Shantong LI, Yunzhong LIU, Bo CHEN (Development Research Center of State Council, PRC)

Transcription

1 RESEARCH ON MEASURES: OBJECTS AND DEGREES OF LOCAL PROTECTION IN CHINESE DOMESTIC MARKET -- An analysis based on sample survey Shantong LI, Yunzhong LIU, Bo CHEN (Development Research Center of State Council, PRC) Abstract The paper is based on the survey of local protection in Chinese domestic market. The survey covers all provinces, autonomous regions and municipalities except Hong Kong, Macao and Taiwan. 3,500 pieces of questionnaire are collected and the sample survey is the first systematic survey of local protectionism in China. The survey finds that local protection is still a key factor to influence enterprise s expansion although the degree of local protection has been weakened. Moreover, measures and objects of local protection have also changed dramatically. The paper also puts forward some policy suggestions to break down local protection. Key Words: Local Protection, Market Integration, Chinese Economy 1. Introduction Local protectionism in Chinese domestic market is a long-standing issue. Before 1978 s economic reforms and opening, the planned economy in China was a highly centralized and vertical control system, which is called as tiaotiao. This system to allocate resource could lead to the whole China as an integrated chess, under which regions could develop more equally, but inefficiently. Because sectors were separated in tiaotiao system, the mobility of products and factors was limited within each sector. Two enterprises affiliated to different sectors couldn t have the supplier-buyer link even if they were located in the same region and had the need to buy and sell. On the other hand, if two enterprises were affiliated to the same sector, they could exchange their goods without the consideration of cost and distance. Thus, there existed a visual vision to confuse the economic linkage among regions. Since the beginning of 1980s, China started the reform to entrust local government the power to develop local economy and local authorities obtained much discretion on finance, tax and investment. Local government s incentives for economic growth surged up accompanied with local protectionism emerging. To take a sweeping view of the history of local protectionism, the evolution of local protectionism could be divided into two stages. The first stage lasted between the beginning of 1980s and 1994 because China didn t implement tax sharing system until 1994.In the period, Chinese economy was characteristic of shortage and fiscal revenue distribution between central government and provincial government was regulated by contracts that stipulated a lump-sum remittance for each province to increase annually by an agreed rate, leaving local governments with all the rest. This fiscal system drove local protectionism directly. The main object of local protectionism is products market, especially important factors markets. Cotton battle, coal war and silkworm 1

2 battle manifested the feature of local protectionism. The second stage started from 1994.Since then, other factors including the power division between central and provincial government, social security system and property right system, especially the land property right, gave rise to the local protectionism. Moreover China economy has changed from shortage to surplus. Thus the local protectionism has changed dramatically, protection content shifting from resource to market, methods from explicit ways to implicit ways and coverage from product market to factors market. The fragmentation of domestic market and local protection has impeded free exchange of commodities and factors among regions, and is neither beneficial to carrying forward the comparative advantage of localities and forming specialized division of work nor to gaining scale efficiency. Thus it is China central government s important task to break down the local protectionism and enhance the domestic market integration. The improvement of China s integration of domestic market depends on the improvement of infrastructure including telecommunications, transportation and energy development as well as the establishment of the competitive market order. At present, China s investment in infrastructure has greatly helped improve the situation of domestic infrastructural facilities 1. The issue of a package of laws and regulations in recent years has put an end to many means used to block the market 2. Through years of hard efforts by the Chinese government, there are still urgent issues required for study. Included are how to integrate China s domestic market, what feature of measures of local protectionism is, and what measures the government should take to eliminate the phenomenon of the market fragmentation. The questionnaire survey to enterprises and non-enterprises units on market fragmentation and local protection is helpful to collect direct experience of enterprise operators in existing local protection means and understand the influence of market fragmentation on enterprise performance. The conclusion of the analysis of the questionnaire should supplement the conclusions of other literatures whose research measures are based on the statistical data. So far there has not been a scale questionnaire analysis on China s domestic market fragmentation and local protection 3. We wish to use questionnaire analysis to give answers to such issues as whether local protectionism exists or not, its influence, its ways and means, and the efficiency of central government s policy etc. This could offer solid basis for relevant government agency to work out policy measures for the promotion of Chinese market integration. The questionnaire aimed at enterprises covered such contents as enterprises basic conditions of enterprises, market operation and competitiveness, evaluation of 1 According to the data of the Summary of China s Statistics, 2003, the long distance automatic exchange capacity in 2002 was 353 times that in 1980 and 48 times that in The civil aviation mileage was 8.4 times that in 1980, and 3.2 times that in The railway mileage was up 34.9 percent over 1980, and 24.4 percent over The highway mileage increased 99.8 percent over 1980, and 71.7 percent over These data have not yet considered the improvement of the quality of infrastructure such as the construction of expressways. 2 Law on Unjust Competition approved in 1993, and the State Council No. 303 Order, Stipulation of the State Council to Forbid Regional Blockade in Market Economic Activities, issued in European Commission (EC) made similar investigation on trade barrier in the commercial service within the EC region, See European Commission (2001) Barriers to Trade in Business Services, Center for strategy & Evaluation Services. 2

