OECD Territorial Reviews: Guangdong, China 2010
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Frederik and G. Gereffi and R. Google Scholar W. Miberg , X. Jiang and G.
Salazar-Xirinachs and R. Kozul-Wright Macmillan , Palgrave , Google Scholar Porter, M. Industrial Policy for Prosperity — Reasoning and Approach.
OECD Territorial Reviews: Guangdong, China 2010
Google Scholar R. Zhu, T. Sturgeon, M. Tsai and T. As successively demonstrated by Poulsen as well, these studies, based on aggregate flows and the total number of BITs, fail to separate more accurately the effects of BITs from the strong upward trend in FDI over time, finding out fictive strong evidence of BIT impact on FDI flows. Indeed, it is difficult to evaluate the impact of BITs on FDI flows, especially taking into account that the selection of BIT partners is usually endogenously and politically determined Guerin, For instance, according to Hallwarrd-Driemeier it is possible that a reverse causation subsists: that the existence of extensive FDI flows represents a strong incentive for a country to conclude a BIT with the host country.
Since there could be a positive feedback from FDI to the probability that a BIT is ratified, it becomes crucial to take into account and to differentiate between BITs provisions in order to determine their impact on FDIs. For example, BITs with market access provisions would be expected to have a greater impact on investment flows than BITs covering only the post-establishment phase, while BITs which incorporate a legally binding arbitration procedure are likely to be better valued by investors than BITs where such opportunity is limited or even absent Ginsburg, To sum up, FDI flows are determined by a large range of regulatory, political and economic factors that could easily prevail over BITs positive effects.
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Many of these aspects are difficult to estimate in a quantitative way, also due to the fact that FDI data are measured in various and incompatible ways. For these reasons, we deem necessary to directly ask to the actors involved in investment decisions about their investment behavior and the evaluation of the relevance of BITs, especially in the case of investors operating in China. The research aims firstly at taking a deeper look at the main motivations of Italian investments in the region in order to create the empirical basis enabling to better understand the implications for an EU-China BIT.
Moreover, the Guangdong success has been built on an externally oriented model, characterized by high FDI inflows and a high ratio of trade to GDP.
Globally about According to the Italian Trade Commission in about of them were invested by Italian capitals 6. Nevertheless, the well-developed service sector is becoming more and more dynamic and relevant, producing in RMB 2. Within the province, particular cities serve as engines of growth, shaping the geography of its industry, and encouraging the spatial agglomerations of enterprises focused on the production of products belonging to the same supply chain Barbieri et al. The most important are the capital city Guangzhou and its productive district of Foshan, the financial hub and high-tech city of Shenzhen, and the manufacturing base of Dongguan.
They contribute to the prominent economic position of the Pearl River Delta, a cluster of 9 cities that concentrates half of the total population of the province Although a low response rate was expected, we preferred to undertake a primary data collection directly from Italian investors in the Guangdong province in order to avoid the lack of accuracy, to address specific research issues and directly managing how the information was collected.
Consequently, the primary data was collected elaborating and sending a structured questionnaire to a pre-selected sample of Italian firms operating in the Guangdong province. The questionnaire assembled 34 questions which, apart from a preliminary part on the company profile and background information, were split into two sections. Section 1 aimed at verifying the structure of Italian investments in the Guangdong province, particularly investigating the main characteristics of the initial FDI, and, even more important, the major motivations of inward Italian investments in China and in the Guangdong Province, with a particular regard to the obstacles and problems faced during the investment.
Section 2 investigated the institutional investment framework perceived 4 National Bureau of Statistics, China 6th Census The questionnaire was mainly characterised by open-ended questions or multiple-choice queries. For the questions requiring a judgement on the significance of particular aspects, a five-point Likert-type scale was used for each specific statement.
Therefore, a consolidation of a new EU BIT with China could improve the level of protection especially for Italian investors, granting the same protection enjoyed by other EU Member states companies covered by more recent and stronger BITs with China, or even improving them.
By the deadline given, 42 companies responded to the questionnaire, representing a statistical significant distribution of Italian firms investing in the Guangdong region in terms of sector, size and geographical distribution. The respondent sample is characterised mainly by Italian firms who invested in the Guangdong region recently, following the trend of European firms investing in China no more than 15 years ago.
From a sectoral perspective, the sample is statistically representative of Italian investments in the Guangdong province, especially regarding industry and size.
