Cross-Border Economic Cooperation Between China and Southeast Asian Countries (Research Series on the Chinese Dream and China’s Development Path) 981190135X, 9789811901355

Table of contents :
Series Preface
Foreword
Preface
Contents
1 Theories of Border Economic Zones
1.1 Theories of Industrial Clusters
1.1.1 Alfred Weber’s Theory of Agglomeration
1.1.2 Alfred Marshall’s Theory of Industrial District
1.1.3 New Economic Geography
1.1.4 Theory of Competitive Advantage
1.2 Institutional Economics
1.2.1 Cluster from the Transaction Costs Perspective
1.2.2 Social Network Theory
1.2.3 Local Innovation Theory
1.3 Unbalanced Growth Theory
1.3.1 Francois Perroux’s Growth Pole Theory
1.3.2 Gunnar Myrdal’s Circular Cumulative Causation Theory
1.3.3 Albert O. Hirschman’s Core-Periphery Theory
1.3.4 Gradient Transfer Theory
1.3.5 Geo-Economics
1.3.6 Location Advantages
1.4 Theories About Cross-Border Economic Cooperation and Related Empirical Studies
1.4.1 Relevant Theories
1.4.2 Empirical Studies
References
2 Economies and Industries of Border Regions in China’s Southwest and Its Neighboring Countries
2.1 Border Economic Zones (BEZs)
2.1.1 BEZs on the Border Between China and Vietnam
2.1.2 BEZs on the Border Between China and Laos
2.1.3 BEZs on the Border Between China and Myanmar
2.2 Profiles of Industries
2.2.1 Industries in Yunnan, China
2.2.2 Industries in Lao Cai, Vietnam
2.2.3 Industries in Laos
2.2.4 Industries in Myanmar
References
3 Resistance to Cross-Border Trade Due to Border Effects and Its Influencing Factors
3.1 Introduction
3.2 Model Construction
3.2.1 Construction of the Model
3.2.2 Influencing Factors of Border Effects
3.3 Data Sources and Processing
3.3.1 Data Sources
3.3.2 Data Processing
3.4 Results and Analysis
3.4.1 Estimation of the Resistance Caused by Border Effects
3.4.2 Influencing Factors of Border Effects
3.5 Conclusions and Policy Implications
4 Factors Affecting Firm-Level Investment and Performance in Border Economic Zones and Implications for Developing Cross-Border Economic Zones Between the People’s Republic of China and Its Neighboring GMS Countries
4.1 Introduction
4.2 Background
4.3 Literature Review and Formulation of Hypothesis
4.4 Methodology
4.5 Results
4.5.1 Nonparametric Analysis
4.5.2 Parametric Analysis
4.6 Conclusion and Policy Implications
References
5 Selection of Industries for Cross-Border Economic Cooperation
5.1 Introduction
5.2 Methodology
5.2.1 Analysis of the Disparities in Industrial Structure and the Industrial Linkages
5.3 Analysis of RCA and TC
5.4 Empirical Analysis
5.4.1 Data Sources
5.4.2 Calculation Results and Analysis
5.5 Conclusions and Policy Implications
References
6 Financing Environment in Cross-Border Regions
6.1 Introduction
6.1.1 Background
6.1.2 Literature Review
6.2 Analysis of Financial Structure and the State of Economy
6.2.1 The Financial Structure and the State of Economy of Yunnan, China
6.2.2 Financial Structure and the State of Economy of Yunnan’s Neighboring Countries
6.3 Descriptive Analysis of Statistics About Financing Environment
6.3.1 Initial and Follow-On Funding for Firms
6.3.2 Follow-Up Investment and Related Loans of Firms
6.4 Impact of Financing Environment on Investment of Firms
6.4.1 Impact on Investment Motives of Firms
6.4.2 Impact of Financing Environment on Follow-Up Investment
6.5 Impact of Financing Environment on Performance of Firms
6.5.1 Definition of the Variables and Model Estimation
6.5.2 Analysis of the Modeling Results
6.6 Conclusions and Policy Implications
Reference
7 The Impact of Cross-Border Economic Cooperation on Regional Economy
7.1 Introduction
7.2 Literature Review
7.3 Methodology and Data Analysis
7.3.1 Data Sources
7.3.2 Model Evaluation
7.3.3 Scenarios
7.4 Results and Analysis
7.4.1 Correlation Between Industries
7.4.2 Multipliers of the Impacts
7.4.3 Impacts on the Economy in Different Scenarios
7.5 Conclusions and Policy Implications
References
8 Principles and Influential Factors of Cross-Border Economic Cooperation Zones
8.1 Definition of CBEZ
8.2 Basic Principles of CBEZ
8.2.1 Use of Resources in Border Regions
8.2.2 Use of Complementary Resources Across the Border
8.2.3 Transformation of Peripheries to Centers
8.2.4 Low Costs of Public Utilities
8.2.5 Expansion of Markets and Economies of Scale
8.2.6 Peace and Stability
8.3 Functions of CBEZs
8.4 Stages and Modes of CBEZs
8.4.1 Stages of CBEZs
8.4.2 Modes of CBEZs
8.5 Factors Influencing the Performance of CBEZs
8.5.1 Regional Governance
8.5.2 Regional Institutions
8.5.3 Regional Financial Systems
8.5.4 Social Capital
8.5.5 Political Cooperation, Level of Economic Development, and Trade and Investment Barriers
References
9 An Institutional Economics Approach to the Construction of CBEZs
9.1 Literature Review
9.2 Analysis from the Perspective of Institutional Economics
9.2.1 Levels
9.2.2 Existing Problems
9.2.3 Mechanism Design
9.3 Case Study
9.3.1 The Position of the Border Areas Between China and Myanmar in the Rubber Industry
9.3.2 Problems Confronting the Rubber Industry in the Border Areas Between China and Myanmar and the Causes of Problems
9.3.3 Policy Implications
References
10 Conclusions and Policy Implications
10.1 Promoting Cooperation with Foreign Countries in Border Areas
10.2 Promoting Cross-Border Trade
10.3 Attracting Investment from Outside the Region
10.4 Promoting Industrial Development in Cross-Border Areas
10.5 Impacts of Cross-Border Economic Activities on Regional Economy
10.6 Establishing the Foundation of Institutions for CBEZs
10.7 Major Challenges in Establishment of CBEZs
References

Citation preview

Research Series on the Chinese Dream and China’s Development Path

Zanxin Wang Wei Wei

Cross-Border Economic Cooperation Between China and Southeast Asian Countries

Research Series on the Chinese Dream and China’s Development Path Series Editors Yang Li, Chinese Academy of Social Sciences, Beijing, China Peilin Li, Chinese Academy of Social Sciences, Beijing, China

Drawing on a large body of empirical studies done over the last two decades, this Series provides its readers with in-depth analyses of the past and present and forecasts for the future course of China’s development. It contains the latest research results made by members of the Chinese Academy of Social Sciences. This series is an invaluable companion to every researcher who is trying to gain a deeper understanding of the development model, path and experience unique to China. Thanks to the adoption of Socialism with Chinese characteristics, and the implementation of comprehensive reform and opening-up, China has made tremendous achievements in areas such as political reform, economic development, and social construction, and is making great strides towards the realization of the Chinese dream of national rejuvenation. In addition to presenting a detailed account of many of these achievements, the authors also discuss what lessons other countries can learn from China’s experience. Project Director Shouguang Xie, President, Social Sciences Academic Press Academic Advisors Fang Cai, Peiyong Gao, Lin Li, Qiang Li, Huaide Ma, Jiahua Pan, Changhong Pei, Ye Qi, Lei Wang, Ming Wang, Yuyan Zhang, Yongnian Zheng, Hong Zhou

More information about this series at https://link.springer.com/bookseries/13571

Zanxin Wang · Wei Wei

Cross-Border Economic Cooperation Between China and Southeast Asian Countries

Zanxin Wang School of Business and Tourism Management Yunnan University Kunming, China

Wei Wei Key Research Institute of Yellow-River Civilization and Sustainable Development Henan University Zhengzhou, China

Translated by Xiaonan Zhang

Supported by a Grant from the Yunnan University Double First-Class Initiative ISSN 2363-6866 ISSN 2363-6874 (electronic) Research Series on the Chinese Dream and China’s Development Path ISBN 978-981-19-0135-5 ISBN 978-981-19-0136-2 (eBook) https://doi.org/10.1007/978-981-19-0136-2 Jointly published with Social Sciences Academic Press The print edition is not for sale in China (Mainland). Customers from China (Mainland) please order the print book from: Social Sciences Academic Press. Translation from the Chinese language edition: 跨境经济合作: 原理、模式与政策 by Zanxin Wang, and Wei Wei, © Social Sciences Academic Press 2017. Published by SSAP. All Rights Reserved. © Social Sciences Academic Press 2022 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Series Preface

Since China’s reform and opening began in 1978, the country has come a long way on the path of Socialism with Chinese characteristics, under the leadership of the Communist Party of China. Over 30 years of reform, efforts and sustained spectacular economic growth have turned China into the world’s second-largest economy and wrought many profound changes in the Chinese society. These historically significant developments have been garnering increasing attention from scholars, governments, and the general public alike around the world since the 1990s, when the newest wave of China studies began to gather steam. Some of the hottest topics have included the so-called China miracle, Chinese phenomenon, Chinese experience, Chinese path, and the Chinese model. Homegrown researchers have soon followed suit. Already hugely productive, this vibrant field is putting out a large number of books each year, with Social Sciences Academic Press alone having published hundreds of titles on a wide range of subjects. Because most of these books have been written and published in Chinese, however, readership has been limited outside China—even among many who study China—for whom English is still the lingua franca. This language barrier has been an impediment to efforts by academia, business communities, and policy-makers in other countries to form a thorough understanding of contemporary China, of what is distinct about China’s past and present may mean not only for her future but also for the future of the world. The need to remove such an impediment is both real and urgent, and the Research Series on the Chinese Dream and China’s Development Path is my answer to the call. This series features some of the most notable achievements from the last 20 years by scholars in China in a variety of research topics related to reform and opening. They include both theoretical explorations and empirical studies and cover economy, society, politics, law, culture, and ecology, the six areas in which reform and opening policies have had the deepest impact and farthest-reaching consequences for the country. Authors for the series have also tried to articulate their visions of the “Chinese Dream” and how the country can realize it in these fields and beyond. All of the editors and authors for the Research Series on the Chinese Dream and China’s Development Path are both longtime students of reform and opening and v

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recognized authorities in their respective academic fields. Their credentials and expertise lend credibility to these books, each of which having been subject to a rigorous peer-review process for inclusion in the series. As part of the Reform and Development Program under the State Administration of Press, Publication, Radio, Film, and Television of the People’s Republic of China, the series is published by Springer, a Germany-based academic publisher of international repute, and distributed overseas. I am confident that it will help fill a lacuna in studies of China in the era of reform and opening. Shouguang Xie

Foreword

One of the most remarkable recent developments associated with the current wave of regionalization is the growing recognition of the importance of cross-border economic cooperation (CBEC) as an effective policy tool with a dual impact. On the one hand, it serves as a fertile ground for regional cooperation and hence is firmly rooted in regional integration initiatives. On the other hand, it can be a potential tool for the development of border areas, which are generally marginalized in the process of development. Yet to date, there has been far too little serious analysis of the status of border areas, and their development potential and challenges from the perspective of different forms of economic cooperation with neighboring countries. This book fills that gap. It focuses on cross-border cooperation between the PRC and its neighboring countries in the Mekong region under the broad framework of Greater Mekong Subregion (GMS) Economic Cooperation Program. The GMS Economic Cooperation Program was launched in 1992 by six countries that share the Mekong River with the support of the Asian Development Bank (ADB) set out to create a harmonious, integrated, and prosperous subregion through a “3Cs” strategy of enhancing connectivity, improving competitiveness, and promoting a greater sense of community. In the initial phases, the program focused on linking the GMS countries through the development of transport corridors and reducing nonphysical barriers to movement. Subsequently, in 1998, a need was felt to broaden the scope of transport corridors by evolving them into economic corridors with the objective of attracting investment from within and outside the subregion, promoting synergy and enhancing the impact of GMS activities. In June 2008, the GMS members set up an Economic Corridors Forum to enhance collaboration among the countries in developing industrial nodes along these corridors. The choice of border areas and/or towns selected as potential nodes of industrial clusters is a critical component of this program which aims at bringing about economic development in border areas. The PRC integrated these initiatives on cross-border cooperation with its development strategy for the Western China in 2000. It set “cross-border economic cooperation” as the central pillar of its western development strategy with increasing border trade and investment, and encouraging economic and technical cooperation with neighboring countries as the key objectives. vii

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Border regions are typically the least efficient locations in terms of transport routes, markets, and sociopolitical factors. This raises some pertinent questions in the context of the promotion of cross-border trade and investment, two key elements of CBEC. What is the rationale of promoting these geographical peripheries as development nodes? What is the economics of border areas? How can these zones attract investment and other economic activities? What types of industries can be promoted in these areas? Can they bring about development in the region? This book addresses these questions drawing on both the qualitative and quantitative analyses. It provides compelling evidence using the secondary and primary databases on the factors driving cross-border economic cooperation and charts the roadmap for policy-makers for a successful strategy for its promotion. This is the first comprehensive assessment of cross-border economic cooperation. While the key analysis covers Mekong region with a focus on the PRC, the study has a much wider implication for such initiatives in general. The first two chapters of the book set the tone for an ambitious quantitative analysis that follows, by offering an in-depth understanding of the rationale and theoretical approaches to CBEC. It explores the benefits of such economic cooperation in border areas and delves into the economic status of the border areas in detail in terms of economic development, industrial development, trade and industry association, and industrial linkage. A major highlight of the book is the use of quantitative tools to assess various aspects of cross-border economic cooperation, meticulously organized in the rest of the book. It begins by identifying the poverty-reducing factors in the border areas. The findings reveal the significance of human and social capital in achieving the goal of poverty reduction in these areas and thereby establish the need to promote crossborder economic cooperation which fosters income generation, people-to-people contacts as well as networks between communities. This facilitates the generation of human capital on the one hand and social capital, trust, and mutual understanding among local communities on both sides of the border, on the other. In what follows, the study focuses on cross-border trade and investment as two key forms of economic cooperation and explores the potential and challenges in promoting them. It draws on both the relevant secondary databases and a primary survey database, and uses relevant econometric techniques to produce evidence-based wealth of information on the development of border areas. Cross-border trade is found to be constrained by distinct border effects, the barriers being most constraining in Vietnam, followed by Laos and Myanmar in that order. It reveals that removal of linguistic barriers, reduction in cultural and institutional differences, regional integration of currency, and improvement in macroeconomic control can help reduce the border effect and thus promote cross-border trade. While dealing with investment, it turns its focus on the existing border economic zones on the PRC side and explores the potential, critical success factors and performance of these zones. The target under the GMS program is to evolve them into cross-border economic zones by integrating them with border economic zones on the other side of the borders. The study is optimistic about the prospects of cross-border economic zones. It finds that private investors can leverage the abundance of resource

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and market potential in these areas by investing in resource intensive industries with market potential. However, they need to be made attractive for private investors by offering a package of incentives and services. One of the most contentious issues in the debate on SEZs is the role of investment incentives in attracting investment. Most studies however focus only on tax incentives. The study defines incentives broadly to include preferential tax policy, land use policy, financial support service policy, labor use policy, and investment facilitation. It provides evidence that preferential tax policy plays a critical role in influencing firms’ investment decisions. In general, financial support and land use policies are also found to be important. But it finds heterogeneity in their effectiveness across regions. Overall, the analysis arrives at the conclusion that the construction of CBEZs would require better fiscal and financial services. It is desirable to introduce some strategic financial corporations and establish financial institutions specialized in providing financing, insurance, and currency clearing exclusively to these zones. It also highlights the need for reconciliation of customs policies to reduce the transaction costs of multinational economic activities. Overall, it emphasizes how improved incentive packages and a favorable investment climate are indispensable for the promotion of border and cross-border zones. The assessment of the macroeconomic impacts of cross-border cooperation in different scenarios using an input–output model is an important contribution made by the study. The impacts are assessed in terms of output, GDP, household income, employment. It is discovered that cross-border trade has the greatest impact on the regional economy, followed by private investment and government investment in that order. The study concludes with an institutional analysis to discuss the dilemmas and opportunities for cross-border investors. It is carried out at four levels: the embedded social background (informal institution), the formal institutional environment (law, regulation, and policies), governance, and resource allocation; and is concluded with important policy implications. Overall, the study highlights the criticality of cross-border economic cooperation and points out that effective policies are needed to promote cross-border trade and investment to encourage economic cooperation. It produces a set of evidence-based recommendations to help policy-makers further improve and scale the programs to fully capture their potential. This book is a valuable contribution to the literature on cross-border economic cooperation. I congratulate the author and welcome the publication of this book. I believe that this evidence-based analysis would provide useful insights for policy-makers in designing and implementing the complex policy of cross-border economic cooperation. Aradhna Aggarwal Professor Asia Research Centre, Department of International Economics and Management Copenhagen Business School Frederiksberg, Denmark

Preface

Since the start of reform and opening-up, China has focused its economic development efforts on the coastal regions for strategic development. But as its coastal regions make continuous economic progress, the regional imbalance in economic development is also growing in China, which is incompatible with the country’s objectives of achieving balanced economic development and a harmonious society. China’s border regions are of great strategic significance as important land gateway to Southeast Asia, South Asia, and Europe. These regions are largely home to ethnic minority groups, which have experienced considerable economic growth thanks to reform and opening-up. Due to weak industrial base and complicated relations between people of different ethnic and religious backgrounds in these regions, however, it remains a major challenge for China to boost their economic development and narrow the economic gap between border regions and coastal regions amid the global economic integration and the regional imbalance in its economic development. China launched the western development strategy in 2000 in pursuit of more balanced economic development across regions and common prosperity for all Chinese people. By January 2010, ten years after the strategy was adopted, the western region of China had seen great improvement in GDP, infrastructure, ecology, rural development, regional cooperation, and other areas of work. Nonetheless, a wide economic gap remained between the east and the west of the country, which kept widening because of higher economic growth rate in the east. While the proportion of the GDP of the western region to that of the east China in 2010 showed a slight decrease from the level in 2000, the absolute gap between them has been widening. The gap in GDP per capita, for example, increased from 995 yuan in 1990 to 7687 yuan in 2000, 26,734 yuan in 2010, and 32,815 yuan in 2015. The increasing economic gap between the east and the west in China calls for further government policies to develop the western region. Apparently, continuation of the western development strategy alone is not sufficient. New policies are required. China shares its over-22,000-km-long land borders with 14 countries, but China’s trade volume with neighboring countries accounts for only about 5% of its total foreign trade. Considering the situation, in China’s further efforts to develop the western region, priorities should be given to opening the border areas, enhancing xi

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border trade, and encouraging economic and technological cooperation with neighboring countries. The Central Committee of the Communist Party of China (CPC) and the State Council of China issued the “Opinions on the Implementation of the Western Development Strategy” on June 29, 2010, which highlighted the significance of cooperation with neighboring countries and further opening border areas under the framework of the China-ASEAN Free Trade Area and the GMS Economic Cooperation Program to the development of Western China. To balanced economic development across regions and common prosperity, the central government of China issued the “Action Plan for Enriching Border Areas and the Residents Therein (2011–2015)” (hereinafter referred to as the Action Plan) in May 2012, covering 136 border counties, cities, and districts of nine provinces and autonomous regions, including Yunnan, Tibet, Gansu, and Xinjiang, and fiftyeight regimental pastures and farms in the border areas of Xinjiang Production and Construction Corps. The Action Plan aimed to significantly improve the living standards of the residents, reduce poverty, raise the income of rural and urban residents, and boost employment, all in border regions. Opening border regions and promoting cross-border economic cooperation are two important ways to meet the objectives. The Silk Road Economic Belt and the 21st Century Maritime Silk Road (hereinafter referred to as the Belt and Road initiative) in 2013 by Chinese President Xi Jinping represent a new model of international and regional economic cooperation conducive to economic globalization. Chinese Premiere Li Keqiang, while addressing the Boao Forum for Asia Annual Conference 2014, stressed that China would enhance cross-border economic cooperation with its neighboring countries during the implementation of the Belt and Road Initiative. The establishment of cross-border economic cooperation zones is apparently an important component of the efforts to implement the Belt and Road Initiative. China’s rise to the world’s second-largest economy is to a great extent attributed to the reform and opening-up policy the country adopted in late 1970s which attracted substantial foreign investment in its special economic zones. Border and cross-border economic cooperation zones will play a role similar to that of the special economic zones in China’s coastal regions and are expected to act as a catalyst to stimulate the economic growth in Western China. Several conditions are favorable for opening the border regions in southwestern China. First, the provinces along the southwest borders of China have long been in harmonious relations with the neighboring countries, serving as China’s land gateway to Southeast and South Asia. Second, with abundant natural resources such as mineral, water, and biological resources, the southwestern provinces have great development potential. Third, since the start of reform and opening-up, especially since the implementation of the western development strategy, the southwestern provinces have made a remarkable progress in self-development capacity. Fourth, the border regions in southwestern China are different from, and complementary to other GMS countries in development conditions, resource structure, industrial structure, the level of market development and consumption, and so forth.

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China’s cooperation with neighboring countries, including the launch of the GMS Economic Cooperation Program and the China-ASRAN Free Trade Area, provides a solid foundation for opening the border regions in southwestern China. While China’s border regions, which are mainly inhabited by ethnic minority groups, are economically backward, they connect China’s coastal regions and the developed regions in the east with its neighboring countries and even a larger region. This book explores new approaches to economic development in border regions and proposes a new theoretical perspective for promoting development and participation in regional economic integration of border regions. It will also enrich the theories of regional economics and development economics. We started the research on cross-border economic cooperation in China’s southwestern border regions in the project “Policies for Investment in China-GMS CrossBorder Economic Zones: Incentive Effects and Redesign” (No. R-CDTA 6407) of the Phnom Penh Plan for Development Management of the Asian Development Bank (ADB) in 2009. The project was led by the School of Development Studies, Yunnan University, China, and supported by the National University of Laos and Hanoi University of Agriculture. In the process, we participated in several investigations and international seminars, from which we realized the importance of cross-border economic cooperation for regional economic development and developed a strong interest in relevant topics. After the project was closed in 2011, we worked on several other projects on related issues, the findings of which are included in this book. We will first give an introduction to the organization of this book. Border regions are mostly economically underdeveloped, with geographical conditions and issues concerning ethnic minorities and politics more complicated than in inland areas. While the existing theories of industrial clusters, institutional economics, and unbalanced growth do not suffice to guide the development of border regions, the theories of cross-border economic cooperation and related researches have served as a new starting point. So, this book starts with a review of the existing theories of regional economic development and cross-border economic cooperation. Border regions have a weak foundation of industry, while agriculture plays a dominant role in their economy. In addition, a lot of ethnic minority groups in these regions are mostly engaged in agricultural production. To promote cross-border economic cooperation, we must understand the state of the industries in these regions. We thus analyze the industrial development in China’s southwest border regions and its neighboring countries in Chap. 2. Cross-border economic cooperation is mainly advanced by promoting trade and investment. Chapter 3 analyzes the existing trade and investment policies on both sides of the border, and compares and contrasts these policies of China and its neighboring countries, i.e., Vietnam, Laos, and Myanmar. The resistance of border effects in cross-border trade in the past two decades or so is then calculated using the gravity model to guide further efforts to promote cross-border trade. Applying parametric and nonparametric analysis, we also study the factors affecting the investment in border economic zones based on survey data, the findings of which provide policy implications for border economic zones in attracting foreign investment. Meanwhile, in view the pillar industries and financing climate in a region are inextricably linked

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with investment. Chapter 4 examines the elements that should be considered in the design of CBEZ incentives by looking at the effects of (i) factors that attract investments to the zones and (ii) investment incentive policies on the performance of industries located in these zones. Chapter 5 uses the gray relational analysis (GRA) and reveals comparative advantage to study the linkages between China and its neighboring countries, Laos, Myanmar, and Vietnam, in different industries, and Chap. 6 analyzes the impact of financing climate on the investment motives and performance of firms in border regions. To understand the impact of cross-border economic cooperation on economic development of regions on both sides of the border, Chap. 7 examines the impact of cross-border economic cooperation on resident’s income, gross output, and valueadded using scenario simulation and input–output analysis of forty-two sectors in Yunnan, China. Cross-border economic cooperation zone is an important mode of cross-border economic cooperation. Establishment of such zones will further strengthen cross-border economic cooperation. Chapter 8 reviews the definition, theories, and development of cross-border economic cooperation zones and studies the factors that affect their performance. Chapter 9 explores the institutions needed in cross-border economic cooperation zones under the analytical framework of institutional economics, and analyzes the problems in development of the rubber industry and the institutional causes of such problems. The final chapter presents conclusions and policy implications for the endeavor in six areas, including inter alia, promoting international cooperation in border regions, boosting cross-border trade, and attracting foreign investment. It also sums up the major challenges to be overcome in the construction of cross-border economic cooperation zones, taking into account the prerequisites to their establishment and the state of development of such zones. This book contains the research findings of several projects, including the Phnom Penh Plan for Development Management of the ADB, the Research on International Cooperation Platforms in Ethnic Minority Areas: Modes and Mechanisms for CrossBorder Economic Cooperation Zones (Approval No.: 2015-GM-017) of the National Ethnic Affairs Commission of the People’s Republic of China, the Research on Enterprise Behavior and Agglomeration in China’s Border Economic Zones in an Indefinite Environment (Approval No.: 71362026) of the National Natural Science Foundation of China, the human resources training programs of Yunnan Provincial Science and Technology Department, Yunnan provincial government and Yunnan University. We overcame considerable pressure and challenges in these projects. Meanwhile, we are grateful to Aradhna Aggarwal of Copenhagen Business School, ADB’s regional cooperation specialist Alfredo Perdiguero, and Yang Xianming of the School of Development Studies, Yunnan University, for their advice on the research design and implementation. Luo Meijuan, Chen Ying, and Yuan Fan of Yunnan University participated in the research project of the ADB. Some graduate students of the School of Development Studies, Yunnan University, also participated in the research: Yang Jingli, Li Jiefei, Wu Peng, and Li Xiaoyi, respectively, participated in the drafting or research of

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Chap. 1, Chaps. 3, 4, and 9, Chap.7, and Chap. 8. We appreciate their efforts and contribution to this book. We are also grateful to Yunnan Federation of Social Science Circles for funding the publication of this book through the program of Innovative Achievements in Social Sciences. While we have made our best efforts to avoid omissions and mistakes, we would appreciate any advice from our readers. Kunming, China

Zanxin Wang

Contents

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Theories of Border Economic Zones . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Theories of Industrial Clusters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.1 Alfred Weber’s Theory of Agglomeration . . . . . . . . . . . . . 1.1.2 Alfred Marshall’s Theory of Industrial District . . . . . . . . . 1.1.3 New Economic Geography . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.4 Theory of Competitive Advantage . . . . . . . . . . . . . . . . . . . . 1.2 Institutional Economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.1 Cluster from the Transaction Costs Perspective . . . . . . . . . 1.2.2 Social Network Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.3 Local Innovation Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Unbalanced Growth Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.1 Francois Perroux’s Growth Pole Theory . . . . . . . . . . . . . . . 1.3.2 Gunnar Myrdal’s Circular Cumulative Causation Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.3 Albert O. Hirschman’s Core-Periphery Theory . . . . . . . . . 1.3.4 Gradient Transfer Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.5 Geo-Economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.6 Location Advantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Theories About Cross-Border Economic Cooperation and Related Empirical Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.1 Relevant Theories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.2 Empirical Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 2 2 3 3 4 5 6 6 8 8

13 14 17 19

Economies and Industries of Border Regions in China’s Southwest and Its Neighboring Countries . . . . . . . . . . . . . . . . . . . . . . . 2.1 Border Economic Zones (BEZs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.1 BEZs on the Border Between China and Vietnam . . . . . . . 2.1.2 BEZs on the Border Between China and Laos . . . . . . . . . . 2.1.3 BEZs on the Border Between China and Myanmar . . . . . . 2.2 Profiles of Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21 21 23 25 26 29

9 10 10 12 13

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2.2.1 2.2.2 2.2.3 2.2.4 References 3

4

5

Industries in Yunnan, China . . . . . . . . . . . . . . . . . . . . . . . . . Industries in Lao Cai, Vietnam . . . . . . . . . . . . . . . . . . . . . . . Industries in Laos . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Industries in Myanmar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....................................................

Resistance to Cross-Border Trade Due to Border Effects and Its Influencing Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Model Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 Construction of the Model . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.2 Influencing Factors of Border Effects . . . . . . . . . . . . . . . . . 3.3 Data Sources and Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.1 Data Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.2 Data Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Results and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.1 Estimation of the Resistance Caused by Border Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.2 Influencing Factors of Border Effects . . . . . . . . . . . . . . . . . 3.5 Conclusions and Policy Implications . . . . . . . . . . . . . . . . . . . . . . . . Factors Affecting Firm-Level Investment and Performance in Border Economic Zones and Implications for Developing Cross-Border Economic Zones Between the People’s Republic of China and Its Neighboring GMS Countries . . . . . . . . . . . . . . . . . . . 4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Literature Review and Formulation of Hypothesis . . . . . . . . . . . . . 4.4 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5.1 Nonparametric Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5.2 Parametric Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 Conclusion and Policy Implications . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selection of Industries for Cross-Border Economic Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.1 Analysis of the Disparities in Industrial Structure and the Industrial Linkages . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Analysis of RCA and TC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 Empirical Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.1 Data Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.2 Calculation Results and Analysis . . . . . . . . . . . . . . . . . . . . .

29 33 34 34 35 37 37 39 39 40 41 41 42 43 43 45 46

49 49 50 51 53 54 54 65 83 87 89 89 91 91 92 93 93 94

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5.5 Conclusions and Policy Implications . . . . . . . . . . . . . . . . . . . . . . . . 101 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 6

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Financing Environment in Cross-Border Regions . . . . . . . . . . . . . . . . 6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.2 Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Analysis of Financial Structure and the State of Economy . . . . . . 6.2.1 The Financial Structure and the State of Economy of Yunnan, China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.2 Financial Structure and the State of Economy of Yunnan’s Neighboring Countries . . . . . . . . . . . . . . . . . . . 6.3 Descriptive Analysis of Statistics About Financing Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.1 Initial and Follow-On Funding for Firms . . . . . . . . . . . . . . 6.3.2 Follow-Up Investment and Related Loans of Firms . . . . . 6.4 Impact of Financing Environment on Investment of Firms . . . . . . 6.4.1 Impact on Investment Motives of Firms . . . . . . . . . . . . . . . 6.4.2 Impact of Financing Environment on Follow-Up Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 Impact of Financing Environment on Performance of Firms . . . . 6.5.1 Definition of the Variables and Model Estimation . . . . . . . 6.5.2 Analysis of the Modeling Results . . . . . . . . . . . . . . . . . . . . 6.6 Conclusions and Policy Implications . . . . . . . . . . . . . . . . . . . . . . . . Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

105 105 105 106 108 108 112 117 118 120 123 123 131 136 136 137 139 143

The Impact of Cross-Border Economic Cooperation on Regional Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 Methodology and Data Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.1 Data Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.2 Model Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.3 Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 Results and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.1 Correlation Between Industries . . . . . . . . . . . . . . . . . . . . . . 7.4.2 Multipliers of the Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.3 Impacts on the Economy in Different Scenarios . . . . . . . . 7.5 Conclusions and Policy Implications . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

145 145 146 148 148 149 151 155 155 156 158 162 163

Principles and Influential Factors of Cross-Border Economic Cooperation Zones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1 Definition of CBEZ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 Basic Principles of CBEZ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2.1 Use of Resources in Border Regions . . . . . . . . . . . . . . . . . .

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8.2.2 Use of Complementary Resources Across the Border . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2.3 Transformation of Peripheries to Centers . . . . . . . . . . . . . . 8.2.4 Low Costs of Public Utilities . . . . . . . . . . . . . . . . . . . . . . . . 8.2.5 Expansion of Markets and Economies of Scale . . . . . . . . . 8.2.6 Peace and Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3 Functions of CBEZs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4 Stages and Modes of CBEZs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4.1 Stages of CBEZs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4.2 Modes of CBEZs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5 Factors Influencing the Performance of CBEZs . . . . . . . . . . . . . . . 8.5.1 Regional Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5.2 Regional Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5.3 Regional Financial Systems . . . . . . . . . . . . . . . . . . . . . . . . . 8.5.4 Social Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5.5 Political Cooperation, Level of Economic Development, and Trade and Investment Barriers . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

An Institutional Economics Approach to the Construction of CBEZs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1 Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2 Analysis from the Perspective of Institutional Economics . . . . . . 9.2.1 Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2.2 Existing Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2.3 Mechanism Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3 Case Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3.1 The Position of the Border Areas Between China and Myanmar in the Rubber Industry . . . . . . . . . . . . . . . . . 9.3.2 Problems Confronting the Rubber Industry in the Border Areas Between China and Myanmar and the Causes of Problems . . . . . . . . . . . . . . . . . . . . . . . . . 9.3.3 Policy Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10 Conclusions and Policy Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1 Promoting Cooperation with Foreign Countries in Border Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2 Promoting Cross-Border Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3 Attracting Investment from Outside the Region . . . . . . . . . . . . . . . 10.4 Promoting Industrial Development in Cross-Border Areas . . . . . . 10.5 Impacts of Cross-Border Economic Activities on Regional Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.6 Establishing the Foundation of Institutions for CBEZs . . . . . . . . . 10.7 Major Challenges in Establishment of CBEZs . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

168 168 168 169 169 170 171 171 173 176 176 177 177 178 178 180 183 184 185 185 193 196 199 200

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Chapter 1

Theories of Border Economic Zones

Researchers across the world have laid the theoretical foundation for the development of special economic zones (SEZ) with in-depth studies of SEZ, agglomeration and the consequent emergence of new spatial patterns, and relevant development policies and strategies from different points of view using theories and methodologies of various disciplines.

1.1 Theories of Industrial Clusters The theories of industrial clusters are generally rooted in the theory of external economies of Alfred Marshall, the theory of agglomeration economies of Alfred Weber et al., and the theory of competitive advantage of Michael Porter. In the late nineteenth century, neoclassical economist Alfred Marshall first elaborated on the formation of industrial clusters based on the concept of division of labor proposed by Adam Smith. Following his studies, researchers have examined the formation of industrial clusters and the underlying mechanism from different perspectives. The relevant theories in this regard include, inter alia, the industrial location theory proposed by Alfred Weber in 1909, the transaction cost theory by Ronald Coase in 1937, the theory of increasing returns to scale by Krugman in 1991, and the competitive advantage theory by Michael Porter in 1998. The establishment of SEZs in border regions tends to transform these regions to the central areas of common markets of a region of larger scale. At least, this is the case at the advanced stage of economic integration. Effective forward and backward linkages between firms significantly improve the integration of markets on both sides of the border and the market potential of border areas, boost cross-border trade between countries, and attract more firms and people to cluster in border areas. The establishment of SEZs in China’s southwest border regions will enable the cross-border zones to achieve agglomeration economies of scale in cooperative development, increasing © Social Sciences Academic Press 2022 Z. Wang and W. Wei, Cross-Border Economic Cooperation Between China and Southeast Asian Countries, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-19-0136-2_1

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1 Theories of Border Economic Zones

the likelihood of relocation of enterprises to border regions and clustering of highly profitable industries with competitive advantages over the neighboring countries. The theories of industrial clusters and the relevant methodologies can be applied in studies of all these aspects.

1.1.1 Alfred Weber’s Theory of Agglomeration According to Weber, agglomeration economies are achieved by clustering of manufacture or technology due to internal factors of industrial agglomeration, including expansion of production and enhanced cooperation between firms, and social agglomeration caused by external factors, such as lower costs thanks to access to infrastructure as a result of clustering. Geographically, agglomeration falls into three types, namely localization agglomeration (the production units of the same type in a given area considered as a whole), urbanization economies (such as benefits to companies arising from lower costs following the formation of cities), and central district industries (the industries in an area with a high concentration of firms). Weber’s theory of industrial location and agglomeration has been used and developed by later economists and geographers.

1.1.2 Alfred Marshall’s Theory of Industrial District The concept of industrial district was proposed by Marshall in Principles of Economics in 1890, which was later defined as a naturally and historically bounded area, in which small and medium-sized enterprises proactively interact with each other and firms and community tend to merge. Marshall’s analysis of industrial districts is largely from the perspective of agglomeration economies. That means, he examined the spatial concentration of firms in terms of external economies and other advantages in static efficiency. Marshall (1890) proposed the concept of external economies, or, economies of agglomeration. He believed that contingent factors were involved in the specialization of a district. According to Marshall, once agglomeration economies were achieved in a district, such district was supported by external economies of scale. Marshall also designed an analytical framework that facilitates the flow of information and knowledge between member enterprises, consisting of industrial atmosphere, externalities, and social and cultural elements. Industrial atmosphere refers to trade secrets, ideas and practice. Externalities refer to impacts beyond individual firms but within a cluster. Social and cultural elements refer to trust between firms in a cluster and so forth. In short, in his studies of industrial district, Marshall focused on analysis of the spatial concentration of industries from the perspective of static efficiency, such as external economies of scale and reduction of transaction costs, highlighting the flow of specific knowledge and information between economic entities concentrated in a locality.

1.1 Theories of Industrial Clusters

3

1.1.3 New Economic Geography Paul Krugman’s economic geography has attracted the attention of regional economists because it holds that industrial clusters, as a special form of industrial organization, play a special role in industrial and economic development. Their analysis of the economic significance of regional networks and organizations within a region stimulates the interest in studies of industrial clusters in the field of economics. Krugman is a neoclassical economic geographer, who agreed in part with Marshall. He believed that three main factors, namely labor market pooling, specialized suppliers, and knowledge spillover contribute to external economies of scale. This is different from Marshall’s theory of industrial district, but akin to the new trade theory. Krugman’s research was based on the assumption of a market with imperfect competition. He believed that market uncertainties and rapid technological changes led to the decline of internal economies of scale and economies of scope, in which case agglomeration economies could reduce transaction costs by outsourcing of vertical and horizontal production activities. Accordingly, Krugman claimed that agglomeration economies had greater advantages of external economies of scale and economies of scope. In his “Increasing Returns and Economic Geography” published in 1991, Krugman considered geographical factors in economic analysis. He used a model to show that in a country or a region, in order to realize economies of scale and minimize transportation costs, manufacturing enterprises tend to locate in a region with larger demand, but the location of demand itself depends on the distribution of manufacturing, leading to the emergence of a core-periphery pattern. The core-periphery pattern depends on transportation costs, economies of scale, and the share of manufacturing in national income. In other words, firms and industries tend to concentrate in specific spaces, and the spaces where they concentrate tend to vary between industries. The concentration of a large number of relevant or identical industries in a region is related to industrial specialization and market demand. Specialization and demand of an industry are mutually reinforcing, resulting in positive feedback effect. Firms and industries concentrating in a region gain increasing returns on factors thanks to reduction in transportation and communication costs.

1.1.4 Theory of Competitive Advantage Michael Porter’s research of industrial clusters is part of his studies of the competitive advantages of countries. He conducted comparative analysis of the competitive advantages of countries based on the characteristics of competition between industrial clusters of different countries and regions. Porter believed that countries were external environment of firms and that governments should strive to create a favorable environment for domestic firms.

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1 Theories of Border Economic Zones

On industrial clusters and competitive advantages, Porter remarked as follows: First, clusters are geographic concentrations of interconnected companies and institutions in a particular field. Within clusters, vertical linkages are found between firms on the chain of industries, and horizontal linkages are found between competitive and complementary firms. The vertically connected entities include an array of linked industries and other entities related to competition, such as suppliers of components, machinery and services, and providers of specialized infrastructure. Clusters often extend downstream to channels and customers and laterally to manufacturers of complementary products and to companies in industries related by skills, technologies, or common inputs. Clusters may also include supportive institutions— such as governments, universities, standards-setting agencies, think tanks, vocational training providers, and trade associations—that provide specialized training, education, information, research, and technical support. Second, industrial clusters have significant impacts on competitive advantages of industries in three aspects. First, clusters enhance the productivity of firms. Firms in clusters have better access to employees and suppliers. Clusters enjoy abundant information about market, technology, and competition which are frequently transferred. Cluster members have better access to specialized information. Clusters also result in advantages as a result of complementarity, such as complementary products in meeting customers’ needs, and the coordination of activities across companies to optimize their collective productivity. Second, clusters facilitate innovation, thus laying a foundation for productivity enhancement. In addition to making innovation opportunities more visible, clusters also enhance the capacity of companies to act rapidly. Firms in a cluster often can source locally what they need to implement rapid innovations. Local suppliers and partners are closely involved in the innovation process, ensuring a better match with customers’ requirements. Third, clusters contribute to the formation of new companies and business. In a cluster, the barriers to entry are lower than elsewhere. Needed assets, skills, inputs, and staff are often readily available at the cluster location, waiting to be assembled into a new enterprise. Local financial institutions and investors, already familiar with the cluster, may require a lower risk premium on capital. In addition, a cluster often comes with a huge local market, and entrepreneurs may benefit from established relationships. All of these factors reduce the risks of entry, and the risks of exit, should the enterprise fail. Clusters boost their own development, as each member benefits as if it had greater scale or as if it had joined with others formally without sacrificing its flexibility.

1.2 Institutional Economics Since the 1990s, in addition to theories of agglomeration economies, some new concepts and theories of institutional economics have been adopted in studies of industrial clusters. Examples include transaction cost reduction, innovation network, learning region and alliances of enterprises.

1.2 Institutional Economics

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1.2.1 Cluster from the Transaction Costs Perspective Allen J. Scott and Michael Storper are representative of the researchers who have studied clusters from the perspective of transaction cost reduction. In early researches, they used the concept of transaction cost proposed by Ronald Coase and Oliver Williamson for analysis of firm’s vertical disintegration and localization agglomeration. They argued that clusters of firms were a special form somewhere between hierarchical organizations and market-based organizations. According to their research, thanks to the geographical concentration of companies and the formation of company networks, amid rapid changes of markets and technologies, the local production collaboration networks consequent upon the concentration of companies reduce the transaction costs and protect factors that contribute to cooperation, which is conducive to enhancing the innovation capability, flexibility and adaptability of companies. Compared with geographically dispersed enterprises, local companies face lower transaction costs arising from their frequent interactions. This is mainly attributed to the high costs of providing and identifying information due to great information density and frequency of transmission in the locality. Frequent cooperation between geographically adjacent enterprises allows them to honor their agreements at lower costs. Both researchers deemed that concentration of companies could minimize transaction costs because transaction costs were the most important manufacturing costs related to geographical distance. In addition, to reduce technology lock-in and lower the barriers to exit, companies must perform externalization and vertical disintegration so as to realize the specialization of production of each company and the overall flexibility of the industrial complexes (industrial clusters), thus forming a production pattern and production networks featuring flexible specialization. Their analysis of industrial clusters based on the transaction cost theory came under criticism from various sectors. In response to the criticism, Storper and other researchers noticed the vital role of knowledge and learning in innovation and development of clusters. Based on analysis of transaction costs, Storper proposed the concept of untraded interdependencies. It is believed that an agglomeration of enterprises, once formed, would evolve into an industrial community, with strong untraded interdependencies between members mainly in the form of habits, rules, practices and institutions for companies to help each other with strategic planning while market and technological uncertainty continues to increase, thus providing the local production system with knowledge in various aspects such as markets for new products, methods of production and sourcing of resources. Such mutual assistance is usually found beyond traditional trading markets, largely characterized by tacit knowledge and local embeddedness. It thus facilitates the formation of the local production system, or, knowledge community. Companies, the main components of knowledge communities, are directly involved in knowledge creation and spreading. The significance of knowledge at state level is explained in relation to concepts such as the learning economy and the learning region: knowledge is the most important resource for fostering competitive advantages; the special local institutional arrangements play an important supporting role in the process. Therefore, the development of learning

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behavior and institutional arrangements in the locality where clusters are formed is crucial to the creation of the local production system. According to Storper et al., above all, the relations between firms/organizations and technological learning in agglomeration economies are regional input–output relations, or traded relations, which form a nexus of user-producer relations essential to information flow and spreading. The other relations between firms, such as labor markets, local practices, standards and values and public or semi-public institutions, also play an important role.

1.2.2 Social Network Theory Some researchers have used the social network theory for analysis of industrial clusters, and proposed concepts such as local embeddedness and institutional thickness. According to their theory of embeddedness, social networks penetrate irregularly and in differing degrees into various sectors of economic activities. The theory is adopted in studies of industrial clusters, stressing that firms are embedded in clusters and connected to various components in different manners. Mark Granovetter emphasized that the diffusion of new information was achieved via weak ties. According to Granovetter, new information was obtained through casual acquaintances, i.e., weak ties, rather than close personal friends, i.e., strong ties. His assertation of the strength of weak ties is based on the assumption that strong ties are formed between cluster members by frequent interactions, and weak ties emerge from the communication and connection with different members of a community rather than with a firm at the center. Frequent interactions within a cluster result in information redundancy. Weak ties, on the other hand, lead to opportunities, because they present opportunities to get access to new, different information media. Therefore, cluster members are allowed better access to novel ideas and knowledge and information about competitiveness if they can maintain thick social networks that do not overlap. The social network theory examines the innovation and internal structure of relations within clusters from the sociological perspective. The studies based on the social network theory highlight the high level of trust between firms as a symbol of close interactions in industrial districts, which facilitates the sharing of knowledge among various entities. The typical networks of relations between firms in these communities are thick or overlaid, and knowledge is spread and shared rapidly via such networks in geographical clusters.

1.2.3 Local Innovation Theory The GREMI (European Research Group on Innovative Milieu) represented by Denis Maillat studied clusters from the perspective of innovative milieu. Based on empirical analysis of the development of financial clusters in Europe, they developed the theory

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of local innovative milieu, thus applying the concept of innovative milieu in studies of clusters. According to the GREMI approach, the core mechanism and signature feature of local innovative milieu is collective learning. Innovative milieu, in a broad sense, means the local social and cultural environment where the industrial cluster is located. Generally, it refers specifically to the sum of local institutions, laws and regulations and practices in a cluster. Using the innovative milieu approach, Maillat examined the relations between localized production systems, innovative milieu and urban systems, namely the endogenous regional economic development model. He asserted that the endogenous regional development consisted of three processes, i.e., innovation, cultural integration and reproduction. The innovation process is ultimately dependent upon the local technical and market environment. The main function of the cultural integration process is to enhance internal coordination inside a cluster and prevent the dismemberment of local resources. The role of reproduction processes is to replicate the constituent elements of the system (agents, resources, know-how, rules, relational capital, etc.). As Giacomo Becattini emphasized, “Producing does not just mean transforming a set of (given) inputs into an output (finished product) by given technical processes, in a given time interval, but also means reproducing the material and human conditions from which the production process itself starts”. The GREMI’s innovative milieu theory explains how the innovative milieu steers localized production systems and how it facilitates, invigorates and guides innovation processes, cultural integration processes and the incubation, capture and dissemination in reproduction processes. Therefore, the innovative milieu is not a special type of localized production systems, but a cognitive set on which the evolution of local organized systems depends and which has impacts on factors such as local technologies and relations. The GREMI believes that the innovative milieu is an outwardlyopen production complex. It is open to the technological and market environment, which incorporates and masters know-how, rules and relational capital. The innovative milieu thus forms the foundation of the localized production system where the cluster is located. The innovative milieu is a complex of permanent processes of adjustments and transformations. These processes are activated by the internal interaction logic and learning dynamic. The internal interaction logic is determined by the ability of companies—main innovators inside the cluster—to cooperate and be in an interdependence relationship. In an innovative network, the interaction logic is determined by the relational capital that has been built up in the course of development. It is thanks to collective learning that new know-how and technologies are created, the balance between cooperation and competition relations is maintained, and new solutions are found more easily. Therefore, the learning dynamic mainly modifies the behaviour of cluster members in the technological and market environment so as to develop new projects and create new resources.

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1.3 Unbalanced Growth Theory Some economists and geographers have proposed the theory of unbalanced regional growth in studies of regional development. According to the theory, as long as the overall development level remains low, the natural impact of market forces will necessarily increase domestic and international inequality. Strong government intervention and well-conceived economic policies are required to boost the development of less developed regions and narrow the gaps between regions. Growth poles and growth centers, for example, may be established in less developed regions to stimulate their development and enhance their self-development capacity so as to facilitate the accumulation and growth in these regions with market forces. By establishing SEZs in the southwest, China is striving to create growth poles in the border areas to stimulate the economic growth of the surrounding areas. Since the 1950s, despite economic development in developing countries, the gap between developing and developed countries has been widening. The polarization of developed and underdeveloped regions has also been increasing as developed countries keep pouring substantial resources and factors into economically advantaged regions in pursuit of high economic growth rate. The growing gap and polarization between countries and regions show that it is now difficult to solve all regional development issues relying on market forces alone. The regional gap in economic growth has not been declining as neoclassical economists anticipated, but has been growing. To explain the phenomena and provide developing countries and less developed regions with theories and foundations of policies for economic growth, economists have proposed some insightful theories about unbalanced regional economic growth, such as the growth poles theory of the French economist Francois Perroux, the circular cumulative causation theory of the Swedish economist Gunnar Myrdal, and the core-periphery theory of the American economist Albert O. Hirschman.

1.3.1 Francois Perroux’s Growth Pole Theory Unlike classical economists who maintain equilibrium growth, Perroux asserted that non-equilibrium existed in regional development. According to Perroux, the concentration of some dominant sectors or innovative firms and industries in a specific region resulted in the formation of growth poles of attraction and repulsion. That means, some economic units are in an advantageous position in economic activities as a result of their growth and innovation. Thanks to the abilities of such economic units to perform and stimulate technological innovation and accumulate and spread capital, firms and industries can pursue development through large-scale and concentrated operations, thus promoting the development of surrounding areas and creating regional economic complexes with growth poles as the core and non-equilibrium growth in the periphery.

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Perroux referred to the process of some economic units dominating others as dominance, and economic units in an advantageous position, the growth and innovation of which stimulate the growth of other economic units, as propulsive industries. The growth of propulsive industries generates benefits to industries with forward, backward and horizontal linkages, which cluster around the propulsive industries to form industrial complexes. The industry complexes grow and innovate at a significantly faster rate than elsewhere. Perroux’s growth pole theory draws heavily on the innovation and long wave theories of Joseph A. Schumpeter. According to Perroux, entrepreneurial innovation is the most important factor driving economic progress, and that the most innovative economic activities always take place in large economic units which tend to be propulsive industries. Economic growth does not appear everywhere and all at once, but appears in growth poles with various intensity. Taking advantage of the interconnection and interdependency between industries, it spreads along diverse channels to produce varying ultimate effects on the whole economy.

1.3.2 Gunnar Myrdal’s Circular Cumulative Causation Theory Myrdal’s circular cumulative causation theory represents a regional development model of the unbalanced development theory. He argued that the changes in certain variables of the social system would not result in counter forces to restore a state of balance, but would take the system further away from its initial state of balance. To him, the social system is not characterized by self-stabilization, but follows the circular cumulative causation theory. In thriving areas, as the concentration of economic activities results in increased productivity, market forces cause further agglomeration of economic activities and increasing pay. Such agglomeration enables fast growth of thriving areas by continuous accumulation, which gives rise to the backwash and spread effects. Spread effects refer to the movement of capital and technology from the center to the periphery: thriving areas purchase raw materials and agricultural products from backward regions, which helps improve the income and economy of backward regions, increases investment and introduces technology to these regions. Backwash effects mean the flow of capital and labor from the periphery to the center: capital, labor and other factors of production move from slow-growing backward regions to fastgrowing regions, which is in line with the law that factors of production flow to localities with higher income levels. According to Myrdal, the immediate impact of backwash effects is the cumulative circulation in different regions, which results in the accumulation of wealth in developed regions. As a result, the spread effects emerge to stimulate the development of underdeveloped regions, which may narrow the regional gap. It is possible for developing countries like China to balance the development of developed and underdeveloped regions. That explains why Myrdal is a strong supporter of governmental

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intervention in economic development. According to him, in the primary stage of regional economic development, efforts should focus on the development of areas with great potential for investment returns so as to take advantage of the spread effects to stimulate the development of the whole region.

1.3.3 Albert O. Hirschman’s Core-Periphery Theory Hirschman used the growth pole theory in studies of geographic space. He proposed the core-periphery theory to explain the necessarily unbalanced growth between regions. According to him, economic progress does not take place everywhere at the same time, but appears first in one or several regional centers of economic strength. Once it has appeared, however, it serves as a great economic impetus resulting in concentration of economic growth around the initial growth poles. Therefore, in the process of development, the emergence of growth poles is an indication of the unbalance in economic growth between countries or regions. Owing to such unbalanced growth, the growing regions have positive impacts on lagging areas, which are known as the trickling-down effects. As a result of the trickling-down effects, the progress in growing regions leads to increase in their purchases and investments in lagging areas and spread of technology in these areas, improves their productivity and technology, and boosts their economic growth. Under the framework of the core-periphery theory, Hirschman considered the strategy of unbalanced growth the best option for regional economic planning. He claimed that governments should increase investment in lagging areas and take measures to direct capital and talent to these areas while making investment to improve infrastructure and investment climate so as to enhance the trickling-down effects by government intervention.

1.3.4 Gradient Transfer Theory The gradient transfer theory has been adopted in studies of regional economy. In China, it is mainly used in areas such as studies of the spatial transfer of development priorities and spatial structure adjustment. The gradient transfer theory draws on the theory of life cycle of industrial products (i.e., the product life cycle theory). According to the product life cycle theory, all industrial sectors and products moves through four stages in their development: introduction, growth, maturity, and decline. Based on their stage of development, products and sectors are divided into three categories: the thriving, the stagnant, and the declining. Industrial sectors and products in the stages of introduction and development are considered thriving. Considering the innovator’s monopoly of know-how relating to production of new products and the minor impact of production cost on location due to low price elasticity of new products, it is advisable to manufacture such products domestically. Industrial sectors and products going through the stage

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of maturity are considered stagnant. In this stage, the relevant technologies have fully evolved, and a vast number of cheap labor with moderate skills is required. Due to increasing competitors and rising price elasticity of demand, the key to beating one’s competitors is cost reduction. It is thus advisable to relocate production to foreign countries with lower production costs (i.e., lower-gradient regions) and introduce a new product. According to the gradient transfer theory, in a large scope of areas, due to differences in factors such as geographical environment, development conditions, natural resources, and foundations, the social, economic and technological development of regions is unbalanced, and economic and technological gradients exit between regions. Gradient leads necessarily to spatial gradient transfer, i.e., transfer of productivity from high gradient developed areas to low gradient lagging areas, thus narrowing the regional gap and achieving relatively balanced economic distribution in a region. During the process, priorities are usually first given to high gradient areas with relatively good conditions to promote their rapid development, followed by transfer to low gradient areas. As the economy and technology continue to develop, the transfer gathers pace, and the regional gap is increasingly narrow. Ideally, regional imbalances will ultimately be eliminated. The cross-border areas of southwest China, Vietnam, Laos, Myanmar, and Thailand vary in gradient of social, economic and technological development due to disparities of factors such as geographical environment, development conditions, natural resources and foundations, which provides the foundation for vertical division of labor in organizations for collaborative development of cross-border areas. Evident differences in gradient are observed between Guangxi and Yunnan of China and Vietnam, Laos, Myanmar, and Thailand. By establishment of SEZs in the GMS, China aims to make these zones high gradient areas so as to enable transfer to low gradient areas, thereby creating a multi-win situation to boost the economic development of GMS countries. The gradient transfer theory has been an enduring topic of discussion among researchers, and has given rise to some new spatial transfer theories, the most important being the “inverse gradient transfer theory”. According to the anti-gradient transfer theory, the existing productivity gradient does not necessarily determine the order of introducing advanced technology and economic development. A region, whatever its gradient, can introduce advanced technology and engage in large-scale development when conditions permit if such actions are required for economic development. Advocates of the theory also claim that the gradient transfer theory denies development opportunities to lagging areas, which will cause these areas to always lag behind. There are also researchers alleging coexistence of various forms of transfer or dominance of gradient transfer—some argue that gradient transfer, anti-gradient (leapfrogging) transfer and mixed transfer coexist, and some, acknowledging the various forms of transfer at different levels, believe that the gradient transfer plays a dominant role, while other forms of transfer are only to be applied in a few sectors, areas or special periods. The gradient transfer theory does not conflict with the antigradient theory. The latter has fully justified the feasibility of establishing SEZs not only in China’s developed coastal areas, but also in its southwest border areas.

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Practice has shown that it is the demand for and possibility of economic development that determine the adoption of either gradient transfer or anti-gradient transfer. Low-gradient areas that lag behind can introduce cutting-edge technologies and promote the development of high-tech industries to pursue unconventional development, and transfer to high-gradient areas when they have achieved a certain level of development.

