The Role of Special Economic Zones

in China Economy Development

Sari Wahyuni
Esther Sri Astuti S.A.
Mardha Thilla Amelia

Abstract
Remarkable economic growth has been spotlight China as the potential world
economic leader. China is the world’s second largest economy after overtaking Japan in
2010. China has been succeed to have GDP real growth for 10,3 % in 2010 and reached GDP
per capita to US$7,400 (CIA World Fact Book 2011). The aim of this paper is trying to
provide a picture on how China has been able to achieve a remarkable economy success.
How did China achieve this rapid growth? What have been its key drivers? What is investor’s
opinion about China? And, most importantly, what can be learned from China’s success. This
paper is emerged with some basic strategies and information aim to provide some
benchmarking for other countries to generate some understanding and penetrate the China’s
strategy in attracting foreign investment. This study based on some theoretical perspective
(see Porter 2008, CSF, 2007; Wahyuni, et al. 2009) that measure country competitiveness
based on government support, industrial structure/cluster strategy, innovation policy,
infrastructure, bureaucracy and the important variable of doing business. To answer the above
question, we employ a qualitative research by conducting some interviews and field visit
(indirect observation) in SEZ area of Jinnan Scientific Industrial and Trade Park. We choose
Jinnan due to their strategic location which is close to the central government in Beijing. By
conducting observation in Jinnan, hopefully we can get insight on how they manage
bureaucracy ties between central and local government.

Keyword: Special Economic Zone, China

I. Introduction
Remarkable economic growth has been spotlight China as the potential world
economic leader. China is the world’s second largest economy after overtaking Japan in
2010. China has been succeed to have GDP real growth for 10,3 % in 2010 and reached GDP
per capita to US$7,400 (CIA World Fact Book 2011). Analyzing the circumstances for the
past 30 years, China's economy has changed from a centrally planned system that was largely
closed to international trade to a more market-oriented that has a rapidly growing private
sector. A major component supporting China's rapid economic growth is the growing of
exports. This positive skewed graphic economy of China has trigger some countries to
question and analyze what is exactly happening in China and how this country reached
numerous increase growth in their financial sector.
Looking at the historical path, China starts its reformation by implementing an open door
policy as the way in admitting that China can not stand alone in grabbing the world economy.
China launched its Open Door reforms in 1978 as a social experiment— one that was
designed to test the efficacy of market-oriented economic reforms in a controlled
environment. Not knowing what to expect from the reforms, Chinese authorities decided not
to open the entire economy all at once but just certain segments: in Deng Xiaoping’s words,
“crossing the river by touching the stones” (Zeng, 2011). Therefore, besides the usual
objectives of an SEZ—such as attracting foreign investment and technologies, promoting
exports, and generating employment and spillovers to the local economy—one important
mission of the first Chinese SEZs was to test the new policies and new institutions for a
market-oriented economy. A freedom of policies has been given to areas designated for SEZ.
For example, additional administrative powers were granted to Shenzhen in order to allow it
more freedom in pursuing new policies and development measures. In 1981, the Guangdong
Provincial Committee granted Shenzhen the same political status as Guangzhou, the
provincial capital (CCPR, 1987, p. 53), and in 1988 it was upgraded to the level of a province
for economic planning purposes (Sklair, 1991, p. 203). Furthermore, Shenzhen was exempted
from the requirement of submitting tax revenues to the central and provincial governments
over its first 10 years, an unparalleled advantage that allowed it to experiment with whatever
policies and practices it deemed expedient to vitalize the economy (Zhu, 1996, p.189). With a
progressively increasing level of freedom, Shenzhen achieved many successful policy
breakthroughs.
China’s success in developing its regions to build special economic zones has brought
a significant increase of development in China. They have been successful in transforming a
village into a metropolitan centre of industry and blending the urban life for the sake of
increasing the industry growth through SEZ. The economic impact of these zones has been
far-reaching, transforming entire regions and economies. There are useful lessons to be drawn
from China's experience by many developing countries such as Indonesia in designing their
economic reform policies.

The aim of this paper is trying to provide a picture on how China has been able to
achieve a remarkable economy success. How did China achieve this rapid growth? What
have been its key drivers? What is investor’s opinion about China? And, most importantly,
what can be learned from China’s success. This paper is emerged with some basic strategies
and information aim to provide some benchmarking for other countries to generate some
understanding and penetrate the China’s strategy in attracting foreign investment.
II. Research Model

This stuudy based on

o some theeoretical peerspective (ssee Porter 2008,
2 CSF, 2007; Wah
hyuni, et
al. 2009) that meaasure counttry competiitiveness based
b on government
g support, in
ndustrial
structurre/cluster sttrategy, innnovation poolicy, infrasstructure, buureaucracy and the im
mportant
variablee of doing business.
b Inn this case we will an
nalyse the data
d of Doinng Businesss (2012)
which indicate
i thaat there aree 10 imporrtant indicaators of SE
EZ competittiveness: Sttarting a
businesss, Dealing with
w construuction permiits, Employiing workers , Registerinng property,, Getting
credit, Protecting
P innvestors, Payying taxes, Trading
T acro
oss borders, Enforcing ccontracts, Resolving
R
insolvenncy (formerlly recogniseed as closingg business). At the end, we will seee the perform
mance of
special economic
e zoone in Chinaa. Our researrch model can be seen in
i Figure 1.