3 operational environment, appraisal of trade barriers, measures to limit products to enter market, measures to limit the accession of production and marketing organizations, and the appraisal of the efforts made by the central and local governments to eliminate local protection. The Department of Development Strategy and Regional Economic in the Development Research Center, State Council had got support from The World Bank to organize relevant departments across the country to jointly launch the questionnaire. The survey included all provinces, autonomous regions and municipalities except Hong Kong, Macao and Taiwan. Altogether questionnaire were issued in March 2003 and 3,500 were collected in June Included were 3,156 pieces of effective paper. This sample survey is the first systematic survey on local protectionism in China. In the rest of this paper, section 1 discusses the validity of questionnaire, section 2 explains the main findings of the survey and section 3 is the conclusions and suggestions. 2. Distribution of Objects in the Survey The objects in the survey were required to be distributed widely in all provinces, autonomous regions and municipalities excluding Hong Kong, Macao and Taiwan and come from enterprises of different sizes, ownerships and industries. The Table 1, Table 2, Table 3 and Table 4 list the distribution of effective sampling regions, sizes, ownerships and industries. Table 1: Regional distribution of enterprise effective sampling (%) Province % Province % Province % Beijing 0.4 Anhui 1.7 Chongqing 5.1 Tianjin 5.0 Fujian 3.5 Sichuan 5.1 Hebei 5.3 Jianxi 1.9 Guizhou 4.9 Shanxi 0.8 Shandong 5.0 Yunnan 3.3 Ineer Mongolia 2.1 Henna 3.9 Tibet 0.9 Liaoning 5.1 Hubei 4.5 Shannxi 3.5 Jilin 4.3 Hunan 7.1 Gansu 4.4 Heilongjiang 3.2 Guangdong 1.9 Qinghai 1.1 Shanghai 3.6 Guangxi 5.9 Ningxia 1.1 Jiangsu 2.3 Hainan 1.0 Xingjiang 0.8 Zhejiang 1.4 Table 2: Scale distribution of enterprise effective sampling (%) Scale large Middle Small % Note: The National Statistical Bureau issued the Provisional Measures to Divide Large, Medium-sized and Small Enterprises in Statistics on May 22, In line with the measure and the actual conditions of the survey, the division standard of the measures can be simplified into the following forms: large enterprise: each with 2,000 employees and sales income of over 300 million yuan. If the enterprise is in commercial trade or catering service, it will have at least 200 employees with an annual sales income of over 150 million yuan. If it is a telecommunication and postal industrial enterprise, it will have more than 1,000 employees with an annual sales income of 300 million yuan. Medium-sized enterprise: each with 300~2,000 employees and sales income of 30~300 million yuan. If it is in commercial trade or catering service, it will have employees with sales income of million yuan. If it is in postal and telecommunication sector, it will have employees with sales income of million yuan. Small-sized enterprise: each with less than 300 employees and sales income of less than 30 million yuan. If it is in commercial trade or catering service, it will have less than 100 employees with sales income of less than 10 million yuan. If it is in postal and telecommunication sector, it will have less than 400 people with sales income of less than 30 million yuan. As for a large and medium enterprise, if it meets one of the conditions, it can descend on grade. Table 3: Distribution of ownership of enterprise (%) Ownership % Ownership % 3

