Why Foxconn and Samsung are moving west
June 01, 2012 | BY
clpstaff &clp articles &Chongqing attracted more foreign direct investment than Beijing last year. Impressive tax incentives are only part of the reason why businesses are moving to China's interior
A report by the Economic Intelligence Unit released last week calculated FDI in Chongqing at $10.8 billion in 2011. The municipality overtook Beijing for the first time, with analysts predicting it will surpass Tianjin and Shanghai by 2014.
Many believe cheaper land and labour are causing this shift, but Sam Feng of Llinks in Shanghai says the move to the Western regions is being caused by possible tax savings.
“Investors heading to the West can enjoy a reduced enterprise income tax rate of 15% instead of 25%, subject to investments in the encouraged category under several catalogues of industries promulgated by the Central Government for guiding investment,” said Feng.
One of these catalogues includes the Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录), amended in 2011, but foreign investors can still enjoy the lower tax rates under the encouraged category of the 2007 version. Foreign investors investing in industries under the encouraged category find it much easier compared to the restricted category.
Last month, Samsung set up a factory in Xi'an, while Foxconn, one of Apple's largest manufacturers in the mainland, already has a factory in Chengdu. Feng says these are just two examples of multiple foreign companies who are opening up subsidiaries in the Western regions.
In addition to lower tax, investors are being driven west by a range of incentives. Enterprises importing equipment for their own use do not have to pay customs duties in the west. 
Feng also notes from his experience that “comparatively speaking the visa application process is easier for foreign employees in the Western region”. While there is no specific policy in place, Western regions want to attract talented foreigners.
From a legislation perspective, moving to the west is no different to setting up companies in Shanghai or Beijing and the most positive attitude of local governments there can make the process easier.
Despite the attraction, infrastructure remains weak in many parts of China's interior. Living conditions and poor transport can prevent foreigner investors from moving their operations there.
“Chengdu, Xi'an and Chongqing are the most attractive as they still fall under the Western regions, but are more advanced with the local governments having experience in foreign investment,” says Feng.
The government is also drafting a special investment guidance catalogue specifically for the west. A first draft is said to be already under review and is likely to be released later this year. This catalogue underpins the government's stance to drive investment away from the more prosperous coastal regions.
While the trend is definitely to move to China's interior, many companies will remain in the east. “It is convenient and advanced. Tax is not only thing foreign investors consider, they look at the bigger picture,” commented Feng.
It is not thought the eastern provinces will suffer from the investment shift. Short-term investors will stick with what they know. In the long term, the government will look to find a balance between the country's regions.
Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录) 2011
Foreign Investmen t Industrial Guidance Catalogue (外商投资产业指导目录) 2007
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