Figure 1. Research
h Model

III. Methodoloogy

To answer the above question,

q w employ a qualitativee research bby conductin
we ng some
intervieews and field visit (indiirect observvation) in SE
EZ area of Jinnan
J Scienntific Industrial and
Trade Park.
P We chhoose Jinnaan due to their
t strateg
gic locationn which is cclose to thee central
governm
ment in Beij
ijing. By coonducting obbservation in
i Jinnan, hopefully
h wee can get in
nsight on
how thhey managge bureaucrracy ties between central and local govvernment. Indirect
observaation is obbservation with
w n between researcherrs and the people
limitedd interaction
observes. According to Wahyuni (2012) indirect observation is distinguished from
participant observation in a number of ways. First, an indirect observer doesn't typically try
to become a participant in the context. However, the direct observer does strive to be as
unobtrusive as possible so as not to bias the observations. Second, indirect observation
suggests a more detached perspective. The researcher is watching rather than taking part.

Instead of observation we also conducted indepth interviews to investor in Tianjin and

key policy maker of special economic zones which consist of Investment Promotion Agency
of Ministry of Commerce Peoples Republic of China, SEZ managers in Tianjin. Besides
these two qualitative approaches, we also use secondary data. The usage of these three types
of data collection is a part of triangulation process which hopefully can increase the reliability
and validity of the data. The list of interview can be seen in Table 1.

Table 2. List of interview in China

Duration of
Date Agenda
Interview

Investment Promotion Agency, Ministry

July 4th 2011 3 Hours
of Commerce (MOFCOM)

Tianjin Zhonghuan Electronics and

July 5th 2011 3.5 Hours
Information (Group) Co., Ltd

Jinnan District Scientific Industrial and

July 5th 2011 2 Hours
Trade Park

China Association of Development

July 6th 2011 3 Hours
Zones

IV. Findings and Analysis

4.1. Doing Business Performance in China

An important part of the economic reform process in China has been the promotion of foreign
direct investment (FDI) inflow. Since early 1990s, China has been the world largest FDI recipient
among developing countries its accounts for 1/4 to 1/3 of total FDI inflow to developing countries
(Fung et al. 2002). When China had just reopened to foreign trade and investment, their SEZs
had an almost immediate impact. In 1981, the four zones accounted for 59.8 percent of total
FDI in China, with Shenzhen accounting for the lion’s share at 50.6 percent and the other
three rooughly 3 peercent each. Three yearrs later, the four SEZs still accounnted for 26 percent
F (Wong,, 1987).Chiina’s infrastructure haas conducted great chaanges in
of Chinna’s total FDI
spotlighhting the Shhenzen, Chiina’s first SEZ. Shenzh
hen used to be small village and a fishing
area (700,000 resideents, 325 sqq miles areaa) which hass turned intoo a modern city with 7 million
populattion and haas 120,000 foreign TN
NC's (Wand
da Guo, 20007). Additioonal admin
nistrative
powers were grantted to Shenzzhen in ordeer to allow it more freeedom in purrsuing new policies
and devvelopment measures.
m F
Furthermore
e, Shenzhen
n was exem
mpted from the requireement of
submittting tax revenues to the central annd provinciaal governm
ments over itts first 10 years,
y an
unparallleled advanntage that allowed
a it to
t experimeent with whhatever poliicies and praactices it
deemed expedient too vitalize thee economy (Z
Zhu, 1996, p.189).
p As a result, Shennzhen’s GDP
P in 1981
which was
w only 0.9 percent of Hong
H Kong’ss, by 2005 haad improvedd to 34 perceent. Similarly
y, the per
capita GDP
G of Shenzhen in relattion to Hongg Kong is rep
ported to havve improved from 11.4 percent
p in
1987 to 28.5 percentt in 2005 (Shhen, 2008)
Nowadays, there
t Zs and industtrial parks sppread all oveer China.
are moore than thouusand of SEZ
China reformation
r n has implem
mented to welcome
w fo
oreign invesstors with a lot of pack
kages in
startingg business. Despite
D the success of SEZ, China rank in dooing busineess does nott show a
significcant progresss. Even som
me of the rank has beeen deterioting such as protecting investor
that eveen drop 4 point
p than the
t prior yeear rank. Table
T 3 provvide the rannk of Chinaa Doing
Businesss in the yeear 2011 annd 2012 com
mpare with Indonesiann Doing Buusiness 2012
2. There
are twoo areas thhat Indonessian perform
mance is much
m betteer than Chhina: dealin
ng with
construction permiit and proteccting investtor.