4 SOE 35.7 Limited liability 35.7 Collective 5.2 Stock company 15.9 Stock cooperative 2.4 Private 11.2 Affiliated 1.5 Foreign capital 5.3 Note: The form of enterprise ownership does not equal the form of enterprise registration. However, we use for reference the form of enterprise registration to differentiate the form of enterprise ownership. Because an enterprise is a company in the form of registration, it is still a state enterprise in ownership. Statistical results show that eight percent of questionnaires have multiple choices. Table 4: Distribution of industry (%) Industry % Industry % Industry % Industry % Industry % Industry % Chem. Nonmetal Instru. & Agri 1.6 Clothes Commerce 5.0 product mineral office ma. Chem. Metal Other Mining 3.0 Timber Finance 1.1 Fibre product manuf. Public Real Food 7.1 Leather 0.8 Medicine 6.2 Machine utility estate Rubber & Cul & Drink 3.8 Paper Vehicle 2.9 Construct plastic edu. Sport Black Electric S&R Tobacco Transport equipment metal machine service Oil Colored Electron Weaving Communic 2.1 Other 3.5 product metal equipment Note: Because China does not have product classification standard, it uses only the standard of industrial classification. The listed 36 industries are regulated in line with the industrial classification standard released on October 1, Under the situation that one enterprise involves many industries, less than 15 percent of the questionnaire had multiple choices. Industries, where enterprises belong to, depend on products. If some commercial enterprises are engaged in retail sales of certain goods, they will be regarded to be in the industry, which carries out whole sales of their commodities. Because of the difference of economic size, the number of enterprises and the production scale in different areas of China, the survey divided provinces into three categories according to their sizes. The category of large size consisted of 13 provinces, the medium-sized, 14, and the small, 14. Altogether 450 questionnaires went to large provinces, 300 to medium-sized ones and 90 to small ones. In addition, the Guanghua School of Management of Peking University carried out scattered investigation. In view of the samples collected, people surveyed were distributed to all regions, scales and ownerships and industries, though there are only a small number of questionnaires gathered in Beijing. This indicates that the survey meet the requirement of complete sample survey. 3. The Results of the Survey (1) Efforts to reduce local protection are effective To reduce local protection is part of the work that the central government tries to accomplish. With the deepening of the reform and restructuring, the overall development of public servants and the progress in other fields, the work to reduce local protection has gained achievements. The survey result shows that enterprises agreed that the degree of local protection is much more less than 20 years ago and less than 10 years ago. They are more satisfied with the efforts made by the central government than local governments to eliminate regional trade barriers. Table 5 shows that 34.4 percent of enterprises agreed that the degree of local protection is much more less than 20 years ago, and 35.4 percent of enterprises agreed that the degree of local protection is less than 20 years ago. The proportion of satisfaction with the efforts done by the central government is higher than that by local governments. This indicates that the degree of local protection has reduced since 4

5 1980 especially since 1994 when China reformed its taxation. However, the efforts done by the central government have been approved more than local governments. Table 5 The comparable results of the degree of local protection at present and 20 to 10 years ago, and the appraisals of the central and local governments policies(%). No answer Much worse Worse No change Better Much better Compared to 20 years before Compared to 10 years before No answer Very Satisfaction Satisfaction No satisfaction On central government On local governments Different areas show different views on the efforts made to eliminate local protection. In view of the survey results, the degree of satisfaction with the central government s efforts is highest in Jilin and Fujian provinces, and lowest in Hubei and Hainan provinces. The degree of satisfaction with local governments efforts is highest in Jilin and Fujian province, and lowest in Beijing, Jiangxi, Hubei and Hainan. Appendix Table 1 shows the reflection of the efforts made by the central and local governments in different areas. Regional difference of appraisals on the central government may indicate that the measures employed by the central government in different areas have generated different results. Regional difference of appraisals on local governments may indicate that the efforts by local governments are varied. The survey shows that tobacco industry has special view on the change of the degree of local protection. Enterprises of tobacco industry agree that local protection has been severer over the past two decades or one decade. The number of enterprises, which regard that the local protection is heavier, unchangeable, slightly light and lighter in comparison with 20 years ago, accounts for 21 percent, 34 percent, 12 percent, 25 percent and three percent. Meanwhile, the number of enterprises, which regarded that the local protection is heavier unchangeable, slightly light and lighter in comparison with 10 years ago, accounts for 12 percent, 40 percent, 25 percent, 15 percent and six percent. Such answers are different from the answers of other industries. (2) The local protectionism still exists The questionnaire asked enterprises to compare operational environment of their own province with other provinces in five aspects of legal system, capital, market, credits and social environment and give their appraisal on operational environment on the basis of five marks. The legal environment means whether the legal interest of an enterprise is effectively protected, its economic and intellectual property dispute timely solved. The capital environment refers to enterprise financing. The market environment means the fair transaction among enterprises. The credit environment means whether the loans can be recovered in time and the debts among enterprises. The social environment refers to the degree of irrational charge for enterprises, the understanding of the role played by small and medium-sized enterprises and the service offered by government agency. The outcomes of the appraisal are included in the Table 6. 5

