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Researches on Application Conditions of Grads Theory and Industrial
Transfer in the Eastern Developed Provinces
XIE Jian
City College, Wenzhou University, P.R.China, 325035
[email protected]
Abstract: There are many constraints on the application of the grads theory, which are related to the
grads theory’s application conditions, that is, whether the low grads regions meet the requirements of
industrialization; whether the low grads regions have an adequate district division that could form a
completed industry chain for industrial transfer; whether the transferred industry can comply with the
policies of the low grads regions, especially the eco-environment protection laws and regulations. In the
industrial transfers in the eastern developed province of China, there are some significant differences
between Guangdong Province and Zhejiang Province. In terms of the application conditions of the grads
theory, it is proved that the industrial transfer mode within the regions of Guangdong province is
ineffective, while the double transfer mode in Zhejiang Province which combines the internal and
external industrial transfer has proved to conform to the objective regulation of industrial transfer.
Keywords: the Grads Theory, industrial transfer, the eastern developed provinces, Guangdong Province,
Zhejiang Province
1 Introduction
The grads theory indicates that a certain industry transfers from one country or area to another country
or area as a result of the changes of the economic environment, the resource supply and the market
demand, which could be defined as industrial transfer. It is an important approach for the industrial
adjustment and upgrading among countries and areas, which is also proved by some countries’ industrial
development process. Observed from the characteristics of the industrial transfer in the world, it is
transferred from the relatively developed country to the sub-developed country, and then from the
sub-developed country to the developing country. A wave of industrial transference had been formed
because after the Second World War, some developed countries such as The US and Japan had
transferred a portion of their industry to some fresh industrialization Asia countries such as Korea,
Singapore, and Chinese Taiwan in the 60th last century, then these transferred industry grew up and
matured. In the 80th, these sub-developed countries also began to transfer some of their industries to
some developing countries in east Asia. Viewing from the domestic, since China’s reform and
opening-up in the end of the 70th, the eastern coastal areas had attracted some industries from the
relatively developed countries such as Japan and Korean. When developing to a certain level, they began
to transfer some labor-intensive and resource-intensive industries to China’s relatively backward Middle
Western areas.
However, there are some factors that restrict the grads theory’s application in China. For example, the
integrality of the industries transfers that means whether the whole industrial chain could be completely
transferred; paying more and more attention to the environmental protection policies that restrict the
industrial transfer; the conditions for industrial transfer that mean whether the low grads areas could
meet the requirements of the industrial transfer. Especially in some small districts, the local governments
try to accelerate their industrialization process by adopting the industrial transfer, but the results
normally are not expectable. So, it is necessary to analyse the application conditions of the grad theory
as well as comparing the currently mode of the industrial transfer in eastern of China thus reach a
rational choice for where could the traditional industry in eastern developed provinces be transferred.
2 The Grads theory and the industrial transfer in developed regions
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2.1 Review of the Grads Theory
It is deemed in the grads theory that the development of the regional economies depend on the status of
the industry structure that also lie on region economic department, especially the stage of the leading
industries in the industry lifecycle. If the leading industries are composed by some innovational
academic departments, thus these areas are developable and could be concluded as high grads district.
This theory indicates that the innovation activities determine the regional development level and most of
the innovation activities happened in the high grads areas. As time goes by and life-cycle stages changes,
production activities gradually transfer from high-grads regions to low-grads regions, and the process of
this grads transfer mainly expanded through the multi-level urban systems. Similar to the Grads Theory
is the Flying Geese Model that proposed by a Japanese scholar, regarding the issue in Flying Geese
pattern theory that production international transfer is according to the Comparative Advantage Theory,
is similar to the Product Life-cycle Theory of Vernon (1966).
