Business setup easy, navigating the murk harder
Print Edition
FOREIGN companies remain leery about the new Shanghai free trade zone because the rules surrounding its operation are often murky and its potential benefits hard to discern, according to people involved in the process.
“The process of actually setting up the company is quick and relatively straightforward,” said Dennis Scott, a director on the management council of Pudong International Talent City. “The problem is providing the information overseas individuals and companies need to make business decisions.”
Scott has been working with the Human Resources and Social Security Bureau of the Pudong New Area, the Pudong International Talent City and the Shanghai Zhangjiang Group to create a support platform for foreign companies thinking about entering the zone.
From its launch September last year to March 25, the zone has attracted 7,492 companies, but only 8.3 percent of them are foreign-funded.
Gray rules
Scott’s project includes creating case studies to troubleshoot the process. However, even with assistance from local authorities, he said, navigating the system is difficult.
“We have undertaken test cases on a range of potential new start-up businesses and have found it very difficult to determine the specific information needed in each case,” he said. “The policies, controls and available benefits are very dependent upon the intended activities and products of the proposed company.”
The gap between policy intentions and relevant business information needs to be bridged, Scott said. “Soft” issues, such as family relocation, schooling, accommodation, taxes and visas, also need to be addressed.
“The rules are gray, not black and white, with overlap between them,” he said. “The Chinese think this provides flexibility, thereby providing a business advantage. Overseas companies interpret this flexibility as uncertainty and hence business risk. It’s simply a difference in overseas and local cultural thinking.”
He said one of the major communications flaws is the lack of clarify about what benefits companies would derive by locating in the zone.
“There are supplementary incentives not presented formally through FTZ policies,” Scott said. “We must ensure the most attractive package of support and incentives is made visible to investors.”
He said clarity is important for the success of the zone, which was created as a national pilot project for further market deregulation.
“Remember, Shanghai is competing against not only other countries — including South Korea, Japan, Indonesia, Singapore and Malaysia — but also against other major cities in China,” Scott said. “Shanghai must capitalize on this pilot program before the same model is rolled out across China, possibly as soon as next year.”
While larger companies generally have the resources to grapple with policy interpretations, smaller businesses are being left out in the cold.
“We are focusing on overseas individuals and smaller companies that don’t have the resources to send a ‘scouting team’ to Shanghai,” he said.
Last month, Zhou Zhenhua, head of the municipal Development Research Center, was quoted as saying regulators might reduce the negative list in the zone by 40 percent in 2014. The negative list spells out which specific activities are not allowed in the zone. It replaces the vaguer, former system of listing which activities are allowed.
The zone’s administration said policies for the zone will be liberalized this year, along with plans to lower the entry and operating thresholds for certain industries.
Scott said policy changes, even ones presented as positives for businesses, are often perceived as problematic by foreign companies.
“The FTZ policies are being refined each month and, in the main, simplified,” he said. “The negative list of 1,000 items is being reduced, step by step. You would think this would be seen as positive. However, this policy simplification introduces uncertainty because people assume that future policy changes will come and that not all changes could be favorable.”
More liberal policies
Michael Cole, director of communications and publications for the American Chamber of Commerce in Shanghai, predicted that foreign interest in the zone will rise as policies become more liberal.
“The situation has improved,” he said. “More detailed guidelines provided by the government and indications of further liberalization are on the way. There hasn’t been a shifting of goal posts — at least not in terms of moving things further away from what investors are looking for.”
What remains unclear, he said, is how firms will ultimately benefit in the zone.
“The number of firms actually moving into the zone will be determined by the concrete advantages offered as regulations are finalized,” he said. “The major advantages of the zone are yet to come.”
Much of the disappointment over the zone results from overly high expectations at the start, rather than a failure on the part of policymakers, Cole added.
The trade zone covers 28.78 square kilometers in Pudong. Among its initial features are a switch to a business registration system that cuts the former approval process to four days from 29 days, and the shift to the negative list.
The original blueprint released by the central government outlined 23 policies to further open up the services sectors in industries such as finance, shipping, legal services, the cultural industry, education, healthcare and value-added telecommunications.
Since February, policies restricting nonbank borrowing and interest rate ceilings have been eased gradually.
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