and DEDA in Tianjin Municipality Figure 5.4: Accumulation of Land Figure 6.1: The Phases of IPA Investor Interaction Figure 6.2: Aligning Interests by Building Bridges Figure 6.3: Redraw of the Binhai New Area Tables Table 4.1: Model IPA Organizational Structure Table 5.1: Economic Indicators of Tianjin versus National Table 5.2: Key Performance Indicators v

6 Acknowledgments An invaluable source of support for producing this paper was the working group led by Hubert Schmitz and including Michael MacDonald, Luis Osorio, and myself. The regular discussion and debate within this forum has also assisted me in framing some of the concepts used in this paper. Subsequently Mick Moore and Hubert Schmitz helped to sharpen the main arguments. This paper could not have been written without help from my esteemed friends and colleagues in China, David Zheng, Tan Yuzhu, and Counsellor Xu in particular, 很多谢! vi

7 Abbreviations CPC* Communist Party of China DEDA Dongli Economic-Technological Development Area EDA Economic Development Area FDI Foreign Direct Investment FIE Foreign Invested Enterprise IPA Investment Promotion Agency MIGA Multilateral Investment Guarantee Agency MOFCOM -- Ministry of Finance and Commerce MOU Memorandum of Understanding OSS One Stop Shop PRC People s Republic of China SOE State-Owned Enterprise TEDA Tianjin Economic-Technological Development Area TMG Tianjin Municipal Government WFOE Wholly Foreign-Owned (or Invested) Enterprise WTO World Trade Organisation VAT Value Added Tax * also seen elsewhere as CCP also seen elsewhere as EDZ, OEZ (open economic zone), FEZ (free economic zone) also seen elsewhere as WFIE, WOFE, WFV vii

8 1. Introduction When China opened its door to the outside world in 1978, foreign direct investment (FDI) was virtually non-existent in the country s dishevelled and struggling economy. 1 Three decades on, and China has surpassed the United States to become the world s largest recipient of FDI, capturing US$64 billion in 2004, which amounted to a third of share of FDI heading to developing countries (Gottschalk 2005) and nearly ten per cent of world FDI flows (UNCTAD 2004b; USFCS 2005). This fact is quite striking when one considers that China is still very much a developing nation, with about 750 million people living below the international poverty line of US$2 per day. 2 It is even more so when one considers the fact that it has achieved this position of leading FDI recipient without the benefit of the economic institutions prescribed as vital by most of the world s most prominent economists and policy advisors, namely, the rule of law and well-defined property rights. On the contrary, China seems to be attracting large amounts of investment despite its poor performance on cross-national corruption and at best rudimentary system of property rights (IBRD 2005b; Dollar, Shi, Wang and Xu 2003). The incongruence of theory versus practice in the Chinese case shows the limitation of the prevailing investment climate approach advocated by the World Bank and other donor agencies - in explaining and promoting investment. A full explanation of China s success in attracting FDI has yet to emerge. Presumably such an explanation needs to give central attention to the high profits that investors expect from producing for China s large and growing internal market and from using China as a platform for exporting to the rest of the world. 3 1 FDI can refer to: bricks-and-mortar investments, M&A, and tech-transfer through licensing, as well as reinvested earnings and intra-company loans (UNESCAP 2003). 2 Based on a 2001 survey in the World Bank s 2005 World Development Indicators available online: (accessed ). Based on the same survey, 265 million people live on less than $1 per day. According to China s own poverty line (US$0.20 per day), about 160million people are living in destitution - Epoch Times, 4 February (accessed ). 3 Delios, Yang, and Zhou (2002) stress the importance of these factors. Ethnic connections also play an important role: Liu & Wei (2001) and Hsing (1998) stress the importance of overseas Chinese investors. 1

9 In spite of these high-perceived business opportunities, FDI is very uneven in China. The preference of investors for the coastal (versus interior) regions is well known. What is less well known is that there are considerable variations within the coastal region. This study focuses on such differences by way of a case study. The comparison of a successful and unsuccessful locality in terms of attracting FDI is expected to provide insights that are of relevance not just to China but also to other countries. It is a study that focuses on the local determinants of FDI and brings out the importance of understanding the politics of investment and growth. This emphasis on the local determinants, in particular on local government, is not entirely new. Terms such as local state corporatism (Oi 1992; 1995) and entrepreneurial bureaucrats (Duckett 2001; Hubbard 1995) have been used to explain the local-government-driven success in promoting economic development. There is however a tendency for the literature on Chinese local government to focus on the state as an economic actor and institutions purely in the economic sense. There are certain dimensions that are missed in this narrow economic approach. 4 In this paper, I bring out a more multidimensional layer of Chinese local government, which situates the local actors in the political system and shows how this affects the agency of those actors. This analysis at the local level also contributes to an explanation as to why and how China has attracted investment even though it lacks the recommended formal economic institutions. In order to get closer to an understanding of the variations in China s FDI story, I will drill down further into the local government level and focus on one particular institution that forms part of the structure to attract FDI to the country that is the local investment promotion agency (IPA). The IPA lies at the nexus of the interaction between the Chinese government and the private sector; therefore, it is a good point at which to start our understanding of Chinese FDI attraction dynamics. Key to the research design is the comparison of two Chinese local-government investment promotion agencies in the city of Tianjin. One of the two can be held up as a 4 Zafirovski (1999) gives a good summary as to why the economic approach to economic sociology is unsustainable in epistemological terms, and Fine (1999) questions the growing influence of mainstream economics over other social sciences. 2

10 successful case of FDI attraction, and the other represents an IPA that has had relatively less success in attracting FDI. The primary question driving this study is: (1) Why has one locality been so successful at attracting FDI without the recommended policy environment? In unravelling the reasons behind this, I hope to also shed some light on a second question: (2) What are the factors behind China s uneven development? This second question is driven by the recognition that China s success has not been uniform. The regional distribution of FDI in China is very uneven. Approximately 87% of the cumulative FDI is located in the eastern regions, while the remaining 13% is located in the central and western regions. 5 However, as the case studies of this paper will show, discrepancies are also observable even within one region. I plan to accomplish three things with this paper. First, by comparing the two case studies, I hope to be able to find discrepancies that may account for the difference in success at attracting FDI. In doing so, the factors that I uncover may offer an explanation as to what may have developed in China that allows investors to invest without the sense of security provided by the recommended formal institutions. Second, by studying two IPAs within one geographical area, I hope to also stymie the effects of the exogenous factor of location to learn more about what else might be behind the unevenness of the FDI that does come into China. Third, I hope to show where there is need for perhaps a different focus in the literature and the policy recommendations. The city that I have chosen for this study, Tianjin, is located in the north of China on the coast, 120 km from Beijing. This represents a region less commonly studied by those attempting to explain China s economic story. The largest number of Chinese case studies is conducted on areas in the coastal south and southwest (Guangzhou and Shenzhen in Guangdong, Xiamen in Fujian province, and the Shanghai-Pudong area). In the south, the proximity to ethnic-chinese investment from Taiwan or Hong Kong is a considerable factor (Liu & Wei 2001; Hsing 1998), supporting an ethnic 5 China Statistical Yearbook

11 explanation for China s success without the proper institutions. However, in Tianjin today, this type of FDI weighs less in the equation, and the city draws a much larger proportion of its investment from the United States, Japan, Korea as well as Europe. 6 The smaller impact of FDI of Chinese ethnic origin in Tianjin further encourages investigation into other explanatory factors of China s success and its local variations. The paper is structured as follows: Section 2 reviews the literature on investment attraction policies, including both the Investment Climate and the Investment Promotion literature. The former has been well formulised, particularly in the most recent World Development Report in which it talks about a package of policies needed from property rights and business regulation to infrastructure and labour markets to create an environment conducive to investment (IBRD 2005b: 56). The latter confers a much more interventionist policy strategy, putting forth the merits of actively promoting investment through country and area marketing. An IPA is part of this second brand of investment attraction literature, however beyond cross-country best practice analysis, there has been very little study of the IPA as an institution in itself, and particularly in regards to China. Therefore I draw on those academic discussions that might help us understand what is behind the process of attracting FDI and why it works in some cases and not others. At the end of the review, I draw together several of the perspectives and develop two hypotheses relating to China s success in the context of attracting FDI: (a) Successful attraction of FDI is related to the alignment of the interests of the investors and the government; and (b) The success or ability of the public IPA to align its own interests with private interests is linked with the institution s positioning within the political system. 6 After Hong Kong (which is often considered alongside the British Virgin Islands, and the Caymans as an outlier in FDI statistics due to its involvement in round-tripping Chinese capital), the US is the largest investor in Tianjin having brought over US$82 billion in capital to the municipality. The US is followed by Korea and then Japan, which have brought in over US$45 billion and US$37 billion, respectively (2003 Tianjin Statistical Yearbook). 4

12 Section 3 outlines the methodology used for investigating these two hypotheses. Section 4 presents the Chinese institutional context which is essential for understanding the subsequent analysis. The discussion of the national context emphasises that China s reforms have not been carried out according to a comprehensive blueprint, but have occurred in a more piecemeal fashion, as the Chinese saying goes crossing the river by feeling for the stones. 7 Perhaps due to this, progress has been uneven, and at times unclear. Nevertheless, these policies provide the important institutional background to China s FDI attraction and the role of local government in attracting investment. Section 4 also shows how local government relates to the central state and the Party. Understanding these relationships is essential for the later sections which explain why one IPA has been more successful than the other. The IPAs on which this study focuses are both in Tianjin: these are the IPAs of Dongli Economic Development Area (DEDA) and Tianjin Economic and Technological Development Area (TEDA). Section 5 gives a brief historical path for the two areas, and shows the differences in their ability to attract investment. Section 6 examines the reasons for this difference, focussing on my two hypotheses. I first show that one IPA has been more successful at aligning public-private interests than the other and I illustrate that this corresponds with the level of FDI attraction. Next, I examine the political position of the two IPAs and find that one has had more success in aligning interests because its position within the political system gives it more access to decision makers and resources. The concluding Section reflects on the relevance of these findings for both the academic and policy debate on investment attraction. While the empirical findings are China-specific, the insights might be of general relevance given that country-internal differences in attracting investment are very common. 7 A term that Deng Xiaoping is often cited as using to describe China s economic reforms. 5