1.3.5 Geo-Economics Concerning the geopolitical, geo-economic and geo-cultural relations between China and its neighboring countries, some researchers claim that China now enjoys unprecedentedly friendly cooperation with neighboring countries, and that as the factors hampering cooperation are gradually removed, further improvement is expected in China’s sound political relations with neighboring countries. Peace and development represent the general trend of the world, and the world economy is increasingly moving towards regionalization and establishment of groups. The rising of China’s economy has enabled the fruitful economic cooperation and collaboration between China and neighboring countries. China’s border areas in the northeast, northwest and southwest have all established geo-cultural relations with neighboring countries, lubricating the opening-up and development of these border areas. From the geo-economic perspective, the southwest border areas of China are the only regions in the country bordering ASEAN countries including Vietnam, Laos and Myanmar, and are adjacent to Thailand. They are China’s overland gateway to the Indochina Peninsula and a hub of economic and trade ties and cooperation. These areas boast rivers, railways and highways running through several countries and adjoining coastlines. On both sides of the border are major cities such as Hanoi, capital of Vietnam, and Nanning and Kunming, respectively capital of Guangxi Zhuang autonomous region and Yunnan province in China, and hosts of small and medium-sized towns. China has established 12 ports approved by the State Council (Category A ports) and 16 ports approved by provincial governments (Category B ports) and a lot of border trade zones in the border areas, creating close economic and trade ties. Considering the important geographical location and unique geographical relations of China’s southwest border areas, it is necessary to study the cooperative development of these areas. The establishment of SEZs is a measure adopted by China to promote cooperation and development in the GMS, which will contribute to China’s geo-economic security. Some believe that efforts should be made to promote regionalization in East Asia to create an Asian market, which features openness, sound interaction and cooperation, thus reducing dependence on Europe and the US. The regionalization in East Asia will be conducive to satisfying the increasing demand for productive resources as China’s economic development gathers pace, and help open up the Southeast Asian market to win a bigger global market share and enhance economic cooperation in East Asia.

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1.3.6 Location Advantages On the relationship between border trade and location, the border location theory argues that the opening-up of border regions significantly reduces the trading costs in these regions. According to the theory, production in border regions is conducive to export, which makes these regions the best location for exporters. The establishment of border economic cooperation zones and other SEZs enjoying preferential tariffs and other preferential policies in border regions will enhance the performance of these areas, contribute to their prosperity and amplify the benefits of ports. It also counteracts the effects in border regions of a longer spatial distance due to economic location factors such as tariffs and border crossing procedures and a longer social and psychological distance due to non-economic location factors such as politics, economy, culture, faith, language, ethnicity and religion. Location advantages of border regions, including the gradient potential economic and social energy, border-crossing needs, and market expansion efforts of firms, can be leveraged to strengthen economic cooperation in these regions, create cross-border regional economic alliances, and advance the coordinated social and economic development in border regions. The establishment of SEZs is a way to reconstruct location advantages in border regions. Location in border regions and location advantages of border regions are different but related concepts. Amid the economic globalization and regional economic integration, as countries experience increasing border-crossing needs resulting from growing international trade, border regions have changed from peripheries to cores, which has led to reconstruction of the location in border regions. The establishment of SEZs can re-create the location advantages of border regions, which will enhance the significance of location in border regions and strengthen its role, thus reconstructing the location in border regions. The changes in external environment and factors, especially amid economic integration and open development, have led to increasing connectivity between economic activities of neighboring countries and frequent changes in such activities. SEZs are thus important in that they improve the significance and role of border regions, build up and integrate the complementary factors of countries on both sides of the border, and stimulate the development of border areas. This is where effective reconstruction is needed. The establishment of SEZs will better reconstruct location in border regions and location advantages of border regions.

1.4 Theories About Cross-Border Economic Cooperation and Related Empirical Studies Cross-border economic zones (CBEZ) are generally considered a mechanism for close cooperation between two countries in their adjoining border regions. Considering the state, characteristics and strengths of border regions in opening-up, in addition to the development of border trade and border economic cooperation zones,

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special customs supervision is combined with the efforts to create a favorable policy environment for industrial cooperation. Regions on both sides of the border are connected to maximize their interaction and complement each other’s strength, thus boosting the economic development of the border regions. CBEZs are different from SEZs. The latter generally refer to designated areas in a country where special policies featuring greater openness and flexibility than elsewhere in the country are adopted. CBEZs can follow the pattern of SEZs. Nonetheless, as such zones benefit from the special advantages of cross-border regions and concern the economic interests and policies of two or more countries and their cooperation, it is worth studying how CBEZs should be established and managed. Yuan and Xu (2009) defined CBEZ as a designated zone at the border between two countries, where special fiscal, tax, investment, trade and industrial policies are adopted and special cross-border customs supervision are exercised in some parts of the zone to attract people, goods, capital, technology, information and other factors of production to boost its development, which will stimulate the development of surrounding areas.

1.4.1 Relevant Theories The theoretical studies of cross-border economic cooperation can trace their roots to the location theory. German economist Alfred Weber introduced the theory of industrial location in 1909, according to which transportation cost and wages are the main factors determining the location of industries. The tenet of his theory is that the location factor determines the place of production, which attracts companies to areas with the lowest production cost and maximum saving in costs. Drawing on the studies of Weber et al., Christaller (1933) introduced the central-place theory, claiming that the central places serving the surrounding areas are developed according to the marketing principle, the transportation principle and the administrative principle. Lösch (1954) expanded the location theory with studies from the perspectives of market demand and supply, arguing that industries should be located in areas that allow profit maximization. Attaching great importance to the relationship between market areas and industrial distribution, Losch studied topics such as the number of the place of consumption in market areas of different scales and the maximum range of supply, introducing a new approach to the research of industrial distribution: from the perspective of the place of consumption. French economist Francois Perroux proposed the growth pole theory in 1950, saying that as economic growth usually spread from one or several growth centers to other sectors or regions, a specific geographical space should be chosen as the growth pole to stimulate economic development. The formation and development of growth poles result in the effects of polarization and spread. The polarization effect results in the return and concentration of various factors of production to/in growth poles, while the spread effect causes the spread of factors of production from growth poles to the surrounding less developed areas. The polarization effect plays a dominant role in the preliminary stage of

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development, but when the growth pole achieves a certain level of development, the polarization effect starts to weaken and the spread effect plays a stronger role. Starting from the 1950s, researchers applied the location theory, which had mainly been used for research of domestic economies, in studies of international economic cooperation, especially economic integration and sub-regional economic cooperation. Dutch economist Jan Tinbergen (1954), the first to give a definition of economic integration, proposed the notions of positive and negative integration. Positive integration refers to the modification of existing instruments and the creation of new institutions and their instruments by force to ensure the performance of the market and the realization of macroeconomic objectives. Negative integration causes opposite effects. The American economist Jacob Viner developed the theory of customs union in 1950, pointing out that the establishment of customs unions results in trade creation, diversion and expansion. Trade creation leads to gain in welfare of member countries, while trade diversion causes loss in welfare (Viner 1950). Spaak (1956) introduced the theory of common market, which was expanded by James E. Meade and Ian Wooton. Based on analysis of the impact of a common market on the price of factors and profits of members when free movement of factors of production is allowed, they believed that the establishment of a common market results in net income and increased national income of member countries, while the transfer of know-how and management skills raises the productivity and enhances the economic effects (Tian 2005). Scitovsky (1958) drew on the theory of common market and introduced the concept of mega-market to explain the competition effect of regional economic integration. In addition to productivity and economic effects, they also analyzed the competition effect of regional economic integration, arguing that the formation of a common market will cause intensified competition between companies, and small companies with comparatively inferior performance will gradually close, resulting in a big market economy dominated by economies of scale. The big market economy benefits from the competition effect of common market, because competition leads to the specialization of production, improvement of technology and adoption of advanced equipment of micro entities, thus contributing to economic growth (Scitovsky 1958). The above-mentioned theoretical studies largely focus on removal of trade barriers and acceleration of the flow of capital, labor and other factors of production, and resort to customs union, free trade zone, common market and other measures to achieve industrial agglomeration in a specific region and thereby achieving economic integration. Compared with the traditional location theory, the economic integration theory takes into consideration the economic interests of countries, making a significant contribution to the international economic cooperation and development. It is also the theoretical foundation of the research of the cross-border economic cooperation between China and Myanmar. Since the 1970s, in view of the growing trend of economic globalization and the new situation of economic development, many researchers have studied cross-border economic cooperation from the perspectives of foreign direct investment and industrial relocation. According to the theory of life cycle of industrial products introduced by Raymond Vernon in 1966, all industrial sectors and products go through four stages of the life cycle, i.e., introduction, growth, maturity and decline. Drawing on

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this theory, regional economists introduced the theory of gradient transfer of regional economic development. According to the gradient transfer theory, as products move through different stages of the life cycle, production transfers from high-gradient areas to low-gradient areas. Accordingly, developed areas should first speed up their development and then transfer the industries to less developed areas to stimulate the development of the overall economy. In the 1970s, Japanese researchers Kaname Akamatsu and Kiyoshi Kojima proposed the flying geese paradigm, according to which technology-intensive industries, capital-intensive industries and laborintensive industries should be distributed in countries or regions at different stages of economic and technological development. According to the theory, Japan, which headed East Asia in economic development with advanced technology and abundant capital, is the lead goose, and should mainly engage in technological development and industrial transfer; the Four Little Dragons, namely Hong Kong, Taiwan, Singapore and South Korea, with necessary capital and technology, should focus on the development of capital-intensive industries and some technology-intensive industries; the Association of Southeast Asian Nations (ASEAN) and China, which enjoy plenty of labor, should grasp the opportunities emerging from the industrial transfer from Japan and the Four Little Dragons to boost the development of labor-intensive industries, serving as the rear guard. The gradient transfer theory and the flying geese paradigm enrich and advance the research of international economic cooperation with studies from the perspective of products and industries while considering the time factor. Dunning (1977) introduced the eclectic theory of international production, according to which the foreign investment of companies is determined by three factors: first, the ownership advantages, i.e., access to and ownership of assets not available to foreign firms; second, the internalization advantages, i.e., the ability of companies to internalize their ownership advantages; third, the location advantages of the host country, namely its advantages in resource endowment, infrastructure, market potential, technological barrier, and foreign investment policies. In establishing CBEZs, attention should also be given to agglomeration of industries. A pressing issue in need of research is how we can create the conditions for industrial agglomeration in a designated area. Porter (1991) argued that as the principal advantage of industrial agglomeration is lower costs ensuing from economies of scale and economies of scope, the creation of a regional external economies of scale should be able to promote industrial agglomeration in the region. The new economic geography, representative researchers including Krugman, adopts the increasing returns-imperfect competition model to re-examine the spatial economic structure and its changes, and includes the economic geographical analysis into economic research. It uses the theory of increasing returns in research of the spatial agglomeration of economic activities. Spatial agglomeration is the indication of increasing returns. It is an economic effect following the concentration of industries and economic activities in a location, and a centripetal force that drives economic activities towards the center. The research of Krugman (1991) of the spatial concentration of economic activities mainly concerns three areas, i.e., increasing returns,

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agglomeration in space and path dependence. Increasing returns refer to cost reduction resulting from economically correlated industries and economic activities, proximity in space, or economies of scale. Agglomeration in space means the concentration of industries or economic activities in a location as a result of cost reduction following the agglomeration. Path dependence refers to the long-term agglomeration of a specific economic activity in a location due to first-mover advantage gaining from contingent historical events. According to the new economic geography, Fujita (2004) believed that factors resulting in spatial economic agglomeration include first nature (natural conditions), second nature (endogenous mechanisms leading to agglomeration) and the media (such as historical environment, public policies and emergencies), and that factors resulting in dispersion include increase in price of factors (such as price of land and wages) due to concentration of economic activities and congestion costs (traffic congestion and air pollution). According to the theory, cost reduction leads to spatial concentration of economic activities. Speaking of the factors resulting in agglomeration in cross-border zones between China and Myanmar, cost reduction can be achieved by complementary natural resource endowment and geographical advantages. On the other hand, high transportation costs, inadequate technology and wide funding gaps may lead to dispersion.

1.4.2 Empirical Studies In addition to theoretical studies of cross-border economic cooperation, researchers have also conducted extensive empirical studies in this regard and have put forward opinions and suggestions from various perspectives. Joachim (2000) studied the cross-border economic cooperation in Konstanz of Europe and found that professional associations between governments and nongovernmental organizations played a big role in boosting cross-border economic cooperation. Krieger-Boden (2002) studied the European integration from the perspective of the new economic geography, and concluded that the European integration will cause growing core-periphery-divide of regional income and divide between rich and poor member countries, therefore they called for compensatory regional policies to make up for the loss of some member countries. Lara and Traistaru (2003) investigated the impact of market integration on regional production structures and regional growth differentials in Hungary from 1994 to 2000, which revealed the relocation of manufacturing to border regions and increasing specialization. Martincus and Molinari (2005) examined the trade between Argentina and Brazil and found dramatically increasing intensity of trade, but no synchronization of business cycles; so, they attributed the high trade volume in this region to the border effect and suggested that border regions could boost the trade of cross-border regions. Some researchers believe that economic cooperation in border regions can be advanced by leveraging the advantage of cheap labor of a certain country in cross-border regions. The research of Fujimura (2006) of the GMS countries, however, showed that due to poor infrastructure, less developed countries and regions had difficulties attracting

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high-quality investment, as the advantage in labor cost cannot offset costs such as transport cost and the cost of building new factories. Kudo (2009) pointed out that in cross-border areas of less developed and developing countries, the less developed countries can utilize the better infrastructure of developed and developing countries and their cheap labor force to exploit the location advantages of cross-border zones and contribute to the economic development of these regions; to this end, he suggested establishing SEZs to enhance cross-border economic cooperation. A lot of Chinese researchers have also studied cross-border economic cooperation, in particular the cross-border economic cooperation in Northeast Asia, Southeast Asia and the GMS in terms of, inter alia, the choice of model, characteristics of location and cooperation conditions. In “Boundary effect and cross-border subregional economic cooperation—a case study of East Asia”, Tang and Zhang (2002) pointed out that subregional economic cooperation should be advanced by preferential trade, inter-governmental agreements and division of labor, development of multilateral projects and financial transfer managed by development banks. Du and Song (2004) analyzed the impact of the China-ASEAN Free Trade Area on foreign direct investment, claiming that the location advantages of the free trade area lead to investment creation and diversion effects, both of which contribute to increase in investment in the area. Li and Jiang (2005) conducted an empirical research of the agglomeration of enterprises with a case study of the maquiladoras in the border regions between the United States and Mexico. They concluded that the border regions between developed countries with horizontal linkages may become centers if their industries are highly related, but the border regions between developing countries with loosely related industries may face major difficulties evolving into central areas where enterprises agglomerate. After examining the models of economic cooperation between Xinjiang, China and Siberia of Russia, Wu and Yang (2008) suggested that these regions should pursue open and extendable subregional cooperation based on their economic complementarity, reduce and eliminate negative factors in cooperation such as unfavorable infrastructure and policies through reconstruction of location, and introduce binding institutions. Lei (2008) investigated the trade between India and Myanmar, which revealed that India was most concerned with its national security space and geopolitical interests in its efforts to promote economic and trade relations, especially border trade, with Myanmar, making further expansion of trade between the two countries difficult. This chapter is a review of the literature involved in this book, including theories of industrial clusters, institutional economics, unbalanced growth and cross-border economic cooperation. While covering a broad scope, the existing researches concern only general issues without systematic and detailed analysis of CBEZs. This book aims to fill this research gap with systematic studies of the establishment of such zones. Chapter 2 will analyze the theory and model of CBEZs, and draw on existing studies to analyze the main influential factors in the process.

References

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References Christaller W (1933) Central Places in Southern Germany, Translated by Carlisle W Baskin from the original publication. Die Zentralen Orte in Süddetschland Christaller W (1935) Central places in Southern Germany. Prentice-Hall, Englewood Cliffs Coase RH (1937) The Nature of the Firm. Economica 4(16):386–405 Du Q, Song Y (2004) Effects of China-ASEAN FTA on FDI. J Int Trade 3:51–54. (in Chinese) Dunning JH (1977) Trade, location of economic activity and the MNE: a search for an eclectic approach. MacMillan, London Fujimura M, Edmonds C (2006) Impact of cross-border transport infrastructure on trade and investment in the GMS. ADB Institute Discussion Paper no. 48 Fujita M, Krugman P (2004) The new economic geography: past, present and the future. Regional Sci 83:139–164 Iara A, Traistaru I (2003) Integration, regional specialization and growth differentials in EU acceding countries evidence from Hungary. Paper presented at the INFER annual conference, May 2003 Joachim B (2000) Emerging cross-border regions as a step towards sustainable development. Int J Econ Dev 2(3):402–439 Krieger-Boden C (2002) European integration and the case for compensatory regional policy. Paper represented at the 42nd European congress of the European regional science association, May 2002 Krugman P (1991) Geography and trade. MIT Press, London Kudo T (2009) Border area development in the GMS: turning the periphery into the center of growth. ERIA-DP-2009-15 Lei Z (2008) The status quo of border trade between India and Myanmar and the impact of India’s selection of eastward trade routes on regional economic cooperation. South Southeast Asian Stud Z2:34–42. (in Chinese) Li T, Jiang H (2005) The research on mechanism of sub-regional economic cooperation: an analyzing framework from the view of border effect. North Asia Forum 3. (in Chinese) Lösch A (1954) The economics of location. Yale University Press, New Haven Marshall A (1890) Principles of Economics. London, Macmillan Martincus CV, Molinari A (2005) Regional business cycles and national economic borders: what are the effects of trade in developing countries. Rev World Econ 143(1):132–156 Porter ME (1991) Towards a dynamic theory of strategy. Strat Manage J 12(S2):95–117 Porter ME (1998) Clusters and the new economics of competition. Boston. Harvard Business Review 76(6):77–90 Spaak PH (1956) Intergovernmental Committee on European Integration. The Brussels Report on the General Common Market Scitovsky T (1958) Economic Theory and Western European Integration. London, George Allen and Unwin Tang J, Zhang B (2002) The boundary effect and cross-border Subregional economic cooperation: a case study of East Asia. Human Geogr 1:8–12. (in Chinese) Tian Q (2005) International economic integration. Economic Press China, Beijing. (in Chinese) Tinbergen J (1954) International economic integration. Elsevier, Amsterdam Vernon R (1966) Comprehensive model-building in the planning process: The case of the lessdeveloped economies. The Economic Journal 76(301): 57–69 Viner J (1950) The customs union issue. Carnegie Endowment for International Peace, New York Weber A (1909) Theory of the Location of Industries. Chicago, The University of Chicago Press Wu M, Yang Z (2008) Models of economic cooperation between Xinjiang of China and West Siberian Region of Russia. Arid Land Geogr 31(3):470–476. (in Chinese) Yuan X, Xu Z (2009) A novel model of opening up border areas: cross-border economic cooperation zones—a case study of Honghe-Lao Cai CBEZ. J Int Econ Cooper 9. (in Chinese)

Chapter 2

Economies and Industries of Border Regions in China’s Southwest and Its Neighboring Countries

2.1 Border Economic Zones (BEZs) SEZs play an important role in promoting economic development. Their fundamental objective is to attract foreign investment in various industries with preferential policies (Ota 2003). Since the start of economic reform in China in 1980, SEZs have triggered enormous changes in China, including strong economic growth, rapid increase in employment rate in the SEZs, productivity gains and fast expansion of the country’s foreign trade (Ge 1999). In short, SEZs have become a major driving force for China’s economic development. China shares its 22,000-km-long border with fourteen countries, but border trade accounts for only five percent of its total trade. Moreover, the bulk of China’s foreign trade takes place in the coastal regions. To change the situation, the government of China has reached agreements with its partners in Asia on regional economic cooperation and other aspects. Under the circumstances, CBEZs are well recognized as a special kind of SEZs. China believes that new cross-border SEZs means new potential benefits arising from trade liberalization and economic growth, and seeks to achieve a better geographic and socioeconomic distribution of such benefits in relevant regions and even across the country. Policies for developing CBEZs mainly aim to attract attention and investment in border areas, which can stimulate the investment and trade between China and its neighboring countries, and boost the development of regions such as Yunnan and Guangxi in China and the social progress and economic development in neighboring countries. CBEZs have significant potential in catalyzing cooperation between China and other GMS countries in investment, trade, production and tourism and stimulating a greater outward orientation in the subregion (Wang and Nandy 2007). To promote the development of its border regions, China has been building statelevel BEZs since 1992. There are fourteen such zones in the northeast, northwest and southwest of China. Special policies are adopted in BEZs, where the open cities on the border prioritize border trade and export-oriented processing industry. Accordingly, © Social Sciences Academic Press 2022 Z. Wang and W. Wei, Cross-Border Economic Cooperation Between China and Southeast Asian Countries, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-19-0136-2_2

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BEZs play an active role in boosting trade and friendly relations with neighboring countries and promoting economic development in ethnic minority areas. In the past eighteen years, the central and local governments of China spent fourteen billion yuan on infrastructure construction, with a total construction area of ninety-two square kilometers, in fourteen BEZs. Major economic indicators of these zones have been growing at an annual rate of twenty to thirty percent. In terms of the input and output per square kilometer, on average, the expenditure of RMB 150 million on infrastructure yields tax revenue, gross domestic product (GDP), industrial output, and total export that is respectively twice, fifteen times, ten times, and thirty-two times the input. The per capita disposable income in these zones is now five to eight times higher than the level in 1992. It is evident that infrastructure construction in BEZs has become a main source of growth, which contributes to the rapid development of the local economy and community. China has set up five BEZs on its border to promote trade with other GMS countries. Hekou BEZ was established to boost the trade between China and Vietnam. In 2015, China was the largest border trade partner of Vietnam, accounting for eighty-five percent of Vietnam’s border trade, USD 27.56 billion. Ruili BTZ was established to catalyze the trade between China and Myanmar. In 2015, the largest share of Myanmar’s border trade of USD 6.369 billion was from China, reaching USD 5.294 billion, while Thailand, India and Bangladesh contributed USD 1.04 billion, USD 60.5 million and USD 10.49 million respectively. Mohan Economic Development Zone is on the border between China and Laos, which houses foreign trade and commercial companies. In 2013, the foreign trade in Mohan Economic Development Zone reached USD 2.5 billion. To strengthen the economic and trade cooperation with Vietnam, China has established BEZs in Pingxiang and Dongxing of Guangxi. An international highway and railway traverse Pingxiang, an area of 7.2 km2 , known as China’s South Gate. Pingxiang boasts customs, export specialists and freight forwarding companies. Statistics show that the annual trade between Pingxiang and the neighboring country exceeds four billion yuan (approximately USD 500 million), accounting for ten percent of China-Vietnam trade. Dongxing has also been conducting border trade with Vietnam since approved by the State Council of China in September 1992, and the government’s continuous efforts to encourage investment in border trade have paid off. Despite these achievements, BEZs have, for a number of reasons, failed to serve as the engine of economic development in border regions. In 2008, the total GDP of China’s fourteen state-level BEZs was only 1.3% of that of its state-level economic and technological development zones and fifteen percent of that of the western development zones. Foreign direct investment in BEZs was less than one percent of the same in state-level economic and technological development zones, and the cumulative investment in infrastructure in these zones was less than ten percent of that in economic and technological development zones in the east. It is therefore imperative to strengthen economic cooperation with neighboring countries to boost the development of border regions. To this end, a well-recognized strategy is to transform BEZs to cross-border economic zones (CBEZs).

2.1 Border Economic Zones (BEZs)

23

2.1.1 BEZs on the Border Between China and Vietnam The China-Vietnam CBEZ will cover an area of sixty-five square kilometers, the centers being Mengzi, the capital of Honghe, Yunnan province in China, and Lao Cai in Vietnam. In 2005, the local governments of two border areas, Honghe, Yunnan in China and Lao Cai in Vietnam, reached an agreement on the plan for establishing Honghe (China)-Lao Cai (Vietnam) Cross-Border Economic Cooperation Zone. The economic zone was set up along the Kunming-Ha Noi Economic Corridor, covering an area of 129.85 km2 . The economies of cities, especially the industrial parks in Kunming, Honghe, Yuxi and Wenshan in China and Ha Noi, Hai Phong, Quang Ninh, Hai Duong, Phu Tho, and Lao Cai in Vietnam, will serve as its supporting framework.

2.1.1.1

BEZs in Honghe, China

The industries in Honghe in Yunnan, China are relatively well-developed. Two important BEZs, i.e., Honghe Industrial Park and Hekou Economic and Technological Development Zone, are located in Honghe. Covering the land of Gejiu, Kaiyuan, and Mengzi, the total area of Honghe Industrial Park is expected to reach 65 km2 . The Kunming-Ha Noi Highway and the Yunnan-Vietnam Railway traverse the industrial park. The overarching goal is to develop the park into an integrated base for large-scale industries, a pillar for economic growth in the south of Yunnan, and spearhead of opening-up to Southeast Asia. The industrial park is divided into several functional zones, including those for processing of metallurgical materials, chemical products and biological resources, high-tech industries, and export-oriented processing industries. Hekou Economic and Technological Development Zone is located in Hekou county in Honghe, China. The Yunnan-Vietnam Railway passes through the zone. Hekou was approved by the State Council in 1992 as a border gate, and the Hekou border gate to Lao Cai was opened in 1993. The Kunming-Ha Noi Railway was then put into use in 1996, which has been a major means of land transport between China and Vietnam. Hekou BEZ was approved by the State Council of China in 1992, with a planned area of 4.02 km2 , which was later expanded to 24.1 km2 . So far, the construction area has reached 9 km2 . The governments of Hekou, Honghe and Yunnan have made consistent efforts to promote the development of Hekou BEZ. As shown in Fig. 2.1, the investment in fixed assets and the output of industrial companies above designated size in Hekou both show a rising trend. In particular, the industrial output of companies above designated size grew substantially in 2006. According to the official website of the local government of Hekou county, in 2016, RMB 1.15 billion would be invested in five infrastructure projects, for which tenders had been invited, including a highway connecting a road in the county and

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Fig. 2.1 Investment in fixed assets and output of industrial companies above designated size in Hekou county

a railway station, and the water plant and water pipeline network of Hekou-Lao Cai CBEZ; RMB 1.735 billion would be invested in eleven industrial projects, for which tenders had been invited, including a project for intensive processing of rubber, an ethanol fuel production line with an annual output of 100,000 tons, and a motorcycle assembly line with an annual output of 100,000 vehicles. The overall platform for industrial development in the border area of Honghe, China has been improving. Vigorous efforts are underway to promote the development of pillar industries.

2.1.1.2

BEZ in Lao Cao, Vietnam

The city of Lao Cao is the capital and political, economic and cultural center of Lao Cai province in Vietnam, and an important economic center in northern Vietnam. As stated in Prime Minister’s Decision No. 44/2008/Qd-TTG issued on 26 March, 2008 on the operational regulations of Lao Cai Border-Gate Economic Zone, the main objective was to make the zone a leading motive economic zone, with the development of cities, industries, trade and services in the Lao Cai-Hanoi-Hai Phong economic corridor according to the plan for building Vietnam-China border regions till 2020. Lao Cai Border-Gate Economic Zone comprises of four functional zones,

2.1 Border Economic Zones (BEZs)

25

i.e., a trade-industry zone, an industrial park, an urban and residential zone, and a border-gate management and control zone. Lao Cai Border-Gate Economic Zone contains a number of industrial clusters, namely Kim Thanh Commercial–Industrial Park, North Duyen Hai Industrial Cluster (covering 80 ha), East Pho Moi Industrial Cluster (covering 100 ha), and Tang Loong Industrial Cluster (covering 2000 ha). It is home to about 100 domestic and foreign firms, with registered investment of 2 trillion Vietnamese Dongs. Tang Loong Industrial Park is a state-level industrial park, the construction of which was expected to complete in 2015. From 2001 to 2015, the industrial output of Lao Cai grew at an annual rate of around ten percent. By the end of 2007, a total of thirty-eight projects with foreign direct investment had been developed in Lao Cai, among which eighteen projects were funded by investment from Yunnan, China. In 2009, Lao Cai earned revenue of USD 450 billion, and created more than 3000 jobs. A conference was held in 2016 to promote investment and tourism in Lao Cai, Vietnam, which disclosed several potential projects, including the Lao Cai airport, the Lao Cai-Ha Noi standard-gauge highspeed railway, the Red River inland waterway, the development of Sa Pa to a national key tourist area, the second phase of the Noi Bai-Lao Cai highway, and the Lao Cai central port economic zone.

2.1.2 BEZs on the Border Between China and Laos 2.1.2.1

BEZ in Mohan, China

Mohan, a town in Xishuangbanna of Yunnan province, is one of the first border gates of China approved in 1992. Since then, RMB 120 million has been invested to improve the infrastructure in the area. In particular, the industrial park for exportoriented processing industries in Mohan has attracted total investment of RMB 530 million. Mohan Border Trade Zone was set up in 2001 and renamed Mohan Economic Development Zone in 2006. From 2004 to 2008, the fixed capital investment in Mohan Economic Development Zone stood at RMB 36.9 million, RMB 77.3 million, RMB 80 million, RMB 86.6 million, and RMB 144.1 million respectively. In 2013, Mohan Economic Development Zone witnessed sound economic and social development and significant growth in major economic indicators: the government revenue exceeded RMB 200 million, the foreign trade reached USD 2.5 billion, and the per capita net income of rural residents reached RMB 5,350. In 2016, RMB 1.6 billion was expected to be invested in four projects, for which tenders had been invited, including a biomedicine processing and biomedical engineering project and the China-Laos International Convention and Cultural Exchange Center.

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BEZ in Boten, Laos

The Boten border crossing in Luang Namtha province, Laos is fifty-seven kilometers to the northeast of downtown Luang Namtha city. In China, Mohan BTZ was established in 2004, and is now in operation. In Laos, Boten BTZ is under construction. China is making increasing investment in Luang Namtha province and Ton Pheung and Huay Xai of Bokeo province in Laos. Sitting between China and Thailand, Luang Namtha province is expected to become a land transport hub. There is a place called “Gold Boten Special Zone” in Boten, but no official SEZ has been established in Boten so far. In addition, Boten does not have well-developed manufacturing, processing or assembly industries. In addition to agriculture which is its main economic sector, Boten has only a few hotels and entertainment facilities. Prime Minister’s Decree No. 89 issued on April 2, 2010 has been an important legal framework for the development of Boten SEZ, which specifies the principles and rules of organization, administration, and supporting investment policies of the SEZ. There are a number of economic zones and industrial parks in Laos. A famous one is Savan-Seno Special Economic Zone, which encourages the development of export-oriented processing, free trade, and logistics. Another example is Vientiane Industrial Park, which is eighteen kilometers from the capital city of Vientiane and fifteen kilometers from the Mekong International Bridge. According to official statistics of Laos, in the fiscal year 2014, the country received domestic and foreign investment in 2073 projects, the investment value of which totaled USD 9.723 billion, up by 216.7% year-on-year. This included USD 940 million in twenty-nine franchising projects, USD 8.43 billion in 2011 general investment projects, and USD 349 million in thirty-three projects in SEZs and economic zones. In the same period, the Lao government invested USD 780 million in 5169 projects.

2.1.3 BEZs on the Border Between China and Myanmar The China-Myanmar CBEZ will be established around Ruili in China and Muse in Myanmar. As the border trade between China and Myanmar grew steadily, the two countries reached a border trade agreement in 1988. The Myanmar Ministry of Commerce revealed that in the fiscal year from April 1, 2014 to March 31, 2015, the border trade between China and Myanmar reached USD 5.669 billion, an increase of USD 1.914 billion, or fifty-one percent, from USD 3.755 billion in the fiscal year ended on March 31, 2014.

2.1.3.1

BEZs in Dehong, China

There are two major industrial parks—Luxi Industrial Park and Ruili Industrial Park—and one BTZ, Jiegao BTZ in Dehong of Yunnan province, China.

2.1 Border Economic Zones (BEZs)

a.

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Luxi Industrial Park

The park is home to main industries such as intensive processing of agricultural products, processing of biological resources, and export of processed products, and subsidiary industries including the new construction materials industry and the pulp and paper industry. Mining and logistics are also taking off in the park. The park is composed of four districts: (i) Padi District for biological resources processing, green agricultural products processing, and innovative industries; (ii) Zhefang District, for machinery, export-oriented processing, and logistics industries; (iii) Beituo District, for silicon processing; and (iv) Longjiang District, for pulp and paper, food processing, and tourism products industries. The total planned area of the industrial park is 26.75 km2 , and the construction in an area of 0.87 km2 has been completed. In 2015, Luxi Industrial Park witnessed a significant growth of major economic indicators: the industrial output grew by 11.3% year-on-year to RMB 6.3 billion; the industrial added value grew by nineteen percent year-on-year to RMB 1.8 billion; the income from main business grew by 11.12% year-on-year to RMB 5.8 billion; the tax revenue grew by 6.1% to RMB 381 million; the investment in fixed assets amounted to RMB 900 million. b.

Ruili Industrial Park

There are two state-level border crossings in Ruili, namely Ruili, which was opened in 1987, and Wanding, which was opened in 1952. In 1992, Wanding BEZ and Ruili BEZ were set up. The overarching plan for Ruili Industrial Park has been adjusted according to the general requirement for the national key pilot zone for development and opening-up. As per the new plan, the industrial park consists of three sectors, namely Wanding sector for new industries, Mengmao sector (east and west), and Nongdao sector. Its area grows from 20.53 km2 to sixty square kilometers. According to the administrative committee of the industrial park, in the first quarter of 2016, forty-five firms entered the park, producing industrial output of RMB 204 million, including RMB 179 million from industrial enterprises with an annual output of more than twenty million yuan; the investment in fixed assets amounted to RMB 648 million, including RMB 180 million in the industrial sector and RMB 468 million in infrastructure. c.

Jiegao BTZ

Jiegao BTZ was set up in 2000. By the end of 2007, 109 firms—seventy-nine private firms, ten foreign-owned firms, and twenty state-owned or collective firms—had located in the zone. Jiegao has become the largest border gate between China and Myanmar. Jiegao BTZ borders Muse in Myanmar and covers an area of 1.92 km2 . According to its plan, it will promote trade, processing, warehousing, and tourism. According to the general plan for the trade zone, it consists of four functional districts: (i) a business district centering around Dongjinyi avenue, covering an area of 1065 µ (approximately 71 ha); (ii) a processing district centering around Beishangyi avenue, covering an area of 990 µ (approximately 66 ha); (iii) a storage district centering

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around Jiegao border fair, covering an area of 885 µ (approximately 59 ha); and (iv) a tourism district, centering around Moon Island in the Ruili River, covering an area of 660 µ (approximately 44 ha). The infrastructure in Jiegao BTZ is relatively well-developed. The land area of public roads, municipal facilities, and administrative offices totals about 74 ha. The total area of transferable land in the zone is about 121 ha, including about 12.5 ha on Moon Island and about 1.5 ha along the Nanbahe River, of which an area of about 8.5 ha is available for use. By the end of 2007, 1400 firms with a total capital of RMB 29.823 billion had been registered in the zone. From 2000 to 2007, the average value of imports and exports of the trade zone reached RMB 2.71 billion, registering an annual growth rate of twenty-two percent. The total value of trade of Jiegao accounted for sixty-four percent of the trade between Yunnan and Myanmar and twenty-six percent of the trade between China and Myanmar. An average of 5.24 million people and 850,000 vehicles passed through the border gate each year. With the exception of Jiegao BEZ, the total investment in the above-mentioned industrial parks is rather limited, and their land has not been fully used. Efforts are required to attract more investment. Proper and more preferential investment incentives will advance the development of economic development zones. China and Myanmar will also cooperate in nearby economic zones and industrial parks, including Yingjiang Industrial Park. From January to June 2009, about RMB 1.78 billions of industrial capital was invested in the area, up by 32.13% from the same period in 2008.

2.1.3.2

BEZs in Muse, Myanmar

Muse is Myanmar’s first crossing for border trade, which was opened in 1988 along with the establishment of an industrial park in Muse and a commerce and trade zone in White Elephant Street. A thirty-hectare heavy industry zone and a ten-hectare light industry zone were set up in 1994. The currencies of China and Myanmar as well as some other currencies have been used for settlement in import and export transactions since 1997. The annual China-Myanmar Border Economic and Trade Fair has been held in Ruili, Yunnan of China and Muse, Myanmar since 2001. Muse was one of Myanmar’s border gates approved in 2004, which is as important as Yangon border gate. Following the model of Jiegao in China, Myanmar government set up the 150-ha Muse Economic and Trade Zone in 2004, which is also known as the 105 Mile Border Trade Zone. China and Myanmar have been witnessing the transformation from border trade to general trade between the two countries since early 2005. Muse is now a land border gate of Myanmar with the best infrastructure, the largest facility, the most preferential policy, and the fastest growth rate. Main exports of Muse BTZ include agricultural, marine, forestry and mineral products, manufactured goods, and so on, and main imports are capital goods, raw materials, and commodities for daily use. The border trade between China and Myanmar at Muse and Ruili accounted for seventy percent of Yunnan’s total trade

2.1 Border Economic Zones (BEZs)

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volume with Myanmar. Since 2001, the China-Myanmar Border Trade Exhibition has been held annually, the venue rotating between border cities of the two countries. In 2015, the event was held in Muse, Myanmar from December 15 to December 21. Foreign investment in Myanmar increased by 174.1% from 2000 to 2005 despite wide fluctuations in some years, but the growth rate dropped from 2006 to 2015. On average, the annual growth rate during 2000 and 2015 was ten percent. Since Myanmar was open to foreign investment in 1988, up to the end of December 2015, China remained Myanmar’s largest foreign investor, with investment of USD 15.418 billion in 115 projects, accounting for 26.07% of the total foreign investment in the country. Singapore and Thailand ranked second and third with investment of respectively eleven billion US dollars and ten billion US dollars.

2.2 Profiles of Industries 2.2.1 Industries in Yunnan, China In 2015, Yunnan’s GDP reached RMB 1.37 trillion, up by 7.1% year-on-year, a growth rate 0.4 percentage point higher than the previous three quarters and 1.8 percentage point higher than the national growth rate. That made Yunnan the ninth in the country by GDP, compared to twentieth in 2014 and twelfth in the previous three quarters in 2015. The value-added of the primary, secondary and tertiary sector increased respectively by 5.9% to RMB 205.571 billion, 8.6% to RMB 549.276 billion, and 9.6% to RMB 616.941 billion. The total industrial value-added reached RMB 392.518 billion, up by 6.7% year-on-year. The value-added of the construction industry, the retail and wholesale industry, and the financial industry grew by respectively 14.8%, 6.2% and 13.5% to RMB 157.448 billion, RMB 133.462 billion, and RMB 98.186 billion. Yunnan’s per capita GDP increased by RMB 1751 to RMB 29,015, up by 8.1%, a growth rate 0.6 percentage point higher than in 2014. The shares of the three sectors in Yunnan’s economy were fifteen percent, forty percent and forty-five percent in 2015, showing some improvement from the structure of 15.5, 41.2 and 43.4% in 2014. The share of the tertiary sector was 1.7 percentage points higher from the level in 2014 (Fig. 2.2). Since 2006, Yunnan has made efforts to promote the development of five pillar industries, i.e., tobacco, tourism, electricity, biological resources, and mineral industry. These industries contribute to a large proportion of Yunnan’s GDP and serve as the main driving force of its economy. In 2015, the sales value of the tobacco industry in Yunnan increased by 4.7% year-on-year to approximately RMB 1.42 trillion, and the value-added of the tobacco products industry increased by 4.4% from a year earlier to about RMB 130.02 billion. Major cigarette brands, namely Yunyan, Hongtashan, Baisha and Liqun, sold about 41.69 million boxes, accounting for 83.72% of the total. High-end cigarettes sold 2,965,300 boxes, up by 3.1% from a year earlier. A dozen or so cigarette brands are

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Fig. 2.2 GDP and GDP growth rates of Yunnan from 2005 to 2015

exported to more than twenty countries and regions, including Japan, members of the Commonwealth of Independent States, Vietnam, and other countries in Europe, the Middle east, and Southeast Asia. With a concentration of rich hydropower resource, Yunnan provides the central and southern parts of China with electricity at a competitively low price. Yunnan Power Grid Co., Ltd. has also made active efforts to cooperate with its counterparts in neighboring countries such as Vietnam, Myanmar, Thailand and Laos. In 2015, Yunnan produced 235.24 billion kWh of electricity, including 197.89 billion kWh of hydropower and 26.484 billion kWh of thermal power. The value-added of the power and heat production and supply industries increased by 7.9% to RMB 53.576 billion. Thanks to the abundance of biological resources in Yunnan, enormous ecological industries have taken off in the province, including the production of green food, pharmaceuticals, special forest products, biological and biochemical energy, poultry, rubber and linen, flower and gardening products. In 2015, the GDP of the biopharmaceutical industry in Yunnan exceeded RMB 100 billion. Yunnan is rich in minerals including non-ferrous metals, ferrous metals and non-metallic minerals. In 2015, the output of ten non-ferrous metals reached 3.33 million tons, up by 3.87% from the level in 2014, and 38.5% from the level at end of the eleventh FiveYear Plan period. Among the total, there were 545,000 tons of copper, up by 6.9% year-on-year, accounting for 6.8% of the national output; 1.2 million tons of primary aluminum, up by twenty percent year-on-year, accounting for 3.8% of the national total; 1.14 million tons of zinc, up by 2.7% year-on-year, accounting for 18.5% of the national total; 346,000 tons of lead, down by 23.5% year-on-year, accounting for 8.96% of the national total; 85,000 tons of tin, down by thirteen percent year-onyear, accounting for fifty-four percent of the national total; 114,000 tons of antimony, down by sixty-three percent year-on-year, accounting for 10.1% of the national total.

2.2 Profiles of Industries

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Yunnan has also made remarkable achievements in technologies relating to precious metals. Among others, the development of technologies for processing of copper matrix, tin matrix, semiconductor materials, non-metallic inorganic materials, organic materials and composite materials is advancing the rapid development of the new materials industry. a.

Honghe, Yunnan

Honghe, Yunnan in China borders Lao Cai in Vietnam. The Hekou–Lao Cai CBEZ is thriving thanks to the efforts of the governments of China and Vietnam. In 2015, the GDP of Honghe reached RMB122.228 billion, up by 10.2% from the previous year at comparable price. The value added of the primary, secondary and tertiary sector was respectively RMB 20.199 billion, RMB55.379 billion, and RMB 46.65 billion, growing by 6.4%, 12% and 9.2% year-on-year. The total industrial value-added amounted to RMB 42.783 billion, up by 10.1%. The value-added of the construction industry grew by 19.7% to RMB 12.615 billion. The shares of the three sectors were respectively 15.5%, 45.3%, and 38.2%. Major industries in Honghe include energy, chemicals, metallurgical industry, biological resources, tourism and tobacco industry. The energy and chemical industries aim at all-round development. Considering local conditions, the local government has made great effort to promote the development of phosphate chemical and coal chemical industries, and accelerate the development of facilities for production of chemicals such as methanol, OME, ethylene and fertilizer. The metallurgical industry has also been booming. Iron ore in Honghe and surrounding areas has laid a solid foundation for development of the iron and steel sector, and for enhancing the production and processing capacity of tin, lead, zinc, copper, and bauxite. Honghe exploits iron alloy, industrial silicon, titanium, and gold through the mining industry, and promotes intensive processing and tin processing to further extend the industrial chain, maintaining a high annual growth rate of the metallurgical industry. The exploitation of biological resources has been developing steadily. In order to make the biological resources industry the pillar industry and a growth engine in development of green economy, Honghe adopts the market-oriented approach and makes great effort to improve and strengthen its traditional pillar industries and enhance cooperation with foreign countries to attract enterprises, capital, and technology for development of the biological resources industry. In 2015, the value-added of industrial enterprises with an annual output of more than twenty million yuan in Honghe totaled RMB 36.336 billion, an increase of 10.2% from the previous year. That includes RMB 17.713 billion from light industries, up by 7.1% year-on-year, and RMB 18.623 billion from heavy industries, up by 13.1% year-on-year. The valueadded of the tobacco products industry grew by 4.4% year-on-year to RMB 14.832 billion. b.

Dehong

Dehong, Yunnan in China borders Myanmar. A CBEZ is located in Ruili of Dehong in China and Muse in Myanmar. From 2005 to 2014, the contribution of the tertiary

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2 Economies and Industries of Border Regions in China’s …

Fig. 2.3 GDP and contribution of three sectors of economy in Dehong, Yunnan

sector to Dehong’s GDP first declined, and then climbed (see Fig. 2.3). However, the secondary sector grew much faster than the primary and tertiary sector. Since 2005, the secondary sector in Dehong has been grown rapidly, the GDP of which reached RMB 7.162 billion in 2014, accounting for twenty-six percent of Dehong’s GDP. The growth rate of the tertiary sector kept pace with that of the total GDP of Dehong, while the growth rate of the primary sector dropped slightly. Efforts are required to adjust the industrial structure of Dehong. Industries in Dehong fall into four categories. The first category produces exportoriented products based on Dehong’s natural resources, such as sugar, spice, pepper, tea, local special food, rubber, tin, and electrometallurgical products. The second category also relies on local resources, but their products, such as cement, are mainly for consumption in Dehong. The third is the trade-oriented processing industry, including processing of timber, jewelry, jade, and pharmaceuticals. The fourth is the essential industries which provide fundamental products and services to facilitate the development of local industries, including the hydropower, machinery, and coal industries. Hydropower, nonferrous metallurgy, and sugar industry are pillar industries of Dehong. In 2015, the industrial value-added of Dehong reached RMB 4.937 billion, an increase of 2.5% from the previous year. The value-added of power production and supply, sugar industry and ferrous metallurgy industry in that year was respectively RMB 2.156 billion, RMB 653 million and RMB 276 million, accounting for 43.7%, 13.2% and 5.5% of the total. This shows a lack of industrial diversity in Dehong despite the expanding size. At present, lack of diversity is the major factor inhibiting the sound and stable development of industries in Dehong.

2.2 Profiles of Industries

c.

33

Xishuangbanna

Xishuangbanna of Yunnan province borders Laos, and the Mohan-Boten CBEZ is located in the border area. In 2015, the GDP of Xishuangbanna reached RMB 33.591 billion, an increase of ten percent year-on-year. The value-added of the primary, secondary and tertiary sector was RMB 8.554 billion, RMB 9.463 billion and RMB 15.575 billion respectively, up by 5.4%, 13.8% and 9.3%. The share of the valueadded of the three sectors of economy in the total GDP of Xishuangbanna in 2015 was 25.5%, 28.2% and 46.4% respectively. Pillar industries include forest products, hydropower, tea, cannabis and TCM. Take the tea industry for example. In 2015, the tea growing area in Xishuangbanna was about 23,800 ha, the output value reaching RMB 267 million.

2.2.2 Industries in Lao Cai, Vietnam Most heavy and medium industries in Vietnam, including the state-owned coal, tin, chrome, and other mining enterprises, concentrate in the north. Industries in this area include the manufacturing of machinery, automobiles, air-conditioners, electric engines, motorcycles and bicycles, washing machines, beer, shoes, electric fans, transformers, ceramic tiles, kraft paper, sugar, electricity, chemical fertilizers, construction materials, steel, tires, refrigerators, seafood, glass, condensed milk, garments, television, cigarettes, MSG, diesel engines, crude oil and so on. Major industries in Vietnam are associated with food processing, garments, shoes, machinery building, mining, cement, chemical fertilizers, glass, tires, oil, coal, steel, and paper. The export value of Vietnam increased from USD 39.6 billion in 2006 to USD 162.11 billion in 2015. The chief exports of Vietnam are crude oil, marine products, rice, coffee, rubber, tea, garments, shoes and so on, which are mainly sold to the US, Germany, South Korea, Japan, mainland of China, Singapore, Hong Kong SAR and Taiwan. The value of goods imported to Vietnam increased from USD 44.4 billion to USD 165.65 billion in 2015, mainly being machinery, petroleum products, fertilizers, steel, cotton, crops, cement, and motorcycles from the mainland of China, France, Hong Kong SAR, India, Taiwan, South Korea, Singapore and so on. Each cluster in Lao Cai BEZ is designated a unique function. The Tang Loong Industrial Park, for example, is an industrial cluster for production of metallurgical and chemical products and related products, and a large proportion of its members are manufacturers of pure copper, phosphorus, steel and chemical fertilizers. Its production capacity of copper is 10,000 tons per year, and that of phosphorus fertilizer is 200,000 tons per year. The East Pho Moi Industrial Park, which is near Lao Cai Railway Station, mainly houses warehousing and logistics industries. Firms in this cluster are mainly engaged in installation and packing of electrical and electronic equipment and other services related to production. Major members include headquarters of railway and shipping companies, rubber companies and petroleum

34

2 Economies and Industries of Border Regions in China’s …

companies. The North Duyen Hai Industrial Park is located in the coastal area of Lao Cai and connects Lai Cai with the Kim Thanh Commercial-Industrial Park. Firms in the park are mainly engaged in production of high-quality construction materials, works of art, and handicrafts and installation and repair of machinery. There are currently thirty-one firms are in the park, including six from China and one China-Laos joint venture. Other plants in Lao Cai BEZ belong mainly to the fundamental sector, including vegetable processing and production of flowers, fruits, tea, and other cash crops. In addition, efforts are underway to carry out some other projects funded by China for production of potassium permanganate, including a sulphuric acid plant. The government of Lao Cai also encourages investment in other sectors of economy, such as new materials, new energy and high-tech products, biotechnology, information technology, machinery building, agricultural, forestry, and aquaculture, salt production, breeding of new plant and animal varieties, development and application of high technology, eco-environmental conservation, scientific research, and labor-intensive industries.

2.2.3 Industries in Laos Laos has made most of its economic sectors open to foreign investors, and especially encourages foreign investment in the energy industry, mining industry, agriculture and manufacturing industry. The main activities encouraged by the Lao government include (1) export of products; (2) agricultural and forestry activities, agroforestry, and processing and trade of handicrafts; (3) industrial processing and other industrial activities using modern technology, scientific research and analysis, and development, and activities relating to conservation of environment and biodiversity; (4) construction of infrastructure; (5) production of raw materials and equipment for use in key industries; and (6) development of tourism and transportation services. Meanwhile, foreigners are prohibited from some business activities in Laos, including (1) exploitation of forest for timber; (2) retailing; (3) accounting; (3) tourism; (4) operation of vehicles and machinery; and (5) paddy cultivation. In the border area between China and Laos, only a handful of companies in Laos are engaged in industrial operation.

2.2.4 Industries in Myanmar Myanmar is the second largest country in Southeast Asia. According to statistics of the World Bank, in 2014, Myanmar’s GDP reached USD 64.3 billion, 16.2% of which was from the secondary sector. Myanmar has a variety of industries, including the

2.2 Profiles of Industries

35

production of agricultural, forest and marine products, works of art, handicrafts, automobiles, construction materials, chemicals, computers and communication devices, electricity, fuel, rubber, beverages, tobacco, leather, tea, pulp and paper, textiles and garments, and so on. The large-scale industrial companies in Myanmar are all closely associated with the production of rubber, tea, coconut, tobacco, agricultural products, garments, textiles and cement, and petroleum refining. The value of goods exported from Myanmar, mainly coal gas, agricultural products, minerals, forest products, aquatic products, and so on, increased from USD 4.5 billion in 2006 to USD 11.03 billion in 2014. These goods are mainly exported to Thailand, India, mainland of China, Singapore, Hong Kong SAR, and so on. The value of goods imported to Myanmar, mainly consumer goods and capital goods from China, Singapore, Japan, Malaysia and Thailand, increased from USD 2.6 billion in 2006 to USD 16.23 billion in 2014. According to statistics released by the government of Myanmar, from January to July 2014, the import and export value of Myanmar reached USD 14.844 billion, up by 31.4% year-on-year. That consists of imports of USD 9.163 billion and exports of USD 5.681 billion, creating a trade deficit of USD 3.482 billion. The top three trade partners are China (USD 4.566 billion), Thailand (USD 2.88 billion) and Singapore (USD 2.395 billion). Provided that the Foreign Investment Law is followed, Myanmar allows economic activities of foreigners in almost all sectors of the economy. The Myanmar Investment Commission encourages investment in agriculture, animal husbandry, fishery, forestry, mining, manufacturing, construction, transportation, communications, trade, and so on. Any economic activity not covered in official regulations will be considered on a case-by-case basis.

References Ge W (1999) Special economic zones and the opening of the Chinese economy: some lessons for economic liberalization. World Dev 27(7):1267–1285 OTA T (2003) The Role of Special Economic Zones in China’s Economic Development as Compared with Asian Export Processing Zones. Asia in Extenso :1979–1995 Wang Y, and Nandy S (2007) Enhancing China-ASEAN economic integration: Cross-Border Economic Cooperation at the China-Vietnam Border. United Nations Development Programme Project Document

Chapter 3

Resistance to Cross-Border Trade Due to Border Effects and Its Influencing Factors

3.1 Introduction Cross-border economic cooperation and political relationship are gaining importance amid the global economic integration. To promote coordinated regional economic development and achieve the goal of common prosperity, the government of China is placing greater importance on cross-border economic cooperation. The “Action Plan for Enriching Border Areas and the Residents Therein (2011–2015)” (hereinafter referred to as the Action Plan) issued by China’s central government in May 2012 proposed to bringing development and opening-up in border areas to a higher level and improve cross-border economic cooperation. The “Decision of the CPC Central Committee on Some Major Issues Concerning Comprehensively Deepening the Reform” (hereinafter referred to as the Decision) passed at the third plenary session of the eighteenth CPC Central Committee in November 2013 specified that China would further open up inland and border areas and take advantage of the opportunity of worldwide industrial restructuring to promote coordinated development of trade, investment and technological innovation in inland areas. Chinese Premier Li Keqiang stressed at the annual conference of the Boao Forum for Asia in 2014 that China would implement the Belt and Road initiative and strengthen cross-border economic cooperation with neighboring countries. Since the start of reform and opening-up, China has seen increasingly frequent cross-border economic cooperation with its neighboring countries. The most distinctive feature is that the volume of cross-border trade keeps growing. Nonetheless, consumers tend to prefer products of their home country over foreign products of the same nature. This results in problems in distribution of gains between countries and increases the likelihood of trade frictions. Therefore, to promote cross-border trade, it is imperative to mitigate border effects between countries.1 1

Border effect refers to a situation in which there is more domestic trade than trade with neighboring countries due to the existence of borders between countries. © Social Sciences Academic Press 2022 Z. Wang and W. Wei, Cross-Border Economic Cooperation Between China and Southeast Asian Countries, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-19-0136-2_3

37

38

3 Resistance to Cross-Border Trade Due to Border Effects …

Border effects are a major barrier to cross-border trade. It raises the costs of cross-border trade, and impedes the flow of factors of production on both sides of the border. To promote cross-border trade and economic cooperation, countries on both sides of the border need to not only increase the volume of trade across the border, but also mitigate the impacts of border effects and reduce trade frictions. The concept of border effect was introduced by John McCallum in 1995. ShangJin Wei designed a gravity model in 1996 in a micro-level research, in which the constant elasticity of substitution (CES) utility function was used while controlling the national income. Researchers in China and other countries have since conducted further studies of border effects mainly in two areas: First, the existence of border effects and the difference in border effects between regions and industries. Concerning the border effect between countries and within regional economic alliances, researchers have conducted empirical studies of country pairs such as the US and Canada, China and a neighboring country, Japan and a neighboring country, members of the European Union, the ASEAN countries, developing countries, and so on. Research shows that economically developed countries and organizations have smaller border effects. Meanwhile, studies of border effects in different industries such as agriculture, animal husbandry, resource exploitation and manufacturing demonstrate that border effects are smaller in the manufacturing industry than in agriculture and resource exploitation. Second, ways to reduce border effects. According to new regionalism, border effects are caused by non-economic barriers such as differences in culture, security, history, institutions and society. Some studies show that border effects can be reduced through measures such as common language within a region, greater trade openness, further opening of cooperation zones, establishment of optimal currency areas, and improvement of transportation facilities. The establishment of BEZs, especially CBEZs, will mitigate border effects and reduce transaction costs. It will also boost the concentration of factors of production in border areas, facilitate the division and specialization of labor, and strengthen the trade relations between firms, thus enabling the formation of cross-border industry chains. Efforts to enhance peopleto-people exchanges and promote cultural integration in cross-border zones can also reduce border effects. In light of the issuance of the Action Plan and the Decision and the implementation of the Belt and Road initiative, we conduct a quantitative analysis of the border effect and its major influencing factors based on studies of the cross-border trade between Yunan, China and three neighboring countries, i.e., Laos, Myanmar and Vietnam (collectively referred to as LMV). We have chosen the research objects out of two considerations. First, the GMS Economic Cooperation Program initiated by the ADB in 1992 provides a sound mechanism for cross-border economic cooperation. The program aims to strengthen the economic ties between member countries and facilitate their economic and social development, so as to build an integrated, coordinated and prosperous subregion comprising Cambodia, China (specifically Yunnan and Guangxi), Laos, Myanmar, Thailand and Vietnam. Second, the State Council of China issued opinions on supporting Yunnan province in accelerating its development as an important gateway to the southwest in 2011, which specified

3.1 Introduction

39

the development goals of Yunnan in cross-border economic cooperation. According to the opinions, China will make efforts to open up economic belts in border areas, accelerate the building of economic corridors between Yunnan and other GMS countries, and strengthen the role of Yunnan in domestic economic corridors by improving the infrastructure and promoting the development of industries (especially industrial clusters). A research of the border effect and its influencing factors is thus of great significance to implementing China’s relevant policies and enhancing cross-border economic cooperation between China and its neighboring countries. It will also inspire future studies of border areas and provide policy implications.

3.2 Model Construction We first use the gravity model to analyze whether cross-border trade is influenced by border effects of LMV, and use the resistance function to estimate the value of resistance from the three economies due to border effects. After that, we construct an econometric model to analyze the key factors influencing border effects, and explore the ways to reduce border effects.

