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July 1, 2024

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City beckons foreign investors with ever-improving business environment

The steady improvement of Shanghai’s business environment, particularly in terms of creating legal infrastructure to protect investor interests, is making the city even more attractive to foreign investors.

This observation was shared recently by Sun Lixing, a researcher at the Institute of World Economy of the Shanghai Academy of Social Sciences, in a interview.

“There have been unsubstantiated allegations about the transparency of China’s business operating regime, and about policy consistency, but my field research suggested that Shanghai’s appeal to foreign investors and multinational companies remains unchanged,” Sun said.

Sun said that, given the steady improvement of the city’s business environment, foreign investors are well aware that as China beefs up its protection mechanism for foreign investors, there are more reasons for investors to stay upbeat.

Sun conceded that some investments have been withdrawn as a result of international political disturbance, particularly in terms of the rhetoric for decoupling from China, or even blockades, but this should be viewed in the larger context of the city’s aspiration for optimized composition of foreign-invested companies, with growing stress on overall quality of the investment.

Specifically, one of the inducements for early investors in China used to be the considerable costs savings in production, labor, land use and environmental compliance. Today, with China’s commitment to green development, green investment, and green financing, the message is sinking in for foreign investors that, to stay in the game in China, it is of critical importance for them to come up with differentiated products of high quality, followed by competitive services.

“As a consequence, if you scrutinize the investment data, it would not elude you that some of the foreign enterprises are actually beefing up their Research and Development presence,” Sun said.

This should also be viewed through the prism of the city’s commitment to optimizing the clearance procedures for R&D materials, support for legitimate cross-border flow of R&D data, stepped-up financial support, and stricter protection of intellectual property rights.

The city has long been exemplary in creating incentives for talent, and in drafting more favorable fiscal and tax policies for foreign R&D entities.

Sun also pointed to an observable paradigm shift in foreign investment, with investors increasingly favoring joint venture schemes.

“This cooperation with local enterprises could help them adapt to the fast-changing local markets and aligning with local regimes and protocols, so as to minimize the compliance costs in their operations,” Sun said.

Sun said there had been a migration of some enterprises from China to Southeast Asia as a result of costs, but it was interesting to see that some of these businesses are returning.

“Although they might not return to the coastal east, given the higher aggregate costs, it does point to a simple fact: China is not easily replaceable given its well-developed manufacturing infrastructure and its sophisticated supply chains,” Sun concluded.

Another factor driving this return was the lack of skilled labor forces elsewhere, which prevented investors from achieving added value accruing from quality and technological improvements, a handicap that limited the returns on their investment.

In time, persuaded that labor cost savings in Southeast Asia might not compensate the inadequacy in overall infrastructure, some came to the inevitable decision of returning to China, albeit to second-tier or third-tier cities, he said.

All these factors should be viewed in the perspective of steadily improved foreign investment laws enabling foreign companies to seek development here on an equal footing with their Chinese counterparts, and greater protection of IPRs, including the legal infrastructure for dealing with IPR conflicts rapidly.

In these aspects, the China (Shanghai) Pilot Free Trade Zone has played a pioneering role in creating a host of policies and legal setups for foreign investment, not least in creating a category regime for cross-border data transfers whereby export of data outside the catalog does not merit security assessment.

Sun agreed there was still room for improvement, for instance in helping foreigners more in terms of their sense of engagement, fulfillment and satisfaction.

Addressing these issues would entail efforts along three lines — further dismantling of administrative hurdles, further opening up, and an improved legal infrastructure.

“We often talk of granting foreign investment pre-establishment national treatment, but the policies and services they could access in their routine operations are also important, for entry is not the same as unhindered routine operations,” Sun said.

Some hidden obstacles, Sun said, are driving up the compliance costs for foreign investors.

Hence the need to set up a regular monitoring regime that reflects the genuine perception of foreign investors, in the hope of facilitating investment, with higher administrative efficiency, and more standardized government services, all within a well-defined legal infrastructure.


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