13 2. Literature Review The literature on foreign direct investment in China comes entangled with extensive surveys and works discussing the rapid economic growth of China and its emergence as an economic powerhouse. The most abundant FDI-related literature focuses on the effects of FDI on China s economic development (Hanson 2001; Fan, E.X. 2002; Hsiao and Shen 2003). For the purposes of this paper, however, we will need to turn to the factors that cause FDI flows to turn one way or another and trace a path through the literature that covers the determinants of FDI. The investment attraction literature can be divided into two bodies, the first of which is the Investment Climate literature propelled by the World Bank s Investment Climate Surveys and crystallized in the recent 2005 World Development Report entitled A Better Investment Climate for Everyone. The second can be called the Investment Promotion literature, which is primarily addressed in Multilateral Investment Guarantee Agency (MIGA) and United National Conference on Trade and Development (UNCTAD)-led forums. Both will be discussed in more detail in the following two subsections. After reviewing these two bodies of work, I will turn to finding concepts in the literature that might help to serve as a framework upon which we can begin to build an understanding of the role of local government in China and may specifically help to suggest some answers as to why there are observable discrepancies in China s success The Investment Climate Literature In General According to the 2005 World Development Report, a good investment climate will provide opportunities and incentives for private firms from farmers and microentrepreneurs to local manufacturing companies and multinational enterprises to invest productively, generate jobs and expand. For most purposes, the investment 6

14 climate refers to the level of costs, risks, and barriers that may effect an investor s perception of returns to be gained from an investment (IBRD 2005b). Factors that would affect the level of perceived costs, risks, and barriers may be categorized into three components. 8 The first would be inputs which entail infrastructure and services (both physical and financial) as well as labour that are vital to a firm s productivity. Cross-country analysis appears to corroborate that the attractiveness of a country towards FDI correlates with the availability of physical infrastructure (Kumar 2001), and that human capital formation and skills development can also attract FDI (Miyamoto 2003). The second component of the investment climate is the regulatory environment which includes regulation of entry and exit, the labour market, financing and taxation, as well as public interests such as the environment, health and safety. Javorcik, Beata Smarzynska and Mariana Spatareanu (2003) for example discuss the effects of labour market regulation; Morrisset and Pirnia (2000) examine the effect that regulatory fiscal instruments such as taxes may have on FDI with a cross-country analysis. 9 The third component is the set of macro or country-level issues concerning economic and political stability and what Globerman and Shapiro (2002) refer to as governance infrastructure. Positive governance infrastructure includes an effective, impartial and transparent legal system that protects property and individual rights; public institutions that are stable, credible and honest; and government policies that favour free and open markets. (Kaufmann, Kraay, and Zoido-Lobaton 1999; Keefer and Knack 1995) A host of empirical, cross-country investment climate literature has set up a best practice prescription of sort for policy-makers in developed and developing countries to use in their investment promotion strategy. 10 How useful and applicable 8 Loosely adapted from Dollar et al (2003). 9 More references available in the 2005 World Development Report (IBRD 2005b). 10 See Bruce Blonigen s 2005 working paper, A Review of the Empirical Literature on FDI Determinants, (accessed ). See also, the World Bank/IFC s papers and links on Policies to Attract Foreign Direct Investment at (accessed ) 7

15 their best practice perspective is questionable, as we will see looking at the case of China On China Beyond the cross-country empirical evidence that tests various hypotheses relating to the effects of the individual components of the investment climate to FDI, there have been relatively fewer studies that have focused specifically on China. Giner and Giner (2004) find that political instability negatively affects the flow of FDI from their survey of China for the period Liu and Wei (2001) used large panel data sets over the periods to analyze several investment climate variables including political risk and the availability of finance and, respectively, found negative and positive correlation to attracting FDI. The World Bank has implemented a series of investment climate surveys in a number of countries and China, in 2003, was one of the first to be evaluated on this level. 11 While China has performed well on physical infrastructure (lagging only on roads, phone and computer connectivity), it has been particularly weak in financial infrastructure -providing financing to firms. China has human resources comparable to that of other East Asian countries, even despite low enrolment in tertiary education, but it lags behind in research and development capabilities. China has been given high marks for political stability, average on government effectiveness, but has consistently scored at the lower end of the corruption scale. China is more open to foreign trade than India, has held a mixed record in terms of entry and exit barriers (IBRD 2005b; Dollar et al. 2003). 11 The WB s Investment Climate Surveys cover: Firms' Perceptions; Infrastructure & Services; Finance; Government Policies; Conflict Resolution & Crime; Capacity & Innovation; and Labor Relations. 8

16 Figure 2.1: The Investment Climate in China - Firms Concerns Source: World Bank s Investment Climate Snapshot China (2003) (accessed ) In addition to scoring low on several key governance indicators, China falls far behind when it comes to securing property rights, which, according to mounting evidence cited in the World Bank s report, create a positive investment climate and encourage FDI by protecting privately held assets from arbitrary direct or indirect appropriation (IBRD 2005b: 79). Even though it amended its constitution in March 2004 to include protection of lawful private property, China's courts almost never accept cases argued on constitutional grounds and the common property underpinnings of the Party continue to provide ideological conflict in this respect (Economist 2004). China s property rights are still largely undefined and as such, the country appears to stand far outside the best practice example. This approach based on formal property rights can neither explain the China s success in attracting FDI, nor the considerable differences within China which this paper seeks to understand. 9

17 2.2. The Investment Promotion Literature In General The second body of work relevant to FDI attraction policies takes the approach that the enabling framework (Kumar 2003) of an improved investment climate is not enough to attract FDI in today s competitive world. The amount of world FDI flow is increasing (UNCTAD 2004a; 2004c) due to pressure for companies to seek opportunities overseas in order to increase profits; and so is recipient countries competition for their share of this growing pie. In both the developed and the developing world, this competition for FDI manifests in the form of investment promotion activities. Governments of developing countries need to go beyond offering a passive open door regime for FDI (Kumar 2003). Competition for a piece of the pie has driven governments to more proactive strategies, that is, marketing their area through investment promotion agencies, or IPAs. In 1964, at the first United Nations Conference on Trade and Development, the issue of promotion of foreign direct investment was addressed. The Conference recommended that developing countries set up investment bureaux and investment advisory services and... determine and publicize areas of investment, manner of investment and investment policy. The Conference also recommended countries to establish information centres... to supply all the necessary information about investment conditions, regulations and opportunities. It was not until the 1980s, when more attention was being paid to the role of FDI in economic development, however, that most countries had set up IPA (Fredriksson 2003: 7). 12 The body of literature dealing primarily with the activities of the IPA has only really come into play within the last decade. UNCTAD began their study of what constitutes best practice in investment promotion in 1997, creating an analytical framework to survey a variety of critical components in an investment promotion strategy. This was 12 Information on nearly 200 world IPAs is found in the membership list of the World Association of Investment Promotion Agencies (WIPA): (accessed ) 10

18 just a preliminary study, however, and it did not enable UNCTAD to set out what these best practices might be (UNCTAD 1997). 13 The job of formulating best practice strategies in investment promotion was taken on by the World Bank s Multilateral Investment Guarantee Agency (MIGA) which, since its establishment in 1988, has developed extensive literature, toolkits and website designed specifically for guidance of IPAs in the World Bank s member countries. 14 The role and activity of the IPA is discussed in this body of literature as well as in reports, and handbooks produced by private consultancy and marketing firms. Everything from its institutional makeup (government versus quasi-government, or private), budget, and staff to its marketing techniques is evaluated. Commissioned by MIGA, GDP Global conducted a survey in 2005 of 188 IPAs (102 in developing countries, 86 in developed) in order to create a ranking of IPAs. The benchmarks that this survey used were, however, restricted to more general marketing techniques. 15 Jacques Morisset (2003) also conducted a survey of national-level IPAs in 58 countries in the year 2001 for the World Bank s Foreign Investment Advisory Service. This assessed the contribution of the IPA to the country s FDI flows for that year. Despite its large scope, it drew some interesting conclusions about the role of the IPA, determining that the most effective activity of an IPA was policy advocacy, followed closely by image building and investor servicing. While Morisset s survey did not include China, by citing policy advocacy as a key component to FDI attraction, it does raise an interesting, unprecedented point about the political nature of the IPA. 13 UNCTAD s World Investment Reports have, however, each had a prescriptive element to them as to the IPA s role in promoting the particular policy advice specific to each report, eg. WIR 2005 Transnational Corporations and the Internationalisation of R&D contains a section entitled IPA s role in promoting R&D, and WIR 2001 Promoting Linkages focuses a short section on the IPA s role in promoting linkages. 14 MIGA s IPA website: (accessed ) 15 The benchmarking elements that were used in this survey were: envelope or presentation, folder or attached files, business card, customization of communication, response time, brochure, professional image, customized information, telephone contact, and content relevance 11

19 On China There is very little academic research on the specific role of the IPA in China. GDP Global s performance benchmarking survey included just three IPAs in China and Morisset s assessment did not include China, the US, Brazil or India, as his focus was on the national-level IPA, and most of the investment promotion in these four countries is conducted primarily through regional IPAs. 16 While this will be discussed further in the next section of this paper, it is important at this point to note that China s IPA are situated on a regional or local level and are always an administrative unit linked to designated economic development areas (EDAs). 17 The bulk of the academic work on Chinese development areas has hereto been confined to the first EDAs, the Special Economic Zones (SEZs) in Guangdong and Fujian province, and their relationships with the central government either as part of the national economic plan or in discussions of China s decentralization and increasing regional autonomy (Ge 1999; Hong 1998). 18 A recent, very comprehensive piece that is particularly relevant to this paper s comparison of two IPAs in Tianjin is Meng Guangwen s 2003 doctoral thesis on The Theory and Practice of Free Economic Zones: A Case Study of Tianjin. Meng s historical study highlights similarities in China s EDA compared to those in the rest of the world (the enclave nature, outwardly-oriented economic sectors, and more open economic and trade policy), but he also points out some of the more unique elements of the Chinese EDA: historical influences, their experimental nature, and their part in the stepping stone strategy of development and opening to the world. He then evaluates Tianjin s TEDA and suggests that it demonstrates the way in which EDAs can evolve from their original structure, compensating for changes in national policy and becoming more self-sufficient. Meng s historical analysis does not explain the reasons for regional disparity and why some EDAs are more successful than others or perhaps why one would evolve and 16 GDP Global included the China International Investment Promotion Agency (part of MOFCOM), Sichuan Provincial Promotion Bureau, and Xiamen International Investment Promotion Center. 17 Economic development area in Chinese: jīngjì kāifāqū, or simply kāifāqū. 18 SEZs: Shenzhen, Zhuhai and Shantou in Guangdong Province and Xiamen in Fujian Province, (in 1984) and the entire province of Hainan (in 1988). 12

