How can overseas industrial parks open a new chapter of the Belt and Road?

The Belt and Road Initiative will deepen international cooperation and advance economic growth in countries along the route.

Today, China overseas industrial parks have become an important medium to promote B&R development and international capacity cooperation. The overseas industrial parks effectively encourage China's advantageous industries to “go abroad”. For host countries, these industrial parks have attracted more Chinese enterprises to invest and build factories in their countries, which will not only drive employment and tax revenues, expand exports and foreign exchange, but also strongly promote their industrialization and upgrade of industries. The overseas industrial parks also create favorable conditions for enterprises to “go abroad” and reduce operating costs. At present, the number of China overseas industrial parks is on the rise, and their functions are diversifying. On the other hand, governments also play more effective roles in guiding the construction while the enterprises are still being the dominant power in the construction. Therefore, the development of overseas industrial parks requires both governments and enterprises in China and host countries to work together to achieve mutual benefits and win-win results.

The COVID-19 pandemic in 2020 dealt a major blow to the global economy. According to the World Bank, the global economy is expected to contract 5.2% this year.¹ Meanwhile, talks on "deglobalization" are raging, however, China has clearly shown its stance – "globalization represents an inevitable trend in the development of the world. Only by keeping the global production and supply chains stable and promoting the liberalization and facilitation of trade and investment, can countries jointly cope with downward risks to the world economy.² The Belt and Road Initiative (BRI) has been playing an important and positive role in deepening international cooperation, promoting geographical relations and advancing economic growth in countries along the route since its launch. At present, countries along the Belt and Road (B&R) have become the world's most important destinations for foreign investment and one of the world's largest trading blocs, second only to the EU.³ Emerging from COVID-19, countries will have a stronger need to grow the economy and improve lives as well as a surging demand for public health cooperation. However, the gaps in infrastructure of health and telecommunication areas in B&R countries are still big, which will drive these countries to advance the development of "Health Silk Road" and "Digital Silk Road" and inject new impetus into global economic recovery.

The future of the BRI lies in expanding the cooperation to new areas. China overseas industrial parks are designed to be built in the major cities of B&R countries. With the advantages of integrating policies and resources, the parks always present strong clustering effect to attract enterprises along the industrial chain, creating new development opportunities for the BRI. As it enters the stage of in-depth development, through promoting international capacity cooperation, China overseas industrial parks will provide Chinese enterprises with ideal platforms to expand B&R markets. Also, in the "post-pandemic era", faced with the restructuring of the global industrial chain, they will be more strategically important in balancing regional economic development, optimizing the internationalization of Chinese companies, and diversifying supply chain risks. According to EY analysis, most of the China overseas industrial parks are still in the early stage of construction and development. It is necessary to strengthen systematic planning, enhance communication and collaboration among related governments and enterprises, and develop innovative operational models. Also, we need to actively learn from past experience to build a high-quality platform for international capacity cooperation. In the future, as the BRI accelerates to release each country’s development potential, overseas industrial parks will continue to drive economic integration and achieve win-win results between China and B&R countries. Furthermore, the construction of overseas industrial parks will certainly be more economic, efficient and diversified.

In this issue of Navigator, we look at the latest development status and future trends of overseas industrial parks. Besides, we incorporate business cases that EY has assisted, providing Chinese enterprise with solutions on the challenges of the external environment, cooperation models and systematic planning.

This issue presents future development trends of overseas industrial parks:

• More digital in operation – will shift primary industry toward high-tech fields
• More diverse in operation – will promote collaboration in the development of parks and enterprises
• City-industry integration will become the orientation for the development of overseas industrial parks
• Connect with professional service providers to leverage their expertise for business

Shared growth and win-win results achieved through cooperation, as the Belt and Road Initiative (BRI) accelerates advancement 

The BRI has been playing an important and positive role in deepening international cooperation, promoting geographical relations and advancing economic growth in countries along the route since its launch. As of January 2020, China has signed 200 B&R cooperation documents with 138 countries and 30 international organizations⁴, further extending the coverage. At present, B&R countries have become the most important destinations of foreign investment, as such, the BRI has created the world's second largest trade bloc after the European Union⁵, showing its increasing influence on the global economy.

The COVID-19 pandemic in 2020 dealt a major blow to the global economy. According to the World Bank, the global economy is expected to contract 5.2% this year⁶. However, from January to May 2020, China’s non-financial ODI in B&R countries increased by 16%⁷ against the downward trend, which indicates the BRI is playing an increasingly important role in the internationalization of Chinese enterprises. The outbreak of COVID-19 highlighted the gaps in infrastructure of health and telecommunication areas in B&R countries. This will drive B&R countries to advance the development of ‘Health Silk Road’ and ’Digital Silk Road’ and inject new impetus into global economic recovery.