6 Table 6: Enterprise appraisal on five categories of environment in and outside the province Number Average score Environment Inside Better than Inside worse than outside outside Inside of province Outside of province Legal system Finance Market Credit Society It is easily seen that the average marks for operational environment inside the province are higher than that of other provinces. The number of samples regarding better environment inside the province than outside is more than the other way round. Such difference of appraisal is worth of careful consideration. We believe that such difference has reflected the possibility of the existence of local protectionism. First of all, if the operational environment of all areas is similar and the objects surveyed truly reflected the feeling, the difference of the appraisal of operational environment in and outside a province is comparatively smaller. Secondly, if there is difference in enterprise operational environment among different areas but there should not be great difference in comparison with different areas and the appraisal of environment inside the province is closes to the appraisal of environment outside the province. The difference of the selected number of samples is not great. Thirdly, the difference of appraisals of legal environment and market environment in and outside a province is greater. This means great difference of the protection of legal rights and transactional fairness of an enterprise inside and outside a province. An enterprise, which undertakes operation outside its province, has experienced unfair treatment. Another aspect of the thing is that locality has protected local enterprises. Of course, there is a phenomenon that the appraisal of provincial environment is higher than outside in most parts of China. This might be one reason that local enterprises are more familiar with local environment. This is a deviation of perceptual knowledge and not the reason of local protectionism. The phenomenon that the appraisal inside the province is lower than outside indicates the economic and social environment of these areas cannot leave a good impression on people. They need to make improvement. (3)Varieties of ways and means of local protection To learn the concrete ways of local protection in detail, the questionnaire listed 42 types of eight varieties in two categories of forms and debits of local protection to ask people surveyed to make appraisals. Appendix 1 shows the detail of specific content of ways of local protection. According to the survey, the above-mentioned forms of local protectionism still exist. Forms such as controlling prices and quantity of products from outside, which we believed not to exist before the sample survey, still generate unbeneficial influence on the marketing of products. Therefore, we agree that the forms of local protection for products and element market are multifarious. One cannot easily or subjectively decide that some of the forms no longer exist. 6

7 (4) Local protection for tobacco, alcoholic drink and motor vehicle markets is severer The scope of products protected by localities listed by enterprises covers almost all products. Table 10 shows ten categories of products protected heavily by localities according to the statistics of the frequency of products mentioned by enterprises. Table 7: Ten categories of products protected heavily by localities number number number number Tobacco 601 Alcohol 484 Vehicle 185 Food 154 Farm product 111 Medicine 105 Power 62 Fossil goods 60 Beverage 58 The reason why these products are protected by localities is because they generate high profits and high tax. Included are tobacco 4, beer, motor vehicles and medicine. Another reason is special system such as tobacco monopoly system, purchase and reserve system for farm products such as cotton and grain and power grid. (5) Enterprises respond strongly to protect labor force market The questionnaire asks to give appraisal and marks to 42 varieties of eight categories of forms of local protection according to the gravity. Table 8 shows the marks of the forms of local protection. Table 8: Evaluation and order of eight categories of local protection Scores Order Limit the sale of non-local products directly Price restriction & subsidy Administerial Discrimination Other Informal means Intervening in raw materials input Intervening in labor market Intervening in finance Intervening in technology Table 8 shows that the most serious forms of local protection include the limit of labor force, invisible limit to prevent outside products to enter local area and discrimination in industrial and commercial quality control. The three forms rank the top three. Meanwhile, the direct quantity and price control are not very serious, and the capital intervention is not a projecting issue. In addition, the absolute marks for the eight categories are not very high (the full marks are 100). Maybe they reflect the degree of seriousness of protection forms is not very high 5. Table 9: Ten most serious forms Ranking Forms Severity(by industrial sector) - descending 4 See China Economic Times, Page 6, February 17, 2003, How Tobacco System becomes Monopoly Local Tobacco. 5 Another reason might be that many samples do not understand certain forms of local protection and give 0 mark to these forms thus reducing the marks of these forms to cause the absolute marks to be low. 7