20 another would not. Furthermore, it focuses on the economic development mandate of the EDA rather than the FDI promotion mandate of the IPA. Particular emphasis on the IPAs in China is necessary in this paper because they are the local government organizations at the front line of investment promotion and interaction with the investors. This paper seeks to address these gaps in knowledge of China s investment attraction activities Theoretical Framework for this Study Available frameworks for understanding IPAs are largely limited to benchmarks designed by GDP Global or broad mandates suggested by Morisset and are thus constrained in their capacity to teach us why there would be differences in the success of IPAs within one country. For this purpose, deeper evaluation of the IPA as an institution is necessary, as well as a search through the literature as to what features may cause discrepancies The IPA as an Institution The UNCTAD I mandate for IPAs was to provide information on investment conditions, regulations and opportunities to foreign direct investors. In it, there are implications that such an institution is necessary because this information is not being supplied by other means. By the early 1980s, a group of economists were talking about a core market failure, having found that market mechanisms do not address problems of information provision (Stiglitz 2000). Obtaining information can be costly, and there are important asymmetries of information. It is helpful to see FDI as a transaction between government and private investors. In the context of China, this transaction is taking place primarily on the local level, so it is a transaction between local government and private foreign investors. 13

21 Imperfect information hampers the transactions between actors because these interactions rely on a mutual trust that the other side will deliver on their end of the bargain (Humphrey & Schmitz 1998). North (1997) identified four key information uncertainties that can feature in varying degrees during a transaction, hampering this trust : (a) the attribution of value of that which is being exchanged; (b) how much loyalty does either side bear to the transaction; (c) [judicial] enforcement; and (d) the difference in ideology or perception of the transaction from either side. North (1990; 1997), Williamson (1985; 2000) have proposed that institutions compensate for this market failure. These neo-institutionalists have shown that institutions matter because they can correct for the informational failure of the market by setting the rules of the game. While institutions can take many shapes, economic institutions have perhaps held the podium the longest and are considered the core component of defining property rights. 19 Many of these institutionalists drew on Coase s work on property rights, where he argued that establishing clear and firm property rights was a necessary precondition to a functioning private-enterprise system (Coase 1959, cited in Williamson 2000). As stressed before, in the case of China, a need to look beyond property rights is clearly necessary. Different types of institutions may be working to secure the level of trust from investors needed in order to attract their investment. I suggest that the IPA is an example of just such an alternative. The Chinese IPA is an institutional design rather than simply an organisation. It is formally born in policy and its bureaucratic function is to facilitate transactions, and, in structure, it defines the rules of the game, correcting for informational failure North (1990) cites a singular function of economic institutions to define property rights. 20 Institutions, either formal (policy, legislation) or informal (cultural norms), define the rules of the game according to North (1990; 1997), Williamson (1985; 2000), and Wang (2000) 14

22 China s Transitional Institutions Having identified the IPA as an institution at the nexus of government-investor interaction, but driven by the need to find out why the Chinese institutions may be different, the work of Qian Yingyi (2003) becomes very useful. Qian s insightful article How Reform Worked in China (2003) suggested that special, transitional institutions have driven China s success. Here, Qian highlights the dual-nature of the institutions in China in that they are built not only to achieve a national purpose but also to serve personal interests. These institutions work because they achieve two objectives at the same time they improve economic efficiency on the one hand, and make the reform compatible for those in power on the other. (ibid.: 305). This illustrates China s innovative solution to politically difficult problem, and confounds the development orthodoxy, fostered by neoliberalism, that states will resist market reform (Duckett 2001: 23). These transitional institutions may be seen as a product of a particular Chinese government structure that has been expounded upon greatly in the literature. There is a prominent focus on the embedded nature of the Chinese state, this embeddedness has positive implications for development because it can provide sources of intelligence and channels of implementation that enhance the competence of the state. (Evans 1995: 248-9) But it can also, as Qian has indicated, work to make sure that the interests of both sides are met. One manifestation of this idea is the emphasis on entrepreneurial bureaucrats as a key feature of China s economic development (Hubbard 1995; Francis 2001; Duckett 2001; Breslin 2004). Oi (1992; 1995) also addresses this dual nature and goes further in identifying ways in which this alignment of interests may be established. In her theory of local state corporatism local governments treat enterprises within their administrative purview as one component of a larger corporate whole. Oi s analysis is from the perspective of the rural industrialization process and the success of township-village enterprise (TVE) leading China s economic development. It is helpful in that it provides a view 15

23 of a level at which a symbiotic relationship between the private enterprises and local officials has formed (1995: 1148). These discussions of distinctly Chinese institutions are helpful in that they assist in understanding the relationship between the state and the market in China and observing the dual purpose of the transitional institutions also helps to shed some light on an additional framework, that is, how interests come into play Alignment of Interests In the case of the FDI transaction, some of the information relating to North s information costs (valuation, loyalty, enforcement, and ideology) can be easily transmitted by the IPA via distribution of information on specific policies, costs, and investment plans. However, more subjective details such as the interests and future intentions of the individual actors (which link to loyalty and ideology) are also important pieces of information to the transaction. According to game theory, such as the Prisoner s Dilemma, each actor comes to the table with its own set of interests and when various actors are brought together, these interests and motivations can either complement or conflict with each other and produce different levels of outcome accordingly. 21 Recent work at the Centre for the Future State led by Mick Moore suggests that states should create institutions in which government agencies and private companies interact, exchange information and ideas, and obtain clearer information about mutual intentions and interests. These would be specific institutional arrangements that successfully enhance interaction and trust between government and business. (Moore 2004). And so, through the institutional arrangement, actors may find ways in which their interests may be aligned for mutual benefit. Moore and his colleagues refer to this process as constructing common interests. While this is a powerful idea in theory, putting it into practice may be problematic. By using the term construction, it suggests that the meeting of interests happens 21 The Prisoner s Dilemma Merrill Flood and Melvin Dresher, Rand Corporation,

24 because of an active, interventionist process, rather than simply an organic alignment of interests (in which actors have no indication of the other s interests and yet serendipitously chose a course beneficial to both). Constructing common interests is an active process, but the procedure is not clear and there is very little literature from which to draw. A logical first step, nevertheless, would be to identify what Schmitz calls the constellations of interests. 22 These constellations make up the shape of interests that each actor may bring to the table. For the foreign investors in China, their interests may be derived from Raymond Vernon s product cycle theory, which explains the motivation of foreign direct investment by emphasizing the parent company s interests. Firms are interested in separating the different functions along the product cycle such that labour-intensive parts of the work are done in places where labour is inexpensive and capital-intensive parts of the work are done in countries where capital is more easily available. FDI takes place as a part of the parent corporation s effort to defend or extend its ability to extract profits from quasi-oligopolistic control over intangible assets, in the face of ongoing competitive challenges at home and abroad. (Moran 2002: 3). The investor s ability to extract profits abroad is linked to investment returns, affected by the cost of and access to inputs such as land and labour. An investor would harbour interests strongly related to such costs, which can be mitigated by preferential economic policies. Purveyors of FDI also bring with them non-economic interests. Foreign investors (particularly, those that are not ethnically Chinese) bring with them the roots of their own cultural heritage, which may or may not be at odds with the Chinese, and so a need to feel a sense of understanding of the Chinese way is often prevalent. Personal non-economic interests such as promotion and prestige can also be linked to the success of the FDI transaction. For the local government, their interests are both economic and political. A recent Chinese paper outlined capital shortage, job creation and generation of tax revenues 22 Conversation with Hubert Schmitz at the Institute of Development Studies, Brighton, 22 July 2005) 17

25 as the core economic interests of the local government in FDI. 23 A desire to absorb foreign management skills is also among the government interests (Enderwick and Xue 2003). China s non-democratic political structure means that political success and promotion is also not linked to constituency support in China, but rather performance as evaluated by higher echelons. Measures of performance, in turn, are directly linked to successful attraction of FDI. 24 At this point, some of the interests of the investors and the local government may be illustrated in Figure 2. Figure 2.2: Determining Interests LOCAL GOVERNMENT Investment GDP growth Tax Revenues Job Creation Management Skills Personal Promotion I P A Investment (profit) Access to Land Labour Infrastructure Policy Cultural Information Personal Promotion INVESTOR The Chinese IPA may be identified as a transitional institution in that it may not only provide information to facilitate the transaction, but it also serves to align the interests of government and investor. Having identified the interests involved, this paper examines whether or not the interests were aligned in the each of the two cases of the Chinese IPAs. To do this, I use an experimental framework in the case analysis, which breaks the process down to the level of interaction between the IPA and the investor this is discussed further in later sections of this paper. The hypothesis driving this discussion is: Hypothesis 1 = The success of FDI attraction is related to the ability of the IPA to align the interests of the government and the investor. 23 Author Unknown, Published on Kafaqu.com Why Does China Still Need to Use Foreign Capital?/ 中国为什么还需要积极利用外资? (accessed ) 24 The notes of the Statistics Monthly of the Tianjin Port Free Trade Zone highlight GDP, Exports, Contractual FDI, and Actual FDI as the components of regional progress/statistics that are evaluated by the Tianjin Municipal Government. 18