Tabel 3. China's raanking in Dooing Busineess 2011 & 2012

INDON
NESIA
TOPIC RA
ANKINGS DB CH
HINA DB 2012 CHINA CHINA
DB 20112 Rank Ran
nk DB 2011 Rank
k Change in Rank

Starting a Business 155 1511 150 -1

Dealing with Construcction 71

Permits 1799 180 1

Getting Ellectricity 161 1155 116 1

Registering Property 99 40 38 -2
 INDON
NESIA
TOPIC RA
ANKINGS DB CH
HINA DB 2012 CHINA CHINA
DB 20112 Rank Ran
nk DB 2011 Rank
k Change in Rank

Getting Crredit 126 67 64 -3

Protecting Investors 46 97 93 -4

Paying Taxxes 131 1222 119 -3

Trading Across
A Borders 39 60 61 1

Enforcing Contracts 156 16 17 1

Resolving Insolvency 146 75 72 -3

Source:: Doing Bussiness Databbase, 2011

Beneath, we
w discuss eaach of the above
a variab
ble in Doingg Business.

4.1.1. Starting a Business

China has the

t rank 151 out of 183 countries in starting a business in 2011. Ch
hina has
the sam
me rank in 2010,
2 it means China has
h not beeen moving forward
f in starting a business.
b
Comparred with othher countriees, based onn doing busiiness 2009, China is inncluded in countries
c
which reformed
r annd make it easier
e in dooing businesss especiallyy in startingg a businesss (Doing
Businesss, 2011).

Figure 1. China’s Global

G Rankking in Starrting a Busin
ness
Source: Doing Business Database, 2011

Our interview with multinational investors indicates that small companies are mostly thinking twice to
enter Chinese market:

“China is our fourth choice of investment simply because of the size of our company .It is still
a big risk for us to enter Chinese market. Lots of multinational companies who have many
plants around the world can afford to invest in china. If their plants in China do not work,
then it is ok, they still have lots of plants in other countries. So, the size of the market is
significant enough for them to gamble. But for us, we only have manufacturing in the UK and
in Thailand. So it’s quite a big risk for us.”

“It is easy to find engineering in China. China has also a big market but doing business in
China is not really cheap”

4.1.2. Dealing with Construction Permits

Construction permit and infrastructure in China is closely related with environmental issue.
Chinese government has been according greater importance to the country’s environmental
protection. They have announced plans to move the factory clusters, which are major
polluters, to rural areas outside the city (see http://www.chinaknowledge.com). To improve
environmental quality, the government has imposed strict requirements on enterprises that
make investments in the city.

Regulations regarding investments in zones basically are set by authorities in the central,
provincial, municipal, and zone levels. The Central government’s role is to set general rules
and guidelines regarding issues like land use, labour, environment, and other standards.
Bureaus and ministries within the provincial governments must create more detailed rules to
implement those guidelines (Competitiveness Support Fund, 2007). Zone authorities will also
have a set of rules for investors that may or may not conform to the ones set by central and
provincial authorities.

When provincial governments set standards on issues such as building, safety, environmental,
and economic impact, they can often be very specific to the exact locations and industries of
the types of investments in question. Different rules can apply to different regions and cities,
with the more lenient standards reserved for less developed areas. Rules are often then broken
down by industry. Zone level authorities usually have their own regulations which can add to
work in parallel with, or sometimes contradict central and provincial regulations. The end
result is a bevy of highly detailed rules specific to locations and types of investments that
prescribe what the investor can and cannot do in almost every aspect of their operations
(Competitiveness Support Fund, 2007). With this multiple level of bureaucracy, it is
understandable why investors somewhat worry and feel cautious with having investment in
China. As indicated in the following quote:
” Overall, I think that the market is very excited about China, the potential that China has to
offer, but is scared about the things they can’t see!”

“China has tough regulation but not clear for example different regulation in every province
and science park”

As a result, for the first time China posits 180 rank in dealing with construction permits in the
year 2011.

Tabel 4. China’s Global Ranking in Dealing with Construction Permits

Source: Doing Business Database, 2011

4.1.3. Registering Property

Property as the main asset in doing business becomes a very important variable in
attracting investor to invest in China. The procedure in transferring land in building up
business takes 4 steps and 29 days in China. This is a big lag if we compare with Norway that
only have 1 day registering property. Interestingly, China also applies different treatment for
registering property for different area. They divide region into two parts: region with the
high number FDI and the lower one. The development of a region which is less capable in
developing competitiveness and far away from trade port make property registrations take
less time. This is one of the Chinese government strategies in spreading up investment to gain
equal economic growth.