3.2.1 Construction of the Model The maximum trade flow between two economies without border effects can be estimated according to the gravity model of trade: Qij = A0

Yi *Yj Dij

(3.1)

where Qij stands for the potential maximum volume of exports from economy i to economy j; A0 is the modified coefficient; Yi is the GDP of economy i; Yj is the GDP of economy j; and Dij stands for the straight-line distance between the two economies. In reality, cross-border trade is subject to the influence of border effects. To be specific, border effects reduce the trade flow between two economies. Considering border effects, the gravity model is modified to qij = Qij *eαi BEij

(3.2)

where qij stands for the actual volume of exports from economy i to economy j; αi stands for the indicator of border effects; and BEij stands for the variable of the border effect of economy i on economy j.

40

3 Resistance to Cross-Border Trade Due to Border Effects …

Since the actual volume of bilateral trade is smaller than the potential maximum volume, the value of αi in Formula 3.2 is below zero. Take the log of both sides of Formulas 3.1 and 3.2, we get the model: lnqi jt = αi BEij + β1 logYit + β2 logYjt + β3 logDij lnqi jt = αi BEij + β1 logYit + β2 logYjt + β3 logDij

(3.3)

where BEij is a dummy variable for existence or non-existence of border effects; and Yit and Yjt stand for the GDP of economy i and economy j in year t. The impacts of border effects can be estimated according to the variable of border effect resistance (BER), which stands for the size of the impacts of border effects on potential trade flow between two countries. Based on Formulas 3.1, 3.2 and 3.3 we get Formulas 3.4 and 3.5 as follows: lnqi jt − logqiit = αi + β2 log

Yjt + β3 logDij Yit

  Yjt qi jt = 1 − exp αi + β2 log + β3 logDij qiit Yit   Yjt qi jt BERij = 1 − = 1 − exp αi + β2 log + β3 logDij qiit Yit

(3.4)

BERij = 1 −

(3.5)

In Formula 3.5, BERij stands for the resistance of economy j to economy i, qiit stands for the consumption and reinvestment in GDP of economy i in year t.

3.2.2 Influencing Factors of Border Effects Border effects are influenced by a host of factors, such as differences between countries in language (L), settlement currency (M), traditional culture (TC) and institutional system (IS), the consumption and investment ability (CIA) of the private sector and macroeconomic regulation and control (PB) in a country or region. The resistance model as shown in Formula 3.6 is constructed with the said variables as the explanatory ones and the resistance as the explained. BERij = γ1 Lij + γ2 Mij + γ3 TCij + γ4 ISij + γ5 CIAij + γ6 PBij

(3.6)

In Formula 3.6, the L variable is defined as whether Chinese is used as a lingua franca, the M variable is defined as whether the renminbi is used as the settlement currency. γ1 -γ4 are estimated to be above zero, because the smaller the differences in language, settlement currency, culture and institutional system, the smaller the impacts of border effects on cross-border trade. γ5 may be above or below zero, because the increase in investment and consumption ability of the private sector in a

3.2 Model Construction

41

country or region may result in more consumption of products of the home country or region and stronger impacts of border effect, or more consumption of foreign products and weakened impacts of border effects. Likewise, the improvement in macroeconomic control of a country or region may lead to strengthened or weakened impacts of border effects, depending on their attitude toward cross-border economic activities, so, γ6 may be above or below zero.

3.3 Data Sources and Processing 3.3.1 Data Sources Our data sources include statistical yearbooks of Yunnan province, and databases of the World Bank and the World Trade Organization (WTO). Trade relations of ten pairs, namely Yunnan-Yunnan, Yunnan-Myanmar, YunnanLaos, Yunnan-Vietnam, Myanmar-Myanmar, Myanmar-Yunnan, Laos-Laos, LaosYunnan, Vietnam-Vietnam, and Vietnam-Yunnan, are examined. The period concerned is from 1998 to 2012, and the value of t is from 1 to 15. The year 1998 is chosen as the base year, and all economic data are shown in constant prices to eliminate the impact of price fluctuation. The data for Dij, the variable for distance, are based on the search results in an online system for finding distance between cities based on their longitude and latitude.2 To ensure the accurate distance between relevant economies, we first measure the straight-line distance between major economic cities of the economies concerned, then calculate the weighted average to find the geographical center of these urban economies, and finally calculate the distance between the economies concerned. The rules for determining the value of other variables are specified in the following section. For the variable for border effect, if i = j, its value is 0; if i = j, its value is 1. Due to historical and cultural reasons, the languages spoken in Yunnan province are very similar to those in the neighboring countries. For convenience, the research is based on the assumption that a common language, Chinese, is used in the cooperation zone. Therefore, if i = j, the value of Lij is 1; if i = j, the value of Lij is 0. China started cross-border trade settlement in the renminbi in July 2009. Therefore, in years after 2009, if i = j, the value of Mij is 1; otherwise, its value is 0. The variable TC uses the disparity in traditional festivals as the substitution variable. In this chapter, the seventeen traditional festivals of Yunnan province, including the Spring Festival, the Lantern Festival, the Qingming Festival, and so on, are

2

http://www.hjqing.com/find/jingwei/.

42

3 Resistance to Cross-Border Trade Due to Border Effects …

Table. 3.1 Results of unit root test LLC test

HT test

Variable

t

P

Stationarity

Variable

z

P

Stationarity

Cij

−3.73

0.0000

Stationary

Cij

3.52

0.0007

Stationary

Yi

−3.09

0.0010

Stationary

Yi

3.91

0.0000

Stationary

Yj

−3.09

0.0010

Stationary

Yj

3.91

0.0000

Stationary

selected as the benchmark, so the value of TC is 1 for Yunnan province, 0.235 for Laos, 0.353 for Myanmar, and 0.706 for Vietnam.3 A negative correlation exists between the consumption and investment ability (CIA) of the private sector and its substitution variable, the debt ratio (PD) of the private sector. We calculate the ratio of the private sector’s debts to national income to obtain the debt ratio of the private sector of the four economies from 1998 to 2002.4 According to the negative correlation between CIA and PD, the annual CIA of the private sector is then calculated. The variable PB is based on the economic management cluster issued by the World Bank annually, in which the macroeconomic management and policies of economies are rated on a scale of 1 (low) to 6 (high).

3.3.2 Data Processing a.

Dependent variables

When i = j, the dependent variable qij stands for the exports from economy i to economy j; When i = j, the dependent variable qij stands for the GDP of economy i minus the output of the services sector and net exports. b.

Unit root test

The data we use are panel data, which may have non-stationarity. Unit root tests are thus performed to reduce the deviation. There are a lot of methods to test for unit root. We use the Levin-Lin-Chu Test (LLC test) and the Harris-Tzavalis Test (HT test) which are designed for test of strongly balanced panel data, as we use in this paper. Unit roots in time series data lead to fallacies in regression. As shown in Table 3.1, the values of p in both LLC test and HT test are small, showing a denial of the assumption that unit roots exist in the data at the significance level of one percent. 3

A total of seventeen traditional festivals are celebrated in Yunnan province, so it gets 17 points. The points of Laos, Myanmar and Vietnam in this regard are calculated according to their similarity to Yunnan in traditional festivals. Vietnam, for example, gets one point for celebrating the Spring Festival. Vietnam gets 12 points altogether. The data are normalized to obtain the figures as shown. 4 The average debt ratio of the private sector in Yunnan province of China, Vietnam, and Myanmar is 2.4%, 1.1% and 4.9% respectively. The figure is comparatively higher in Laos, reaching 25.7%.

3.3 Data Sources and Processing

43

The results of the LLC test and HT test show that the time series data used in this research do not possess root units at the significance level of one percent.

3.4 Results and Analysis According to statistics of the Statistical Bureau of Yunnan Province and the World Bank from 1988 to 2012, price fluctuations considered, the trade flow from Yunnan province of China to Laos, Myanmar, and Vietnam increased by 12.14 times, 4.33 times, and 13.09 times respectively; the trade flow from the three countries to Yunnan, China increased by 25.83 times, 16.52 times, and 26.61 times respectively. The trade flow from Yunnan, China to the three countries showed a marked increase in this period. The year 2012, however, saw much more goods of Laos, Myanmar and Vietnam provided to regions within the respective countries than to Yunnan, China: the former being 6.67 times, 5.89 times, and 5.33 times of the latter. In the same year, the goods sent to regions within Yunnan are 67.30 times, 6.39 times, and 5.02 times more than the same for export to Laos, Myanmar, and Vietnam.5

3.4.1 Estimation of the Resistance Caused by Border Effects Assuming that the impact of deviations is a random effect, we use the least squares method for estimation relating to Formula 3.3. The results as shown in Table 3.2 demonstrate a high Z value for estimated coefficient of each independent variable, all being significant at the confidence level of one percent. In addition, Wald chi2(6) = 147.70. In another words, the six independent variables, including HBi , Yi and Yj , can pass the joint significance test. The results show that an increase of one percent in the GDP of a country or region leads to an increase of 0.222% in its export; an increase of one percent in the GDP of a foreign country or another region leads to an increase of 0.538% in the GDP of a country or region; an increase of one percent in the distance between a country or region and another country or region leads to a fall of 0.498% in export. The significant coefficients of the BE variables for Laos, Myanmar, and Vietnam suggest that the cross-border trade between Yunnan and the three economies is affected by border effects. Based on the estimated coefficients of independent variables in Table 3.2, the values of the resistance caused by border effects of Laos, Myanmar and Vietnam to Yunnan’s cross-border trade from 1998 to 2012 are calculated according to Formula 3.5. 5

The wide gap between the goods provided to regions within Yunnan and to Laos is mainly attributed to three factors. First, the size of Yunnan’s economy is larger than that of Laos. Second, the consumption capacity of residents is greater in Yunnan than in Laos. Third, the trade flow between Yunnan and Laos is limited.

44 Table. 3.2 Econometric results of the gravity model

3 Resistance to Cross-Border Trade Due to Border Effects … Dependent variable: export Independent variable

Regression coefficient

Standard deviation

Z

BE2

−2.997***

(0.532)

−5.63

BE3

−1.222***

(0.356)

−3.43

BE4

−2.818***

(0.275)

−10.24

Yi

0.222**

(0.111)

2.00

Yj

0.538***

(0.087)

6.18

Dij

−0.498***

(0.039)

−12.78

Constant

4.299***

(1.734)

2.48

R-sq

Within

Between

Overall

0.8729

0.9882

0.8675

Obs: 15 * 10 = 150 Wald chi2(6) = 147.70 p = 0.0000 Robust standard errors in parentheses ***p < 0.01, **p < 0.05, *p < 0.1

Table 3.3 shows the results. The values of the three countries are all high. The values of Laos and Myanmar are decreasing. Meanwhile, the average value of Myanmar is the lowest, and the average value of Vietnam is the highest. The higher the value of resistance, the stronger tendency to prefer products of home country and Table. 3.3 Value of border effect resistance of Laos, Myanmar and Vietnam to Yunnan’s cross-border trade

Year

Laos

Myanmar

Vietnam

1998

0.9117

0.8701

0.9790

1999

0.9031

0.8619

0.9786

2000

0.8953

0.8645

0.9795

2001

0.8881

0.8527

0.9793

2002

0.8762

0.8155

0.9788

2003

0.8700

0.7866

0.9788

2004

0.8649

0.7813

0.9781

2005

0.8622

0.7723

0.9776

2006

0.8634

0.7452

0.9767

2007

0.8625

0.6913

0.9754

2008

0.8602

0.6143

0.9730

2009

0.8584

0.6020

0.9716

2010

0.8596

0.5672

0.9696

2011

0.8486

0.5161

0.9657

2012

0.8440

0.4900

0.9641

Average

0.8712

0.7221

0.9751

3.4 Results and Analysis

45

region. When the value of border effect resistance is high, the products of a country or region tend to be consumed domestically. Vietnam has the strongest resistance, mainly because most of its consumers’ demands are satisfied by domestic production. Vietnam has advantages in industries such as textile, food processing, non-ferrous metal smelting and rolling, and manufacturing of transportation facilities, and roughly the same industrial conditions as in Yunnan. Therefore, most of the products of Vietnam go to domestic markets, and only a small proportion of goods are exported to Yunnan, China through cross-border trade. The resistance of Laos and Myanmar is comparatively weaker, because they have weak industrial foundations and need a large volume of industrial products. The industries in which Laos and Myanmar enjoy advantages are largely based on resources, such as agriculture and mining. Excluding those for satisfying domestic demands, a large proportion of their products are exported to trade for industrial products and make up for the deficiency. Concerning the changes in resistance, the most significant decline is observed in Myanmar, and the smallest decrease is found in Vietnam. The changes reveal Yunnan’s strengthening trade relations with Myanmar and Laos, while no significant changes are found in its trade relations with Vietnam.

3.4.2 Influencing Factors of Border Effects The method of least squares is used to conduct regression analysis of Formula 3.6 to find the contributors to the border effect, the results of which are shown in Table 3.4. The estimates of the model show that the coefficients L, M, and the other three independent variables are statistically significant and in line with expectations, but the CIA coefficient is not significant. The value for F test is 7130.73 and the P value is 0.0000, showing no redundant explanatory variables in the model. The coefficient of determination, 0.9792, confirms goodness of fit of the model: 97.92% of the samples can be explained by the independent variables. The factor with the strongest impact on border effect resistance is language (L). When two economies share the same language, the resistance is reduced by 0.7857. In practice, it is difficult to find two countries using exactly the same language. An implication of the strong impact of common language on border effect resistance is that the establishment of language training centers, such as Chinese teaching centers, helps mitigate the impact of border effect on trade. Traditional culture (TC) and institutional system (IS) are also factors having strong impacts on border effect resistance. When two economies share the same culture and system, the two variables reduce the resistance by 0.2327 and 0.1767 respectively. Cultural differences have an impact on consumers’ choice and result in a preference for domestic products. Differences in institutional systems raise the costs of crossborder trade. Settlement currency (M) and macroeconomic regulation and control (PB) have relatively minor impact. When the same settlement currency is used and

46 Table. 3.4 Econometric results of the resistance model

3 Resistance to Cross-Border Trade Due to Border Effects … Dependent variable: BER Independent variable

Coefficient

Standard deviation (Robust)

t

L

−0.7857***

(0.04060)

−19.35

M

−0.0955**

(0.03616)

−2.64

TC

−0.2327***

(0.03582)

−6.50

IS

−0.1767***

(0.02749)

−6.43

CIA

−0.0007

(0.05566)

−0.01

PB

−0.0083*

(0.00493)

−1.69

(0.01685)

51.40

Constant

0.8662***

F (6.53) = 7130.73 (P = 0.0000) R-squared = 0.9792 Observations: 60 Standard errors in parentheses ***p < 0.01, **p < 0.05, *p < 0.1

PB reaches the maximum value of 6, the two variables reduce the resistance by 0.0955 and 0.0083 respectively. Using the same settlement currency, such as regionalization of the the renminbi in GMS countries, cuts transaction costs. Improvement in macroeconomic regulation and control creates a stable market environment for cross-border trade, thus reducing risks and transaction costs.

3.5 Conclusions and Policy Implications To better implement its cross-border trade policies, China must have a clear understanding of the resistance to cross-border trade and its influencing factors. This study begins with an analysis of the impacts of border effects on cross-border trade, using the gravity model, based on panel data of trade flow between Yunnan, China and Laos, Myanmar and Vietnam. Results show that border effects lead to discriminative consumption in a region and that the discrimination grows with the coefficient of border effects. It then goes on to use a resistance function to calculate the border effect resistance of Laos, Myanmar and Vietnam to Yunan, China from 1998 to 2012. No significant differences are detected, though Vietnam has the highest resistance, followed by Laos and Myanmar. Finally, we explore the contributors to border effects based on a factor analysis model. Results show that several factors help reduce border effects, such as the use of a lingua franca and a single settlement currency, reduction of differences in culture and institutional system, and improvement in macroeconomic regulation and control. The above conclusions provide the following policy implications for cross-border trade between Yunnan, China and LMV:

3.5 Conclusions and Policy Implications

47

Yunnan is confronted with considerable resistance due to border effects in its efforts to promote cross-border trade with LMV. In comparison, Vietnam has the highest resistance and Myanmar has the lowest. It is thus advisable to take into account such difference in border effects and economic conditions of the border areas to promote cross-border trade phase by phase while implementing national policies on opening up border areas. The use of a lingua franca on both sides of the border is the most significant contributory factor to reduction of border effects. While it is difficult to unify the languages across the border, in China’s endeavor to open up its southwest border areas, it may set up language (especially Chinese) training centers in cross-border trade zones. This will give full play to the positive effect of a lingua franca and facilitate cross-border trade. The reduction of differences in culture and institutional system also helps mitigate border effects. Governments may take measures to encourage cross-border cultural exchanges. For example, governments may organize exchange activities, and provide civil societies with preferential and convenient conditions and facilities. Meanwhile, since the convergence of institutional systems reduces border effects, governments may establish SEZs in border areas to create a favorable institutional climate for development of firms on both sides of the border. Use of the same settlement currency and improvement in macroeconomic regulation and control can also reduce border effects. It is thus advisable to promote regionalization of the renminbi in cross-border trade zones, which will reduce transaction costs and resistance to cross-border trade. Better governance or administration efficiency of the government will also create a favorable market environment for cross-border trade.

Chapter 4

Factors Affecting Firm-Level Investment and Performance in Border Economic Zones and Implications for Developing Cross-Border Economic Zones Between the People’s Republic of China and Its Neighboring GMS Countries

4.1 Introduction The establishment of cross-border economic zones (CBEZ) in the border areas of the People’s Republic of China (PRC) and its neighboring Greater Mekong Subregion countries has recently emerged as a strategy for further promoting trade and investments in the subregion. Unlike a border economic zone (BEZ), which is confined within the national territory, a CBEZ is an economic zone traversing a transnational area and requiring a unified set of policies and incentives in such areas as finance, taxation, investment, trade, and customs regulation. While no CBEZ currently exists in the GMS, the establishment of this type of zone has recently been initiated for Hekou–Lao Cai along the North–South Economic Corridor border involving Yunnan province in the PRC, and Lao Cai province in Vietnam. The design of incentive packages to be implemented in the CBEZ is thus a major challenge for policy makers. To help inform the design of incentive policies in CBEZs, this research studied BEZs in selected border areas in Yunnan province, and in Lao Cai province, with the objective of assessing (i) the factors that attract investments to the zones, and (ii) the effects of investment incentive policies on the performance of firms locating in these zones. Using three types of investment motives (market-seeking, resourceseeking, and efficiency-seeking) as dependent variables, and applying parametric and nonparametric analysis, the study identified significant variables that affect the firms’ locational decisions and investment performance. The implications of these variables on the design of incentive policies were subsequently analyzed.

© Social Sciences Academic Press 2022 Z. Wang and W. Wei, Cross-Border Economic Cooperation Between China and Southeast Asian Countries, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-19-0136-2_4

49

50

4 Factors Affecting Firm-Level Investment and Performance …

4.2 Background Despite its vast land area, the western region of the People’s Republic of China (PRC)1 is economically underdeveloped, far behind its eastern region in terms of gross domestic product (GDP) and income per capita. To narrow the gap between the eastern and western regions of the PRC, the central government adopted policy measures in 2000 for the development of western PRC, which was consistent with the overarching national goal of promoting equity and the well-being of the Chinese people across the country. Although significant improvements have been made since the implementation of the program, the economic gaps between eastern and western PRC are still large. The per capita income of eastern PRC in 2008 was 36,958 yuan, more than twice that of western PRC in the same year. Over the past 10 years, the PRC government continued to adopt policies to further promote the development of western PRC. Development priorities included the opening of border areas, increasing border trade, and encouraging economic and technical cooperation with neighboring countries. The PRC’s participation in regional initiatives, such as the Greater Mekong Subregion (GMS) Program and the ASEAN+32 initiative, supported these priorities. The landmark Association of Southeast Asian Nations (ASEAN)-China Free Trade Area (ACFTA) agreement that came into force in January 2010 gave a further boost in intensifying trade between the PRC and the dynamic economies of ASEAN. Investments from both local and foreign sources were encouraged in border areas to exploit local resources, promote industrial processing, generate jobs, and increase local revenue. Various forms of border economic zones (BEZ) were established as a means of increasing economic exchanges with neighboring countries. The government undertook improvements in infrastructure and adopted effective investment policies to attract domestic and foreign direct investments in the BEZs in order to develop the manufacturing sector and increase trade. This research studied BEZs in selected border areas in Yunnan province—one of the most underdeveloped provinces in western PRC—with the objective of assessing (i) the factors that attract investments to the zones, and (ii) the effects of investment incentive policies on the performance of industries locating in these zones. The results of the study are to be used as basis for the design of investment incentives for CBEZs, which Yunnan province has been planning to develop with neighboring countries. The establishment of CBEZs is a potential strategy that could be adopted for transnational regions such as the GMS. A CBEZ is a transnational economic zone in a border area, supported by preferential policies in such areas as finance, taxation, investment, trade, customs regulation, 1

In this study, the eastern region of the PRC refers to Beijing, Tianjin, Hebei, Shanghai, Jiangsu, Zhejiang, Fujian, Shandong, Guangdong, and Hainan while the western region includes Guangxi, Yunnan, Guanzhou, Sichuan, Chongqing, Tibet, Xinjiang, Qinghai, Gansu, Inner Mongolia, Shanxi, and Shaanxi. 2 ASEAN+3 is a grouping that includes the 10 ASEAN member countries plus the PRC, Japan, and the Republic of Korea.

4.2 Background

51

and industrial development, and where there is unrestricted flow of goods, capital, and technology. CBEZs can be an effective growth strategy of transnational regions, with the objective of exploiting the locational advantage of border areas to boost trade. CBEZs derive their competitive advantage from complementary factor endowments, cross-border infrastructure services, and reduced border barriers that could attract investments from both home and abroad (Li 2009). While a BEZ would be confined in the border area of a country, a CBEZ would encompass a border area between two countries with a unified set of policies being implemented within the zone. CBEZ can be especially beneficial for industries that are operating in a vertical supply chain. The idea to set up CBEZs in the GMS was one of the key recommendations of the North–South Economic Corridor Strategy and Action Plan discussed at the 15th GMS Ministerial Meeting held in Cha-Am, Thailand in June 2009. CBEZs were proposed to be set up along the North–South Economic Corridor to facilitate trade between pairs of countries traversed by the corridor. In June 2010, the Yunnan provincial government signed a framework agreement with Vietnam on the construction of Hekou–Lao Cai CBEZ. This was a significant step toward establishing CBEZs. Apart from Lao Cai in Viet Nam, Yunnan province had planned to set up CBEZs in the PRC–Myanmar border at Ruili–Muse, and in the PRC–Lao People’s Democratic Republic (Lao PDR) border at Mohan–Moding. The second step is to expand the three CBEZs through cooperation of special economic zones (SEZs) within Yunnan province with those in the border provinces of Viet Nam, Lao PDR, and Myanmar. Although Yunnan province has plans to set up CBEZs in borders with neighboring GMS countries based on its existing BEZs, no CBEZ has been established to date. This study covers BEZs in the PRC-Vietnam border (Honghe and Lao Cai), the PRC-Lao PDR border (Xishuangbanna and Boten), and the PRC-Myanmar border (Dehong and Muse). Since there are no BEZs on the border sides of Lao PDR and Myanmar, surveys were conducted in Honghe, Xishuangbanna, and Dehong on the PRC side, and Lao Cai on the Vietnam side.

4.3 Literature Review and Formulation of Hypothesis A firm’s decision to invest in a foreign country is affected by three key factors: ownership advantages, locational advantages, and internalization advantages. The first two factors are firm-specific while the third is host country-related. The study focuses on the locational aspects since this has important implications in the design of policies for attracting foreign direct investment (FDI) flows to the host country (Dunning 2001). Several studies have tried to investigate the factors affecting the location decisions of firms. The relative importance of the different location-specific determinants were discussed on four aspects of investment (Dunning 1993; UNCTAD 1998), namely (i) the motive (resource-seeking or market-seeking), (ii) the type of investment (greenfield or sequential FDI), (iii) the sector of investment (services or manufacturing), and (iv) the size of the investment. Other studies (Dunning 1993, Amiramahdi and Wu

52

4 Factors Affecting Firm-Level Investment and Performance …

1994, de Mello 1997, Kening 1997) have identified important location-specific determinants of FDI that include political stability, market size and growth, macroeconomic conditions, infrastructure, government policy, investment incentives, natural resources, cheap and skilled labor, and an appropriate institutional framework. In studies on firms with investments in the PRC (Cheng and Kwan 2000; Wei and Liu 2001; Fu 2000, Ng and Tuan 2002), important FDI determinants include market size, economic development, labor market conditions, infrastructure, and preferential taxes. The PRC recognizes the important role of SEZs in attracting FDI, and promoting trade, infrastructure development, employment creation, foreign exchange generation, export competitiveness, and technology transfer (Lakshmanan 2009). Although the SEZs’ pattern of development has been uneven, the SEZ policy in the PRC was considered a significant endeavor in the 1980s (Delfs 1985). Aimed at attracting foreign investments, SEZs provide flexible and innovative incentive packages that usually include duty-free privileges; concessionary tax rates, tax breaks, and exemptions; preferential fees for land or facility use; favorable arrangements with respect to project duration, size, sector invested, location, and type of ownership; and flexible treatment regarding business management, employment, and wage schemes, among others (Ge 1999). The failure or success of an SEZ is linked to the country’s investment policy and incentive framework, where it is located, and how it is developed and managed. Incentives alone cannot ensure the good performance of a SEZ, especially if these are not sufficient to offset the disadvantages of poor location and inadequate facilities. Besides incentive policies, other factors that could contribute to the success of SEZs include the availability of land to support the desired level of economic activity; strategic location and multimodal connectivity with major trading destinations; government participation in developing zone infrastructure; efficient and effective governance; availability of transport, trade, and investment facilitation; the availability of skilled and cost-effective labor force; and resource availability (Lakshmanan 2009). The overall investment climate is thus important for a firms’ decision to invest in an SEZ or a region. Drawing from investment theory and the findings of previous studies, this research tested the following four hypotheses. It must be noted that in this study, the term BEZ is used to refer to special economic zones located at the border with a neighboring country. Hypothesis 1: Incentive policies play a positive role in attracting investments to BEZs. Investment incentives can be categorized into fiscal (those related to taxes), and non-fiscal (those relating to financial policy support and investment facilitation). The motivation for a firm’s decision to invest—whether this is market-seeking, resourcesseeking, or efficiency-seeking—is an important consideration in determining the role of incentives. The role of incentives can also differ based on the firms’ characteristics and stage of development. Firms at an early stage of development may find those incentives that reduce the costs of investment expenditures more relevant, while firms at an expansion stage may benefit more from incentives associated with profit and

4.3 Literature Review and Formulation of Hypothesis

53

taxes. Compared with service firms, manufacturing firms attach greater importance to incentives related to asset depreciation, because large-scale investments are required for fixed assets. Investors without access to local investment resources would be attracted by start-up grants or financial support from local governments rather than tax holidays. Different incentives will affect a firm’s decision to invest differently. Hypothesis 2: Investment climate can affect a firm’s decision to invest. The investment climate is the totality of the economic, social, political, and legal systems that constitute a firm’s environment. A favorable investment climate can facilitate a firm’s ability to accumulate capital and increase output. According to the literature, such as Hall and Jones (1999), the difference in capital accumulation is, in essence, the difference in the investment climate between countries, which in turn, affects firms’ efficiency by influencing transaction costs. Factors Affecting Firm-Level Investment and Performance in Border Economic Zones 5. Hypothesis 3: Incentives have a positive impact on a firm’s performance. Incentives can contribute to the effective use of resources, while at the same time offsetting locational disadvantages, thus affecting performance. Similar to Hypothesis 1, the effects of incentive policies on performance can vary depending on the firm’s stage of development and the type of industry. This suggests that the design of incentive policies may have to be customized. Hypothesis 4: A good investment climate has a positive impact on the performance of firms. Investment climate includes transport facilities, logistics systems, and related infrastructure that are linked with the firms’ production and operations. It also encompasses good governance and a stable political and legal environment that can reduce the transaction cost of production and operation. In the short run, location, resource availability, and market potential can contribute to a firm’s stability but can affect a firm’s performance significantly once they are changed.

4.4 Methodology Data to quantify the variables were collected through field questionnaires and focus group discussions. The research hypotheses were tested using nonparametric and parametric methods. Nonparametric analysis was conducted to identify important factors and to test the effects of variables. Based on 5-point scale data, important factors were identified using an assessment index/score (I ij ) of variable, while the effects of variables were tested through cross-tabulation and chi-square statistics. An assessment score of the variable is constructed as follows: Ii j = 10 ×

n 1  Vi j − Vmin n i=1 Vmax − Vmin

(4.1)

54

4 Factors Affecting Firm-Level Investment and Performance …

where I ij is the assessment score of firm i to item j; n is the number of firms answering item j; V min and V max are the minimum and maximum points of item j in a Likert scale. The multiplication of 10 is to enhance the scale of the index. The higher the index value, the better the assessment. The parametric analysis used the multinominal logit and the ordered logit models to assess the different incentives on the firm’s decision to invest. Explanatory variables were identified based on survey data for the assessment of the effects of incentive policies on the firm’s performance. Incentive policies that were studied include preferential tax policy, land use policy, finical service policy, labor use policy, and investment facilitation. Their values were generated from the recorded scale data using the principal component method and the scoring method. The basic statistics and correlation coefficient matrix of explanatory variables were analyzed. The results show that the collinearity of explanatory variables is not statistically significant.

4.5 Results 4.5.1 Nonparametric Analysis General profile of firms surveyed. In the border areas covered by the study, most investments are from domestic firms and very few are foreign-invested companies. Investments from non-state-owned firms account for 83.6% and state-owned firms account for 10.4%. Only 3.7% of total investment comes from multinational enterprises. A large number of firms surveyed is resource-based or resource–oriented (48.1%), followed by service-oriented firms (23.0%). The three largest groups in the sample are in wood processing and furniture making, basic metals processing, and the primary agricultural products processing. It is evident that the industries that located in the BEZ are natural resource-intensive, while capital- and technologyintensive industries are few. Trade. Some 41.5% of surveyed firms are exporters in raw materials (14%), machinery parts (4%), final products (67%), and other products (12%). More than half (54%) are exported to mainland of China, Lao PDR, Myanmar, and Vietnam, while the rest are exported to non-GMS countries. About 49% of surveyed firms have import activities, mostly in agricultural products. About two-thirds of imports are sourced from mainland of China, Lao PDR, Myanmar, and Vietnam. As the number of exporters and importers is less than 50% of the sample size, the firms covered by the study have no distinct export orientation. Imports are mainly raw materials, and exports are final products. Economic linkages. The economic linkages among firms indicate that products are mainly exported to meet the needs of foreign consumers while imported products are mainly raw materials from foreign producers (Table 4.1). Most firms have stronger linkages with the domestic market than with foreign markets. Business relations

4.5 Results

55

Table 4.1 Firms’ linkage with domestic and foreign markets Export activities

% of exporters

Import activities

% of importers

Export to foreign producer

14.9

Import materials from foreign producer

37.0

Export to foreign consumer

26.9

Import product from foreign producer

17.0

Sale to domestic producer

32.1

Buy materials from domestic producer

41.8

Sale to domestic consumer

55.2

Buy product from domestic producer

19.4

among firms mainly concern purchases of raw materials and sales of final products. Owing to the relatively few transactions of intermediate products, the linkages among firms are weak and the industrial chain is undeveloped. Thus, the level of industrial development is relatively low and the industrial chain is short and weak. In essence, foreign trade is the main cross-border economic activity. Investment motives. Seven motives of investment were tested through regional crosstabulations (Table 4.2). As chi-square tests reveal, responses to the motives of “Securing/maintaining a regional production base mainly to serve nearby foreign markets” and “Securing/maintaining raw materials, parts, components for selling Table 4.2 Motives-regional cross-tabulation

Securing/Maintaining raw materials, parts, components for production at home country Region

Yes

No

Total

PRC-Xishuangbanna

1

16

17

PRC-Honghe

4

47

51

PRC-Dehong

3

32

35

Vietnam-Lao Cai

10

21

31

Total

18

116

134

Statistical significance

χ2

χ2

7.815

= 12.363

(0.05,3) =

Securing low-cost production base for home markets PRC-Xishuangbanna

1

16

17

PRC-Honghe

3

48

51

PRC-Dehong

2

33

35

Vietnam-Lao Cai

23

8

31

Total

29

105

134

Statistical significance

χ2

χ2

7.815

= 65.679

PRC = People’s Republic of China Source Authors

(0.05,3) =

56

4 Factors Affecting Firm-Level Investment and Performance …

in the regional markets” were not statistically independent among the study areas. Their calculated chi-square tests for the two motives are 6.874 and 4.218, respectively, which are less than the critical chi-square, χ2 (0.05,3) of 7.815. However, the reverse was observed in the firms’ responses to the motive of “Securing/maintaining raw materials, parts, components for production at home country” and “Securing low-cost production base for home markets.” The χ2 (0.05,3) for the two motives are 12.363 and 65.679, respectively. Similar analyses were conducted to test two other motives. The calculated chi-square tests are 9.292, 69.254, and 16.359, respectively, for the motives of “Securing/maintaining raw materials, parts, components for selling in other markets,” “Securing low-cost production base for regional markets” and “Capitalizing on knowhow.” They are greater than the critical chi- square tests, x 2 (0.05,3) , which is 7.815, indicating that these motives were closely associated with regions where the firms invested. According to the frequencies for each motive, firms in Lao Cai are more prone to secure and/or maintain raw materials, parts, and components for production in their home country, and secure a low-cost production base for export to regional markets; while firms in Honghe tend to secure and/or maintain raw materials, parts, and components to be sold in other markets. Capitalizing on know-how is not a major motive for investment in the study area. Locational advantages. Assessment indices calculated from pooled data indicate that firms are optimistic about the economic growth potential in the region and attach great importance to the availability of local natural resources (Table 4.3). In general, incentive policies, social stability, real estate cost, and market potential are not considered as important as the previous two factors. The least importance is attached to labor. The low importance attached to labor and incentive policies indicate that these are not considered essential factors in attracting investments. Furthermore, low labor costs do not necessarily enhance comparative advantage; rather, comparative advantage in labor is a combination of labor quality, skills, and wage productivity. Across the BEZs covered by the study, investment incentives rated high in Lao Cai while incentive policy and political and legal stability rated low in Honghe. Across industries, resource availability expectedly rated high among resource-based firms, political and legal stability rated high among service-oriented firms, and economic growth potential rated high in other industries. Table 4.4 shows the effect of various dimensions of location advantages on investment decisions. Based on pooled data the highest importance was attached to geographic location of the BEZ in relation to shipping and trade routes. This indicates that the BEZs located in the terrestrial junctions of Yunnan province and other GMS countries offer a prominent location advantage in terms of trade routes. Scores from disaggregated data by region and industry were relatively higher than those calculated from pooled data. Location advantages vary from region to region, with Honghe obtaining the highest score on the presence of industrial clusters, consistent with its status as a relatively developed industrial area in Yunnan province.

5.89

3.91

4.48

4.50

4.70

4.96

F2

F3

F4

F5

F6

F7

By region

5.41

4.41

3.24

2.81

3.98

5.77

6.48

PRC-Honghe

5.50

6.35

6.39

5.58

4.60

5.69

6.07

PRC-Xishuangbanna

4.32

5.27

5.04

4.69

4.13

5.40

5.00

PRC-Dehong

6.21

5.24

5.93

6.45

4.56

6.70

6.94

Vietnam-Lao Cai

By industry

4.68

5.27

4.66

5.05

4.40

6.65

5.95

Resource-based industry

5.60

4.18

4.30

3.85

3.10

5.27

6.50

Other industries

4.20

4.40

6.07

4.52

4.29

5.34

5.91

Services

F1= Economic growth potential, F2 = Resource availability, F3 = Labor, F4 = Incentive policy, F5 = Political and legal stability, F6 = Real estate costs, F7 = Market potential, PRC = People’s Republic of China Source Authors

6.16

Pooled

Assessment score

F1

Factors

Table 4.3 The importance of factors affecting investment decisions

4.5 Results 57

5.80

3.89

4.57

4.43

4.67

3.62

3.63

3.18

3.76

F2

F3

F4

F5

F6

F7

F8

F9

F10

4.79

3.95

3.40

0.91

5.00

1.25

0.87

2.14

3.18

3.64

4.38

4.62

6.67

5.00

6.11

5.28

2.71

5.74

4.72

PRC-Dehong

3.96

3.84

5.00

4.24

3.67

6.17

4.62

3.33

6.88

3.87

Vietnam-Lao Cai

3.21

2.93

2.76

2.99

4.67

4.56

7.22

9.00

7.33

6.25

2.55

2.29

3.40

2.71

4.68

3.70

5.27

2.08

5.15

3.86

Resource-based industry

PRC-Xishuangbanna

PRC-Honghe

1.11

By industry

By region

3.19

1.90

2.91

2.97

4.95

2.71

4.38

2.93

5.00

3.04

Other industries

5.00

2.95

3.33

4.85

4.70

6.50

4.38

5.00

7.33

3.68

Services

F1 = Proximity to big city, F2 = Geographic location of the zone on shipping and trade routes, F3 = Distance from the nearest airport, F4 = Distance from the railway station, F5 = Higher standard of living, F6 = Presence of industrial clusters, F7 = High rate of literacy, F8 = Recreation facilities, F9 = Education facilities, F10 = Lower cost of living, PRC = People’s Republic of China Source Authors

3.79

Pooled

Assessment score

F1

Factors

Table 4.4 The importance of location features in investment decisions

58 4 Factors Affecting Firm-Level Investment and Performance …

4.5 Results

59

As a popular tourist destination, Xishuangbanna rated high in terms of good living conditions; and so did Dehong which lies in an important route to South Asia. Given its relatively good transport system, Lao Cai scored high in terms of traffic conditions. Ratings of locational factors by resource-based industries and other industries did not reveal significant differences. For service industries, the most important locational factors include the strategic location of the zone on shipping and trade routes, higher standard of living, and lower cost of living. The perceived benefits of locating in BEZs compared to other regions are reflected in Table 4.5. The most important benefits include geographical proximity to the investor’s own country, connectivity to important export markets, government incentives, availability of cross- border raw materials, and the assistance provided by the government during the establishment of the firm. This suggests that the appeal of BEZs comes basically from government incentives and assistance. The comparison across regions indicates that BEZs in Honghe are less attractive than in other regions. Generally speaking, the benefits of BEZs are confirmed by the surveyed firms. Investment incentives. Although location, resource availability, and economic growth potential exert important impacts on investment decisions, investment incentives are one of the most crucial factors affecting the inflow of investment. This is particularly true for BEZs. This section analyzes the effects of incentive policies in general, and then analyzes the impact of each type. Cross-tabulations were constructed to test whether there are regional differences in the importance of policies. As Table 4.6 shows, the chi-square test indicated that the importance of “investment service” is not statistically independent among regions. The importance of incentive policies vary significantly across regions as indicated by the chi- square tests. The incentive policies that are statistically significant include tax policies, financial support, land use policy, and labor use policy. “Investment service” is not statistically significant across regions. Based on frequency scores, firms in Xishuangbanna attach relatively equal importance to all policies; those in Honghe consider investment service to be important, while firms in Dehong attach least importance to labor use policy. Firms in Lao Cai attach importance to all policies. Tax policies. Table 4.7 reflects the relative importance of the different types of tax policies across the BEZs. In general, the importance of tax policy is relatively significant. Among the specific type of tax policies, customs duty, value-added tax, and turnover tax are considered the most important. Among the three regions in the PRC, there is no apparent difference since they implement similar tax policies. Across industries, customs duty and export tax rebate were rated high since corporations engaged in import and export activities account for a relatively large percentage of the sample. Land use policy. The rate of land use, the stability of land use policy, and the duration of land use (or tenure) are the most important factors affecting firms’ decisions (Table 4.8). Land use approval process ranks second in importance. Results indicate that land cost and land tenure are firms’ biggest concerns. There are no significant differences across regions or industries in terms of how land use policy affects investment

5.52

4.15

4.86

5.47

4.13

3.61

3.11

6.07

6.28

Q2

Q3

Q4

Q5

Q6

Q7

Q8

Q9

Q10

6.84

5.94

4.36

3.05

2.45

5.87

3.59

3.70

5.14

4.01

5.25

5.89

5.58

7.56

7.86

5.96

7.66

5.94

7.94

7.17

8.33

6.46

5.15

4.29

6.36

5.63

6.47

6.87

5.83

5.59

7.89

7.00

2.90

5.40

6.99

5.33

7.20

7.42

6.33

7.42

5.75

6.01

2.43

3.73

4.17

5.71

4.82

5.49

6.03

6.03

By industry Vietnam-Lao Cai

Resource-based industry

PRC-Dehong

PRC-Honghe

PRC-Xishuangbanna

By region

6.90

6.33

3.96

4.35

5.24

5.54

4.80

3.70

4.79

5.36

Other industries

7.67

5.38

5.30

5.45

5.94

5.95

5.11

6.97

5.80

6.96

Services

PRC = People’s Republic of China, Q1 = Better government incentives, Q2 = Assistance provided by the government during establishment, Q3 = Better infrastructure facilities, Q4 = Easier government rules, Q5 = Easy availability of cross- border raw materials, Q6 = Better law and order, Q7 = Less stringent environmental regulations, Q8 = Less stringent labor laws, Q9 = Better connectivity to important export markets, Q10 = Geographical proximity to investor’s home country Source Authors

5.63

Pooled

Assessment score

Q1

Benefits

Table 4.5 Perceived benefits from border economic zones

60 4 Factors Affecting Firm-Level Investment and Performance …

4.5 Results

61

Table 4.6 Policy-regional cross-tabulation Region

Investment service 1

2

3

4

5

9

Total

PRC-Xishuangbanna

0

0

7

7

0

3

17

PRC-Honghe

3

6

31

7

0

4

51

PRC-Dehong

0

5

17

9

1

3

35

Vietnam-Lao Cai

0

1

24

5

0

1

31

Total

3

12

79

28

1

11

134

Statistical significance

χ2 = 23.308 χ2 (15,0.05) = 24.996 α = 0.078

PRC-Xishuangbanna

0

1

9

3

1

3

17

PRC-Honghe

5

6

18

3

2

17

51

The tax policy

PRC-Dehong

0

9

11

10

1

4

35

Vietnam- Lào Cai

1

3

15

9

2

1

31

Total

6

19

53

25

6

25

134

Statistical significance

χ2 =

32.153

χ2

(15,0.05)

= 24.996

PRC = People’s Republic of China Notes 1 = Not important at all, 2 = Not important, 3 = Important, 4 = Very important, 5 = Most important, and 9 = Not applicable Source Authors

decisions. However, it was observed that informal “gifts” or payments made during land use approval process play a role in Xishuangbanna and Lao Cai, indicating that some form of rent-seeking occurs during the process of policy implementation. Investment services. As far as the investment service is concerned, efficiency is what firms value most. In general, the scores for various policies pertaining to investment services are high although there is no significant variance in terms of overall scores (Table 4.9). Some salient factors were observed in regional comparisons: delays in administrator decisions and a bad attitude of government officials were remarkably salient in Honghe; pre-entry services, effectiveness of the authorities in providing single-window clearances at the time of entry, and post-establishment support services by the zonal authorities were significant in Xishuangbanna; effectiveness of the authorities in providing single-window clearances, and effectiveness of the authorities in providing single-window clearances at the time of entry were salient in Dehong; and delays in administrator decisions and effectiveness of the authorities in providing single- window clearances were significant in Lao Cai. No significant discrepancy exists among different industries in terms of the opinion on investment services, and there is no pattern, either, both of which suggest a link to some specific problem in the investment service that firms encounter. Financial services. In general, the overall score of financial services is relatively low, although domestic financial regulation and easier finance approval process were

5.99

5.95

5.22

5.78

6.23

6.56

6.01

6.36

P3

P4

P5

P6

P7

P8

P9

6.39

7.20

7.39

6.76

5.49

4.70

6.13

5.53

7.23

7.73

5.00

7.05

6.35

6.25

5.89

6.91

7.17

4.75

6.60

7.08

5.69

5.75

5.58

4.73

6.52

6.85

6.61

5.60

4.92

8.00

7.85

6.13

6.05

5.93

6.67

6.21

6.25

5.38

6.09

5.80

6.10

5.25

6.09

5.82

6.01

By industry Vietnam-Lao Cai

Resource-based industry

PRC-Dehong

PRC-Honghe

PRC-Xishuangbanna

By region

6.56

6.71

7.39

6.91

5.28

6.29

5.92

5.93

7.18

Other industries

6.25

7.41

5.75

5.71

6.02

6.19

5.63

6.58

8.18

Services

PRC = People’s Republic of China P1 = Custom duty, P2 = Value-added tax, P3 = Turnover tax, P4 = Land use tax, P5 = Enterprise income tax, P6 = Tax rate, P7 = Tax preferential regulation, P8 = Export tax rebate, P9 = Tax exempt Source Authors

6.52

P2

Pooled

Assessment score

P1

Tax policy

Table 4.7 Importance of tax policy

62 4 Factors Affecting Firm-Level Investment and Performance …

6.64

6.77

5.86

3.77

Q3

Q4

Q5

3.41

5.81

7.34

7.50

8.99

6.15

8.44

7.35

7.06

6.47

3.30

6.02

6.97

6.67

7.58

6.34

7.42

6.69

8.28

7.31

4.90

5.78

6.70

6.51

6.75

By industry Vietnam-Lao Cai

Resource-based industry

PRC-Dehong

PRC-Honghe

PRC-Xishuangbanna

By region

3.72

5.94

7.33

7.33

7.84

Other industries

4.13

7.83

7.67

7.19

6.25

Services

PRC = People’s Republic of China, Q1 = Land use rate, Q2 = Land use life, Q3 = Land use policy stability, Q4 = Land use approval process, Q5 = Informal gift or payment expected or requested during application Source Authors

7.07

Q2

Pooled

Assessment score

Q1

Land use policy

Table 4.8 Importance of land use policy

4.5 Results 63

5.67

5.41

5.99

5.21

5.86

4.31

5.26

4.55

5.29

5.38

Q2

Q3

Q4

Q5

Q6

Q7

Q8

Q9

Q10

Q11

5.97

6.13

5.14

5.41

4.58

5.76

7.78

7.50

4.76

5.63

5.58

7.05

7.22

7.62

6.39

6.07

6.56

5.91

5.91

6.14

6.59

6.04

6.56

7.35

6.67

7.14

6.94

6.83

6.67

6.59

5.66

5.91

6.10

4.84

8.50

5.33

6.24

5.78

5.32

5.32

7.85

5.73

6.88

6.99

5.34

5.06

4.57

5.42

5.68

6.10

5.24

6.25

5.75

6.18

5.75

Resource-based industry

Vietnam-Lao Cai

By industry PRC-Dehong

PRC-Honghe

PRC-Xishuangbanna

By region

5.30

5.59

4.57

5.06

4.08

6.04

4.83

7.35

5.30

7.17

8.00

Other industries

5.65

6.94

5.93

7.04

6.49

5.76

5.87

6.30

4.78

6.67

6.67

Services

PRC = People’s Republic of China, Q1 = Complexities of rules and procedures, Q2 = Convenience in following rules and procedures, Q3 = transparency in the implementation of rules, Q4 = Delays in administrator decisions, Q5 = Attitude of government officials, Q6 = Effectiveness of the zone authorities in providing customs-related facilities and facilitating export procedures; Q7 = Effectiveness of the border economic zone authorities in dealing with labor-related problems, Q8 = Effectiveness of the authorities in providing single-window clearances, Q9 = Pre-entry services, Q10 = Effectiveness of the authorities in providing single-window clearances at the time of entry, Q11 = Post-establishment support services by the zone authorities Source Authors

5.69

Pooled

Assessment score

Q1

Investment service

Table 4.9 Importance of investment services

64 4 Factors Affecting Firm-Level Investment and Performance …

4.5 Results

65

considered relatively important (See Table 4.10). Across regions, finance approval process is the predominant factor, indicating the expectation that locating in BEZs can facilitate loan processing. No significant differences were observed across the different industries. Labor use policy. Most firms do not consider labor use policy to be important, and the labor use policy in the regions covered was not restrictive. The quality of labor is a much more important concern, considering that the government does not provide adequate support for the training of the workforce. Infrastructure. The chi-square scores in Table 4.11 indicate that responses to the availability of infrastructure were statistically related to the regions for electricity, warehousing facilities, banking facilities, high-quality telecommunication facilities, residential complex, and social utilities; the availability of water and gas and transport facilities were not statistically independent for the regions. Based on the frequency scores for each type of infrastructure, most firms placed high value on the availability of water or gas and transport facilities; firms in Xishuangbanna placed high value on all infrastructures except for residential complex facilities; firms in Honghe attached great importance to warehousing and banking facilities; while firms in Dehong gave higher importance to electricity and water or gas. Firms in Lao Cai placed a high value on all infrastructure except social utilities. As indicated in Table 4.12, most firms were satisfied with infrastructure conditions at the BEZs, in particular, the availability of water facilities, electricity, and internet and telephone connectivity, while transport facilities and logistics received lower satisfaction ratings. Scores for three BEZs in the PRC are similar, but firms in Lao Cai indicated a low level of satisfaction with electricity, warehouse facilities, hotels and restaurants, housing, and environmental quality. General assessment of BEZs. Cross-tabulations were conducted to compare the general assessment of BEZs in Honghe, Dehong, Xishuangbanna, and Lao Cai. The assessment consisting of five elements (incentive policy, governance, infrastructure, availability of production factors, and market potential) were done using a 5-point Likert scale. Results show that the general assessment of BEZs varied across the regions for each element. Firms in Xishuangbanna gave the highest value to infrastructure and the lowest value to market potential; firms in Honghe gave a high value to all elements; firms in Dehong gave low values to the availability of production factors and infrastructure, and high values to other elements; and firms in Lao Cai gave a high value to all elements except infrastructure.

4.5.2 Parametric Analysis Using parametric analysis, the section analyzed the factors affecting investment and firms’ performance in terms of the incentive policy and investment climate. The four hypotheses (refer to Sect. 2: Literature Review and Formulation of Hypothesis) were

5.51

3.28

4.79

2.67

Q3

Q4

Q5

3.75

8.33

2.75

7.30

6.83

6.50

6.25

5.21

6.15

5.19

4.62

5.13

6.25

7.63

6.11

3.88

5.86

6.77

6.77

6.77

2.67

5.28

3.42

7.32

5.77

By industry Vietnam-Lao Cai

Resource-based industry

PRC-Dehong

PRC-Honghe

PRC-Xishuangbanna

By region

3.33

4.35

4.19

5.68

5.30

Other industries

4.04

4.63

4.29

5.23

6.50

Services

PRC = People’s Republic of China, Q1 = Finance regulation of the host country, Q2 = Easier finance approval process, Q3 = Finance institutions in surrounding region, Q4 = Facilitation of border economic zone administrator, Q5 = Informal gift or payment expected or requested during application Source Authors

5.44

Q2

All

Assessment score

Q1

Financial support services

Table 4.10 Importance of finance support services

66 4 Factors Affecting Firm-Level Investment and Performance …

4.5 Results

67

Table 4.11 Infrastructure-regional cross-tabulation Region

Water or gas 1

2

3

4

5

9

Total

PRC-Xishuangbanna

0

0

8

7

2

0

17

PRC-Honghe

3

11

25

7

2

3

51

PRC-Dehong

2

5

14

8

2

4

35

Vietnam-Lao Cai

2

4

16

7

1

1

31

Total

7

20

63

29

7

8

134

Statistical significance

χ2 = 15.853 χ2

Region

Transport facilities 5

9

Total

PRC-Xishuangbanna

0

0

5

8

2

2

17

PRC-Honghe

1

2

16

28

2

2

51

PRC-Dehong

0

2

20

12

1

1

35

Vietnam-Lao Cai

0

1

17

12

1

1

31

Total

1

5

60

6

6

134

Statistical significance

χ2 = 15.908 χ2

1

2

(0.05,15)

3

58 (0.05,15)

= 24.996 4

= 24.996

PRC = People’s Republic of China Notes 1 = Not important at all, 2 = Not important, 3 = Important, 4 = Very important, 5 = Most important, and 9 = Don’t know, can’t say, not applicable Source Authors

tested using the multinominal logit (MNL) method. The variables and their measures are as shown in Table 4.13. The results provide important evidence and bases for formulating policies on the establishment of BEZs in the PRC. Impact of incentive policies on firms’ investment motives. The first hypothesis (H1)—incentive policies play a positive role in attracting investments in BEZs— was tested by using investment motives as the explained (dependent) variable. Using the motive of market-seeking as a reference group, the MNL method was applied using four control groups: Model 1 is estimated without controlling for the differences in regions and in industries, Model 2 controls for differences in industries, Model 3 controls for differences in regions, and Model 4 controls for differences in both regions and industries. The results in Table 4.13 indicate that the estimated coefficients of the regional variables are statistically significant in the firms’ decision to invest, while the estimated coefficients for the industry variable are not. The marginal effects of each model are estimated using the market-seeking motive as reference (see Table 4.14). The estimated coefficient for preferential tax policy is positive and significant, which means that the more generous the tax preferences given by the government, the more benefit firms can obtain and the higher is the probability for firms to seek resources or efficiency gains, other things being equal. Estimates of the marginal effects (see Table 4.14) show that the coefficients of the variables “market-seeking” (M) and “resource-seeking” (R) are negative and significant, while

7.17

5.92

6.17

5.57

5.94

6.06

6.25

6.71

6.57

6.26

8.36

8.17

Q2

Q3

Q4

Q5

Q6

Q7

Q8

Q9

Q10

Q11

Q12

Q13

8.37

6.73

6.63

6.73

7.14

6.94

7.14

5.00

5.41

5.52

6.35

9.00

9.20

9.00

6.73

7.56

6.73

7.56

0.00

6.76

10.00

8.23

9.00

10.00

8.54

7.50

8.23

8.59

8.33

7.04

6.92

6.11

5.37

6.85

5.91

6.30

6.36

7.42

7.33

7.74

8.06

3.55

1.61

1.29

5.32

5.16

6.45

5.32

6.94

4.63

3.06

6.77

7.69

8.27

5.59

6.43

6.15

5.63

6.04

5.74

5.00

5.89

5.57

6.13

7.73

Resource-based industry

Vietnam-Lao Cai

By industry PRC-Dehong

PRC-Honghe

PRC-Xishuangbanna

By region

8.63

8.38

6.75

6.88

7.32

7.13

6.38

6.15

6.83

6.75

6.49

9.15

8.90

Other industries

8.50

8.57

7.00

6.32

3.68

6.00

5.50

6.00

4.55

5.56

5.59

5.95

7.27

Services

PRC = People’s Republic of China, Q1 = Water facilities, Q2 = Electricity, Q3 = Warehouse capacities, Q4 = Container- handling facilities at the warehouse, Q5 = Transport facilities, Q6 = Logistics, Q7 = Recreation facilities, Q8 = Health care, Q9 = Hotel and restaurant, Q10 = Housing, Q11 = Environmental quality, Q12 = Internet connectivity, Q13 = Telephone connectivity Source Authors

8.11

Pooled

Assessment score

Q1

Investment service

Table 4.12 Infrastructure assessment of border economic zones

68 4 Factors Affecting Firm-Level Investment and Performance …

4.5 Results

69

Table 4.13 List of variables and measures Variables

Measurement

Dependent variables The motive of firm’s investment

Three motives, including market-seeking (M), resource-seeking (R), and efficiency-seeking (E) Detailed motives cover access to local and surrounding market, resources, application of technologies, and others. The responses are coded as 0 = No and 1 = Yes. The original data were further grouped into three groups 1 = M, 2 = R, 3 = E, using the cluster analysis method

Firm’s performance

It includes revenue, production efficiency, technology, import and export, product quality, production scale, and others in the past 3 years It is assessed using a 3-point Likert scale

Main independent variables Investment policy Tax type

The importance of tax types, including customs duty, value-added tax, turnover tax, land use tax, and enterprise income tax. They are assessed using a 5-point Likert scale. The data was changed to be continuous using normalized indices

Land price

The effect of lower land price The assessment of land price is coded as 1 = Cheaper in SEZ; 2 = No difference; and 3 = More expensive in SEZ. Using the “no difference” group as a reference, the other two were used as dummy variables in the model

Financial service

The importance of financial service in SEZ It is assessed using a 5-point Likert scale. The coded data were then changed to be continuous using normalized indices

Investment environment Resource availability

The importance of ease of access to local resources (natural resources, labor, and financial resources) It was assessed using a 5-point Likert scale. The coded data were then changed to be continuous using normalized indices

Market potential

The importance of market potential The market potential covers local demand, resource, market sizes, and market linkage. It was assessed using a 5-point Likert scale. The coded data were then changed to be continuous using normalized indices (continued)

70

4 Factors Affecting Firm-Level Investment and Performance …

Table 4.13 (continued) Variables

Measurement

Geographic location

The importance of geographic locational advantage Locational advantage is assessed in terms of proximity to a large city, transport convenience, industrial cluster, and prices of goods It was assessed using a 5-point Likert scale. The coded data were then changed to be continuous using normalized indices

Political and legal stability

The importance of political and legal stability It was assessed using a 5-point Likert scale. The coded data were then changed to be continuous using normalized indices

Governance

The importance of SEZ’s administration The administration efficiency was assessed in terms of ease, convenience, transparency, punctuality and efficiency. It was assessed using a 5-point Likert scale. The coded data were then changed to be continuous using normalized indices

Tax policy importance

The importance of preferential tax policy on firms’ performance It was assessed using a 5-point Likert scale. The coded data were then changed to be continuous using a normalized index

Land policy importance

The importance of preferential land policy on firms’ performance It was assessed using a 5-point Likert scale. The coded data were then changed to be continuous using a normalized index

Finance service degree

The degree of financial services that firm can access Financial services include financial agencies’ service, SEZ’s facilitation, preferential tax rate, and irregular payment in financing. It was assessed using a 5-point Likert scale. The coded data were then changed to be continuous using a normalized index

Investment service degree

The degree of investment facilitation service provided to firms It covers easiness, transparency, administration efficiency, custom service, and others It was assessed using a 5-point Likert scale. The coded data were then changed to be continuous using a normalized index

Satisfaction with labor policy

The effect of labor policy on firms’ performance Whether there are wage floor, available skilled labor, insurance payment, working time limit, restriction on firing employment, training, and others. They are coded as 0 = Satisfied or 1 = Unsatisfied (continued)

4.5 Results

71

Table 4.13 (continued) Variables

Measurement

Infrastructure change

Infrastructure covers utility, logistics, road, internet, hotel, education, recreation, and others. They are assessed using a 3-point Likert scale where: 1 = Worse, 2 = No change, and 3 = Improved. The coded data were then changed to be continuous using a normalized index

Governance

Governance covers the ease and length of time for review and approval, and others. They are assessed using a 3-point Likert scale. The coded data were then changed to be continuous using a normalized index

Loss from public utility interruption Loss from interruptions of public utilities They are assessed using a 3-point Likert scale where: 1 = No loss, 2 = Small loss, and 3 = Huge loss. The coded data were then changed to be continuous using a normalized index Irregular payment

Payments other than those as officially required It is assessed using a 3-point Likert scale where: 1 = Worse, 2 = No change, and 3 = Improved. The coded data were then changed to be continuous using a normalized index

Other control variables in the whole analysis Firm size

0 = small and large firms, with an annual revenue less than RMB 5 million; 1 = large size firms, with an annual revenue greater than RMB 5 million

Firm’s age

Number of years since firm’s location in SEZ

Industry dummy

26 specified industries were grouped into primary, secondary, and tertiary industries, using the former as a reference and the latter two as dummies

Region dummy

The four regions as mentioned Lao Cai is used as a reference, while other regions as dummies

RMB = yuan, SEZ = Special economic zone Source Authors

that of the variable “efficiency-seeking” (E) is positive and significant. Other variables being held constant, this means that the more preferential tax types are available, the higher the probability that firms would seek efficiency gains, and the lower the probability that they would seek market and resource advantages. As shown in Table 4.15, the coefficients for lower land price and financial support are positive and statistically significant for efficiency-seeking motives in Model 1, but they become insignificant as the variable of “region” is included. For the resourceseeking motive, the coefficients of the two policy variables are also insignificant. Thus, other variables being constant, lower land price and financial support tend to increase the probability that efficiency-seeking firms will invest in the study areas.

