November 2007
PRM Policy NoteSeries No. 2Pakistan Resident Mission
Special Economic Zones and CompetitivenessA Case Study of Shenzhen, the People's Republic of China
Wanda Guo and Yueqiu Feng
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The PRM Policy Note Series is based on papers and notes prepared by PRM staff and resource persons. The series is designed to provide concise non-technical accounts of issues of policy importance to Pakistan. Feedback is welcome via e-mail ([email protected]).
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The views expressed in the series are those of the authors and do not necessarily reflect the views or policies of the ADB.
Pakistan Resident MissionAsian Development Bank1st Floor, OPF BuildingSharah-i-Jamhuriyat, G 5/2Islamabad. Pakistan© 2007
PRM Policy Note Series Review Committee
Chair:Peter L. Fedon, Country Director, Pakistan Resident MissionAsian Development Bank
Members:Emma Xiaoqin Fan, Senior Public Resource Management SpecialistSafdar Parvez, Economist
Coordinator: Khurram Butt
PRM Policy NoteSeries No. 2Pakistan’s Resident Mission
Dr. Wanda Guo is vice-president of the China Development Institute (CDI), and Ms Yueqiu Feng is director of the CDI's International Cooperation Department. This paper was presented at the Pakistan Development Forum in April 2007. The authors thank Peter L. Fedon, Emma Xiaoqin Fan, and Safdar Parvez for comments and suggestions; Maheen Pracha for copy editing; and Khurram Butt for coordinating the publication of this issue.
November 2007
Wanda Guo and Yueqiu Feng
www.adb.org/prm/publications.asp
Special Economic Zones and CompetitivenessA Case Study of Shenzhen, the People's Republic of China
Contents
Abbreviations
1 Introduction 1
2 SEZs compared to Industrial/High-Tech Parks 3
3 The Development of the Shenzhen SEZ 5
4 Factors Underpinning Shenzhen's Success 7
5 Key Policies Contributing to Shenzhen's Industrial Competitiveness 9
6 Conclusion 11
ADB Asian Development Bank
FDI foreign direct investment
GDP gross domestic product
PRC People's Republic of China
PRM Pakistan Resident Mission
SEZ special economic zone
Abbreviations
(i) In this paper, "$" refers to US dollars.
1
1. Introduction
Special economic zones (SEZs) have played an important role
in advancing economic reform in the People's Republic of
China (PRC) and, particularly, in opening up its economy to the
rest of the world. The Shenzhen SEZ was the first SEZ to be set
up in the PRC. Over the past few decades, Shenzhen has
developed from being a small fishing village in Guangdong
Province into a major industrial and financial center, benefiting
substantially from the liberal economic policies granted by the
Central Government to SEZs. Shenzhen's rapid development
has showcased the advantages of “open door” policies and
market-oriented reforms, served as a “laboratory” for piloting
policies, and propelled economic development in the rest of
the country.
This policy note briefly documents the experience of Shenzhen
and analyzes the factors that have contributed to its
emergence as a successful SEZ. There are useful lessons to
be drawn from Shenzhen's experience by countries such as
Pakistan in designing their economic reform policies. The
major findings of this policy brief are summarized below.
The experience of Shenzhen has demonstrated the important
differences between a “special economic zone” and an
“industrial/high-tech park.” A SEZ is a comprehensive
laboratory in which fully fledged economic reforms can be
piloted, while industrial parks are a supporting component of
SEZs, but with an industrial focus. SEZs in the PRC are
authorized by the Central Government and cover large
administrative areas such as an entire province or a city. In
contrast, industrial parks are authorized by provincial and
municipal governments, and generally encompass only part of
a city. There are over 1,500 industrial parks in the PRC, but only
7 SEZs. In this sense, few countries in the world have SEZs,
while most have industrial parks. Too often policies of setting
up isolated industrial parks lead to the development of
enclaves which are unable to propel sustained economic
growth. Given the importance of SEZs in testing and
showcasing the success of economic reforms, the PRC's
experience on SEZs sheds light on the concept and potential
of SEZs for other developing countries.