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In addition, the sample is representative of Italian investments in the region also from a geographical point of view, since their location is concentrated in the Pearl River Delta, especially in the cities of Guangzhou 13 firms , in its manufacturing district of Foshan 9 and in Shenzhen 9 , while the remaining 8 firms are spread out across the region.
From the survey it is possible to find out also that a large majority of Italian firms investing in the Guangdong region prefers to invest in a brand new activity greenfield investment instead of acquire a participation in an existing company. In order to express the significance of determinants and obstacles, a five-point Likert-type scale was used for each statement. As several theoretical contributions on FDIs in China already previewed, the large majority of respondents identify the Chinese market size and its potential growth as the most important investment motivation, assigning an average preference of 4,2 on 5.
Moreover, the proximity to customers or suppliers ranks second among the FDI determinants, perhaps finding out an investment structure mainly market seeking directed, and not related, as usually claimed, with the low costs of production resources. On the contrary, it is possible to notice a significant relation between cost saving FDI strategy and different investment motivations such as cheap labour costs, low regulatory standards, favourable exchange rate and Chinese Government incentive policies.
Differently, on average the Italian firms recognize as quite important the motivations related to the globalization process, giving relevant grades of 3,5 and 3,4 over 5, identifying their investment to China as part of company globalization process, and using it as an export platform for other markets. The motivations related to cost saving strategies are judged significant by Italian firms only one step lower than the first two categories. However, the cheap labour and resources costs are deemed as key determinants of inward FDI in China, graded over the threshold of importance, reaching about 3,1 Likert-type points.
Low labour and resources costs are still proving to be key location factors for Italian investors in China, especially in the manufacturing industry such as the automotive and electronic appliances. However, the cost saving determinants may not be sustainable in the long-run for China, facing an increasing competition from the neighbouring countries of Vietnam, Laos and India. On the contrary, the Chinese Government incentive policies seem to be less significant for Italian firms in their investment choice in China, followed by regulatory standards and exchange rate too.
For instance, the investments in the service sector are mostly related to the motivation of acceding to specific technology and knowledge, particularly relevant when it is essential to adapt its product to the local market needs. This evidence finds out that Italian companies in the manufacturing industry seem not to follow the sample average, investing in China not in order to take advantages from the expanding domestic market, but looking for the best business environment possible in terms of production costs. In fact, in this way manufacturing firms can reduce their production costs, not having to support higher productive standards required elsewhere, and taking advantages from government incentives that cut off the initial costs while increasing the expected profit and the overall investment net value.
Furthermore, the final goods do not seem designed and produced for the local market, in fact Italian manufacturing firms in China have a propensity to re-export their products to other markets, perhaps not only to take advantages from Chinese trade policy facilities, but also back to the EU market, where producing the same goods may require higher costs and production standards. The analysis of the determinants of Italian inward investments in China can be further deepened through the study carried out by this survey on the motivations that led to the specific geographical location of the investment in the Guangdong Province.
From the sample mean scores analysis, it is clear that only few variables are widely recognize as key factors by the Italian firms investing in the Guangdong province. Among them, the Guangdong logistic position is considered as the most important factor influencing Italian firms to invest in this region.
In fact, the highly developed regional infrastructures not only offer the possibility to exploit the efficient export system to move their own goods to other foreign markets, due to its favourable location on the south-China sea, but also allow a fast movement of goods through this region, characterised by a higher economic growth in respect to the Chinese average, and a quick access to the rest of China by an extensive rail network.
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Also in this case, even thought the findings seem to demonstrate the prevalence of a common market seeking strategy among the Italian firms investing in the Guangdong region, the sectoral study emphasize different relations among the variables. Regarding the service sector instead, the main determinants related with seem to be the proximity to the Hong Kong international financial centre and the Guangdong lasting trade culture.
Obviously, the trading sector remains essentially based on the region logistic strategic position, considering that the Hong Kong and Guangzhou harbours are the closest ones in the maritime route to Italy and Europe. Secondly, remarkable results were found out also in relation with the typology of production and the firm FDI strategy.
Secondly, the main determinant of the inward investments in China is the possibility to accede to specific knowledge, probably the local business environment needs and the way to faced it. Moreover, it is evident that the principal motivation of the investments in the Guangdong region is the customer proximity, since the region is highly-industrialized and could offer a huge number of potential customers for a firm operating in the B2B sector. The analysis further proceeds studying the determinants of Italian investments in the Guangdong region and their reflections on the firm investment strategies.