According to this theory, every country or area stays at a certain economic development grads, which
will then transfer from high-grads zone to low-grads zone when new industries, new products and new
technologies appear. Therefore, in a global perspective, new industries, new products, new technologies
are always firstly appeared in the developed countries and regions because of the existence of
differences in regional economic development, and then gradually transfer to the sub-developed
countries and regions, and finally transferred to the developing counties and regions, forming the ‘Grads
Transfer’ feature in the industry. This industrial grads transfer is also considered as industrial regional
transfer that is based on business-led economic activities, defined as the economic behavior and process
for some industries’ transferring from a country or region to another country or region as a result of
changes on resource supply or product demand conditions. In the view of the exchange scope of
regional industrial transfer, it could be divided into national industrial grads transfer and regional
industrial grads transfer. For some areas, it also includes two dynamic processes that are the out-regional
industrial grads transfer and the local industrial grads transfer to other place. In China, ‘Grads Transfer’
represents that by upgrades of economic structure in the firstly being rich eastern areas, some
labor-intensive, some large nature resources consuming and the traditional products industry (e.g.
manufacturing) transferred to the central and western regions, and may firstly transfer to the central and
then to the west according to the order of the grads.
2.2 The necessary conditions of the Grads Theory
2.2.1 The necessary condition 1: The low grads areas must be qualified for industrialization.
Observe from the industrialization process in various countries, there are two kinds of necessary
conditions to achieve the industrialization: One is the condition that is required to carry out the
industrialization, such as the inner force of the economic structure, a unified national policy etc.; the
other is the condition that can boost and promote the process of industrialization, such as the powerful
government policies to promote industrialization.
Economists provide some perspectives from different point of view for the necessary conditions for
industrialization according to the experience of the advanced industrialized countries or the
requirements of national industrialization. For example, in the first half of the 19th century, Liszt
suggested that the industrial development in the backward countries require the government to
implement the selective tariff protection policy. In the 50th, a number of economists had investigated the
issue of the industrialization condition, in which Rostow’s ‘Stages of Economic Growth’ owned the
greatest reputation. In Rostow’s opinion that the following aspects must be qualified for a country to
step into the modern economy growth: the establishment of the social working capital, including
railways, ports, roads, etc.; there are some new risk-taking investors; the investment transferred to
infrastructure and industrial sectors; priority development of the agricultural; the application of the
modern science and technology in the industrial and agricultural sectors; the generation of central
government and its effective performance; the change of social attitudes. Habakkuk from the UK
suggested that the conditions of industrialization mainly were political stability, the effective function of
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market mechanisms, the highly liquidity of economic resource, a vast market and the favorable external
condition. Some scholars make some new interpretations on the conditions of industrialization in some
backward countries by comparing these conditions between the developing countries and the developed
counties in Europe. For example, Kim Yong-ho, South Korean scholars considered the combination of
the nation and the foreign investment, the introduction and using foreign investment in great amount as
the conditions to realize the industrialization in the developing countries.
Guoan Zeng (1998), a Chinese scholar presented the conditions of industrialization from common sense,
he believed that to achieve industrialization, a country must be qualified eight conditions: sustained
industrialization momentum; adequate, reasonable flow and effective utilize of the economic resource;
continued technological innovation and mechanisms; accumulated growth; strong industrial organizer;
the coordinated development of infrastructure; coordinated institutional framework for industrialization;
national independence and a strong government continued to promote the industrialization.
Above all, the regional industrialization conditions could be divided into two aspects: internal conditions
and external conditions. The internal conditions include the factors of location, resource, environment,
population, infrastructure etc. that owned by the less developed regions themselves; the external
conditions include country’s policy on the external funding and external capital investments. Generally
speaking, the underdeveloped regions could not generate the momentum of industrialization from the
internal without the support of external conditions due to their imperfect internal conditions; they are
also unable to obtain the continuing momentum of industrialization without internal foundational
condition support if they only rely on external conditions. Therefore, in order to promote the
industrialization in the less developed regions, the two conditions - internal and external conditions must be coordinated.
2.2.2 The necessary condition 2: There is an adequate region division for the integrated industry chain of
industrial transfer.