The success of Shenzhen further demonstrates the
importance of an enabling policy environment. In particular,
Shenzhen's experience indicates the benefits of open and
market oriented economic polices. Indeed, Shenzhen has
enjoyed by far the most open and market-oriented economic
policies in the PRC. This has attracted not only young and
skilled migrants from across the country, but also large inflows
of foreign direct investment (FDI), transforming a small village
into a financial and industrial hub. This openness to both
financial and human capital has promoted fast economic
growth, which has, in turn, been beneficial for generating
employment, improving people's livelihoods, and reducing
poverty.
Shenzhen serves as a good example of how industrialization
and urbanization can act as catalysts for economic
development. By implementing comprehensive economic
reforms, SEZs ultimately unify the industrialization and
urbanization processes.
2
2. SEZs compared to Industrial/High-Tech Parks
SEZs were established in the PRC as early as 1980. The
Central Government has so far only authorized seven SEZs.
These are occasionally referred to as the ”4+2+1,” where (i)
”4” refers to the first group of SEZs that were authorized in
1980-Shenzhen, Zhuhai, Xiamen, and Shantou; (ii) ”2“ refers to
the new Pudong district in Shanghai and Hainan province,
both authorized as SEZs in 1990; and (iii) ”1“ refers to the
Newly Developed Area of Tianjin Binhai, which was authorized
in 2006.
The key differences between SEZs and industrial/high-tech
parks are outlined below.
(i) Essentially, a SEZ is an administrative division: it can span
an entire province, such as Hainan; entire cities, such as
Shenzhen, Zhuhai, Xiamen, and Shantou; or even part of a
large city, such as Shanghai's Pudong district and Tianjin's
Binhai's Newly Developed Area. Industrial and high-tech
parks, on the other hand, are often part of a city or province
and are not organized as separate administrative
divisions.
(ii) SEZs in the PRC tend to cover large geographic areas.
Shenzhen, for instance, spans nearly 2,000 square
kilometers (km); Shanghai's Pudong district is 522 square
km; and Hainan, 34,000 square km. Industrial parks,
however, rarely average more than 10 square km.
(iii) A SEZ in the PRC is intended specifically as a pilot area in
which comprehensive economic reforms can be carried
out and the zone opened up to the rest of the world
economy. It is thus mandated to “experiment,” and
accorded the ”the right to experiment” by the Central
Government. This is equivalent to granting a SEZ a high
degree of autonomy in implementing economic policies.
3
(iv) The PRC’s SEZs are located in coastal areas with easy
access to ports and transport networks. Moreover, they
are specially set up in areas adjacent to the PRC's
“internationalized” cities, economic hubs, or neighboring
countries. Shenzhen borders Hong Kong, China; Zhuhai
borders Macao; Xiamen adjoins Taipei,China; and the
Tianjin Binhai Newly Developed Area borders Japan and
the Republic of Korea. In contrast, the PRC's industrial
parks are less bound by the geography of existing hubs
and are located either in coastal areas or the interior
provinces.
(v) Finally, SEZs are subject to “preferential policies” on land,
taxation, customs clearance, the use of foreign capital and
profit repatriation by foreign investors, imports and
exports, finance, and logistics. Such policies may be
applied in many industrial parks following the practices of
SEZs, but generally only after they have been “tested” in a
SEZ.
The subsequent sections use the Shenzhen SEZ as a case
study to illustrate how preferential policies and the advantages
of location have substantially improved its industrial
competitiveness.
4
3. The Development of the Shenzhen SEZ
On 26 August 1980, as one of the important measures carried
out to implement the PRC's new “open door” policy, the State
Council of the PRC approved the establishment of the
Shenzhen SEZ, making it the PRC's first SEZ since the
country's independence in 1949. During the last few decades,
Shenzhen has developed at a phenomenal pace, now
famously referred to as “Shenzhen speed.” From 1980 to 2005,
the average annual growth rate of the gross domestic product
(GDP) of Shenzhen was 27%. This growth can be divided
roughly into three stages: (i) from 1980 to 1986, which was
characterized by an annual average growth rate of 44%; (ii)
from 1987 to 1995, when GDP grew at an annual average rate
of 29%; and (iii) from 1996 to 2003, when it grew at 19%
annualy .The growth rate recorded in 2006 was 15%. To date,
Shenzhen is still one of the largest and the most successful
SEZs in the PRC.
