High-tech plan benefits foreign
firms By Federico Bordonaro
Beijing recently approved China's 11th
Five-Year Plan, setting out the country's goals
for national economic and social development
through 2010. The one aspect of the plan that has
perhaps attracted the most international notice is
its goal of upgrading and boosting China's
high-tech industrial structure.
As the
People's Daily stated on March 8, this ambitious
aim will be pursued through "the extension of
high-tech industries from processing and
assembling to independent research and development
[R&D] and advancement of [the] independent
commercialization" of innovations. As a
consequence, "a series of
leading industries with core
competence should be formed, a group of industrial
bases with concentration effect [ie, sufficient
critical mass to be internationally competitive]
and a batch of transnational high-tech companies
should be established, and a raft of brand names
[with] proprietary rights should be raised".
In light of China's economic success in
recent years, major corporations around the globe
appear optimistic regarding their chances to take
advantage of this new drive for high-tech
investments, incentives, and industrial
strategies. Thus not only knowing how to compete
successfully with other contenders, but also
knowing how to move in accordance with China's
market rules will be key factors for global
technology players in the years ahead.
Crucial shift A scientific
approach to R&D - aimed at enhancing
innovation in high-tech sectors - is a central
feature of Beijing's new industrial policy. A
crucial change is thus discernible in China's
approach to its economic growth. Whereas its quest
for development had traditionally been based on
exports and labor-intensive production with a low
value-added, President Hu Jintao's administration
is now determined to make China a world leader in
scientific research and high-tech production.
In other words, as Minister for Science
and Technology Xu Guanhua declared, "China is
trying to transform itself from a manufacturing
center into the world's top inventor." Xu also
explained that innovation is the only way to
achieve Beijing's economic and environmental
goals: to quadruple individual incomes by 2020
while simultaneously tackling pollution with
greater use of alternative energy sources, which
will have the side-effect of decreasing the
country's dependence on foreign powers.
Information technology, biotechnology,
energy, telecommunications, satellites and
aerospace as well as new-materials research will
all benefit from Beijing's new plan.
A set
of new policies will thus be implemented over the
next five years: among these, funding for
high-tech enterprises and research institutes,
along with the availability of credit on special
easy terms, will obviously be imperative. In
particular, Beijing intends R&D spending to
rise from its present level of 1.23% of gross
domestic product to 2.5% by 2020.
What
will sound particularly sweet to global investors
and producers is that Beijing is perfectly aware
that attracting massive foreign investments to
boost the new expanding sectors will be required
for the plan's success.
Clearly, the
government is trying to create a
foreign-investor-friendly environment, but at the
same time, it must require global players to
assure effective management and rigorous use of
funding. The plan explicitly foresees incentives
for foreign groups prepared to invest in R&D
centers for cutting-edge technology. Even more
important, corporations willing to cooperate with
Chinese universities, scientific institutions and
enterprises will be particularly welcomed.
The plan's guidelines were not unexpected.
China's attempts to attract foreigners to advance
its R&D capabilities and institutes had
already begun in the last decade. But hesitations
due to inadequate safeguards for investments -
linked to an often unpredictable legal environment
- have somewhat hampered a real boom in this
sector up to now.
To secure the new
policy's success, it can thus be expected that
Beijing will now act more vigorously to provide
better protection for foreign corporations'
copyrights, and also to improve legal guarantees
and assure equitable treatment, so as to make
investments in the country more attractive.
A quick look at local-government
industrial policies in various regions of China
further confirms the central government's
commitment to its "charm offensive", aimed at
boosting high-tech foreign investors. In this
regard, tax incentives are one of the most popular
tactics.
The town of Zibo, in the
northeastern province of Shandong, for instance,
sends out an appealing message to global players:
For newly established manufacturing
enterprises, if the project [conforms] to the
high-tech product catalogue promulgated by the
central government or the investment in fixed
assets is over 100 million yuan (or US$10
million investment abroad), [starting] from the
date the company is making [a] profit, in the
first five years, all the local portion of
income tax shall be totally refunded to the
company by the local government as supportive
capital.
And that is not all: "For
newly established foreign invested projects, if
the project [conforms] to the high-tech product
catalogue promulgated by the central government or
make[s] great contributions to Zibo's economy, the
local government shall refund a certain percentage
of the local part of the land-transfer fee to the
company."
Another example is the Kunshan
Economic and Technological Development Zone (east
of Kunshan city in Jiangsu province), which
has decided, in keeping with the Detailed Rules
for the Implementation of the Income Tax Law of
the People's Republic of China on Foreign
Enterprises and Enterprises with Foreign
Investment, that "the income tax shall be levied
at a reduced rate of 15% on manufacturing
enterprises with foreign investment", and that
"the income tax levied on enterprises with foreign
investment in the field of energy, transportation
and large-scale integrated circuits shall be
exempted for the first five profitable years and
be granted a 50% reduction in the next five
years".
In Shenzen, a special economic
zone just north of Hong Kong in the southern
province of Guangdong,
"foreign-invested operations engaged in high-tech
industries are free of income tax for two years
and enjoy half reduction for the ensuing eight
years. Having successfully absorbed the related
technologies and started production, the high-tech
projects are given three years of income-tax
exemption on the profit hitherto made regardless
of previous tax incentives."
In this
region, "given local registration and a minimum
investment ratio of 70% in the high-tech sector,
such investment entities are entitled to all the
tax holidays and other incentives enjoyed by the
high-tech firms", among other incentives.
In the case of foreign investments in
wind-power generation systems, the government
seems instead to have chosen a peculiar strategy
based on an auction system. As Reuters reported on
March 31, the latter "offers the cheapest bidder
the right to build wind farms", but some observers
argue that such an arrangement risks engendering a
"race to the bottom that could deter foreign
investors and smaller private business".
In fact, as state-owned enterprises, which
are free from shareholder pressure for profits,
may have a bidding advantage, "they are unlikely
to push cutting-edge technology". Thus several
independent analysts quoted by Reuters forecast
that the government may "tweak or even replace the
system over the next year, after a few rounds of
bidding give a clearer idea of acceptable pricing
levels", as the wind-power sector is set to
expand.
Huge stakes Despite the
fact that different sectors may still operate
under different market rules - and thus present
different risks - a clear trend is now emerging:
China's bid for high-tech leadership is opening up
new markets and redefining economic stakes. Major
global players will not miss out on this
opportunity, but smart outsiders will also have
their chance as competition increases over the
coming years.
Federico Bordonaro
is senior analyst with the Power and Interest News
Report. He can be contacted at
fbordonaro@NOSPAMpinr.com.
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