The integrity of the industry chain is closely related to the economic region division. Industry chain is a
subset of the related industrial activities, and its unit is composed by amount of relative economic
activity sets, namely, industry circle or specific industrial sectors; while industrial circle (industry
department) is also a number of enterprises group engaged in the same economic activities. In order to
maximize their own interests, the enterprises engaged in the same or similar economic activities strive to
explore the excellent region for their own economic actives. There are two aspects in this ‘priorities lead
transfer’ process, on one hand, in order to gain the concentrated economic benefits, the enterprises -micro-constituent units of the industrial circle (industry department) gradually gathered in the excellent
location that is appropriate to their development and growth, which also means the similar enterprises
originally distributing in various areas now gathered in excellent location that is named as ‘Clusters’. On
the other hand, in order to obtain the efficiency of geographical industrial division, the various industries
circle (industry department) tend to spread in space due to the different economic characteristics and
pursuit of their own priorities locations. In this way, the result of ‘priorities lead transfer’ of the space
economic in the enterprises and departments within the industry chain system is that the various aspects
of the industry chain are contributed or laid to the specified location that fit the characteristics of the
economic activities. For this reason, when some regions have large economic dimension, such as the
large economy area, large economic zone, province or basin economic zone, or as large as it could cover
the whole geographical space of the industrial chain, the industry chain perform obvious integrity; when
the economic region division is small such as city, county or that focus on the development industrial
area, its geographical range is typically difficult to include various aspects of the industrial chain, some
economic region could form the specialized industry, but the chain has shown significant intermittent
nature.
2.2.3 The necessary condition 3: The transferred industry should conform to the policies of low-grads
regions, particularly the laws and regulations on eco-environmental protection.
In accordance with the law of market economy development, the industrial grads transfer mostly are
traditional one, mostly are labor-intensive and somehow polluting industries. The pollution could be
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brought to the local environment if there is inappropriate choice of the industries. Development and
pollution, the ‘inverted U-type’ relationship has important tips applies to the regional rather than global:
Although economic development can promote the adoption of environmental technologies, but it is quite
possible for the pollution fall into the ‘zone transfer trap’ due to the imbalance of economic development:
some developed countries improve their environment not only by the technical factors, but also by
transferring the highly polluting industries out of their region and even by the clumsy international
waste trade. This risk may result from the corresponding cost comparison of various dealing methods.
For some specific areas, if it is possible to solve the pollution by adopting the environmental
technologies or transferring the pollution, the cost is the final decision for the choice in these regions.
Observing from the current situation, the cost of improving the environment by adopting the
environmental protection technology is usually higher than transferring the industry directly. So, the
protection the eco-environment policy must be put in the first place in regional industrial policy,
particularly in less developed regions where the eco-environment is very fragile. It is supposed that the
if the eco-environment is destroyed by the introduction of the high-polluting industries, then the loss
would outweighs the gain. The limitations of the Grads Theory become visible when the government in
the developed region recognizes this point and forbids the high-polluting industries to settle in through
legislation.
3 The industrial transfer modes in eastern developed regions: A comparison
between the two modes.
3.1 The industrial transfer mode in Guangdong: intra-regional industrial transfer mode
Guangdong province, one of the earliest provinces to implement the reform and opening up policy in
China , explored a typical outsourcing-oriented development way by taking the advantaged superiority
of its location along the southern coast, being adjacent to Hong Kong and Macao, and many overseas
Chinese all over the world, it also took the great opportunity of the transferring the labor-intensive
industries in Hong Kong, Macao, Taiwan and Southeast Asia to develop the Export-oriented industries
such as processing with supplied material, assembling parts supplied by clients, processing with
customer’s samples and compensatory trade.
However, as affected by the regional character in Guangdong province, the regional economic are
significant difference as some of which located in the country’s most developed cities such as
Guangzhou and Shenzhen, some of which located in the country’s most economically developed regions
like Pearl River Delta, while some of which located in the country’s most poor region as the east and
west wing as well as mountainous area. In 2005, a strategy proposed by Guangdong province in order to
promote the industrial transfer by joint the mountainous areas and the two wings with the Pearl River
Delta in order to accelerate exploit the wings and mountainous areas and to promote the industrialization
process in backward areas and narrow the gap in various regions in Guangdong Province. This
development strategy is based on the industrial transfer zone, transferring the traditional industry in
developed Pearl River Delta regions to the less advanced regions, on the meantime, encouraging the
labor transfer from the less developed regions to the developed regions ( named ‘double transfer’).
