Faced with the impact of industrial relocation, China’s regional economic development is like a small boat swaying in turbulent waters, facing unprecedented challenges. Businesses are faced with two choices: relocate within the country, or cross the ocean in search of new opportunities?

This choice depends not only on the investment and business environments in China’s less developed regions but also on how these environments compare to those in Southeast Asia, Central and South America, and other regions.

Optimizing the business environment and enhancing the capacity to attract industrial relocation have evolved from domestic regional competition into global competition. However, challenges persist in China’s central and western regions regarding their ability to attract industrial relocation, requiring coordinated solutions at a higher level.

Central and Western Regions

Common Challenges in Industrial Relocation

Investment and Business Environments

Falling Short of the Threshold to Attract "Peacocks Flying West"

According to the *China Business Environment Report 2020* released by the National Development and Reform Commission and the *2020 Research Report on the Business Environment of Chinese Provinces* published by Peking University’s Guanghua School of Management, the central and western regions generally rank lower in business environment evaluations.

Compared to the eastern coastal regions, the challenges faced by central and western regions include a relatively high corporate tax burden, prominent information silos, and relatively underdeveloped public services.

For example, in a certain city in central and western China, the corporate contribution rates for social pension, unemployment, work-related injury, and medical insurance are 16%, 0.7%, 0.56%, and 8%, respectively, whereas in Guangdong, enterprises only need to pay 15%, 0.32%, 0.2%, and 5.5%.

Although leveraging information technology to improve the efficiency of government services has become a widely accepted consensus, the failure to achieve information sharing often leads to complex approval procedures and prolonged processing times.

Furthermore, there is a lack of standardized and legally grounded safeguards regarding the implementation and sustained enforcement of business facilitation policies across regions. These factors indirectly increase local operating costs for enterprises and reduce their willingness to relocate to central and western regions.

Limited Infrastructure Interconnectivity

The "diseconomies of scale" phenomenon persists

According to data from the National Bureau of Statistics, there is a significant gap in railway network density between the central and western regions and the eastern region.

Over the past decade, the state has continuously accelerated the construction of railway networks in the central and western regions, yet their density remains just over half that of the eastern regions and falls below the national average.

Zooming in further, we see a similar disparity between the Southwest and Northwest regions. More importantly, most areas in the central and western regions have failed to integrate traditional infrastructure with the “new infrastructure” of the digital age.

The “2020 White Paper on China’s New Infrastructure Competitiveness Index,” released by Tsinghua University’s Internet Industry Research Institute, shows that among the 12 provinces (autonomous regions and municipalities) in the west, only Sichuan and Guizhou have competitiveness indices higher than the national average. Although the situation has improved somewhat since 2020, the fundamental pattern remains unchanged.

This is closely related to the unique human and geographical conditions in the central and western regions, where the phenomenon of “diseconomies of scale” has constrained investment efficiency.

Lack of Supporting Industrial Chains

Significant barriers to attracting industrial relocation

The industrial strengths of central and western regions are relatively concentrated in the upstream raw materials sector, with few downstream processed and manufactured products. Coupled with the relatively weak technical capabilities of local supporting enterprises, these regions face the awkward reality that:

Enterprises relocated from the eastern regions to take advantage of cheap raw materials often struggle to find local suppliers.

This is a widely overlooked phenomenon: rising business operating costs erode the advantage of low-cost factors, making it difficult to establish and maintain core competitiveness in industrial development.

For example, a certain county vigorously attracted an equipment manufacturing enterprise, but because it could not find supporting industries locally, the enterprise was forced to source components from other provinces. This greatly increased the enterprise’s procurement and sales costs, severely impacting production efficiency.

Similarly, a certain region has vigorously taken on the eastern silk industry and, although it has become the national leader in production volume, it faces an awkward situation within the silk industry chain: low silk reeling rates, gaps in raw silk bleaching, silk dyeing, and digital printing.

Insufficient Human Capital for Industrial Relocation

At present, central and western regions are also grappling with a thorny issue: labor shortages.

Imagine these ambitious enterprises being forced to scale back production due to a lack of manpower, leaving advanced equipment to gather dust. Some companies dare not accept more orders even when they have them, and have even slowed construction progress or scaled back investment.

In the past two years, the scale of chemical projects relocating to central and western regions has been unprecedented, yet these regions lack the corresponding human resource reserves. For instance, we urgently need experts in production management, safety monitoring, and R&D; technical personnel are even more in short supply, such as those in analytical testing, electrical equipment maintenance, electrical and welding work, and special operations.

Talent is the driving force behind innovation and the cornerstone of development. Without a robust talent mechanism to support it, this wave of industrial relocation to the central and western regions will be difficult to sustain.

Severe "Inward Competition" in Investment Promotion

Faced with fierce competition for investment, local governments have resorted to wielding the “sword” of policy, rolling out a barrage of preferential measures and incentives. With limited economic resources, they can only maintain cross-regional cooperation and integration of industrial policies at the most basic level.

What is even more concerning is that these preferential policies and measures often lack thorough, well-considered justification. This situation may, in fact, make the transformation and upgrading of industrial structures and the coordinated development of regional economies increasingly difficult.

Approaches and Countermeasures to Address Common Challenges in Industrial Relocation to Central and Western Regions

Based on the Principle of Competitive Neutrality

Optimizing the Investment and Business Environment

Fundamentally, we must adhere to the principle of competitive neutrality, ensuring that state-owned enterprises and enterprises of other ownership types have equal access to production factors and compete on a level playing field in the market.

