Beijing and Shanghai are the top two cities attracting foreign tourists coming to mainland China. They were the top choices for foreign investors as well. In 2006, 80% of the fortune 500 companies with offices in China had their offices in Shanghai or Beijing. Only a few had a presence in second- or third- tier cities. But this is not the case anymore.
Recent statistics showed a decrease in the percentage of FDI contribution towards GDP in Shanghai and Beijing. Meanwhile, more and more multinational giants are increasing their investment in less developed cities: IBM set up its global service center in Chengdu in 2007; GM spent $550 million last year in establishing its second factory in Shenyang; Pfizer will complete its $300 million manufacturing center in Suzhou by 2010; also in Suzhou is Samsung`s $150 million LCD panel factory that just started construction a half year ago; Intel has pledged $2.5 billion in establishing its chip factory in Dalian by 2010; and Airbus will setup an assembly line in Tianjing with potential total investment reaching $1.4 billion with the assembly line delivering its first A320 by the end of this year.
These second- and third tier- cities are generally cities with efficient government, a clear development strategy, a well-connected transportation system, easy access to high quality labor, and most of them have already attracted major domestic companies that are industry leaders.
The economy of these cities is generally domestic-oriented and less dependent on foreign trade when compared to cities like Beijing or Shanghai. As a result, they were minimally affected by the recent financial tsunami. In addition, these cities are the largest beneficiaries of the $600 billion stimulus package and the recent rural land reform. A majority of the stimulus fund will go to infrastructure construction, which is already very well developed in first tier cities, thus, the fund will undoubtedly improve the business and living environment of the second and third tier cities. The recently announced rural land reform will also play an important role in accelerating the development of those lower tiered cities, as most of these cities are surrounded by rural lands. The reform will cause an increasing amount of rural residents to sell or lease their land to develop business, which will greatly boost the urbanization process of those areas as well as their economic growth.
One of the most recent examples is Hangzhou City, a world-famous tourist attraction located in the Yangtze River Delta. Hangzhou has a population of 7.5 million and is just 100 minutes by car from Shanghai, a city with over 18 million people.
Within one of Hangzhou’s districts (Yuhang District), the government has initiated a plan to transform, in the next 5 to10 years, a 38-square mile area with a current population of 200,000 into a “China Silicon Valley”. Within 5 years, they expect the population to grow to 700,000. The area is known as XiXi Sci-Tech Island (“Island") and is adjacent to a 4-square mile National Urban Wetland Park which is just 15 minutes by car from downtown Hangzhou.
The Island has recently been designated a National Hi-Tech Industrial Zone. With 41 colleges and universities around Hangzhou, and more than 650,000 students graduating every year, the government claims that it can provide a high quality work force for those companies investing on the Island. Nokia was impressed enough to choose Hangzhou when it was hunting for locations in China to set up its R&D Centers in 2002 and cooperated with the Zhejiang University, one of the top five universities in China.
So far, the Island is still in its early stage of development, but it has already attracted attention of the Chinese IT giant Alibaba, which has decided to invest $200 million to build a center for Taobao, its online trading platform (the Chinese equivalent of Ebay).
Recently, the government has begun construction of a Shanghai-Hangzhou high speed train. After its completion, travel time between the two cities will be shortened to 38 minutes. After this news came out, the Island attracted more attention from investors from all over the world. Currently, multinational companies that have decided to invest on the Island include major players in IT, service outsourcing as well as the tourism industry.
Xixi Sci-Tech Island is just one of over 6,600 special zones designated by the National Government.Most of these special zones are within the second or third tier cities. As competition grows between them, and the cost of business becomes higher in the first tier cities, it might be wise for foreign investors to give the second and third tier cities a look. They are bound to find more opportunities with less costs.