8 1 2 3 Local government demands to give priority to employing local citizens when an enterprise employs people It is too expensive for children of employees from outside to study in a local school It is difficult for an employee from outside to settle down Deal a light blow on locally produced imitative commodities Because the government s corresponding functions are not perfect, the government can hardly provide pension, medical and unemployment insurance for employees from outside Judicial departments are not active when implementing the judgment When an outside enterprise brings a suit against a local enterprise, judicial departments are not active Obviously give unprincipled protection to local enterprise during a judicial procedure When the government or enterprises bid for construction projects, they give consideration to local enterprises Limit the flow of technicians, especially important technicians by way of forcing them to pay a large sum of expenses or not to transfer their archives and registered permanent residence Table 9 shows the top ten forms of the 42 types of local protection patterns. They include priority given to employing local citizens, difficulty for children of outsiders to study in school, difficulty for employees to settle down, loose investigation and prosecution of imitative goods, imperfect social insurance coverage, difficulty in judgment, difficulty in prosecution, unfair judicature, consideration given in the government bidding, and difficulty for technicians to flow. The focus includes the flow of labor force, technicians in particular and judicial try. 8

9 (6) Difference of different industrial sectors in evaluating forms of local protection Different industries have different appraisals about the forms of local protectionism. Table 10 shows the severe appraisals listed by different industries. One example is tobacco and stationery industries, which regard quantitative control as the severest local protectionism. Leather industry agrees that technology control is the severest local protectionism, and banking, insurance, electric equipment and storage industries believe that judicature and bidding are the severest local protectionism. Many industries regard the control of labor force market as the severest local protectionism. Table 10: The rank of eight categories of local protectionism. Sale limit Price restriction Admi. discrimination Informal means Interv.in materials Interv.in labor Interv.in finance Interv.in tech. Agri Mining Food Drink Tobacco Weaving Clothes Timber Leather Paper Sport equipment Oil product Chem. product Chem. Fibre Medicine Rubber & plastic Black metal Colored metal Nonmetal mineral Metal product Machine Vehicle Electric machine Electron equipment Instru. & office ma Other manuf Public utility Construct Transport Communic Commerce Finance Real estate Cul & edu S&R service Other Note: 1 indicates the severest, and it is followed by 2. It is worth mentioning that the rank of severe local protectionism has surpassed the scale of the industries. Some enterprises make appraisals not only in line with their industrial situation but also employ information of market fragmentation of other industries. In addition, the appraisals on the forms of local protection made by enterprises have little relation with the relations between enterprise scale and ownership. The proportion will be smaller with the change of the enterprise scale and ownership. 9

10 (7) Difference in local protection in different areas The questionnaire asked people being surveyed to give a mark to provinces (municipalities and autonomous regions) in accordance with the above-mentioned five aspects of legal system, capital, market, credits and social environment. An appraisal of enterprise operators will come out based on the marks given to different provinces, municipalities and autonomous regions. (Table 11) Table 11: Appraisal of enterprise operator on operational environment Legal system financing market credit society Total East Center West Whole Note: The gross marks derive from the average of the marks gained from the five aspects and convert into numerical value (%). The higher the value, the better the environment. The enterprise operational environment of Shanghai, Zhejiang, Jiangsu, Fujian and Xinjiang is good, and that of Shanxi, Heilongjiang, Tibet and Ningxia is poor. It is easy to find that the enterprise operational environment of provinces with developed economy and rapid economic development speed is good. In contrast to capital environment and credit environment, the legal environment is good indicating the financing and credit relations of enterprises is quite tense 6. (8)Local protectionism is a key factor to affect enterprises to sell products and offer service outside the province but it is by no means a chief factor. 1) Situation of an enterprise selling products and offering service outside its province People being surveyed were required to have practical operational experience outside his province in order to guarantee the survey result to be convincing in truthfulness and effectiveness. Of the collected effective samples, 20 percent of people surveyed said they mainly sold products locally, and five percent noted that the proportion of their local sales reached 90~100 percent. Such proportion is small and has little influence on the result of the survey analysis. With the expansion of enterprise size, the proportion of local sales shrinks. One example is the proportion of sales of 21 percent of small enterprises is less than 10 percent, and that of 27 percent of large enterprises is less than 10 percent. In view of ownership, the sales proportion of foreign-funded enterprises, shareholding companies and state enterprises in their provinces is smaller. We believe that the samples are in accordance with the requirement of analysis on the whole because most samples have experience of marketing outside their provinces and are distributed rationally. The number of samples with the proportion of marketing outside their provinces accounts for 51 percent. Table 12 displays the proportion of marketing within enterprises provinces. Table 12: Distribution of the proportion of enterprises local sales (%) classification No answer < 10% 11-50% 51-80% % Large Here may exist bias of self-selection. According to an analysis of people surveyed to fill in forms, many people were enterprise employees engaged in marketing and financing who show interest in fund and credit issues. 10