Government in Guangdong province not only steps up the construction of the infrastructure like road
mainly but also rewards to construct the ‘industrial transfer zone’ in order to facilitate the industrial
transfer and improve the traffic conditions in surrounding areas. The governments that immigrated out
play a leading role in financing, development, construction and enterprises recruitment, so they could
share a part of taxes collected from the enterprises immigrated into the industrial zone according to a
predetermined ration within a certain period as a repay.
At the end of 2008, under the vigorous promotion of the government, the number of transfer industry
zone in Guangdong has reached more than seventy, among which there are 29 zones identified by
Guangdong Province involving electronic communication, metal manufacture, hardware machinery,
furniture, shoes, clothing, household appliance, toys food and medicine etc.. It is estimated that,
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according to the program, if the entire identified industry transfer zone are established into use, the
yearly output value will reach 300 billion RMB which almost over the half of industrial output value in
more than 14 cities of the mountains and two wings of Guangdong province totally.
However, observing from the real practice, the operation of internal economic cooperation model leaded
by the government as the industrial transfer zone in Guangdong province did not achieve the supposed
effect. The main reasons are as followings:
Firstly, the actual participation of Pearl River Delta is not enough. The two wings and the mountain area
show a warm phenomenon while the Real River Delta shows cold.
Secondly, actually there are only few enterprises transferred from the cooperated Pearl River Delta into
industry zone. The constructions in the industry zone are far from that were supposed in advance , and
even some industry zones do not meet the minimum standards of economic operation, and there is no
investment project at all in some zones. It falls within a dilemma since quite a few enterprises are not
willing to move in. For example, the Dongguan Shilong (Shixing) industry zone which is the first
transfer industry zone in Guangdong province with the total planning area 6,000 acres and 1918 acres in
the first phase of development. However, three years after the industry zone open, there is no enterprise
moving in at all that leads the serious waste of resources.
Thirdly, the target of the transfer industry zone is not clear enough, in which homogenization
competition existed so it is difficult to attract business. For example, in Guangdong Province, among the
identified 29 zones there are 13 electronic information industry, 8 mechanical industry, 6 metal
manufacture, 6 textile and garment industry, 5 furniture industry, which shows the repeated positioning
in the zone.
Fourthly, it lacks the substantial positive policies that could active the Pearl River Delta. Although
Guangdong Province has proposed the instruction opinions on the construction, the management, the
benefit distribution of the industrial transfer zone and so on, there is no specific mandatory that it
encountered hard enforcement situations in the actual operation in the industrial transfer.
Fifthly, it lacks a great amount of funds in the construction of the infrastructure outside the zone which
affected the development progress and its investment environment.
Fundamentally, the main reasons that frustrate the application of industry upgrading development
strategies in Guangdong Province are as followings:
Firstly, neglect the enterprises’ leading role in the industrial transfer. Analysis from the characteristics of
industrial transfer globally, the reasons are very complex and the national government’s development
strategy may play an important role such as the positive effects of open-door policy in the eastern
coastal areas in the 80th last century of China. But the main factor in the industrial transfer is the industry
comparative advantage. According to ‘marginal industrial expansion theory’ of Kojima (Kiyochi Kojima,
1978) a Japanese scholar, industrial transfer is result of the enterprises’ looking for the advantageous
resources under the market economic condition. The places where the industries transfer to are
determined by whether there are advantageous of resource, environment and policy in the low-grads
area. Viewing the current situations in various areas of China, the central and western areas are more
competitive in undertaking the transferred industry than the mountainous areas of Guangdong Province.
