Chinese cities with good investment climates not only attract more foreign investment, they also achieve a more "harmonious society." Cities with good climates for foreign investment tend to have better environmental outcomes, such as clean air days per year and better social outcomes such as low infant mortality and low unemployment.
This is the main conclusion of a new World Bank study of investment climate in 120 Chinese cities.
The World Bank, working together with the National Bureau of Statistics, surveyed 100 firms in each city (200 firms in four mega-cities). In this sample of 12,400 manufacturing firms, majority State-owned firms only accounted for 8 percent of firms.
These state-owned firms tend to be large, however, so that they control one-third of the total assets. This ratio varies a lot across China.
In the southeast coastal cities manufacturing is almost completely private sector. In the northeast and centre, on the other hand, manufacturing assets are still majority state owned.
This issue is important because in the same sector and same location, state-owned firms have a much lower return on assets than private firms: 7 percent compared to 20 percent.
Interestingly, the pre-tax rate of return for foreign firms and joint ventures is about the same as the return for the domestic private sector. The difference in ownership structure is one reason why the coastal areas have grown faster.
Objective measures of investment climate vary a lot among Chinese cities: this is a second major finding of the study.
The survey asks practical questions such as how long it takes to get goods through customs or how much time firm management spends dealing with government bureaucracy.
Many manufacturing firms both import some parts or materials and export some of their products. Combined import plus export customs clearance is a very low three days in cities such as Jiangmen or Dongguan.
On average the time is seven-eight days in the southeast, compared to twice as long (15 days) in the northeast. On time spent dealing with government bureaucracy, Hangzhou scores best - firms report spending only eight days per year dealing with government bureaucracy.
Other cities that are relatively unbureaucratic are Qingdao, Huizhou and Shantou. At the other end of the spectrum, firms report spending 60 days per year dealing with bureaucracy in northeastern cities and nearly 80 days per year in the northwest.
There is a clear regional pattern on investment climate, with the southeast best, followed by the Bohai area, the centre, northeast, southwest, and northwest. Within each region, however, there is also a lot of variation among cities. The Bohai cities of Qingdao, Weihai and Linyi are among the best in the country in terms of investment climate. Dalian in the northeast is also one of the best.
Good investment climate attracts foreign investment and domestic private investment, leading to faster growth and a higher standard of living.
This is the third major conclusion from the analysis.
In the best one-fifth of cities in terms of investment climate, foreign investment accounts for about one-third of manufacturing. In the worst one-fifth of cities, it is about 5 percent.
Foreign investors are attracted to port cities and to big cities with large markets. But after taking account of that, we find that foreign investors are also attracted to cities with efficient services such as rapid customs clearance, relatively low bureaucracy and red tape, and good infrastructure.
The cities that score best in these areas are not the big flagship cities of China, but rather smaller cities that have to try harder to attract foreign investment.
Hence we find that some of the best locations for manufacturing production in China are cities such as Jiangmen, Suzhou, Hangzhou, Weihai, Qingdao, Linyi, Yantai and Shaoxing, which are not as much in the limelight as the mega-cities of Beijing, Shanghai and Tianjin.
Cities benefit from good investment climate through more investment and growth. Their populations also benefit through higher wages.