11 Middle Small EOS Collective Stock cooperative Affiliated Limited liability Stock company Private Foreign capital Total ). Important degree of the influence of local protection factor on enterprises sales outside their provinces To make clear about the important degree of the influence of local protection factor on enterprises sales outside their provinces, the questionnaire had listed seven such factors as products with less market demand, products lack of price competitiveness, products, of which the quality needs to be improved, products unsuitable for selling outside, high cost of transport, blockage of transport, local protection and unfair competition. It asked people surveyed to rank these factors according to their influence. Table 8 and Table 9 show the results of appraisals of the importance of different factors by enterprises, which sell products and offer service outside their provinces or have not yet had marketing business in other parts of the country. Table 13: Appraisal of the importance of factors to limit enterprises with business outside the province to sell goods outside Small demand No price No quality Limited by High No channel to advantage advantage Long distance Transport cost market Agri Mining Food Drink Tobacco Weaving Clothes Timber Leather Paper Sport equipment Oil product Chem. product Chem. Fibre Medicine Rubber & plastic Black metal Colored metal Nonmetal mineral Metal product Machine Vehicle Electric machine Electron equipment Instru. & office ma Other manuf Public utility Construct Transport Communic Commerce Finance Having protectionism 11

12 Real estate Cul & edu S&R service Other Total Table 14: Appraisal of the importance of factors to limit enterprises without business outside the province to sell goods outside Small demand No price No quality Limited by High No channel to advantage advantage Long distance Transport cost market Agri Mining Food Drink Tobacco Weaving Clothes Timber Leather Paper Sport equipment Oil product Chem. product Chem. Fibre Medicine Rubber & plastic Black metal Colored metal Nonmetal mineral Metal product Machine Vehicle Electric machine Electron equipment Instru. & office ma Other manuf Public utility Construct Transport Communic Commerce Finance Real estate Cul & edu S&R service Other Total Note: 1) Maximum influence, 2) Next, follow-up, 7) minimum influence Having protectionism Different enterprises with different characteristics respond differently to outer environment including local protectionism 7. It is necessary to make clear the influence of local protection and market fragmentation to enterprises to engage in trans-regional operational activities. In view of the statistical results of all effective samples, all enterprises with and without marketing in other parts of the country agreed that local protection and unfair competition are the fourth important factor. For enterprises with sales outside, the top three were the lack of price competition, high 7 During the pilot survey before carrying out the massive investigation, enterprises regarded that local protection was not the leading issue in their operational development. 12

13 transport cost and less market demand. For enterprises ready to sell products outside, the lack of price competition, high transport cost and less market demand will block them from entering the market. Of the all factors to affect enterprises to enter outside market, local protection including market demand, price, quality, transport cost and shipping channel, ranks in the middle and not in the lead. Of course, the situation is varied from different areas, scale and industries. In view of areas, enterprises of Heilongjiang, Anhui, Guangdong and Yunnan provinces regard local protection as the most important factor to sell products outside their provinces. Enterprises of Hebei, Inner Mongolia, Heilongjianig, Shandong and Shaanxi regard local protection as the most important factor to block the sales of products from outside to their provinces and region. In view of the scale production, enterprise scale has no influence. Enterprises with sales outside and enterprises ready to sell products outside have different views on the importance of the two factors: less market demand and the lack of price competitiveness. The former regards the price should rank the top, and the latter believes the market demand the first. High transport cost and local protection ranks the second and fourth place each. In view of industries, tobacco, medicine, building and telecommunications, education, culture and scientific research service enterprises regard local protection as the first factor to affect sales in other parts of the country. Enterprises of beverage, tobacco, wood furniture, chemicals, medicine, building, telecommunications and culture and education regard local protection as the first factor to limit the entry of goods from outside. Localities control culture, education, health and telecommunications tightly. A small number of samples listed other factors to affect operation outside. In addition to the quality of enterprises, six factors in relation to the unified national market are worth of attention. They include 1) poor credit of customers and difficulty in recovering loans, 2) extravagant investigation and prosecution by law enforcement department, 3) excessive charge of road passes, 4) corruption of judicial departments, 5) forged goods popular on the market, and 6) conduct of the underworld. Apart of customers credit, the above-mentioned factors, more or less, concern whether the government behavior is responsible or rational. The conduct of the underworld, which affects enterprises normal production and operation, should arouse attention. (9) Weakening of local protection is beneficial to improving industrial competition Local protection influences enterprises production and operation. According to the sample survey, the sales prices of most enterprises in other parts of the country are higher than on local markets because of the increase of the sales costs. The fixed prices of different industries are varied. The fixed prices of posts and telecommunications, instruments and meters and office machinery, electric machinery and paper-making is lower in other parts of the country than local areas. This is in relation with participation into market competition with low price. The product prices of these industries maintain a high level in local areas. The specific influence of local protection may be estimated according to the change of future sales, prices and the quality of products after eliminate local protection. According to the survey result, if the local protection is over, the sales, prices and quality of almost all industries will be up thus beneficial to improving low-level industrial competition. The influence of local protection to the change of sales and the quality is obvious. The collected results of every industry show the rapid increase in sales volume. Table 14 shows that 23 percent of the enterprises surveyed agreed that the sales would rise 13