It is interesting to note that all land in China is owned by the government and only the
land use right can be sold to private investors. Land usage rights can be classified into
agricultural use, industrial use, and commercial use (CSF, 2007).

Table 5. Registering Property in China

Source: Doing Business Database, 2011

4.1.4. Getting Credit

Credit as one of the main sources of capital has become the foundation for business to
start a company. Getting credit is not only applied for starting business but also for business
expansion. It is interesting to note that China’s rank on getting credit only achieve 65 which
is worsed compare to China’s perfomance in the year 2010.

China has policy reform in getting credit. Getting credit was made easier by
expanding the range of assets that can be used as collateral through a new property law in
October 2007. Accounts receivable and a combination of assets can be used to secure a loan
(Doing business database, 2011).

China economic policy requires some separated asset to lend. Information are widely
provided by the credit registries and credit bureau. But there are some regulations
implemented to get the credit in China, this is one of the main reasons

Figure 3. China Getting Credit Inflow 2011

 Source: Doing Business 2011

Table 6. China History of Getting Credit

Source: Doing Business Database, 2011

4.1.5. Protecting Investors

Among other doing business variable that have been increase in China, investor protection
seem to be a daunting task for Chinese Government which is indicated from their protecting
investor rank in the year 2011 (93 rank)

Investor from foreign nations keeps increasing considering the cheap labour cost, tax
incentives, and land or facilities provided.
 Since the investor becomes one of key point in China development, protecting
investors becomes crucial issues that the government should put big portion of attention.
Investors need the presence of legal and regulatory to confirm the protection of their money.
Thus both governments and businesses have an interest in reforms strengthening investor
protections. One of the strategies that China implemented regarding protecting and increasing
the service for the investor is creating special team for managing the investor activity such
China Association of Development Zones (CADZ, 2011). Increasing the protection for the
investor will have positive impact in increasing China’s economy development. China needs
to upgrade the disclosure, director liability index and other index related to protecting
investor indicators in order to have higher rank in 2012.

“China is quite a complicated regulatory environment. They have a tendency to change their
regulations quite quickly. So suddenly they will implement a regulation that you will not be able to
register your motorcycle in that city or not ride your motorcycle in this city on certain days. For us,
China is a big market obviously but for a company of our size it is quite a big risk entering to the
Chinese market.”

Tabel 7. Protecting Investors

Sources: Doing Business Database, 2011

4.1.6. Paying Taxes

Tax is always becoming the most notable incentive for the company in starting their
business. China has implemented the reduced corporate income tax rate with no custom
duties on imported materials and parts as long as they are for re-export. Income tax
exemptions for foreigners working in SEZs and also for green projects to support the 12th
Chinese Five Year Plan which aimed to achieve “the greenest in history ,”
Tabel 8. Paying Taxes

Sources: Doing Business Database, 2011

The tax burden was reduced on businesses by reducing the corporate income tax rate
from 33,3 percent to 25 percent and unifying the criteria and accounting methods for tax
deductions (Doing Business, 2009).
Although China’s rank for paying tax is slightly low (in the rank of 119), China has
actually offered many incentives as a part of strategy in attracting investment. The following
strategies are implemented by Chinese government in order to attract more FDI:
1. Corporate Income Tax three-year exemption + three-year half reduction
Revenues earned by energy conservation, water saving conservation projects,
environmental protection and clean development mechanism projects are eligible
for a three-year exemption and three-year 50 percent reduction in corporate
income taxes (http://www.china-briefing.com). This is including technological
renovation with respect to energy conservation and emission reduction,
comprehensive exploitation and utilization of methane, as well as public sewage
treatment, public garbage treatment and seawater desalination. It is also eligible
for this tax incentive is investment in and operation of infrastructure projects
which have major support of the State, including electric power and water
conservancy projects.
2. High and new tech enterprises
Many enterprises engaging in activities in the green sector are considered high and
new technology enterprises, which can be granted a reduction in CIT tax liability.

In addition, high and new technology enterprises in special economic zones

(Shenzhen, Zhuhai, Shantou, Xiamen and Hainan) are eligible for tax holidays
(first two years tax-free, subsequent three years taxed at 12.5 percent).
 3. VAT exemptions/reductions

Products or services making a “comprehensive utilization of resources” through

utilization of wastes as production inputs or energy-efficient processing have
been eligible for VAT exclusion since 2008. This includes resources such as
green building materials, combined heat and power pollutions, reclaimed waste-
water.