From a long-term perspective, we must safeguard the broader environment for fair competition, nurture the spirit of entrepreneurship, and use the rule of law to forge more comprehensive and equitable local business facilitation systems, while ensuring rigorous oversight of their implementation and enforcement.

From a medium-term perspective, we must pave the way for leapfrog development in economically underdeveloped regions. For example, we should consciously promote the assignment of officials from eastern regions to serve in central and western regions, and encourage enterprises from the east to acquire and restructure enterprises in the central and western regions, thereby generating greater synergies.

In the short term, we need to implement more aggressive tax and fee reduction policies to open a window of opportunity for relatively underdeveloped regions. We must increase fiscal transfer payments to alleviate the burden on enterprises.

Improving the Infrastructure Supply System

Interconnected infrastructure serves as an invisible golden corridor, effectively reducing transaction costs and enabling fragmented markets to operate as an integrated system.

To address the issue of insufficient transportation connectivity, we must, based on local cultural, geographical, and economic endowments, strive to advance the development of production-service and commerce-service hubs as well as key cities, with a focus on improving accessibility and traffic flow.

In particular, we must strengthen the synergistic efforts of new infrastructure and traditional infrastructure to form an infrastructure supply system capable of promptly responding to and precisely matching the needs of different structures or scenarios, with strong adaptability and rapid adjustment capabilities. For example, we should increase support for eligible cities to build airport logistics industrial parks and comprehensive smart logistics parks, further breaking down information silos, reducing enterprise logistics costs, and attracting import and export enterprises to settle there.
Actively Explore

New Models for Industrial Cluster Relocation

To address the issue of insufficient industrial support, the focus should be on methods such as attracting investment along industrial chains and developing industrial clusters.

In terms of industrial chain investment promotion, localities have long been competing to take the lead. Moreover, an increasing number of local governments and industrial parks are beginning to collaborate with third-party investment promotion agencies and industrial research institutes to formulate targeted investment strategies. Through these efforts, they aim to strengthen connections between upstream and downstream segments of industrial chains, deepen industrial division of labor and cooperation, and drive the coordinated development of related industries.

It is worth noting that with the gradual refinement of the “chain leader system” and “cluster leader system,” investment promotion efforts are moving toward the introduction and cultivation of the entire industrial chain—from components to finished products to end-users—and exploring new models based on industrial cluster relocation.

Furthermore, investment promotion does not necessarily mean looking solely outward to tap into external “existing resources.” Devoting more time and effort to nurturing, supporting, and serving enterprises that have already settled in the region—thereby enabling existing “resources” to generate greater “growth” and, in turn, attract further “growth”—is also an effective form of investment promotion.

Accelerate the Improvement of Talent Incentive Mechanisms

Faced with challenges in recruiting and retaining talent, central and western regions should formulate policies and measures tailored to local conditions. This includes providing support in areas such as housing, medical care, education, living allowances, loan interest subsidies, equity incentives, project funding, professional title evaluation and appointment, and talent program selection.

Compared to other factors of production, talent is relatively less mobile. However, as long as talent can move freely and without barriers, differences in industrial structures between regions will quickly narrow, and development gaps will gradually be bridged.

On the one hand, we must broaden career advancement pathways for manufacturing talent in central and western regions and strengthen incentives for professional growth—such as improving the professional title evaluation system for skilled workers and establishing mechanisms for stable income growth, while actively guiding young people to understand the employment landscape and foster a correct mindset toward employment. On the other hand, we must improve the working environment in manufacturing enterprises by enhancing employees’ living conditions, accommodation, and meal quality, and appropriately increasing wages and subsidies to meet employees’ necessary and legitimate needs.

In addition, a database of human resources service agencies covering all levels should be established to address the information asymmetry between labor supply and demand in the manufacturing sector.

Advancing the Development of a Unified National Market

Behind the “involution” of investment promotion lies a concentration of deep-seated, systemic issues, such as industrial homogenization in some regions and inconsistencies in performance evaluation systems.

On the one hand, bottom lines must be established and upper limits set. Research on standardizing local investment promotion should be strengthened; a “comprehensive maximum ratio” for policy support should be established based on project investment amounts to prevent “excessive preferential treatment.” At the same time, supervision should be intensified to strictly limit local “side agreements” and “hidden subsidies.”

On the other hand, we must distinguish between the relocation of existing enterprises and new investment to reduce ineffective spending. Building on optimized performance evaluation criteria, we should encourage the development of professional teams and expert groups, and place greater emphasis on due diligence and technical feasibility studies for enterprises. This approach will not only prevent blind investment and ineffective spending driven by the pursuit of political achievements but also appropriately differentiate between existing enterprises and new investments. Beyond normal industrial relocation, we must eliminate as much as possible the opportunity for enterprises to “move to a different location just to claim subsidies.”

Furthermore, advancing the development of a unified national market will make the business environment the primary driver of investment attraction. Only by accelerating the construction of a unified national market that is efficient, standardized, fair, and fully open can resources and factors of production flow more efficiently, enabling coordinated planning of industrial development and avoiding excessive homogenization.

Furthermore, localities should be encouraged to accelerate the creation of a stable, fair, transparent, and predictable business environment, using high-quality institutional frameworks and innovation to drive high-quality local economic development.