Shenzhen is located on the country's southern coast, adjacent
to Dapeng Bay in the east, the Pearl River estuary in the west,
and Hong Kong, China lying close to its southern perimeter.
The total area of Shenzhen is about 2,000 square km and it has
a population of about 12 million. Shenzhen consists of seven
districts: Bao'an, Futian, Longgang, Luohu, Nanshan, Shekou,
and Yantian.
In 2006, Shenzhen's total GDP was $71.3 billion, ranking it
fourth among the PRC's rapidly growing cities, and very close
to the third-ranked city, Guangzhou. Shenzhen's GDP is
expected to exceed that of Guangzhou in 2007; it is almost half
that of Hong Kong, China. In 2006, Shenzhen's per capita GDP
was ranked first in the country at more than $8,619 compared 1with the national average of about $2,000 . Shenzhen can thus
5
1 These figures are measured at current dollar prices.
be regarded as one of the richest cities in the PRC.
Since 1979, Shenzhen's industrial base has continued to grow
rapidly. The average annual growth rate of industrial value-
added was 40.2% between 1980 and 2004. In 2005, Its ratio of
primary to secondary to tertiary industries was 0.2 : 53.2 : 46.6.
The area's industrial structure has undergone three key
transformations: (i) from traditional industry to hi-tech industry,
(ii) from small-scale and scattered operations to large-scale
and group-based companies, and (iii) from assembling and
processing to independent manufacturing. This industrial
structure is concentrated in certain sectors that account for
large shares. In 2005, telecommunications, computers, and
electronics accounted for almost 60% of the total industrial
output in Shenzhen.
Firms in Shenzhen have gradually established their own brand
names. By the end of 2005, there were five Shenzhen brands
with sales of more than Yuan10 billion (about $1.25 billion).
Many well-known brands have emerged from the areas of
telecommunications equipment, computer and related
products, digital audio and video, flat panel display
equipment, software, biomedicine, and the apparel sector.
Huawei and Zhongxing, both large manufacturers of electronic
and telecommunications equipment in Shenzhen, have
become major suppliers in this sector not only in the PRC but
also world wide. Since 1996, China International Marine
Containers (Group) Ltd. has ranked first in terms of container
output, accounting for more than 30% of the total share of the
world market. The output of micro-motors accounts for about
10% of the world's total.
Shenzhen remains an attractive destination for foreign
investors. In 1979, the actual use of foreign capital amounted
to $153.7 million; by 2006, it had reached $3.3 billion.
International companies of office automation in Shenzhen
6
include Ricoh, Toshiba, Epson, Copier, and Xerox. Their
“Shenzhen plants” generate a total output equivalent to about
21% of the world's total outputs by these companies. Other
major investors include Wal-Mart, Compaq, Sony, Intel, IBM,
and Siemens. In all, 141 of the world's top 500 multinational
companies have currently invested in Shenzhen.
7
4. Factors Underpinning Shenzhen's Success
Many factors have contributed to the success and
competitiveness of Shenzhen, some of which are discussed
below.
First, and most importantly, the Central Government has
provided a special policy framework for the Shenzhen SEZ that
has helped to create a “soft enabling environment” to enhance
the city's industrial competitiveness. As a SEZ, Shenzhen has
enjoyed by far the most liberal economic policies in the PRC,
both in terms of attracting FDI and engaging in international
trade. As a result, the actual utilization of FDI increased by 10%
annually from 1980 to 2006, the value of exports reached
$136.1 billion in 2006, while imports reached $101.7 billion.
Shenzhen has been a testing ground for comprehensive
reforms. For example, it was one of the first cities to apply
differential corporate tax rates for foreign and domestic firms.