Under the green building sector, VAT exemptions are given for selling self-
manufactured products no less than 30 percent of waste residues in raw materials;
an immediate rebate selling of self-manufactured recycled asphalt concrete
produced from waste asphalt concrete; and immediate rebate (50 percent) on
selling of self-manufactured environmentally-friendly new walling materials.

Among the government tax incentives specifically targeted at this sector is an

immediate VAT rebate (50 percent) applied to selling self-manufactured electric
power generated from wind power.

4. Energy-saving services
Effective January 1, 2011, income earned by qualified energy-saving service
companies engaging in energy management contracting projects is temporarily
exempted from business tax. When an energy-saving service company transfers its
taxable goods from qualified energy management contracting projects to energy-
consuming enterprises, the value-added tax arising shall be temporarily exempted.
Such companies are also eligible for the CIT three-year exemption + three-year
half reduction. (Asia Briefing, 2011)

4.1.7. Trading Across Borders

China is also concerning about the facility regarding the trade conducted across
border. China government has implemented some regulations to encourage investors in doing
the trading to another place to be easier.
 Picture 3. Trading Across Borders

Sources: Doing Business Database 2011

Table 9. Trading Across Borders

Sources: Doing Business Database 2011

China has suffered the decreasing in the rank of doing business 2010 to 2011, it is caused by
the increasing cost to export and cost to import from 2008 to 2011. Trading across borders
will influence the operational savings or any financial sector in company. Focusing on the
improvement for these indicators will lead China to better economic growth.
4.1.8. Enforcing Contracts

China has developed into the trading countries that really focus on their way in doing
the contract with the company. In doing the contract, China shows the stable rank from Doing
Business 2008 -2011 and has the 15th place among the other 182 countries all over the world.
This contract comes when the company for example the seller and plaintiff will have a
problem with the other company as defendant and solve it through the court. The procedures
include filling the court case, trial and judgment, and the enforcement.

Table 10. Enforcing Contracts

Sources: Doing Business Database

4.1.9 Closing a Business

A company will come to their destiny in ending their business. China becomes the
country having the 68th rank in closing its business in 2011. The position is going down from
2010. China’s rank in the ease of doing business has influenced by the competitiveness of
China Special Economic Zones. China tries to divide its region to some special economic
zones and facilitate those zones to ease the bureaucracy in closing the business. Improving
the expectation of creditors and debtors about the outcome of insolvency proceedings, well-
functioning insolvency system can facilitate access to finance, save more viable business, and
thereby improve growth and sustainability in economy overall.
 Table 11. Closing a business

Sources: Doing Business Database 2011

4.2. China SEZ Development

In 1980, China started to develop special economic zones which has special
treatment and incentive in 4 zones including Shenzhen, Macau (Zhuhai), Taiwan (Shantou
and Xiamen). Strategic location supports Shenzen to easily attract investor in that area. It is
located close to Hong Kong, the only modern port facility of the time that had effective
access to the global shipping network. SEZ model was judged to be successful and could be
expanded in 1984 (Wanda Guo and Yueqiu Feng, 2007). In developing SEZ, China has its
own department who focus on their special region in order to ensure that a success story in
one zone will be replicated by other zone, they established CADZ. China Association of
Development Zones (CADZ) is a non-governmental national level organization approved by
Ministry of Civil Affairs. It is established in 1993in the aim to serve and promote China
Development Zone. It is also a platform for development zones to share working experiences
and exchange information. They also conducted a thorough research on its regional design,
operation system, transport logistic, market condition, industrial layout, etc. CADZ consists
of CADZ by central government, CADZ as SOE controlled by the local government. Based
on the interview with the CADZ representative on July 13 2011, most of CADZ is under
national government level. In China, there are over 1500 development zones includes
provincial level, state level, and national level. There are 5 types of economic zones
including national level, free trade zones, high tech zones, border zone, and provincial level.
CADZ makes China becomes more focus on the zone development. The initial setting of the
first four SEZs was mainly concerning southern China. China has done some expansion to 14
coastal port cities, from the Dalian to Beihai selected to become SEZs. This triggered the
development of modern port infrastructures, particularly container ports that were essential to
support an export-oriented strategy. (www.cadz.com)
SEZ has become the main key success in boosting China’s economy. The number of
SEZ keeps increasing year by year until the total number of its special zones 115 (Table 10).
The number of special economic zones reached the FDI as the following table until the end of
2008.
The increasing level of SEZ means the increasing level of companies and business
activities that influence the flow of FDI and export in China. Number of export in SEZ is
keeping increasing year by year. The following table shows the increasing of export and FDI
inflow from 5 main SEZs in China.

Table 11. Exports and FDI Inflows in SEZs, 1978–2008

Note: a.1979. b.1980. c.Preliminary figures. d.January–November. e.January–

September. Sources: Compiled by authors from SBST, 1994, 2007; SBHN, 2007, 2008;
SBSZ, 2007; SBXM, 2007, 2008, SBZH, 2007; and SBGD, 2008.