72

4 Factors Affecting Firm-Level Investment and Performance …

Table 4.14 Marginal effects of investment incentive policies on investment motives Item

M

R

E

Model 1 Tax type

(0.355)a

Land price: constant

Reference

Land price: cheaper

(0.0627)

M

R

E

0.334a

0.0338a

Model 2 0.303a

0.0515a

0.0162

0.0465b

(0.0487)

0.0233

0.0254

Land price: expensive (0.0207)

0.192

(0.171)

(0.0821)

0.238

(0.156)

Finance service

0.0122

0.026c

(0.0438)

0.0287

0.0151

(0.0371)a

0.039a

(0.0382)

(0.368)a Reference

Model 3

Model 4

Tax type

(0.0127)a

(0.0293)a

0.042a

(0.00192)a

Land price: constant

Reference

Land price: cheaper

(0.00026) (0.019)

0.0192

(4.45E-05) (0.009)

0.00904

Land price: expensive (0.00441) 0.283

(0.279)

(0.00039)

0.456

(0.456)

Finance service

0.000982

(0.0282)

0.000172

0.0272

(0.0274)

Lao Cai

Reference

Xishuangbanna

1a

(0.965)a

(0.0348)a

1a

(0.972)a

(0.028)a

Dehong

1a

(0.859)a

(0.141)a

1a

(0.883)a

(0.117)a

Honghe

1a

(0.948)a

(0.0515)a

1a

(0.955)a

(0.0454)a

Reference

0.0272

Reference

( ) = negative, E = Investment motivation is to improve firm’s efficiency, M = Investment motivation is to expand market, R = Investment motivation is to obtain resources a Coefficients is significantly different from 0 at the 1% level b Coefficients is significantly different from 0 at the 5% level c Coefficients is significantly different from 0 at the 10% level Note The results of the control variables, such as firm’s nature, firm’s age, and industry dummy variables, are not reported in the table Source Authors

However, the effects of two policies tend to diminish as the investment region is specified. The significance of the regional dummy variables suggests that greater attention should be given to regional differences of BEZs in the PRC-GMS border areas. As shown in Table 4.15, with reference to Lao Cai province in Vietnam, the coefficients of the three regional dummy variables are significant and negative, which means, other variables being held constant, there is a higher probability that market-seeking firms will invest in the study areas. As reflected in the estimates of marginal effects in Table 4.14, the signs of coefficients of the three regional variables are the same. The sign of the coefficient for market-seeking (M) is significant and positive, while those of the other two motives are significant and negative. The results indicate that, compared to Lao Cai in Yunnan province, the probability of market-seeking investment is higher, while that of resource- and efficiency-seeking investments is lower. In summary, the estimated results partially support hypothesis H1, which states that incentive policies have positive effects on investment decisions in the study

No

(120.4)

Log Lik

2.391

1.524

Industry dummy

(10.25)a

(3.872)b 2.206 Yes (115.7)

2.657

2.882

18.29a

(91.49)

No

0

16.59

4.428

12.17

(35.30)a 3.483

(23.81)a 2.655 (23.14) 2.914

Honghe

Constant

(33.52)a 3.431

(24.72)a 2.668

(21.35)a 2.844

(37.02)a 3.648

0.560

(0.105)

1.210

1.295

0.604

0.025

1.453a 0.514

Dehong

0.667

(0.769)

2.621e + 08

(39.72)

0.694

0.452

2.479a 0.758

R

Model 4

(23.07)a 2.789

0.548

(0.088)

1.207

1.375

0.580

0.0112

1.476a 0.513

E

(24.91)a 3.090

(5.518)b

0.393

(9.138)a

0.500

0.390

0.512

0.894c

0.149

0.911c

0.108

Reference

R

Model 3

Xishuangbanna

Lao Cai

Finance service

(42.90) 9.979e + 08

0.661

0.607

3.432e + 07 1.007

0.483

1.225b

(35.24)

0.466

0.150

2.566a 0.698

0.960

0.584

0.172

Land price: cheaper

1.435a 0.473

0.420

1.356b

Reference

Land price: constant

2.420a 0.672

1.370a 0.468

Land price: expensive

E

Coefficient (Reference: investment motivation is to expand market)

R

Tax type

Variables

Model 2

R

E

Model 1

Table 4.15 Estimation results of the impacts of incentive policies on investment decisions

(86.87)

Yes

(36.28)a 3.088

(36.89a 3.051

(35.06)a 3.247

0.726

(0.903)

30.60 0

(continued)

2.032e + 08

(58.50)

0.729

0.281

2.589a 0.770

E

4.5 Results 73

0.186

0.356

101.3

E

R

Model 4

0.389

110.5

E

( ) = negative, E = Investment motivation is to improve firm’s efficiency, R = Investment motivation is to obtain resources a Coefficient is significantly different from 0 at the 1% level b Coefficient is significantly different from 0 at the 5% level c Coefficient is significantly different from 0 at the 10% level Note Standard deviations are in italics. Results of the control variables, such as firm’s nature, firm’s age, and industry dummy variables, are not reported in the table Source Authors

134

0.153

Observations

52.91

43.56

Pseudo-R2

R

Model 3

Coefficient (Reference: investment motivation is to expand market)

E

LR

R

Variables

Model 2

R

E

Model 1

Table 4.15 (continued)

74 4 Factors Affecting Firm-Level Investment and Performance …

4.5 Results

75

areas. Among the incentives, preferential tax policy is the most important factor in attracting investments to the BEZs at present. Impacts of investment climate on firm’s investment motives. To test the second hypothesis (H2)—investment climate can affect a firm’s decision to invest—a model with a similar structure to that used in testing H1 was constructed. The explained variables on motives are the same as those used in testing H1. The explanatory variables and the controlled variables are different. The explanatory variables include location, availability of resource, market potential, political and legal stability, governance, and infrastructure. Location, availability of resource, governance, and infrastructure were quantified using the principal component analysis method, while market potential and political and legal stability were quantified using the assessment scores in the nonparametric analysis. The control variables include the firm’s ownership (whether it is privately owned; YES is 1, NO is 0), age, size, industry type, and geographic location. The test of the correlation matrix between the explanatory variables and the explained (dependent) variables indicated that the collinearity of the explanatory variables is not statistically significant. Four models (Models 1’-4 ) were estimated applying the MNL method. Model 1 is estimated without controlling for the differences in regions and industries, Model 2 controls for the differences in industries, Model 3 controls for the differences in regions, and Model 4 controls for the differences in both regions and industries. The results of model estimation are shown in Table 4.17. The coefficient of resource availability is positive and significant, implying that there is a high probability that resource-seeking investments will locate in the study areas. The variable resource availability is an assessment indicator of locally available natural resources (such as minerals and wood), cheap labor on both sides of the border, availability of skilled labor, and lower land price. The richer the natural resources and the lower the labor cost, the higher the probability that firms seeking resource or efficiency advantages will invest in the study areas, other things being equal. As revealed by the analysis of the marginal effects of investment climate on investment motives (See Table 4.16), the coefficient of the variables marketseeking and efficiency-seeking are negative and significant, while that of the variable resource-seeking is significant and positive. This means that the more resources are available, the higher the probability that resource-seeking investments will locate in the BEZs, and the lower the probability that market-seeking and efficiency-seeking investments will locate there. For resource-seeking and efficiency-seeking motives, the coefficients of market potential are positive and highly significant, indicating that the probability of these two types of investments locating in the BEZs tend to be higher, compared with market-seeking investment. Market potential is indicative of the growth prospects of the local economy and the importance of local market share. This varies across regions and industries. Based on the analysis of marginal effects, market potential has a significantly positive impact on the probability of efficiency-seeking investments. The reverse holds true for market-seeking and resource-seeking investment.

76

4 Factors Affecting Firm-Level Investment and Performance …

Table 4.16 Marginal effects of investment climate on investment motives Item

M

R

E

Model 1

M

R

E (0.0324)

Model 2

Resource availability

(0.222)

0.25

(0.0276) (0.223)

0.255

Market potential

(0.579)

0.381

0.198

(0.594)

0.397

0.197

Geographic location

(0.0211)

(0.0731)

0.0942

(0.014)

(0.076)

0.0899

Political and legal stability 0.188

(0.176)

(0.0121) 0.188

(0.17)

(0.0176)

Governance

(0.0583)

0.0916

(0.0333) (0.0518)

0.107

(0.055)

Infrastructure

(0.126)

(0.318)

0.444

(0.283)

0.404

Model

3

(0.121) Model

4

Resource availability

(0.006)

0.0898

(0.0838) (0.00627) 0.108

(0.102)

Market potential

(0.0202)

(0.107)

0.127

(0.115)

0.134

Geographic location

0.00196

(0.19)

0.188

0.216

(0.0193) 0.00222

(0.218)

Political and legal stability 0.0059

(0.00797) 0.00207

0.00581

0.00185 (0.00766)

Governance

(0.0116)

0.287

(0.275)

(0.0111)

0.275

Infrastructure

(0.00195) (0.765)

0.767

(0.00299) (0.765)

Lao Cai

Reference

Xishuangbanna

1

(0.869)

(0.131)

1

(0.883)

(0.117)

Dehong

1

(0.812)

(0.187)

1

(0.853)

(0.147)

Honghe

1

(0.885)

(0.115)

1

(0.891)

(0.109)

(0.263) 0.768

Reference

( ) = negative, E = Investment motivation is to improve firm’s efficiency, M = Investment motivation is to expand market, R = Investment motivation is to obtain resources Note The results of the control variables, such as firm’s nature, firm’s age, and industry dummy variables, are not reported in the table Source Authors

The results imply that market potential will attract business investments to raise efficiency, integrating available resources and market opportunities, and integrating geographically scattered production units so as to achieve economies of scale. The estimated coefficients for political and legal stability are all significantly negative (Table 4.17), implying that a sound political and legal system is positive for market-seeking investment. Table 4.16 shows that political and legal stability have a positive correlation with the probability that market-seeking and resource-seeking investment will locate in the study area, and a negative correlation with efficiencyseeking investment. Since politics is stable and a legal framework is in place in the surveyed areas, firms will invest for market-seeking motives but the probability is relatively small. According to some literature, infrastructure is an important factor affecting investments. In this analysis, the estimated coefficient of infrastructure for resourceseeking investments is negative, and that for efficiency-seeking investment is positive. However, the former is not significant while the latter is significant. The results of the marginal effects of investment climate on investment motives (Table 4.16) show

4.5 Results

77

that infrastructure has a significant and positive correlation with the probability of efficiency-seeking investments, and a negative correlation with market-seeking and resource-seeking investments. That is, the better the infrastructure, the higher the probability that efficiency-seeking investments will locate in the study areas. Regional differences have significant impacts on investment motives. The estimated coefficients of the dummy variable of region are negative and significant, Table 4.17 Estimation results of the impacts of investment climate on investment decisions Model 1 R

Model 2 E

R

Model 3 E

R

Model 4 E

R

E

0.458

1.117b

0.444

0.492

0.622

0.528

0.655

2.863a

3.648a

2.875a

3.730a

1.009

0.873

1.107

0.887

1.159

0.863

(0.529)

0.677

(0.620)

0.795

0.528

0.363

0.581

0.387

0.595

(0.884)b

(0.864)c (0.909)b (0.952)c

0.417

0.376

0.505

0.379

0.528

(0.370)

2.072c

0.298

2.085c

0.349

Variables

Coefficient (Reference: investment motive is market seeking)

Resource availability

1.081a

0.349

1.085a

0.285

1.002b

0.393

0.546

0.396

0.567

Market potential

2.285a

3.261a

2.334a

3.365a

0.651

0.960

0.660

Geographic location

(0.0875) 0.878c

(0.113)

0.298

0.305

Political and legal stability

(0.847)a (0.606) 0.299

0.401

0.300

Governance

0.335

(0.135)

0.346

0.770

1.082

0.775

1.138

1.118

1.260

1.134

1.344

Firm nature

1.041

(1.190)

1.100

(1.409)

(0.0529)

(1.469)

0.149

(1.634)

0.915

0.929

0.916

0.950

1.124

0.971

1.152

1.003

Infrastructure

(0.290)

4.206a

(0.241)

4.028a

(0.668)

4.231b

(0.483)

4.537b

1.037

1.451

1.052

1.488

1.373

1.838

1.399

1.874

Firm size

(0.558)

(1.397)c (0.577)

(1.431)c (1.025)

(1.599)

(0.917)

(1.512)

Lao Cai

0.580

0.781

0.838

0.794

1.012

0.515

(0.826)a (0.653)

0.588

0.778 0.981 Reference

Xishuangbanna

(25.31)a 4.681

(21.54)a (25.95)a (21.47)a 4.374 5.257 4.954

Dehong

(1.73)a 4.445

(21.59)a (22.29)a (21.48)a 3.950 4.975 4.497

Honghe

(23.65)a 4.610

(21.27)a (24.23)a (21.74)a 4.263 5.144 4.823

Constant Industry dummy

(2.860)

(9.716)a (4.220)

(7.255)c (18.56)a

12.06

15.86a

12.35

2.216

3.515

3.942

0

4.612

0

No

2.722 Yes

4.389 No

Yes

Log Likelihood (86.12)

(86.12)

(83.69)

(83.69)

(68.71)

(68.71)

(65.67)

(65.67)

LR

108.9

108.9

113.7

113.7

143.7

143.7

149.8

149.8

Pseudo-R2

0.387

0.387

0.405

0.405

0.511

0.511

0.533

0.533 (continued)

78

4 Factors Affecting Firm-Level Investment and Performance …

Table 4.17 (continued) Model 1 R

Model 2 E

R

Model 3 E

R

Model 4 E

Variables

Coefficient (Reference: investment motive is market seeking)

Observations

133

R

E

( ) = negative, E = Investment motivation is efficiency seeking, R = Investment motivation is resources seeking a Coefficient is significantly different from 0 at the 1% level b Coefficient is significantly different from 0 at the 5% level c Coefficient is significantly different from 0 at the 10% level Note Standard deviations are in italics. The result of control variables, such as firm’s nature, firm’s age, and industry dummy variables, is not reported in the table Source Authors

indicating that regional differences favor market-seeking investments. The marginal effects analysis reveals that the study regions in Yunnan province are more favorable for market-seeking investments, while that in Lao Cai has a higher probability of resource-seeking investments. Other aspects of the investment climate were also analyzed, including distance from the adjacent city, distance to railway stations and airports, and linkages with import and export markets. However, the estimated coefficients for all these variables were not significant and were therefore are not reflected in Tables 4.17 and 4.16. In summary, the estimated results of the models mostly support H2. The key findings are (i) aspects of the investment climate that have a significant effect on investment motives are the availability of resources, market potential, political and legal stability, and infrastructure; (ii) various aspects of the investment climate have different effects as investment motives change; and (iii) differences in investment climate in the regions studied are associated with different investment motives. Impacts of incentive package on a firm’s performance. To test the third hypothesis (H3)—incentives have a positive impact on a firm’s performance—four models were constructed using the ordered logit method (Table 4.18). Model I is estimated without including the dummy variables of industry and region, Model II is estimated by controlling for differences in industry, Model III is estimated by controlling for differences across regions, and Model IV is estimated by controlling for differences in both regions and industries. The explained (dependent) variables are improved performance, unchanged performance, and worsened performance. Results show that the estimated coefficients of the industry dummy are insignificant while that of the region dummy are very significant. Thus, Models 1 and 4 are discussed in further detail. In Model I, financial support service is the dominant explanatory variable affecting firms’ performance. This means that the more financial support services are extended to the firm, the higher the probability that the firm’s performance will improve. Another dominant variable is land use policy, indicating that the more preferential the land use policy, the higher the probability that the firms’ performance will improve.

4.5 Results

79

Table 4.18 Estimation results of effect of incentive policies on firms’ performance Variables

Model I coefficient

Model II coefficient

Model III coefficient

Model IV coefficient

Tax policy importance

0.213

0.404

(0.0147)

0.302

0.309

0.309

0.391

0.401

Land policy importance

0.628c

0.740b

0.113

0.0114

0.367

0.375

0.424

0.457

Finance service degree

1.889b

1.854b

1.357

1.428

0.919

0.897

0.976

0.921

Investment service degree

(0.282)

(0.718)

0.529

0.260

1.262

1.314

1.440

1.551

Labor policy satisfactory

0.213

0.404

(0.0147)

0.302

0.309

0.309

0.391

0.401

Lao Cai

Reference

Banna

(1.136)

(0.645)

0.762

0.895

Dehong

0.0139

0.450

0.822

0.928

(2.033)a

(2.443)a

Honghe

0.736

0.839

Cut 1

1.322

2.005

(1.690)

(1.187)

1.419

1.813

1.822

2.106

Cut 2

3.004b

3.757b

0.182

0.846

1.438

1.813

1.777

2.047

Industry dummy

No

Yes

No

Yes

Log Lik

(129.5)

(126.5)

(120.4)

(113.6)

LR

14.30

22.32

26.86

38.16

Pseudo-R2

0.0547

0.0766

0.121

0.171

Observations

134

( ) = negative a Coefficient is significantly different from 0 at the 1% level b Coefficient is significantly different from 0 at the 5% level c Coefficient is significantly different from 0 at the 10% level Note Standard deviation are in italics Source Authors’ estimates

On the analysis of the marginal effects of incentive policies on firms’ performance (see Table 4.19), results indicate that the higher the importance attached to land use policy and/or financial services, the greater the probability of improved performance; as a corollary, the probability of a worsened or unchanged performance will be lower. Given these results, hypothesis H3 is accepted as valid.

80

4 Factors Affecting Firm-Level Investment and Performance …

Table 4.19 Marginal effects of incentive policies on firms’ performance Tax policy importance

Land policy satisfactory

Finance service Investment degree service degree

Labor policy

Model I: No control industry and region difference Worse

(0.0282)

(0.0832)c

(0.25)b

0.0373

0.0144

No change

(0.025)

(0.0738)c

(0.222)b

0.0331

0.0128

0.0531

(0.157)c

(0.472)a

(0.0704)

(0.0271)

Improvement

Model IV: Control industry and region difference Worse

(0.0307)

(0.00116)

(0.145)

(0.0264)

0.00192

No change

(0.0448)

(0.00169)

(0.212)

(0.0386)

0.0028

Improvement

0.0755

0.00285

0.357

0.0651

(0.00472)

( ) = negative a Coefficient is significantly different from 0 at the 1% level b Coefficient is significantly different from 0 at the 5% level c Coefficient is significantly different from 0 at the 10% level Note Probabilities are calculated while evaluating all other variables at their average values. Other control variables, such as firm’s age, industry dummy, and regional dummy, are omitted from this table Source Authors

The results of Model IV show that, after the inclusion of dummy variables for region and industry, the estimated coefficients of policy variables are not statistically significant. The coefficient for the region dummy of Honghe is negative and significant. This implies that compared with the reference, Lao Cai, the probability of worsened or unchanged performance of firms in Honghe is greater. According to the marginal effect analysis, the probability of worsened and unchanged performance of firms in Honghe is 37.7% compared to Lao Cai’s 13.7%, while the probability of improved performance of firms in Lao Cai is reduced by 51.4%. Thus, when the region dummy is included, hypothesis H3 is rejected. In addition, the estimated cutoff points are very significant, indicating that the ordered logit model with four different letter grades is highly appropriate. Impacts of investment climate on a firm’s performance. To test the fourth hypothesis (H4)—a good investment climate has a positive impact on the performance of firms—a model with a similar structure to that used for H3 was constructed using the same explained (dependent) variables: worsened performance, unchanged performance, and improved performance. The differences lie in the explanatory variables. Explanatory variables are elements of the investment climate that include resource availability, market potential, geographical location, political and legal stability, governance, infrastructure, and logistics. The first four explanatory variables were created using the same testing methods as in H2. The value of governance was based on the recorded data from the survey question “how do you evaluate governance efficiency after your firm located in the BEZ?” In the questionnaire, governance is evaluated in terms of satisfaction about

4.5 Results

81

the procedure of administrative review and approval, time taken for the review and approval, and minimum fund requirement for entry. The survey data was aggregated to generate an index of governance. Using the principal component method, the value of infrastructure was generated from answers to the survey question “Have the following infrastructure changed for the past five years?” with reference to water supply, electricity supply, warehousing, cargo handling facilities, road facilities, and public utilities. The value for public utilities was based on recorded data for the question “Has your firm experienced interruption of the following services; if yes, please evaluate its impact on your firm.” The impacts were assessed using a 3-point Likert scale: great loss, small loss, and no loss. The value of the variable was generated by computing a comprehensive index. The impact of corruption on firms’ performance—a main concern in the developing countries—was represented in the study by the concept of irregular payment. Irregular payments may be required in dealing with the administrative processes, such as review and approval, issuance of licenses, customs clearance, labor supervision, environment monitoring, and taxation. It was assessed with a 4-point Likert scale: 1 = Never, 2 = Occasionally, 3 = Sometimes, 4 = Often/ regularly. The value of irregular payment is the mean of the assessment score for each source of irregular payment. Other control variables are same as in H3. The collinearity of explanatory variables were found to be statistically insignificant. Four models are constructed using the ordered logit method (Table 4.18). Model I is estimated without including the dummy variables of industry and region; Model II is estimated by controlling for differences in industries; Model III is estimated by controlling for differences in regions; and Model IV controls for differences in both regions and industries. Results show that the estimated coefficients of the industry dummy are insignificant while that of the region dummy was very significant. Thus, Models I, III, and IV are discussed in further detail. The coefficients of resource availability in the three models are significant at the level of one percent. In particular, the effect of resource availability in Model IV was investigated. As shown in Tables 4.20 and 4.21, the greater the resource availability, the higher the probability that the firms’ performance can be improved. The results of Model I show that better infrastructure and transport, logistics system, and electricity supply will lower a firm’s production cost, and thus improve the firm’s performance. In Model III, the coefficient of geographical location is significant at the level of ten percent. The survey data shows that the highest score was given to trade routes, while scores for other dimensions of geographical location were not as high. In essence, the effect of location on the improvement of firms’ performance is limited. In Model III, the coefficient of governance is significant at the level of five percent, indicating that the simpler the administrative procedures, the lower the administrative cost and time involved in doing business. In other words, the higher the efficiency of governance, the lower the transaction cost of production and operation. The role of governance is similar in Models III and IV. The coefficients of market potential, political and legal stability, logistics, interruption loss, and irregular payment are not statistically significant in relation to the probability of improved firm performance.

82

4 Factors Affecting Firm-Level Investment and Performance …

Table 4.20 Estimation results of the impacts of investment climate on firms’ performance Variables

Model I Coefficient

Model II Coefficient

Model III Coefficient

Model IV Coefficient

Resource availability

0.785a

0.714a

0.833a

0.714a

0.239

0.239

0.242

0.259

Marketing

0.385

0.405

0.214

0.169

0.383

0.409

0.368

0.386

Location

(0.189)

(0.101)

(0.406)c

(0.303)

0.210

0.212

0.223

0.221

(0.188)

(0.224)

0.256

0.275

0.197

0.189

0.220

0.232

Governance

0.583

0.530

0.884b

0.800b

0.356

0.375

0.381

0.398

Infrastructure change

0.378a

0.444a

0.164

0.210

0.123

0.122

0.147

0.144

Loss from public utility interruption

0.0655

0.190

0.101

0.312

0.182

0.195

0.288

0.295

Irregular payment

0.147

0.118

(0.0404)

(0.138)

Firm size

0.531

0.439

0.964b

1.013b

0.424

0.450

0.434

0.462

Primary industry

Reference

Political

Second industry

0.147 0.855

0.799

Third industry

(0.796)

(1.574)c

0.924

0.919

Lao Cai

0.111

Reference

Xishuangbanna Dehong Honghe

(2.304)

(2.357)

1.422

1.461

(0.348)

(0.327)

1.223

1.266

(2.744)b

(3.517)a

1.199

1.240

4.039b

4.433b

3.107

3.052

1.878

1.906

2.320

2.306

Cut 2

5.924a

6.382a

5.172b

5.282b

1.877

1.906

2.324

2.323

Log Likelihood

(118.2)

(115.7)

(110.0)

(103.9)

LR

35.79

41.68

47.76

63.14

Pseudo-R2

0.133

0.151

0.193

0.237

Cut 1

(continued)

4.5 Results

83

Table 4.20 (continued) Variables

Model I Coefficient

Observations

133

Model II Coefficient

Model III Coefficient

Model IV Coefficient

( ) = negative a Coefficient is significantly different from 0 at the 1% level b Coefficient is significantly different from 0 at the 5% level c Coefficient is significantly different from 0 at the 10% level Note Standard deviations are in italics Source Authors

In addition, when the dummy variable region is introduced, only the coefficient for Honghe is significant, indicating that, compared with Lao Cai, the probability of worsened or unchanged performance is higher in Honghe. To sum up, the estimation results partly support H4.

4.6 Conclusion and Policy Implications Drawing from the theory of FDI, the study assessed the impacts of incentive policy and investment climate on the investment motives and performance of firms located in the border economic zones of Yunnan province of the PRC and Lao Cai province of Vietnam. The findings are as follows: • Among the set of incentives, preferential tax policy plays a highly significant role in affecting a firm’s investment decisions. Two other significant factors are financial support policy and land use policy, although their effects become insignificant when regional differences are considered. • A firm’s investment decision is also affected by some elements of the investment climate, namely, resource availability, market potential, political and legal stability, as well as infrastructure. The probability of resource-seeking investments has a positive relation with preferential tax type, resource availability, market potential, and governance. Investments in Lao Cai have a high propensity to seek resource or efficiency advantages, while those in the border areas of Yunnan province tend to be more market-seeking. • Financial support policy has a positive relation with the probability of improved firm performance. However, its effect on firm performance becomes insignificant when regional differences are considered. As shown by the results of nonparametric analysis, financial support policy is associated with regional attributes. • Firms’ performance is affected by certain elements in the investment climate, namely resource availability, infrastructure, transport, governance, logistics system, electricity supply, and geographical location. However, these elements are

Resource available

Marketing

Location

(0.0527)

0.0962

(0.1070)a

(0.1960)a

No change

Improvement

Improvement

(0.1010)a

0.0623a

0.0391a

(0.0471)

0.0258

0.0213

(0.0279)

0.0422

(0.1180)a

0.1780a

No change

Improvement

(0.0758)

0.0501

0.0257 0.0686

(0.0453)

(0.0233)

0.0639

(0.0393)

(0.0246)

(0.0470)

0.0258

0.0213

Political stability

0.2000b

(0.1320)b

(0.0678)b

0.2210b

(0.1360)b

(0.0851)b

0.1460

(0.0798)

(0.0659)

Governance

0.0525

(0.0347)

(0.0178)

0.0410

(0.0252)

(0.0158)

0.0946a

(0.0518)a

(0.0428)a

Infrastructure

0.0781

(0.0516)

(0.0265)

0.0253

(0.0155)

(0.0098)

0.0164

(0.0090)

(0.0074)

Logistic interruption loss

(0.0345)

0.0228

0.0117

(0.0101)

0.0062

0.0039

0.0366

(0.0201)

(0.0166)

Irregular payment

( ) = negative a Coefficient is significantly different from 0 at the 1% level b Coefficient is significantly different from 0 at the 5% level c Coefficient is significantly different from 0 at the 10% level Note Probabilities are calculated while evaluating all other variables at their average values. Other control variables, such as firm’s age, industry dummy, and regional dummy, are omitted from this table Source Authors

(0.0143)

(0.0605)a

Worse

industry and region difference controlled

0.0536

0.2080a

No change

Model

(0.0329)

(0.1280)a

IV :

(0.0206)

(0.0802)a

Worse

Model III : region difference controlled

(0.0435)

(0.0887)a

Worse

Model I : no control of industry and region difference

Item

Table 4.21 Marginal effects of investment climate on firms’ performance

84 4 Factors Affecting Firm-Level Investment and Performance …

4.6 Conclusion and Policy Implications

85

region-specific. Firms’ performance is not significantly affected by other elements of the investment climate, including market potential, political and legal stability, logistics interruption loss, and irregular payment. In terms of the effects of investment climate on firms’ performance, firms in Lao Cai have a greater probability of improving their performance compared with those in Honghe. Policy Implications. The results of the study indicate that regional differences in terms of incentive policies and investment climate have important effects on firms’ investment decisions and performance. The following policy implications can be drawn from the study. Improvements in incentive policies and investment climate can play positive roles in attracting investments in BEZs, given the abundant natural resources in the border areas of the PRC and other GMS countries. However, most firms located in these BEZs are involved in the production of primary products and the industrial chains are short. In particular, few FDI is attracted to the study areas. To promote the development of CBEZs, improved incentive packages and a favorable investment climate are indispensable. Preferential tax policy is closely related to the probability of firms investing in the BEZs on account of resource availability. However, with the exception of a few firms in Honghe, most firms in the study areas are relatively young. Since tax policy is usually not flexible, long-term effects should be considered in designing tax policy. A high percentage of firms in the study areas indicated difficulty with financing or obtaining a loan. Better financing support policies and services could therefore facilitate the development of industries, especially small and medium-sized enterprises. To promote the development of BEZs, financing support policy should be designed according to region-specific situations and should be accompanied by corresponding financial services. In terms of the investment climate, it is essential to maintain resource availability, build market potential, and improve governance, but major efforts should also be made to improve infrastructure, including transport and public utilities. In particular, the logistics system should be given priority because it affects directly a firm’s production and operating cost. In Yunnan province, the investment policies for BEZs are the same as the policies for the development of the rest of western PRC. There is no specific policy for the border areas of Yunnan province; thus in terms of incentives, the border areas have no advantage over the rest of western PRC. Because economic development in Yunnan province is lagging, investment flows to the border areas are even less than those in the many other parts of western PRC. Thus, incentive policies should be designed to highlight the unique advantages of specific border areas to attract investments. In establishing CBEZs in the GMS, it is important to design policies that are consistent and mutually beneficial for the countries involved. Although there are great similarities in the incentive policies of the PRC, Lao PDR, Myanmar, and Vietnam, careful attention should be given to the differences in policies to ensure that these do not contradict each other and lead to unintended results. Thus while basic policy principles may be the same for countries sharing borders, it may be

86

4 Factors Affecting Firm-Level Investment and Performance …

necessary to differentiate policies that are applicable to CBEZs that may be set up in the borders of the PRC–Vietnam, the PRC–Lao PDR, and the PRC–Myanmar. Although it may not be possible to design a well-functioning policy package at one time, it may be possible to initiate small-scale, tentative efforts on a pilot basis based on mutual agreement. These pilot schemes can be improved gradually and subsequently expanded until a unified policy is realized. CBEZs can provide the great advantage of simple, convenient, and efficient movement of commodities, labor, and other production factors across borders. As revealed in the field surveys, firms encounter difficulties in the customs transit of products and raw materials. Since problems related to customs transit are associated with national customs policies, it is advisable that policies for CBEZs are designed with special features that can reduce the transaction cost of cross-border economic activities. The quality of labor is an issue considered important by many local firms. In addition to broad policies on the development of human resources, it may be necessary to also promote policies to enhance local human capital; otherwise, the lack of quality labor could become a bottleneck in the development of CBEZs. In addition to government programs, it may be desirable to engage professional training agencies, as well as the business firms themselves, in conducting education and training programs that could be entitled to special incentives. Moreover, although significant progress has been made with respect to the construction of cross-border roads, the corresponding traffic and logistics infrastructure still needs further improvement. Special incentives could be made available to firms that are willing to invest in these improvements. A majority of the firms surveyed in 2010 use their own funds to invest in the BEZs and very few receive support from the local financial agencies because the finance industry has been slow to develop. Moreover, there is lack of currencyclearing institutions, although several informal channels are involved in cross-border trade. The construction of CBEZs will require improved fiscal and financial services. Financial institutions specialized in providing financing, insurance, and currencyclearing services exclusively to CBEZs should therefore be encouraged. The results of this study have shown that the general performance of firms in BEZs is not high, and that it has been difficult to attract well-performing manufacturing firms to locate in BEZs. In the long-run, however, the viability of these firms is indispensable if the region is to become a production base for export businesses located at the junction between the PRC and the ASEAN countries to take advantage of the opportunities under the China-ASEAN Free Trade Area.3 The local industrial structure is currently dominated by resource-based firms. As industrial policies shift to higher value-added activities, and as regional supply chains develop, the development of CBEZs will be imperative both for the PRC and its neighboring countries.

3

The design of incentive policies for CBEZs should take into account the policy context of the CAFTA.

References

87

References Amiramahdi H, Wu W (1994) Foreign direct investment in developing countries. J Developing Areas 28(2):167–190 Cheng LK, Kwan YK (2000) What are the determinants of the location of foreign direct investment: the Chinese experience. J Int Econ 51(2):379–400 De Mello Jr LR (1997) Foreign direct investment in developing countries and growth: a selective survey. J Develop Stud 34(1):1–34 Delfs R (1985) Changing the pattern. Far Eastern Economic Review. 9 May Dunning JH (1993) Multinational enterprises and the global economy. Addison Wesley Wokingbam, England Dunning JH (2001) The eclectic (OLI) paradigm of international production: past, present and future. Int J Econ Bus 8(2):173–190 Fu J (2000) Institutions and investments: foreign direct investment in China during an era of reforms. The University of Michigan Press, Ann Arbor Ge W (1999) Special economic zones and the opening of the Chinese economy: Some lessons for economic liberalization. World Development 27(7):1267–1285 Hall RE, Jones CI (1999) Why do some countries produce so much more output per worker than others? Q J Econ 114(1):83–116 Kening L (1997) Foreign direct investment in China: performance, climate and impact. University of Bradford management centre working paper, no. 9719 Lakshmanan L (2009) Evolution of special economic zones and some issues: the Indian experience. RBI Stuff Stud (4) Li R (2009) Regional economic integration and industrial agglomeration, the industrial division of labor: a study from the perspective of new economic geography. Inq Econ Issues (5) [In Chinese] Ng LF, Tuan C (2002) Building a favourable investment environment: evidence for the facilitation of FDI in China. The World Economy 25(8):1095–1095 UNCTAD (1998) World investment report. United Nations conference on trade and development. New York Wei Y, Liu X (2001) Foreign direct investment in China: determinants and impact. Edward Elgar, England

Chapter 5

Selection of Industries for Cross-Border Economic Cooperation

5.1 Introduction According to new regionalism, regional economic integration requires more than increase in cross-border trade. Instead, an integrated production network shall be established in cross-border zones. As borders perform more economic functions than dividing territories and marking sovereignty (Luo 2012), the establishment of CBEZs to promote regional economic development has attracted increasing attention. Spatial economics (Krugman 1991; Myrdal 1957) claim that lower transaction costs, availability of skilled labor, and the concentration of infrastructure and research and development create localization and agglomeration effects in geographic centers, so economic activities tend to concentrate near geographic centers. Economic activities do not gravitate to border regions due to their long distance from major metropolitan centers and the consequent high transportation costs (Dimitrov et al., 2003). The establishment of CBEZs increases the agglomeration of production factors in border regions and division of labor, and strengthens the trade relations between firms, thus contributing to the formation of international industry chains (Stiller 2003). Ultimately, border regions will be transformed from peripheries to centers of economic growth. In recent years, Yunnan province in China has made active efforts to advance the construction of three major CBEZs, namely China (Hekou)-Vietnam (Lao Cai) CBEZ, China (Ruili)-Myanmar (Muse) CBEZ, and China (Mohan)-Laos (Boten) CBEZ. While it has made remarkable achievements, Yunnan faces a host of problems. A serious one is inadequate support from the industrial sector (Luo 2012). Therefore, to promote cross-border economic cooperation, it is imperative to focus on industries in which both sides can benefit from the cooperation. Cross-border economic cooperation should take into account comparative advantages on both sides of the border, and be promoted in industries with strong linkages, in which both sides enjoy a competitive edge and complement each other in trade. Industrial linkages are found between cluster members which are on the same or © Social Sciences Academic Press 2022 Z. Wang and W. Wei, Cross-Border Economic Cooperation Between China and Southeast Asian Countries, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-19-0136-2_5

89

90

5 Selection of Industries for Cross-Border Economic Cooperation

similar industry chains, with forward, backward and horizontal linkages (Hu 2006). The availability of specialized inputs and services and technology spillover (Krugman 1991) emerging from industrial linkages play a significant role in coordinating the development of industries for complementarity, creating jobs, extending industry chains (Yang 2009), enhancing the competitiveness of border regions (Schmitz 1999) and so forth. They can thus produce a synergistic effect among firms, industries and areas concerned, so that one plus one is greater than two (Lyu and Nie 2007). Cross-border industrial linkages are mainly established in the form of trade and flow of goods based on comparative advantages, which promotes the competition and spread of industrial structures centered around dominant industries (Zhang and Bian 2009). The coupling effects of industrial integration (trade, investment, technological transfer, industrial policies, and so on) strengthen the industrial linkages between countries and regions (Kuchiki 2007). Forward and backward linkages between industries integrate the markets on both sides of the border, and increase the market potential of border regions. As a result, more firms and people concentrate in border regions with the location advantage of proximity to foreign markets, resulting in the formation of central border regions (Hanson 1996), thus re-constructing the location advantage of border regions (Li 2006). The formation of industrial clusters starts with the selection of industries (Zang and He 2007), which is inevitably influenced and constrained by internal and external factors. Major factors that may affect the selection include labor cost due to location stickiness of industries (Li 2009), the effect of industrial competition (Li 2013), and regional factor endowment (Jin and Zhu 2002). Kiyoshi Kojima’s theory of marginal industry expansion and Louis T. Wells’ theory of small-scale technology both emphasize that the selection of industries for clusters should be based on comparative advantages and economies of scale. New economic geography places great emphasis on the decisive effect of demand and cost linkages in selection of industries to form a cluster (Krugman and Venables 1995). The impacts of industrial linkages (Fujita and Krugman 2004) contribute significantly to the unbalanced regional distribution of industries. Therefore, regions should, based on their respective advantages in resources (Ellison and Glaeser 1997), have division of labor and identify their respective strong industries and dominant industries to turn the advantages in terms of resources into advantages in industries (Li and Wang 2011), thus contributing to the formation of industrial clusters. This chapter uses grey relation, revealed comparative advantage (RCA) index, and trade complementarity (TC) index to analyze the industrial linkages, comparative advantages and complementarity of industries in Yunnan province of China and its neighboring GMS countries, i.e., Vietnam, Myanmar and Laos, based on which we propose the industrial path to promoting cross-border economic cooperation in the southwest border regions of Yunnan, China.

5.2 Methodology

91

5.2 Methodology This study begins with an analysis of the disparities in industrial structure and the industrial linkages between Yunnan, China and its three neighboring countries. It then goes on to measure the RCA and TC of the economies concerned in agriculture and sub-sectors of the manufacturing industry, based on which the industrial path to establishing CBEZs in the southwest border areas of Yunnan, China is proposed. The methods used are as follows:

5.2.1 Analysis of the Disparities in Industrial Structure and the Industrial Linkages a.

Analysis of the disparities in industrial structure

Analysis of the disparities in industrial structure between regions reveals the interregional industrial linkages, which helps determine the impacts of regional industrial structure on interregional industrial interaction and economic cooperation. It is generally believed that in a region, the greater the disparities in industrial structure between sub-regions, the stronger the regional industrial linkages and the higher the level of territorial division of labor. The disparities in industrial structure are generally analyzed using the similarity coefficient recommended by the United Nations Industrial Development Organization (UNIDO) according to the formula.  (X ik X jk ) Si j =  2 (X ik )(X 2jk )

(5.1)

In Formula 5.1, i and j stand for the two regions under comparison; Sij stands for the similarity coefficient: 0 ≺ S ij ≺ 1. If S ij = 0, it means that the industrial structures of region i and region j are completely different; if S ij = 1, it means that the two regions have exactly the same industrial structure. The larger the coefficient, the more similar the industrial structure of region i and region j. X ik and X jk stand for the share of industrial sector K in the industrial structure of region i and region j. b.

Analysis of the industrial linkages

The grey relational analysis method is used to analyze the location quotient and industrial linkages. The location quotient, also known as the specialization rate, is proposed by Peter Haggett in 1996 to measure the specialization rate of an industry in a given region. First, calculate the location quotients of the industries in the countries and regions concerned. The formula is

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5 Selection of Industries for Cross-Border Economic Cooperation

 Ni j Ni  Qi j = Pi j Pi

(5.2)

where i stands for economy i; j stands for industry j; N ij stands for the GDP of industry j of economy i; N i stands for the total GDP of all industries of economy i; pij stands for the GDP of industry j; and pi stands for the GDP of all industries. The higher the location quotient, the higher level of specialization of industry j of economy i. Second, list the location quotient matrix of relevant industries as follows: ⎡

⎤ Q 11 Q 12 · · · Q 1n ⎢ Q 21 Q 22 · · · Q 2n ⎥ ⎢ ⎥ C Qi j = ⎢ . .. .. ⎥ ⎣ .. . . ⎦ Q m1 Q m2 · · · Q mn

(5.3)

Third, conduct gray relational analysis. Determine the reference sequence x 0 (k), and let the industrial structure sequences of other economies be the sequences to be compared x i (k). According to the absolute deviation of the reference sequence and the sequences to be compared, i = x 0 (k)-x i (k), min(i (min)) and max(i (max)) are obtained. The correlation coefficient is thus calculated according to Formula 5.4 (Liu and He 2011). ξi (k) =

min(i (min)) + ρ max(i (max)) |x0 (k) − xi (k)| + ρ max(i (max))

(5.4)

ρ in Formula 5.4 is the distinguishing coefficient. There is no consensus on determining the value of ρ. In this chapter, as in most literature, its value is set as 0.5. The regional correlation r 2 of the same industry is then calculated using the formula N  ri = N1 ξi (k). k=1

5.3 Analysis of RCA and TC a.

RCA index

The RCA index refers to the ratio of the share of a country or a region’s total exports of the commodity in question in its total exports to the share of global exports of the same commodity in total global exports (Balassa 1965). It is widely used by international organizations such as the World Bank to measure the competitiveness of products. Its calculation formula is    RC A = (X i j X i ) (X w j X w )

(5.5)

5.3 Analysis of RCA and TC

93

where X ij stands for the exports of commodity j from economy i; X i stands for the total exports of economy i; X wj stands for the world exports of commodity j; and X w stands for the total world exports. Concerning the value range of the RCA index, this chapter adopts the criteria set by Japan External Trade Organization (JETRO): if RCA > 2.5, the industry under consideration possesses very strong competitive advantages; if 2.5 > RCA > 1.25, the industry possesses strong competitive advantages; if 1.25 > RCA > 0.8, the industry has moderate competitiveness; and if RCA < 0.8, the industry is at a disadvantage. b.

TC index

The TC index measures the competition and complementarity between economies and how well their import and export structures match. The formulae are Ci jk = RC A xik × RC Am jk Ci j =



 (RC A xik × RC Am jk ) × (Wk W )

(5.6) (5.7)

i

where RCAxik = (X ik /X i )/(W k /W ), and RCAmjk = (M jk /M j )/(W k /W ). RCAxik stands for the RCA index of economy i in commodity k; X ik stands for the exports of commodity k of economy i; X i stands for the total exports of goods of economy i; W k stands for the total world exports of commodity k; W stands for the total world exports of goods; M jk stands for the imports of commodity k in economy j; and M j stands for total imports of goods of economy j. C ij represents the TC index between economies i and j in commodity k. The composite trade index is obtained by weighting the TC indexes of all industries concerned, the weight being the share of each commodity in trade. If 0 ≺ C ij ≺ 1, the TC between the two economies in question is weak; if C ij  1, the TC between the two economies are strong. The higher the value of C ij , the stronger the complementarity.

5.4 Empirical Analysis 5.4.1 Data Sources Based on the data of 2013 of the World Bank, the World Trade Organization (WTO) and the statistical yearbooks of countries and regions concerned, three sectors of economy of Yunnan province of China and Vietnam, Myanmar and Laos are chosen as the main economic indicators. The three sectors are divided into thirteen industries, namely agriculture, forestry, fishery, mining, manufacturing, power, gas and water production and supply, construction, transportation, storage and postal services, retail

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5 Selection of Industries for Cross-Border Economic Cooperation

Table 5.1 Industrial structure and shares of the three sectors in GDP of Yunnan, China and Vietnam, Laos, and Myanmar in 2013 Unit: USD 100 million Country (region)

GDP

Primary sector

Secondary sector

Tertiary sector

Value

Share (%)

Value

Share (%)

Value

Share (%)

Yunnan

1803.22

291.58

16

758.12

42

753.52

42

Vietnam

1712.05

376.65

22

684.82

40

650.58

38

Laos

100.99

28.27

28

36.36

36

36.36

36

Myanmar

594.27

213.94

36

154.51

26

225.82

38

Data source: World Bank; Statistical yearbooks of Yunnan

and wholesale, hotel and catering, financial, real estate, and other services industries.1 Considering the characteristics of industries of the region and countries concerned, agriculture and manufacturing industry are further divided into twelve sub-industries, namely agricultural produce, non-ferrous metal smelting and pressing, mining, textile, garment, timber processing, transportation equipment manufacturing, food processing, chemical and chemical manufacturing, electrical appliance and equipment manufacturing, electronic and communication equipment manufacturing, and high-tech manufacturing.

5.4.2 Calculation Results and Analysis a.

Comparison of the industrial structure of Yunnan, China and Vietnam, Laos and Myanmar, and analysis of industrial linkages

As shown in Table 5.1, there are a number of similarities between the industrial structure of Yunnan province and its three neighboring countries. The primary and tertiary sector account for a large proportion of their GDP, while the secondary sector contributes a small part. They are economically backward, without a clear division of labor and a comprehensive industrial system. Formula 5.1 is used to calculate the similarity coefficient between the three chosen sectors of Yunnan and Vietnam, Laos and Myanmar. The value is 0.9710, 0.9078 and 0.9714 respectively, showing a high degree of similarity in industrial structure. Table 5.2 and Fig. 5.1 show the location quotients and industrial linkages. Vietnam, Myanmar and Laos have high location quotients in industries such as agriculture, fishery, and transportation, storage and postal services. In addition, they all have industries with high level of specialization. Vietnam has high location quotients in agriculture, fishery, manufacturing, retail and wholesale, and real estate. Laos has high location quotients in agriculture, forestry, fishery, mining, power and water supply, and retail and wholesale. Myanmar has high location quotients in agriculture, 1

Statistical criteria vary between countries. In this study, leasing, public administration, recreation and education, and public welfare are considered other services industries.

5.4 Empirical Analysis

95

Table 5.2 Location quotient matrix of industries of Yunnan, China and Vietnam, Laos, and Myanmar in 2013 Industry

Yunnan

Vietnam

Laos

Myanmar

Agriculture

0.6263

1.1797

1.5793

1.5180

Forestry

1.2520

0.2909

1.6751

2.1635

Fishery

0.5342

1.2874

1.3248

1.5302

Mining

1.2201

0.9413

1.1806

1.0469

Manufacturing

0.8504

1.3755

0.8124

0.4042

Power, gas and water supply

0.9807

0.8775

1.6502

1.0127

Construction

1.3729

0.8320

0.6396

0.4139

Transportation, storage and postal services

0.6859

1.0010

0.8187

1.9812

Retail and wholesale

0.9138

1.2266

1.0778

0.5955

Hotel and catering

0.8282

0.7784

0.2539

2.2865

Financial

1.6933

0.5511

0.3585

0.2984

Real estate

0.9596

1.2558

0.6372

0.4474

Other services

1.2357

0.8504

0.6312

0.7785

Data source: World Bank; Statistical yearbooks of Yunnan

Fig. 5.1 Industrial linkages between Yunnan, China and Vietnam, Laos and Vietnam in 2013

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5 Selection of Industries for Cross-Border Economic Cooperation

forestry, fishery, transportation, storage and postal services, and hotel and catering. In particular, the location quotients of Myanmar in forestry, transportation, storage and postal services, and hotel and catering are much greater than one, representing a high degree of specialization. The results show that Myanmar and Laos are comparatively better developed in agriculture, forestry, fishery and tourism, and have a high degree of similarity in industrial structure. Yunnan province of China has higher location quotients than its neighboring countries in mining, construction, financial industry and other services industries, which is in line with reality. As shown in Fig. 5.1, the linkages between Yunnan, China and its three neighboring countries also vary in industries. The highest value 0.8539 is found in the mining industry, which can be attributed to local resource endowment. Strong linkages are also observed in power, gas and water supply, real estate, and other services industries, the value of which is all greater than 0.7. The financial industry has the lowest value 0.51 because of disparities in financial systems. With strict financial regulation, Yunnan, China and its neighboring countries has not yet established a cross-border financial system. Yunnan, China and its neighboring countries have different location quotients in industries, and each has its own strengths. The industrial linkages are all greater than 0.50, indicating a solid foundation for industrial cooperation. Concerning agriculture and forestry, the economies concerned have high location quotients, but the linkages are not strong, which reveals a lack of cooperation in these two industries. This is to some extent caused by industrial homogeneity between these economies. b.

RCA and TC of industries of Yunnan, China and its neighboring countries

The RCA indexes of the sub-industries of agriculture and manufacturing industries of Yunnan, China and its neighboring countries are shown in Table 5.3. As shown in Table 5.3, Yunnan, China has very strong competitive advantages in industries including non-ferrous metal smelting and pressing, textile, food processing, electrical appliance and equipment manufacturing, and high-tech manufacturing, and has strong competitive advantages in agricultural produce, mining, transportation equipment manufacturing, chemical and chemical manufacturing, and electronic and communication equipment manufacturing. Such competitiveness is attributed to its rich mineral resources and strong technological support from the inland areas of China. Nonetheless, Yunnan has weak competitive advantages in timber processing. Vietnam enjoys strong competitive advantages in industries such as garment, electrical appliance and equipment manufacturing, and timber processing, but its competitive advantages in mining, chemical and chemical manufacturing, transportation equipment manufacturing, and high-tech manufacturing industries are weak. Thanks to favorable climate conditions, abundant natural resources and low labor costs in Myanmar and Laos, the two countries have strong competitiveness in industries such as agricultural produce, non-ferrous metal smelting and pressing, and timber processing. But their competitiveness in industries that require high technologies, such as electrical appliance and equipment manufacturing, electronic and communication equipment manufacturing and high-tech manufacturing, is very weak. It is evident that the economies concerned have comparative

2.6369

1.8929

1.8727

1.1935 4.1381

1.2527 0.9175 8.7863

1.4271 0.0852

0.0072

0.1912 2.2467

0.8742

1.8860

0.1280

0.0397

0.2757

1.0360

5.5414

4.3656

47.4085

2.2859

2.1773 5.3555

1.5729

Myanmar 2.8920

0.3791

0.2468

Laos

1.0507

3.3509 1.1781

1.9247

Vietnam

1.0890

1.6475

Yunnan

8.7337

Agriculture Non-ferrous Mining Textile Garment Timber Transport Food Chemical and metal processing equipment processing chemical smelting manufacturing manufacturing and pressing

Industry

0.4916

0.2510

3.2147

16.7951

Electrical appliance and equipment manufacturing

0.2953

0.0398

0.9460

2.4718

0.4629

0.0468

0.4566

5.5165

Electronic and High-tech communication manufacturing equipment manufacturing

Table 5.3 RCA index of agriculture and manufacturing industries in Yunnan province of China, Vietnam, Laos and Myanmar in 2013

5.4 Empirical Analysis 97

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5 Selection of Industries for Cross-Border Economic Cooperation

advantages in labor-intensive industries and industries based on resource and factor endowment, and that they do not enjoy much competitiveness in capital-intensive industries. The competitiveness indexes of the industries concerned are shown in Table 5.4. Table 5.4 Competitive advantages of Yunnan province of China, Vietnam, Laos and Myanmar in agriculture and manufacturing industries in 2013 RCA Index

Very strong Strong competitive competitive advantage (1.25 < advantage (RCA RCA < 2.5) > 2.5)

Moderate competitive advantage (0.8 < RCA < 1.25)

Weak competitive advantage (RCA < 0.8)

Yunnan

Non-ferrous metal smelting and pressing, textile, food processing, electrical appliance and equipment manufacturing, high-tech manufacturing

Garment, mining

Timber processing

Vietnam

Garment, timber Agricultural processing, produce, textile, electrical food processing appliance and equipment manufacturing

Non-ferrous metal smelting and pressing, electronic and communication equipment manufacturing

Mining, transportation equipment manufacturing, chemical and chemical manufacturing, high-tech manufacturing

Laos

Non-ferrous metal smelting and pressing

Garment, food processing

High-tech manufacturing, transportation equipment manufacturing, electronic and communication equipment manufacturing, chemical and chemical manufacturing, electrical appliance and equipment manufacturing

Agricultural produce, mining, transportation equipment manufacturing, chemical and chemical manufacturing, electronic and communication equipment manufacturing

Agricultural produce, mining, textile, timber processing

(continued)

5.4 Empirical Analysis

99

Table 5.4 (continued) RCA Index

Very strong Strong competitive competitive advantage (1.25 < advantage (RCA RCA < 2.5) > 2.5)

Myanmar

Agricultural produce, non-ferrous metal smelting and pressing, garment, timber processing

Mining, textile, food processing

Moderate competitive advantage (0.8 < RCA < 1.25)

Weak competitive advantage (RCA < 0.8) Transportation equipment manufacturing, chemical and chemical manufacturing, electronic and communication equipment manufacturing, electrical appliance and equipment manufacturing, communication equipment and communication equipment manufacturing, high-tech manufacturing

Table 5.5 shows the TC indexes of the industries concerned. The TC indexes between Yunnan, China and Vietnam, Laos and Myanmar are strong in industries such as agricultural produce, non-ferrous metal smelting and pressing, mining, textile, and food processing. The complementarity is especially strong in non-ferrous metal smelting and pressing, food processing, and textile industry. In terms of trade relations, a strong complementarity exists between Yunnan’s industries, including agricultural produce, non-ferrous metal smelting and pressing, mining, textile, food processing, electrical equipment manufacturing, high-tech manufacturing, and the imports of its neighboring countries. The industries of Vietnam, Laos and Myanmar, including agricultural produce, non-ferrous metal smelting and pressing, mining, textile, garment, timber processing, and food processing, are also complementary to the imports of Yunnan. In terms of the composite TC indexes between Yunnan and its neighboring countries, the TC indexes between Yunnan’s exports and the imports of Vietnam, Laos and Myanmar reached 5.1049, 4.6434 and 4.5109 respectively, all greater than 4.5, showing a high degree of complementarity; the TC indexes between Yunnan’s imports and the exports of Vietnam, Laos and Myanmar also show strong complementarity, reaching 3.1604, 2.5293 and 4.1782 respectively, all greater than 2.5.

