Investments in China - Avoiding the Pitfalls

Labor costs in China are on the rise, but thanks to an expanding consumer market and the growing purchasing power of domestic consumers, China remains one of the more attractive destinations for foreign investment. In the early days of the reform program that gradually opened up the market to foreign investors, much of the investment from abroad was in raw materials processing for export. But in more recent years foreign investors have moved into new areas, both in terms of the type of business they are in as well as geographic locations.

Choosing the most suitable investment area in the Chinese market remains a serious matter that calls for careful consideration. For foreign investors, China is a country of diverse regions with significant differences in terms of economic development, the types of industries, social composition, population density and the like. Choosing the right place for investment is one of the keys to success in Greater China.

Foreign investors should carry out market research on their market segment. They need to consider the adaptability of their projects to the chosen region. The current status of foreign investment illustrates this point. Generally speaking, if the investment is in the fast-moving consumer goods industry, most foreign investors would consider setting up joint ventures. In particular, production of some goods which require a relatively small distribution range, will mean a business location close to first-tier consumer markets. Yakult, the maker of the yoghurt drink of the same name, is an example; it has joint ventures in Guangzhou, Shanghai, Tianjin and Wuxi -- all of them near major consumer markets.

For foreign investors in the financial sector, they may be more inclined to set up offices in Shanghai, which is a global financial center. If foreign companies want to engage in venture capital activities, they might gravitate towards major cities such as Shanghai, Beijing, Tianjin or Shenzhen.

Foreign investment entities engaged in agriculture and fisheries would probably consider the unique geographic and resource characteristics of different regions.

Foreign investors should also look at the advantages of different regions where there are industrial clusters. For instance, there is a semiconductor industrial cluster in the Yangtze River Delta region represented by Suzhou, Wuxi and other places. With a US$7 billion investment by Samsung Electronics, Xi’an will develop into a new city with a semiconductor industrial cluster. If a city has a large number of enterprises in a single industry, there will be resource advantages in terms of attracting skilled workers and upstream and downstream enterprises capable of supplying resources and processing goods.

Furthermore, foreign investors need to examine the depth of talent pools in different regions. The Beijing-Tianjin-Hebei region, for example, takes Beijing and Tianjin as its core, while the Yangtze River Delta has Shanghai as its economic engine and the Pearl River Delta has Guangzhou and Shenzhen at its core. All of these regions have deep pools of skilled and semi-skilled talent. Foreign investors set up companies in these places where they can recruit suitable workers more easily. And some cities in the central part of the country enjoy significant advantages in terms of labor supply. Wuhan is one such place, boasting the biggest number of universities in the country, ranking first with a population of about 1 million college students and graduates. Such areas are worth considering as a place to invest.

In addition, foreign investors should consider regional transport. Foreign investors need to consider transport costs for a manufacturing operation, and many logistics firms offer widely different rates in different parts of the country.

Regional Policy Environment
Different policies in different regions or cities have different impacts on foreign investors. Therefore