It is recognized that the development of industries is critical for CBEZs to operate successfully. Thus, a major objective of CBEZ is to attract investments both from home and abroad (Li 2009). The potential of a region for attracting investment is determined by its locational advantage. By surveying firms in BEZs, the main factors attracting investment to the BEZs, and the effects of current investment incentive policies on investment decisions can inform the design of effective investment incentives for CBEZs. In the PRC–Viet Nam border area, the BEZs are relatively mature. In the PRC–Lao PDR and PRC–Myanmar border areas, some BEZs on the PRC side are well established; while BEZs on the Lao PDR and Myanmar side of the border are still under construction. Thus, the study focused on BEZs in Yunnan Province, PRC, and in Lao Cai Province, Viet Nam. The BEZs in these regions have a relatively long history and reveal the problems associated with current investment incentive policies, thus providing valuable insights for the development of CBEZs.
1.2 Objectives of the Study
The analysis will be based on the investment climate of BEZs, as none of the CBEZs is yet operational. Thus, policy implications for CBEZs will be drawn from the study of BEZs. The primary objectives of the study are to assess the investment climate, especially the incentive policies, and geographic location for investments in CBEZs in the PRC–GMS border areas; and to analyze their impact on regional production networks and economic diversification.
More specifically, the study will
i. assess the impacts of the investment climate in terms of infrastructure, factor endowments, governance, and incentive policies on firms’ decisions to invest in BEZs;
ii. draw policy implications for CBEZs; and
iii. analyze the possible impacts of cross-border investment on the local and regional economy.
1.3 Scope and Significance of the Study
The study covers the PRC, the Lao PDR, Myanmar, and Viet Nam. The major survey areas include Yunnan Province, the major cities on both sides of the borders of the PRC and its neighboring GMS countries, and some major industrial areas in Yunnan Province and neighboring GMS countries.
The effectiveness of incentive policies can be assessed at various levels, including its effects on (i) a firm’s decision to invest; (ii) the volume and quality of investments; and (iii) the macro economy, i.e., whether incentives created distortions in factor prices and markets. The study will focus on the effects of the incentive policies on the firm.
The study has the following significance:
First, the study of the effects of incentive policies on firms’ decisions to invest in SEZs will provide a basis for establishing the economic rationale for FDI incentives and SEZs, especially those at the border areas in the GMS. Establishing the economic rationale for SEZs is particularly important because in the PRC, SEZs were established to perform a special role in FDI promotion when the country opened up its economy. The SEZs function not only as vehicles for expanding exports, but also as laboratories where economic policy experiments are carried out in a geographically restricted area. The SEZs also function as government units, unlike other processing zones in Asia that are run by management boards. Given this particular context in the PRC, the research should be able to yield significant inputs for policy making.
Second, the project is of great strategic value to policy making. The study will identify obstacles to the implementation of incentive policies, and gather firms’ perceptions of existing policies and expectations for new policies. The results will provide a justification for policy improvement or new policy design, as well as for measures to be taken to overcome difficulties that are barriers to the implementation of existing policies.
Third, the study will identify elements of different countries’ policies that are in conflict with each other, if any, and compare the effects of incentive polices in different countries. The results will provide inputs for the promotion of economic cooperation between the PRC and its neighboring GMS countries, in particular, for the development of CBEZs.
2. Literature Review
2.1 Factors Affecting Investment
FDI is not only one means of affecting service trade, but it is also important in the production of goods. Under appropriate conditions, FDI can generate employment directly and indirectly, promote competition, improve the efficiency of host country workers, and transfer technology from one country to another (Goldin and Reinert 2007). FDI is usually associated with new job opportunities and enhancement of technology transfer, and it boosts overall economic growth in host countries (Chowdhury and Mavrotas 2006).
The theoretical foundation of FDI is rather fragmented, comprising bits and pieces from different fields of economics to elucidate the location pattern of firms (Sun 2002). Several theories have been put forward to explain FDI. Hymer (1960) views multinational corporations (MNCs) as oligopolist. FDI is considered to be the outcome of broad corporate strategies and investment decisions of profit-maximizing firms facing worldwide competition. Dunning (1977) and Rugman (1981) invoke transaction costs to explain firms’ internationalization, putting emphasis on the intangible assets that firms have acquired. Bhagwati and Srinavasan (1983) and Grossman and Helpman (1991) use the international trade theory to explain the allocative aspects of FDI. Dunning (1996) identifies four types of MNC activity: resource-seeking, market-seeking, efficiency-seeking, and strategic asset or capability-seeking.
In the early 1980s, no large FDI inflows to the PRC occurred because of poor infrastructure (OECD 2000); while during 1983–1991, a steady growth and relatively large inflows could be seen as the SEZs expanded from 4 to 14 cities, and FDI incentives were introduced in 1986 (Ali and Guo 2005). FDI began to pour in the PRC after 1992, and annual flows have been over $50 billion since 2002 (Yin 2008). A study by the World Bank (Broadman and Sun 1997) indicates market size and preferential policy as the two most important determinants of the location of FDI in the PRC (Hu and Wang 1999). Some other studies give more specific determinants, such as preferential tax status to foreign investors, lower tariffs, better infrastructure, more flexible labor markets, and less bureaucratic control (Panagariya 1993).
Sun (2002) identifies eight potentially important determinants of FDI distribution across provinces in the PRC. These are (i) market demand and market size; (ii) agglomeration, which refers to the concentration and co-location of economic activities that give rise to economies of scale and positive externalities; (iii) labor quality; (iv) labor cost; (v) level of scientific research; (vi) degree of openness; (vii) political risk; and (viii) FDI substitutes. Swain and Wang (1995), Liu et al (1997), Zhang (2000), Wei and Liu (2001), Zhang (2002), and others argue that the determinants of FDI inflows into the PRC, as identified by FDI theories, can be classified into three categories: micro, macro, and strategic determinants. Micro factors concern firm-ownership specific advantages, such as product differentiation and the size of the firm. Macro determinants of FDI emphasize the market size and the growth of the host country, which is measured by gross domestic product (GDP) and GDP per capita, since rapid economic growth may create large domestic markets and business opportunities. Other macro factors include taxes, political risk, and exchange rates. Strategic determinants refer to long-term factors, such as to defend existing foreign markets, to diversify firms’ activities, to gain or maintain a foothold in the host country, and to complement another type of investment.
Incentive policies are an important factor to consider, especially in developing countries (Sun et al 2002). FDI incentives include tax and other fiscal inducements, financial subsidies, and derogations