SHANGHAI retains its allure as a destination for foreign investment, bucking a nationwide trend of declining overseas capital flows. But here is little room for complacency.

In March, the city had more than a 40 percent year-on-year surge in foreign direct investment, while China as a whole suffered its fifth consecutive monthly decrease.

Some analysts attribute Shanghai's good fortune to the magnet of the huge Disneyland theme park under construction in the city.

They warn, however, that the aura of Mickey Mouse and Donald Duck is no guarantee that Shanghai will continue to be immune to a global economic slowdown that is causing investors to tighten their belts and competitors in other emerging markets to redouble the chase for foreign capital.

The humbling fact remains that Shanghai's first quarter growth of 7 percent was among the slowest of all China's provinces and provincial-level municipalities. That suggests more needs to be done.

One of the biggest challenges Shanghai faces in keeping itself competitive in the foreign investment sweepstakes is rising production costs.

During a seminar with a Norwegian business delegation last month, one official from the solar-products industry posed a telling question: "Why on earth should I outsource my business to Shanghai when the costs are almost the same as in my homeland, if you take transportation into account?"

Many overseas investors are beginning to feel that way. China, hailed as "the factory to the world," is rapidly losing its luster where cheap production is concerned. In big cities like Beijing, Shanghai and Guangzhou, labor costs have risen to almost world average levels.

Business people don't make decisions based on charity. They want returns. China once delivered them big profits. Can it still do that?

Direct foreign investment in China in March fell 6.1 percent from a year earlier to US$11.7 billion, worsening from February's 0.9 percent drop. Just 12 months earlier, such investment was up almost 33 percent.

Shanghai looked exceptional in the data. In March, foreign investors channeled US$1.3 billion into the city, a whopping 46 percent gain.

In the first quarter, foreign investment increased 29.2 percent to US$3.3 billion, making it among the best performers among China's provinces and municipalities.

Based on such encouraging signs, the Shanghai government released an ambitious target for foreign investment of at least US$10 billion a year between now and 2015. It is forecasting that 150 multinational companies will locate new regional headquarters in the city, adding to the 370 already here.

Shanghai also unveiled a grand blueprint to try to channel investment into areas it considers key to its economic restructuring: information technology, high-end machinery, biotechnology, alternative energy, advanced industrial materials, environmental protection, green vehicles, finance, logistics and tourism.

Unfortunately for Shanghai, these are some of the same sectors that other countries have placed high on the priority list of their own economic development.

India is strong in information technology. Germany is a veteran in manufacturing machinery. France is good at developing new energy products, and the US is virtually advanced in everything. Why should investors choose Shanghai instead of anywhere else?

Gateway to inland

Well, one reason comes to mind. Shanghai can serve as an efficient gateway to the inland Chinese market with its vast untapped potential. The city has traditionally been a starting point for foreign companies wanting to do business in China.

It enjoyed a good reputation among foreign investors for the transparency of its commercial laws and regulations, for its large pool of skilled labor, for its convenient transportation and for its educational and medical amenities.

On a more personal level, Shanghai people are renowned for their hospitality toward foreigners, and many can speak English, Japanese, French, Russia or Spanish.

I heard of cases from friends in the Shanghai Commission of Commerce where multinational companies have returned to Shanghai after enduring less-than-favorable experiences in inland cities. They had left Shanghai in search of cheaper production costs but found that such price advantages come at other, sometimes intangible, costs.

One simple example. A foreigner taking a standard taxi ride is much less likely to be overcharged in Shanghai than in other cities. In far-flung places like the northeastern city of Harbin, there are tales of cabbies dumping passengers who won't pay more.

It's nice to rest on laurels but also dangerous.

In the five years to 2011, Shanghai attracted US$46.7 billion in foreign investment, roughly US$9.3 billion on average each year. From that perspective, the goals set for the current Five-Year Plan through 2015 look a bit overly ambitious. To realize its goals, the city needs to work harder to make itself an even more attractive magnet for investment. It is striving to do that.

Ambitious plans

Municipal officials are undertaking ambitious plans to reshape underdeveloped areas into major projects such as the Hongqiao Business Zone, the Pudong post-Expo Business Cluster, the North Bund area and Lingang New City.

Shanghai is also working hard to recast itself into a global financial center. Nothing attracts money like a money center. The planned International Board in Shanghai, which will allow foreign companies to list in yuan-denominated shares, will certainly be a source of further capital incentive. Programs allowing foreign funds to invest in yuan-denominated assets have been expanded, and new futures and derivatives markets will provide diversified channels of investment.

Foreign investors are being invited to join in the growth of venture capital, equity investment, financial leasing, financial guarantee and other programs.

Which all brings us back to Disneyland. It was a coup for the city to get the first Disney theme park on the mainland. Construction there and development around the site have been a big shot in the arm for capital inflows. But what happens next?

As the late Walt Disney once said: "All our dreams can come true, if we have the courage to pursue them."