Entrepreneurial Environment in Chinas Free Trade Zones: Lessons To Be Learned

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Entrepreneurial Environment in Chinas Free Trade
Zones Lessons To Be Learned

• Paul Denlinger, China Business Strategy
  (www.china-ready.com)
• For
• VIII Latin American Free Trade Zones Conference
• San Juan, Puerto Rico
• Sept. 8, 2004

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Chinas Free Trade ZonesBackground

• Chinas first free trade zone was in Shenzhen,
  across border from Hong Kong
• Started 1978 under Deng Xiaopings reform
  policies
• Investment laws were different from rest of
  China allowing and encouraging foreign
  investment
• Chinese nationals needed special permission to
  live and work in Shenzhen

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Chinas Free Trade ZoneBackground Cont.

• First attracted light manufacturing from Taiwan
  and Hong Kong investors and businesses (shoes,
  toys, textiles, etc.)
• Deal Structure
• China provided labor, electricity, water
• Foreign partner provided capital and expertise
• Finished products were re-exported from Hong Kong

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Chinas Free Trade ZoneThe Advantage

• China has lots of cheap labor free trade zones
  provided employment opportunities
• Provided opportunity for Chinese to learn foreign
  technology and expertise, upgrade their skills
• Foreign partner was able to improve profits by
  lowering manufacturing costs

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Chinas Free Trade Zone The Story Today

• All of China is a free trade zone because of the
  success of the Shenzhen experience
• City and provincial governments compete with each
  other to attract investments
• Different cities, provincial governments have
  different priorities
• Wenzhou, for example, has much more private
  investment, and businessmen have reputation for
  being aggressive
• Chinese central government in Beijing defines
  strategic industries, but cities and provinces do
  not necessarily listen
• Projects over US30 million must be approved by
  Beijing

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Chinas Free Trade Zones Today

• China experimenting with trade and development
  zones in other parts of China, esp. north and
  west China
• In China today, there is too much investment in
  manufacture, leading to excess capacity
• China needs more in terms of services and
  commodities
• Can service businesses be organized into special
  zones?
• Why not?

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Success Factors

• China had cheap labor
• Foreign partners had expertise and capital
• The benefit
• Chinese learned and built up capital
• Foreign partners were able to increase their
  profit margins and lower manufacturing costs

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Lessons for Countries of Latin America

• Do not try to copy everything about the Chinese
  model
• It is impossible to compete with China on labor
  costs alone China will always be lower, and the
  quality is good
• Example Mexicos maquiladoras could not compete
  with Chinese on labor costs alone
• China is now worlds largest buyer of commodities
  and bulk goods
• Ask yourself the question What products/services
  do we have which can compete in the international
  market?
• Form joint venture companies with Chinese
  partners to sell your product to China and other
  markets
• Building trust is important and takes time be
  patient

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The Challenge

• Ask yourselves the questions How do we build
  value with our own limited resources? How can
  working with China and Chinese companies add
  value to those resources?
• The Chinese domestic market will only get bigger
  and stronger, and it will be huge
• Within 10 years, the Chinese consumer market will
  be bigger than US in most sectors
• This was how China, Taiwan, South Korea and
  Singapore started their success.

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Thank you!

• Reference The Truth About Doing Business in
  China 2004 (Report by Paul Denlinger). Special
  offer for conference participants. (Ask the
  hosts/Paul Denlinger)
• Paul Denlinger contact information
• Email pdenlinger_at_china-ready.com
• Visit the China Business Strategy website at
  www.china-ready.com and subscribe to China
  Business Express newsletter. Its free!