While foreign investors paid a nominal tax burden of 15% and
an actual tax burden of 11%, the corresponding figures for 2
domestic investors were 33% and 23%, respectively . In other
words, the tax burden of domestic enterprises was twice that of
foreign investors' enterprises. In 2007, the PRC carried out
reforms to unify the two tax rates, which eliminated the
preferential tax rate of 15% for most enterprises. However, this
tax rate still applies to the hi-tech sector and small enterprises
in the city. An open and liberal policy environment is the most
important reason behind Shenzhen's success.
Second, Shenzhen has been home to migrants from across
the country and, more recently, from overseas. The innovative
spirit of the city stems in part from its vibrant and strongly
motivated migrant community. Migrants account for 83% of the
8
2 The actual tax rates take into account tax rebates, tax holidays, and other benefits provided to firms.
total population. Shenzhen's demographic profile favors
economic development, given that 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%.
Third, Shenzhen's enabling financial environment ensures that
finance is available even for relatively risky ventures. This has
been important for the city's industrial transformation,
increasing its competitiveness. Indeed, Shenzhen is the PRC's
most active city as far as the availability of venture capital is
concerned. By the end of 2005, the number of venture capital
firms in Shenzhen accounted for one third of the total number
in the whole country. The city also houses the Shenzhen Stock
Exchange, the Shenzhen Small and Medium Sized Enterprise
Guarantee Center, and other critical financial architecture.
Fourth, there is well established infrastructure in Shenzhen.
Shenzhen's harbor ranks fourth in the global container
transportation business, and Shenzhen's airport ranks third in
PRC, with 18.4 million passengers in 2006. The supply and
qual i ty of other infrastructure, such as roads,
telecommunications, and utilities, also rank highly in the PRC. All
of these conditions have built a favorable logistic environment for
the upgrading of industrial competitiveness in the city.
Fifth, Shenzhen enjoys the advantage of location. As a coastal
city bordering Hong Kong, China, Shenzhen's bid to upgrade
its industrial structure and competitiveness has benefited
hugely from its proximity to Hong Kong, China as a major
international financial, information, and services center. A large
share of investment to Shenzhen has come from Hong Kong,
China, especially during the early years of Shenzhen's
9
development.
Finally, the Shenzhen government is efficiently run, and apt to
continuously reform and upgrade its administrative capacity.
The government has provided “convenient services,” through
direct one-stop services for large enterprises. Administrative
transparency has improved over the years to strengthen the
government's accountability. For instance, a development plan
formulated by the Shenzhen government must be submitted to
the People's Congress for approval. At the same time, local
opinion is sought and encouraged to increase the
transparency and effectiveness of the government decision-
making process. Business procedures in Shenzhen are simple
and streamlined. The Shenzhen government has also
implemented personal service responsibility to ensure that
firms' applications for various categories of government
approval are processed within a specified period of time.
Business approval procedures are currently under review and
are expected to become even more business-friendly in the
near future.
10
11
5. Key Policies Contributing to Shenzhen's Industrial
Competitiveness
One of the most important factors helping to facilitate
Shenzhen's industrial transformation has been its ability to
attract foreign investment, which undoubtedly lies behind
much of the upgrading of the city's industrial structure and
competitiveness. Output from foreign invested firms account
for more than 40% of Shenzhen's GDP. Over the last few
decades, FDI policies in the PRC, and especially in its SEZs,
have become increasingly liberal. These include: (i)
permission to set up wholly foreign-owned firms, (ii) enabling
easier access to land and infrastructure, (iii) allowing the
repatriation of profits, and (iv) favorable export and import
polices.
While FDI inflow was earlier concentrated in labor-intensive
and small-scale operations, increasingly large multinational
corporations from technology-intensive industries have begun
to enter the PRC. To upgrade its industrial structure, the
Shenzhen government has formulated a strategy to develop a
“headquarter” economy by inviting multinational companies to
move their headquarters into Shenzhen. This strategy consists
of:
(i) formulating systems to certify the headquarters of
manufacturing companies,
(ii) stipulating preferential measures to attract the
headquarters of multinational corporations, and
(iii) streamlining government procedures and enhancing
government services for companies who choose to locate
their headquarters in Shenzhen.
