This is a very significant conclusion for assessing the overall promise of FDI to positively affect China’s economy. Although it has contributed to wage increases its tendency to crowd out domestic investment confirms its role in employment creation has not been a positive one. Bidding for investment is certainly not unique to China. For a number of years, economists and policy makers have studied and even decried the so-called “War Between the States,” a popular name given to the U. S. inter-state competition for investment and jobs (Federal Reserve Bank of Minneapolis 1994; Burke and Epstein 2001).
Moreover, an enormous amount has been written about tax competition in the European Union as well as internationally among nations. But the level to which this “War Between the Provinces” has risen in China is, perhaps, surprising, even to those well-schooled in the many paths of capital mobility. This point was brought home to us rather starkly when one of us interviewed a Chinese official in a Northeastern coastal city, Dalian, about foreign investment. 13 This official is the associate director of one Dalian’s special economic zones, in this case, a high tech export
Bootstrapping is a Monte Carlo method designed to produce estimates of the bias and variance of an estimator by taking repeated random subsamples of the data, accumulating estimates of the quotient ?? LT , and using the standard deviations of those estimates to get the overall variance of the bootstrap estimate (Kennedy 1993; Peters and Freedman 1984). These interviews were carried out in the PRC by Gerald Epstein between August, 2000 and July, 2001. processing zone. We asked him, “Who is your greatest competitor when it comes to trying to
attract foreign investment? ” expecting the answer to be Vietnam, or Malaysia or, perhaps, Beijing. But his answer startled us: “Our biggest competitor is the export processing zone down the street. ”14 Not only does one province or one town compete with another; but in China, there are numerous zones – export processing zones, high tech zones, industrial zones – all of which compete for foreign investment.
The result is cut throat competition. The nature of this competition takes a number of forms even while the central government tries to limit and regulate it, primarily in order to preserve its tax revenue and also to promote its industrial policies. The central government determines the tax rates that foreign invested enterprises must pay. The various special zones established with the central government’s permission at the local level offer preferential tax rates, especially for desired types of investments, but these rates are set by the central government.
15 Despite this central government control, holding constant the amount of investment, government tax revenue will fall as there is more foreign investment getting preferential rates. While much of this revenue goes to the central government, there is a complex revenue sharing mechanism which sends some of it back to the provinces (Wong 2000). Presumably, provincial governments therefore receive a diminished amount of tax revenue to the extent that the amount going to the central government falls. (Wong 2000). But there are other, indirect and potentially costly ways in which this inter-zone, inter-city and inter-provincial competition occurs out of the reach of the central government’s control.
According to an official whose job it is to attract foreign investment to a city in Southeastern China, “Under the general policies, the local and municipal governments can do some [things to attract companies]. For example, the local and municipal governments can reduce or return the taxes enjoyed by local governments to the enterprises which [the] city [is] eager to attract,including the income tax and value added tax [which] belong to local and municipal governments (25 percent of the total VAT).
”16 This potential decline in VAT revenue can be significant. In addition, perhaps the most widely used incentive under the control of local and municipal governments is the provision of free or highly subsidized land, subsidies for electricity and other utilities, and sometimes, the building of roads and other infrastructure projects supporting the factory sites. According to this same official, “Subsidies for the land are the most used policies by municipal and local governments. Nearly for all projects, governments give the subsidies for the land.
The selling price of land is lower than the development cost. And for the local government encouraged projects, the price is cheap, [sometimes close] to zero. ” The official adds that “Local governments [have] less control over [the] price of water and energy. But they can reduce or exempt some fees charged by governments. ”17 14 Interview, August, 2000, Dalian, PRC. 15 See Appendix B for more information about tax policy toward foreign companies. 16 Interview with Foreign Investment Officer, Fujian Province, May, 2001. 17 Ibid.