China's Investment Climate: Hardware And Software

The importance of a country's "investment climate" has recently received much attention. The reason is not only the quality of one country's investment climate influences its economic growth directly, but also regional development competition in China is getting more focused on it. As to investment climate, there are always two aspects—the "hard" side and the "soft" side. Most of China's past efforts on investment climate's improvement are on the "hard" side. Now we should pay more attention to the "soft" side, as small and medium enterprises become the main body of investment and foreign investors concentrate on the "soft" side.In this paper we use a survey of more than 1200 Chinese small and medium enterprises in 23 provinces to analyze the components of China's investment climate, including infrastructure, efficiency of government, governance burden, rule of law, corruption, and financial system. We find that the "hard" side of China's investment climate has become much better since 1978 despite some problems on transportation and human resource infrastructures. In the meantime, the "soft" side of investment climate has become the bottleneck of investment attraction and investment climate improvement, especially on the issues of governance burden, access to finance and corruption.Therefore, it is far from enough to attract investment only though beneficial policies. To build a transparent, stable and effective investment climate is a matter of great urgency.