A Blueprint for Growth

June 18, 2010 by Paul Wong and Heidrun Haug

In China sind die meisten Betriebe verstaatlicht. In Chongqing ist das ein Erfolgsmodell.

State-owned Enterprises are common practice in China.

How does the Chongqing model work?

Cui Zhiyuan: Initially, the city itself was an economic disaster. The region is surrounded by mountains, so ground transportation was almost impossible for decades. The Chongqing model explains how this city became China’s fastest growing city during last year’s financial crisis, despite its slow start in economic reform.

The key factor for this success, in my opinion, is a combination of good government policy and investment. This significantly increases overall business activity, which in turn attracts additional private sector investments. The Chongqing model shows that large investments by the local government through state-owned enterprises attracted increasing amounts of private sector investment – generating jobs and raising land values.

So, the local government attracts investment?

Cui Zhiyuan: Yes, but that’s not all. A major reason why this model is effective is the government’s ability to use state-owned enterprises to strategically invest in certain industries. Actually, this type of investment is seen as a China-specific method of controlling investment. However, other counties can also do this, especially developing countries that face the same kind of problems as Chongqing.

How do these investments support local growth and consumption?

Cui Zhiyuan: China’s economy has learned to follow these state-owned enterprises. Here’s a simple example: Because of China’s size and structures, one or two large-scale raw material producers – such as steel companies – can employ a workforce that is equivalent to the population of a midsize town in other countries. This kind of factory and its workers will need a large chain of services, including postal, telecommunications, media, and real estate. The majority of these services are also state owned.

The chain will continue until it encompasses small businesses, such as shops and entertainment. By this stage, a number of banks would have taken full advantage of this area, and a brand-new financial chain would have been established. Foreign investors would have also picked up the growth in the local region and invested once again. This further pushes up key economic figures, such as land prices. Over the years, China has reproduced this development miracle over and over again. The system is stable and has not failed yet.

What role do technology and IT play in Chongqing’s rise?

Cui Zhiyuan: This is where geographical disadvantages in Chongqing can be disregarded. Today, when we talk about the manufacturing of complex technology, we are no longer talking about microwaves and washing machines. We are talking about a race to produce sophisticated parts of a larger product, such as a certain drive or chip for the latest laptop model or mobile phone. There comes a point where these parts or technologies are too precious to be transported by road or rail, and aviation comes into the picture.

 

 

 

So Chongqing’s location can almost be disregarded?

Cui Zhiyuan: In the past, we talked about horizontal manufacturing, where countries or regions would compete for the right to manufacture an entire product. But in today’s competitive market, it is more about vertical integration. Each individual part is produced at the most effective locations and transported to another location for completion. Chongqing also encourages its businesses to focus development on products for local markets as well as on Internet-based products, including software and telecommunications.

Could you give an example?

Cui Zhiyuan: Let’s take Hewlett-Packard. It moved a large section of its Asia-Pacific headquarters from more developed cities such as Singapore and Hong Kong to Chongqing. But prior to moving, it had smaller test locations to assess the labor force and the effectiveness of conducting business in these local areas.

HP started with simple operations, such as call centers, which could be monitored easily. Then it moved its advanced operations to Chongqing. Start-up companies with their innovative ideas are also important. Chongqing has opened up an IT Science Park where young companies can grow.

How can the Chongqing model act as a blueprint for other regions in China?

Cui Zhiyuan: China only has a few cities on the eastern coast that can be considered developed in an economic sense. Chongqing still is in a developmental phase. The Chongqing model is significant because it focuses on how fast this region was able to develop without relying heavily on exports and foreign investments in the way Shanghai and Guangzhou do. There are a number of regions in China that are growing slowly and have the potential to implement a similar model.

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