Business Environment in Shanghai

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Enterprises that want to invest in China can stumble over an array of regulations that do not give them free choice of where they wish to locate. This situation has been changing, and China's membership in the World Trade Organization (WTO) should act as another catalyst to make the investment climate freer in several industries. Enterprises can look forward to making decisions on where to locate within China based on factors that they would use in the more-familiar open environment. To appeal to businesses, cities need a good IT infrastructure, strong leadership, incentives, and "livability" (see Figure A).

Figure A

The size of China's market and Western enterprises' desire to get close to it means that Chinese cities do not generally compete for foreign investment with cities in other Asia/Pacific countries. Outside the manufacturing sector, most enterprises locate in China because they want to sell to China.

Of all China's cities, Shanghai has gone furthest toward the success factors for a global "smart city." Its ambition to become a major financial center and player on the international stage by 2015 has fueled this drive. History has also given Shanghai many advantages. It is probably the most outward-looking of any Chinese city and has a strong political voice in Beijing. The latter has allowed Shanghai to lead the way in many initiatives because China's political leaders often use the city to test out new ideas. As a result, many initiatives that started in Shanghai have now spread elsewhere in China.

Shanghai's characteristics
To most Western expatriates, Shanghai is perhaps the most livable of Chinese cities. The city continues to make strides to improve (e.g., announcing new rules to allow foreigners to buy property for the first time). Measured against other big cities such as Singapore, Hong Kong, or Sydney in the Asia/Pacific region, Shanghai still scores low. From a global perspective, livability is one of Shanghai's weakest areas. However, livability has a large subjective component, and what appeals to Western tastes may not rank as important to the skilled Chinese workforce that an enterprise might what to attract.

Shanghai has traditionally enjoyed a sizable chunk of foreign investment into China, in part because of its position as a testing ground for reform. In some cases, China has forced foreign investors to set up in the city first. This advantage will diminish, and Shanghai will need to learn to play on a more-level playing field.

The city has committed to spending, by 2005, 150 billion yuan (one-third of its total industrial investment) on expanding its high-tech sector. This investment targets software and integrated circuit manufacturing, and the city will provide some tax breaks for new operations and help for self-employed software designers. Keeping costs low is key in attracting new business. Shanghai will have to balance the inevitable rise in labor costs with suitable business incentives.

Shanghai's leaders know where they want to go during the next 10 or 15 years and what basic things they need to do to get there. However, they did not develop this vision in partnership with business or the community. Rather, as a command economy, decisions have been made by a select few behind closed doors. Thus, its leaders have greater ability to get things done quickly than leaders in democratic societies often have. Cities such as Shanghai can complete projects without long internal or public debate over infrastructure projects that might take years in the planning stages in other countries and involve a myriad of agencies.

Shanghai has benefited tremendously (certainly compared to the rest of China) from the pedigree of its leaders. President Jiang Zemin and Premier Zhu Rongji are former leaders of Shanghai and have strongly supported the city.

However, Shanghai knows that spending does not necessarily produce results. Ten years...
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