2.0705 5.4077 10.8232

Electrical appliance and equipment manufacturing

Electronic and communication equipment manufacturing

High-tech manufacturing

0.0564

1.1221

2.7668

0.9107

45.6042

1.0087

1.1537

1.6979

13.1234

0.9693

14.7247

2.5052

Yunnan-Laos

2.6083

0.6011

3.8064

0.9564

42.5041

0.4591

0.5912

0.7916

12.1897

1.1849

27.8200

1.2966

Yunnan-Myanmar

6.7874

6.9995

1.9723

0.5274

13.8089

0.2937

38.7888

5.9631

5.1301

1.0125

6.2867

10.5367

Vietnam-Yunnan

0.6954

0.2943

0.1540

0.0760

6.4010

0.0110

12.6798

1.0216

2.9516

1.0165

33.1553

12.5141

Laos-Yunnan

Note In the second to the seventh column in the first row, the first country (region) is the exporter, and the second is the importer

0.5804

Timber processing

Chemical and chemical manufacturing

0.3017

Garment 0.2339

0.2368

Textile

47.3550

15.4947

Mining

Food processing

1.8719

Non-ferrous metal smelting and pressing

Transportation equipment manufacturing

1.9214 20.0697

Agricultural produce

Yunnan-Vietnam

Industry

6.8824

2.1849

0.3016

0.2451

16.4506

0.1309

78.0682

4.6076

2.8123

3.0974

15.7768

15.8321

Myanmar-Yunnan

Table 5.5 TC index between Yunnan province of China and Vietnam, Laos and Myanmar in agriculture and manufacturing industries in 2013

100 5 Selection of Industries for Cross-Border Economic Cooperation

5.4 Empirical Analysis

101

Due to different factor and resource endowment, Yunnan, China and its three neighboring countries have different comparative advantages in industries. They have strong trade complementarity in industries such as agriculture, non-ferrous metal smelting and pressing, mining, textile, food processing, and so on. The composite trade complementarity is also significant. The four economies may reduce the border effect and create a favorable investment climate to promote cross-border economic cooperation. This will enable large-scale production, so that these economies will benefit from the division of labor and see further development of the regional economy.

5.5 Conclusions and Policy Implications Using gray relational analysis, RCA index and TC index, this chapter measures the industrial linkages, comparative advantages and trade complementarity of Yunnan, China and its neighboring countries, Vietnam, Laos, and Myanmar. The following conclusions can be drawn: First, strong industrial linkages exist between Yunnan, China and its neighboring countries, Vietnam, Myanmar and Laos, which serves as a solid foundation for their industrial cooperation. The linkage is the strongest in the mining industry, and the weakest in the financial industry. Second, Yunnan, China and the neighboring countries have different comparative advantages, which are closely related to their respective factor and resource endowment. The complementarity between Yunnan, China and the three neighboring countries is strong in resource and labor-intensive industries, but weak in capital- and technology-intensive industries. It is therefore advisable for Yunnan, China to make vigorous efforts to promote the development of agricultural produce and resource-based industries to enhance cross-border economic cooperation. The policy implications of this study are that efforts should be made to foster • cross-border pillar industries. Considering the high degree of similarity between the economies concerned in natural endowment and technology, in selection of dominant industries for CBEZs, priorities should be given to resource-intensive and labor-intensive industries with comparative advantages, strong complementarity and linkages, such as agricultural produce, non-ferrous metal smelting and pressing, mining, textile, and food processing industries. Efforts are needed to press home the comparative advantages and catalytic effect of pillar industries to promote cross-border economic cooperation. • cross-border economic cooperation zones. China (Yunnan)-Vietnam CBEZ should focus on agricultural produce, non-ferrous metal smelting and pressing, transportation equipment manufacturing, and textile industry; China (Yunnan)Laos CBEZ should focus on agricultural produce, mining, and non-ferrous metal smelting and pressing; and China (Yunnan)-Myanmar CBEZ should focus on agricultural produce, textile, and non-ferrous metal smelting and pressing. This

102

5 Selection of Industries for Cross-Border Economic Cooperation

will bring the economic cooperation to a higher level and create industrial clusters with full-fledged industrial system, economies of scale and strong catalytic role, in which the strong industries play a leading role. • cross-border industry chains. China (Yunnan) and Vietnam, Laos and Myanmar should accelerate the cross-regional reorganization of industries such as agriculture, forestry, textile and mining, and improve the distribution of resources. For better integration of parties on both sides of the border into the global division of labor, efforts should be made to promote industrial specialization to strengthen the horizontal and vertical linkages between industries, expand the production scale, form clusters of industrial chains with regional advantages, and establish a regional industrial cooperation mechanism.

References Balassa B (1965) Trade liberalisation and ‘revealed’ comparative advantage. Manch Sch 33(2):99– 123 Dimitrov M et al. (2003) Cross-border cooperation in Southeastern Europe. Eastern European Economics 41(6):5–25 Ellison G, Glaeser EL (1997) Geographic concentration in U.S. manufacturing industries: a dartboard approach. J Polit Econ 105(5):988–997 Fujita M, Krugman P (2004) The new economic geography: past, present and the future. Reg Sci 83:139–164 Hanson GH (1996) Integration and the location of activities- economic integration, intraindustry trade and frontier regions. Eur Econ Rev 40(3–5):941–949 Hu D (2006) The connection of enterprise cluster’s competitive advantages with industry interrelation and synergy. Chin J Manage 3(6) [In Chinese] Jin RX, Zhu XY (2002) The Origin and Evolution of Specialized Industrial Zones: A Historical and Theoretical Perspective. Economic research journal 8:74–82 Krugman P (1991) Geography and trade. MIT Press, London Krugman P, Venables AJ (1995) Globalization and the inequality of nations. Q J Econo 110(4):857– 880 Kuchiki A (2007) Industrial policy in Asia. IDE discussion paper no. 128 Li J, Wang F (2011) Foreign direct investment and the formation of industrial cluster—an empirical analysis based on China. Econ Surv (5) [In Chinese] Li H (2006) Border zone, industrial belt and network of free trade area: three levels of development in regional economic cooperation between China and the ASEAN. Asia-Pacif Econ Rev (2) [In Chinese] Li R (2009) Regional economic integration and industrial agglomeration, the industrial division of labor: a study from the perspective of new economic geography. Inquiry Econ Issues (5) [In Chinese] Li F (2013) The location and industry selection of China’s outward foreign direct investment to promote industrial upgrading. Int Econ Trade Res (2) [In Chinese] Liu W, He X (2011) A novel grey relational model. Stat Decis (14) [In Chinese] Luo S (2012) A study of the construction of cross-border economic cooperation zones in yunnan. J Int Econ Cooper (6) [In Chinese] Lyu T, Nie R (2007) The definition, theories and forms of industrial interaction. J Indus Technol Econ (5) [In Chinese] Myrdal G (1957) Economic theory and underdeveloped regions. Duckworth, London

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Schmitz H (1999) Global competition and local cooperation: success and failure in the Sinos Valley, Brazil. World development 27(9):1627–1650 Stiller S (2003) Integration in the German-polish border region-status quo and current developments. In: 43rd congress of the European Regional Science Association Peripheries, Centres and Spatial Development in the New Europe Yang X (2009) On Constructing the international border industrial belt oriented for South and Southeast Asia. South Southeast Asian Stud (1) [In Chinese] Zang X, He Q (2007) Preliminary discussion on industrial cluster’s rents and industrial cluster’s evolution. Chin Indus Econ (3) [In Chinese] Zhang J, Bian Q (2009) Industrial linkages between the Northeast China and the Republic of Korea. Soc Scii Front 2 [In Chinese]

Chapter 6

Financing Environment in Cross-Border Regions

6.1 Introduction 6.1.1 Background Since 2010, the People’s Bank of China has issued several documents requiring improvement in financial services to small and medium-sized enterprises (SMEs). Financial institutions are required to consider improving financial services to SMEs and increasing credit supply to SMEs as important strategies. In comparison with the central and east areas of China, in its cross-border regions, SMEs account for a larger proportion of the total, the development of which is severely impeded by the harsh financing environment in these regions. Therefore, to advance the development of China’s western region, one of the major tasks to be addressed is to improve the financing environment in cross-border regions to help SMEs with financing. By financing environment, we refer to the regulations and policies about economic and political stability and foreign trade and investment, the effectiveness of regulatory framework to ensure the efficiency and transparency of market entry and exit, labor relations, financing and taxation, and the quantity and quality of available financial services. China should prioritize in its endeavor to improve the financing environment in the west. To be specific, priorities should be given to addressing factors of the financing environment that have strong impacts on SME’s financing behavior.1 SMEs mainly need financing in initial investment and follow-on investment. Different factors of the financing environment have strong impacts on their financing behavior in these two stages, so separate studies are required. In this chapter, based on data obtained from field surveys, the multinomial logit model is used to examine the

1

Improving the financial environment is a complicated task. Considering the limited capacity of the government, it would be inefficient trying to advance on all fronts. An efficient way is to prioritize the work and first deal with factors that have strong impacts. © Social Sciences Academic Press 2022 Z. Wang and W. Wei, Cross-Border Economic Cooperation Between China and Southeast Asian Countries, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-19-0136-2_6

105

106

6 Financing Environment in Cross-Border Regions

impacts of financing environment on SME’s initial investment motives, and the binomial logit model is used to study the impacts of financing environment on their followon investment. This chapter also analyzes the influence of financing environment on the performance of firms.

6.1.2 Literature Review The financing difficulty of SMEs has been a hot topic in research. Experience shows that for enterprises, loans from banks and other financial institutions are the principal sources of external debt financing. Due to information asymmetry and moral hazards in lending, banks may raise interest rates and credit rationing to prevent risks. Among the factors that affect the financing behavior of private SMEs, the information asymmetry between banks and enterprises is the most fundamental one. Some researchers also argue that government’s control on interest rates prevents banks from price discrimination based on risks, thus hindering banks from offering loans to enterprises, especially to SMEs. A good financing environment provides SMEs with multiple channels and methods of financing to satisfy their need for funds at different stages of development, making it easier and cheaper for them to obtain financial resources. In China, SMEs mainly get external financing through bank loans, private lending and loans from friends and family. According to the long-term interaction hypothesis, an effective way to help SMEs with financing is to establish small and medium-sized financial institutions, because guarantors have an increasingly better understanding of the business performance of local enterprises after long-term cooperation with them, resulting in the long-term interaction effect. In short, to address the financing difficulties of SMEs, it is imperative to speed up the innovation of financial systems to create a better financing environment. In a financing environment, enterprises can obtain either internal or external financing. According to the pecking order theory, enterprises prefer internal financing to external financing, and debt financing to equity financing. The requirement for funds varies for enterprises at different stages of development. Small start-ups may seek internal financing, such as one’s own savings and funds of friends and family. But at some point, enterprises will shift from internal financing to external financing from banks, public bonds or equity markets. The theory of control right of firm financing claims that the financing structure of firms determines not only the distribution of income stream, but also the distribution of control right of firms. Due to incomplete contracts, the distribution of control right is particularly important. For sound and steady development of SMEs, the financing environment must be improved to ensure a wide variety of external financing sources. The financing environment has impacts on the behavior of firms, or, to be specific, on their initial investment motives and follow-on investment. Since the 1950s, theoretical studies of foreign direct investment (FDI) have focused on investment motives and location factors. FDI is a rational economic behavior aiming at cost minimization

6.1 Introduction

107

and profit maximization. FDI of firms is inspired by the motives of seeking resources, market, production factors, and strategic assets. Resource and market seeking are the principal motives for initial FDI, and production factor and strategic asset seeking are the main motives for follow-on FDI. Kojima (1978) classified the motives behind the FDI of developed countries in developing countries into three categories: natural resource oriented, production factor oriented, and market oriented. According to the theory of government incentives, government intervention is required in an imperfect market to optimize resource distribution; governments may introduce incentives to guide the flow of FDI and the selection of FDI destinations. Institutional economics has analyzed the effects of politics, economy, law, institutions, and other factors of host countries on FDI attractiveness and found that the state of the financial industry is also an important contributor to FDI attractiveness. The impact of the financing environment on follow-on investment of firms is generally examined in terms of the financing constraints. In an imperfect capital market, information asymmetry and agency problems result in higher costs of external financing than internal financing. Due to such financing constraint, the investment behavior of firms is not only affected by their investment demand, but also by internal capital. The financing constraints of firms are not only subject to the influence of their size, potential, profitability, and capital structure, but also significantly influenced by the state of the financial industry of the host country, such as the market orientation, competition intensity and market orientation of credit funds. A well-developed financial market can effectively mitigate information asymmetry and agency problems, and reduce firms’ financial constraints, thus promoting economic development through the micro transmission mechanism. Some researchers have conducted empirical studies using principal component analysis and other methods, which showed that in the economic subsystem, the financial environment factor has the weakest influence on domestic and foreign investment; but the indicators they used for financial environment are inflation rate and lending interest rate, which cannot effectively reflect the influence of financial environment. Some have studied the policy environment of a county based on survey data and used the analytic hierarchy process to assign weights to the factors of policy environment, which revealed a significant influence of credit guarantee on investment. Some studies have analyzed the external environment and institutions that constrain the development of the private sector in terms of the policies about private investment, investment and financing, investment services, and protection of investor’s rights and interests, and offered suggestions. There has been a limited number of studies of the financing environment in southwest China’s border regions. The theory of regional finance is helpful in studies of this area. Many researchers believe that the economic backwardness of western China is closely related to factors such as available capital, investment and financing systems, economic structure, role of market, openness, and state policies. The deficiencies in capital formation (referring to the process through which an economically backward country or region obtains sufficient initial capital for economic development and modernization) are deemed to be the main cause of economic backwardness in the west of China, and the key to addressing the issue is to improve the capital allocation

108

6 Financing Environment in Cross-Border Regions

efficiency. Researchers have conducted detailed studies of the ways to improve the functions of the financial system, arguing that to remove the constraint of singlefunction financial system in cross-border regions, efforts must be accelerated to create a diverse, multi-level financial system that can perform various functions in western China to better satisfy the needs of economic development and economic restructuring in the region. The non-public sector of economy in China’s cross-border regions faces hosts of problems, such as shortage of resources, lack of technological innovation, inadequate business size and low market share. The fundamental cause is a serious lack of funds. Firms need various financing sources to obtain funds. Therefore, both internal and external financing sources must be improved to create a favorable financing environment for the non-public sector. China should explore new development approaches for the financial sector and promote the development of small and medium-sized financial institutions in cross-border regions to improve the financing environment in the west. In summary, the cross-border regions are lagging behind in economy, and have harsh financing environment. Considering the significant impacts of financing environment on the development of SMEs, it is necessary to compare the impacts of the various factors of financing environment through an empirical study. The financing environment in the border regions between China and other GMS countries, lying in the west of China, is even worse. The micro entities located in these regions are largely SMEs. This chapter examines the financing environment of these regions. Considering that China is making great efforts to promote the development of its border regions under the Belt and Road initiative, this study is highly relevant.

6.2 Analysis of Financial Structure and the State of Economy This chapter examines the financing environment of the border regions between China and other GMS countries, or, to be specific, the cities of Yunnan, China bordering other countries. To this end, we need to have a preliminary understanding of the state of the financial industry and economy of Yunnan, China and its neighboring countries.

6.2.1 The Financial Structure and the State of Economy of Yunnan, China The west of China has been lagging behind in economy, and Yunnan is one of the provinces on the southwestern frontier. Over the years, Yunnan has put a lot of efforts to enable changes in conceptions, especially to change the model of economic development. With great efforts to promote the development of green economy and the

6.2 Analysis of Financial Structure and the State of Economy

109

cultures of ethnic minorities and to make Yunnan a gateway for China’s opening to the southwest, Yunnan has witnessed rapid economic development. In 2011, Yunnan’s GDP reached RMB 875.095 billion, up by 13.7% from 2010, 4.5% points higher than the national growth rate. This included RMB 368 billion from the non-public sector. In the same year, Yunnan’s foreign trade also grew steadily: its imports and exports reached USD 16.05 billion, up by 19.6% from 2010. After reform for nearly three decades, supported by policies of the central and local governments, the financial sector of Yunnan has taken off. Currently, it comprises banks and non-bank financial institutions dealing with securities, insurance, and so forth, in which state-controlled financial institutions play a dominant role. Great efforts have been made to improve the financing environment of firms by fostering a market-oriented financing system and improving financial services.

6.2.1.1 a.

Banking Institutions in Yunnan, China

Deposits and loans of the banking industry

The deposits of banking institutions are important financial assets of the region, comprising the deposits of firms, governments, rural and urban residents, and others. As shown in Table 6.1, the deposits of rural and urban residents accounted for forty percent of the total in Yunnan from 2006 to 2010, taking up the largest share; the deposits of firms contributed the second largest share of about thirty percent; the growth rate of deposits was declining. In recent years, the deposits of rural and urban residents and firms have been growing rapidly, reflecting the sound economic development of Yunnan, China. We can also see from the figures of loans in Table 6.1 that from 2006 to 2010, the loans granted increased at a high rate, and the balance of loans exceeded one trillion yuan in 2020. It showed that with the rapid economic development in Yunnan, firms are in need of increasing funds. Medium and longterm loans accounted for a large share of the total, which increased by 38.3% in Table 6.1 Financial assets of banking institutions in Yunnan, China Unit: RMB 100 million Year

2007

2008

2009

2010

Deposits of financial institutions in the 6131.25 banking industry (balance)

7170.87

8418.94

11,119.64

13,476.23

Deposits of firms

2066.50

2578.84

2882.69

3942.38

4500.78

143.99

246.78

240.17

337.57

327.77

Deposits of rural and urban residents

2854.86

3046.40

3783.78

4668.61

5744.21

Loans of financial institutions in the banking industry (balance)

4803.51

5671.66

6594.33

8779.63

10,701.94

Deposits of governments

2006

Short-term loans

1881.70

2125.16

2505.45

2924.40

2702.44

Medium and long-term loans

2735.61

3363.25

3817.03

5585.26

7768.37

Data source Almanac of China’s Finance and Banking (2010), China Financial Publishing House

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6 Financing Environment in Cross-Border Regions

Table 6.2 Financial institutions of the banking industry in Yunnan, China Year

2006

2007

2008

2009

2010

Large state-owned commercial bank

1555

1560

1549

1548

1551 138

Joint stock commercial bank

125

89

105

117

Urban commercial bank

105

105

113

123

131

2335

2435

2354

2306

2382

1

1

2

2

2

Rural financial cooperative Foreign-invested financial institution

Data source Almanac of China’s Finance and Banking (2010), China Financial Publishing House

2010, representing a growth rate 17.9% points higher than the average of loans. This is attributed to several factors, including the rapid increase in investment, increasing demand for housing, and banks’ preference for medium and long-term loans with stable returns. In recent years, most of the loans to firms in Yunnan have been given to transportation and logistics, manufacturing, energy and infrastructure construction industries. The loans to agriculture, rural areas, farmers and SMEs and guaranteed small loans to startups also increase rapidly. In short, Yunnan province has put in more efforts to support the development of SMEs. b.

Banking institutions in Yunnan, China

The banking industry is the major player of the financial sector in Yunnan, which provides the essential financial services for regional economic development. It contributes to the economic growth of Yunnan by providing both policy-based financing services and financing services for firms. Table 6.2 presents the numbers of banking institutions in Yunnan from 2006 to 2010. No significant changes were found in the number of various types of banking institutions. Large state-owned commercial banks, which account for a large share of the total, are the principal suppliers of financial services in Yunnan. Joint stock commercial banks and urban commercial banks are not well developed in Yunnan, and foreign-invested banks are scarce. In addition, Yunnan’s banking industry does not have a proper market structure. The monopoly of state-owned banks in terms of the number of branches and the scope of financial services tends to cause capital outflow from Yunnan province.

6.2.1.2

Securities industry in Yunnan, China

Yunnan Securities Corporation, solely invested by Yunnan Branch of the People’s Bank of China, was established in September 1988 upon approval by the People’s Bank of China. A few other trust and investment companies were later approved to establish securities department. By the end of 2007, there were two securities companies in Yunnan, namely Hongta Securities and Pacific Securities. Both companies have been developing steadily thanks to their efforts to expand business and

6.2 Analysis of Financial Structure and the State of Economy

111

Table 6.3 Number of relevant companies in the securities industry in Yunnan in 2010 Item

Number

Securities companies with headquarters in Yunnan

2

Fund companies with headquarters in Yunnan

0

Futures companies with headquarters in Yunnan

2

Listed companies in Yunnan at the end of 2010

28

Funds raised through A shares in 2010 (Unit: RMB 100 million)

56

Funds raised through H shares in 2010 (Unit: RMB 100 million)

0

Funds raised through domestic bonds in 2010 (Unit: RMB 100 million)

358

Funds raised through short-term commercial paper (Unit: RMB 100 million)

160

Data source Kunming sub-branch of the People’s Bank of China

improve compliance. The launch of stock index futures and the wide fluctuations of commodity prices have resulted in the surge of futures trading. In 2010, the value of agency trade in the futures markets increased year-on-year by 167.6%. The two futures company in Yunnan province also delivered strong performance, the net profit of which increased by 1.1 times. Yunnan Baiyao Group was the first company in Yunnan to get listed. By 2010, Yunnan had twenty-seven listed companies. As shown in Table 6.3, some companies engaged in direct financing. In 2010, the capital market of Yunnan continued to grow rapidly: the funds raised through A shares totaled RMB 5.6 billion, the number of new stock accounts reached 174,000, and the cumulative turnover of the securities market amounted to RMB 866.48 billion.

6.2.1.3

Financing Sources and Financial Instruments in Yunnan, China

The share of loans in financial assets in Yunnan, China showed a considerable decline from 2001 to 2010, but still constituted the majority of the financial assets. As shown in Table 6.4, the funds raised through loans accounted for over eighty percent of the total. In Yunnan, the main financing channel is indirect financing through bank loans. In 2010, however, the funds raised through bonds increased by 2.68 times. The increasing share of funds raised through bonds over the decade shows that firms are better able to perform bond financing. Corporate bonds, an important way for companies in Western countries to obtain financing, do not make up a large share in Yunnan’s financial assets. This is to some extent related to the intentions and policies of the government. The lack of a sound credit mechanism and order in the market of corporate bonds also have significant negative impacts on the credibility of the bonds issued by Yunnan companies. Despite the limited ability of Yunnan companies to engage in direct financing through the capital market, thanks to supportive policies of government, at the end of 2010, the funds raised through direct financing reached RMB 41.4 billion, up by 130.8% year-on-year. The rapidly growing size of direct

112

6 Financing Environment in Cross-Border Regions

Table 6.4 Financing structure of non-financial institutions in Yunnan, China Year

Funds raised (Unit: RMB 100 million)

Share (%) Loans

Bonds (including convertible bonds)

Stocks

2001

195.4

96.2

0.0

3.8

2002

257.8

97.3

0.0

2.7

2003

564.1

98.8

0.7

0.5

2004

439.2

98.1

0.0

1.9

2005

669.4

98.8

1.2

0.0

2006

886.8

92.4

5.4

2.2

2007

1001.7

88.1

4.4

7.5

2008

1254.1

86.6

8.6

4.9

2009

2382.6

92.5

4.1

3.4

2010

2261.9

81.7

15.8

2.5

Data source Kunming sub-branch of the People’s Bank of China

financing and the increasing share of stocks in financial assets are good indications that as Yunnan’s economy grows, its capital market is also taking off. Financial instruments include treasury bonds, negotiable certificates of deposit, commercial papers, banker’s acceptances, repurchase agreement, stocks, corporate bonds, and so on. Yunnan has a limited variety of financial instruments, and the trading value thereof is also very small. Providing loans is the principal way to transform deposits into investment. Due to the small number of private businesses, poor performance of state-owned and collective enterprises, and long chains of debt in Yunnan, China, commercial papers lack credibility, and only a few banker’s acceptances are handled. As a result, the financial instruments market lacks participants, and only a small number of instruments of a limited variety. Moreover, the turnaround time for the instruments is very long.

6.2.2 Financial Structure and the State of Economy of Yunnan’s Neighboring Countries Originating in China’s Tanggula Mountains in the Tibetan Plateau, the 4,880-km long Mekong River is an important one in Asia. It flows southward through China, Myanmar, Laos, Thailand, Cambodia and Vietnam. The GMS Cooperation Program is based on the locations of these six countries. In order to examine the financing environment of the border regions between China and other GMS countries, we have studied the financial industry of Yunnan, China. In the following sections, we will analyze the financial industry and the state of economy of Laos, Myanmar and Vietnam.

6.2 Analysis of Financial Structure and the State of Economy

6.2.2.1

113

Vietnam

Over the past two decades, Vietnam has witnessed rapid social and economic development. The industrial sector is playing an increasingly important role in its economy. The eleven provinces in the Mekong River basin in Vietnam are mainly engaged in processing of agricultural products and construction materials industry. Major industries include food and cooking oil processing, sugar production, textile, weaving, daily chemicals, aquatic products processing, forest products processing, pharmaceuticals, leather, construction materials, machinery manufacturing, hydropower, and so on. In 2010, Vietnam’s GDP per capita reached USD 3,070, and its GDP reached USD 106.43 billion, up by seven percent year-on-year. In the same year, the trade between China and Vietnam totaled USD 30.09 billion, up by 54.6% from 2008. China’s exports to Vietnam and imports from Vietnam in 2010 stood at USD 23.11 billion and USD 6.98 billion respectively, up by 52.8 and 60.8% from 2008. China mainly exports textiles, high-tech products, steel, and agricultural produce to Vietnam, and imports mechanical and electrical products, coal, high-tech products, agricultural produce, textiles, crude oil, and rubber from Vietnam. By the end of 2010, the total investment of Vietnam in China reached USD 120 million, and that of China in Vietnam reached USD 990 million. The financial industry of Vietnam comprises mainly banks, but its capital market has also been developing rapidly. The Ho Chi Minh City Securities Trading Center was established in 2000. Vietnam has more than 200 companies listed on its securities exchanges, and the market value of outstanding shares exceeds forty billion US dollars. Since 2009, Vietnam’s economy has been developing rapidly, and its stock market has been in favor with investors around the world. Its banking industry grows rapidly, with a total asset growing at an annual rate of thirty percent. Up to June 30, 2011, the total asset of banks in Vietnam increased by twenty-one times from the level in 2000 to VND 4496.5 trillion. The total capital of the banking industry stood at VND 378.63 trillion, up by 45.57% from 2010 and 36 times more than in 2000. The balance of deposits and loans of commercial banks in Vietnam reached VND 2,369.945 trillion and VND 2479.452 trillion respectively, up by 20.17 and 28.21% from 2010. The market share of joint stock commercial banks continued to increase. As of June 30, 2011, the joint stock commercial banks in Vietnam surpassed their state-owned counterparts and topped the list in terms of the balance of deposits, which increased by 4.54% from 2010 and accounted for 47.71% of the total. In the same period, the balance of deposits of state-owned commercial banks in Vietnam was down by 5.21%, and its share in the total also dropped from 56.88% in 2008 to 43.86%. The share of joint stock commercial banks in the total balance of loans increased from 26.52% in 2008 to 37.78%, while that of state-owned commercial banks dropped from 58.15 to 49.09%. As shown in Table 6.5, Vietnam’s financial market has been booming and increasingly diverse. The share of deposits in GDP increased from forty-eight percent in 2002 to ninety-nine percent in 2007. The share of investment in stocks increased from 0.96% in 2002 to fifteen percent in 2008. The shares of government bonds, insurance and pension accounted in GDP remained small without significant changes.

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6 Financing Environment in Cross-Border Regions

Table 6.5 Financial market of Vietnam (share of GDP) Type

2002

2003

2004

2005

2006

2007

2008

Deposits

48

52

60

67

78

99

92

Loans

45

52

61

70

75

93

93

Stocks

0.96

2.06

3.05

5.55

22.61

43.38

15

Government bonds

NA

7.3

8.4

8.2

8.1

13.7

15.1

Insurance

1.44

1.72

2.00

1.63

1.54

1.44

NA

Pension

3.45

3.59

4.12

4.04

3.70

NA

NA

Data source Vietnam Development Report 2009, World Bank

Vietnam’s banking industry delivers an outstanding performance in formal finance. But in Vietnam, the per capita access to formal finance is only ten percent, so, informal finance has edges over formal finance in dealing with information asymmetry related to individuals, firms and rural areas. Vietnam has five state-owned commercial banks, thirty-seven joint stock banks, thirty-seven branches of foreign banks, six joint venture banks and two policy banks. As shown in Table 6.6, in Vietnam, state-owned commercial banks make up the largest share of the country’s financial assets, but their share of deposits decreased from 80.8% in 2001 to 58% in 2007, and their share of loans decreased from 73% in 2001 to 54% in 2007. This is attributed to the fact that after the financial crisis, almost all state-owned enterprises asked for loans from state-owned banks, which ended up causing substantial bad debts and increased the burden on state-owned commercial banks. Data show that the share of joint stock banks increased dramatically in 2006 and 2007. Their share of GDP in the deposits market rose from 11.3% in 2000 to 29% in 2007, revealing the increasing market orientation and diversity of Vietnam’s banking industry. The share of foreign banks in the balance of deposits showed a slight increase after the financial crisis, but their share in the balance of loans had been decreasing since Table 6.6 Statistics of the banking sector of Vietnam (share of GDP) Type

2000 2001 2002 2003 2004 2005 2006 2007 Share of deposits

State-owned commercial banks

78.4 80.8 80.5 79.5 78.1 78.6 70.0 58.0

Joint stock banks

11.3 9.2

10.1 11.2 13.2 14.3 22.0 29.0

Branch of foreign banks and joint venture 10.3 10.0 9.4 banks

9.3

9.7

7.1

8.0

13.0

Type

Share of loans

State-owned commercial banks

72

73

74

73

75

68

63

54

Joint stock banks

11

13

15

15

14

16

27

38

Branch of foreign banks and joint venture 17 banks

14

12

13

12

16

10

8

Data source Vietnam Development Report 2009, World Bank

6.2 Analysis of Financial Structure and the State of Economy

115

2000, which demonstrated that despite the recovery of Vietnamese economy, foreign banks were not optimistic about the Vietnamese market and did not show a strong willingness to lend.

6.2.2.2

Laos

Laos is an underdeveloped country in Southeast Asia. Its economy is primarily agricultural, and the industrial sector is very weak. In 2010, the GDP per capita of Laos was USD 2,440, and its GDP reached USD 7.296 billion. For seven years, Laos maintained an average economic growth of eight percent. The trade between China and Laos in 2010 stood at USD 1.05 billion, up by 150% from 2008. In that year, the exports from China to Laos totaled USD 480 million, and the imports to China from Laos reached USD 570 million, up by 77.8 and 28.0% from 2008 respectively. China mainly exports mechanical and electrical products, textiles, garments, hightech products, automobiles, motorcycles, and so forth to Laos, and mainly imports from Laos copper ore, copper material, agricultural produce, timber, rubber, and so forth. Up to the end of 2010, Laos had invested USD 37.61 million in China, and China’s FDI in Laos totaled USD 850 million. The enabling financial environment and relaxed foreign exchange controls in Laos create a favorable investment climate for foreign investors. The financial services available in Laos, however, are rather limited. The Lao Securities Exchange, established in 2010, was a very small one. Insurance companies from Japan, Thailand and other countries have been providing insurance services in Laos, but the banking industry remains the dominant player of the country’s financial sector. The Bank of the Lao P.D.R regulates the country’s financial services, with Lao Development Bank, Agricultural Promotion Bank, the Bank of Foreign Trade and Nayoby Bank, a policy bank, operating under its supervision. The Lao government encourages foreign financial institutions to establish branches or joint ventures in Laos. By 2009, in Laos, there were four joint venture banks, namely Joint Development Bank, Lao-Viet Bank, Banque Franco-Lao, and Lao Thai Bank; two private banks, namely Vientiane Commercial Bank and Phongsavanh Bank; an office of foreign bank, i.e., Standard Chartered; and branches of seven foreign banks, namely Public Bank, Bangkok Bank, SIAM Commercial Bank, Bank of Ayudhya, Krung Thai Bank, TMB Bank, and Indochina Bank. Banks in Laos have limited assets and lack diversity in business. Moreover, Laos does not have a personal credit system. Banks are thus reluctant to offer loans, having set strict lending conditions and high interest rates for loans. As shown in Tables 6.7 and 6.8, from 2005 to 2009, the balance of deposits and loans of commercial banks did not account for a large share of the GDP of Laos, but the figures were on the rise, which reflects the slow growth of Lao economy in those years. A large proportion of the financial institutions in Laos are commercial banks. In 2009, there were twenty-three commercial banks and nine other financial institutions. The small number of financial institutions reflects the small economic size of Laos.

116

6 Financing Environment in Cross-Border Regions

Table 6.7 Statistics of Lao financial market (share of GDP) Year

2004

2005

2006

2007

2008

2009

Balance of deposits of commercial banks

16.90

15.89

16.25

19.28

19.51

23.91

Balance of loans of commercial banks

23.47

23.64

23.14

27.60

29.23

36.68

Data source Database of the International Monetary Fund (IMF)

Table 6.8 Statistics of financial institutions in Laos Year

2004

2005

2006

2007

2008

2009

Number of commercial banks

12

12

13

16

20

23

5

6

7

8

8

9

Number of other financial institutions Data source Database of the IMF

6.2.2.3

Myanmar

Myanmar has abundant resources but an underdeveloped economy. Agriculture and forestry contribute about fifty percent of its GDP, while the industrial sector accounts for only about ten percent. Its manufacturing industry, mainly manufacturing of food and beverages, is dependent on its natural resources. In 2010, Myanmar’s GDP per capita was USD 1950, and its GDP increased by ten percent from 2009 to USD 22.349 billion. The trade between China and Myanmar in 2010 reached USD 4.44 billion, an increase of 68.8% from 2008. In 2010, China’s exports to Myanmar totaled USD 3.48 billion, and its imports from Myanmar reached USD 960 million, up by 75.8 and 47.7% from 2008 respectively. The goods exported from China to Myanmar are mainly textiles, high-tech products, steel, automobiles, and so forth, and the goods imported from Myanmar mainly include agricultural products, lumber and so forth. As of the end of 2010, Myanmar had invested USD 89.72 million in China, and China’s FDI in Myanmar reached USD 1.95 billion. The securities industry and insurance industry in Myanmar are a gap in the market. Its financial sector comprises primarily banks. There are four state-owned commercial banks in Myanmar, namely Myanmar Economic Bank, Myanmar Investment and Commercial Bank, and Myanmar Foreign Trade Bank, which are allowed to deal with foreign exchanges and letters of credit, and Myanmar Agricultural Development Bank. Access to financing is rather limited in Myanmar, because its banking sector provides only short-term loans, guaranteed loans and term loans. None of the financial institutions in Myanmar offers medium and long-term loans, unsecured loans or other financing services. In Myanmar, banks refuse to offer loans to firms without a security, and the guaranteed loans account for only fifty percent of the security’s value. Most private banks in Myanmar are part of private corporate groups, which tend to only offer loans to related companies. All these result in a harsh financing environment for SMEs in Myanmar. As shown in Table 6.9, the number of commercial banks in Myanmar remained around twenty, and the number of other financial institutions is tiny. The Central Bank

6.2 Analysis of Financial Structure and the State of Economy

117

Table 6.9 Statistics of financial institutions in Myanmar Year

2004

2005

2006

2007

2008

2009

Number of commercial banks

25

23

20

20

20

20

2

2

2

2

2

2

Number of other financial institutions Data source Database of the IMF

Table 6.10 Internal structure of deposits and loans of Myanmar (share of GDP) Year

2004

2005

2006

2007

2008

2009

2010

Balance of deposits

5.61

6.09

5.73

5.49

5.57

6.46

8.96

Balance of deposits of firms

4.29

4.44

4.13

3.76

3.73

4.29

6.00

Balance of deposits of residents

1.32

1.65

1.60

1.73

1.85

2.18

2.96

Balance of loans

3.37

3.32

3.44

2.82

2.65

2.82

3.52

Balance of loans of firms

3.33

3.25

3.36

2.74

2.58

2.74

3.43

Balance of loans of residents

0.05

0.07

0.08

0.08

0.07

0.08

0.09

Data source Database of the IMF

of Myanmar approved the establishment of four private banks in May 2010. By 2012, there were fifteen private banks in Myanmar. As a result, entities in the banking sector of Myanmar compete with each other in services and operation, and firms and people are thus allowed more option. But foreign banks are denied business registration in Myanmar and thus unable to operate business in the country. The branches of foreign banks in Myanmar decreased from over sixty to thirteen. Table 6.10 shows that deposits of firms accounted for a large share of the total in Myanmar. In addition, the balance of deposits of firms kept increasing, accounting for six percent of Myanmar’s GDP in 2010. Residents, by contrast, contribute a very small share of the balance of deposits.

6.3 Descriptive Analysis of Statistics About Financing Environment For this study, questionnaire surveys were conducted in economic development zones and trade zones in border regions of Yunnan, China, including Honghe, Xishuangbanna and Dehong, and among firms in the border economic zones of Vietnam, Laos and Myanmar. Effective questionnaires were selected based on data integrity and coherence. A total of 134 effective samples were obtained, including samples from Honghe, Xishuangbanna and Dehong of Yunnan, China, and Lao Cai of Vietnam. The distribution of samples in effective questionnaires is shown in Table 6.11. The questionnaire is based on subjective perception. The questions are coded quantitative variables, and the variables are measured using the Likert scale. Some

118 Table 6.11 Distribution of samples in effective questionnaire

6 Financing Environment in Cross-Border Regions Locality

Sample size

Share (%)

Honghe

51

38.1

Dehong

35

26.1

Lao Cai

31

23.1

Xishuangbanna

17

12.7

134

100.00

Total

questions include “I cannot answer” as an option, which should be set as missing values. Considering the small size of effective samples, the missing values have a significant impact on the modeling result. It is thus imperative to use a proper method to impute the missing values before modeling. This study uses the mean imputation method.

6.3.1 Initial and Follow-On Funding for Firms As shown in Fig. 6.1, 72.8% of the surveyed firms rely on their own savings to raise startup capital; those borrowing from parent company and subsidiaries account for 8.7% of the total. Both are internal financing in nature. Altogether 80% of the

Fig. 6.1 Major sources of initial funding for firms

6.3 Descriptive Analysis of Statistics About Financing Environment

119

surveyed firms are started through internal financing. Loans from state-owned banks account for the largest share of financing methods, excluding internal financing, and 5.8% of the samples resort to such loans. Considering the strict conditions of stateowned banks for offering loans to start companies, the samples relying on such loans are probably in priority industries supported by state policies or subsidiaries of large state-owned enterprises. Some samples, mostly small or medium-sized startups, find it hard to win sufficient support from the government or state-owned banks, and obtain their startup capital from friends and family, which account for 2.9% of the total. Other funding sources, such as loans from foreign banks and aid agencies, private joint stock banks and financial companies, account for a very small proportion of the total. The data shows that firms in development zones receive inadequate support from aid agencies. It also reveals the underdevelopment of financial services and limited financing sources in the border regions between China and other GMS countries. Private joint stock banks and financial companies have failed to finance firms because of limited number of such institutions and their slow development. As shown in Fig. 6.2, among the firms relying on savings as the initial funding source, sixty-six are private firms, accounting for eighty-eight percent of the total. It shows that the primary source of funding for small and medium-sized private firms in cross-border regions is the savings of founders or their family and friends. In addition, such savings play a dominant role in their further development. As firms continue to grow and their market continues to expand, they face increasingly fierce competition. Therefore, they need to enhance their competitiveness and obtain additional finance. Most SMEs are labor-intensive enterprises which lack diversity in products and do not enjoy high profitability. As internal financing is restricted by a firm’s ability to accumulate capital, internal financing alone is far from sufficient to satisfy the firm’s financing needs.

Fig. 6.2 Nature of firms relying on savings as a primary source of initial funding

120

6 Financing Environment in Cross-Border Regions

To analyze the financing environment of firms while making investment decisions, this study calculates each variable of financing environment, the scores of which are shown in Table 6.12. In terms of the scores from pooled data, domestic financial regulation and convenient approval process have greater impacts. Q1 = Domestic financial regulations. Q1 ranks second in terms of the importance of policies with a score of 5.44. In this regard, Honghe has the highest score of 6.83 by region, and the services industry has the highest score of 6.50 by industry. The scores show that domestic financial regulations have a great impact on firm’s investment decisions, especially on those making investment in Honghe, China and in the services industry. Q2 = Convenient loan approval process. Q2 ranks first in terms of the importance of policies with a score of 5.51. In this regard, Dehong has the highest score 7.63 by region, and resource-based industries have the highest score of 7.32 by industry. The results show that convenient loan approval process is the most important factor affecting firms in making investment decisions, especially for firms making investment in Dehong and in the resource-based industries. Q3 = Services of financial institutions in neighboring countries. Q3 ranks fourth in terms of the importance of policies with a score of 3.28. For Q3, Lao Cai, Vietnam gains the highest score 6.77 by region, and the services industry gains the highest score of 4.29 by industry. The results show that services of financial institutions in neighboring countries are also important for firms in making investment decisions, especially for firms making investment in Vietnam and in the services industry. Q4 = Administrative convenience provided by development zones to firms in obtaining loans. Q4 ranks third in terms of the importance of policies with a score of 4.79. For Q4, Honghe gains the highest score of 8.33 by region, and resource-based industries gain the highest score of 5.28 by region. The scores show that the administrative convenience provided by development zones to firms in obtaining loans have certain impact on investment decisions of firms, especially on those making investment in Honghe and in resource-based industries. Q5 = Informal gift or payment expected or requested during application. Q5 gains the lowest score in terms of the importance of policies. For Q5, Xishuangbanna has the highest score of 6.50 by region, and the services industry has the highest score of 4.04 by industry. The results show that this factor only has a minor impact on firm’s investment decisions.

6.3.2 Follow-Up Investment and Related Loans of Firms Table 6.13 shows that eighty-eight firms have made follow-up investment in recent three years, accounting for sixty-six of the total. Overall the firms in cross-border regions are booming, with a strong need for investment. More than half of the samples are still growing. Nonetheless, thirty-four percent of the firms did not apply for loans for the purpose of follow-up investment, but relied solely on internal financing. This is probably thanks to their abundant funds as a result of thriving business. But it is also possible that they have difficulties obtaining loans.

5.51

3.28

4.79

2.67

Q2

Q3

Q4

Q5

Dehong

3.75

8.33

2.75

7.30

6.50

6.25

5.21

6.15

4.62

5.13

6.25

7.63

6.11

Vietnam

3.88

5.86

6.77

6.77

6.77

2.67

5.28

3.42

7.32

5.77

Resource-based industries

Xishuangbanna 5.19

Honghe

6.83

Industry

Locality

3.33

4.35

4.19

5.68

5.30

Other industries

4.04

4.63

4.29

5.23

6.50

Services

Data source Study of investment policies about the establishment of cross-border economic cooperation zones between China and other GMS countries, ADB

5.44

Pooled

Score

Q1

Financial support services

Table 6.12 Importance of financial support services

6.3 Descriptive Analysis of Statistics About Financing Environment 121

122

6 Financing Environment in Cross-Border Regions

Table 6.13 Firms with follow-up investment that have or have not applied for loans Firms that applied for loans

Firms that did not apply for loans

Total

Number of firms with follow-on investment in recent three years

58

30

88

Number of firms without follow-on investment in recent three years

0

0

46

Multiple response sets are used to further study the reasons why some firms did not apply for loans for follow-on investment, and the results are shown in Fig. 6.3. Of the 134 samples, 23.1% did not think it necessary to ask for loans, which shows that the principal reason that firms did not request loans is the abundance of funds; 20.9% did not ask for loans because of inadequate security, which shows that the underdevelopment of the guarantee industry has been a major inhibitor to firms applying for loans; 15.7% did not ask for loans because they thought the approval process too complex, which shows that the low efficiency of governments and the financial sector in cross-border regions has hindered the development of firms. As shown in Fig. 6.4, over forty percent of the samples with follow-up investment obtained loans from four major state-owned banks. It proves that the four major stateowned banks are the principal source of loans for firms making follow-on investment in the border regions between China and other GMS countries. Figure 6.4 also shows that twenty percent of the samples with follow-on investment enjoyed preferential loan interest rates.

Fig. 6.3 Reasons why some firms did not apply for loans

6.4 Impact of Financing Environment on Investment of Firms

123

Fig. 6.4 Share of firms with follow-up investment receiving various financial services

6.4 Impact of Financing Environment on Investment of Firms 6.4.1 Impact on Investment Motives of Firms To attract more firms to make investment in the border regions between China and other GMS countries, it is necessary to study firm’s investment motives. The investment theories as mentioned are combined with empirical studies to explore the correlation between regional financing environment and investment motives of firms. The motives and external conditions co-determine the investment decisions of firms. Meanwhile, firms with different investment motives have different requirements for the external environment. Motives and conditions interact. While the firm variable is fixed, the motives of firms are closely related to the location variable and the condition factor.

6.4.1.1

Methodology

Kojima (1978) classified the motives of firm’s initial investment into three categories: natural resource oriented, production factor oriented, and market oriented. In order to include the three categories of motives in the model, let Y = j, when j = 1, 2, and 3 represents natural-resource-seeking, production-factor-seeking and marketseeking motives respectively. These motives are binary and unordered variables, so the multinomial Logit model is used.

124

6 Financing Environment in Cross-Border Regions

 log

Pr(Y = j) Pr(Y = 1)

 = αj0 + βji Xi + γjm Pm + κjn In

(6.1)

In Formula 6.1, Xi represents the variables of financing environment i, including domestic financial regulation (X1 ), convenient loan approval process (X2 ), services of financial institutions in neighboring countries (X3 ), administrative convenience provided by development zones to firms in obtaining loans (X4 ), and informal gift or payment expected or requested during application (X5 ). Tax policy and land use policy also have great impact on the initial investment of firms. P1 stands for tax policy, and P2 stands for land use policy. The variable In is used to show the difference between industries in investment motives. In stands for the manufacturing industry, and I2 stands for the resource-based industries, and I3 stands for the services industry. a.

Marginal effects of financing environment

In the multinomial Logit model, the marginal effects of financing environment are expressed as the impact on probability Pr(Y = j) and the impact on the hazard ratio Pr(Y = j)/Pr(Y = 1). In reality, we are more concerned with the hazard ratio, because the impact of the change in a variable of financing environment on Pr(Y = j) is an absolute value, while its impact on the hazard ratio is a relative value. Relative values are undoubtedly more relevant in practice than absolute values. Moreover, it is difficult to estimate the impact of financing environment on Pr(Y = j) using Formula 6.1. With other conditions remaining unchanged, use Formula 6.1 to take and simplify the derivative of Xi :   ϑ Pr(Y = j) = βji log (6.2) ϑXi Pr(Y = 1) If βji > 0, it means that variable i of financing environment causes rise in the hazard ratio Pr(Y = j)/Pr (Y = 1). In other words, a small positive change of Xi causes the firm to be inclined to production factor seeking (For example, when j = 2). If βji < 0, it means the firms concerned are inclined to resource-seeking. b.

Marginal effects of policies and differences between industries in investment motives

As with the marginal effects of financing environment, the impact of tax and land use policies on the hazard ratio is determined by γjm . If γjm > 0, it indicates that the change in tax policy (for example, when m = 2 and the taxes are raised), firms are inclined to production factor seeking in investment. In is a binary variable which describes the type of industries. I2 , for example, represents resource-based industries as compared to the manufacturing industry. If κjn < 0, it means that in comparison with the manufacturing industry, resource-based industries have weaker investment motives oriented towards seeking production factors. If the results of empirical analysis in this study confirms this point, it indicates that

6.4 Impact of Financing Environment on Investment of Firms

125

the regression results are consistent with practice. In other words, it proves that resource-based industries are inevitably inclined to resource seeking in investment.

6.4.1.2

Interpretation of Variables and Test of Multicollinearity

Based on analysis of the previous sections, the investment motives of the surveyed firms are classified into three categories, namely market-seeking, resource-seeking and efficiency-seeking. The questionnaire contained seven motives, which need to be classified into the said categories using k-means clustering. The missing data are handled using pairwise deletion. The first category, resource-seeking, includes ninety-two cases; the second category, efficiency-seeking, includes thirty cases; and the third category, market-seeking, includes twelve cases. The clustered motive variables are set as explained variables y = j (j = 1, 2, 3), which correspond to the three categories of investment motives. j = 1 represents resource-seeking motive, j = 2 represents efficiency-seeking motive, and j = 3 represents market-seeking motive. Independent variables are the responders’ assessment of the importance of factors of financing environment on their investment decisions, namely the importance of domestic financial regulations (X1 ), convenient loan approval process (X2 ), services of financial institutions in neighboring countries (X3 ), administrative convenience provided by development zones to firms in obtaining loans (X4 ), and informal gift or payment expected or requested during application (X5 ). A Likert scale is used, in which responders specify the importance in five levels, ranging from not important to very important. Data not available through the questionnaire is marked as missing. Tax and land use policies are also important variables affecting the initial investment decisions of firms. Their importance is also measured using a five-point scale. Tax and land use policies are included in the model to enhance the interpretability. But if the nine variables for tax policy and five variables for land use policy are all included into the model, the impact of financing environment variables will be weakened, which runs contrary to the research objective. Moreover, too many variables would cause collinearity and empty units. With only 134 samples, the existence of empty units will further reduce the number of effective samples. Dimensionality reduction is thus required. Principal component analysis and factor analysis can be used for dimensionality reduction, but as the variables contained in the questionnaire are qualitative ones, the principal factors as calculated may not be the real factors. Considering that each section of the well-designed questionnaire can be regarded as a factor, clustering (using the Euclidean distance and the Ward’s method) is used for dimensionality reduction. All samples of each section are clustered and classified into two categories. Analyze the differences between the two categories in value to obtain a new composite variable. All samples in the first category are coded “1” and all samples in the second category are coded “2”. The two groups of variables are processed using the same method to obtain two composite indexes. By so doing, the dimensionality reduction is achieved while also avoiding empty units. Meanwhile, the investment decisions of firms are also influenced by factors such as its industry and location, which are included in the model as control variables and

126

6 Financing Environment in Cross-Border Regions

Table 6.14 Collinearity of investment motive variables X1

X2

X3

X1

1.0000

X2

0.3667

1.0000

X3

0.3600

0.1397

1.0000

X4

0.3666

0.4254

0.3010

X5 Tax2 Land2

X4

X5

Tax2

Land2

1.0000

0.1724

0.1495

0.4430

0.3749

1.0000

−0.2119

−0.2427

0.1297

−0.0301

0.2645

1.0000

0.0953

0.1486

−0.2145

0.0845

−0.0846

−0.3521

1.0000

referred to as the industry variable. Based on the data obtained in the questionnaire, in this study, the industries of the firms surveyed are classified into manufacturing and other industries, resource-based industries, and services industry. The industry variable is an unordered categorical variable, which needs to be coded using dummy variables. The manufacturing and other industries are used as a reference to set the two variables of resource-based industries and services industry. The multinomial Logit model is applicable when unordered categorical response variables fall into three categories. In this study, the three categories of motive variables are unordered, so the multinomial Logit model is used for modeling and analysis. The motive of resource seeking motive is used as a reference group. The linear correlation of the independent variables is tested before modeling. As shown in Table 6.14, the correlation coefficients are all less than 0.5, indicating that these variables do not have significant collinearity, so they can be used in the model for a regression.

6.4.1.3

Estimation Results and Analysis

This study involves several categories of response variables (motives of resourceseeking, market-seeking, and efficiency-seeking) which are unranked, and a number of levels of independent variables. The Stata is used to analyze the multinomial Logit model, the results of which are shown in Table 6.15. Model I includes only financing environment variable and policy variable, and Model II also includes industry variable. Model III including the extra variable of region is extremely insignificant, and thus not analyzed. The regression results in Table 6.14 show that in both Model I and Model II, the null hypothesis is rejected according to the Chi-squared test of LR. In other words, there are no redundant variables in the models. Meanwhile, the high values of PseudoR2 in the two models indicate that the models fit the data well. The significance level of the regression coefficient of X1 and P2 in all models is lower than ten percent. X2 and X3 are significant in the market-seeking motive model (the significance level being ten percent); X5 is significant in the production-factor-seeking motive model. In addition, the high significance level (one percent) of the coefficient of I2 , the

6.4 Impact of Financing Environment on Investment of Firms

127

Table 6.15 Impact of financing environment on investment motives of firms Variable

Model I Y=2

Model II Y=3

Y=2

Y=3

Resource-seeking motive as reference group Domestic financial regulation (X1 )

−3.382**

−5.062***

−21.773***

−23.474***

(1.683)

(1.775)

(2.368)

(2.423)

Convenient loan approval process (X2 )

−0.237

2.700**

−1.084

−1.998*

(1.102)

(1.366)

(1.134)

(1.159)

Services of financial institutions in neighboring countries (X3 )

−1.071

−1.984*

−0.699

2.455*

(0.991)

1.021

(1.222)

(1.484)

Administrative convenience provided by development zones to firms in obtaining loans (X4 )

−0.199

−1.397

0.071

−1.026

(0.972)

(1.056)

(1.945)

(1.261)

Informal gift or payment expected or requested during application (X5 )

2.644*

1.463

3.025

1.739

(1.626)

(1.630)

(2.245)

(2.299)

Tax policy (P1 )

0.014

-0.968

0.372

-0.040

(1.276)

(1.362)

(1.844)

(1.857)

4.441*

5.754**

23.854***

25.109***

(2.504)

(2.566)

(3.485)

(3.594)

7.204

13.187**

59.644***

63.892

(6.375)

(6.576)

(3.765)

(2.986)

Land use policy (P2 ) Constant

Industry variable with the manufacturing industry as the reference group Resource-based industries (I1 )

−0.015 (2.077)

−0.631 (2.376)

Services (I2 )

22.193***

23.667***

(3.913)

(3.961)

Log Likelihood

−36.645

−32.605

LR chi2

95.69 (p = 0.0000)

103.77 (p = 0.0000)

Pseudo-R2

0.5663

0.6141

explanatory variable for type of industry, indicates significance differences between the manufacturing industry and the services industry in initial investment motives. a.

Impact of financing environment on initial investment motives

As shown in Table 6.14, the coefficients of domestic financial regulation (X1 ), convenient loan approval process (X2 ), services of financial institutions in neighboring

128

6 Financing Environment in Cross-Border Regions

countries (X3 ), and informal gift or payment expected or requested during application (X5 ) are significant. The following sections will focus on these variables. (1)

Domestic financial regulation

In the multinomial Logit model, the coefficients of domestic financial regulation are significant and negative in each model, indicating that domestic financial regulation has impact on investment decisions of firms. While other conditions remain the same, tighter domestic financial regulation causes firms to be inclined to the motive of resource seeking. Domestic financial regulation has great impact on investment decisions of firms. This is attributed to the following factors. First, when a country adopts strict financial regulation, it has great impact on the investment decisions of foreign enterprises, especially foreign financial institutions. As capital flows have significant influence on economy, an important component of financial regulation is the regulation of capital inflows and outflows. Substantial foreign investment is needed in China to facilitate its economic development. Foreign exchange under the capital accounts, nonetheless, is still controlled in China even after it became a member of the WTO. Foreign firms are subject to tight regulation in market access and operation. Foreign financial institutions, for example, are restricted by policies and regulations about local incorporation of foreign banks in China, the renminbi business, the cap on foreign ownership of joint ventures, and so forth. Foreign banks to set up locally incorporated banks in China must have a minimum net asset of USD 20 billion. Foreign-funded financial institutions are also subject to restrictions on business scope and stricter requirement for auditing of financial statements. Second, excessive regulation of the banking sector can cause financing difficulties for firms, so, a country’s bank regulation is an important factor that affects the investment decisions of firms. China has foreign exchange reserves of more than three trillion US dollars, household savings of more than thirty trillion US dollars, and a huge amount of fiscal reserves. Due to strict regulation of the banking sector in China, nearly one third of the funds have not been functional. Banks in China have abundant money, but firms in the country are in acute shortage of funds. The development of firms is hindered by lack of funds and difficulties in investment, which has affected the firm’s willingness to make initial investment. While the local governments of the border regions between China and other GMS countries are confronted with similar problems, they also have unique advantages. As a result of the booming economic and trade cooperation between Yunnan, China and its neighboring countries, there have been increasing cross-border flows of the renminbi in the border regions between China and Vietnam, Laos and Myanmar. The People’s Bank of China launched a pilot program of cross-border trade settlement in the renminbi in Yunnan province on June 22, 2010, which has boosted cross-border trade. Meanwhile, to make outbound investment in the renminbi, there is no need to use foreign exchange reserves. Nor is there any currency risk. The cross-border flows of the renminbi have thus stimulated the investment in the GMS and the inflows of return on investment to China.