4.3. A Study of China First SEZ, Shenzen

In developing Shenzen, the government tries to improve the policies regarding to

bureaucracy in Shenzen. A lot of strategies had been implemented in contributing to
Shenzhen’s success and competitiveness. There are some factors that influence the
development of Shenzhen. Some of which are discussed below:

4.3.1 The role of Central Government

The central government tried to provide a special policy framework for the Shenzhen
SEZ that has helped to create a “soft enabling environment” to enhance the city's industrial
competitiveness. Liberal economies policies applied in Shenzhen for both attracting FDI and
engaging in international trade. As a result, the foreign direct investment has been increased
by 10% annually from 1980 to 2006 reached $136.1 billion in 2006, while imports reached
$101.7 billion. Shenzen also became the testing ground for comprehensive reforms. It
became the first city to apply differential corporate tax rates for foreign and domestic firms.
This concept imply that tax burden of domestic enterprises was twice that of foreign
investors' enterprises. An open and liberal policy environment becomes the main key factor
behind Shenzhen's success (ADB, 2007).

4.3.2. Favorable Demographic for Economic Development

The population of Shenzen consists of migrants from some foreign countries. The
demographic profiles including permanent citizens under the age of 16 make up 21% of the
population, 17- to 24 year olds comprise 13% of the population, 25- to 44 years-old make up
49%, while people aged 60 and above account for less than 6% of the population, compared
with the national average of 11%. This demographic will make Shenzhen as a city which had
innovative and developing spirit (ADB, 2007).

4.3.3. Financial Warranty

Shenzhen try to create financial warranty which was available even for relatively risky
ventures. This has becomes the important factor that engage more firms to come to this city
to do the business. By the end of 2005, the number of venture capital in Shenzhen had
accounted for one third of the total number in China. This financial growing earned this city
as the houses of Shenzhen Stock Exchange, the Shenzhen Small and Medium Sized
Enterprise Guarantee Center, and other critical financial architecture (ADB, 2007).

4.3.4 Infrastructure
 The establishment of Shenzhen infrastructure contributed such significant effect in
Shenzhen development. In 2006, Shenzhen's harbor ranks fourth in the global container
transportation business, and Shenzhen's airport ranks third in China with 18.4 million
passenger. Shenzen really puts big portion of attention in quality of supply chain and
facilities in this city including the electricity, communication, roads, and logistic facilities and
so on. This city keeps upgrading the infrastructure in order to increase the industrial
competitiveness in the city.

4.3.5 Location

Shenzen enjoys the strategic location which is placed this city as a coastal city
bordering Hong Kong, China. These advantages help the development of Shenzhen to attract
investment from the neighbor country, Hongkong. A big amount of investment came from
Hongkong as a major international financial, information, and services center.

4.3.6 The role of Local Government

Local government acted as the controlling actor in developing the city. Shenzen
government continuously adapts to the reforms and increases its administrative capacity.
Shenzhen government tries to provide convenient services with the availability of direct one-
stop services for large enterprises. Transparency and accountability played an important role
in helping the developing process. This strategy applied by submitting Shenzhen
development plan to the People's Congress for approval to divide the power of government.
At the same time, local becomes such consideration toward the new reform.

4.4. Keys Success Factors SEZ Development in China

The basic concept that China purposes in creating its first special economic zones is an
open and liberal policy environment. It becomes the most important reason behind
Shenzhen's success. There are some key policies contributing to Shenzhen's Industrial
Competitiveness. These key policies try to examine the opportunity and mix it with the need
of investors.

4.4.1. Government
 China government plays an important role in composing the regulation by indulging the
municipal institution or the local government to adapt their regulation framework based on its
region needs. Top level government support and big commitment from China has been
transformed into the booming success with its SEZs. The local government who want to
create SEZ will propose innovative policy in developing their region related to the specific
need of the region. The Central Government of China has provided a special policy
framework for SEZs in helping China to increase the zone’s industrial competitiveness. This
regulation will create a sense about “soft enabling environment” as the effort to enhance
investor interest to come to China (firstly implemented in Shenzen). “One of our government
strategies is to examine that the business will grow well or not in the future. After
establishing their business, investors will automatically attract others to invest in these zones.
For example, Tianjin wants to specialize in the electronic because it is clean, environmental
friendly, high profit, has strong park history in chemistry. This area is also near to petroleum
and gas which is already developed as an industry. The fact that a lot of electronic suppliers
build their production plant in this area ultimately will attract many electronic companies to
invest here. We finally developed an electronic cluster. The SEZ proposal was submitted by
the province and the central government approved the design of the SEZ. However, new
investor can also get incentives although there are not located in SEZ” (said the
representative of CIPA, Investment Promotion Agency of Ministry of Commerce of Peoples
Republic of China on interview 13 July 2011). This key policy will make the special
economic zones will help China to boost its economy. It will also generate multiplier effect
such as increasing the number of export, job opportunity, etc.
4.4.2. Industrial Structure