26 Accounting for Differences: Position in the Political System Having identified IPAs as transitional institutions, this alone does not account for differences between them. What might be affecting the agency or ability of the IPAs to build such an alignment? Further reading suggests that a political understanding has been missing up until now. Zhang Jian (2004) points out that Oi, and others like her, treat local governments as fully fledged economic actors (Oi 1995: 1137) and do not fully acknowledge the political interests of local government officials. Zhang seeks to address this oversight of Oi s and so takes a political perspective, highlighting the political interest of local governments in the TVE example. The nature of the close involvement of local governments in the local economy is not just to accumulate personal or organizational wealth. Rather, their involvement has much to do with a concern to maintain and expand their power over local society, which has been largely eroded by the decollectivisation of agricultural production in the early period of the economic reforms. (Zhang 2004: 25). Acemoglu, Johnson, and Robinson (2004: 1) give a poignant description of political primacy over economics: Economic institutions determine the incentives of and the constraints on economic actors, and shape economic outcomes. As such, they are social decisions, chosen for their consequences. Because different groups and individuals typically benefit from different economic institutions, there is generally a conflict over these social choices, ultimately resolved in favour of groups with greater political power. The distribution of political power in society is in turn determined by political institutions and the distribution of resources. Political institutions in China are best understood as being part of a political system rather than a government apparatus, this is because there are at least three components shaping governance in China that are not all directly related to the latter. These are: (1) centre-local relations, (2) party relationships within the bureaucracy, and (3) personal relationships within the government. These points will be discussed further in the next section; but I will briefly point out here how each has been dealt with in the literature. 19

27 The central-local relationship has been dealt with most extensively in the literature. According to Jae Ho Chung (2000), Territorial dimensions of power and politics are particularly pertinent to the study of China whose history has been replete with centrifugal challenges from local governments, clans, and militia. Since the early 1990s, authors have focused particularly on the fiscal relations between the central state and the localities (Chen 2004; Jin, Qian, and Weingast 2005; Wang 1994). However, only a small number of the authors that discuss centre-local relations appear to take into account the fact that local government in China is of different parts and does not always articulate as one agency (Zhang 2004). This reflects a general tendency within the literature on China to neglect the political dynamics among bureaucratic networks within the local state which is a lose term covering a spectrum of government hierarchies from provincial to village level. Wong (1997) as well as Herrmann-Pillath and Feng (2004) enter the void with their respective discussions of the intra-local governmental bargaining process that was spurred by China s 1994 budgetary reform. It is vital to take into account the multidimensional nature of local government in China, because it shapes the specific political context of institutions built at this level, such as the IPAs. Another important component of intra-governmental relations is the political relationship with the Communist Party of China (CPC). The power dynamics between the government administration and the CPC have shifted over time. Today, some contend that the power of the Party is waning or is being threatened by the market and the rise of strong players from the private sector (Hu, Opper, and Wong 2002). Within the bureaucracy, however, the power of the CPC is still very significant. Most notably, it is the Party that appoints or nominates candidates for cadre positions. Therefore, it is still widely acknowledged that the highest point of the political spectrum, beyond the legislative executive, is occupied by the CPC (Onishi 2003; Edin 2003; Smarzynska & Wei 2000). The informal Chinese institution of Guanxi or personal connections also inevitably plays a prominent role amidst the Chinese government; political networking is a major component of these dynamics. Fan Ying s Questioning 20

28 Guanxi in the International Business Review (2002) gives an excellent overview of the current thought on Guanxi. These three components all give rise to a political system that shapes the way individuals within it can act. This is an elemental point of the structure versus agency concept (Giddens 1984; Shilling 1999), which holds that individual action is shaped by structures around it. As Boucher (2001) affirmed, agency is context bound. This occurs because the elements within the political context mentioned above shape the resources and employment of the bureaucrats within the institution (Williamson 2000), which in turn affect their ability to act as well as their incentives. 25 It follows that where an agent is positioned within this political system affects agency. This can be applied to the case studies of the two IPAs examined in this paper. Recognition of the importance of positioning within the political system and the effects on the agency of the IPAs leads to a second hypothesis: Hypothesis 2 = The success or ability of the public IPA to align its own interests with private interests is linked with the institution s positioning within the political system. The next sections, following a brief explanation of methodology, show the conditions in which the transitional institutions (the IPAs) were created and then examine if and why they have fulfilled their purpose in forming that nexus that aligns the constellation of interests between the government and the investors. 25 This would be the fourth level of social analysis to which Williamson (2000) refers: L1 Informal Institutions, L2 Formal Institutions, L3 Governance, L4 Resource Allocation and Employment. 21

29 3. Methodology This study is based on both secondary and primary sources. Secondary sources were referred to for provision of the contextual and statistical analysis. 26 The findings were then confirmed and complemented by primary research that included legal documents published by the Chinese government. Most of the material used was published in both English and Mandarin Chinese. A small portion of the news articles and reports were in Chinese only and this is indicated where titles are also given in their Chinese form. Primary research - in the form of interviews - was carried out in Tianjin and Beijing in July This fieldwork consisted of a series of in-depth interviews with sources close to the investment attraction process in TEDA, DEDA or China as a whole (see References for list of interviewees). In addition to these face-to-face interviews in China, information was also gathered via phone and . The in-depth interviews were conducted on an informal and largely unstructured basis, and conversational interview methods were useful for providing the interviewees with a sense of security enabling them to better express their respective insights. The anecdotal evidence gained from these interviews accords with the qualitative, interpretative approach to the research for this paper. 27 Where appropriate, care was taken to sensitively frame the questions relating to the failure of one IPA over another by presenting questions with more general focus on the role of the local government and actors, and how it might link to successful cases. Critically, access to these sources was possible due to my own past experience in China. For nearly four years, from 2001 to 2004, I worked for and with Chinese investment promotion agencies. For six months I worked within the Chinese 26 Although China s official statistical outputs are subject to some debate, I used the State s Statistical Yearbooks, which are the most widely cited. Consistency in data collection is still a problem in China and both the Tianjin and China Yearbooks were limited in their provision of data sets across a length of time, and Tianjin s most recent figures were from Tools and tips were gathered from Rita Berry s paper Collecting data by in-depth interviewing presented at the British Educational Research Association Annual Conference, University of Sussex at Brighton, 2-5 September Available online at (accessed ) 22

30 government offices for the IPA of Yantai Economic and Technological Development Area in Shandong Province, China. For the time thereafter I worked for a North American based consultancy that worked with IPAs in China as well as in Europe, Australasia, and Southeast Asia. 28 It was during this time that I became acquainted with Tianjin and the IPAs of TEDA and DEDA. I liaised on a daily basis directly both with the personnel of the IPAs and higher-level Chinese government bureaucrats as well as with the North American and European investors who were seeking international location advice. This experience equipped me with certain insight and the access needed to conduct the research for this paper. Being able to speak Chinese helped the collection of data and views. Throughout the process of researching and writing this paper, new information was evaluated against what had already been gathered, and confirmed by alternative sources whenever possible. 28 Odell, Simms & Associates based in Falls Church, Virginia, USA 23

31 4. The Chinese Context The purpose of this section is to provide the context in which my own transitional institutions (TEDA and DEDA) were created and then evolved China s Opening Although China received some FDI prior to 1949, during the first thirty years of the Communist Party rule in China, all FDI ceased. Ideologically, and particularly during the Cultural Revolution, the use of foreign capital especially FDI, was regarded as contrary to socialism, begging from capitalist countries and losing face. (Liu and Wei 2001). All began to change after Mao s death in 1976 and the rise of Deng Xiaoping s reforms, crystallised in the 1978 plenary session and the opening-up policies (kāifàng zhèngcè). This has been characterized by some as Deng s response to the economic crisis that China was in and the need of foreign capital and advanced technology. China s doors were re-opened to FDI in 1979 with the Law on Sino-Foreign Equity Joint Ventures. 29 This law paved the way for future legislation regarding FDI and marked the beginning of what Linda Ng and Chyau Tuan (2001: ) have labelled the first of five phases of FDI promotion policies The First phase Especially important in this first phase was the decision to establish four Special Economic Zones (SEZs) (in Shantou, Shenzhen, Xiamen and Zhuhai). The preferential policies designed to attract FDI to these zones were to serve as pilots of reform for the rest of the Chinese economy (Saich 2004: 312). In 1984, the more flexible, FDI-attracting, economic policies of the SEZs were extended to 14 Open Coastal Cities (which included Tianjin as well as Beihai, Dalian, Fuzhou, Guangzhou, Lianyungang, Nantong, Ningbo, Qingdao, Qinhuangdao, Shanghai, Wenzhou, Yantai, Zhanjiang). 29 English versions of all laws mentioned in this section available from MOFTEC s website: (accessed ) 24

32 These zones were to operate as a window for the introduction of technology, management techniques and information. Local authorities were allowed to attract foreign investors through preferential policies. They were also allowed to undertake their own infrastructure development and other investment as long as they could raise the funds from taxation, from profits of the enterprises they own wholly or partly, or from banks in the zones (Tseng and Zebregs 2002: 16). This initial phase of radical opening concludes, according to Ng and Tuan, in 1986 with the Law on Wholly Foreign-Owned Enterprises, which gave the option of more control to attract foreign investors. This year also saw a substantial shift in China s FDI policies from that of merely permitting FDI to actively providing incentives for it. These incentives were laid out in the Provisions of the State Council of the People s Republic of China for the Encouragement of Foreign Investment (Annex 3). Fung, Iizaka, and Tong (2002: 3) give a good summary of these 22 Article Provisions : These provided foreign joint ventures with preferential tax treatment, the freedom to import inputs such as materials and equipment, the right to retain and swap foreign exchange with each other, and simpler licensing procedures. Additional tax benefits were offered to export-oriented joint ventures and those employing advanced technology. The government also attempted to guarantee further the autonomy of joint ventures from external bureaucratic interference, to eliminate many unfair local costs, and to provide alternative ways for joint ventures to balance foreign exchange. Privileged access was provided to supplies of water, electricity and transportation (paying the same price as state-owned enterprises) and to interest-free RMB loans. For each EDA, the local government created an administrative committee. These committees were in charge of the administration of the EDAs and were also responsible for infrastructure investment, and investment promotion activities. The Administrative Committees of the EDAs in China can be referred to as IPAs as they generally follow quite closely the organizational structure as identified by MIGA in Table 1 on the following page. The key to the Chinese IPA is that they are the instrument that gains approval for foreign investment and therefore the purveyors of the preferential policies outlined in the 22 Article Provisions. As shown later, this advantageous position was taken into account by local authorities later on in the early 1990s. 25

