For many, entering the Chinese market has been about establishing a presence in the biggest cities such as Beijing, Shanghai and Guangzhou. For the bolder firms, a move into some of the second-tier cities – generally provincial capitals with populations of millions – is the next step, with the coastal regions of China coming a close second.

FDI inflows into central China reached $4.3bn in the first four months of 2014, up 33.6% year on year. The western region attracted $3.2bn, up 2.7% year on year. This is not only to do with the less competitive environment of these less-developed areas, but also potential wage savings. While only 10 years ago such areas were insufficiently developed for many businesses, the trickle-down effect of China’s growth has changed that. It is telling that cities such as Chengdu, Dalian, Suzhou, Qingdao, Nanjing, Shenzhen and Tianjin, with populations of between 1 million to 3 million, all have major expatriate websites in English.

Niche opportunities

Thanks to China’s enormous size, the abundance of these cities and the sheer number of consumers in them, there are numerous niche markets and unique opportunities that would be hard to find in the first-tier locations. Mobile entertainment is a good example: consumers with low-priced smartphones want a different type of product to those with expensive Apple and Samsung products.

"Most of our users are in the third- and fourth-tier cities, and we've noticed they have different interests than people in the top cities,” Frank Wang, founder and CEO of Easou, China's second largest mobile search engine, said in a press release. “We focus on their needs and give them more of what they want.” 

The appeal of these cities is emphasised by the Chinese government as it looks to evenly distribute the country’s growing wealth and create a more mature economy. This is particularly pertinent given the gradual implementation of reforms to China’s household registration system. 

“Chinese citizens from rural areas no longer have their social benefits anchored to their places of birth and will now have the freedom to move into and live in China’s expanding third- and fourth-tier cities without losing their right to access general public services and social welfare benefits,” says Mark Bolger, chief representative for Asia with the International Business Development Group at Export Development Canada (EDC), in a recent blog post.

There are still challenges in these areas, where business can be done differently, and there may well be less support from trade organisations and foreign government chambers. 

“Depending on the company and the customer, you have to be aware of the political system,” says Jens Richter, managing director of Multivac Packaging Equipment, in a recent interview with Fiducia China. “We often have to deal with the local government even if, according to our Western understanding and mindset, the project has nothing to do with them. Some customers want to use our advanced German technology to gain investment or support, for example. In Shanghai or Beijing, this does not tend to happen and business is done without any political impact.” 

Despite the challenges, firms are already entering these markets. Here are five smaller cities in China where FDI is growing:

Tai'an 

Tai’an in Shandong Province has a bustling tourist trade thanks to its location at the foot of the famous Mount Tai, and its proximity to Qufu, the birthplace of Confucius.

This has attracted investment in consumer areas, such as the recently opened Mount Tai Beer City, as well as a significant deal for exchange and co-operation with the Russia city of Lobnya. Tai’an’s mayor, Wang Yunpeng, told China Daily that Tai'an's favourable location, convenient transportation, prominent industries, education, history and culture clinched the deal.

Liuzhou 

Liuzhou in Guangxi Province is a promising producer of automobiles for the Chinese market. Dongfeng's local plant serves the Vietnamese market, and General Motors’ Chinese partner SAIC took over the Liuzhou automobile plant, which is the biggest minivan producer in China. Their joint venture, the SAIC-GM-Wuling Automobile, sold 1.445 million units in China in 2012, and the companies aim to sell more than 2 million in 2014 or 2015.

The surrounding region is also known for its agriculture, and it is developing a modern agricultural industry that includes kumquats, a scientific grain storage project and an eco-industrial park.

The city is still developing, but its large manufacturing base, airport, good rail connections and southern location mean it is likely to attract further investment in the coming years. 

Xiangtan 

Xiangtan is a little-known city in Hunan Province, but as part of a larger city cluster it has great potential. According to local government statistics, the Changsha-Zhuzhou-Xiangtan city cluster and surrounding area achieved GDP of Rmb1054bn ($175bn) in 2013, a growth of 11.5% year on year.

Xiangtan is now attracting investment from some of the larger global firms. Australian mining giant Rio Tinto has signed a five-year partnership with Xiangtan Electric Manufacturing Group to supply and service heavy mobile equipment across its global operations.

Huizhou 

Guangdong Province’s Huizhou is already home to the Huizhou Dayawan Economic and Technological Development Zone, which has been in existence for more than 20 years and was further expanded in 2006. This has attracted a number of Fortune 500 companies, including Shell and Honda. FDI for the zone reached $329m in 2012, 19% of Huizhou’s total FDI that year.

Huizhou has also established the Huizhou Overseas Research Centre at Huizhou University this year. Huizhou Port is also appealing for would-be investors, and has already attracted large hotel chains to the area: Renaissance, Intercontinental and Ramada all have properties there.  

Yiwu 

Yiwu in Zhejiang Province is perhaps best known for the largest small commodities wholesale market in the world, known as China Commodity City. This helps it attract a variety of trade shows to the region, including the recent China Yiwu International Commodities Fair, now in its 20th year, and the 2014 China International Electronic Commerce Expo. 

It now has one of the most significant trade transport links between China and Europe; the Yiwu-Madrid train link, made up of 82 cargo trucks, took its first journey on November 18. It is the longest railway linking China and Europe at 13,052 kilometres, passing through Kazakhstan, Russia, Belarus, Poland, Germany and France. 

Asian investment in Yiwu is also on the rise, with the creation of the Tasty Singapore Food Product Centre and significant commodities investment from India over the past decade.

While all of these cities are still a long way from having the mature economies of China’s biggest urban areas, for businesses seeking new markets they are an appealing prospect.