Third, industrial parks are an integral component of the
Shenzhen SEZ. There are about 100 industrial parks located in
12
the city, more than 90% of these located outside Shenzhen 3checkpoint , and about 70% based in villages and small towns.
Shenzhen plans to integrate the existing parks and develop 52
larger parks.
Fourth, Shenzhen encourages the formation of industrial
clusters or concentrations to benefit from economies of scale
and scope. Various industrial clusters have been formed in the
city, including clusters for the garments, bicycles, furniture,
and semi-conductor industries. All these clusters have gained
substantially from economies of scale and scope.
Fifth, in the last 3 years, in order to upgrade its industrial
competitiveness, the Shenzhen Municipal Government has
proposed policies to develop a recycling economy, with the
aim of improving the city's environment and saving resources.
On 16 March 2006, Shenzhen passed its Recycling Economy
Promotion Rules, enforcing more than 10 key procedures and
systems to assess a firm's mid and long-term performance
and planning, and to provide government procurement and
policy support for developing industries that are
environmentally-friendly and energy-efficient.
Sixth, in order to improve industrial competitiveness, the
Shenzhen Government has decided to implement a new
innovation strategy in early 2006. The aim is to structure
Shenzhen 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.
3 There are 9 checkpoints in Shenzhen. They were set up at the time when Shenzhen SEZ was established. The PRC Central Government gave Shenzhen a special policy to circle the area with wire to reduce the management pressure of the border, which was connected with Hong Kong, China. People who are not permanent citizens of Shenzhen must have a certification issued by the Police Bureau to enter Shenzhen. Since the space for development within the checkpoint, which is also where the city center is located, is quite limited, most of the industrial parks are set up outside.
13
6 Conclusion
What can Pakistan learn from Shenzhen's experience of
rapidly increasing its industrial competitiveness?
Since the Industrial Revolution, economic development has
been driven primarily by (i) industrialization, and (ii)
urbanization. The development experience of Shenzhen
shows that the development trajectory of developing
economies also needs to proceed along this arc. In the late
1960s, Hong Kong, China; Singapore; the Republic of Korea;
and Taipei,China made considerable progress in
industrialization and urbanization. They serve as good
examples and models demonstrating how industrialization
and urbanization can act as catalysts for the process of
economic development.
A key factor in facilitating the industrialization and urbanization
processes, however, is the provision of open and liberal
economic policies. Industrialization and urbanization have
taken place in the PRC in parallel with its transition from a
planned to a market economy. A driving force in this
transformation has been the implementation of economic
reforms opening up the country to the world economy. In the
process, the question of how to continually promote
sustainable economic development and upgrade industrial
structures in tandem with urbanization has become a
significant issue for the whole country. From this perspective,
Shenzhen's ability to undergo rapid industrialization and
urbanization in a short span of time serves as an illuminating
example, not only for PRC, but also for other developing
countries.
The experience of Shenzhen has also demonstrated the
important difference between a SEZ and an industrial/high-
tech. The key point is that SEZs ultimately regenerate the
unification of the industrialization and urbanization processes
through comprehensive reforms. This is a critical lesson for
Pakistan as it embarks on economic reforms and
development. Too often policies of setting up isolated
industrial parks lead to the development of enclaves that fail
to propel sustainable economic growth. Shenzhen has the
most open policy in the PRC for accommodating and
attracting migrants from all over the country. It has also been
open to foreign trade and foreign capital inflow, especially
FDI. The openness to both financial and human capital has
promoted fast economic growth. This, in turn, is beneficial for
generating employment, improving people's livelihoods, and
reducing poverty. In Shenzhen, the comprehensive reforms
implemented in the SEZs by the Central Government have
been supplemented by the local government's open and
business-friendly policies, proving a powerful combination of
forces driving economic growth and development.
14
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