Regional Economic Development in China

4. Cost Impact and Industrial Upgrading in Pearl River Delta Region: Case Study on Shenzhen and Dongguan

Cost฀Impact฀and฀Industrial฀Upgrading฀in฀Pearl฀River฀Delta฀Region฀ 53 4 Cost Impact and Industrial Upgrading in Pearl River Delta Region: Case Study on Shenzhen and Dongguan Guo Wanda and Feng Yueqiu BACKGROUND Being฀at฀the฀forefront฀of฀China’s฀reform฀and฀opening-up,฀the฀Pearl฀River฀ Delta฀(PRD)฀region฀at฀large฀faced฀problems฀with฀its฀industrial฀transitions฀ and฀upgrading฀in฀the฀recent฀two฀years฀as฀a฀result฀of฀the฀Chinese฀renminbi฀ (RMB)฀appreciation,฀rising฀raw฀materials฀cost,฀increasing฀labour฀and฀land฀ cost฀etc.฀Moreover,฀a฀series฀of฀regulatory฀changes฀such฀as฀the฀implementation฀ of฀the฀new฀Labour฀Contract฀Law฀and฀“Unified฀Tax฀System”฀as฀well฀as฀policy฀ adjustment฀in฀the฀processing฀industry,฀brought฀about฀unprecedented฀“cost฀ impact”฀to฀the฀PRD฀region. International฀experiences฀indicate฀that฀there฀are฀mainly฀three฀types฀of฀ industrial฀upgrading฀and฀transition,฀that฀is,฀through฀technological฀innovation,฀ institutional฀and฀cultural฀evolution,฀and฀cost฀considerations.฀Since฀the฀recent฀ industrial฀transition฀in฀the฀PRD฀region฀is฀a฀combination฀of฀the฀above฀three฀ 04฀RegEDC.indd฀฀฀53 7/3/09฀฀฀2:10:50฀PM 54฀ Guo฀Wanda฀and฀Feng฀Yueqiu types,฀the฀industrial฀upgrading฀could฀progress฀towards฀an฀ideal฀state฀after฀ ten฀to฀twenty฀years’฀of฀natural฀evolution. The฀ industrial฀ transition฀ and฀ upgrading฀ of฀ the฀ PRD฀ has฀ aroused฀ the฀ attention฀of฀the฀international฀community.฀On฀25฀February฀2008,฀the฀Wall฀ Street฀Journal฀published฀a฀long฀article฀titled,฀“Has฀the฀Prosperity฀of฀PRD฀ Become฀Yesterday’s฀Dream?”฀It฀reported฀that฀10฀per฀cent฀of฀70,000฀Hong฀ Kong฀invested฀factories฀will฀stop฀their฀production฀by฀the฀end฀of฀this฀year฀ because฀of฀increased฀cost฀and฀strict฀supervision.฀This฀article฀sparked฀a฀debate฀ in฀ mainland฀ China.฀The฀ authority฀ of฀ Guangdong฀ Province฀ said฀ that฀ the฀ data฀was฀inaccurate฀and฀the฀facts฀exaggerated.฀ Industrial฀ transition฀ and฀ industrial฀ upgrading฀ are฀ important฀ to฀ the฀ improvement฀of฀the฀competitiveness฀of฀the฀PRD฀and฀the฀Chinese฀central฀ authority฀ have฀ also฀ paid฀ much฀ attention฀ to฀ it.฀ After฀ an฀ inspection฀ of฀ Shenzhen฀ and฀ Dongguang฀ in฀ late฀ April,฀ Wang฀ Yang,฀ party฀ secretary฀ of฀ Guangdong฀Province฀said,฀“If฀you฀don’t฀adjust฀the฀industrial฀structure฀today,฀ you฀ will฀ have฀ to฀ be฀ adjusted฀ by฀ the฀ industrial฀ structure฀ tomorrow.”