Co-developing China overseas industrial parks to build a new landscape of the B&R

The overseas industrial parks have been developing rapidly since the BRI was launched in 2013. Most of the parks are jointly developed and promoted by Chinese and foreign governments or enterprises, which can provide stationed enterprises with relatively complete industrial infrastructure, more attractive preferential policies and business environment, and better supporting services to reduce barriers for overseas investment. Chinese enterprises can further expand business to surrounding countries and regions through the markets where the parks are located. At the same time, they can push forward the localization of technology and talent, leverage China’s advantageous industries to optimize the industrial structure of host countries, drive local economic development, and achieve mutual benefit and win-win results. Based on an analysis of 74 overseas industrial parks⁸, the overall distribution is "generally dispersed and regionally concentrated". The parks spread across Asia, Europe and Africa, covering all six B&R economic corridors, and nearly 80% of which are in Asia with Southeast Asia taking up the highest proportion. From an industry perspective, the parks are dominated by traditional industries. Among all, the number of processing and manufacturing parks is the largest, accounting for more than 30% of the total. Cross-border cooperation in technological parks and innovative research & development center parks are still at the early stage of development. Overseas industrial parks are designed to be built in the major cities of B&R countries. With the advantages of integrating policies and resources, the parks always present strong clustering effect to attract enterprises along the industrial chain, creating ‘going abroad’ opportunities for Chinese enterprises. However, most of the overseas industrial parks are still in their early stage of construction and development, facing challenges like unstable external environment, lack of protective mechanisms in cooperating models and systematic planning. It is necessary to strengthen collaboration among all parties, including governments and enterprises from both China and host countries, to achieve win-win results.

Challenge 1: Macroeconomic and political instability and unfavorable business environment in host countries

Along the route are mainly developing countries or regions with relatively unstable politics and economy, unfavorable business environment and insufficient supporting services. Thus, investors of the overseas industrial parks often encounter issues such as project suspension, government disapproval, political instability, and insufficient market absorption capacity. It is recommended that, when making the first overseas investment, enterprises should conduct comprehensive external environment analysis, including macroeconomic, industry and market analysis, assess business environment and formulate corresponding risk prevention and control mechanisms.

Challenge 2: Cooperation model requires more protective mechanisms

Many disagreements will need to be resolved in the long-term, due to the differences in culture, working habits, laws and regulations between China and the host countries. Enterprises investing in overseas industrial parks are usually at a disadvantageous position when they negotiate policies with the host government. For example, it is often difficult to achieve ideal outcome on major issues such as the park’s desired operating model and profit-sharing scheme. In addition, there are also business overlaps and lack of coordination among government agencies in the host country. Enterprises are recommended to set up joint ventures to improve the park’s collaboration mechanism. Finding a local partner in the host country to jointly invest and participate in the park’s operation will enable Chinese enterprises to understand local market rules and regulations in a more efficient manner and will also be more conducive to gaining the local market’s recognition and better develop business locally.

Challenge 3: Overseas industrial parks lack systematic planning

Although overseas industrial parks are often led by governments, the operation is eventually implemented by enterprises. However, many enterprises’ capabilities are limited by their small scale and insufficient experience in overseas investment, which always leads to frequent changes of primary industries of the parks, or lack of specialized supporting services for a long time. As a result, the parks will face difficulties in attracting investment. Moreover, site re-selection and capital withdrawal may happen. Related enterprises are recommended to design comprehensive strategies, operation and implementation plans of overseas industrial parks. Also, by doing a competitive analysis, investors could better understand the competitive landscape and formulate more reasonable and feasible strategies. In addition, a detailed business operation and implementation plan can help investors implement the development strategy smoothly. It is also recommended to continuously seek performance improvement during the whole operation phase.

Future development trends of overseas industry parks

Today, China overseas industrial parks have become important platforms for promoting B&R development and international capacity cooperation. EY expects four future development trends of overseas industrial parks. Firstly, more digital in operation - will shift primary industry toward high-tech fields. Utilize digital technology to solve the problems encountered in overseas investment and operation, improve the park’s business environment, reduce operating cost, increase the core competitiveness and finally enhance investment attractiveness to achieve win-win results. Secondly, more diverse in operation - will promote collaboration in the development of parks and enterprises. Future operators of overseas industrial parks will integrate more participants including governments, implementation enterprises and external companies. All participated parties will work together to promote the development of the parks. Thirdly, city-industry integration will become the orientation for the development of overseas industrial parks. China's extensive experience in city-industry integration can be replicated to B&R countries and regions after applicable adjustments. Through the help of industrial parks, host countries can form characteristic leading industries such as high-end manufacturing, information technology, etc. By combining supporting services such as real estate, business and urban services, city-industry integration can be realized to promote economic and social development of host countries. Lastly, connect with professional service providers to leverage their expertise for business expansion. As more Chinese enterprises move into overseas industrial parks, we expect increasing demands for various professional services. The establishment of a professional service platform in an overseas industrial park will help companies quickly connect with relevant service providers, make full use of local resources to conduct business effectively. 

With further development of the BRI, Chinese enterprises are exploring new ways to get deeper involvement. The Infrastructure projects have paved the way for industrial cooperation between China and B&R countries, while building high-standard overseas industrial parks will create closer ties and open a new chapter for achieving high-quality development of the BRI.