33 Table 4.1: Model IPA Organizational Structure Division (ideal number of staff) Promotion (5) Responsibilities Investor targeting, publicity, public relations, advertising, overseas media, inward and outward missions Investor Services (5) Investor servicing and responsibility for individual cases Investor Development (3) Investor aftercare and re-investment Legal Division (1) Legal advice and approvals Secretariat (4) Corporate Services (4) Planning, policy, relations with sponsoring ministry, board of directors, meetings, annual report Personnel, training, finance, MIS, reception, facility management Strategy, management, government, parliament and Senior Management (3) domestic media relations Source: MIGA s FDI Promotion Centre, Toolkit Module 2 IPA Set-up (accessed ) The Second Phase The second phase of FDI promotion policy identified by Ng and Tuan runs from They and others (Liu and Wei 2001: 8) characterize this period as one of steady growth, with more gradual development of the opening-up policies. 30 During this time, the government engaged, through preferential policies, in more concerted efforts to target FDI that was export-oriented or that used advanced technology The Third Phase The third phase of China s FDI policies is agreed by most authors to cover the period During the first year of this period, new regulations gave more powers to the subprovincial cities to approve foreign investment (Hong 1998: 397) and within two years, over 6,000 development zones were established by local governments across the country (Cartier 2001; Zweig 2003). 31 Each zone would also have an Administrative Committee / IPA which offered foreign and domestic investors exemptions from government taxes that they technically lacked the power to grant, but the decentralization of the right to examine and approve EDAs had led to the 30 However, Liu and Wei suggested that this second period started earlier in 1984 after the Open Coastal Areas were created. 31 Also in Xinhua News 22 March 2005: Development Zones Nationwide are Examined and Reduced by 4813, down by 70.1% of the Original Total / 全国各类开发区核减 4813 个占原总数 70.1% (accessed ) 26

34 confusion of their objectives, definition, and administration (Zweig 2003; Meng 2003: 75). As Hsing (1998: 156) notes, Many of the so-called economic zones were designed simply as land development projects without infrastructure construction plans or agreements from investors to set up enterprises in the zone. Also fuelling the Zone Fever (Cartier 2001; Zweig 2003) in 1992, was Deng Xiaoping s famous Southern Tour (Nán Xún) to SEZs and other open cities in order to defend, through impassioned and oft-cited speeches, his open-door economic strategies against hard-liners. Moves towards more opening of the tertiary sector finance, insurance and trade were also made on a trial basis during this period. These developments combined to serve as a catalyst and FDI flows to China rapidly took off, increasing by nearly ten-fold in (see Figure 3 on next page), and the growth of foreign invested enterprises (FIEs) was exponential (Huang 1999) The Fourth Phase The fourth phase of China s FDI policy started after 1994, Ng and Tuan describe it as the Mature Stage, while Liu and Wei (2001: 11-9) refer to it as the adjustment period. During this phase, China s FDI promotion policies were targeted for the preparation of the WTO entry by increasing the degree of market competitiveness and global openness. (Ng and Tuan 2001: 1055). Although China had formally applied for re-entry to the WTO in July 1986 partly because of the central Chinese government s grappling with decentralization (to be discussed in the next section) concerted efforts to join did not begin until At this point, the preferential policies for EDAs were scaled down in order for the country to better comply with WTO requirements to move towards more equal openness (Meng 2003: 141) The Fifth Phase China officially became a member of the WTO on 11 December 2001 and in so doing, entered Ng and Tuan s fifth phase of FDI policy. Although the WTO is primarily concerned with trade, China also took on obligations to eliminate certain trade-related investment restrictions, such as requirements for domestic content, 32 As defined in Article 4 of the 1979 JV Law, to qualify as an FIE, the foreign partner s equity investment must be no less than 25 per cent. 33 China was actually a founding member in 1947 of the General Agreement on Tariffs and Trade (GATT) former name of the WTO but Mao withdrew the country s membership in

35 foreign exchange balancing, and technology transfer, and to open gradually opportunities for foreign investment in specified sectors that had previously been off limits (USFCS 2005: 124). Ng and Tuan predicted that China s entry would usher in a second wave of FDI by virtue of the huge business opportunities provided by China s WTO obligations (Ng and Tuan 2001: 1056). FDI flows have indeed increased since WTO entry, although figures of the last few years have been skewed somewhat due to the 2003 SARS crisis that caused a fall and then sharp rise in growth FDI inflow (USFCS 2005). Figure 4.1: FDI Flows to China Phase 1 Phase 2 Phase 3 Phase 4 Phase US$ Billion 80 Contracted Actual Year Source: China Statistical Yearbook 2003 and MOFCOM In terms of China s WTO obligations and continued commitment to opening its economy, the country has fallen behind schedule for some measures, and application of liberalizing regulations has not been uniform (USFCS 2005: 124). This is due in large part to the piece-meal use of EDAs to introduce reform. While it has caused reform to be uneven, it has also according to some authors facilitated in the reform being more palatable for the state. Ng and Tuan (2001: 1056) comment that The strategic move of the pioneering establishment of the SEZs acted as an ice-breaking mechanism to the economic setting under a planned economy. By opening the country to FDI in pockets, it has 28

36 enabled the state to institute the sort of dual track policy regime that Qian (2004) referred to as a transitional institution. Huang (2003: 405) says that The separate legal regime designed for foreign-invested enterprises (FIEs) is simultaneously used to complement socialism as well as to insulate socialism from the full effects of foreign direct investment (FDI). Breslin (2004) reiterates that although China is moving from a state planned and state owned economy, what it is moving towards, rather than an open market economy, is instead a state regulation of a hybrid economic system with the existence of a private economic sphere that remains very close to the state system that spawned it. Having discerned the context of national FDI policy, it is important to make note of another set of issues that have set the political context for this study of local governments role in FDI promotion; that is, the local-central relationship in China Intra-Governmental Relationships in China As mentioned earlier, this can be broken into two dimensions, the first being the central-local relationship and the second being the party-government relationship The Central-Local Relationship Administratively, below the central government, China is divided into thirty provincial-level localities, which includes 23 provinces, four municipalities (Tianjin, Beijing, Chongqin, and Shanghai), five autonomous regions, and two special administrative regions (Hong Kong and Macau). 34 Under the provincial-level government are three further administrative tiers: the prefectures, the counties, and the townships. As the economic reform in China has evolved, China s centralized economic planning system has been greatly decentralized, which is attributable in part to the central government s desire to win wider political support of the reform at the local level, to shift the financial burden, and to increase revenue (Hsing 1998: 108). This decentralization of the economic decision-making system has substantially increased the localities power in areas such as revenue collection, government 34 The 23 includes Taiwan, Province of China. 29

37 expenditure, credit allocation, investment project approval, price and wage control, foreign trade management and industrial policy formation (Ma 1997: 1). This substantial shift in economic responsibility has increasingly led observers of China s rapid economic growth to the conclusion that China s local officials are propelling the economic process (Zhang 2004: 10; see also White 1998; UNESCAP 2003; Hsing 1998). Local governments have increasingly become entrepreneurs and major stakeholders in local enterprises, seeking to maximize employment and revenueraising opportunities in the areas under their jurisdiction, regardless of the policy instructions of the central government (Duckett 2001). Despite the fact that the local government is constitutionally bound to the central state s economic development plans, the evident devolution of power has borne resentment from the central government. 35 Wang (1999: 221) quotes Qiao Shi, a onetime NPC Standing Committee chairman, accusing provincial and local leaders of having the habit of placing their importance above the centre s simply because they have been economically successful. Wang interprets this as being illustrative of the unresolved problem of central government s lack of control over provincial and local leadership. Nevertheless, Mao Zedong made no secret of the fact that he considered the power of local governments something for him to calibrate and adjust, giving and taking back as and when he saw fit (Swift 2004). Thus, this process of power devolution has taken place on a see-saw, shifting back and forth between the centre and the local levels. Hsing (1998: 109) identifies the central theme of the central-local relationship as fiscal politics. Indeed, Wang and Hu (1994, cited in Hsing 1998: 6) showed that from 1978 to 1990, the Chinese local government s share of the total national revenue grew from less than 20% to 80% to become one of the highest in the world. In 1994, the central government imposed the substantially recentralizing Tax Sharing System reforms in an attempt to impose clear vertical budgetary constraints and regain control of the country s revenues (Herrmann 2004: 386). By 2002, the central 35 Section 5, Article 118 of the 1982 Constitution of the PRC states that The organs of self-government of the national autonomous areas independently arrange for and administer local economic development under the guidance of state plans. 30

38 government had regained control of 10 per cent more of the national revenues (IBRD 2005a). An example of one of the components of the Tax Sharing System was the VAT arrangements. The national legislation set a 3:1 central-to-local ratio for sharing of VAT revenues collected, but no directives were issued at the central level as to how the local portion of the VAT would be distributed among the different tiers of local government, from provincial down to township level. Consequently, the 1994 reform had the effect of triggering an intensification of lowerlevel government competition (Herrmann-Pillath and Feng 2004: 395). Past studies of local government central-local fiscal relations have tended to focus on the provincial level and its interaction with the central budget. However, the sharing of revenues among the lower tiers of government significantly affects the incentives for resource allocation and revenue mobilization at the local levels (Wong 1997: 28). More indepth study of this would be within the scope of this paper s subject as it forms a large part of the interests of the local government. However, it has not been feasible to include in this paper, but certainly warrants further research. Of note also in the central-local dynamics is the China s land policy. The zone rush of the early 1990s was as much a result of a slackening of control of land transfer laws as it was of decentralised investment approval regulations by the central government. Local governments were interpreting the laws to privately negotiate transfer of land to private developers for industrial use. In recent years, the central government (facing mounting pressure from displaced farmers) decided to take back control of the land transfer process and, after a series of false starts, enacted the Urgent Notice on Further Governing and Rectifying Land Market and Strengthening Administration of Land (Decree No. 20) on 29 April As will be shown later on in the paper as I analyse the case studies, this has had a significant effect on the context in which the IPAs now operate in China. 36 A good view of the swinging pendulum of control over the real-estate market is found in Beijing This Month, 15 April China s Continuing Effort to Cool and Stabilize its Land Market. 31