฀The฀ first฀ “adjustment”฀ in฀ his฀ speech฀ means฀ “positive”฀ action,฀ while฀ the฀ latter฀ means฀“passive”,฀that฀is,฀it฀will฀hinder฀the฀local฀economic฀development฀if฀ you฀don’t฀adjust฀the฀industrial฀structure.฀Wang,฀a฀member฀of฀the฀Political฀ Bureau฀ Committee,฀ proposed฀ that฀ all฀ the฀ government฀ officials฀ should฀ further฀“open฀their฀minds”,฀after฀he฀took฀up฀his฀post฀as฀party฀secretary฀of฀ Guangdong฀Province.฀ This฀ study฀ takes฀ Shenzhen฀ and฀ Dongguan,฀ two฀ cities฀ in฀ the฀ PRD฀ region,฀as฀the฀examples฀to฀analyse฀the฀industrial฀transition฀under฀the฀“cost฀ impact”.฀Shenzhen฀and฀Dongguan฀are฀both฀highly฀export-oriented฀economic฀ entities฀which฀are฀also฀the฀national฀centres฀of฀“low-cost฀industries”,฀that฀is,฀ the฀processing฀trade.฀According฀to฀statistics,฀the฀processing฀trade฀accounts฀ for฀76฀per฀cent฀of฀Shenzhen’s฀total฀export฀volume฀and฀up฀to฀94฀per฀cent฀ of฀Dongguan’s฀in฀2006. How฀ the฀ “cost฀ impact”฀ to฀ deal฀ with฀ under฀ the฀ circumstance฀ of฀ such฀ a฀ high฀ proportion฀ of฀ “low-cost฀ industries”?฀ Will฀ the฀ natural฀ evolution฀ of฀ industrial฀ transition฀ and฀ upgrading฀ be฀ interrupted฀ by฀ the฀ “cost฀ impact”?฀ What฀ should฀ the฀ government฀ do฀ about฀ it?฀These฀ are฀ the฀ questions฀ to฀ be฀ explored฀in฀this฀chapter. LITERATURE฀REVIEW Three฀Types฀of฀Industrial฀Transition฀and฀Upgrading According฀ to฀ the฀ literature฀ review฀ of฀ previous฀ studies฀ on฀ industrial฀ transition฀and฀upgrading,฀there฀are฀three฀types฀of฀industrial฀transition฀and฀ upgrading. 04฀RegEDC.indd฀฀฀54 7/3/09฀฀฀2:10:50฀PM Cost฀Impact฀and฀Industrial฀Upgrading฀in฀Pearl฀River฀Delta฀Region฀ 55 In฀the฀first฀type,฀industrial฀division฀among฀states฀or฀regions฀is฀explained฀ from฀ the฀ perspective฀ of฀ initial฀ factor฀ endowment.฀ Such฀ division฀ brings฀ about฀industrial฀transition฀and฀upgrading,฀or฀“factor฀division-type฀industrial฀ transition”.฀The฀early฀factor฀endowment฀theory฀by฀Eli฀Heckscher฀and฀Bertil฀ Ohlin,฀ and฀ the฀ later฀ “flying-geese฀ pattern฀ of฀ development”฀ by฀ Japanese฀ economists฀are฀such฀explanations.฀Factor฀division฀is฀the฀basis฀for฀international฀ trade.฀ The฀ decision฀ of฀ large-scale฀ international฀ trade฀ and฀ the฀ method฀ of฀ participation฀ in฀ international฀ trade฀ are,฀ on฀ the฀ one฀ hand,฀ related฀ to฀ the฀ national฀economic฀system฀(such฀as฀planning฀or฀market฀economy,฀open฀or฀ closed฀economy)฀and฀on฀the฀other฀hand,฀related฀to฀the฀supply฀chain฀among฀ regions฀or฀cities฀(such฀as฀regional฀monopoly,฀and฀administrative฀blockade).฀ Therefore,฀the฀industrial฀transition฀and฀upgrading฀among฀states฀or฀regions฀ resulting฀from฀factor...