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EDZs key to boosting producer services industry

XI QIANGMIN | 2020-12-18
(Chinese Social Sciences Today)

A worker moves parcels at a smart logistics base for Chinese e-commerce retailer Suning Group, in Nanjing City, East China's Jiangsu Province. Photo: IC


As the most location-oriented industrial policy in China, the establishment of economic development zones (EDZs) is in essence government-led industrial clusters in designated geographical spaces driven by tax incentives or subsidies. These clusters produce external economies and create more employment opportunities and economic output. 

As demand for producer services grows due to the evolution of the industrial structure and the transformation and upgrade of the manufacturing sector, the industry is bound to have a deeper impact on the expansion of EDZs. In turn, the rapid development of a high-quality and efficient producer services sector will be an important driving force for Chinese enterprises to participate in the division of labor in the international value chain, promote the transformation and upgrade of industrial structures, and optimize regional spatial distribution. 
 
Going forward, the replenishment of producer services in EDZs is of great significance to realize high-quality economic development in China.
 
High-quality development zones
EDZs are not a Chinese creation, but China has achieved tremendous success with this economic tool. China's first batch of national development zones were established in 1984 and by 2018, China had 552 national-level and 1,991 provincial-level development zones. Few can deny the significance these areas have had in building China into a global economic powerhouse. For more than 30 years, China's EDZs have played a positive role in attracting foreign investment, promoting modern manufacturing industries and improving the investment environment. 
 
In order to usher in the integrated development of manufacturing and producer services as well as upgrade the industrial structure, EDZs have been devoted to bolstering producer services while advancing modern manufacturing. To clarify, we define producer services as information transmission services, computer services, software industries, financial industries, real estate industries, leasing and business services, scientific research, and technical services, according to the China National Standard Industry Classification.
 
As early as 2005, the State Council made it clear that building a modern service industry was among the goals of China's national-level development zones, to encourage multinational companies to set up centers for R&D, financial management , technical services, training, procurement, logistics and operation and other producer services projects in EDZs. In 2014 and 2017, the State Council issued guidelines on the innovative development of national development zones, which highlighted the importance of producer services in building high-quality EDZs.
 
Though the maturity of producer services in China lags behind that of developed countries, its status in economic development has constantly improved over the years. In 2017, the added value of producer services accounted for 57.5% of the added value of the service industry and 29.8% of the GDP.
 
In recent years, the Chinese government has issued a series of policies and guidelines to promote the development of producer services and improve the quality and efficiency of the economy, facilitating its transformation and upgrade. In the Made in China 2025 strategy, prioritizing the development of producer services was clearly proposed. The goal is to promote the simultaneous advancement of service-based manufacturing and producer services by creating and optimizing functional areas of producer services in EDZs. 
 
Agglomeration effect
Under the theoretical framework of a new economic geography, the establishment of EDZs will unravel the original urban industrial spatial structure, and re-form a stable and balanced spatial structure under the coexistence of agglomeration and selection effects. The new economic geography model confirms that areas with high market potential have an efficiency advantage, and the source of this advantage is generally attributed to the agglomeration effect. 
 
A localized cluster of similar industries can produce Marshall externalities, which improve efficiency through knowledge spillovers, labor pooling, and the close proximity of specialized intermediary goods suppliers, while diverse industries can produce Jacobs externalities through knowledge or technology spillover to fuel innovation, thus improving efficiency.
 
Relevant empirical studies show that the establishment of EDZs in China positively promotes the efficiency of producer services. Therefore, in the process of each region's economic restructuring, the industrial agglomeration effect should be taken into account to guide producer services towards concentrating in location-oriented policy areas such as development zones.
 
For producer services, manufacturing enterprises are the customers, who determine the potential and size of producer services markets. Therefore, the agglomeration effect of producer services in EDZs depends on the scale of local manufacturing industries and the strength of industrial correlation. When the producer services industry and the leading manufacturing industry in a development zone have a high degree of correlation, the agglomeration effect is stronger. 
 
In this light, local governments should fully consider the existing manufacturing industries in EDZs when undertaking central planning, and prioritize those with a high correlation, instead of blindly pursuing high-tech and new-tech industries, so that producer services and manufacturing sectors in development zones can better integrate and achieve efficiency.
 
Selection effect
In order to promote producer services in EDZs, the Chinese central government has introduced a series of preferential policies such as preferential tax, financial subsidies, credit facilities, preferential land transfer, and convenient administrative approval. In terms of land use, the national policy demands a higher proportion of producer services use land in development zones, and also allows the producer services industry to use the national stock of unused industrial land. 
 
Within the first five years, land owners need to use their land according to its original purpose and type, whereas after that, land users can apply to transfer land rights or change the original purpose and type of the land in negotiations and at market price.
 
In terms of fiscal and tax policies, incubators in national development zones that provide technical services for small and medium-sized start-ups and home-grown innovators, and public infrastructure projects that provide technical services for service outsourcing or Internet of Things enterprises, can apply for central fiscal discounts and various tax reductions and exemptions. 
 
In addition to the preferential policies set by the central government, zone-specific policies tailored to attract businesses and investors are also in place throughout Chinese cities. For example, the Beijing Economic-Technological Development Area will provide financial support equivalent to 40% of the corporate income taxes for companies in producer services industries such as the headquarters and regional headquarters of transnational corporations, as well as R&D centers, marketing centers, settlement centers and logistics centers, within five years from the date of their registration.
 
Different from large market areas and central areas in the general sense, an EDZ is a cluster area formed under the guidance of policies, and its preferential policies will have different spatial selection effects on heterogeneous enterprises. For producer services in EDZs, the mechanism of the selection effect includes the market’s competition effect, which is characterized by the turnover of inefficient enterprises under a survival of the fittest ethos, and the site selection effect of heterogeneous enterprises, which reveals the influence of entry thresholds on the proportion of inefficient enterprises. 
 
To be specific, manufacturing clusters enlarge the market scale of producer services, which will intensify market competition and raise commercial land rental prices. Eventually, under market mechanisms, the proportion of enterprises with high efficiency will increase in EDZs. At the same time, the existence of a "policy lease" in EDZs will lower the threshold of enterprises to enter, allowing inefficient producer service enterprises to engage, which may somewhat reduce efficiency of the producer services industry in EDZs. Both work to determine the impact of selection effects on the efficiency of the producer services industry in development zones.
 
Agglomeration effects allow EDZs to attract enterprise inflows without policy stimulus, giving full play to the market mechanism of resource allocation, instead of blind preferential tax policies. In the best case scenario, agglomeration effects will work with the development zone's natural endowment and industrial establishments, to promote the efficiency of the producer services industry.
 
Xi Qiangmin is an associate professor from the School of Applied Economics at Renmin University of China.
 
Edited by YANGXUE