39 Party-Government Relationships In addition to the political dynamics of the centre-local government relations in China, the Communist Party of China (CPC) is another factor affecting the political context and it spans all tiers of the government administration. During the Cultural Revolution, the CPC s power was relatively weak compared to the government apparatus. But along with Deng Xiaoping s economic policy reforms, came also his will to strengthen the position of the CPC. Jiang Zemin continued Deng s work with his Three Represents theory (sāngè dàibiăo) put forth in February Jiang proposed that the CPC represents the most productive force in Chinese society, the most advanced culture of Chinese society, and represents the fundamental interests of the people. Furthermore, China has two [complementary] constitutions that of the state, and that of the CPC. In November 2002, the CPC constitution was revised boost the CPC s power by beginning with the sentence: The Communist Party of China is the vanguard of the Chinese working class and of the Chinese people and the Chinese nation. 37 The CPC s paramount position of power is not just reflected in its rhetoric. The Party has representative bodies parallel to all four tiers of sub-national government (provincial, prefecture, county and township). At every level, the Party leader is appointed according to Nomenklatura rules. The government leader, or cadre (which does not necessarily denote Party member) at each level is pre-selected by the Party and then recommended to the representatives of local people s congresses for election. In this way, the local government officials, from the Party chief and Mayor down, are not directly responsible to the citizens but rather to the government and Party organs. Their entrepreneurial spirit is focused on cultivating accomplishments (yèjī) for a better career, which will be evaluated by upper-level governments and Party organs (Herrmann-Pillath and Feng 2004: 416). The CPC s prominence also becomes of particular interest when looking at regional disparities in central-local government relations. While the 153-member Standing 37 More information on the CPC, its constitution, and the Three Represents can be found (in both Chinese and English) at the International Department of the CPC s Website: (accessed ) 32

40 Committee of the proportional representative National People s Congress (NPC) is the highest legislative body in the PRC, real executive power lies in the hands of the top advisory body, the Standing Committee of the 22-member Politburo of the CPC. The regional (local) party apparatus provides the most substantial block in the Politburo, only however, in that it represents the traditional major municipalities (Beijing, Shanghai and Tianjin) and the wealthy coastal province of Guangdong. The local inland and poorer areas of China are entirely excluded at this highest level (Saich 2004: 102). While this example is illustrative of China s regional inequality, it also has particular significance for this case study of Tianjin because it means that in this city, there lies the potential for a political network that extends all the way up to the highest levels of political power. 33

41 5. TEDA and DEDA Having provided the general context, I will now introduce Tianjin municipality as well as the subjects of this case study: Tianjin Economic and Technological Development Area and Dongli Economic Development Area. Figure 5.1: Location of Tianjin in China Source: CIA World Fact Book (adapted) 5.1. Background of Tianjin The municipality of Tianjin is a major international harbour situated 120km from Beijing on the northern extremity of the Bohai Bay, leading out to the Pacific. Originally a garrison town, after the Opium War of 1840 it became a concession port for nine Western powers (American, British, French, German, Belgian, Austro- Hungarian, Italian, Russian, and Japanese). For the first half of the nineteenth century, its industrial production and port trade volume were second only to Shanghai, and it became the second largest commercial city in China and the biggest financial and trading centre in north China. 38 After the founding of the People's Republic of 38 More information on Tianjin available in English at China National Tourism Administration s website: (accessed ) 34

42 China Tianjin became, in 1954, along one of the three municipalities (with Shanghai and Beijing) directly under the central authorities. 39 From that time on, Tianjin came under the shadow of a Beijing-centred policy and due to the close location to Beijing, the city had to adopt a political regime that was acceptable to the central government and flexible enough to deal with its close proximity by avoiding any form of political turmoil. (Meng 2003: 121). Nevertheless, Tianjin has since grown to be one of China s central players as the third largest city in the country with a population of over 10 million people (behind Shanghai and Beijing). Tianjin is the fifth largest city with regards to its economy, which totals a GDP of 205 billion yuan (behind Shanghai, Beijing, Guangzhou, and Shenzhen) and the third largest in gross industrial output with 332 billion yuan (behind Shanghai and Shenzhen). 40 Table 5.1: Economic Indicators of Tianjin versus National Indicator National Tianjin % National Total Population 1.3 billion 10 million 0.7% GDP $ 10.5 billion $ 0.2 billion 2.0% Investment in Fixed Assets $ 537 billion $ 10 billion 1.9% Gross Industrial Output $ 1,368 billion $ 46 billion 3.4% Gross Agricultural Output $ 338 billion $ 2 billion 0.6% Total Value in Wholesale $ 505,000 billion $ 11 billion 0.002% and Retail Sales Number of Institutes of 1, % Higher Education Scientific and Technical 21,739, , % Personnel in State-owned R&D Institutes Telephones 380 million 6 million 1.6% Foreign Trade $ 851 billion $ 23 billion 2.7% Actual Foreign Investment $ 53 billion $ 1.6 billion 3.4% in 2003 (all $ amounts are in US$) Source: China Statistical Yearbook 2003 and 2003 Tianjin Statistical Yearbook 39 Chongqing became the fourth in figures from 2003 China Statistical Yearbook 35

43 Figure 5.2: Tianjin Municipality (Hebei) Ji Xian (Beijing) (Hebei) Baodi Trunk Line (road & rail ) connecting the port to Beijing Wuqing Ninghe Xian Hangu Downtown Tianjin: Heping, Hexi, Hebei, Nankai, Hedong, Honqiao Beichen Xiqing Dongli Jinnan Tanggu Jinghai Xian (Hebei) Dagang Bohai Gulf Tianjin municipality is divided into 18 county-level areas. 15 of these are districts (qū ), and three are counties (xiàn). Six of the districts govern the urban area of Tianjin (Heping, Hexi, Hebei, Nankai, Hedong, and Hongqiao). Another six districts (Dongli, Jinnan, Xiqing, Beichen, Baodi, and Wuqing) govern satellite towns and rural areas close to the urban centre. The three remaining districts (Tanggu, Hangu and Dagang) 36

44 govern towns and harbours along the seacoast, and the three counties (Ji, Jinghai, and Ninghe) govern towns and rural areas further away from the urban centre. 5.2 TEDA In April 1984 the government of Tianjin responded to the municipality s designation by the State Council as an Open Coastal City and began plans to set up an Economic and Technological Development Zone (ETDZ). This followed the State Council s recommendations to set up the infrastructure in specific areas of land designated to attracting new and high technological industries. In October 1984 plans for the Tianjin Economic and Technological Development Area (TEDA) were approved by the State Council and development began on a 4.2km 2 plot of land on an old salt field in Tanggu district. 41 An administrative committee was also set up to act as a general administrator and IPA of the area. 42 From 1985 to 1988, a total of 123 investment projects were started in the area by both foreign as well as Taiwan, Hong Kong and Macau investors such that by 1989, TEDA was able to use its annual financial revenue and land fees to carry out new land development at a rate of 1km 2 of land every year (Meng 2003: 140). Today, TEDA encompasses an area of 33km 2 the original area is well developed and is now supplemented by a further industrial area in Baotai and three specialist zones: a chemical industry park in Hangu district, a scientific industry park in Wuqing district and a microelectronics zone in Xiqing. TEDA is part of the Binhai New Coastal Area, which was established in March 1994 at the second session of the 12th Tianjin People s Congress. The purpose of delineating this area was to create a target for policy support with the aim of generating at least 40% of Tianjin s revenues by 2004 from this region. 43 The Binhai New Coastal Area also encompasses a Free Trade Zone and Marine Industry High- 41 The Chinese transliteration for TEDA is: Tàidá / 泰达. 42 More information on (accessed ) 43 From enorth.com.cn (Tianjin s media source) Survey of Binhai New Area of Tianjin (accessed ) 37

45 Tech Development Area in Tanggu District, as well as the marine industry areas in Hanggu District, and the oil and petrochemical industry areas of Dagang District. To date, TEDA s most important investor has been the U.S.-based communications technologies giant, Motorola, which made its first Chinese investment in Tianjin in March There are now close to 4,000 foreign invested enterprises in TEDA, for a combined contractual investment of US$18bn (Sturrock 2004). In 2002, the United National Industrial Development Organization designated the Tianjin Economic and Technological Development Zone one of the most dynamic regions in the China DEDA In 1992, when the Chinese government decided to decentralize FDI approval authority from the central government to local governments, the Tianjin government approved a further nine economic development areas. One of these was a 2km 2 area in Dongli District named Tianjin Dongli Economic Development Area (DEDA). 45 On behalf of the Dongli District People s Government, an administrative committee exercises the general administration and acts as IPA of this area. 46 DEDA is located along what is known as the Golden Corridor, which is the main trunk line of communications running from Tianjin Port to the city proper. Both the Tianjin-Tanggu Highway and the Jinbin light rail system both run across DEDA s north end, and these combine with Tianjin Airport the largest cargo airport in North China to give DEDA advantageous access to goods from land sea and air as well as labour from downtown Tianjin. Over the past 13 years, DEDA has attracted investment from 34 foreign investors. Six of the 34 are joint-venture establishments with Chinese partners, the rest are wholly foreign-owned enterprises (WFOEs). The breakdown of foreign investors in DEDA is as follows: Japan-13, Korea-6, Europe-5, America-4, Hong Kong-2, Singapore-2, 44 According to TEDA s promotional material: (accessed ) 45 The other eight EDAs were in Jinghai, Baodi, Ninghe, Jixian, Hanggu, Dagang, Xiqing, and Jinnan. 46 More information at (accessed ) 38