As a result, the Italian companies implementing in China a cost saving strategy, driven by the research of low labour and resource costs and by a favourable exchange rate, have located their investments in the Guangdong province in order to benefit from the local Government incentive schemes aimed at attract foreign capital, from its logistic strategic position and, even more important, to place the manufacturing sites close to the Guangdong suppliers, ensuring the security of supply sources. Conversely, the firms with a market seeking business strategy explained their investments in Guangdong mainly through the location determinants of proximity to Hong Kong, widening in this way their potential markets, and for the spatial proximity also with their Guangdong customers, as previously discussed, mainly other business activities.
Interestingly, it appears that the Italian firms investing in China in order to carry on RD activities with cheaper costs than in Italy decide to establish their RD centre in the Guangdong region principally to accede to specific knowledge, probably related to the sophisticated business network located in it. Moreover, the investments in the province are influenced by the incentives and subsidies offered by the local Government in order to attract more and more innovative firms, creating in Guangdong a high-intensive scientific pole, which could enable the transfer of new technologies and competences to Chinese industries, pushing the development and structural transformation of Chinese productive system.
Nevertheless, the Italian firms investing in China have not experienced only benefits from their activities, but faced several times different obstacles prejudging their operations in such a difficult business environment. For this reasons, the survey investigated the main obstacles and problems faced during the investment process in China. From Figure 4 it appears that the main obstacles are related with the political and legal environment of China. According to our respondents, the major problem concerns the heavily complicated application procedures, for instance for the licensing, the standards to fulfil in order to start the production, the registration processes and so on.
Particularly relevant are the discretionary enforcement of different drafted laws and regulations, the lack of coordination between different regulatory agencies and the lack of harmonisation with international standards. This kind of misconduct could lead to a slowdown in foreign investment flows to China, whether the foreign firms would be too worried about the regulatory environment.
Related to this aspect, the second greatest concern for Italian companies is the continuous IPR laws infringement. According to the study, this aspect is particularly true for the Italian firms establishing part of their RD activity in China. Not only they experienced IPR law infringement and compulsory technological transfer, but also they perceived a sort of technical barrier to the investment, facing problems in the application for standard requirements and registrations and with the national financial and banking system.
As a matter of facts, many Italian investors judge unsatisfactory the Chinese banking system not able to provide sufficient financial resources to the foreign firms operating in the country. Particularly interesting is the sectorial analysis. The survey finds out that the manufacturing firms, as before highlighted mostly characterised by cost saving strategies to re-export their products to third markets, are particularly concerned about the unsatisfactory Chinese trade policy, which favours the domestic industry, usually creating a comparative disadvantage in terms of access to subsidies or tax incentives for the export.
Moreover, the Italian manufacturing firms are more and more worried about the negative impact on their operative margins, since the growing cost of labour and of doing business in China would in the next future lower their productivity. This policy aimed at supporting Chinese firms moving up the value chain, with the requirement that foreign companies have to register their IPR in China in order to participate to several tender procedures, disclosing commercially sensitive information related to innovation and IPR.
Such provisions have severely hampered the competition between Chinese and foreign owned enterprises, limiting the access for foreign investors to Chinese procurement in a wide number of innovative sectors, from green technology to telecommunications An and Peck, Furthermore, overall the Italian firms investing in China are facing an increasing competition both by foreign and local competitors.
The Chinese companies catch up their international counterparts in terms of product, services, technology and management, increasing the intensity of the competition. As a result, Italian firms are more aware and sensitive to changes in the regulatory landscape that may affect them, and for these reasons they have expressed their concerns about the lack of institutional support that may inform and help them in their business activities in China. For the moment the Chinese Government interference and the FDI protection and limitation policies are not listed among the most worrying concerns, even if in the future there will be a growing claim for institutional support from the Italian and European firms facing growing adversities in China.
Primarily, the questionnaire asked about the effective utilisation of the existing Bilateral Investment Treaty tools, which are part of the instruments that the EU investment policy should reshape in future with China. In fact, the final aim of this survey is to better understand the probable implications of an EU-China BIT for Italian firms operations in their investment activities in China, in order to offer some proposals in terms of policy options for the EU investment policy. Among the 42 respondents to the questionnaire, only 5 Italian firms admit that they have used some provisions under the China-Italy bilateral investment agreement in order to defend their rights as foreign investors, usually for the most sensitive and important cases.
Over the past century, various states have re- unified, which forced them to adapt their governance systems. Land governance has been critical to this transforming institutional form and function Augustinus ; Borras and Franco ; Deininger and Feder ; Enemark According to Palmer et al.