To upgrade the city's industrial structure and regional competitiveness, China gave
permission to set up wholly foreign-owned companies. Formerly it was not possible for
foreign companies could enter China only by joint venture with local partner. This condition
enables such an easier access to land and infrastructure, allowing the repatriation of profits,
and favorable export and import polices.
China government also formulates a strategy to develop a “headquarter” economy by
inviting multinational companies to move their headquarters into China. The strategy
contains the formula to certify the headquarters of manufacturing companies, preferential
measure to attract the headquarters of multinational corporations, and streamlined
government procedures to enhance government services for companies who choose to locate
their headquarters in Shenzhen. This strategy makes the corporation will be centered in
Shenzen as the effect to make it easier to have its supply chain and facilities provided to
develop the business. It will cluster the business to not spread around China in making the
distribution of materials less effective. Having special zones consist of a lot of headquarters
of multinational corporations will make the way to reach the facilities to be more effective
and more efficient.
Realizing the important of being efficient concentrate China Government encourages
the formation of industrial clusters or concentrations. In this case the supply chain will be
placed in the neighbourhoods of the company’s production. This cluster strategy eventually
provides economies of scale and scope for the company located in this area. Various
industrial clusters have been formed in the China’s SEZs including clusters for the garments,
bicycles, furniture, and semi-conductor industries.

4.4.3. Innovative Policy

As the most successful SEZs in China, Shenzen become the most spotlighting zone to
be examined. This city keeps purposing innovative policy to improve the regulation in order
to satisfy all the stakeholders. In the last 5 years, Shenzhen Municipal Government had
proposed policies to develop a recycling economy in the aim of improving the city's
environment and saving resources. Shenzhen passed its Recycling Economy Promotion Rules
on 16 March 2006, enforcing more than 10 key procedures and systems to assess a firm's mid
and long-term performance and planning (Hongyi Harry Lai, 2006). Shenzen also provides
government procurement and policy support for developing industries that are
environmentally-friendly and energy-efficient. It will make the process of industrializations
minimize the environmental damage in producing its goods. Considering about research and
development, in early 2006, the city’s government decided to structure Shenzen as a
“National Innovative City” in the PRC. Based on this decision, research and development
investment will account for nearly 4% of the city's total GDP by 2010. The output value of
high-tech products is expected to grow at an annual average rate of 20% over the next few
years(Hongyi Harry Lai, 2006). Recycling and contributing 4% of Shenzen GDP gave a big
change in Shenzen development. The effort to keep upgrading the technology while caring
the environment at the same time makes Shenzen grows in economy even faster than those
other SEZs in China.

4.4.4. Human Resources

Next analysis is about the human resources in China. Shenzhen consists of a lot of
migrants from across the country and, more recently, from overseas. “China can attract of
investment because of the labor force. Labors in China want to work overtime and very
diligent. Industrial system is very heavy; it is very easy to find a supporting industry”(based
on direct interview to CIPA) . It brings the innovative spirit of the city stems as the part from
its vibrant and strongly motivated migrant community. Focusing on how Shenzhen has
increased its economic development, the demographic profile favors a lot. In 2011, the
demography of China shows the age structure 0-14 years reach 17.6% (male
126,634,384/female 108,463,142), 15-64 years reach 73.6% (male 505,326,577/female
477,953,883), and 65 years and over reach 8.9% (male 56,823,028/female 61,517,001) (2011
etc.). It showed that there are a lot of potential human resources available to run the
production. China as the world most populated country will provide a lot of labor and
employee to be hired. The big number of human resources will increase the competition
among the potential workers which eventually will lower the payment for labor as well as the
salary for the employee. In the Special Economic Zones in China, it also provides the
university students as the potential workers to fulfill the demand for the companies.

4.4.5. Infrastructure

The following analysis comes to the facilities provided in the special economic zones in
China including the transportation, infrastructure, financial warranty and convenience
services. Transportation becomes the vital part in economic zones as the distributions of the
materials rely on it. Shenzen is located near the harbor and airport will be easier the
movement of the goods. The quality of Shenzhen's harbor ranks fourth in the global container
transportation business, and Shenzhen's airport. Shenzhen does enjoy the advantage of
location. Shenzen is a coastal city bordering Hong Kong, China.“Domestic infrastructure for
various things continues to improve”(based on direct interview to CIPA). This location gives
China a big chance to upgrade its industrial structure and competitiveness. It produces huge
benefit from its proximity to Hong Kong as a major international financial, information, and
services center. In case of Shenzen, the big number share of investment to Shenzhen has
come from Hong Kong especially during the early years of Shenzhen's development. The
infrastructure in Shenzhen is well established. The supply and quality of other infrastructure,
such as roads, telecommunications, and utilities, also rank highly in China. It will make such
a favorable logistic environment for the upgrading of industrial competitiveness in the city.