6.4 Impact of Financing Environment on Investment of Firms

(2)

129

Convenient loan approval process

The coefficient of convenient loan approval process in Model I of market-seeking motive (Y = 2) is positive and significant (+2.700), indicating that the variable has impact on investment decisions of firms. When other conditions remain unchanged, the easier it is for firms to obtain loan approval, the higher the probability of market-seeking investment. When the industry variable is included, the coefficient becomes negative and significant (-1.988), showing that the demand for convenient loan approval process varies between industries. In the model with industry variable, convenient loan approval process tends to increase the probability of resource-seeking investment. The models show that convenient loan approval process has the greatest impact on investment decisions of firms, especially market-seeking firms. In China’s financial sector, banks play a dominant role. They are the principal source of financing for firms. Therefore, the financing efficiency of firms is determined by the efficiency of banks. As the projects of SMEs are time-sensitive, the delay in financing has huge impact on their development. That explains why convenient loan approval process is an important factor of financing environment when firms make decisions to invest. Convenient loan approval process leads to efficiency in financing which will definitely facilitate the development of firms. (3)

Services of financial institutions in neighboring countries

The coefficient of services of financial institutions in neighboring countries in Model I of market-seeking motive is negative and significant (−1.984), indicating that the variable has impact on investment decisions of firms. When other conditions remain the same, the increase in importance of the services of financial institutions in neighboring countries means higher probability of resource-seeking investment. When the industry variable is included, the coefficient becomes positive and significant (+2.455), showing that the demand for services of financial institutions in neighboring countries varies between industries. If the industry variable is considered, the services of financial institutions in neighboring countries tend to increase the probability of market-seeking investment. The CBEZs between China and other GMS countries rely primarily on the financial industry of Yunnan, China for financial services, though the financial institutions of Yunnan’s neighboring countries also play a supplementary role. When Yunnan, China cannot provide sufficient financial services to satisfy the financing demand of firms, the financial institutions in the neighboring countries become an important factor that affect the investment decisions of firms. Up to the end of September 2011, the GMS countries bordering China had established eight banks (with thirty-two branches), five branches and seven offices in China, the total assets of which reached RMB 186.95 billion. China has also been enhancing cooperation with other countries in the banking sector, with large state-owned banks, policy banks, and small and medium-sized joint stock banks and urban commercial banks participating in cooperation. Cooperation has expanded from international settlement to credits, agent

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6 Financing Environment in Cross-Border Regions

banking and investment banking. As the financial institutions of neighboring countries provide more and more services, the financing environment in the regions is improved, so firms are more likely to investment in these regions. (4)

Informal gift or payment expected or requested during application

Not considering the differences between industries (Model I), the coefficient of informal gift or payment expected or requested during application is positive and significant (+2.644), indicating that informal gift or payment expected or requested during application has positive effect on investment decisions of firms. When other conditions remain unchanged, the increase in importance of informal gift or payment expected or requested during application leads to higher probability of productionfactor-seeking investment. The request for informal gift or payment in application for loans is a kind of rentseeking behavior in financial markets. Rent-seeking refers to the efforts to obtain claim to production factors that are fixed in supply by unproductive profit-seeking activities. It usually refers to the activities of entities seeking or maintaining an existing rent by seeking or maintaining a monopoly in an industry. The rent in this context is extra profit arising from scarcity of resources due to government’s intervention and control of market and the consequent lack of market competition. In developing countries like China, funds are scarce. During the development of the socialist market economy in China, rent-seeking behaviors take place in applications for loans as a result of competition between entities and the impact of factors in addition to the market in allocation of funds. Rent-seeking in the financial market is covert and does not affect the price of loans, but it raises the financing cost. Therefore, financial rent-seeking has impact on investment decisions of firms. b.

Impact of land use policy on initial investment motives

Land use policy has significant impact on initial investment motives of firms. In the model of production-factor-seeking motive (Y = 2), greater importance of land use policy leads to higher probability of production-factor-seeking investment. In the model of market-seeking motive (Y = 3), greater importance of land use policy also leads to higher probability of market-seeking investment. This can be explained by comparing resource-seeking investment with production-factorseeking and market-seeking investment. Unlike resource-seeking investment, if a firm decides on production-factor-seeking or market-seeking investment, it would need land on which to put up buildings. Any change in land use policies would cause changes in the costs of firms, so businesspeople are more sensitive to such changes. When governments provide preferential land use policies, firms are inclined to make production-factor-seeking or market-seeking investment. In addition, in Model I and Model II, when the industry variable is included, the impact of land use policies is significantly stronger (for example, when Y = 2, 23.854 > 4.441; when Y = 3, 25.109 > 5.754), because the manufacturing industry, in comparison with other industries, needs more land for construction of buildings, thus it is more sensitive to land use policies. Model I measures the average impact of

6.4 Impact of Financing Environment on Investment of Firms

131

land use policies on all industries. When the industry variable is included, the model reflects only the impact on the manufacturing industry.

6.4.2 Impact of Financing Environment on Follow-Up Investment 6.4.2.1

Methodology

Financing environment also has impact on the decisions of firms to make follow-up investment. This study uses “does your firm obtain loans for follow-up investment” (AI) as the explained variable. It is a 0/1binary variable: 1 = Yes. 0 = No. A binary Logit model is constructed to analyze the impact of financing environment on AI: Pr(AI = 1|FS) =

1 1+

e−(α0 +δFS)

(6.3)

FS stands for the set of six financing environment variables, namely “does your firm receive financial support services” (fs1 ), “does your firm have easy access to loans from the four major state-owned banks” (fs2 ), “does your firm have easy access to loans from other financial institutions” (fs3 ), “does a local government or institution provide your firm with financial guarantee” (fs4 ), “does your firm enjoy preferential interest rates for subsequent loans” (fs5 ), and “does your firm receive initial funding from local governments” (fs6 ). They are all binary variables. 1 = Yes. 0 = No. Comparative statics analysis is used to estimate the impact of financing environment on AI. In other words, the impact of the changes of a chosen financing environment variable of financing environment is measured, when other variables remain unchanged. For example, Formula 6.4 is used to estimate the impact of fs1 , d[Pr( AI = 1|fs1 )] d[Pr( AI = 1|fs1 )] = Pr( AI = 1|fs1 = 1) − Pr( AI = 1|fs1 = 0)

(6.4)

Let the coefficient of fs1 in Formula 6.3 be δ1 . Formulas 6.3 and 6.4 are used to calculate the impact of fs1 on AI, the value of which is 1/ 1 + e−α0 −δ1 . The same is applicable to estimation of the impact of other variables on AI.

6.4.2.2

Check for Multicollinearity

The collinearity of the independent variables is tested before modeling. As shown in Table 6.16, the correlation coefficients between the independent variables are all less than 0.8, indicating that these variables do not have significant collinearity, so they can be included in the model. The binary Logistic model is used. Variable P

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6 Financing Environment in Cross-Border Regions

Table 6.16 Collinearity of variables in loan model fs1

fs2

fs3

fs4

fs5

fs1

1.0000

fs2

0.5805

1.0000

fs3

0.2546

0.2872

1.0000

fs4

0.3615

0.4085

0.2109

1.0000

fs5

0.2676

0.3820

0.4133

0.1883

1.0000

fs6

0.3254

0.2734

0.1902

0.5200

0.3198

fs6

1.0000

stands for the probability of firms obtaining loans for follow-on investment. Stata 10 is used for regression based on the data of eighty-eight samples.

6.4.2.3

Estimation Results and Analysis

Among the 134 samples, eight-eight firms had follow-on investment in the three years before the survey, fifty-eight of which had obtained loans, and thirty had not. The objective of this section is to analyze the impact of financing environment on AI, so the size of sample for regression analysis is eighty-eight. Use Formula 6.3 to obtain the regression results shown in Table 6.17. The value of LR χ2 in the model is 53.59 (p = 0.000), showing that the six financing environment variables are jointly significant. The value of pseudo R2 is 0.6923, meaning that the probability for the model used to predict the probability of the dependent variable AI is about seventy percent. Among the six independent variables, the significance level of the coefficients of variables fs1 , fs2 and fs5 are ten percent. The other three variables are statistically insignificant, but still relevant in economics. Therefore, based on the regression results in Table 6.17, Formula 6.4 is used to measure the impact of the six financing environment variables on AI. (1)

Financial support services

Among the firms with follow-on investment, 38.64% have received financial support services. The coefficient of financial support services in the empirical model is significant, the value of which is 1.286. According to Formula 6.4, financial support services increase the probability of firms obtaining loans for follow-on investment by 27.4%. The availability of financial support services is a composite concept reflecting the state of financial services in a region. Financial support services include services provided by all sectors of the financial industry, such as the banking sector, insurance sector, securities sector, and so forth. Speaking from the demand-following perspective, as an economy continues to grow, the entities will have demands for financial services, leading to the appearance of financial institutions and financial services, and thus contributing to the constant development of the financial system. The supply-leading approach, on the other hand, stresses the catalytic role of the

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Table 6.17 Empirical model of the impact of financing environment on AI Variable

Coefficient (standard deviation)

Does your firm receive financial support services? (fs1 )

1.286** (0.630)

Does your firm have easy access to loans from 2.020*** the four major state-owned banks? (0.586) (fs2 )

Z value 2.04

3.44

Does your firm have easy access to loans from −0.231 other financial institutions? (0.743) (fs3 )

−0.31

Does a local government or institution provide 0.863 your firm with financial guarantee? (1.007) (fs4 )

0.86

Does your firm enjoy preferential interest rates 1.108* for subsequent loans? (0.622) (fs5 )

1.78

Does your firm receive initial funding from local governments? (fs6 )

−0.801 (1.070)

−0.75

Constant

−1.316 (0.265)

−4.96

Log likelihood

−64.873

LR χ2 (6)

53.59 (p = 0.000)

Pseudo Obs

R2

0.6923 88

Significance of variables, *p < 0.1, **p < 0.05, ***p < 0.01

supply of financial services to economic development. The economic zones in the border regions between China and other GMS countries are primarily dependent on the economy of Yunnan, China. As an economically less-developed area in China, Yunnan province is a late starter in financial services. While it has been making slow progress in this sector, supply-led financial services play a dominant role. Great efforts should be made to promote the development of financial services in Yunnan, China, so that more firms with financing needs can have access to financial support services, which will significantly boost the development of Yunnan, China and the CBEZs. (2)

Loans from the four major state-owned banks

Among the samples with follow-on investment, 45.5% have easy access to loans from the four major state-owned banks of China. The coefficient of this variable in the empirical model is also significant, the value of which is 2.02, indicating that easy access to the four major state-owned banks increases the probability of firms obtaining loans for follow-on investment by 45.8%. Of all the means of indirect financing, bank loans are most favored by firms because of low risks and costs, and

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6 Financing Environment in Cross-Border Regions

account for a large proportion of the funds raised by firms through financing. Large state-owned banks prefer lending to state-owned large and medium-sized enterprises, but tend to ignore the needs for loans of SMEs. Their lengthy approval process has somehow resulted in comparatively higher loan interest rates. But due to fierce competition and unbalanced developed in China’s banking sector, the four major state-owned banks, benefit from preferential policies and market power. They take up about sixty-five percent of the total deposits and sixty percent of the total loans in China. Accordingly, firms with financing needs prefer large state-owned banks. This is consistent with the results of the model: Firms tend to apply for loans from state-owned banks if they have easy access in this regard. (3)

Preferential interest rates for subsequent loans

Among the samples with follow-on investment, 22.73% enjoy preferential interest rates for subsequent loans. The coefficient of this variable in the model is significant, the value of which is 1.11, indicating that preferential interest rates for subsequent loans increase the probability of firms obtaining loans for follow-on investment by 23.7%. Firms in western China generally find it difficult to negotiate preferential loan interest rates with banks. Due to shortage of funds in the region, they have to pay high costs to obtain bank loans. Except for a few industries and firms supported by the government, most firms have been unable to obtain preferential loan interest rates, and face high financing costs. Therefore, if firms have access to preferential interest rate, they will show a strong willingness to apply for loans. (4)

Loans from other financial institutions

Among the samples with follow-on investment, 20.45% have easy access to other financial institutions. The coefficient of this variable in the empirical model is − 0.23, showing that this variable decreases the probability of firms obtaining loans for follow-on investment by 3.6%. In this study, other financial institutions refer to financial institutions other than state-owned banks that can provide loans to firms, including private banks, foreigninvested banks, credit cooperatives, savings and loan associations, cooperation funds, and so forth. The private joint-stock financial institutions have been thriving in China, giving rise to the emergence of a huge financial services market. Thanks to their lean organization structure, cost-efficient operation, flexibility and efficiency, they have been able to provide more enterprises, especially SMEs, with new financial products and services in response to their financing needs. (5)

Financial guarantee provided by a local government or institution

Among the samples with follow-on investment, 15.9% have received financial guarantee services from a local government or institution. The coefficient of this variable in the empirical model is 0.86, indicating that the availability of financial guarantee by a local government or institution increases the probability of firms obtaining loans for follow-on investment by 17.7%.

6.4 Impact of Financing Environment on Investment of Firms

135

Commercial banks in China have been requiring security and guarantee for loans since 1998 to avoid risks and reduce the bad and doubtful debts ratio. Due to lack of a sound credit system of firms in Western China, financial institutions primarily provide loans to firms in the form of mortgages and guaranteed loans, which has led to higher borrowing costs than credit loans and reduced the probability of firms applying for loans. While such practice reduces the risks of financial institutions, it causes many problems. First, due to limited security, firms are unable to obtain sufficient subsequent funds to satisfy their need for substantial funding. Second, the practice leads to higher transaction costs and greater moral hazard. Third, it reduces the size of financial market and hinders the efforts to improve the order of financial market. Fourth, the number of security available limits the loan size of financial institutions. Governments and large enterprises are reluctant to provide guarantee for firms in need of financing. Banks are not allowed to serve as guarantors. Private credit guarantee institutions, which are rather limited in number, have limited capability to provide guarantees due to inadequate funds and poor risk-taking capability. Moreover, these institutions themselves have problems such as lack of relevant system and efforts to ascertain the sources of funding. Due to flaws in the guarantee system, the guaranteed loans provided to firms in Western China fall short of their enormous need. This is consistent with the modeling results. If governments or other institutions can provide guarantees for firms, firms will show stronger willingness to apply for loans. (6)

Initial funding from local governments

Samples that have received initial funding from local governments account for 10.23% of the firms with follow-on investment. The coefficient of this variable in the empirical model is −0.80, indicating that the access to initial funding from local governments reduces the probability of firms obtaining loans for follow-on investment by 10.4%. Western China has just begun to experience an economic boom. Governments still play an important role in capital formation. Over one third of the capital formation in Western China is attributed to governments, while in the east, the figure is a bit more than one fourth. In comparison, firms in Western China have heavier dependence on support from governments. If they can obtain initial funding from governments at a low cost, they are less willing to borrow from other sources.

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6 Financing Environment in Cross-Border Regions

6.5 Impact of Financing Environment on Performance of Firms 6.5.1 Definition of the Variables and Model Estimation The performance of firms is generally estimated by quantitative analysis of financial indicators. This study, however, is based on nonquantitative data of questionnaire. In addition, as it is difficult to obtain specific financial data from firms, the assessment of their performance can only be based on the subjective perception of the respondents. So, the following formula is used to measure the performance of firms, using Y * to represent the performance: Y ∗ = α0 + α T X i + ε

(6.5)

Y i ∗ can be expressed by the K × 1 vector Xi . The unexplained part is assumed to show a logistic distribution. Y* is a categorical variable, so, the performance of firms is classified into three categories according to the following rules: If tj−1 ≤ y∗i ≤ tj , yi = j, j = 1 to 3 ⎧ ⎨ 1 ⇒ performance is worse, if − ∞ ≤ yi* ≤ t1 Yi = 2 ⇒ performance is unchanged, if t1 ≤ yi* ≤ t2 ⎩ 3 ⇒ performance is better, if t3 ≤ yi*

(6.6)

Y is a coding data based on the questionnaire. Respondents are required to assess the performance of the firms in the recent three years with one of the three levels for measurement: 1 = worse, 2 = unchanged, 3 = better. The performance of firms in the questionnaire is expressed by ten variables, namely productivity, imports, exports, working hours, mechanization of production, product quality, employment, skills of employees, production capacity and profits. Collinearity exists between these performance variables, and none of them alone can fully reflect the performance of firms. The performance variables are thus clustered into three categories using K-means to ensure that the performance of firms becomes an ordered variable with increasing utility. If Y = 1, the performance of firms gets worse. If Y = 2, the performance of firms remains unchanged. If Y = 3, the performance of firms gets better. The explanatory variables are the policies which are expected to have impact on the performance of firms in the questionnaire. The policy variables fall into five categories, including nine in tax policy, five in financing environment, ten in labor policy, eleven in investment policy, and five in land use policy. For financing environment policy, we use the same variables as in the multinomial Logit model. The other policy variables are classified into five categories using cluster analysis to

6.5 Impact of Financing Environment on Performance of Firms

137

Table 6.18 Linear correlation of variables Policy Policy

X1

X2

X3

X4

X5

1.0000

X1

−0.0603

1.0000

X2

−0.0638

0.4999

1.0000

X3

−0.2216

0.2194

0.1695

1.0000

X4

0.0403

0.2691

0.5275

0.1891

1.0000

X5

0.0007

0.0217

0.2321

0.3601

0.3567

1.0000

obtain a new composite variable. In addition to the financing environment variable, the industry variable and region variable are also considered. Since Y is an ordinal variable, the ordered Logistic model can be used to estimate Y, the performance of firms. The linear correlation of the independent variables is tested before modeling. As shown in Table 6.18, no significant correlation exists between these variables, so they can be used in the model for a regression.

6.5.2 Analysis of the Modeling Results Three models, as shown in Table 6.19, are constructed based on regression using Stata 10. Model I includes only policy variable, Model II includes policy and industry variables, and Model III further includes region variable. The modeling results are shown in Table 6.19. Of the three models of performance, Model III with policy, industry and region variables has the best goodness of fit. Among the variables, only three variables, namely convenient loan approval process, services of financial institutions in neighboring countries, and administrative convenience provided by development zones to firms in obtaining loans, are significant. Results of the empirical study are as follows: (1)

Convenient loan approval process

In the ordered Logistic models, the coefficient of convenient loan approval process in Model III is 0.521, which is significant. It indicates that the said variable of financing environment has a positive impact on the performance of firms. A possible explanation might be that convenient loan approval process leads to improved financing efficiency, which boosts the development of firms. (2)

Services of financial institutions in neighboring countries

In the ordered Logistic models, the coefficient of services of financial institutions in neighboring countries in Model III is 0.651, which is significant. It indicates that the said variable of financing environment has a significant positive impact of the performance of firms. The reason for this is that, compared with their counterparts in

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6 Financing Environment in Cross-Border Regions

Table 6.19 Impact of financing environment on performance of firms Variable

Model I

Model II

Model III

Domestic financial regulation

−0.274

−0.296

−0.235

(0.253)

(0.255)

(0.276)

Convenient loan approval process

0.342

0.373

0.521*

(0.283)

(0.284)

(0.329)

−0.160

−0.204

−0.651**

(0.28)

(0.223)

(0.271)

Administrative convenience provided by development zones 0.393* to firms in application for loans (0.263)

0.352

0.168

(0.265)

(0.283)

Informal gift or payment expected or requested during application

0.049

0.099

0.104

(0.270)

(0.279)

(0.289)

Other policies

−0.040

−0.040

−0.019

(0.128)

(0.128)

(0.132)

Cut1

−0.549

−0.636

−2.032

(1.105)

(1.124)

(1.386)

Cut2

2.037

1.967

0.737

(1.119)

(1.135)

(1.369)

Services of financial institutions in neighboring countries

Industry variable, with the manufacturing industry and other industries as reference group Resource-based industries Services industry

0.485

0.519

(0.587)

(0.587)

−0.138

−0.089

(0.397)

(0.456)

Region variable, with Lao Cai, Vietnam as reference group Xishuangbanna

0.859

Honghe

−0.422

Dehong

−1.242*

(0.674) (0.645) (0.635) Log Lik

−129.85 −129.371 −123.651

LR

6.76

7.72

19.16

Pseudo-R2

0.0254

0.0290

0.0719

Note Level of significance of variables, *p < 0.1, **p < 0.05, ***p < 0.01

6.5 Impact of Financing Environment on Performance of Firms

139

the rest of China, firms in the border regions of Yunnan province have better access to financial services of neighboring countries, thus have more financing sources. In particular, the financial support from these financial services in the export and import of firms has helped firms increase their profits and improve their performance. (3)

Administrative convenience provided by development zones to firms in obtaining loans

Industry and region are not considered in the first ordered Logistic model (Model I). In this model, the coefficient of administrative convenience provided by development zones to firms in obtaining loans is 0.393, which is significant and positive, but not high. It indicates that administrative convenience provided by development zones to firms in obtaining loans can improve the performance of firms. Governments’ preferential policies are extremely beneficial to firms. Administrative convenience has an effect similar to that of government guarantee. Firms having access to administrative convenience have more trust of financial institutions, which has enabled improved financing efficiency and consequently better performance.

6.6 Conclusions and Policy Implications SMEs face great financing difficulties in western China due to comparatively poor financing environment of the region. This chapter has focused on the firms in the border regions between China and other GMS countries. These firms are largely SMEs with financing difficulties. Most firms, especially private ones, rely on savings for initial funding. Firms have been severely hindered from obtaining loans for follow-on investment by several factors, such as shortage of security and guarantee, and inefficiency of relevant institutions. This study uses the multinomial Logit model to analyze the impact of financing environment on initial investment of SMEs, and uses the binary Logit model to analyze the impact of financing environment on follow-on investment and performance of firms. Results show that financing environment has impact on the investment decisions of firms. A sound financing environment will increase the probability of resource-seeking investment in the border regions between China and other GMS countries. A possible explanation is that resource-seeking firms need substantial funding for initial investment, and it will be very difficult for them to sustain their development without financing. Financing environment also has impact on followon investment of firms. In a good financing environment, firms tend to make more investment. Of the factors of financing environment, loans from the four major stateowned banks and financial support services to firms have the greatest impact on the probability of firms obtaining loans for follow-on investment. This is due to the less developed economy and capital market in the border regions between China and other GMS countries. With only a few funding sources, most firms obtain financing through banks. Therefore, the credit policies of banks have a great impact on the willingness of firms to obtain loans.

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6 Financing Environment in Cross-Border Regions

According to the results of this study, we can draw the following policy implications. First, efforts are required to improve financial regulation and promote the regionalization of the renminbi. The results of the multinomial Logit model show that domestic financial regulations have a great impact on the investment decisions of firms. As far as the CBEZs between China and other GMS countries, efforts should be made to improve the regulation of cross-border the renminbi settlement and further promote the regionalization of the renminbi. While making efforts to promote trade facilitation and economic integration, the use of the renminbi as an invoicing currency in trade and investment and cross-border trade settlement in the renminbi to make it the settlement currency in the region will have great significance to the regionalization of the renminbi and the financial cooperation between China and other GMS countries. The financial cooperation based on the regionalization of the renminbi will have a snowball effect and stimulate the economic development of the region. As the regionalization of the renminbi has just started, the renminbi is mainly used for settlement of border trade with neighboring regions, and payment of cross-border labor services and of tourism expenditure. But when firms in the CBEZs between China and other GMS countries make crossborder investment and need to apply for loans, they can only use their assets in their home country as security, but cannot use their assets in the host country. This has seriously curbed the enthusiasm of firms to make cross-border investment. The use of the renminbi for settlement with neighboring countries will not only significantly reduce the risk of exchange rate volatility, but also enable steady progress in the regionalization and internationalization of the renminbi, so that the renminbi can play a bigger role in the region. Nonetheless, the pilot program of cross-border settlement in the renminbi has revealed a number of problems in financial regulation that have impeded the exchange between the renminbi and other currencies in the border regions of Yunnan, China. First, as required by the People’s Bank of China, the designated foreign exchange banks in border regions of China can post exchange rates between the renminbi and currencies of the neighboring countries, but they must close the consequent foreign exchange position. As a result, although formal financial institutions provide exchange services between the renminbi and currencies of neighboring countries, such services have been stagnant due to concerns about the foreign exchange position. Second, the franchised institutions of the State Administration of Foreign Exchange of China have been unable to provide to engage in foreign exchange services due to lack of qualifications for exchange between the renminbi and currencies of neighboring countries and cross-border circulation of the renminbi banknotes. Third, informal banks are booming, but the lack of proper regulation thereof has increased the currency risks of firms. Fourth, Chinese banks have only a few foreign branches and correspondent banks for international settlement, which are unevenly distributed among the regions. This problem may raise the costs of capital mobility in the GMS, thus hindering the development of trade and investment in the region.

6.6 Conclusions and Policy Implications

141

To address the problems during the regionalization of the renminbi, efforts should be made to: – strengthen the regulation of informal banks in the border regions to help firms reduce currency risks; – give stronger support to formal financial institutions in domestic and foreign currency exchange services, and approve and regulate the foreign exchange services of franchised institutions; – improve the financial infrastructure and establish more branches and correspondent banks. Second, the loan approval process should be simplified to improve the lending efficiency of banks. Convenient loan approval process has a significant impact on the investment decisions and performance of firms. It is thus important to simplify the loan approval process to improve the financing environment in the border regions between China and other GMS countries and promote the economic development. The loan approval process is most complicated and lengthy in state-owned commercial banks. Firms need to obtain approval from about two dozen departments at different levels of the banks. The approval process of these banks is inefficient, involving duplication of effort and failing to consider the difference in risks involved. As a result, these banks cannot satisfy the financing needs in a competitive market. To improve the lending efficiency, banks must improve their business process. Banking institutions at different levels should match their business with proper organization structure and staffing. Credit approval departments and credit management departments should clarify their responsibilities, and should work together to simplify the approval process and enhance the approval efficiency. Meanwhile, considering the characteristics of the GMS Economic Cooperation Program, a sound credit system needs to be established to help relevant regions build credit check systems covering all firms in core regions of the GMS, in which the credit of firms is duly updated. This will not only speed up the loan approval of banks, but also reduce the credit risks of banks. Third, financial services should be promoted to provide firms with more financing sources. Services of financial institutions in neighboring countries not only have impact on the investment decisions of firms, but also significantly contribute to their performance. Loans from the four state-owned banks of China also has a significant impact on firms obtaining loans for follow-on investment. All these indicate that firms in the border regions between China and other GMS countries have difficulty finding sufficient financial services and financing sources. In China, the credit approval of formal financial institutions is to a great extent controlled by the government. A wide array of policies are meant to direct the distribution of loans, which has led to discrimination against firms of certain types of ownership and size. Consequently, a lot of private firms cannot get the loans they need. Informal financial markets will thus continue to exist. This is also the case in developed market economies such as Japan and the US. Partial equilibrium exists

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6 Financing Environment in Cross-Border Regions

between formal and informal financial markets. There is a necessity for informal financial markets. In addition, the prices in informal markets are consistent with those in formal financial markets. Governments should recognize the necessity for informal financial markets and legitimize them in due course. To enable more institutions in the sector of commercial banks in China to provide loans, continuous efforts must be made to support the development of small and medium-sized joint-stock commercial banks and make them more competitive with state-owned commercial banks. It is also necessary to accelerate the reform of the banking sector and reduce market concentration. More foreign banks may be given access to China’s financial market and be allowed to compete in an open, fair and just market. To build a sound financial services platform during the economic cooperation between China and other GMS countries and provide firms with more financing sources, it is advisable to – conduct pilot regional financial reforms: establish small and medium-sized jointstock financial institutions in the border regions between China and other GMS countries, strengthen financial cooperation by means of market-oriented projects, and remove the excessive control of institutional factors; – encourage the state-owned commercial banks to play a bigger role in China’s economic cooperation with other GMS countries: implement the country’s regional industrial policies, give more support to basic industries and pillar industries, especially in investment in industrial base projects, and adopt floating interest rates that reduce firms’ financing costs and attract deposits; – encourage the local financial institutions to operate in neighboring countries to leverage their locational advantages: the local financial institutions with headquarters in Yunnan and the neighboring provinces are familiar with the neighboring markets and adopt a flexible decision-making approach. They should act as the spearhead to expand the financial market in the neighboring countries and provide firms in the border regions with convenient financing sources; – promote the development of private cooperative banks and micro-credit companies so that the informal financial markets can act as a useful supplement to the formal financial markets and equilibrium can be achieved between the two sectors. Fourth, governments should take the following measures to improve the financing environment: a.

Deepening the reform of the financial sector to reduce the costs related to credit rent-seeking

According to the results of the binary discrete choice model about the impact of financing environment on follow-on investment of firms, the costs related to credit rent-seeking have impact on the investment decisions and operational efficiency of firms. To improve the financing environment, measures must be taken to cut the costs related to credit rent-seeking. To address the underlying causes of rent-seeking in commercial banks, the institutional factors that result in rent-seeking must be eradicated. While the ultimate goal is market-based allocation of loans and funds, at

6.6 Conclusions and Policy Implications

143

the current stage, efforts should focus on reforms to improve the market structure, including – removing the constraints on interest rates and abandoning the policies directing the distribution of credit: The fundamental way to eradicate rent is to lift the control on interest rates and allow interest rate liberalization. Meanwhile, the policies aiming to direct the distribution of credit have exacerbated the shortage of funds and resulted in rent-seeking behaviors of firms. To address the problems, the government should lift the control on interest rates and abandon the policies directing the distribution of credit, while allowing the market to determine the interest rates and the distribution of funds, thus delivering the best market performance; – guiding the market restructuring: In response to the lack of competition in some segments of the credit market, efforts should be made to encourage restructuring. The key is to introduce competition. The government should institutionalize the practice of imposing no restrictions on market access to avoid excessive market concentration. b.

Promoting the development of the guarantee industry to improve the financing environment

A major reason that firms, especially SMEs, find it hard to obtain loans from commercial banks is that their unstable business performance and poor credibility mean considerable risks for banks lending to them. It is thus imperative to create a financing guarantee system. Credit guarantee for firms is provided by governmentsupported guarantee agencies, not the government. The government should guide the flow of private capital and bank capital, and encourage commercial guarantee services and mutual guarantee institutions to provide guarantee for firms. To build a financing guarantee system for firms, the government should (1) create a sound legal system by introducing relevant laws and regulations; (2) allocate funds to serve as the principal source of funding for financing guarantee fund; (3) establish a guarantee system comprising the central government and local governments; work together with commercial insurance agencies to fund and establish reinsurance companies, which will provide insurance to guarantee companies for their guaranteed debts, so that guarantee companies will provide more financing support to SMEs.

Reference Kojima K (1978) Direct Foreign Investment: A Japanese Model of Multinational Business Operation. Praeger Publishers, New York

Chapter 7

The Impact of Cross-Border Economic Cooperation on Regional Economy

7.1 Introduction Considering China’s land border of 22,000 km, opening-up of its border regions is of great strategic significance to regional integration. The southwest of China borders Southeast Asian countries such as Laos, Vietnam and Myanmar. The existing policies of China provide a solid foundation for strengthening economic and trade relations with these countries. In 2007, the State Council of China introduced the Eleventh Five-Year Plan for the program to enrich border areas and residents, which introduced private investment to border regions and raised specific requirements for development of border regions in trade, education, projects and so forth. It further released the “Opinions on Supporting the Accelerated Construction of Yunnan as an Important Gateway to Opening-up to the Southwest” on May 6, 2011, highlighting the significance of the development of the southwest border regions, especially Yunnan, to establishment of trade routes between China and Southeast and South Asia, and setting development goals of improving infrastructure, reducing poverty and so forth. The provincial government of Yunnan issued the “Opinions on Accelerating the Development of Border Economic Cooperation Zones” on May 16, 2012, specifying the plans and goals for development of border economic cooperation zones in Masupo (Tianbao), Gengma (Mengding), Tengchong (Houqiao), Menglian (Meng’a), and Lushui (Pianma). Chinese president Xi Jinping proposed the Silk Road Economic Belt and the 21st Century Maritime Silk Road (the Belt and Road initiative) in 2013, providing a new model for international and regional economic cooperation to promote economic globalization. Chinese premier Li Keqiang emphasized at Bo’ao Forum for Asia Annual Conference 2014 that China would strengthen cross-border economic cooperation with its neighboring countries while implementing the Belt and Road initiative. The State Council of China released the “Opinions on Several Policies and Measures Supporting the Development and Opening-up of Priority Border Regions” on December 24, 2015, pointing out that

© Social Sciences Academic Press 2022 Z. Wang and W. Wei, Cross-Border Economic Cooperation Between China and Southeast Asian Countries, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-19-0136-2_7

145

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7 The Impact of Cross-Border Economic Cooperation …

border regions are important platforms for China to further cooperate with neighboring countries through the Belt and Road initiative. The provincial government of Yunnan issued the “Opinions on Implementation of Several Policies and Measures Supporting the Development and Opening-up of Priority Border Regions” on October 21, 2016, specifying the objectives for development of border regions in eight areas of work, including infrastructure improvement, better flow of factors of production, better public services, and poverty reduction. China’s southwest border regions lag far behind the rest of the country. Overall China’s non-coastal border regions are far behind the coastal regions in economic development. According to the National Bureau of Statistics of China, in 2014, the disposable income per capita in east China is 1.32 times the figure in northeast China and 1.7 times the figure in west China. Meanwhile, the economy of China’s southwest border regions cannot even match the border regions in the northeast. Thanks to its early development of heavy industries, northeast China is more urbanized than the southwest, and its infrastructure and industries are better developed. With the state strategies and policies to open up the southwest border regions in China, a pressing issue now is how to promote the economic development of these regions in a more efficient manner. Government should make policies based on a clear understanding of the impacts of government investment, private investment and cross-border trade on regional economy. This study uses the input–output analysis to examine the impacts of increase in government investment, private investment and foreign trade on employment, tax and value added, and proposes policy recommendations based on the analysis results.

7.2 Literature Review Cross-border economic cooperation is achieved through creation of institutions for cooperation in border regions between neighboring countries, which shall enable entities in the regions to enjoy special industrial policies, fiscal and tax policies, financial support policies and so forth, factors of production to flow freely across borders, and factors of production and resources to concentrate rapidly in border regions. The new economic geography represented by Krugman, based on analysis of the links between goods and markets of regions using the market potential model, argues that free trade facilitates the relocation of manufacturing to border areas, causes the labor force in border areas to grow, raises the income of residents in these areas, and increases market demand, thus having a significant positive impact on local economic development (Krugman 1998). According to their core-periphery model, the manufacturing industry tends to contract in areas with low input costs such as production and transportation costs, favorable natural conditions, social environment and market environment, which produces positive agglomeration effects to boost the local economic development (Harris 1954; Krugman 1990). In other words, border regions can be transformed into new economic centers. Border regions are, nonetheless, confronted with problems such as sparse population, underdeveloped

7.2 Literature Review

147

industries and lack of infrastructure. Therefore, governments must adopt preferential policies to encourage the flow of capital, labor and other factors to these regions. Theoretically trade liberalization in border regions can stimulate economic growth in these regions. But social and economic environments of border regions vary between countries, leading to differences in spatial economic effects. Therefore, empirical studies of the impacts of opening-up border regions on regional economy have reached no consensus (Niebuhr 2002). Some researchers believe that agglomeration only has a significant positive impact when transportation costs are extremely low, while the agglomeration of factors in border regions intensifies the competition between firms, thus raising wages and the price of land and others, and increasing production costs. Ultimately the manufacturing industry will spread to surrounding areas in a nonlinear manner, and the agglomeration does not have an immediate impact on regional economy (Ottaviano and Puga 2003). Two interactive effects exist in surrounding areas of border regions. Positive spillover occurs in central areas as a result of accelerated urbanization, infrastructure improvement and so forth in border regions, which stimulates the regional economic development. But the flow of resources towards central areas has negative spread effect on the economy of surrounding areas (Zhang and Liu 2011). The following sections will examine the impacts of cross-border economic cooperation on regional economy in terms of industrial structure, income, employment and total output. At the meso level, significant differences are observed in the interaction between industries and regional economy following the opening-up of border regions. Overall opening up border regions has different impacts on industries in different phases. In addition, under the current economic conditions in China, the upgrading of industrial structure does not necessarily result in economic growth (Yao 1993). The local policies in the northeast, northwest and southwest border regions of China have different priorities, which have significant impacts on the differences between regions in industrial structure and economic performance. Industrial structure is another important factor that leads to economic gap between regions in west China (Huang and Gong 2014). Many researchers believe that infrastructure improvement in China’s border regions and better connectivity between transportation facilities of these regions and other areas in China will further improve their openness to other parts of the country. They claim that a strong correlation exists between these two factors and the development of the manufacturing industry, and that they are especially important for development of border regions (Cheng et al., 2016). The imbalance in industrial structure, however, has a negative impact on regional economy. The concentration of manufacturing alone in west China undermines the economic efficiency in these regions and crowds out some efficient investments, but the concentration of manufacturing and productive services significantly raises the economic efficiencies of cities in west China (Yu et al., 2015). A case study of Inner Mongolia, China shows that the concentration of government funds has enabled improvement in infrastructure and rapid development of the secondary industry, but due to imbalance in development

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7 The Impact of Cross-Border Economic Cooperation …

of the primary industry, healthcare and other areas, there has been no significant increase in local GDP, employment and resident’s income (Wang and Yan 2011). At the macro level, researchers generally agree that the opening-up of border regions has a positive impact on regional economy (Guo et al., 2016). While endeavoring to create a common European market, the EU has established effective routes for cross-border flow of resources. The Oresund Bridge, for example, integrates the labor markets of Denmark and Sweden. The North Calotte Region program facilitates the industrial upgrading in border cities of Finland, Sweden and Norway and increases the trade between the east and west of Europe (Wang 2006). The impact of opening up border regions on resident’s income and employment, however, is different. An analysis of the openness of prefecture-level cities in China using the Baumol-Tobin model shows that trade openness raises not only the income of the region in question, but also the income in its neighboring regions (Yao and Sun 2015). But there has been no consensus on such impact in border regions. In the border region of Inner Mongolia, for example, the government’s efforts to enrich the region and the residents have enabled rapid development of the secondary industry and significant improvement in infrastructure in the region, but there has been no change in the income growth rate of local residents (Wang and Yan 2011). In addition, the growth rates in employment and per capita income in border regions are lower after the enforcement of the North American Free Trade Agreement (NAFTA), and the rate of change in the unemployment rate remain constant (Yoskowitz el al., 2002). It is thus necessary to study the impact of cross-border activities including trade and investment on regional economy (such as GDP, employment and tax) while considering the relevant strategies and policies, such as the Belt and Road initiative. The study will help identify policy priorities for cross-border economic cooperation so that governments can introduce targeted policies and measures.

7.3 Methodology and Data Analysis 7.3.1 Data Sources The input–output model is based on data of the input–output tables of forty-two sectors of Yunnan, China in 2012. The data about investment and cross-border trade originate from the documents issued by the provincial government of Yunnan, China, Yunnan’s statistical yearbooks and statistics of the Department of Commerce of Yunnan Province.

7.3 Methodology and Data Analysis

149

7.3.2 Model Evaluation Input–output analysis uses a series of linear equations to explain the input–output balance between each product and service in an economic system, based on which the quantitative interdependence between sectors of the national economy in production and consumption is analyzed and examined (Leontief 1986). The formula is X = AX + D

(7.1)

where X is the column vector of the total output of a sector, A is the technical coefficient describing the flow of products and services between sectors, and D is the vector of the final demand for the output of a sector. This chapter uses the influence coefficient and sensitivity coefficient to measure the linkage between industries of Yunnan, China. The influence coefficient reflects the impact of one additional unit in final demand in an industrial sector of an economic system on the whole industry, which is calculated according to 1 1  bi j /( 2 bi j ) Fj = n i=1 n j=1 i=1 n

n

n

(7.2)

n where n is the number of industries, i=1 bi j stands for the sum of row vectors in the Leontief inverse matrix B = (I-A)−1 . It measures the extent to which an increase in final demand by one unit in a sector of the national economy influences the demand in all sectors of the economy (Rasmussen 1957). The influence coefficient is widely used in economic studies as an indicator of backward linkages. The sensitivity coefficient is used to measure forward linkages, which reflects the impact of an increase in final products by one unit in all sectors of the national economy on a stated sector. Its calculation formula is ⎛ ⎞ n  n n  1 1 bi j /⎝ 2 bi j ⎠ Fi = n j=1 n j=1 i=1

(7.3)

 where nj=1 bi j is the sum of row elements in the Leontief inverse matrix. In a given economic system, the impacts of changes in final production and consumption on the macro economy are classified into three types, i.e., direct impacts, indirect impacts, and induced impacts. Direct impacts refer to the influence of the production of a given sector and the consumption by the sector of its own products on an economy. Indirect impacts are the catalytic effects of the production activities of a given sector on related industries by obtaining goods, raw materials and services from sectors. Induced impacts refer to the increase in household spending

150

7 The Impact of Cross-Border Economic Cooperation …

of employees in sectors directly or indirectly influenced by production expansion, as the wages of these people change due to direct or indirect impacts. Using the input–output analysis, the impact evaluation of cross-border economic activities can be based on the backward linkages of relevant sectors and other sectors as intermediate inputs. It is thus feasible to set different scenarios according to the economic situation in China’s southwest border regions and use the demand-driven input–output model to evaluate the impacts of cross-border economic cooperation on regional economy in different scenarios. The expansion of economic activities of a given sector has more impacts than directly creating values. Industrial sectors are correlated, so, in addition to the initial changes, the increase in the final demand of a sector has far more impacts on the economic system. Based on the input–output model, the direct impacts and indirect impacts are calculated according to 7.4 and 7.5 I + A

(7.4)

(I − A)−1 − (I + A)

(7.5)

where A stands for the direct consumption coefficient matrix of the input–output table. An extended input–output model is used to calculate the induced impacts: the row vector of residential income coefficient and the column vector of preference in household consumption of goods and services1 are included in the direct consumption coefficient matrix. That means, household income and consumption are included in the input–output model as endogenous variables. The decision is based on two considerations. First, during the production activities of various sectors, a significant linear relationship exists between the output and the wages of residents, as in the case of the output and the consumption of raw materials, fuel, power and other intermediate inputs. As the output continues to grow, the wages are also on the rise. Second, the increase in resident’s wages and consumption has coupling effect on the production of sectors. The growing residential income and consumption following the increase in output will ultimately boost the output of all industrial sectors. The extended matrix (AE ) is  AE =

A Hc Hr h

(7.6)

where AE stands for the extended technical system matrix, the dimension of which is 43 × 43; H c is the column vector of preference in household consumption of 1

The row vector of residential income coefficient is the wages of each sector divided by the total output of the sector; the column vector of preference in household consumption of goods and services is the residential consumption expenditure of each sector divided by the total residential consumption expenditure.

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151

goods and services; H r is the row vector of residential income coefficient; h is the coefficient of resident-to-resident payment, which is assumed to be 0 in this study. The matrix (I-A)−1 only reflects the direct and indirect demands for output of sectors induced by intermediate inputs, while the multiplier matrix (I-AE )−1 also reflects the direct and indirect demands for output of sectors induced by the increase in wages and residential consumption. Therefore, the multiplier matrix of the induced impacts is (I − AE )−1 − (I − A)−1

(7.7)

where (I-AE )−1 is a 43 × 43 matrix, and (I-A)−1 is a 42 × 42 matrix. The matrix (I-AE )−1 needs to be converted according to the dimension and sectors of the matrix (I-A)-1 . While calculating the impacts, let Z stand for the multiplier matrices (Formulas 7.4, 7.5 and 7.6) of direct, indirect and induced impacts. The impacts (P) induced by changes in the final demand (d) is calculated according to P = aXZd, X = H, T, G

(7.8)

where a is the unit row vector which ensures the consistency of dimensions in matrix operations; H is the row vectors comprising residential income coefficients2 ; T is the row vectors comprising net production tax coefficients; G is the row vectors comprising value added coefficients; and d is the column vector of changes in the final demand. The following section deals with the sectors and data.

7.3.3 Scenarios China has introduced a series of policies to boost cross-border economic cooperation in its southwest border regions, including: – increasing government investment in infrastructure improvement such as highways, railways and optical cables in border regions to improve the economic environment and attract more factors of production and resources; – adopting preferential tax and financial policies to attract foreign investment for industrial upgrading in border regions;

2

Considering that people cannot work eight hours per day throughout the year, to avoid statistical discrepancy, the unit in calculation of the impacts on employment is per person per day. The impacts on employment are wages per unit of output multiplied by 251 (251 is the average number of working days in China, calculated by subtracting 104 weekend days and ten holidays (excluding those coincide with weekends) from 365 days in the base year of 2016.

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7 The Impact of Cross-Border Economic Cooperation …

– designing proper institutions and streamlining government administration to simplify the process of border trade and reduce institutional trade barriers, thus raising the trade volume. These policies are mainly implemented through government investment, firm investment and cross-border trade. While considering the supporting government policies, this study examines the following scenarios:

7.3.3.1

Scenarios About Government Investment

As shown in Table 7.1, according to the policies and documents about government investment from 2004 to 2015, government investment mainly went to infrastructure construction, which had a significant impact on the construction industry. During the period, government investment doubled or multiplied every few years. With 2013 as the base year, in which government investment totaled RMB 200 million, this study examines the scenarios in which government investment will increase by (1) 100%, (2) 150%, and (3) 200%. As government investment mainly has direct impacts on the construction industry, in calculation of the base value Y in 2013, government investment is classified as going into the construction sector.

7.3.3.2

Scenarios About Firm Investment

According to the statistics of the Department of Commerce of Yunnan, China and the statistical yearbooks of Yunnan, the foreign investment in eight border cities of Yunnan, China and its growth rate from 2010 to 2014 are shown in Table 7.2. In 2013, the total foreign investment in eight border cities of Yunnan, China reached USD 372 million. About ninety percent of the total went to five industries, namely real estate (37.85%), manufacturing (22.78%), power, gas and water production and supply (9.51%), wholesale and retail (8.63%) and leasing and commercial services (6%). From 2010 to 2014, the foreign investment in these border cities increased at an average annual rate of 25.92%, on which the scenarios are based. The base value Y in 2013 can be calculated according to the total value and proportion of firm investment in these five industries. The value of the demand vector Y of other sectors in these scenarios is 0. As the proportion of the sectors of the manufacturing industry and the power, heat and water production and supply industry cannot be ascertained, the share of the investment used by relevant sectors in the input–output table in the respective total is used for calculation. According to the above analysis, this study examines the scenarios in which firm investment will increase by (1) fifty percent, (2) seventy-five percent, and (3) 100%.

7.3 Methodology and Data Analysis

153

Table 7.1 Documents about government investment Year

Official document

Major government investment

2004 Program to enrich border regions and residents launched by the Department of Transport of Yunnan, China

From 2005 to 2008, RMB 400 million was invested each year. Major highways are constructed to connect the twenty-five border counties of Yunnan, China

2008 Opinions of the Provincial Government of From 2008 to 2012, the provincial Yunnan on Further Opening government of Yunnan invested RMB 100 million every year to support the development of ports. Pilot reform zones should be established in Dehong, Baoshan, Xishuangbanna and Honghe 2009 Opinions on Accelerating the Efforts to Facilitate Faster Clearance

From 2009 to 2012, no less than RMB 200 million was invested exclusively for development of ports in Yunnan, China

2010 Opinions on Improving the Work to RMB 300 million was given to ten Attract More Investment from Outside the provincial-level BEZs which were ready to Province start construction 2011 Opinions of the Provincial Government of Every year, RMB 200 million was invested Yunnan on Implementing the Action Plan in the demonstration project of the program for Enriching Border Areas and the to enrich border regions and residents Residents Therein (2011–2015) 2013 Policies Supporting the Construction of CBEZs in Hekou of Honghe, Ruili, and Xishuangbanna

From 2012 to 2017, the provincial government of Yunnan gave an annual subsidy of RMB 50 million to Hekou CBEZ. From 2013 to 2020, Yunnan government gave an annual subsidy of RMB 100 million to Ruili Pilot Zone. From 2013 to 2017, Yunnan government gave an annual subsidy of RMB 50 million to Mohan CBEZ

2015 Action Plans for Border Regions (2015–2017)

From 2015 to 2017, an annual amount of no less than RMB 300 million was spent to improve the infrastructure, such as transportation and affordable housing facilities

Table 7.2 Foreign investment in eight border cities of Yunnan, China from 2010 to 2014 Year

2010

2011

2012

2013

Foreign investment

1.57

2.20

3.48

3.72

Growth (%)

30.8

53.98

6.7

43.2

2014 3.53 −5.1

Unit USD 100 million Data source Department of Commerce of Yunnan Province; Statistical yearbooks of Yunnan, China

154

7.3.3.3

7 The Impact of Cross-Border Economic Cooperation …

Scenarios of Cross-Border Trade

In 2013, the import and export in cross-border trade of Yunnan, China totaled USD 3.334 billion, including export of USD 1.847 billion and import of USD 1.487 billion. Yunnan province mainly exports mechanical and electric products, agricultural products, textiles and garments, tobacco and tobacco products, power, tin, silver and other nonferrous metal, fertilizer, phosphorous chemical industry, electric devices, agricultural machinery, automobiles and motorcycles, construction materials, household appliances, and daily necessities, which contributed more than eighty percent of Yunnan’s exports in cross-border trade in 2013. The goods imported to Yunnan, China are mainly agricultural products, timber, jade, trinitite, metal ore and mechanical and electric products, which accounted for more than ninety percent of Yunnan’s import in cross-border trade in 2013. The goods imported and exported are classified to different sectors according to the input–output table to reflect the changes in export and import of the sectors. For sectors with no import and export, the change value is assumed to be 0. The growth rates of Yunnan’s cross-border trade from 2010 to 2014 are shown in Table 7.3. The scenarios about cross-border trade use the average export growth rate of 25.78% and the average import growth rate of 25.88% as references. For calculation of the Y of different sectors, the main goods imported and exported are classified into the sectors, and the base value is calculated according to the proportion of each sector in the total. With 2013 as the base year, this study examines three scenarios about crossborder trade, namely (1) cross-border import and export will increase by fifty percent, (2) cross-border import and export will increase by seventy-five percent, and (3) cross-border import and export will increase by 100%. Based on the above scenarios about government investment, firm investment and cross-border trade, the following composite scenarios are created: Scenario I: Government investment will increase by 100%, and import and export in cross-border trade will increase by fifty percent; Scenario II: Government investment will increase by 150%, and firm investment, import and export in cross-border trade will increase by seventy-five percent; Table 7.3 Cross-border trade and its growth in Yunnan China Year

Export

Growth rate of export (%)

Import

Growth rate of import (%)

2010

9.88

39.75

7.47

34.84

2011

12.16

23.08

7.88

5.5

2012

13.95

14.72

7.54

−4.3

2013

18.47

32.4

14.87

97.22

2014

21.79

18.95

14

−5.85

Unit USD 100 million Data source Statistical yearbooks of Yunnan, China

7.3 Methodology and Data Analysis

155

Scenario III: Government investment will increase by 200%, and firm investment, import and export in cross-border trade will increase by 100%.

7.4 Results and Analysis 7.4.1 Correlation Between Industries Correlation between industries measures the extent to which the industrial sectors of an economic system interrelate and interact with each other. The following sections will analyze the correlation between industries using the influence coefficient and the sensitivity coefficient.

7.4.1.1

Influence Coefficient

When the influence coefficient is greater than 1, the production activities of the sector in question have a greater-than-average impact on other sectors of the economy. Based on data from the statistical yearbooks of Yunnan, China, the influence coefficients are calculated according to Formula 7.2. As shown in Table 7.4, for twenty-six of the forty-two sectors of Yunnan, China in the input–output table, the influence coefficient is greater than 1. In other words, an increase of one unit of final demand in these twenty-six sectors has an impact on the demand in other sectors that is greater than the average. The top three sectors in terms of the influence coefficient are electric machinery and equipment manufacturing, artwork and other manufacturing, and construction. The increase in demand in these sectors will significantly boost the output of related sectors, thus contributing to the development of the national economy.

7.4.1.2

Sensitivity Coefficient

The sensitivity coefficients are calculated according to Formula 7.3. As shown in Table 7.5, sixteen sectors have a sensitivity coefficient greater than 1, including five sectors for which the coefficient is greater than 2. When the final products of all the sectors increase by one unit, the final products provided by these sixteen sectors to others are greater than 1 unit. In other words, the other industrial sectors are heavily reliant on the sectors with a high sensitivity coefficient. The said sixteen sectors are the primary impetus to economic development. Take the transportation and warehousing sector as an example. Its sensitivity coefficient is 2.421, indicating that when the final products of all the sectors increase by one unit, the final products provided by the transportation and warehousing sector to other sectors increase by 2.421 units. Its growth rate is 2.421 times the average of all the sectors.

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7 The Impact of Cross-Border Economic Cooperation …

Table 7.4 Sectors of Yunnan, China with greater-than-one influence coefficient Sector

Coefficient Rank

Electric machinery and equipment manufacturing

1.293

1

Artwork and other manufacturing

1.276

2

Construction

1.264

3

Transport equipment manufacturing

1.237

4

Metal products

1.230

5

General- and special-purpose equipment manufacturing

1.220

6

Metal smelting and pressing

1.219

7

Gas production and supply

1.214

8

Nonmetallic mineral products

1.202

9

Chemical industry

1.193

10

Textile, apparel, footwear and headgear, leather, down and related products 1.191

11

Processing of petroleum, coking, processing of nuclear fuel

1.181

12

Manufacture of communication equipment, computers and other electronic 1.178 equipment

13

Mining and processing of metallic ores

1.170

14

Mining and processing of nonmetallic ores and other ores

1.166

15

Papermaking, printing, and manufacture of cultural, educational and sports 1.134 goods

16

Manufacture of instruments, meters, cultural and office equipment

1.130

17

Timber processing and furniture manufacturing

1.121

18

Power and heat production and supply

1.102

19

Leasing and commercial services

1.098

20

Coal mining and dressing

1.060

21

Textile

1.040

22

Healthcare, social security and welfare

1.008

23

Technical services

1.002

24

Household services and other services

1.002

25

Research and experimental development

1.000

26

7.4.2 Multipliers of the Impacts The multipliers of the impacts of per unit (ten thousand yuan) of export, import, firm investment and government investment on employment, tax and value added are calculated by normalization of d according to Formula 7.8 (i.e., each element of d divided by the sum of d). Table 7.6 shows the results. The value of the multiplier reflects the impacts of trade and investment on the regional economy. The greater the value, the stronger the boosting effect on the regional economy.

7.4 Results and Analysis

157

Table 7.5 Sectors of Yunnan, China with greater-than-one sensitivity coefficient Sector

Coefficient Rank

Transportation and warehousing

2.421

1

Metal smelting and pressing

2.137

2

Chemical industry

2.124

3

Coal mining and dressing

2.111

4

Wholesale and retail

2.007

5

Power and heat production and supply

1.962

6

Agriculture, forestry, animal husbandry and fishery

1.858

7

Processing of petroleum, coking, processing of nuclear fuel

1.813

8

General- and special-purpose equipment manufacturing

1.581

9

Mining and processing of metal ores

1.390

10

Finance

1.334

11

Papermaking, printing, and manufacture of cultural, educational and sports 1.295 goods

12

Manufacture of communication equipment, computers and other electronic 1.201 equipment

13

Leasing and commercial services

1.143

14

Information transmission, computer services and software

1.143

15

Transport equipment manufacturing

1.018

16

Table 7.6 Multipliers of the impacts of import, export and investment Type of impact

Export

Import

Firm investment

Government investment

Impact on employment (Unit: Person · Day) Direct impact

46.07

−49.55

20.60

33.72

Indirect impact

27.79

−25.14

14.67

30.61

58.12

−58.77

27.75

50.62

131.98

−133.46

63.02

114.95

Induced impact Total impact

Impact on tax (Unit: RMB 10,000) Direct impact

0.10

0.08

0.13

0.08

Indirect impact

0.08

0.07

0.05

0.09

Induced impact

0.14

0.15

0.07

0.13

Total impact

0.32

0.30

0.25

0.30

Impact on value added (Unit: RMB 10,000) Direct impact

0.56

−0.58

0.75

0.47

Indirect impact

0.44

−0.42

0.25

0.52

Induced impact

0.80

−0.81

0.38

0.70

Total impact

1.80

−1.81

1.38

1.69

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7 The Impact of Cross-Border Economic Cooperation …

Concerning the impacts on employment of the region, the impacts of export, firm investment and government investment are positive, but the impacts of import are negative because of substitution of production. The values show that export has the greatest impacts on employment, and government investment and firm investment have the smallest impacts. The absolute value of the negative impacts of import on employment is equal to that of the impacts of export, so the net impacts of import and export on employment are determined by the industrial structure of goods. In comparison, firm investment has small impacts on employment, indicating that the existing industries in border areas do not have a strong effect on promoting employment. Comparing the strength of impacts in terms of their types, the strongest is induced impact, and the weakest is indirect impact. Government investment has especially strong induced impacts, which is related to the fact that the construction industry is labor intensive. Trade and investment both have positive impacts on tax, and the impacts per unit are roughly the same. Import, unlike its impacts on employment, has positive impacts on tax because of the existence of import duty. Comparing the multipliers of the impacts of different types on tax, firm investment has the largest multiplier of direct impact and the smallest multiplier of induced impact, government investment has the largest multiplier of indirect impact, and import has the largest multiplier of induced impact. The values, however, show that there is no strong correlation between the multipliers of the impacts of import, export and government investment. The impacts on value added are similar to those on employment. The increase in export, firm investment and government investment has positive impacts on value added, but the increase in import has negative impacts. Concerning the multiplier of total impact on value added, export has the largest value, and the medium and the smallest are respectively government investment and firm investment. But firm investment has the strongest direct impact on value added. The indirect and induced impacts of government investment on value added are also strong. The absolute values of the impact multipliers of import and export are the same, but import and export have contrary impacts on value added. As the industrial structures of imported and exported goods are different, import and export do not counteract each other’s impacts.

7.4.3 Impacts on the Economy in Different Scenarios 7.4.3.1

Impacts on Employment

The impacts of import, export, firm investment and government investment on employment in the set scenarios are calculated according to Formula 7.8. The results are shown in Table 7.7. As the trade and investment increase, the impacts on employment also grow. In each scenario, the total induced impact is the strongest, and the total direct impact is the smallest.

