Summary of Key Points
Recently, the state has taken measures to regulate the chaotic practice of offering financial incentives to attract investment at the local level: 833 tax-related documents that violated regulations have been abolished or revised nationwide, and 160,000 companies that were registered in other places to receive subsidies have moved back to their actual locations of operation (with tax revenues increasing by 16% after the move). In the past, local governments relied on financial subsidies to attract businesses, but now a "negative list" has been established, prohibiting the use of indicators such as investment amount, output value, and tax refunds to distribute funds. In the future, local governments will need to rely on genuine strengths to attract investment—long-term cost advantages in areas such as supply chains, energy, and public services. Regions that are developing later will need to identify their unique resources.
I. Why did local governments previously prefer to offer financial incentives to attract investment?
It was simple and effective: attracting a project could bring in investment, create jobs, and generate tax revenue, as well as attract related businesses to form a supply chain. By giving up some fiscal revenue in the form of subsidies in advance, the expected increase in tax revenue would make it a worthwhile trade-off.
For example, consider a manufacturing project with an annual internal rate of return (IRR) of 8.6%. The company might be reluctant to invest, but with a one-time reward of 100 million yuan and annual subsidies of 50 million yuan for the first three years (totaling 250 million yuan), the IRR could increase to 9.6%, meeting the company's investment threshold and leading to the project's implementation. Therefore, when choosing a location, companies considered factors such as land and labor costs, as well as the amount of subsidies offered.
II. The pitfalls of offering financial incentives to attract investment
When multiple governments used this approach, it led to a vicious bidding war:
1. Transfer of tax revenue with no national benefit: Some companies simply moved their registration locations without changing their actual operations, resulting in no net increase in national tax revenue.
2. Local governments earned less: If Location A offered a 2% subsidy and Location B offered a 3% subsidy, or if Location A provided equipment subsidies while Location B offered tax refunds, companies would profit more, but the net revenue for the local government (tax revenue minus subsidies minus public service costs) decreased.
3. Distorted business behavior: If subsidies were linked to investment or output, companies might overbuy equipment or inflate output values just to qualify for the subsidies, affecting their normal operations.
Therefore, the state introduced a negative list, and local governments have started revising their policies. For example, Gedian abolished the reward for quick project commencement, and Jinan adjusted its subsidies for companies meeting certain growth criteria.
III. With fewer subsidies, what do companies consider when choosing a location?
One-time subsidies, no matter how attractive, are not as important as the ongoing costs associated with operating a business. Companies now focus on long-term factors such as:
- Supply chains: For automotive manufacturers, a strong supply chain can significantly reduce costs. For example, Dongfeng in Wuhan has driven the development of 2,000 component companies, creating a 50-kilometer supply chain that saves 300 yuan in logistics costs per vehicle, amounting to 90 million yuan annually for a production volume of 300,000 vehicles, which is more than three times the value of a one-time subsidy of 250 million yuan.
- Electricity prices: Electricity costs account for 70% of operational expenses. A 0.1 yuan per kilowatt-hour difference in electricity prices can result in annual savings of 73.58 million yuan for a large data center, or 700 million yuan over ten years. Low-cost green energy in the western regions is particularly attractive.
- Port efficiency: Efficient ports can significantly reduce transportation costs for export companies. For example, the "One Port Connect" initiative in Guangzhou has reduced container transportation costs for companies in Foshan by 50%, saving 150 million yuan annually for a production volume of 100,000 containers.
IV. How do local governments attract investment now?
The focus has shifted from offering incentives to individual companies to building infrastructure that benefits all:
1. Industrial infrastructure: For example, Ningxia Zhongwei has built dedicated power lines for data centers, providing power to entire clusters without the need for individual fee refunds. Guangzhou has established a network that reduces costs for all export companies.
2. Public services: Hefei has built 41 pilot production platforms, allowing companies to use equipment without purchasing it themselves for a fee, with multiple companies sharing the facilities, making fiscal investments more efficient.
3. Industrial funds: The government invests in companies and recovers the money when they grow. This requires careful judgment of technological trends and industry cycles; incorrect investments can result in losses.
These infrastructure investments are shared by multiple companies, making them more sustainable and harder for other cities to replicate.
V. Will the future industrial landscape change?
Mature industrial clusters, such as those in Wuhan and Shenzhen, will become even more competitive due to their well-established supply chains, talent, and comprehensive public services. Regions with unique resources, such as green energy in the west or ports along the coast, will have a competitive advantage. However, developing regions face greater challenges but also have opportunities. The key is to identify and invest in unique strengths that others cannot replicate.
Conclusion: The era of preferential policies is over; what matters now is genuine competitiveness.
Companies will ask about the location of suppliers, electricity prices, labor availability, and the time it takes to bring a project online. These factors represent true competitiveness, as subsidies are temporary, while long-term cost advantages are what matter in the long run.