Qingdao in the Shandong Province of China is probably best known to Westerners for its eponymous beer or as the host of the sailing events at the 2008 Beijing Olympic Games. Since the Olympics put the city on the map, it has been looking to develop and grow beyond its core industries of tourism and port distribution to attract more foreign investment.

Qingdao has experienced strong growth over the past few years, during which time it has invested in its infrastructure and has sought to increase preferential policies for foreign companies. The first quarter of 2013 saw a 22% year-on-year increase in FDI to $1.29bn, according to the Qingdao Municipal Bureau of Commerce. This is significantly higher than the provincial average, although much of the investment is still in the traditional areas of manufacturing and services, and more than 70% is from other parts of the Asia-Pacific region, namely Hong Kong, South Korea and Japan.

Hired expertise

Despite growth seemingly limited to traditional sectors, Qingdao seems to be keen to change its FDI strategy. Qingdao – often referred to as a ‘quasi-provincial capital’ – was the first city of its type in China to decentralise foreign investment approval to lower administration levels, and has also hired consultancy IBM and various international accounting firms to advise it on attracting foreign investment. Such proactive measures should come as little surprise, given that Qingdao was one of the first coastal areas in China to open up to foreign investment.

One of Qingdao’s main lures is its port. Pierre-André de Chalendar, chief executive of Paris-headquartered window film developer Saint-Gobain, said at the opening of a large plant in Qingdao: “This significant investment in Qingdao will enable us to be much closer to the rapidly growing market for specialty films in China.”

Qingdao has a particular appeal for large multinational companies – not only because of its port, but also because the city is home to a number of locally grown multinational corporations, such as consumer electronics firms Haier and HiSense, as well as the Tsingtao brewery. This leads to mutual benefits, with about 120 projects in the city boasting some level of investment from Fortune 500 companies, while outbound investment by local enterprises topping $480m in 2012.  

Qingdao is also appealing to multinational corporations because it is a city that can attract talent, thanks in large part to its coastal location and the investments in its infrastructure. More than 100,000 foreigners now live in the city and surrounding area, a fact that has helped to attract investment from the likes of Langham Hospitality Group, which has created luxury properties and hotels to meet this demand.

Marine economy

Despite the continued influx of port trade, Qingdao is also hoping to develop its marine economy. The so-called 'Blue Silicon Valley' plans in the city's West Coast New Economic Zone and marine area are designed to provide improved sustainable logistics and marine resources income for decades to come. According government projections, GDP of the zone will reach Rmb500bn ($81bn) by as early as 2015. By serving as an example for national policy, Shandong Province, and Qingdao in particular, will play a pivotal role in marine logistics across the Asia-Pacific region. "This national programme is expected to offer a further impetus for Qingdao's open economy," said Qingdao deputy mayor Liu Mingjun at a recent trade meeting.

The hurdles of building such an economy are many, however, given Qingdao’s continued environmental problems. Still seen as relatively attractive due to its lower levels of air pollution when compared to China’s biggest cities, its economy has still suffered as a result of damage to the nearby marine economy. A recent algal bloom in the surrounding Yellow Sea, which grew to the size of the state of Connecticut, has harmed tourism and cost more than $30m to clean up.

The port industry itself has been also accused of poor practices, with a 2012 survey reported by Chinese newspaper the Economic Observer suggesting that more than 48% of the iron ore stored at Qingdao’s Huangdao Port was unqualified or substandard.  

But there are positives on the environmental front as well, including the recent opening of the 10-square-kilometre Sino-German Ecopark, the first of its kind in China with a European country as a partner. It signals a further shift in commitment to the development of ecobusiness in the area.

Although there are still environmental problems to overcome, Qingdao does have a huge advantage over many other cities in China because of its willingness to continue opening up and investing in social as well as traditional business areas. The city’s renowned beer festival continues to grow, and is just one of more than 50 events held over the past few months, such as the China-Hong Kong International Fashion Luxury Expo, the Qingdao Music Festival and the Taiwan Gourmet Food Festival.

Damage limitation

Such changes are essential, however, to deal with the challenges faced by Qingdao and the rest of China. Lower-level manufacturing firms are pulling out of areas such as Qingdao as wages have risen on average by 20% per year (according to the Department of Commerce of Shandong Province), removing the advantages associated with low-cost labour. Recent speculation that defunct Swedish car manufacturer Saab is to set up a plant in Qingdao has been met with scepticism, precisely because of the level of investment required and associated labour costs in an increasingly competitive domestic car market to make the failed brand once again successful. Similarly, a more than $1.5bn dollar investment in a new shopping mall by the Parkson Retail Group is seen as a potentially risky outlay on one location.

Again though, it does seem as if the city is responding. Its government has addressed rising operational costs and reduced administrative fees, and has also reduced the bureaucracy and time needed for foreign firms to register their businesses.

For some, the key to Qingdao’s growing success is its openness to foreign companies of all sizes and with varying demands. As long as the city can remain strong in the face of environmental and value-chain challenges, the FDI environment in Qingdao should continue to develop strongly in the coming years.