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159

Table 7.7 Impacts on employment in different scenarios Unit: Ten thousand people· day Scenario

Export

Import

Firm investment

Government investment

Total

Direct impact I

1965.19

−1167.59

183.50

67.44

1048.54

II

2947.79

−1751.38

275.24

101.16

1572.80

III

3930.38

−2335.18

366.99

134.88

2097.07

Indirect impact I

1185.61

−592.42

130.61

61.22

785.03

II

1778.42

−888.63

195.91

91.84

1177.54

III

2371.23

−1184.83

261.22

122.45

1570.06

Induced impact I

2479.39

−1384.96

247.17

101.25

1442.85

II

3719.08

−2077.44

370.76

151.87

2164.27

III

4958.78

−2769.92

494.34

202.49

2885.69

I

5630.19

−3144.97

561.28

229.91

3276.42

II

8445.29

−4717.45

841.91

344.87

4914.61

11,260.39

−6289.93

1122.55

459.82

6552.82

Total impact

III

Since Yunnan’s cross-border trade far exceeds its firm investment and government investment and has trade surplus in cross-border trade, the net impacts of cross-border trade on employment are greater than those of firm investment and government investment on employment. Meanwhile, as shown in Table 7.6, the multiplier of the total impact of government investment on employment is greater than that of firm investment. But firm investment has greater impacts on employment than government investment, because the former exceeds the latter in size. Export has the strongest positive total impacts on employment, followed by firm investment and government investment, while import has negative total impacts on employment. Due to a large base figure, export has great impacts on employment and resident’s income. In Scenario I, for example, export creates jobs for 56,301,900 people per day, and raises the wages by RMB 2.928 billion. Export has strong induced impacts and direct impacts, though its indirect impacts are comparatively weaker. This is attributed to two facts. First, the industries producing the main exports, including mechanical and electric products, agricultural products, textiles and garments, are largely labor intensive, so the increase in export has a direct positive impact on the demand for labor. Second, the increase in export also improves the income and consumption capacity of residents, and enhances the coupling effects between the residential sector and the production sector, resulting in strong induced impacts.

160

7.4.3.2

7 The Impact of Cross-Border Economic Cooperation …

Impacts on Tax

As shown in Table 7.8, when trade and investment increase, their impacts on tax also grow significantly. Export and import have strong positive impacts on tax, and firm investment and government investment have comparatively smaller impacts on tax. One reason is that the value of import and export far exceeds the total investment from firms and the government. In addition, imports are taxed. Therefore, import and export contribute the most to tax. The induced impacts of import, export and government investment are stronger than their direct and indirect impacts. Firm investment has strong direct impacts, but its indirect and induced impacts are comparatively weaker. Export has the strongest induced impacts on tax, because the increase in export boosts the aggregate output of Yunnan, China, which improves the income and consumption capacity of residents, thus generating more tax revenue in the residential sector. In addition, the export in Yunnan’s cross-border trade in 2013 far exceeded the firm investment and government in the same period. Increased export will significantly raise the income of residents, so the coupling effects between the residential sector and the production sector will play a significant role. Ultimately export will have great induced impacts on export. Among the impacts of firm investment on tax, the direct impacts are strong, but the indirect and induced impacts are comparatively weak. This is attributed to several factors. First, when firms make investment in border regions, they directly purchase Table 7.8 Impacts on tax in different scenarios Unit: RMB 100 million Scenario

Export

Import

Firm investment

Government investment

Total

I

4.08

1.95

1.13

0.16

7.32

II

6.12

2.92

1.70

0.24

10.99

III

8.16

3.90

2.27

0.33

14.65

Direct impact

Indirect impact I

3.24

1.76

0.40

0.18

5.59

II

4.87

2.64

0.61

0.28

8.39

III

6.49

3.52

0.81

0.37

11.18

Induced impact I

6.17

3.45

0.62

0.25

10.49

II

9.26

5.17

0.92

0.38

15.74

III

12.35

6.90

1.23

0.50

20.98 23.40

Total impact I

13.49

7.16

2.15

0.59

II

20.25

10.73

3.23

0.90

35.12

III

27.00

14.32

4.31

1.20

46.81

7.4 Results and Analysis

161

means of production, which creates a large amount of direct tax. Second, due to underdevelopment of industries and weak linkages between industries in border regions, the indirect impacts of firm investment on tax are weak. Third, the induced impacts of firm investment on tax are also weak, because the return on labor in existing industries is low and the consumption capacity of residents is very limited.

7.4.3.3

Impacts on Value Added

The increase in trade and investment leads to growth in value added, but the contribution is not significant, because the scale of trade and investment is still modest. In Scenarios I, II and III, the increase in trade and investment contributes 0.42, 0.64 and 0.85% to Yunnan’s GDP of RMB 1,172 billion in 2013. Cross-border trade is mainly responsible for the impacts on value added. In Scenarios I, II and III, the rise in import and export contributes 0.29, 0.42 and 0.64% to the GDP of Yunnan, China. In comparison, the contribution of firm investment and government investment to value added is small (Table 7.9). Of the impacts of export on value added, the induced impacts are the strongest, and the indirect impacts are the weakest. Following the increase in export in border regions, firms will employ more local people, which will raise the income and consumption capacity of the residential sector and creates more demand for goods. As a result, firms will enhance their production capacity, thus contributing more value Table 7.9 Impacts on value added in different scenarios Unit: RMB 100 million Scenario

Export

Import

Firm investment

Government investment

Total 17.71

Direct impact I

23.71

−13.62

6.67

0.95

II

35.57

−20.42

10.01

1.42

26.57

III

47.42

−27.23

13.34

1.90

35.43

Indirect impact I

18.81

−9.90

2.23

1.05

12.19

II

28.22

−14.85

3.34

1.57

18.28

III

37.62

−19.80

4.45

2.10

24.37

Induced impact I

34.20

−19.11

3.41

1.40

19.90

II

51.30

−28.66

5.11

2.09

29.86

III

68.40

−38.21

6.82

2.79

39.81

Total impact I

76.72

−42.63

12.31

3.40

49.80

II

115.09

−63.93

18.46

5.08

74.71

III

153.44

−85.24

24.61

6.79

99.61

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7 The Impact of Cross-Border Economic Cooperation …

added. That is why export has stronger induced impacts than direct and indirect impacts. Of the impacts of firm investment on value added, the direct impacts are the strongest, and the indirect impacts are the weakest. As with the impacts on tax, the weak indirect impacts of firm investment on value added are attributed to underdeveloped industries and weak linkages between industries in border regions. Government investment has weak direct impacts, because government mainly makes investment in infrastructure construction, which do not have significant direct impacts on value added. But government investment has strong induced and indirect impacts, which is thanks to the strong linkages between the construction sector and other sectors. The increase in government investment also causes growth in value added of other sectors, which raises the resident’s income, thus having strong induced impacts.

7.5 Conclusions and Policy Implications In China’s efforts to open its southwest border regions, a pressing issue is to promote the economic development of these regions in an efficient manner. The government must know the impacts of government investment, private investment and crossborder trade before introducing relevant policies. This study has used the input– output model to evaluate the impacts of government investment, firm investment and cross-border trade on the employment, tax and value added of Yunnan, China in different scenarios. The following conclusions can be drawn from this study. First, the high influence coefficients of electric machinery and equipment manufacturing, artwork and other manufacturing, and construction and the high sensitivity coefficients of transportation and warehousing, metal smelting and pressing and chemical industry show that these industries have strong linkages with other industries and that their development will have a great impact on the economic development of the region. Second, marked multiplier effect is observed in the impacts of investment and export per unit on employment, tax and value added, which reveals the considerable potential of investment and cross-border trade in border regions. Import and export have contrary impacts on employment, and the same absolute value of multipliers. The multiplier of government investment’s impacts on employment is modest, and that of firm investment’s impacts on employment is much smaller, but both government investment and firm investment have a positive impact on employment. One unit of import, export, firm investment and government investment have roughly the same strength of impacts on tax, but vary in the type of strong impacts. Import, export and government investment have strong induced impacts on tax, and firm investment has strong direct impacts. Import and export have contrary impacts on value added, but the absolute value of their multipliers is the same. Firm investment is responsible for the strongest direct impacts on value added. The rise in export and government investment has strong indirect and induced impacts on boosting value added.

7.5 Conclusions and Policy Implications

163

Third, trade and investment, examined in terms of the impacts per unit, have significantly positive impacts on regional economy. When they are evaluated against the regional economic aggregate, however, their impacts on the regional economy are rather limited due to inadequate investment and cross-border trade in border regions. With Yunnan’s GDP of RMB 1,172 billion in 2013 as the base, the contribution of the increase in cross-border trade and investment to Yunnan’s GDP in three scenarios is respectively 0.42%, 0.64% and 0.85%. Moreover, the contribution is primarily attributed to cross-border trade, while firm investment and government investment account for only a small proportion. Fourth, although import and export have contrary impacts on employment and value added, and their multipliers have roughly the same absolute value, thanks to Yunnan’s surplus in cross-border trade and the differences between imports and exports in industrial structure, cross-border trade has an apparent boosting effect on employment and value added of Yunnan, China. We can draw the following policy implications from the above analysis: First, industries with high influence and sensitivity coefficients will better facilitate the regional economic development. Efforts should be made to promote the formation and improvement of cross-border industrial chains based on industries involved in cross-border trade and the state of firms making investment in border regions. Second, the potential for investment and cross-border trade in border regions remains to be unleashed. Measures, such as improving transportation and logistics facilities and other infrastructure and bilateral consultations, should be taken to further reduce cross-border trade barriers, so that cross-border trade will better fuel Yunnan’s economic development. Third, considering the currently small size of firm investment and the limited industries receiving such investment, investment policies should aim to promote both increase in investment and industrial diversification, thus enhancing the indirect and induced impacts of firm investment. Fourth, import, export and government investment should be integrated and measures should be taken to encourage firm investment. The government may establish processing centers of imported and exported products in border regions, which will increase firm investment and lower the transaction costs of imported and exported raw materials and primarily processed products. Meanwhile, since government investment has strong indirect and induced impacts on regional economy, the government may encourage firms in industries related to construction, such as the building materials industry, to make investment in border regions.

References Cheng Y, Liu H, Gong P, Song T (2016) Spatial disparity and its major influencing factors of export-oriented economy in Chinese border area. Econ Geogr :9 [In Chinese.] 文献 Guo S, Meng Y, Liang R (2016) A study on the impact of opening degree of China’s border capital cities on economic development. East China Econ Manage no. 4 [In Chinese.]

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Harris CD (1954) The Market as a Factor in the Localization of Industry in the United States. Ann Assoc Am Geogr 44(4): 315–348 Huang W, Gong X (2014) Evaluation of open economy in border areas in China and empirical analysis of the influencing factors. [In Chinese.] Inquiry Econ Issues (1) Krugman P (1998) What’s new about the new economic geography? Oxf Rev Econ Policy 14(2):7– 17 Krugman, P (1990) Increasing returns and economic geography. Nber Working Papers 99(3):483– 499 Leontief W (1986) Input-output economics. Oxford University Press, New York Niebuhr A (2002) Spatial dependence of regional unemployment in the European Union (No. 186), HWWA Discussion Paper Ottaviano GIP, Puga D (20003) Agglomeration in the global economy: a survey of the ‘New Economic Geography’. World Econ 21(6):707–731 Rasmussen PN (1957) Studies in the inter-sectoral relations. North-Holland, Amsterdam Wang F, Yan T (2011) Evaluation the effect of program to revitalize border areas and enrich residents’ lives: time series analysis on the Inner-Mongolia’s Border Counties. Guizhou Ethnic Stud 4 [In Chinese.] Wang Y (2006) Review of the EU’s policies of cross-border cooperation. [In Chinese.] DeutschlandStudien 21(3) Yao P, Sun J (2015) Trade openness and the spatial effect of regional income: evidence from China. Fin Trade Econ (1) [In Chinese.] Yao S (2016) Evaluation of the effects of opening up border areas in China under the economic new normal: an empirical study based on the panel data of China’s Border Provinces from 1993 to 2014. Inquiry Econ Issues (5) [In Chinese.] Yoskowitz DW, Giermanski JR, Pena-Sanchez R (2002) The influence of NAFTA on socioeconomic variables for the US-Mexico border region. Regional Studies 36(1):25–31 Yu B, Yang H, Jin G (2015) Does industrial agglomeration enhance economic efficiency? A spatial econometric analysis based on data of Chinese cities. J Zhongnan Univ Econ Law 3 [In Chinese] Zhang J, Liu J (2011) Urban efficiency and its spillover effects—based on the analysis of 34 cities in Northeast China. Econ Geogr 31(4) [In Chinese.]

Chapter 8

Principles and Influential Factors of Cross-Border Economic Cooperation Zones

In the context of globalization, cross-border economics and politics have scaled new heights. As political boundaries and territories remain in place, once the functions of borders change, so will the role of border regions and characteristics of cross-border relations. Thanks to multi-lateral and regional cooperation frameworks, there has been growing and deepening global connectivity. The world is seeing more and more international cooperation organizations and regional and global value chains. While the importance of geopolitics is undermined by the prevalence of neoliberal privatization, various forms of cross-border cooperation have emerged in the past two decades. In North America, cross-border cooperation involves actions of local governments and non-governmental organizations in a bottom-up process, and a number of countries have participated in such cooperation. Europe, on the other hand, adopts the top-down approach, according to which the European Union (EU), an organization transcending the notion of nation states, is established. The national governments in Asia and Africa, with support from international organizations, work hard to improve the infrastructure and establish economic corridors to connect cities. Cross-border economic cooperation zones (CBEZs), pivotal components of economic corridors, are crucial to further development of cross-border economy.

8.1 Definition of CBEZ According to spatial economics, lower transaction costs, availability of skilled labor, public services and infrastructure, and concentration of research and development lead to localization economies and agglomeration economies in regional centers, so that economic activities tend to agglomerate around geographical centers. As border regions are far from major metropolitan centers, the transportation costs are high, economic activities do not gravitate to border regions. The cross-border regions between southwest China and other GMS countries are endowed with abundant © Social Sciences Academic Press 2022 Z. Wang and W. Wei, Cross-Border Economic Cooperation Between China and Southeast Asian Countries, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-19-0136-2_8

165

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8 Principles and Influential Factors of Cross-Border …

natural resources, but they have not been very successful in the efforts to attract foreign direct investment, because the negative impacts of political boundaries result in gap between markets and impedes the location selection of industries in border regions. Considering transportation routes, markets and social and political factors, border regions are not the most effective locations. To raise the efficiency and influence of economic activities in border regions, the key is to improve the regional transportation and logistics infrastructure, which will facilitate the flow of goods and factors of production. Nonetheless, due to non-economic barriers, such improvement does not lead to spontaneous formation of production networks in cross-border regions. According to new regionalism, non-economic barriers are rooted in differences in culture, history, system and society which have collective impacts known as the border effect. A lot of studies have shown that the border effect causes sharp drop in trade flows. Therefore, despite the great significance of transportation corridors to the development of border regions, the corridors per se cannot promote economic activities. For further regional economic integration, CBEZs are required to reduce the border effect. CBEZs are economic zones in designated cross-border areas between two countries, where preferential fiscal and tax, investment and trade, industrial policies and customs regulations are adopted, and goods, capital and technology flow freely. CBEZs are different from BEZs. BEZs are zones in a country, while CBEZs stretch across the border. A CBEZ should have enterprise zones, commercial zones, modern infrastructure and cross-border facilities. Enterprise zones can perform functions such as industrial production, business incubation, investment and financial services, and business development. Commercial zones can host economic activities such as trade of dutyfree goods, specialized markets, cross-border tourism, international conventions and exhibitions, trade facilitation and financial services. Meanwhile, the development of CBEZs requires support from governments, including policies to establish CBEZs and to attract firms to make investment in these zones. It also requires institutions about co-administration of CBEZs and sharing of sovereignty, to which end, the governments on both sides of the border must transfer certain sovereignty over its land in CBEZs.

8.2 Basic Principles of CBEZ The core theories underlying CBEZs are that transportation costs regulate spatial distribution and that border regions are not favored by economic activities because of vast distance from major city centers (Dimitrov et al., 2003). Following these theories, to improve the efficient and influence of border regions, the key is to improve the regional transportation and logistics infrastructure. Well-developed transportation infrastructure and connectivity between countries will facilitate the flow of factors of production and goods across the border. Open borders enable firms allow the possibilities of firms engaging in transactions in large cross-border markets, making

8.2 Basic Principles of CBEZ

167

border regions attractive. But the availability of transportation and logistics facilities does not necessarily lead to spontaneous formation of production networks in border regions, and new regionalism attributes this to non-economic barriers, such as differences between areas across the border in culture, history and society. In other words, even if the economic borders are removed, cross-border economic interactions will still be inferior to economic interactions in a country because of the existing non-economic barriers (Brenton and Vancauteren 2001; Afouxenidis and Leontidou 2004). Therefore, the availability of transportation routes, which may be considered directly related to the development of border regions, cannot spontaneously promote economic activities in border regions. New regionalism stresses the need to develop fully integrated production networks in border regions that have a territorial base instead of merely increasing interregional cross-border trade with a narrow functional base. Apparently, the approach to promoting trade with support from governments to establish formal border and crossborder SEZs goes beyond development of transportation infrastructure. It requires the construction of factories and infrastructure, and in turn includes processes of investment and border economic activities that take advantage of complementary resources and cross-border markets. SEZs in border regions have the potential to turn border regions from the periphery to the center of economic growth, which will benefit the residents in border regions who have been marginalized socially and economically. Economic development in border regions are not only of benefit to host countries, but also may play an important role in the development of neighboring countries. The following sections will deal with the ways to promote the development of border regions.

8.2.1 Use of Resources in Border Regions Border regions generally enjoy unique spatial advantages thanks to their climate, resource endowments, spatial proximity to foreign markets, and greater potential for cross-border backward and forward linkages. In these regions, economic activities are scarce, and production capacities lie idle. BEZs can attract investment to press home such advantages. In the border regions of Yunnan, China, for example, considering the favorable climate for coffee growing, the Chinese government is working proactively to promote coffee production in these regions, and the coffee growing area has reached thousands of hectares. Another example is that CBEZs at the border of Myanmar will lower transportation costs and raise its competitiveness in this area. Therefore, exploitation of under-utilized local resources in border regions may provide the basis for modern industries and export-oriented growth (Crush and Rogerson 2001).

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8 Principles and Influential Factors of Cross-Border …

8.2.2 Use of Complementary Resources Across the Border It is feasible for border regions to import complementary goods. The complementary resources coexisting between borders are closely related to the production of goods with cost advantages. In particular, the relatively developed and less developed economic zones in border regions provide complements with comparative locational advantages in the respective border regions they are located. Border regions gain a special geographic advantage when vertical linkages of firms present opportunities for integration of backward and forward linkages and the incentives for spatial agglomeration are strong (Niebuhr and Stiller 2002). Wide gaps exist between the economies in the GMS. Thailand, Vietnam and China are comparatively better developed, while Cambodia, Laos and Myanmar are at the preliminary stage of development. CBEZs offer an opportunity for less developed economies to participate in the production networks of better developed neighboring economies through BEZs. For example, Cambodia, Laos and Myanmar can provide cheap labor to Thailand and China which enjoy comparative advantages in major imports (materials, parts and accessories), technology and capital in CBEZs. That means, cross-border mobility of factors of production is essential to industrial growth in border regions.

8.2.3 Transformation of Peripheries to Centers CBEZs are in essence geological concentration of government-driven firm clusters, with inherent advantages of effective infrastructure, quality services, sound business environment, efficient regulation and minimum bureaucracy. The expanding industrial clusters and suppliers in related industries will cause competition among firms in the region and competition with other clusters, which will stimulate research and development and give rise to new skills and services. Industries in border regions can increase their attractiveness to FDI by pressing home the unique advantages of border regions thanks to proximity to foreign countries, such as close cooperation, tacit knowledge, low communication cost and so forth. Innovative and efficient clusters will thus become impetus to regional growth.

8.2.4 Low Costs of Public Utilities Firms in CBEZs of less developed countries are linked with neighboring countries by the border, which reduces their operational and service link costs. They also have better access to services such as power, water and communication of better developed neighboring countries. Therefore, CBEZs provide effective cross-border infrastructure and services, which ultimately enhances the competitiveness of border regions.

8.2 Basic Principles of CBEZ

169

8.2.5 Expansion of Markets and Economies of Scale The proximity of border regions to emerging cross-border markets provides new opportunities for firms to expand their economic activities across the border, and allows consumers a broader, better-quality market of goods and services. This leads to increased competition in domestic market of BEZs and reveals new sources of imports. BEZs also create business opportunities for firms of bordering countries. Businesses in border regions are mainly small local suppliers and subcontractors, which is conducive to the transfer of technology and management expertise. This applies especially to SMEs, which are usually more oriented towards neighboring countries than larger enterprises and are subject to more internal constraints on international growth, such as limited capital, management time and experience (Buckley 1989). The effectiveness of various cross-border SME partnerships has been evident in recent years. For example, the economic success of the southern provinces of China since the 1980s is largely thanks to the efficient cross-border SME alliances and joint ventures involving mainland Chinese businesses and Hong Kong-based SMEs (Guan et al. 1991). The linkages between Singapore and some areas of Malaysia and Indonesia have also contributed to prosperity of these regions (Ohmae 1995). In the GMS, the economic sanctions imposed by the US, the EU and other western countries on Myanmar and its underdeveloped infrastructure have impeded its participation in globalization and regional production and distribution networks. The Myanmar government has opened its borders to benefit from neighboring Yunnan province of China and Thailand in the CBEZs, which has a critical impact on the development of the country’s border regions (Kudo 2007).

8.2.6 Peace and Stability Political realism is more concerned with economic cooperation and the role of nation (transnational) states in achieving these goals. But researchers have not reached a consensus on the way in which the economic cooperation should take place. In times of rapid economic transition, a clear common understanding of economic issues among states and nations is that states and nations working together will gain more materially than if they act alone. Cross-border economic cooperation will extend to include political cooperation. Realists claim that economic interdependence increases the likelihood of conflict, while other political scientists believe that economic interdependence between trading partners makes war more unlikely. The prosperity of economic cooperation zones will not only maximize economic welfare, but will also ultimately lead to peace and prosperity in these regions. Political cooperation, peace and stability are significant aspects of the innovation of the GMS. For centuries, the region has suffered from wars, revolutions and political conflicts, which has severely impeded its economic development. The GMS Economic Cooperation Program was greeted with skepticism when it was launched in

170

8 Principles and Influential Factors of Cross-Border …

1992. For example, there were doubts about whether the GMS countries and regions, including Vietnam, Laos, Cambodia, Thailand and Yunnan, China, could shelve their differences and historical confrontations to advance their cooperation. Despite the skepticism, the aspiration for development of transportation and economic corridors in specific border areas generates confidence and a shared sense of responsibility, both of which are essential for stability and lasting peace of the region.

8.3 Functions of CBEZs In the current era of globalization, cross-border economic development and politics are gaining importance. CBEZs are very important to the economic development of border regions. According to the ADB’s program of developing economic corridors in the GMS, the North–South Economic Corridor involving China includes the subcorridors of Kunming, China-Laos-Bangkok, Thailand, Kunming, China-Hanoi, Vietnam-Haiphong, Vietnam, Nanning, China- Hanoi, Vietnam, and Kunming, China-Myanmar. Thanks to the efforts of the Chinese government, remarkable progress has been made in the construction of the North–South Transport Corridor, which lays an important foundation for the establishment of China-Vietnam, ChinaLaos and China-Myanmar CBEZs. CBEZs will become important junctions of economic corridors and an important mechanism to promote cross-border economic development. BEZs in the GMS contributes to the establishment regional or global industrial chains. They are junctions of trade corridors, which connect China with places of origin and markets in other GMS countries, and provide resource-based industries on both sides of the border (especially in China) with preliminarily processed products. BEZs also play an important role in construction of subregional economic corridors, but they cannot fundamentally improve the development capacities of border areas. In the GMS, BEZs are on the periphery of a country’s industrial link and rely on better developed areas in their home country for development. Their contribution to regional economic growth is rather limited. Therefore, BEZs cannot serve as economic growth poles. CBEZs, however, are different from BEZs, and will play an important role in promoting regional economic development. An important objective of CBEZs is to foster economic growth poles which will stimulate regional economic development. First, CBEZs are not mere expansion or combination of BEZs. In addition to promoting international economic cooperation, they can also enhance local development capacities. In particular, in establishing CBEZs, human capital and services for industrial development, especially investment services and market services, will be improved. Therefore, besides location advantages and resource advantages, CBEZs will help foster comparative advantages of higher levels, thus bringing into play the dynamic effects of regional economic integration. Second, CBEZs can address the shortage of cross-border public goods (such as solid waste treatment and sewage treatment) and low-cost public utilities (electricity

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and tap water), which is closely related to the cost sharing of public goods and utilities. Private firms shun investment in public goods and utilities because of high risks. In addition, due to scattered users of public goods and utilities, the efficiency of such investment is low. The supply of cross-border public goods is the foundation for development of border regions. CBEZs are both investors and beneficiaries in investment in public goods and utilities. The agglomeration of firms in CBEZs can also enhance the efficiency of investment in public goods. Third, CBEZs are platforms for local firms to integrate into regional or global industrial chains. They help optimize industrial structure, avoid disorderly competition between neighboring countries in industrial development, and improves the international division of labor between neighboring countries. In the cross-border regions between China and other GMS countries, firms provide goods to firms in other areas, thus integrating into regional industrial chains. The extent to which border regions participate in regional and international division of labor is determined by the type of goods supplied and the degree of product processing. To help border regions better participate in international division of labor, high-quality FDI is needed to enhance the local industries and establish export-oriented processing bases. To attract FDI is a major objective of CBEZs. A common aspiration of the governments of China and other GMS countries is to attract domestic capital and FDI to CBEZs, which will help exploit local resources, boost industrial and trade development, create jobs, and raise the income of local governments and residents. Among the above functions, CBEZs have advantage in soft environment in reduction of transaction costs, and advantage in hard environment in supply of public goods. To construct CBEZs between China and other GMS countries, both advantages must be combined to foster a third competitive advantage in addition to location and resource advantages. The aim is to engage border regions in regional or international industrial chains and improve their self-development capacities.

8.4 Stages and Modes of CBEZs 8.4.1 Stages of CBEZs The development of CBEZs goes through three stages as shown in Fig. 8.1. In Stage I, the parties on both sides of the border mainly conduct cooperation through economic and trade interactions between their economic zones, which has not reduced the negative impacts of border effect on economic activities. In Stage II, the two parties reach cooperation agreements, which mitigates the border effect, but a unified organization is yet to be formed. In Stage III, the border effect is significantly reduced, and the economic zones on both sides of the border have formed a whole under unified planning, coordination and administration of an official organization. The above division of development stages is made from the macro perspective. The micro perspective is also important for evaluation of the development of CBEZs. The

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Fig. 8.1 Three stages of development of CBEZs (Dinyar Lalkaka 2010)

Fig. 8.2 The relationship between border industry and service link costs in three stages of development (Kudo 2009)

micro entities of CBEZs are border industries. A mature CBEZ must host a number of large-scale businesses in border industries. Main factors affecting the performance of border firms are service link costs and utility services.1 The strength of border effects has a direct impact on service link costs, which in turn affects the growth of border industries. Through data mapping, the relationship between border industry and service link costs is moved to the three stages of CBEZs, as shown in Fig. 8.2. In Stage I, service link costs are prohibitive, economies are closed to each other, and border industries are scarce: there are only a few businesses involved in illegal, irregular and small-scale smuggling. It is rare to find CBEZs during this stage of 1

. Service link costs: Industrial parks and zones in different regions are considered as production modules of industrial chains. The costs incurred from contacting different production modules are known as service link costs. Utility services include supply of power, water, communication resources and so forth. Developed utility services and infrastructure such as transportation facilities leads to low service link costs.

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development. China, Laos, Myanmar and Vietnam mainly went through this stage from the 1950s to the 1970s when economies adopted closed-door policies during the Cold War. When economies adopt opening up policies and open their door to each other, service link costs fall significantly, and location advantages such as cheap and abundant labor force stimulate the growth of border industries. In the second stage, however, as other developed regions continues to develop (especially due to the impacts of agglomeration factors), border regions with open-door policies hold decreasing attractiveness to industrial sectors, and border industries decrease. Major characteristics of this stage are that service link costs are going down, infrastructure is underdeveloped, and border industries increase and then decrease. Economically developed areas, especially metropolitan areas, can provide both high-quality labor force and more efficient and cheaper transportation services. More importantly, agglomeration effects take place in these areas, which hold increasing attractiveness to industries as they are upgraded from labor-intensive ones to technology-intensive ones. Despite lower service link costs and better infrastructure in CBEZs, the agglomeration effects in these zones become so weak that border industries begin to decrease. That is the third stage of CBEZs featuring low service link costs and sound infrastructure, but declining border industries compared to the second stage.

8.4.2 Modes of CBEZs A CBEZ mainly consists of an enterprise zone and a commercial zone. The enterprise zone includes industrial parks, business incubation parks, venture investors and service agencies, and the commercial zone includes duty-free shops, specialized markets, tourism services, exhibition centers, and trade facilitation and financial services. A mature CBEZ should have a booming enterprise zone and a prosperous commercial zone. In other words, both zones shall be well developed. When the goods market in the commercial zone is fully developed and the financial services, tourism services and exhibition centers are all available, the development of the commercial zone will have a positive effect on the enterprise zone. The development of the enterprise zone will also increase the types of goods supplied, raise the income of residents and strengthen the industrial chains, thus increasing the prosperity of the commercial zone. This mode of development of CBEZs by balanced development is referred to as the balanced mode (See Fig. 8.3). In such a mode, the enterprise zone of country A interacts not only with its commercial zone, but also with the enterprise zone and commercial zone of country B. In other words, in the cooperation zone, the countries on both sides of the border, including industrial sectors, commercial sectors and government sectors, are in close contact and better coordination. The cooperation zone has reached a stage of virtuous cycle.

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Fig. 8.3 Balanced mode of CBEZ. Source: Revision according to Dinyar Lalkaka (2010)

A prerequisite for application of the balanced mode in development of CBEZs is that the enterprise zones and commercial zones on both sides of the border have reached a certain stage of development. In practice, most CBEZs are still under planning or have just started construction, and their enterprise and commercial zones are not well developed. The balanced mode is thus not applicable. How can we guide the development of these zones so that the balanced mode can be applied? As mentioned, a CBEZ includes an enterprise and a commercial zone. In the early stage of an CBEZ, with limited resources, it can be very difficult to pursue development of both enterprise and commercial zones. In addition, CBEZs vary between regions. According to the priorities in development, CBEZs are divided into two types, namely production-led CBEZs and commerce-led CBEZs (See Fig. 8.4). Production-led CBEZs are suitable for border regions with advantages in resources, such as natural resources, labor and other factors of production. For example, border regions with abundant natural resources enjoy strong comparative advantages and holds strong attractiveness to resource-intensive industries. CBEZs

Fig. 8.4 Two types of CBEZs with different priorities

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with such advantages will gain more by giving priority to the enterprise zone than to the commercial zone. The development of industries in the early stage of CBEZs is closely related to the development environment. Take business incubation parks as an example. A sound business incubation environment will not only attract firms to the parks, but also stimulate the development of border industries. Meanwhile, governments may introduce policies and regulations to reduce service link costs of the enterprise zones on both sides of the border on industrial chains and mitigate the border effect, which will strengthen the industrial linkages between the two enterprise zones and enable win–win development. In such a mode of development, the enterprise zones grow faster than the commercial zones. As the priority is given to enterprise zones of both countries in the early stage of development, it can be called an unbalanced mode of development. Resources are concentrated to promote the development of the enterprise zones, while the commercial zones may lag behind. Nonetheless, this mode of development may be more suitable for CBEZs with resource advantages in the primary stage of development. If a border region have a large potential market, such as a large population, it should give priority to development of the commercial zone in the early stage of CBEZ. It will give rise to a virtuous cycle: the development of commercial zones will raise the income of local residents and turn potential markets to consumers, and the expansion of the consumption market will boost the development of the commercial zones. A commercial zone includes several subzones with different functions. In the early stage of an CBEZ, it is not feasible to develop all the subzones at once. In this stage, there is only limited demand for financial services and other services due to scarce border industries. By giving priority to subzones such as tourism services and dutyfree shops, CBEZs will attract consumers from outside the zones, which will stimulate the growth of local goods market. The prosperity of the goods market will then be an internal impetus driving the functional improvement of commercial zones. Compared with the production-led mode, the commerce-led mode may be more suitable for CBEZs with a large potential market in the early stage of development. Take the tourism industry (especially the cross-border tourism industry) as an example. Due to limited consumption capacities of local residents, a booming tourism industry will attract consumers from other areas, enhance the consumption potential of local market, and contribute to the prosperity and growth of local market. Following the prosperity of local market, local residents will receive higher incomes, and border regions will be able to provide commercial services and tourism services of better quality, thus forming a virtuous cycle. As commercial zones continue to develop, so will enterprise zones. Ultimately CBEZs will grow to a stage in which the balanced mode can be applied.

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8.5 Factors Influencing the Performance of CBEZs Traditionally, the performance of CBEZs are determined by three crucial kinds of factors: firm-specific factors, macro environmental factors and micro environmental factors. The performance of CBEZs is closely related to that of their resident firms. A successful border firm must be able to effectively adapt to inherent cultural diversity (Schuler and Jackson 2001). Social capital, trust and other human diversity factors play an important role in determining what role enterprises and entrepreneurs play in the value adding process. Environmental factors refer to conditions related to investment in the zones, including macro environmental factors, i.e., high-quality infrastructure, financial incentives, exemption from and relaxation of industrial regulations, and a micro environmental factor, i.e., effective corporate governance. All these factors have direct and positive impacts on the performance of CBEZs. Wang et al. (2011) analyzed the role of these factors in the success of CBEZs at the borders between China and Myanmar and Vietnam. The success of CBEZs is usually thanks to two factors: regional connectivity and border trade facilitation. Transport corridors are regarded as a high priority in the pursuit of infrastructure development and trade facilitation at the subregional level in Africa and Asia. Currently, there are a great deal of corridor development approaches and various forms of corridor administration authorities, such as arrangement of leaders of the private sector and operation by national authorities in Asia and Africa. New regionalism, however, is concerned with a broader and intrinsically connected set of factors that affect the performance of BEZs, such as regional governance, regional institutions, regional financial systems, social capital and political cooperation.

8.5.1 Regional Governance There are two modes of regional governance, namely inter-regional governance and cross-regional governance. The former relies on cross-border cooperation (either at a multi-party or union level) between governments and their departments and organizations or between quasi-governmental organizations, which is a way to maintain the integrity of the parts on both sides of the border. The latter is a management approach, according to which all parties cooperate on different specific issues at the cross-regional or inter-regional level for mutual benefit and win–win results. In comparison, the latter is more suitable for cross-border economic cooperation. By governance, we refer to mechanisms that regulate a type of behaviors that transcend borders and extend to various aspects (politics, economy, society, culture, and environment). The development of border SEZs involves broader cross-regional concepts, completely different territorial governance between regions, functional governments,

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and possibly new forms of multi-level governance. Amin (1999) stressed the need for establishment of local governments and local fiscal autonomy. Their proactive measures and powers can mobilize resources from different channels to solve common problems and achieve common development goals. Eurogios, for example, are independent governance organizations of border regions in Europe. They are unique legal cross-border bodies performing various tasks and boasting abundant resources, which play a central role in the development and administration of border regions. Countries on both sides of the border and the local authorities are involved in the establishment of Euregios. Euregios have witnessed a great success in boosting the economic development of border regions. North America, on the other hand, lacks an overarching hierarchy to advance spatial policies and cross-border networks (Clarke 2002). Cross-border cooperation is a bottom-up process, including informal, loose and industry-specific cross-border networks and alliances of state and non-state actors (PRI 2006; Clarke 2003; Blatter 2001; Scott 1999). Multinational organizations are largely non-governmental and rife with institutional gaps (PRI Briefing 2006). To solve problems more effectively and enhance the global competitiveness of its cross-border activities, North America needs to adopt a more integrated approach (Lennox, 2008).

8.5.2 Regional Institutions Krätke (1999) and Digiovanna (1996) emphasized the interplay between patterns of economic development and a set of specific institutional forms, with special emphasis on the regional modes of regulation—influential factors that are differentiated regionally within a national framework, such as labor and wage relations, industrial organization and inter-firm relations, financial institutions, forms of state intervention, and the types of political alliances formed by regional actors. The focus should be on creating an integrated regional market that does not discriminate against foreign participants, which requires coordinated regulatory policies, including technical specifications and other standards, work permits, tax policies, policies about people’s activities and related policies.

8.5.3 Regional Financial Systems The agglomeration of production activities has also raised special requirements for financial markets and institutions. In addition, the supply of financial services in a region can also serve as the foundation for export of financial services.

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8.5.4 Social Capital Social capital is defined as “features of social organization, such as trust, norms, and networks, that can improve the efficiency of society by facilitating coordinated actions” (Putnam 1993). An important feature of social capital is formal and informal networks of interpersonal communication and exchange, such as neighborhood associations, business associations, cooperatives, choral societies, sports clubs, and massbased parties. According to Putnam (1993), the denser such networks in a community, the more likely that its citizens will be able to cooperate for mutual benefit. Meanwhile, social capital may be more important than physical or human capital for political stability, government effectiveness and economic progress. This is particularly important at the cross-border level, because institutional embeddedness has been disrupted by borders. New regionalism is concerned with broader and interrelated factors, and values the region as the focus of analysis and policies, which has effectively downplayed the continuing importance of states, nations and borders. Amin (1999) proposed five general axioms of economic governance that are directly relevant in the context of border regions. First, policies should be targeted at networks of association, instead of individual firms. Second, procedural and recursive behaviors should be encouraged to secure strategic vision, learning and adaptation. Third, policies should be targeted at a plurality of organizations besides state and market institutions. Fourth, the institutional thickness should be enhanced by encouraging enterprise support systems, political institutions and social citizenship. Fifth, policies should be context-specific and sensitive to local path-dependencies. Finally, cross-border regions should constitute learning regions or knowledge regions with binding attraction (Morgan 1997).

8.5.5 Political Cooperation, Level of Economic Development, and Trade and Investment Barriers At the national level, transnational cooperation is about the linkages between political authorities. In terms of politics, the policies, attitudes and policy history of countries are very important for economic development in a cross-border environment. For mutual benefit, bordering countries must support and complement each other. New regionalism believes that economic cooperation cannot succeed without political cooperation, because the power is in the hands of political elites. On the other hand, they claim that political cooperation does not necessarily lead to economic cooperation, because organizations in the economic sectors are very skeptical, fearing that their interests will be jeopardized. According to neorealism, the EU, instead of reflecting the trend towards cooperation, is an expression of the nation-state’s interests. Moreover, the EU itself cannot promote economic cooperation, because it is controlled by governments of nation states and has no effective power over economic organizations.

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Trade relations and economic cooperation eventually depend on the level of specialization and the size of the markets (Dimitrov et al. 2003a; b). Therefore, countries with better developed border firms have better chances of success. In the GMS, if Myanmar does not open its borders to neighboring countries, the underdeveloped infrastructure and lack of industrial environment will impede the establishment of CBEZs. Reduction or removal of tariff and other trade barriers and investment barriers have positive impacts on economic activities in border regions. Emerson et al. (1992) pointed out that border or frontier regions are most likely to benefit from greater integration thanks to reduced economic costs along the border. Increased ability to use economies of scale and higher efficiency will lead to significant increase in income, output, employment and overall economic welfare. There are various estimates of the welfare gains from a program to increase cross-border economic activities in the single and integrated market of the EU. Experience shows that these regions are usually very open, where exports account for a much larger share of their output than in some countries. In summary, a comprehensive range of micro and macro factors play an important role in economic growth and investment activities in BEZs. Promoting the border regions includes economic integration in cross-border regions and cross-sectoral cooperation, and involves a range of actors: the entire socio-economic system and administrative institutions. This is based on the recognition that market does not always function effectively, and that government or state must take actions to remedy or correct its deficiencies (Musgrave and Musgrave 1984). Countries are inevitable key players in economic and political dimensions if cross-border economic activities are to be developed effectively. Recognizing the changing economic and political relations between countries, the nature of the unique, changing, and locally specific modern capitalist borders, and the impacts of all these factors on economic activities, especially on disputes over territories at borders, helps understand the way regulatory modes are perceived on both sides of the border and how state borders undermine these regulatory modes. Kiprianoff (2005) argued that the barriers to cross-border cooperation are relevant to the majority of the construction of CBEZs, and have negative impacts on the performance of firms in border regions. Research shows that in national surveys, firms are not worried about potential barriers such as the quality of infrastructure (roads, nearby checkpoints), but are concerned about broader issues, such as lack of assistance in development of cross-border relations, political stability, corruption, change in exchange rates, and financial conditions of each country. The survey company did not consider the lack of a lingua franca in cross-border regions a major barrier to interactions, but a common understanding of the goals and forms of cooperation between partners seems to be a precondition for successful cooperation. It is suggested that the cooperating parties need to see similar benefits that can be gained through cooperation (Kiprianoff 2005). Logically, they are more concerned with the potential benefits than with whether both parties gain in the same way. In addition, social capital can be applied to petty traders, small firms, and other actors and agents

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in the region to form business contacts or friendly relationships. These social relationships are main tools for reducing some of the risks associated with trade and business (Williams and Balaž 2002; Wallace et al. 1999).

References Afouxenidis A, Leontidou L (2004) Spatial and social exclusion at the EU borders. In: Pan-Hellenic geographical conference of the Hellenic geographical association. University of Aegean Press, Greek, pp 110–117 Amin A (1999) An institutionalist perspective on regional economic development. International journal of urban and regional research 23(2):365–378 Blatter J (2001) Debordering the world of states: towards a multi-level system in europe and a multi-polity system in North America? Insights from border regions. Eur J Int Rel 7(2):175–209 Brenton P, Vancauteren M (2001) The extent of economic integration in Europe: border effects, technical barriers to trade and home bias in consumption. CEPS Working Document no 171 Buckley PJ (1989) Foreign direct investment by small and medium sized enterprises: the theoretical background. Small Bus Econ 1(2):89–100 Clarke SE (2002) Spatial concepts and cross-border governance strategies: Comparing North American and Northern Europe experiences. In Presented at the EURA Conference on Urban and Spatial European Policies Vol. 18:20 Clarke SE (2003) Globalism and cities: A North American perspective. In Globalism and local democracy (pp. 30-51). Palgrave Macmillan, London Crush J, Rogerson CM (2001) New industrial spaces: evaluating South Africa’s spatial development initiatives (SDI) programme. S Afr Geogr J 83(2):85–92 DiGiovanna S (1996) Industrial districts and regional economic development: a regulation approach. Reg Stud 30(4):373–386 Dimitrov M, Petrakos G, Totev S, Tsiapa M (2003) Cross-border cooperation in Southeastern Europe. Eastern European Economics 41(6):5–25 Dimitrov M, Petrakos G, Totev S, Tsiapa M (2003a) Cross-border co-operation in Southeastern Europe: the enterprises’ point of view. Eastern Eur Econ 9(2):5–25 Dimitrov M, Petrakos G, Totev S, Tsiapa M (2003b) Cross-border co-operation in South-Eastern Europe: The enterprises’ point of view. Discussion Paper 9, Department of Planning and Regional Development, School of Engineering, University of Thessaly Dinyar Lalkaka (2010) Cross-border Economic Zone. Second Phnom Penh Plan Research Workshop, ADB (Asian Development Bank) Cambodia Resient Mission. Phnom Penh, Cambodia, presenter Feb. 25 Emerson M, Gros D, Italianer A (1992) One market, one money: an evaluation of the potential benefits and costs of forming an economic and monetary union. Oxford University Press on Demand Guan Z, Ge ZQ, Cai QX (1991) Technological characteristics and change in small industrial enterprises in Guangdong Province China. In: Bhalla AS, Salvatore D (eds) Small and medium enterprises: technology policies and options. Practical Action Publishing, London Kiprianoff I (2005) Cross-border cooperation in the nordic Countries. The conditions, barriers, and efforts to tackle the challenges. http://www.essays.se/essay/1fbe268433/ Krätke S (1999) A regulationist approach to regional studies. Environ Plan A 31(4):683–704 Kudo T (2007) Border industry in Myanmar: turning the periphery into the center of growth. IDE Discussion Paper no122 Kudo T (2009) Border area development in the GMS: turning the periphery into the center of growth. ERIA-DP-2009-15

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Lennox J (2008) Crossing borders, changing worlds: eighteenth-century Nova Scotia’s Atlantic connections. J Canadian Stud/revue D’études Canadiennes 42(1):213–219 Morgan K (1997) The learning region: institutions, innovation and regional renewal. Reg Stud 31(5):491–503 Musgrave R, Musgrave P (1984) Public finance in theory and practice. McGraw-Hill Book Company, New York Niebuhr A, Stiller S (2002) Integration effects in border regions: a survey of economic theory and empirical studies. HWWA Discussion Paper No. 179 Ohmae K (1995) The end of the nation state. Harper Collins, London PRI Briefing (2006) The emergence of cross-border regions between Canada and the US. Roundtable Synthesis Report, Ottawa. http://www.policyresearch.gc.ca/doclib/SR_NAL_CrossBorder_200 605_e.pdf PRI (2006) The emergence of cross border regions between Canada and the US. Canada Institute at the Woodrow Wilson Centre and the CSIS Smart Border North Working Group Meeting, 23, Washington DC Putnam RD (1993) Making democracy work. Princeton University Press, Princeton Schuler R, Jackson S (2001) HR issues and activities in mergers and acquisitions. European management journal 19(3):239–253 Scott AJ (1999) Regions and the world economy: the coming shape of global production, competition, and political order. OUP Catalogue Wallace C, Shmulyar O, Bedsir V (1999) Investing in social capital: the case of small-scale, crossborder traders in post-communist Central Europe. Int J Urban Reg Res 23(4):751–770 Wang F, Yan T (2011) Evaluation the effect of program to revitalize border areas and enrich residents’ lives: time series analysis on the Inner-Mongolia’s Border Counties. [In Chinese.] Guizhou Ethnic Studies (4) Williams AM, Baláž V (2002) International petty trading: changing practices in Trans-Carpathian Ukraine. Int J Urban Reg Res 26(2):323–342

Chapter 9

An Institutional Economics Approach to the Construction of CBEZs

According to the Communique of the Fifth Plenary Session of the Eighteenth CPC Central Committee in 2015, China will continue to integrate its economy into the world economy, advance the Belt and Road initiative, improve the strategy of opening up, and enhance development in border and cross border economic cooperation zones. During the period from the launch of the strategy to develop the western region of China in November 2000 to the release of the said communique, development of BEZs and CBEZs have become an engine of economic development for border regions and neighboring countries. With increasing attention to these zones, active efforts have been made to pursue their development. In a forwarded document in April 1987, the CPC Central Committee and the State Council of China stressed that Xinjiang, Tibet, Yunnan and other provinces and autonomous regions should press home their location advantages in opening up to speed up economic development. The State Council then issued a few other documents in 1992 to implement the strategy of opening up border regions, approving of the opening up of fourteen border cities, including Heihe, Suifenhe, Hunchun, Manzhouli, Erenhot, Yining, Bole, Tacheng, Wanding, Ruili, Hekou, Pingxiang, and Dandong. In the twenty-first century, many provinces and autonomous regions in China, including Xinjiang, Inner Mongolia, Yunnan and Guangxi, have started construction of CBEZs, enhanced trade through border cities, and established industrial parks in border areas. After decades of efforts, China and neighboring countries are seeing strengthening cross-border economic cooperation. Currently, there is only one CBEZ in China, namely the China-Kazakhstan Khorgos International Border Cooperation Center established upon approval by the State Council in 2006. Meanwhile, by promoting CBEZs, China mainly aims to stimulate the economic development in its western region and narrow the gap between the east and the west of the country. But for most CBEZs, progress has been slow. Why is it so difficult to advance the construction of CBEZs? The most important reason is that designing a set of institutions and mechanisms to ensure the market-based operation and development of CBEZs is a challenging task. This chapter will study CBEZs using an © Social Sciences Academic Press 2022 Z. Wang and W. Wei, Cross-Border Economic Cooperation Between China and Southeast Asian Countries, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-19-0136-2_9

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institutional economics approach, trying to locate a proper model of institutions and mechanisms. It will also draw policy implications.

9.1 Literature Review CBEZs represent a way to achieve international and regional integration. Unlike international and regional integration in a general sense, CBEZs can overcome border effects. Therefore, it can be regarded as an upgraded form of international and regional integration. International and regional integration is generally pursued by market integration, functional integration and institutional integration (Soesastro 2006). At present, major theories of international and regional integration include those advocating customs unions, free trade zones, common markets, international division of labor based on agreements, and integrated development (Liang and Lu 2007). Market integration is mainly achieved through integration of product market and factor market. The theories of customs union and free trade zone, which are based on the inability of production factors to move freely between countries in a region, focus on the analysis of product market integration. The common market theory, on the other hand, allows mobility of production factors in a region and focuses on the integration of factor market. Functional integration stresses the ability of governments to adopt collective plans, actions or strategies. For the purpose of functional integration, according to the theory of division of labor based on agreements, countries with different comparative advantages should leverage their respective advantages to manufacture products, which will satisfy the consumption demand in the region while reducing the costs and improving the resource allocation efficiency. According to the theory of integrated development, in a region with a center-periphery economic system where countries vary in the level of development, for functional integration, governments of these countries must make collective decisions to ensure maximum synergy. Institutional integration requires a set of reasonable and balanced institutions based on commonalities between the institutions of the governments of countries in a region. The EU, for example, has a legal system which is different from that of general international organizations and individual countries to ensure regional integration. These theories may have different priorities, but that does not mean market integration, functional integration and institutional integration are separate issues. Instead, they are closely related. In particular, institutional integration is the foundation of market and functional integration, because reasonable institutions in a region are conducive to market and functional integration. Nonetheless, the more countries and the more complicated systems in a region, the more difficult it is to design a set of reasonable institutions. The biggest challenge in international and regional integration is thus how to design institutions suitable for regional development. That is also the case for CBEZs. Generally, the construction of CBEZs is hindered by institutional inadequacies in two respects. First, institutional inadequacies hamper the development of cross-border trade (Haggard et al. 2012). A weak institutional

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environment is rife with trade barriers, which increases the transaction costs and impedes the flow of goods in the region. Second, institutions are a crucial location advantage of host countries aiming to attract foreign investors (Bevan et al. 2004), and have a similar effect on domestic investors (North 1990). Investors from home and abroad, while making investment decisions, consider factors such as government policies, protection of intellectual property rights and political risks (Haggard et al. 2012). While CBEZs are equipped with sound institutions to attract investment, they are largely established in developing countries with a complicated institutional environment. China, for example, is confronted with institutional inadequacies, and even political instability, in its bordering countries. All these have made it more difficult to develop institutions suitable for CBEZs. For development of CBEZs, the negative border effects must be reduced. The impacts of border effects on sub-regional economic cooperation are generally categorized as shielding effects and mediating effects. Shielding effects increase the transaction costs of sub-regional cooperation and significantly reduce the frequency of cross-border economic interactions, while mediating effects are completely the opposite (Li 2005). Meanwhile, as shielding effects are man-made, but mediating effects are inherent, the former can be transformed to the latter (Tu 2015). To enable the transformation of shielding effects to mediating effects, efforts are required to address factors resulting in border effects, mainly home bias (Head and Mayer 2000), national money (Rose and Wincoop 2001) and cultural differences (Huang 2013). Most of the factors are related to institutions. A sound system of institutions can facilitate regional monetary integration, deepen cultural exchanges between countries, and weaken cultural differences and home bias. In summary, reasonable institutions are an important and essential condition for the development of CBEZs. Yet there has been little research of CBEZs using the normative analytical framework of institutional economics. This chapter fills the gap by first analyzing the problems that may arise in development of CBEZs from the perspective of the norms of institutional economics, and studying the main problems with a case study of Ruili (China)-Muse (Myanmar) CBEZ.

9.2 Analysis from the Perspective of Institutional Economics 9.2.1 Levels The development of CBEZs is dependent upon sound institutions. From the perspective of institutional economics, sound institutions should satisfy the requirements at four levels. First, embedded social contexts. Second, institutional environment. Third, governance. Fourth, resource allocation and employment. This chapter will analyze the institutional deficiencies in the development of CBEZs at these four levels. It is necessary to design relevant mechanisms to ensure that the problems

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Fig. 9.1 Normative analytical framework of institutional economics. Source Adapted from Williamson (1998)

can be solved at the second, third and fourth level (The analytical framework of this chapter is shown in Fig. 9.1).

9.2.1.1

Embedded Social Contexts

Embedded social contexts mainly include informal institutions and religion, which are usually spontaneous and hard to be changed in the short term. Informal institutions are socially shared norms that are gradually formed in long-term social interactions, including values, customs, social traditions, morals, ethics and ideologies. A CBEZ involves two countries, and there are vast differences in the residents’ values, customs and so forth. These factors may have negative impacts on the development of CBEZs. In the short term, it can be very difficult to achieve the integration of informal institutions and religions in cooperation zones. As the CBEZ continue to develop, the people on both sides of the border will deepen their cultural and economic exchanges, and the embedded social contexts on both sides will interact, causing the negative impacts on CBEZs to decrease. It is thus advisable to set aside the problems at the first level. In other words, priorities should be given to problems that can be solved in the medium and long run to promote the development of CBEZs, which will facilitate the integration of the embedded social contexts in the region. The integration of embedded social contexts will also help advance the development of CBEZs, thus forming a virtuous cycle.

9.2 Analysis from the Perspective of Institutional Economics

9.2.1.2

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Institutional Environment

Institutional environment is the foundation for development of CBEZs. A welldeveloped institutional environment can ensure clarity in property rights in the legal and economic sense. When property rights are well defined in the legal sense, there is a complete legal status and procedures for such rights, and the gains from the rights of possession and dominion are guaranteed by law. In the economic sense, the rights, responsibilities and interests must be clearly defined in economic operation and be completely and thoroughly defined and guaranteed in the operation of firms. The institutional environment is generally composed of administrative agencies, judicial agencies and policies. Administrative and judicial agencies are crucial for clearly defined property rights respectively in the economic and legal sense. Heterogeneity varies between regions in property rights, which can be adjusted with policies. Administrative agencies are responsible for ensuring clarity in property rights in the economic sense so as to guarantee the sound operation of CBEZs and the order of economic activities. Administrative agencies of CBEZs mainly includes steering committees, management committees and dispute settlement bodies. Steering committees are made up of high-level delegates of governments involved in the construction of CBEZs. As the highest decision-making body of CBEZs, they deliberate and decide on all significant matters related to CBEZs. Management committees, with equal representation of each party, is responsible for enforcement of the agreements related to CBEZs and everyday management of the zones. Dispute settlement bodies, also consisting of an equal amount of people from each party, are responsible for solving disputes in the zones. Judicial bodies guarantees clarity in property rights in the legal sense, thus regulating the behaviors of the participants and managers in CBEZs, and making sure that the zones operate according to relevant rules. Since CBEZs are not independent territories, but a combination of territories of participating countries, none of the judicial bodies of these countries has jurisdiction over the entire CBEZ. Meanwhile, CBEZs are not independent jurisdictions, and do not have independent, sound legal systems. It is thus inappropriate to establish a complete set of judicial bodies. There are two types of judicial bodies in CBEZs, respectively responsible for civil cases and criminal cases. Arbitral tribunals can be established in CBEZs for trial of civil cases such as economic and civil disputes, and discipline inspection committees can be established to supervise and regulate the behaviors of the management. For criminal cases in CBEZs, the participating countries may negotiate agreements according to the principle of personal or territorial jurisdiction. In the development of CBEZs, policies not only serve as catalysts, but also close the loopholes revealed in the process of establishing property rights. Policies target different objects, including industries, trade, finance and culture. Industrial policies are mainly aimed at stimulating the development of existing industries in CBEZs and attracting further residents. Trade policies promote the circulation of goods in the region and reduce trade barriers. Financial policies facilitate the financing of firms by reducing financing costs, creating more financing channels and so forth. Cultural

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policies promote cultural exchanges between the people, and mitigate the negative impacts of differences in culture and tradition on the development of CBEZs.