14 0~10 percent, and 26 percent said they would go up at least 10 percent. This number exceeded those who believed the sales would decline by 7.6 percent. Progress was made in the improvement of the quality. The number of enterprises believing that the quality would be up accounted for 32.5 percent, and only one percent of the enterprises said the quality would be down. The influence of the decline of local protection on price change was uncertain, but most enterprises agreed the prices would be up and only 14 percent said the prices would go down. Table 15 The distribution of the answer to sales prices in other parts of the country, the change of sales volume, prices and the quality (%). Non-local price Change of sale Change of price No answer Higher 10% Higher but Same Lower 10% lower but not not to 10% to 10% No answer -10% -10%< & <0 0 0< & <10% 10% No answer -10% -10%< & <0 0 0< & <10% 10% Change of quality No answer Worse Same Better Conclusion and suggestion This sample survey aiming at enterprises has gained some significant conclusion: 1. The efforts made by the central and local governments over the past decade have gained certain results. At present, the seriousness of local protection has dropped greatly from 20 years ago and is better than a decade ago. 2. Enterprises appraisals of the operational environment in their province are better than the operational environment outside. The variation of appraisals of the environment of legality and market environment in and outside their province reflects the existence of local protection. 3. enterprises appraisals of operational environment of different areas varied greatly. The operational environment of enterprises is good in economically developed areas and areas with rapid economic development. Moreover the difference in environments of legality and market reflects the variety in severity of provinces. 4. In comparison with capital environment and credit environment, the environment of legality is good. This means that financing and credit relation in enterprises is comparatively tense. 5. Local protection is a key factor to influence enterprise s expansion of performance outside though it is not the leading factor. The importance of such factors as price competitiveness of products and service, transport costs and market demand is higher than local protection. 6. High profit rate, tax rate and monopolized system have caused local protection for tobacco, alcoholic drink and motor vehicle products. 7. Under various forms of local protection, the severe forms include priority given to employing local citizens, difficulty for children of outsiders to go to school, difficulty for employees to settle down, loose investigation of fakes, imperfect social insurance coverage, difficulty in judgment and lawsuit, unfair jurisdiction, 14

15 preferential treatment of government bidding and difficulty for technicians to shift to other units. 8. These forms are aimed at the protection of labor force market and judicial departments. This sample survey indicates that progress will be made in improving low-level competition among enterprises if local protection reduces efficiently. Based upon the result of analysis of the sample survey, central and local government can implemented several targeted policies and measures to reduce the barrier of regional economic transaction, and suppress the protective action of local government. Severely protected industry and products of local governments (such as tobacco, liquor, automobile and medicine etc.) should be supervised and investigated in priority, normalize the system of government monopoly of tobacco, prohibit the protection of local auto-market through unreasonable environmental standard etc. Promote the implementation of policy to support labor mobility, such as reform of household registration system (Hukou) and regulation of migration of rural labor to urban area, perfect the land management in agricultural sector. Formation of a trend of orderly flow of labor and capital among urban and rural, gradually improve the recognition of social security accounting system among regions. There is also phenomenon of local protection through judiciary means, it is necessary to establish a proper judiciary system to deal with conflicts and issues of cross-regional trade. Clarify the scope of responsibility and fiscal expenditure of government at different levels. Divide fiscal resource appropriately based on above, stabilize and expand the tax base of local government, improve the fiscal revenue income of local government to deal with its responsibility properly. Reform further the local SOEs, promote separation of governmental administration and enterprise function. Reform the current division of corporate income tax based upon ownership, perfect further the tax sharing system between the central and local. Strengthening the transparency of information of government purchasing to stop the local protective action on government purchasing and bidding process. Perfect the transfer payment system between the central and local government, which may include tax rebate, specific item of allocation and special subsidies targeted to old, minority boarder and poor region, guarantee the normal administrative function of economic backward region. 15