46 Taiwan-1, and Australia DEDA s land area remains limited to its initial 2km 2 despite the administration s plans to utilize 7km 2 at that site as well as open a new industrial park at another location in Dongli district (Liu 2005, interview). To date, DEDA has attracted approximately US$650 million in foreign direct investment. 48 Figure 5.3: Location of TEDA and DEDA in Tianjin Municipality Downtown DEDA TEDA Bohai Gulf 5.4. Difference in Performance While DEDA was established eight years after TEDA, it is still clear that DEDA s development path is not progressing in the same way TEDA s did. In 1998, when TEDA was at the same point on the timeline as DEDA is now, the former had already accumulated over 2.5 billion in FDI and had expanded well beyond its initial 4.2km 2 plot of land (Meng 2003). 47 See Annex 2. Information from DEDA s website: (accessed ) as well as Liu (2005, interview). 48 From DEDA News. Business is Good in DEDA / 东丽开发区招商态势良好 21 July (accessed ) 39

47 Table 5.2: Key Performance Indicators Indicator DEDA 1992 at start TEDA 1984 at start DEDA current TEDA 1998 yrs) TEDA current Land area 2km 2 4.7km 2 2km 2 17km 2 33km 2 Contractual FDI (in US$ million) - - $42m $1,220m $4,100m Actual FDI (in US$ million) - - $10m $1,010m $1,800m Number of Foreign ,500 3,800 Enterprises Total Number of Enterprises ,500 No. of Fortune 500 Companies (all $ amounts are in US$ million) Source: China Statistical Yearbook 2003; Annual Report on the Development of TEDA ( ), Statistical & Planning Bureau of TEDA, cited in Meng (2003); and (accessed ) Figure 5.4: Accumulation of Land km Year 1 Year 13 Year 20 Year of Operation TEDA DEDA The stark contrast between DEDA s present, year 13, performance indicators and those of TEDA at the same point in its own timeline signal that there is much more to this story than a simple head start in life. Time alone is not a significant enough factor to have yielded such discrepancies. Rather, the importance of time is overshadowed by the more visible differences in political and economic conditions (such as were described in Section 4.1) that it engendered. It is to these factors to which I now turn to explain the different abilities to attract investors. 40

48 6. Explaining the Difference The analysis in earlier sections yielded two hypotheses which might explain why some localities are successful in attracting investment and others not. These two hypotheses are examined in the discussion that follows: Hypothesis 1 = The success of FDI attraction is related to the ability of the IPA to align the interests of the government and the investor. Hypothesis 2 = The success or ability of the public IPA to align its own interests with private interests is linked with the institution s positioning within the political system Constructing Alignment This section focuses on hypothesis 1. As discussed earlier in this paper, the investment promotion agencies of Tianjin Economic-Technological Development Area (TEDA) and Dongli Economic Development Area (DEDA) are institutional designs created to facilitate information exchange between local government and investors to attract FDI. Having earlier defined the IPA as a transitional institution, its role is also to construct an alignment of interests between actors that further enhances the bond of credibility and enables the transaction to take place. In the following subsections, I will evaluate whether or not one institution has been better at aligning the interests, which it has already been established are both economic and non-economic in nature. As a government-created entity, the Chinese IPA already has strong links to the government s interests. Through its actions, it should ideally be seeking to align its own interests with those of the investors. Therefore, in order to discover whether or not the IPA s activities are aligning interests, we must look at the IPA-investor relationship from the perspective of the investor. In order to conceptualize this perspective as well as the interaction between investor and IPA, I have chosen to experiment and will posit that the IPA acts as a bridge-builder for the investor. The metaphor of builder implies a proactive function, one that fits well with Moore s construction concept. The opposite term would be gatekeeper which would imply a reactive function. 41

49 I have developed this bridge builder concept from the three phases in which the IPA and the investor interact, which I developed from my personal experience working with investors and IPAs in China along this process. My perspective is supported by TEDA and DEDA s own published and acknowledged procedures, as well as MIGA s online toolkit Module 7 for investor servicing. 49 Figure 6.1: The Phases of IPA Investor Interaction Phase 1 Project Investigation Phase 2 Decision-Making Stage Phase 3 Implementation Handling investor inquiries } Project proposals, negotiation Investor servicing, aftercare Investor Interests Fulfilled Access to Land Labour Infrastructure Policy Cultural Information Investment (profit) Personal Promotion The first stage of interaction would be at the project investigation phase, where the IPA s role would conform most closely with the dominant discourse acting to give the investor access to information in this phase, the IPA would be building an information bridge. Information is often cited by investors in China as the most expensive thing about investing in China, land is cheap, labour is cheap, but information is expensive 50 referring to the time and effort that investors have to put into finding what they need, or loss from receipt of miss-information. Therefore, this role is particularly important in the beginning for the IPA to attract investment. The second phase in which the IPA and investor would interact would be at the decision-making stage. In this phase, the IPA builds a product bridge in that it can offer the investor specifics such as access to land, specific investment opportunities, and preferential policies. The last phase in which the investor and IPA would interact would be in implementation. In this phase, the IPA forms a service bridge, supporting the investor in a variety of ways, throughout the stages of implementation from initial 49 TEDA website (accessed ); Liu (2005, interview); MIGA s IPA toolkit: (accessed ) 50 Zheng (2005, interview) and interviews with investors. 42

50 investor needs such as approval, legal advice, construction, and hiring, to aftercare services, addressing the established investor s needs. This differs from the product bridge in that it addresses more directly the foreign investor s need to navigate doing business in a foreign country, i.e. the need to understand the Chinese way. Figure 6.2: Aligning Interests by Building Bridges LOCAL GOVERNMENT Investment GDP growth Tax Revenues Job Creation Management Skills Personal Promotion I P A Information Product Service Investment (profit) Access to Land Labour Infrastructure Policy Cultural Information Personal Promotion INVESTOR In the next two sub-sections, the ability of TEDA and DEDA to perform this function as bridge builder for the investor is discussed. Following this, I will attempt to explain why one would be more successful than the other TEDA as Bridge-builder At first glance, TEDA is highly accomplished in its role as bridge builder in all three facets. TEDA s investment promotion agency has effectively formed the first information bridge through its creation of an extensive and informative website, available in five languages, and strong promotional materials that divulge information about the regulatory environment, and investment opportunities. The website also provides access to legal advice as well as a breakdown of areas of specific government support and local cultural information. Not only is information readily available in generic form, but investors in TEDA can also expect a response for their more specific inquiries within 24 hours (Zhang 2005, interview). Interviewing TEDA s investors confirmed the positive effects of IPA s response time and ready provision of the details that they needed to know. PPG, one of TEDA s largest investors and the driver of the new materials industry in Tianjin, has always 43

51 felt a great level of confidence in the information that they have received from the TEDA administration. According to Michael R. Sherretz, General Manager of PPG Coatings Co., the local government is very responsive. If we encounter any challenges or have any questions we can make contact with them that day. 51 This has led to the company considering TEDA as an investment location for some of its other business units. Bill Hall, Coatings Operations Director for PPG China praised the information exchange with TEDA in this regard as excellent (Hall, 2005 interview). TEDA has also been effective as a product bridge builder in that the agency has been unusually responsive to investors needs when it comes to providing land and policy packages. TEDA has demonstrated a high degree of flexibility and innovativeness offering investors attractive packages that enhance the standard policy advantages. Key to this has been TEDA s allowing investors to register their investment in TEDA and thus reap preferential policies, but locate in development areas outside of TEDA s own designated 33km 2 development area on the salt field. In 1996, TEDA cooperated with Xiqing, Wuqing and Hanggu development zones to set up further industrial parks in which its investors could locate thus being further away from the salt air (a plus for electronics manufacturers) and closer to the city centre. TEDA has even acquired some such land from Dongli District (Zhang 2005, interview; Liu 2005, interview). TEDA retains the right to the tax and fee income generated from the companies in these areas and pays a very small amount for the land (Zheng 2005, interview; Xu 2005, interview). This has had a noticeable effect on TEDA s ability to attract investment. About 41% of TEDA s large projects with over 10m US$ of registered capital including its largest investor, Motorola are actually located in development areas outside of TEDA s 33km but enjoy the preferential policies of TEDA s administration (Meng 2003). Finally, TEDA has demonstrated itself as a strong service bridge builder, in running a vibrant aftercare program for its existing investors, and adhering to a slogan of The Investor is the Boss for over ten years (Zhang 2005, interview). TEDA has 51 Quoted, April 2003 in Business Forum China, available online at: (accessed on: ) - Sherretz statement was also confirmed by Bill Hall, Coatings Operations Director, PPG (Hall 2005, interview). 44

52 successfully set up a One Stop Shop (OSS) administrative centre where investors are finding that they can obtain all the permits that they need within one building, and sometimes within one day (Tao 2005, interview). MIGA s online investment promotion toolkit promotes the idea of OSS as a best practice example, because the OSS can deliver substantial savings in time and costs for users by providing seamless integrated and easily accessible points of contact, and thus can be a substantial incentive for investors (OECD 2003: 9). Annually, following an initiative from the Tianjin municipal government in June 1997, TEDA has been participating in a Foreign Investment Service Month (fúwù yuè) designed to link IPA and municipal government leaders with foreign investors for the purpose of exchanging views on improving the local environment for overseas investment. During this month, TEDA organises open meetings with international investors, individual company visits, and targeted programmes and conferences (Zhang 2005, interview). 52 This provides a forum directly geared towards servicing existing investors needs and enabling a connection with the local government. TEDA has demonstratively performed its function as bridge-builder in the three phases of investor-government interaction. This proactive action results in its being able to align its own public interests with those of the private investors. In giving investors access to information, products and services that they need, TEDA has been able to attract close to 4,000 foreign investors (Sturrock 2004) DEDA as Bridge-builder In DEDA, one begins to see an entirely different picture. In the first respect, the project investigation phase, reports of poor provision of information from potential and existing investors indicate that DEDA is not adequately building an information bridge. A review of the IPA s website and other promotional material shows that it is inconsistent, available only in Chinese and limited English, and often provides outdated or irrelevant information. 52 People s Daily Saturday, 23 June 2001 City Government Seeks Opinions From Overseas Businessmen. (accessed on: ). 45