4.4.6. Bureaucracy

Sixth is the streamlined procedure in doing business in China. Analyzing the China’s
ranking in Doing Business 2011, China has come up as the highest rank among other
indicators in enforcing contract. Looking at the China’s rank in starting a business, it comes
to the 151 in 2011. Regarding to investment from foreign in aim to start a business in China,
China has implemented conducive environment to do the investment. The reality comes with
the attracted FDI for the last twenty five years achieved $163.6 billion rising from $
163.600.000.000 becomes $2.2 trillion dollar and making China as the third largest economy
in the world. China also has been growing at the rate of 9.5% for last ten years. In 2006 china
grew at the rate of 10%. If China is keeping moving for this fast growing, at 2040, will be
largest economy of the world surpassing the US.
It is clearly shown that China has been growing to the big boosting economy country all
over the world with special economic zones as one the key toward its development. Each of
the SEZ in China has their own strategy in making it suitable with their own regional
competence shown by the Table 9.
 Table 12. Special Roles and Innovations in the Special Economic Zones

Sources: Yue-man Yeung,2008

4.5. Investor Opinion about China

Most investors think that China has a lot offering. China had a lot of incentives (in the
past) because China has industrial policy and regional policy, for example incentive of
corporate income tax (15%) for high tech industry and the other industry has 20% for
corporate income tax. In the past, it is not the same for the incentives, but china gives almost
similar incentives. Investors normally make investment decisions based on 5 factors, which
are growth, valuation, growing domestic market, supporting macro economics, and growing
capabilities. The following statements are investors’ judgment about China’s conditions
regarding those sub-factors.
a. “Economic growth is strong and the whole region is entering rapid development, a lot
of value is being created.”
b. “Valuation is higher than 2 years ago, but I think there is still value to be made,
especially for the long term investor.”
c. “An emerging middle class is driving the economy, so the government can balance
economic growth between export and domestic consumption.”
d.“The government has done and is doing a tremendous job to keep everything running
smoothly.”
e. “Natural resources that can attract investors is almost not found in China, but
Tianjin actually only needs the government to provide electricity and gas”. (Tianjin
Park Management)
f. “The infrastructure will set up at first then China invite the investors. Good
infrastructure is the most attractive factor for investors”.
g.“China has certainty law enforcement”.

But on the other side, investors also consider the intervention from China’s government
which usually generates negative perceptions. The following are some investor’s statements
about government role:
a.“Government Intervention is scary because it seems to just come without warning.”
b.“One child policy is looked like the timing boom”
c.“China has to promote industries that have environmental protection, low material
carbon for instance biotech industry. They have a lot of incentives. The government
makes some regulation for Encourage industry, prohibited industry, limited industry”.

In the future, investors in China will face four issues such as:
a. The labor cost is increase
b. The central government is controlled the land, in the future is more difficult for
foreign companies to get land
c. The moving labor between one company to other company
d. The government wants to change the manufacturing industry to the R & D industry
V. Conclusion

China’s reformation to the open door economy policy has transformed China to the
well infrastructure and modern country. Special economic zones have become one of the
main successes of China in achieving its golden time for its growing economic. The effort of
government to facilitate and support the special economic zones becomes crucial to support
the development of the zones and influence the decision making process. Both the central and
local government has committed to maintain the infrastructure, human resources, innovative
policies, and structuring the industrial cluster in order to create framework as “soft enabling
environment” to attract investor to come to China. The mixture of these key policies
collaborated with China macro competitiveness becomes the strategy of China in attracting
the Foreign Direct Investment as the generator in raising the growth of its economy.
Special economic zones enable China to earn the increasing level of economic growth.
This paper provides benchmarking from China SEZ for some countries to adapt some
strategies and implement it to its country. Government including the central, provincial and
local should be hand in hand in creating soft enabling policy framework to support the
development of special economic zones. Examining the region potential and start to map the
region in the aim to form a cluster to provide streamlined supply chain and focus on suitable
innovative policy as the instrument to develop the zone becomes an urgency. Infrastructure
and bureaucracy play an important part as the strategy in attracting the investor. The
availability of human resources will be the factor influencing investors to come to one
country. Special economic zones create the effective and efficient framework to develop
region’s potential in a country. It makes the government more focus in approving some
incentives as the strategy to attack FDI leading to the economic growth. China has been
succeeding to impress the world with its remarkable economic growth and provide wide
range of benchmarking for other countries in developing special economic zones.

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