16 Appendix Table 1 The degree of satisfaction of localities with the efforts made by the central and local governments to eliminate local protection (%). On central government On local government Count Many Satisfaction Satisfaction No satisfaction Many Satisfaction Satisfaction No satisfaction Beijing Tianjin Hebei Shanxi Inner Mongolia Liaoning Jilin Heilongjiang Shanghai Jiangsu Zhejiang Anhui Fujian Jianxi Shandong Henna Hubei Hunan Guangdong Guangxi Hainan Chongqing Sichuan Guizhou Yunnan Tibet Shannxi Gansu Qinghai Ningxia Xingjiang

17 Appendix Table 2 The five serious local protection measures in each sector Sale limit Price restriction Admi. discrimination Informal means Interv. in materials Interv. in labor Interv. in finance Interv. in tech. Agri Mining Food Drink Tobacco Weaving Clothes Timber Leather Paper Sport equipment Oil product Chem. product Chem. Fibre Medicine Rubber & plastic Black metal Colored metal Nonmetal mineral Metal product Machine Vehicle Electric machine Electron equipment Instru. & office ma. Other manuf. Public utility Construct Transport Communic Commerce Finance Real estate Cul & edu. S&R service Other 17

18 Appendix Table 3 The Appraisal of Entrepreneur on Operation Environment Legal system financing market credit society total Beijing Tianjin Hebei Shanxi Inner Mongolia Liaoning Jilin Heilongjiang Shanghai Jiangsu Zhejiang Anhui Fujian Jianxi Shandong Henna Hubei Hunan Guangdong Guangxi Hainan Chongqing Sichuan Guizhou Yunnan Tibet Shannxi Gansu Qinghai Ningxia Xingjiang Nation

19 Appendix 1 Listed 42 types of eight varieties in two categories of local protection in questionnaires 1. Ways to protect product market: 1) Directly control the sales quantity of domestic imports: (1) Local government lists a purchase catalogue, of which certain products are banned and some are limited from purchasing from other parts of the country, and employs license management for domestic imports. (2) Stipulate the total of local products for enterprises to purchase. This means that an enterprise must buy certain amount of local products before using domestic imports. (3) Local government stipulates the proportion of local products for enterprises to purchase and operate. This means that the amount of products coming from outside is limited by that of local products so as to control the market share. (4) When enterprises purchase rare raw materials, government departments of the rare raw material-producing areas limit the purchase. 2) Price limit and local subsidy (price control): (1) Employ the way of fixing prices with administrative behavior and raise prices for domestic imports. (2) Charge more for domestic imports than local products when selling products from outside. (3) Employ financial leverage, and offer preferential treatment in financing, interest rate and settlement to local products and not domestic imports. (4) Employ financial leverage to reduce or remit taxes of local enterprises and offer subsidy to them. 3) Discrimination of quality examination and other fields (1) Conduct excessive standard examination reports and systems for domestic imports in the name of strengthening market management and quality control. (2) Cut outside channels and varieties of products purchased by local commercial enterprises in the name of streamlining the marketing channels. (3) Employ industrial and commercial examination to limit domestic imports in the name of striking out at imitative commodities. (4) Limit enterprises from outside by way of employing licenses for motor vehicles and ships. (5) Tacitly consent to allow local enterprises to make unreal advertisements to extrude reject domestic imports. (6) Deal a light blow on locally produced imitative commodities. (7) Set up barriers or fee collection stations at the administrative border and carry out improper examination or charge more on commodities in and out of the area. (8) Form technical barriers in the name of environment protection, health and sanitation. 4) Invisible limits to check domestic imports: (1) When an enterprise needs law, accounting and consulting services, it is required or hinted to select local intermediary institutions. (2) When the government or enterprises purchase goods, they give consideration to local enterprises. (3) When the government or enterprises bid for construction projects, they give consideration to local enterprises. (4) When an outside enterprise brings a suit against a local enterprise, judicial departments are not active. (5) Obviously give unprincipled protection to local enterprise during a judicial procedure. 19