China - Facilitating investment and innovation : a market-oriented approach to Northeast revitalization

Report No. 34943-CN China Facilitating Investment and Innovation: A Market-Oriented Approach to Northeast Revitalization Poverty Reduction and Economic Management Unit East Asia and Pacific Region February 15, 2006  ACKNOWLEDGEMENTS The task manager and principal author of this report is William Mako. Major substantive inputs included investment climate surveys by David Dollar, Anqing Shi, Shuilin Wang, and Lixin Colin Xu; detailed assessments by the World Bank Group's Foreign Investment Advisory Service (FIAS); and consultant studies funded by the governments of South Korea, Japan, and the United Kingdom (Department for International Development, DFID). Xiuzhen Zhang provided additional research assistance. This report was requested by the Ministry of Finance. Particularly valuable advice and support were rendered by Vice Minister Xiaowu Song and staff at the State Council Office of the Leading Group for Revitalization of the Northeast and Other Old Industrial Bases; Weizhong Meng and Ke Jin at the Development Research Center of Liaoning Province; Xiaodong Yu and Yuanchao Jiao at the Leading Economic and Financial Group of Heilongjiang Province; and the Development Research Center of Jilin Province. This report was prepared under the supervision of Khalid Mirza. Peer reviewers for the first draft of this report were Joseph Battat (FIAS), Gary Fine (World Bank, Europe and Central Asia region), Holger Grundel (DFID), and Junkuo Zhang (Development Research Center of the State Council). Chunlin Zhang, Yanfei Ye, Jun Wang, Bert Hofman, L. Colin Xu, Xiaolun Sun, Lubomira Beardsley, and Xiaofeng Hua also provided valuable comments.  Table of Contents Page Executive Summary i I. Introduction 1 II. Curing the Northeast's "SOE Syndrome" 10 A. Issues 10 B. Recommendations 18 III. Encouraging Private Investment 30 A. Business Entry 30 B. Taxes, tax administration, and fees 39 C. Customs 44 D. Corruption 46 E. Court-based resolution of commercial disputes 47 F. Access to Finance 49 G. Labor Flexibility 53 H. Infrastructure and Urban Quality of Life 55 I. Skills and Technology 57 IV. Facilitating Innovation 60 A. The Government's Role 60 B. Public-Private Sector Coordination 62 C. Investment Promotion 64 Bibliography 65  Executive Summary While the Northeast has significant potential, its economic growth has steadily lagged behind China's more rapidly growing Southeast provinces. While history and geography play a part, so do government policies and programs. The Northeast's lagging growth reflects both a lack of private sector development and an inadequate transformation of Northeast industry away from state control. The government's current program to "revitalize" the Northeast includes a mix of measures