9.2.1.3

Governance

A sound institutional environment is essential to the development of CBEZs. A proper governing model is also required to ensure that the institutional environment can produce the desired effects. A proper model of governance will enable the institutions to operate efficiently, weaken resistance to the development of cooperation zones, and reduce transaction costs. To ensure a proper governing model, attention should be paid to structure, management and policies. In terms of structure, the focus should be placed on the establishment of government agencies, including administrative and judicial bodies. In terms of management, the priorities should be recruitment, management and motivation of government employees and effective control of government’s financial resources. For policies, the major concerns are what role government staff should play in formulation and implementation of policies and how policies can have wide impacts on the private sector. (1)

Establishment of government agencies

Unlike the establishment of government agencies in a country, such process in CBEZs involves at least two sovereign states. First, steering committee. The steering committee, composed of high-level delegates of the parties concerned, is the highest decision-making body of CBEZs and plays a vital role at the primary stage of CBEZs. It decides on core issues such as the areas to be included in the cooperation zone, its framework, development planning and so forth, which are related to sovereignty and thus very sensitive. In development planning, for example, due to differences in goals, culture, politics, and industrial condition, the two countries involved may have different development plans, and some may be hardly compatible. While the compatible parts can be unified through consultations, the only way to address the hardly compatible parts is concession of sovereignty. In other words, one of these two countries will have to partially abandon its development plans and follow the plans of the other country. Steering committees are generally small and permanent, and do not interfere in everyday operation of CBEZs. Second, management committee. The management committee is the executive body of CBEZs and an administrative body at the grassroots level. With equal representation of all parties involved, it is in direct contact with the private sector such as firms and consumers in the cooperation zones. The staff of the management committee have frequent contacts with the private sector, so they have a better understanding of the private sector than the steering committee. The opinions of primary-level institutions should thus be valued in formulation of specific policies and regulations. Some policies and regulations may be developed by the management committee. In any political system, the primary-level government employees have

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considerable impacts on policies (Lipsky 1980), because the effect of most government policies is not determined by politicians and high-level officials, but by officials and other people working at the primary level, such as police, tax collectors, social workers, and so forth. The latter make decisions on various vases every day, and have some discretionary power. Therefore, it is necessary to increase their participation in the policy making process in order to ensure the effectiveness of the policies. As an administrative body directly participating in the everyday operation of CBEZs, the management committee is responsible for a vast array of matters, especially at the primary stage. If the management committee is not large enough and does not have a clear division of labor, work tends to pile up, which will impede the development of the cooperation zones. Therefore, the management committee must have a proper size and a clear division of labor between its departments. But it can be difficult to define a proper size and division of labor. As CBEZs continue to develop, their management committees may also become increasingly bloated. If all departments of the management committee are permanent, it will inevitably have negative impacts. It is thus necessary to keep some flexible and non-permanent departments under the management committee. Temporary administrative bodies may also be established if necessary. Third, dispute settlement bodies. Disputes tend to occur in the development of CBEZs. Dispute settlement bodies are thus necessary. With equal representation of all parties involved, dispute settlement bodies are also primary-level administrative bodies. Considering the hosts of types of disputes, such as economic disputes, cultural disputes, disputes between firms and consumers, between firms and governments and between consumers and governments, there must be a clear division of labor between the various departments of dispute settlement bodies, as with the management committee. But these departments under dispute settlement bodies must be permanent, because there will always be various disputes. At the early stage of CBEZs, due to inadequacies of operation systems and mechanisms, there will be frequent disputes, and a considerable amount of people will be needed. With the development of the cooperation zones, however, the disputes will decrease, and government employees will become more experienced, in which case staff reduction is necessary in dispute settlement bodies. Therefore, dispute settlement bodies should be permanent, but its number of staff should be flexible. Fourth, judicial agencies. The establishment of judicial agencies in CBEZs is different from the same in a country. First, CBEZs are not independent jurisdictions, so there is no legal basis for establishment of a complete set of judicial agencies. It would also be costly. Second, the core objective of CBEZs is to pursue economic development, while the key tasks of judicial agencies are to regulate the behavior of consumers, manufacturers and administrators, and protect their personal and property rights and other rights and interests. Third, the establishment of cross-border judicial bodies must take into account the differences between countries on both sides of the border in institutional set-up. Considering the disciplinary nature of judicial bodies, a non-coordinated judicial body failing to consider the differences between cooperating countries will hardly be effective. Meanwhile, the judiciary in CBEZs should be a permanent institution with equal representation of the participating parties. As

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for the specific departments under the judiciary and whether all departments should be permanent, it remains to be explored. It is thus advisable to first establish general departments to deal with general matters at the early stage of CBEZs. As the cooperation zones make progress, additional departments may be established to handle special affairs. (2)

Management

To give full play to the role of government agencies, management efforts should focus on four areas. First, the recruitment of government staff. Second, the management of government staff and their behavior. Third, motivating government staff for best efficiency while regulating their conduct. Fourth, effective control of governments’ financial resources to avoid abuse of public resources for person purposes, misallocation of financial resources and continued increase in government spending. Contracts with government employees can be permanent or temporary. The advantages of permanent employment contracts include increasing proficiency of the staff, and their self-regulation as a result of responsibilities entrusted to them. On the other hand, due to lack of competition, permanent employees are likely to get slack, which will push the government budgets up. The effects of temporary contracts are just the opposite. It would be blind and unfeasible for government agencies of CBEZs to stick to only permanent or temporary employment. Permanent and temporary employment should be weighed in view of their strengths and shortcomings, while considering the functions, nature and characteristics of the departments and agencies in need and the stage of development of CBEZs. Take the management committee for example. Under the committee are several departments respectively responsible for the administration of industrial parks, land, cities and so forth. These departments tend to be busy at the initial stage of CBEZs, but the workloads will gradually decrease, while the work efficiency will enhance. They are consequently in great need of employees at the early stage, but need to cut staff at a later stage. In such departments, permanent employment contracts can be adopted for important places, and temporary employment can be considered for others. Staff management should make clear the obligations and rights of employees. In other words, the duties, prohibited conduct, wages and benefits of employees must be clearly defined. Currently, staff management is generally conducted by means of code of conduct and rules for reward and punishment. The advantage of such practice is that the staff can follow the code of conduct and rules, since their obligations and rights of employees are institutionalized, thus reducing the risks of erring. The code of conduct and rules may not be perfect at the initial stage, but the deficiencies will be corrected in due course. The dependence on code of conduct and rules, however, may lead to a problem. The staff tend to rigidly follow well-established regulations, which has significantly dampened their enthusiasm, resulting in low efficiency in government agencies. Incentives, including rewards and relaxation of soft constraints, are needed to motivate government staff and enhance their work efficiency. With constraints, rewards have limited motivating effect on the staff, because for some work, it is

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difficult to measure the performance and specify the reward rules. Relaxation of soft constraints (such as specific work procedures) improves employee engagement and allows them to be more flexible in their work. The efficiency of primary-level government staff, who deal with various affairs, directly reflects the efficiency of government agencies. As the matters they handle are peculiar in some way (entities have different matters), too strong constraints will inevitably weaken their motivation and reduce work efficiency. It is thus advisable to relax soft constraints. On the other hand, mandatory constraints such as legal constraints should be strengthened. Government’s financial resources are used to cover the costs of public services and the salaries of government staff. Problems in CBEZs, such as abuse of public resources for personal purposes, misallocation of financial resources, and continued increase in government spending, not only reduces the resource utilization rate and creates a heavier financial burden, but may also result in disputes between government agencies (which is different from the consequences of ineffective control of financial resources in a country). The sources of government revenue in CBEZs are tax in the zones and transfer payments of the central government of participating countries. The mistake of one party in use of financial resources will lead to decreased resource utilization rate and a heavier financial burden, and ultimately cause increase in tax and transfer payments. Such ineffective control of financial resources because of the behavior of one party will inevitably cause dissatisfaction of the other party and lead to disputes. The control of government’s financial resources has a direct impact on the development of CBEZs. But mistakes are unavoidable. To minimize the impacts of disputes, governments should strengthen mandatory constraints, have more highlevel exchanges, and determine the share of transfer payments according to that of expenditure. Mandatory constraints are hard constraints to regulate the behavior of government staff, which will to a great extent prevent abuse of public resources. With no precedents for development of CBEZs, government should hold more high-level exchanges to explore the development paths and exchange opinions on the effect of policies. In addition, the parties may decide their share in financial resources originating from the central government’s transfer payments according to the share of their expenditure. (3)

Policies

Policies are designed to influence the private sector so that they will move in the planned direction. In this regard, governments must consider two issues. One is the role of government staff related to policies, and another is how policies can have broader impacts on the private sector. Speaking of the role of government staff in relation to policies, we are mainly concerned with their engagement in policy making and implementation. First, do primary-level staff participate in policy making? Are their opinions considered by the top level? As mentioned, the staff at the grassroots level have a much better understanding of the private sector thanks to direct contacts with the latter than high-level government officials. If their views are considered in policymaking, the policies will be more applicable. Second, policy implementation is bound to encounter challenges

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and obstacles, even if the top level has fully considered the opinions of grassrootslevel staff. Due to times lags of policies, when policies start to take effect, the context for policymaking has changed or deviated. It is thus necessary to allow the grassrootslevel staff more discretion in implementation of policies depending on the specific contexts. Policies come with a scope. Introducing policies with a broader scope can reduce the costs of policy formulation and implementation. To increase the influence of policies on the private sector, it is advisable to introduce general-purpose policies and allow staff at the grassroots level greater discretion. Individual entities may have different problems in implementation of policies among entities. Policies are generally made by high-level government officials, the basic content of which is not supposed to be changed once introduced. For non-general-purpose policies, without discretion, the staff at the grassroots level, who are responsible for policy implementation, would find it difficult to make adjustment depending on the context to solve various problems. (4)

Resource allocation and employment

In CBEZs with a well-established institutional environment and the right mode of governance, optimal allocation of resources in the region is crucial to its development. Resources are allocated through the coordination of economic mechanisms such as mechanisms of dynamics, information and decision-making. Resource allocation aims to achieve optimal performance of economic entities including firms, individuals and governments. The pursuit of profits and competition are the dynamics driving resource allocation of economic entities. For firms, the dynamics come from their pursuit of profits and the need to survive in market competition. Meanwhile, timely and comprehensive access to information is essential for reasonable resource allocation, and information mechanism is required to collect, transmit, analyze and use information. The decision-making powers over resource allocation can be concentrated or dispersed, with different checks and balances, thus resulting in different decision-making mechanisms for resource allocation. The institutional environment and governance mode are closely related with the three mechanisms. First, a well-established institutional environment can protect the property rights of economic entities, and the profit-driven dynamics mechanism will create a virtuous cycle (Effective resource allocation of firms enables them to enjoy more protected interest, which stimulates firms to use more effective ways of resource allocation, thus forming a virtuous cycle of the dynamics mechanism). Second, a sound institutional environment and a reasonable governance mode are conducive to the formation of information mechanism. A sound institutional environment has proper arrangement of organizations and the right governance mode, in which all organizations are closely related. It enables increasing efficiency of information transmission and processing and improvement of the information mechanism. Third, the right governance mode will give rise to decision-making mechanisms of higher efficiency. In CBEZs with the right governance mode, the powers over resource allocation are distributed in a more reasonable way, and all economic entities cooperate with each other, so the decision-making process is more efficient.

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A crucial criterion of efficient resource allocation in CBEZs is satisfaction of marginal conditions in the zone. In economics, when three marginal conditions1 are satisfied, the efficiency of resource allocation is Pareto optimal. In an ideal situation with no externalities, it is easy to satisfy the three marginal conditions. But externalities are inevitable. In cases of external economies and diseconomies, the marginal conditions are destroyed, and the efficiency of resource allocation will not be Pareto optimal. The Coase Theorem provides an effective way to address the impacts of externalities of economic activities on resource allocation. According to the theorem, when transaction costs are very low, as long as property rights are clearly defined, it is possible to achieve optimal allocation no matter how the ownerships are allocated initially. In CBEZs, a sound institutional environment guarantees clarity of property rights, and the right governance mode reduces the transaction costs of economic activities. In other words, with sound institutional environment and reasonable governance mode, there will be an endogenous mechanism in CBEZs to enable efficient resource allocation.

9.2.2 Existing Problems Nonetheless, the development of CBEZs faces problems with institutional environment and selection of governance mode, which causes difficulties in clarification of property rights and high transaction costs in CBEZs.

9.2.2.1

Property Rights of Firms in CBEZs

For definition of property rights in CBEZs, unlike in a single country, consideration must be given to the impacts of differences between countries. Firms from countries on both sides of the border are likely to encounter different situations in cooperation zones in a legal or economic sense. To clarify property rights, the owners of property rights, their rights and responsibilities, the boundary of property rights, and the relations between property rights must be clearly defined. Different problems may arise in these aspects in CBEZs. First, the property rights ownership of private firms is clearly defined. But that is not true for state-owned enterprises where the ownership is ambiguous and the capital owners and operators are absent. Nonetheless, the problem with property rights ownership is not a major concern for most CBEZs under construction, as they host primarily private firms. 1

Marginal condition for transaction: The marginal rate of substitution for any two goods is the same for all consumers of these two goods. Marginal condition for factor substitution: The marginal rate of technical substitution of any two inputs is the same for any product using these two inputs. Marginal condition for product substitution: The marginal rate of substitution of any two goods in consumption must be the same as the marginal rate of transformation in production.

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Second, the relations between the rights and responsibilities of property rights owners mainly refer to those between the rights, responsibilities and interests in relation to possession and management. In other words, property rights owners should enforce their rights, fulfill their responsibilities, and protect their interests. Participating countries of CBEZs have their own rules about relations between rights and responsibilities, which are possibly different and even contradictory. Therefore, for clarity of the relations between rights and responsibilities in CBEZs, a major task is to coordinate and unify the rules. Third, property rights include, horizontally, the right to use, the right to earn income, the right of disposal and the right to transfer, and vertically, the right to contribution, operation and management. Property rights can also take different forms, such as value and objects. Without a clearly defined boundary between different types of property rights, it is difficult to clarify the responsibilities and interests relating to these rights, which will cause disputes over interests and responsibilities, increase transaction costs, and ultimately reduce the efficiency of resource allocation through market forces. In CBEZs, the main problem with the boundary of property rights is that the participating countries have different criteria in this regard. Even though the boundary is clearly defined in each of these countries, the lack of unified criteria will cause chaos relating to the boundary of property rights in CBEZs. Fourth, to clearly define property rights, it is important to straighten out the relations between various property rights, such as the relations between the right to contribution and management or operation. Similar to the relations between rights and responsibilities and the boundary of property rights, the relations between property rights in CBEZs are also in a state of chaos due to inconsistent rules or criteria. In summary, the problems relating to property rights in CBEZs are rooted in inconsistent rules and criteria. It is thus feasible to access the institutional environment of CBEZs according to whether there are unified criteria and rules for definition and processing of differences.

9.2.2.2

Problems with Selection of Governance Mode

The right governance mode in CBEZs ensures that the organizations and policies in the institutional environment can function effectively, thus reducing transaction costs. CBEZs represent a new form of international cooperation, which face different situations from individual countries in exploring governance modes. First, governance modes vary from country to country, and participating countries of CBEZs usually prefer modes that have been explored and have been proved suitable for their respective development. Second, a unified governance mode must be adopted in CBEZs. In governance, the top priority for sovereign states is to find a proper mode of governance suited to their respective conditions. Generally, the greater and longerterm political stability in a sovereign state, the better it engages in the exploration of a governance mode suited to its development. Firms in sovereign states with long-term political stability make constant efforts to adapt to the development of their home

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countries. While seeking a proper governance mode for CBEZs, the participating countries prefer a mode they have tried and found suitable. A major reason is that as the governance mode in CBEZs deviates from the mode in home countries, firms and countries will have to adapt, which will incur costs. For firms, when such costs exceed their expected income in CBEZs, they may not enter the cooperation zones. As a new form of international cooperation, CBEZs need unified governance modes to guarantee its construction and development. Otherwise, these zones tend to experience chaos and frequent changes in market rules and regulations, which will increase transaction costs of firms. In short, in the process of seeking and establishing a proper governance mode for a CBEZ, there is a contradiction between the preference of participating countries for modes that have been proved suitable and the need for a unified governance mode in a CBEZ.

9.2.2.3

Market Failure in CBEZs

Inadequate supply of public goods and imperfect competition are two manifestations of market failure in CBEZs. The market failure in CBEZs is different from that in individual countries. Public goods are generally supplied by the government, and some of them involve high costs. Take transport infrastructure such as highways and railways for example. The development of CBEZs is closely related to the construction of transport infrastructure. Convenient transport shortens the distance between CBEZs and markets. As more than one country is involved in the construction of transport infrastructure for CBEZs, the major concerns of CBEZs and the surrounding areas in supply of these public goods are which side should be responsible for planning, construction and funding of such infrastructure. To put it simple, essential high-cost public goods are usually in short supply. During the initial stage of CBEZs, in view of their underdeveloped factor markets and product markets, SMEs are reluctant to settle in these zones, because an imperfect market means high market risks and frequent fluctuations. Due to the lack of strong resilience, SMEs are mostly hesitant about investment in CBEZs, unless the expected returns are substantial. Therefore, in the initial stage, the firms attracted to CBEZs are primarily large firms or SOEs. As a result, large firms tend to become monopolies in CBEZs, and the market is severely non-competitive.

9.2.2.4

Distribution of Benefits

The distribution of benefits is important for the steady development of CBEZs. A fundamental motive of countries for advancing the construction of CBEZs is that they can stimulate economic development in border areas. Unreasonable distribution of benefits will result in conflicts and confrontations and hamper the steady development of CBEZs, while reasonable distribution, or, win–win distribution, will strengthen

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the relations between countries and bring the development of CBEZs onto a “fast track”. The core objective of CBEZs in distribution of benefits is to ensure increased resource allocation efficiency. Whether efficient allocation and distribution of benefits are both achieved in CBEZs has a direct impact on the growth of these zones.

9.2.3 Mechanism Design Mechanism design aims to achieve the core goal. Good mechanism design enables a virtuous cycle between allocation efficiency and benefits distribution. In other words, when problems relating to property rights, governance modes and market failure are solved, resource allocation efficiency will improve, and the total economic benefits will increase. In that case, countries will be more proactive to ensure reasonable distribution of benefits through consultations. Following the reasonable distribution of benefits, countries will accelerate their efforts to clarify property rights, which will further increase the total economic benefits. Three types of mechanisms are required to create the virtuous cycle. The first type is a mechanism to restrict the bias in favor of self-interest, which is required for unification in relation to property rights and governance modes. The second type is a compensatory mechanism to correct market failure. The third type is a set of adaptive mechanisms to encourage reasonable distribution of benefits.

9.2.3.1

Mechanism to Restrict the Bias in Favor of Self-Interest

The two countries involved in establishment of CBEZs have different criteria for clarification of property rights and governance modes, and prefer those favorable to them to serve their interests. Such bias in favor of self-interest will inevitably hamper the adoption of unified criteria for property rights and governance mode in CBEZs. It is thus necessary for CBEZs to introduce a mechanism to restrict the bias. In an individual country, the government is driven by the bias in favor of selfinterest to explore property rights institutions and governance modes suited to its conditions. But such institutions and governance mode may not be suitable for other countries involved in the establishment of CBEZs. If participating countries of CBEZs insist on using their respective criteria and mode, it will definitely hinder their cooperation and delay the development of CBEZs. A mechanism is required to restrict the bias in favor of self-interest, so that countries will not insist on their respective institutions and modes, but compromise and negotiate mutually-beneficial institutions and modes. In establishment of such mechanisms, attention should be given to the following:

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First, countries on both sides of the border are eager to explore such a mechanism, and are willing to allow it to play its role. All participating countries will benefit from the development of CBEZs, but if they refuse to compromise and insist on their respective criteria and modes, it will be difficult to develop CBEZs and a prisoner’s dilemma will ensue. On the other hand, a compromise will enable the CBEZs to develop and create a win–win situation. Second, the mechanism to restrict the bias in favor of self-interest is a mild one. All differences between the criteria for clarification of property rights and governance modes are not irreconcilable. For most criteria and modes, despite the differences, the parties involved are willing to compromise, and it is possible to achieve a win– win result. The mechanism for restricting the bias in favor of self-interest a mild and guiding one. It is not compulsory in nature. Third, the mechanism adopts a bottom-up approach. State governments may provide the frameworks of property rights institutions and governance modes for CBEZs. The specific regulations shall be developed through practice of agencies at the grassroots level. Restricting the bias in favor of self-interest does not prevent grassroots-level agencies of the participating countries parties from exploring criteria and modes suited to their respective conditions. Countries compromise on the details of criteria and modes to reach a win–win result.

9.2.3.2

Compensatory Mechanism

Short supply of public goods is an important manifestation of market failure in CBEZs and the surrounding areas. In particular, the lack of transport infrastructure has a direct impact on firm’s decision to make investment in CBEZs. The construction of transport infrastructure involves high costs. For cross-border transport infrastructure, the proportion of capital contribution must be clearly defined. The proportion is directly related to the construction of transport facilities in cooperation zones and the surrounding areas. Countries with similar economic strength may share equally the capital contribution to CBEZs, in which case a mechanism is not required to promote the supply of transport facilities. If a wide economic gap exists between the participating countries of a CBEZ, attention must be given to how to divide the capital contribution. First, according to economics theories, the country which is better developed economically should share a larger part of the contribution. In practice, however, there is no reason why the theories should be followed. Second, if the economically better developed country is willing to contribute more, how should the proportion be ascertained? We suggest designing a compensatory mechanism which will enable the economically better developed country to be willing to share a larger portion of the capital contribution. In this regard, attention should be given to the following aspects:

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First, the compensatory mechanism must guarantee a compensation for the economically better developed country for sharing a larger portion of the capital contribution. Otherwise, the mechanism will be hardly functional. The compensation can be awarded in future (for example, by giving the economically better developed country more in distribution of benefits) or in the current project (for example, by allowing the economically better developed country more positions and consequently a stronger voice in administrative or judicial bodies of the CBEZ). Second, the compensatory mechanism shall be spontaneous, with an endogenous impetus that encourages the economically better developed country to share a larger portion of the capital contribution. For example, the compensatory mechanism may include a returns-for-contribution system, which, similar to merit pay in the private sector, specifies a few ranks of the proportion of contribution. According to the system, the compensation for the economically better developed country should increase with the rank. Meanwhile, the mechanism must be enforceable. In other words, the compensation must be granted, whether it is granted in future or in the current project. In short, the compensatory mechanism can solve other problems caused by market failures in CBEZs in a way similar to addressing the short supply of transport facilities. But we cannot expect to solve all problems with a single mechanism. Efforts must be made to explore other mechanism.

9.2.3.3

Adaptive Mechanism

In comparison, the issue of benefits distribution is more complicated. As governments, firms and individuals are all involved, it is impossible to address the distribution of benefits with a single mechanism. Firms, for example, are micro entities of CBEZs. Their development contributes to the prosperity of cooperation zones. Firms are attracted to cooperation zones because they hope to gain more benefits in these zones than in other areas. Among the firms on a value chain, those from a better developed country are likely to gain substantial benefits thanks to their core technologies, while their counterparts from a less developed country may gain modest benefits. Such distribution of benefits is unreasonable, which increases the risk of conflicts. Firms from better developed countries may suffer loss in conflicts and may even leave the cooperation zone if the loss is severe. Therefore, CBEZs must consider the distribution of benefits a top priority. In a CBEZ established by two countries with an economy gap, at the firm level, the best mode of cooperation is having firms from both sides on one or several value chains. For example, firms from the better developed country are engaged in the manufacturing sector (downstream of the industry chain), while those from the less developed country are engaged in processing of raw materials (upstream of the industry chain). The raw materials processing industry presents a perfectly competitive market, in which firms from the less developed country do not have a strong voice. Under the effect of market forces, firms from the better developed country will

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push down the prices of primarily processed goods and make hefty profits. Theoretically, a restraint mechanism should be in place. The governments involved should negotiate price floors in upstream industries to guarantee profits for firms from the less developed country without significantly dampening the enthusiasm of firms from the better developed country. Meanwhile, more firms in the same industries from the better developed country will find the high profit margin of downstream industries in CBEZs attractive. But the firms that have entered the cooperation zones earlier will spontaneously form barriers to entry to prevent rivals from entering the zones. For example, the firms that have moved in earlier enjoy better reputation in the cooperation zones and have potential advantages in both factor markets and products markets. It is thus necessary to introduce an incentive mechanism to encourage more firms in the same industries to go downstream. As more firms in the same industries move into CBEZs, the downstream markets will gradually become perfectly competitive. The mechanism will help improve the distribution of benefits. The fiercer the competition in downstream industries, the greater the improvement. The above analysis shows that both restraint mechanism and incentive mechanism can improve the distribution of benefits at the firm level, although each mechanism is suitable for different stages of CBEZs. The restraint mechanism is suitable for the initial stage when the market is small, while the incentive mechanism is more suitable for the growth and late stage, when the market becomes larger. These mechanisms are collectively referred to as adaptive mechanisms. As is evident, more than mechanism is needed to address the distribution of benefits among firms. Naturally, to ensure proper distribution of benefits among all entities involved, more complex adaptive mechanisms are required.

9.3 Case Study Ruili (Yunnan, China)-Muse (Myanmar) CBEZ is in the southwest of China. Both sides of the cooperation zone are economically less developed and do not have adequate transport infrastructure. Nonetheless, the cooperation zone sees frequent border trade. China has a well-developed manufacturing industry, and Myanmar boasts abundant natural resources and cheap labor force. The CBEZ is a win–win program, as its development presses home the advantages of the areas on both sides of the border, and stimulates the economic development of border areas of both countries. Take the rubber industry for example. Myanmar, with favorable climate for extensive cultivation of rubber trees and cheap labor, enjoys comparative advantages in production factors. China has advantages in technology and market thanks to its better technologies and industries and strong demand for rubber products in domestic market. Meanwhile, judging from their development strategies, both countries attach great importance to economic development in border areas, and hope to stimulate the economy in border areas and improve the lives of the residents in these areas by

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advancing the construction of CBEZs. Governments of both countries have issued a host of policies to encourage industrial development. Considering that the development of industries with a long industry chain, such as the rubber industry, can better stimulate the economy, the government has given strong support to these industries. The following sections will analyze the relations between the rubber industry and the CBEZ from two perspectives. First, we will analyze the position of the border areas between China and Myanmar in the rubber industry in terms of technologies. Second, in view of the advantages of border areas in production factors (the supply of natural rubber) and proximity to the potential market (Myanmar has a considerable demand for tires due to extensive use of motorcycles), we will analyze the problems confronting the rubber industry in these areas and the causes of problems, with a case study of the industry chain from natural rubber to radial tire.

9.3.1 The Position of the Border Areas Between China and Myanmar in the Rubber Industry The rubber industry consists of the upstream (rubber cultivation), midstream (rubber processing) and downstream (manufacturing of rubber products). Rubber cultivation includes the planting of rubber trees and the production of field latex, cup lumps and unsmoked rubber sheets. Rubber processing includes the production of concentrated latex, standard rubber, ribbed smoked sheets (RSS), crepe rubber, rubber compound containing RSS and standard rubber, and so forth. Rubber products includes products made from latex and dry rubber. Figure 9.2 shows the composition of the rubber industry. The upstream of the rubber industry, rubber cultivation, requires low technology and produces low value added. The border areas between China and Myanmar enjoy natural advantages in rubber cultivation. As planting of rubber trees does not require great skills, only simple training is required, no matter the owners of rubber plantations decide to grow rubber trees themselves or hire people to do so. The producers of natural rubber in these areas mostly dry field latex to make cup lumps or unsmoked rubber sheets. In the midstream, i.e., rubber processing, the production of compound containing RSS and standard rubber has strict requirements for production technologies, equipment and environment. The human capital and technologies in the border areas between China and Myanmar cannot satisfy the requirements for production of such compounds. The production of concentrated rubber does not require complicated technologies, but only a small number of producers in the border areas between China and Myanmar can produce concentrated rubber. In the downstream, i.e., manufacturing of rubber products, some latex-based products, such as gloves and balloons, are produced with simple tools. As for dry rubberbased products, the production of hoses for experiment and tires requires advanced

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Fig. 9.2 Composition of the rubber industry

Fig. 9.3 Problems confronting the rubber industry in the border areas between China and Myanmar

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techniques, while rubber for footwear does not. The border areas between China and Myanmar will be able to produce similar general goods after industrial upgrading. Judging from the existing production techniques and conditions in areas along the China-Myanmar border, these areas are in a disadvantageous position in the rubber industry. They mainly host upstream and some midstream industries with low value added, and tires and other goods with high value added are not produced in these areas. But they enjoy advantages in resource endowments. In addition, the huge demand for motorcycles in Myanmar has raised the demand for tires in the border areas. As a result, these areas also have the advantage of proximity to the potential market. The following sections will analyze the problems confronting the border areas between China and Myanmar in the industry chain including natural rubber and radial tire, and the causes of problems.

9.3.2 Problems Confronting the Rubber Industry in the Border Areas Between China and Myanmar and the Causes of Problems 9.3.2.1

Problems

The rubber industry in the border areas between China and Myanmar faces three main problems in its development. First, the development of the upstream has been sluggish. Second, processing firms in the midstream and downstream are scarce. Third, the value added obtained from the midstream and downstream is low. The first problem, the sluggish development of the upstream, is attributed to two factors. First, Myanmar has encountered considerable resistance trying to sell its raw rubber to the border areas of China. Second, the raw rubber from Myanmar is mostly sold to the coastal areas in eastern China after being dried and canned. Due to the lack of an extensive market and the high transport costs incurred from selling to localities far away, growers in Myanmar are reluctant to grow rubber trees, resulting in the sluggish development of the upstream. The second problem is the shortage of processing firms in the midstream and downstream of the rubber industry, including manufacturers of rubber compounds, components and tires (including radial tires), and vendors of tires. Currently, in RuiliMuse CBEZ and its surrounding areas, there are many tire sellers, but no firms are engaged in tire manufacturing. This phenomenon has aggravated the difficulties in selling natural rubber in border areas and delayed the development of the upstream. An additional problem is the low value added obtained by the Ruili-Muse CBEZ from the natural rubber industry. For one thing, there are no mid- or downstream firms in the zone. For another, upstream firms sell low-price raw rubber to the coastal areas in eastern China, which incurs high transport costs due to great size.

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Causes of the Problems

To address the problems, it is imperative to improve the institutional environment and mechanism design. Sound institutional environment and mechanism design enable endogenous development of the rubber industry. In other words, an endogenous driving force will enable the rubber industry to grow according to market rules. For improvement in institutional environment and mechanism design, it is necessary to analyze the factors that have resulted in sluggish development of the rubber industry in China-Myanmar border areas. First, property rights should be the primary concern in cross-border economic cooperation. This principle also applies to the development of the rubber industry in China-Myanmar border areas. These areas, especially the border areas of Myanmar, have relatively poor institutional environment and lack the necessary laws and regulations. Firms in the rubber industry will face a major challenge in defining property rights in their pursuit of development in these areas. As China and Myanmar have only started their efforts to construct Ruili-Muse CBEZ, the laws and regulations about property rights and the establishment and operation of government agencies in the cooperation zone are still under discussion. In the context, controversies may arise over property rights. Firms in the rubber industry are profit-driven. Despite high profit margin in the cooperation zone, without legal protection of property rights, firms will not choose to move into the zone. Clearly defined property rights are thus a prerequisite for development of the rubber industry (Table 9.1). Second, trade barriers raise the transaction costs of the rubber industry. Take China’s import tariff on natural rubber as an example. Since 2007, China’s import tariff on TSNR, including standard rubber, latex and concentrated latex has decreased and then increased. Meanwhile, rubber price has plunged: the price of natural rubber futures dropped from 43,500 yuan/ton in December 2011 to 10,540 yuan/ton in late December 2015. Despite a rising trend since 2016, the price of natural rubber is not attractive to growers. The fluctuation of China’s import tariff rates has an impact on the expectation of growers in Myanmar, thus affecting their decision on whether to expand the cultivation. Latex is first harvested seven to eight years after rubber trees are planted. Most of the rubber in Myanmar’s border areas is sold to China. Fluctuation of China’s tariff rates will cause Myanmar growers to be reluctant to expand the planting area. In addition, the declining price of natural rubber leads to further decrease in the supply of natural rubber in Myanmar. Table 9.1 Import tariff rates for technically specified natural rubber (TSNR) in China

Year

Tariff rate (The lower one is applied)

2007–2009 20% (Ad-valorem tax) or 2600 yuan/ton (unit tax) 2010–2012 20% (Ad-valorem tax) or 2000 yuan/ton (unit tax) 2013–2014 20% (Ad-valorem tax) or 1200 yuan/ton (unit tax) 2015-

20% (Ad-valorem tax) or 1600 yuan/ton (unit tax)

Data source http://online.customs.gov.cn/

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Third, with no sufficient midstream and downstream firms in the rubber industry in China’s border areas, Myanmar’s natural rubber has poor sales. Currently, to find new markets, Myanmar has been drying and canning their natural rubber and selling to the coastal areas in eastern China, which incurs very high transport costs. In view of the worsening market environment of natural rubber due to poor sales, Myanmar is reluctant to expand the upstream of the rubber industry. Mid- and downstream firms in the rubber industry are reluctant to make investment in China-Myanmar border areas for three reasons. First, due to limited quality of labor force in these areas, tire companies have difficulty finding skilled workers and technological personnel. Second, power supply, transport facilities and other infrastructure are not well developed. The rubber industry, which is high energy consuming, is particularly dependent on power supply. The supply of power and voltages in border areas cannot satisfy the requirements of downstream firms. Meanwhile, it will take a long time for Chinese tire companies to develop the market in China-Myanmar border areas by measures such as word of mouth and establishing sales channels, while the lack of essential transport facilities will directly hinder the process. Moreover, Chinese firms may not establish manufacturing facilities in border areas due to concern about existing overcapacity. The underlying logic is that with well-developed transport infrastructure, even though they have not developed a new market in these border areas, Chinese firms can cope with overcapacity by exporting; without adequate transport facilities, they will face difficulty addressing overcapacity due to high transport costs. Third, the border areas between China and Myanmar cannot satisfy the requirements for the manufacturing of radial tires, including the manufacturing of components and assembly of finished products, in terms of techniques and equipment.

9.3.3 Policy Implications To attract firms in the rubber industry, Ruili-Muse CBEZ must consider the above factors. A sound institutional environment to ensure clarity of property rights in CBEZs is crucial to all industry chains. Considering the long process and a host of issues involved in exploration of an institutional environment, it is difficult to produce specific recommendations on policies. Nonetheless, we can draw the following policy implications: First, at the current level of tariffs, local governments in China may consider granting subsidies to tire companies to encourage their steady purchase of rubber from Myanmar. China has a strong demand for natural rubber and the domestic output cannot satisfy the demand. As shown in Fig. 9.4, from 2002 to 2015, on average, eighty percent of China’s annual consumption of natural rubber is based on imports, indicating a huge supply gap. Granting subsidies to Chinese firms to encourage purchase of rubber from Myanmar will be a win–win measure: Myanmar will expand rubber plantations, and China will be able to fill the supply gap of natural rubber.

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Fig. 9.4 Output and consumption of natural rubber in China

Second, China and Myanmar may encourage the private sector or government agencies to establish vocational schools in border areas to help local residents develop vocational skills, thus improving the quality of labor force in border areas. The improvement in the quality of labor force will have significant positive impacts on the rubber industry and other industries. In addition, efforts should be made to strengthen people-to-people exchanges in border areas and relax the requirements for work visa so that both sides can benefit from the vocational schools in border areas. Third, China may take the lead in infrastructure improvement to attract mid- and downstream firms in the industry chain of natural rubber of radial tire to move into CBEZs. This is based on three considerations. First, high costs are involved in supply of public goods such as power supply and transport facilities. Second, Chinese firms have stronger dependence on power and transport facilities than their counterparts in Myanmar. Third, in addition to the local market, a large potential market of tires is in China. Of course, due to the strict requirements for the manufacturing of components and assembly of finished products in the manufacturing of radial tires, is will be difficult for CBEZs to attract these firms in the short to medium term. The production of rubber compounds, on the other hand, does not have strict requirements. In addition, compared with raw rubber, rubber compound sheets are smaller, more expensive, and easier to transport. Therefore, infrastructure improvement in CBEZs will help attract manufacturers of rubber compounds, which will enable the cooperation zones to gain more benefits from the industry chain including natural rubber and radial tires.

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References Bevan A, Estrin S, Meyer K (2004) Foreign investment location and institutional development in transition economies. Int Bus Rev 13(1):43–64 Haggard S, Lee J, Noland M (2012) Integration in the absence of institution: China-North Korea cross-border exchange. J Asian Econ 23(2):130–145 Head K, Mayer T (2000) Non-Europe: the magnitude and causes of market fragmentation in the EU. Weltwirtschaftliches Archiv 136(2):284–314 Huang X, Qu A, Li T (2013) Gap in bilateral trade: a new understanding of cultural heterogeneity [In Chinese]. J Int Trade no 9 Li T, Jiang H (2005) The research on mechanism of sub-regional economic cooperation: an analyzing framework from the view of border effect [In Chinese]. Northeast Asia Forum, no. 3 Liang S, Cheng X (2007) A review of the literature on international and regional economic integration [In Chinese]. Inquiry Econ 1 Lipsky M (1980) Street-level bureaucracy. Russell Sage Foundation, New York North DC (1990) Institutions, institutional change and economic development. Cambridge University Press, Cambridge Rose AK, van Wincoop E (2001) National money as a barrier to international trade: the real case for currency union. Am Econ Rev 91(2):386–390 Soesastro H (2006) Regional integration in East Asia: achievement and future prospects. Asian Econ Policy Rev 1(2):215–234 Tu N, Luo Y (2015) A review of the research of border effects in economic integration. Inquiry Econ 10

Chapter 10

Conclusions and Policy Implications

This book examines the theories, functions and development models of cross-border economic cooperation, and conducts in-depth research of some crucial issues in promoting cross-border economic cooperation in Yunnan in southwest China, a border area inhabited by multiple ethnic groups. The following conclusions and policy implications are drawn from the research.

10.1 Promoting Cooperation with Foreign Countries in Border Areas Cross-border economic cooperation boosts cross-border trade and attracts foreign investment, thus promoting regional economic development, enhancing international economic cooperation, and improving local development capacity. In other words, cross-border economic cooperation will stimulate regional economic development in the following aspects. First, the establishment of CBEZs will significantly reduce transaction costs by mitigating border effects, thus promoting cross-border trade. In China’s pursuit of the Belt and Road initiative, the international trade in the Silk Road Economic Belt will inevitably be hindered by borders. An important way to reduce border effects is to establish CBEZs. Second, the local resource advantages of border areas and the complementary production factors on both sides of the border are the foundation for these areas to attract investment. CBEZs not only adopt preferential policies to attract investment from outside the zones, but also serve as production bases of investors. They are platforms for local firms to integrate into the regional or global industry chains. CBEZs also facilitate optimization of industrial structure, prevent disorderly competition between neighboring countries in industrial development, and promote better division of labor between neighboring countries. © Social Sciences Academic Press 2022 Z. Wang and W. Wei, Cross-Border Economic Cooperation Between China and Southeast Asian Countries, Research Series on the Chinese Dream and China’s Development Path, https://doi.org/10.1007/978-981-19-0136-2_10

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Third, CBEZs can transform peripheries to cores to foster new economic growth poles. CBEZs are in essence geological concentration of government-driven firm clusters, with inherent advantages of effective infrastructure, quality services, sound business environment, and minimum bureaucracy. The network of stakeholders, industrial clusters and related industries in CBEZs will ultimately enhance the competition between firms in the region, the formation of economies of scale, and the competition with other agglomerated economies. This will promote research and development and bring about new techniques and services. Innovative and efficient clusters will thus drive regional growth. Fourth, CBEZs promotes regional peace and stability. In an era of rapid economic transition, a clear common understanding of economic issues among states and nations is that they will gain more materially by working together than acting alone. Cross-border economic cooperation will extend to include political cooperation. The prosperity of economic cooperation zones will not only maximize economic welfare, but will also ultimately lead to peace and prosperity in these regions.

10.2 Promoting Cross-Border Trade An analysis of the cross-border trade of Yunnan, China and its neighboring economies, Vietnam, Laos and Myanmar, shows that in Yunnan’s efforts to promote cross-border trade, the strongest constraint is from Laos, and the weakest is from Vietnam. In the context of the state policies for opening up border areas in China, it is advisable to pursue cross-border cooperation step by step based on the availability of infrastructure and the strength of constraints in relevant countries. The impacts of home bias can be mitigated by using a lingua franca on both sides of the border, enabling the regionalization of the Renminbi, strengthening cultural exchanges, and enhancing investment and consumption capacity of the private sector. In its efforts to promote cross-border trade with Laos, Myanmar and Vietnam, Yunnan, China may establish language training centers in areas with a concentration of cross-border trade activities, and press home the advantage of using a lingua franca on both sides of the border. Efforts should also be made to promote the Renminbi settlement in these areas and expand the use of the Renminbi in settlement. Regarding the cross-border trade between Yunnan, China and Laos, in view of the limited trade driven by market in Laos, the governments on both side of the border need to strengthen government-led economic activities and encourage exchanges between civil organizations to promote cultural exchanges across the border, raise Lao residents’ income, and improve the investment and consumption capacity of the private sector. To help firms encountering difficulties in customs clearance of goods and raw materials, the central governments should coordinate their policies and introduce a series of comprehensive and applicable customs clearance policies to reduce transaction costs in cross-border economic activities.

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In addition, considering the different and even conflicting trade policies on both sides of the border, efforts are needed to strengthen bilateral high-level exchanges and consultations on foreign trade policies to reduce the barriers to cross-border trade.

10.3 Attracting Investment from Outside the Region As shown in a survey of the investment behavior of firms in Honghe, Xishuangbanna, and Dehong of Yunnan, China, and Lao Cai of Vietnam, firms making investment in these areas are primarily resource intensive; the bulk of the investment in these areas is from domestic firms, while FDI is rare; these areas mainly import resources and export finished goods in cross-border trade, and have under-developed industry chains. Research shows a strong correlation between investment motives of firms and incentive policies and infrastructure in areas receiving the investment. Underdeveloped transport facilities are a major constraint on economic development in border areas. Most firms are concerned with policies and measures, such as policies about preferential tax and land use, because such policies directly reduce investment and production costs. Many firms have difficulty financing and obtaining loans from local banks and other financial institutions. Due to poor quality of labor force in these areas, firms also have great expectation for support in labor training. Apart from infrastructure, logistics and storage facilities also need improvement. To help border areas attract investment, attention should be given to the following: First, the investment environment should be improved by ensuring the availability of resources, increasing market potential, and improving governance, with a focus on improving infrastructure, including transport facilities and public utilities, especially logistics services. Second, except for investment incentive policies introduced for development of western China, the border areas of Yunnan, China have no special incentive policies. Due to underdeveloped economy, these areas have attracted less investment than other areas in western China. It is necessary to introduce investment incentive policies that give full consideration to the strengths of border areas. Third, CBEZs have considerable comparative advantages in easy, convenient, and low-cost cross-border flow of goods, labor and other production factors. But firms can have difficulties in customs clearance of goods and raw materials. Countries need to coordinate their policies and introduce comprehensive and applicable customs clearance policies to reduce transaction costs in cross-border economic activities. Fourth, the quality of labor force is a major concern for firms making investment in border areas. In addition to adopting policies to attract talent, it is also necessary to improve the quality of local human capital. Otherwise, the shortage of talent will be a constraint on the development of CBEZs. Governments should also set up education and training organizations in the zones. Alternatively, governments may encourage firms to provide training, and adopt preferential policies for competent firms.

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Fifth, as the financial industry in border areas is underdeveloped, most firms rely on their own capital for investment and rarely get financing support from local financial institutions. Border areas also lack currency settlement agencies, and a great number of informal institutions are involved in cross-border trade. Authorities must improve the fiscal and financial services for firms. It would be preferable if the government could bring some strategic financial enterprises into CBEZs to provide firms in the zones with financing, insurance and currency settlement services.

10.4 Promoting Industrial Development in Cross-Border Areas Currently, Yunnan, China, Vietnam, Laos, and Myanmar do not have well-developed industries. They also face difficulty attracting high-quality manufacturing and processing enterprises. Considering the dominant position of resource-based industries in the industrial structure of these countries and regions, industrial policies are required to guide the development of industries in the long term. Research reveals strong industrial linkages between Yunnan, China and its three neighboring economies, Vietnam, Laos and Myanmar, which provides a solid foundation for their industrial cooperation. The strongest linkage is found in the mining industry, and the weakest is in the financial industry. In addition, these places have different comparative advantages, all of which are closely related to their factor endowments. Research also finds that resource-based industries and labor-intensive industries in these places are highly complementary, while their complementarity in capital-intensive industries and technological manufacturing industries is rather weak. In view of the findings, Yunnan, China should strive to promote the development of agricultural and resource-based industries to advance cross-border economic cooperation. The following measures may be considered: First, fostering cross-border pillar industries Considering that the economies involved have great similarity in natural endowment and the level of technological development, in selection of leading industries, CBEZs should focus on complementary resource and labor-intensive industries with comparative advantages and strong linkages, such as agricultural products, non-ferrous metal smelting and pressing, mining, textile industry, food processing industry and so forth. They must make the most of the comparative advantages and catalytic effect of pillar industries to promote cross-border economic cooperation. Second, building cross-border industrial cooperation belts CBEZs should give priority to industries with advantages. Specifically, China (Yunnan)-Vietnam CBEZ should focus on agricultural products, non-ferrous metal smelting and pressing, transport facilities manufacturing, and textile industry, China (Yunnan)-Laos CBEZ should focus on agricultural products, mining, non-ferrous

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metal smelting and pressing, and China (Yunnan)-Myanmar CBEZ should focus on agricultural products, textile industry, non-ferrous metal smelting and pressing. This will bring the industrial cooperation to a higher level and create clusters of industries with advantages in which the industries with advantages play a dominant role. The clusters should boast a complete system of industries and significant advantages from economies of scale, which will have a strong catalytic effect. Third, developing cross-border industry chains Yunnan, China and Vietnam, Laos and Myanmar should accelerate the reorganization of industries such as agriculture, forestry, textile industry and mining industry across regions, and improve resource allocation in these regions. The division of labor must be improved to strengthen the horizontal and vertical linkages between industries and expand production. Efforts are also required to foster industrial clusters with regional advantages and establish mechanisms for regional industrial cooperation to better integrate the development of the countries involved into the international division of labor.

10.5 Impacts of Cross-Border Economic Activities on Regional Economy Cross-border economic cooperation will boost cross-border trade, attract more investment from outside the region concerned and increase the investment in infrastructure, thus stimulating the regional economy. This book has studied the following three scenarios: • Scenario I: Government investment increases by 100% and firm investment and cross-border trade including imports and exports increases by fifty percent; • Scenario II: Government investment increases by 150% and firm investment and cross-border trade including imports and exports increases by 75%; • Scenario III: Government investment increases by 200% and firm investment and cross-border trade including imports and exports increases by 100%. Concerning the impacts of government investment, firm investment and crossborder trade on employment, tax and value added of Yunnan, China, research shows that: First, firm investment and exports have significant multiplier effect on employment, tax and value added, which indicates a considerable potential for investment and cross-border trade in border regions. Import and export have contrary, major impacts on employment, though the absolute values of the impact multipliers are the same. Government investment and firm investment both have positive impacts on employment, but the impact multipliers are modest or minor. The impacts of per unit of import, export, firm investment and government investment on tax are roughly the same, but vary in the nature of impacts: import, export and government investment

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have strong induced impacts, and firm investment has strong direct impacts. Import and export have contrary impacts on value added, though the absolute values of their impact multipliers are the same. Concerning the impacts on value added, firm investment has the strongest direct impacts, and export and government have considerable indirect and induced impacts. Second, trade and investment, examined in terms of the impacts per unit, have significantly positive impacts on regional economy. When they are evaluated against the regional economic aggregate, however, their impacts on the regional economy are rather limited due to inadequate investment and cross-border trade in border regions. With Yunnan’s GDP of RMB 1172 billion in 2013 as the base, the contribution of the increase in cross-border trade and investment to Yunnan’s GDP in three scenarios is respectively 0.42%, 0.64% and 0.85%. Moreover, the contribution is primarily attributed to cross-border trade, while firm investment and government investment account for only a small proportion. Third, import and export have contrary impacts on employment and value added, and the multipliers of such impacts are roughly the same. Nonetheless, thanks to Yunnan’s surplus in cross-border trade and the different industrial structures of its imports and exports, cross-border trade has significantly positive impacts on employment and value added of the province. In view of the above-mentioned impacts, the following factors should be considered in policy-making to promote cross-border economic cooperation: First, the high influence coefficients of electric machinery and equipment manufacturing, artwork and other manufacturing, and construction and the high sensitivity coefficients of transportation and warehousing, metal smelting and pressing and chemical industry show that these industries have strong linkages with other industries and that their development will have a great impact on the economic development of the region. Second, the potential for investment and cross-border trade in border regions remains to be unleashed. Measures, such as improving transportation and logistics facilities and other infrastructure and bilateral consultations, should be taken to further reduce barriers to cross-border trade, so that cross-border trade will better fuel Yunnan’s economic development. Third, currently, the size of firm investment is small, and only a limited number of industries are receiving such investment. Investment policies should aim to promote both increase in investment and industrial diversification, thus enhancing the indirect and induced impacts of firm investment. Fourth, import, export and government investment should be integrated and measures should be taken to encourage firm investment. The government may establish processing centers of imported and exported products in border regions, which will increase firm investment and lower the transaction costs of imported and exported raw

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materials and primarily processed products. Meanwhile, since government investment has strong indirect and induced impacts on regional economy, the government may encourage firms in industries related to construction, such as the building materials industry, to make investment in border regions.

10.6 Establishing the Foundation of Institutions for CBEZs An underdeveloped institutional environment is rife with trade barriers, which increases the transaction costs and impedes the flow of goods in the region. While considering investment in CBEZs, investors take into account factors such as government policies, protection of intellectual property rights and political risks. A sound institutional system is an important location advantage that appeals to investors. Therefore, improvement of the existing institutions and establishment of the essential new institutions are crucial to advancing the construction of CBEZs. A vast of variety of institutions are involved in establishment of CBEZs. In this book, we propose the following measures from the perspective of economics, aiming to clarify property rights, reduce transaction costs and increase economic efficiency: First, improving the institutional environment The institutional environment consists of administrative agencies, judicial agencies and policies. Administrative and judicial agencies are crucial for clearly defined property rights respectively in the economic and legal sense. Heterogeneity varies between regions in property rights, which can be adjusted with policies. To this end, the governments on both sides of the border need to establish a unified framework of institutions that fits with their political systems through consultations. Second, adopting the right governance mode Efforts are required in three areas, i.e., structure, management and policies, to ensure the right governance mode. In terms of structure, the focus should be placed on the establishment of government agencies, including administrative and judicial bodies. In terms of management, the priorities should be recruitment, management and motivation of government employees and effective control of government’s financial resources. For policies, the major concerns are what role government staff should play in formulation and implementation of policies and how policies can have wide impacts on the private sector Third, with a sound institutional environment and the right governance mode, optimal resource allocation in CBEZs is crucial to their development. Resources are allocated through the coordination of economic mechanisms such as mechanisms of dynamics, information and decision-making. The objective of resource allocation is to enable optimal performance of economic entities including firms, individuals and governments. The pursuit of profits and competition are the dynamics driving resource allocation of economic entities, and relevant mechanisms

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are needed to stimulate and ensure such driving forces. Meanwhile, timely and comprehensive access to information is essential for reasonable resource allocation, and information mechanism is required to collect, transmit, analyze and use information. As the decision-making powers over resource allocation can be concentrated or dispersed, with different checks and balances, it is necessary to establish various decision-making mechanisms for resource allocation.

10.7 Major Challenges in Establishment of CBEZs The performance of CBEZs is affected by the nature, structure and dynamic development of the economies on both sides of the border. It is also under the influence of the governance modes in the zones and the differences between the governance modes of the economies involved. In terms of politics, the policies, attitudes, political situation and history of countries play an important role in guiding the economic development in cross-border zones. The differences between the economies on both sides of the border in currency, laws and regulations, tax, industrial system and policies may hinder cross-border economic cooperation. That being the case, the establishment of CBEZs will be achieved through learning by doing. It requires the consultation and cooperation among governments, and the participation of both the public and private sectors. Specifically, major challenges confronting China and other GMS countries in the establishment of CBEZs include: First, difficult conditions for establishment of CBEZs The development of the border areas between China and Vietnam, Laos and Myanmar has been hindered by weak economic foundations and limited self-development capacity. They face problems such as the lack of transport facilities, underdeveloped infrastructure, fragile ecological system, low level of industrialization and a huge population living in poverty. They have been able to attract investment thanks to their advantages in location and resources (Wang et al. 2010) These areas enjoy locational advantages as land passages connecting China and Southeast Asian countries, and benefit from their abundant mineral and biological resources. In view of such comparative advantages, investors are mainly engaged in trade and preliminary processing of raw materials in these areas. Under such circumstances, the economic benefits of CBEZs is dependent upon the self-development capacity of these areas. The Maputo Development Corridor in the border areas between South Africa and Mozambique, for example, has played an important role in improving trade and investment environment and promoting regional integration, but its contribution to economic development and poverty reduction has been insignificant due to inadequate development capacity of the areas concerned. The efforts to improve development capacity should focus on the development of human capital and social capital. To improve human capital, the strengths and deficiencies of cross-border areas should be considered. The government needs to

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combine the demand structure for human capital with the efforts to enhance industrial support capacity and take measures to guide and support the cultivation of human resources. In CBEZs between China and Vietnam, Laos and Myanmar, an important reason for the failure to attract high-quality investment from outside the zones is the lack of human capital. Apart from boosting human capital, efforts are also required to involve different stakeholders in the construction of CBEZs to promote the development of social capital. An important feature of social capital is formal and informal networks of interpersonal communication and exchange, such as neighborhood associations, business associations, cooperatives, choral societies, sports clubs, and mass-based parties (Putnam 1993). Social capital plays an important role in overcoming information asymmetry and raising economic efficiency. In particular, it improves the ability to attract investment and strengthens intra-industry trade relations, thus facilitating the formation of cross-border industry chains. In addition, considering the impacts of border effects in cross-border areas, social capital may be more important than physical or human capital for political stability and government effectiveness. In the cross-border areas between San Diego of the U.S. and Tijuana of Mexico, for example, due to the absence of agencies coordinating spatial policies, a lot of cross-border activities have been conducted by the commercial sector and public institutions. Second, a need for policies that promote the establishment of CBEZs and attract investment from outside the zones Market is not always functional. The development of CBEZs is affected by economic factors such as industries, trade and investment and social and political factors such as sovereignty, security, culture and institutions. Governments or states thus need to take actions to correct market failures (Musgrave and Musgrave 1984). The poor quality of investment in BEZs indicates that the cross-border areas between China and its neighboring countries in the southwest do not have sufficient advantages to attract high-quality investment, and that the existing incentive policies in these zones have only played a limited role in attracting investment (Wang et al. 2010). In addition, considering that the economic policies of the countries on both sides of the border are different in many ways, the policies in CBEZs must be compatible with their existing policies and attend to the economic interests of both countries. Policymaking may follow the principles proposed by Amin in 1999. First, policies should be targeted at the whole economy or industrial networks, not individual firms. Second, procedural and recursive behaviors should be encouraged to secure strategic vision, learning and adaptation. Third, policies should be targeted at a plurality of organizations besides state and market institutions. Fourth, the institutional thickness should be enhanced by encouraging enterprise support systems, political institutions and social citizenship. Fifth, policies must be context-specific and sensitive to local path-dependencies.

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Third, challenges for institutional arrangements The performance of CBEZs is subject to the impacts of differences in culture, society, politics and economy. The differences in economic system, level of economic development, social system, language and culture, and inadequate knowledge of the potential partner’s attitudes and behaviors can lead to mutual distrust, thus hindering crossborder cooperation (Krätke 1999; Melnikas et al. 2006). An international institutional arrangement is needed to reduce the impacts of such differences. CBEZ is an institutional arrangement that requires a relatively high degree of formalization, centralization, and delegation. Formalization is fundamental to international institutional arrangements (Keohane 1989). An institutional arrangement with a high degree of formalization enables CBEZs to be formal and independent entities, which reduces the costs of cross-border transactions. Centralization refers to the administration of collective activities through a concrete and stable organizational structure and a supportive administrative apparatus (Abbott and Snidal 1998). Centralization in CBEZs is crucial to effective administration and decision-making. Otherwise, CBEZs will become mere expansion and combination of BEZs. A high degree of formalization and centralization avoids conflicts arising from political, economic and cultural differences at the borders. For example, the policies of CBEZs should be of mutual benefit to the participating countries. The effective operation of CBEZs also requires a relatively high degree of delegation. Delegation means that a third party is granted authority to implement, interpret, and apply the rules, to resolve disputes, and possibly to make further rules (Abbott et al. 2000). Table 10.1 shows the relations between different institutions and the three dimensions, and the institutions adopted in different stages of CBEZs. Apparently, a mature CBEZ should be a general, formal international organization. Since CBEZs are established by two neighboring countries, they will not evolve into supranational organizations like the EU. As the administrative activities of a lot of agencies on both sides of the border are involved in the operation of CBEZs, a high degree of delegation will reduce bureaucracy, thus bringing down transaction costs. A sound international institutional arrangement is required to ensure a high degree of formalization, centralization and delegation, which shall be made through consultations between neighboring countries interested in cooperation. Fourth, transfer of sovereign powers Transfer of sovereign powers means sharing, not renunciation, of sovereign powers. Despite the benefit of lower transaction costs, transfer of sovereign powers remains a sensitive issue. Countries may not be willing to establish CBEZs because of concerns about national security and sovereignty. For example, although the economic zone at the U.S.-Mexico border has enabled fast growth in employment, output, export and foreign direct investment, the primary concern is still sovereignty, while crossborder economic development remains a low priority on the political agenda of the two countries. To reduce such costs while transferring minimal sovereign powers, it is necessary to examine the causes of cross-border transaction costs.

10.7 Major Challenges in Establishment of CBEZs

217

Table 10.1 Basic international institutional arrangements and the stages of development of CBEZs Degree of formalization

Degree of centralization

Degree of delegation

Institution and the stage of development of CBEZs

Low

Low

Low

Informal agreement (stage I)

High

Low

Low

Self-enforcing agreement (stage II)

High

High

Low or medium

General, formal international organization (Stage III)

High

High

High

Supernational organization

Source Tian (2005) (adapted)

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