China is a large country consisting of 19 city clusters, each with different levels of economic development, population, land resources, industry sectors and unique culture. Choosing the right location to start your business in China is not easy. There are multiple considerations, such as infrastructure, openness to foreign investment, tax benefits, labour cost and many more. This article outlines the primary factors that guide foreign investors in determining their priorities based on their business plans.
1. Industrial clusters
Industrial clusters gather like-minded businesses into the same location; they share industry characteristics, offer a business network and benefit from the collective growth. Each industrial cluster has its own distinct advantages and characteristics. It is significant to pinpoint which cluster aligns best with your business activities so that you can make the most of the regional advantages, collaborate with suitable partners and suppliers, and enjoy the preferential incentives and tax rates offered by the local authorities.
There are four mega city clusters – the Yangtze River Delta (YRD), the Pearl River Delta, the Jing-Jin-Ji region and the Chengdu-Chongqing Twin City Circle – each with its own area of specialism.
- The YRD region is dedicated to becoming a worldwide leading science and innovation centre and an important modern service industry and advanced manufacturing hub. It has a particular focus on electronic, automobile, and modern finance sectors.
- The Pearl River Delta region boasts a long history of traditional manufacturing for automobiles, electronics, and home appliances which is currently undergoing modernization and automation.
- The Jing-Jin-Ji region represents the largest trading hub and is an aviation powerhouse in northern China.
- The Chengdu-Chongqing Twin City Circle is an important trade corridor, with overland rail links to Central Asia and Europe, carrying goods, such as electronics, machinery, auto parts and medicines.
2. Investment policies and tax incentives
The Chinese government offers various tax incentives and subsidies to attract foreign investment including tax refunds, rental subsidies, and rewards. You can compare the level of support for foreign investment among local authorities before deciding on a location.
China has set up 21 pilot free trade zones (FTZs). Foreign invested enterprises and projects, especially the small businesses registered in the free trade zones, can enjoy certain preferential tax benefits on value-added tax (VAT), enterprise income tax (EIT) as well as individual income tax (IIT). Qualified high-tech firms may benefit from a reduced EIT rate of 15%, which is 10% lower than the statutory rate.
For enterprises registering in Pudong New Area of Shanghai and setting up regional headquarters in the form of investment companies with paid-in registered capital of more than US$30 million and employing more than ten employees will be granted a startup subsidy of RMB 5 million. For the existing regional headquarters of multinational corporations that are upgraded to Asia, Asia Pacific or broader regions after 1 January 2012 can each receive a lump-sum upgrading subsidy of RMB 3 million.
Learn more about the subsidies and rewards offered by Shanghai government here.
3. Infrastructure and connectivity
Infrastructure and connectivity are other key factors to consider. It is important to assess the availability and quality of transportation, communication and utilities in the area to ensure smooth business operations. The location must be easily accessible for clients, partners, employees, and other stakeholders through public transportation within a reasonable timeframe.
If you are establishing a consulting Wholly Foreign Owned Enterprise (WFOE), it would be better to select a reputable building with modern facilities in the heart of the city centre, as this would leave a good impression of your brand image to your client. For those planning to set up a manufacturing WFOE, it would be wise to seek out an industrial park that offers a factory site and advanced equipment. When setting up a trading WFOE, you need to consider whether the location is convenient for both domestic and international logistics.
4. Talent and workforce
The availability of a skilled workforce is crucial to the success of your business. Normally the tier-one cities – namely Beijing, Shanghai, Guangzhou and Shenzhen – offer exceptional talent pools. Take Lujiazui, for instance, the international finance and trading centre located in Shanghai, which has more than 500,000 employees predominantly under the age of 30, with 70% holding a master's degree or higher. These talents are typically highly trained professionals with extensive experience in working with global clients, proficient in English or other languages, and possess certifications in certain industries. Although it may be simpler to hire qualified employees in these urban centres, the cost of labour tends to be higher.
5. Local market and competition
Different regions in China have diverse cultures, traditions, languages, and consumer behaviours. The top-selling products in one area may not be popular in others. It is essential to understand the local market and competitive landscape in your preferred destinations.
If you plan to start a business in the Pearl River Delta area, it would be beneficial for you to quickly establish rapport with your clients and business partners if you speak or at least understand their dialects, such as Cantonese, despite it not being a requisite.
Conducting comprehensive market research can help you to identify your strengths and opportunities, ultimately leading to the selection of an appropriate location for selling your products or providing services.
Selecting the right location has a significant impact on the success of your investment, but there is no one-size-fits-all approach. In addition to the factors mentioned above, there are still many others to consider, such as the cost of living, rental of land, shop and office space, friendliness to foreigners, and protection of intellectual property.
Before deciding where to locate your business in China, you should conduct thorough research and seek professional advice from lawyers, accountants, tax advisors and business consultants to ensure that the chosen location is in line with your business plan. Working with a trusted partner who has local knowledge and understands your business needs can make things a lot easier.