53 This shortfall was confirmed by interviews with companies seeking to invest and my own experience of bringing inquiries from North American investors to DEDA. In 2002, Jabil Circuit, Inc. began to explore investment opportunities in the Tianjin area. The company is a US$4 billion per year leader in the global electronics manufacturing services industry, with a worldwide manufacturing footprint of 5,200,000 ft 2 and plants already in Shanghai (purchased from Lucent), Shenzhen, Huangpu (Guangzhou Economic & Technological Development District), and an office in Hong Kong. It was looking to establish a manufacturing base in North China and recognised the logistical advantages of Tianjin. Jabil sent out a series of requests for information to various development zones in Tianjin, letting it be known that they were seeking to establish a WFOE on either a greenfield site or an existing building of at least 300,000 ft 2 to employ about 1,500 people when running at full capacity. 53 Although a sizeable investment at US$20 million, DEDA s administration was extremely slow and almost cryptic in providing Jabil with information on opportunities in the area (Polson 2005, interview). Subsequent conversations with the staff in DEDA revealed that they were unwilling to respond to the inquiry because it was felt that unless the investor had already decided to invest there and stopped looking at other areas it was not worth the effort to collect the required information (Liu 2005, interview; Tan 2005, interview). 54 Eventually, Jabil s persistent request for information led DEDA to finally begin to respond. Nevertheless, DEDA s role as information bridge-builder was observably compromised in this case. Over a year later, Jabil began to hone in on the specifics of the product that it was looking for and negotiation took place between Jabil and DEDA in a meeting held in September During this meeting, Jabil suggested that they might like to operate in a Free Trade Zone. In response to this, DEDA s negotiator pointed to an area within the park and said The Dongli District Mayor can make this a free trade zone 53 Investment planning meetings with Jabil and DEDA, held in Washington, DC, September Although Jabil was also looking at areas in Wuxi, Dalian, Qingdao, and Chengdu, Dongli was the only place in Tianjin that they were considering due to its proximity to the airport. 46

54 for you. A few hours later, this remark was rescinded as the investors commented that to their knowledge, creating a free trade zone was not that simple. Soon after this incident, Jabil withdrew its interests in DEDA as an option for its investment having lost trust in DEDA s ability to deliver or even talk clearly about what was on offer (Polson 2005, interview). In this incidence DEDA demonstrated lack of capacity to build a product bridge rather than lack of will; either way, however, it was to the detriment of the investor s decision. Having seen in the Jabil case two examples of why DEDA has perhaps been unsuccessful in attracting FDI, it is also important to look at how it might deal with existing investors, which would illustrate the service bridge-builder role. While DEDA has ostensibly been a participant in Tianjin s Foreign Investment Service Month, two large investors, Tianjin Lohr Industrial Co., a Sino-French joint-venture and Chinafacturing Solutions, a WFOE involved in shelter-manufacturing within the zone were never made aware that the Service Month existed (Dong 2005, interview; Lardinais 2005, interview; Yan 2005, interview). DEDA therefore missed out on this opportunity to link local government with its investors. Furthermore, interviews with Chinafacturing Solutions revealed that the investor has had to resort to its own contacts in the region in order to solve the issues that it has come across, and has received little contact from DEDA over the last two years since its establishment. Contrasting DEDA s relationship with investors with that of TEDA and its investors, it becomes apparent that, for reasons to be discussed next, DEDA has not been proactive enough with investors. DEDA s inability to connect investors interests with its own and build access to information, product and services, is reflected in the fact that it has achieved comparatively far less foreign investment than its neighbour. The results of these findings in TEDA and DEDA suggest that there is a rather large discrepancy in the ability of the two IPAs to construct the necessary components to align the interests of the investors with those of the local government. The following section will look further into the two cases to find what may be at the heart of this difference. 47

55 6.2. Behind the Bridge-Building and Aligning of Interests Earlier evaluation of the literature and the recognition of the importance of the political environment of an institution led to the following hypothesis: Hypothesis 2 = The success or ability of the public IPA to align its own interests with private interests is linked with the institution s positioning within the political system. In this section, I will evaluate the experiences of TEDA and DEDA against this hypothesis. As discussed in Section 3, the political context in China is highly nuanced by factors such as centre-local dynamics, party involvement, and personal relationships (or networks). This, in turn, creates limitations through resources and employment that can affect the way those within the political context can act. The first factor, central-local dynamics, contains two important features: (a) tensions between the central and local governments and the various policy plays that have resulted; and (b) similar tensions within the local government, which as is commonly missed out by many observers of intra-governmental relationships in China is multi-layered itself. An institution s position within this particular context can, as Herrmann-Pillath and Feng (2004) and Wong (1997) illustrated in their discussion of competition for VAT, affect its access to resources. The second factor concerns the omnipresence of the CPC in China. The CPC exists along side, in parallel to the government apparatus, exerting notable influence through its part in nominating government leaders. An institution s position, relative to the Party can effect how it is able to function and its access to resources. The reason the Party and government hierarchy can exert so much influence on an institution is through a third factor that permeates the Chinese political system, that is Guanxi, or personal relationships. This contributes to shapes that arise from an institution s position in the political system that can be described as personal and political networks. All of which, as will be shown in this section, can have a bearing on the actions of the Chinese IPA. 48

56 The following two sub-sections seek to show that the case studies in this paper illustrate how the IPA s position within the political system can affect its ability to align interests and meet the expectations of its designation as a transitional institution TEDA s Position within the Political System The TEDA case illustrates a development zone that has been able to create strong bonds within the government. Perhaps the most evident example of this is in the employment and promotion links. From observing the trends of career promotion in TEDA an overlapping it with what we already know about personal relationships in China, a clear network is visible that connects from TEDA all the way to the top of the Chinese State. Three of the last former Directors of TEDA have been promoted to members of the Standing Committee of the CPC of Tianjin: Pi Qiangsheng, Wang Shuzu and Ye Disheng, and a fourth, Zhang Zhaoruo, was made Vice Mayor of Tianjin. This puts these men in the position to distribute resources, in the form of approvals and funds, favourably to TEDA and provides precedent for the promotion paths of future directors of DTEDA. Extending further upwards, the current Mayor of Tianjin, Dai Xianglong, is the former Governor of the Central Bank of China (a Central Government Ministry). Therefore, the political network reaches the national level, and because it spans between the government and the Party apparatus, it is plausible that a promotional link extends all the way from TEDA to Tianjin s representation in Standing Committee of the CPC Politburo. These networks may not be immediately visible, but the links become clearer as I was able to observe in my work in China and in the course of interviews for this paper. The importance of these onward career promotional links enjoyed by TEDA can be observed in the quality of staff the agency employs. TEDA is able to attract staff that have received an overseas education (Tan 2005, interview). The younger staff with overseas experience are considered better at understanding foreign investor needs and ideal for investment promotion. They come to TEDA because there are more opportunities for promotion (Zheng 2005, interview). 49

57 The origins of TEDA s advantageous employment path derives partly from the point within the political structure at which it was created. TEDA has central appointment, and its national reporting ability means that it parallels provincial administration. What this effectively does is to make TEDA something similar to an arm of the Tianjin Municipal Government (TMG). Both sides benefit from this relationship. TEDA benefits from TMG s policy support which allows it extra resources and freedom with which to provide preferential policies to investors (Saich 2004, 82). The TMG benefits from TEDA s contribution to the municipality s overall growth, GDP, and domestic as well as international image-building (Xu 2005, interview). An example of how TEDA s advantageous position in the political system affects its resources was seen in the recent visit of Tianjin-born Premier Wen Jiabao. He visited Tianjin June 2005 and brought with him the message that the city should continue to grow and overtake Pudong in the south. 55 He framed his message in a speech based on development of the Binhai New Area. This is the area of Tianjin s coastline mentioned in Section that is designed to focus the policy and resources of the TMG. Its boundary is delineated by TMG s Governor. Before the Premier Wen s speech, the area did not include some of TEDA s newest developments; however, during Wen Jiabao s visit the line was re-drawn to include all of TEDA s newest land developments (see Figure 8 on the following page), thereby solidifying TEDA s political support. Premier Wen s visit signalled to Pi Qiangsheng (also now Director of the Binhai New Area Administrative Committee) that Binhai New Area has been incorporated in the country s overall strategic development plan, and the central government will provide more support to [TEDA] in the future. Policy support is one of the most important aspects. Binhai New Area could be a test zone for China comprehensive reform Xinhua, People s Daily 28 June Chinese Premier urges district to play bigger role in regional development. Online in English at: (accessed ) 56 TEDA News, 13 July Pi Qiansheng Expounds on Binhai New Area s Development. 50

58 This alignment of support from the TMG and the central state confers a degree of power to TEDA, enabling it now to circumvent the new land laws of TEDA has begun construction of new industrial land areas without proper permission, but despite a recent investigation by the government for violations, there is little doubt particularly in light of Wen Jiabao s encouraging visit that TEDA will actually be held accountable to the new laws. Therefore it continues its building (Xu 2005, interview; Zheng 2005, interview). Figure 6.3: Redraw of the Binhai New Area 2005 boundary Previous boundary DEDA TEDA Through its political connections and bargaining power, TEDA has also been able to generate the capital to lay the infrastructure in its new areas to attract FDI. This has come through the proportion of tax revenues that it is able to keep. For instance, TEDA can retain the entire 25% local portion of the VAT revenues collected from the enterprises in its area (Tan 2005, interview). TEDA also raises cash through an unwavering supply of loans from the Central Bank of China, at which the Mayor of Tianjin, Dai Xianglong, was formerly the director. The numerous people speaking on TEDA s behalf within the TMG enable it to secure loans of over US$1 billion at a 57 Decree No. 20 mentioned in Section of this paper. 51