Secondly, inadequate understanding in the condition and process of industry transfer. On the one hand,
low-grads areas need industrialization conditions which are obviously inadequate in the mountainous
areas. There could be some advantages through the government’s vigorous investment and some
favorable policies, however these advantages are unsustainable. Meanwhile, the geographical
environment is also difficult to accept the entire industry chain. On the other hand, industry transfer is a
long-term process, it takes several years from the industry’s migration to the industry’s forming in the
undertaking area. During this period, the external environment has been changed greatly that one
notable characteristic is that the industrialization condition in the Midwest areas become more mature
and the advantages of undertaking industrial transfer becomes greater. While the disadvantages in the
eastern mountain areas are gradually revealed, such as the cost of labor and land increase, the
environmental protection should be strengthened, which are obviously disadvantageous to the long-term
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development of industrial transfer.
3.2 Industrial transfer mode in Zhejiang: the double transfer mode which combines the internal
and external industrial transfer
Zhejiang, the eastern coastal province as well, also faces the challenge of the traditional industrial
transfer. Zhejiang is a land lack area with large population, so it has not only great population density
(460 persons/ sq km) but a great number of mountainous areas (mountainous areas up to 70.4%) as well.
The utilization of land is quite ineffective. When the traditional labor-intensive industries in the coastal
areas in Zhejiang Province developed to a certain extent, the lack of land resource constrains the
expansion of these industries and the rise in the labor costs brings the pressure to the enterprises, which
gradually leads to the corporate relocation. In fact, as early as the 90th in the mid-20th century, the
industrial transfer in Zhejiang Province has already begun, especially in Wenzhou, where the corporate
relocation has caused a widespread concern and controversy. Observing from the industrial transfer in
Zhejiang Province recently, the main characteristics are as followings:
Firstly, the industrial transfer has market-oriented features. As private enterprises in Zhejiang Province
were developed from individual companies established after the reform and opening-up period, which
have the strong market principle consciousness. The national and local economic policies greatly impact
the development of private enterprises in Zhejiang Province during their developing process, but the
government played a supporting role only in the development of the enterprises. In the process of
traditional industries transfer, the local government may show great concern but basically they do not
intervene to the speed and direction of industrial transfer.
Secondly, the industrial transfer combines with the industry upgrading. The development strategy of the
government in Zhejiang Province is to achieve industrial upgrading through industrial transfer. On the
one hand, the traditional industries transfer is inevitable, according to the market rules, let the
labor-intensive industries move outwards to free the space when the land resource in Zhejiang Province
increasingly tense and the purpose is to facilitate the development of new industries and change the
industrial structure.
Thirdly, the industrial transfers are mainly outwards transfer and supplemented by inter-regional transfer.
A survey by Jianjun Chen (2002) shows that the enterprises in Zhejiang Province would like to transfer
their industries to underdeveloped area in Zhejiang Province rather than the central and western regions
of China. Jianjun Chen believed that the main mode of industry regional transfer in Zhejiang Province
currently is market-oriented, supplemented by resource utilization. From the perspective that market
share expansion is the main targets of industrial transfer the enterprises seek for, the central and western
regions obviously own the more advantage than the less developed areas in Zhejiang Province.
Meanwhile, some areas surrounding Zhejiang Province such as Jiangxi, Anhui, Hunan and the western
regions also issue some positive preferential policies, create various conditions and establish special
development zone in order to build a base to undertake industrial grads transferred from Zhejiang
Province. In the meantime, the governments in some less developed areas in Zhejiang Province like
Lishui and Quzhou also try to attract the traditional industries through preferential polices. In recent
years, the government in Zhejiang Province actively promotes the ‘mountain-costal collaboration’
strategy reflecting the economic cooperation in the developed coastal regions and underdeveloped
mountainous areas, which involves assistance to the less developed regions provided by the developed
area as well as industrial transfer from the developed areas to the underdeveloped areas to achieve
‘win-win’ intention.
Fourthly, the less developed areas within the province pay great attention to environmental protection
issue when undertaking the industrial transfer from the developed areas. As most of the less developed
areas in Zhejiang Province are mountainous areas most of which are the key eco-environment protection
areas. There had been bitter lessons in the less developed areas in economic development. Some areas
pursue instant success in economic development at the expense of environmental damage, which
resulted in serious destroy to the ecological environment while the economic development did not reach
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substantive progress. One typical case is Wuyi of Zhejiang undertakes the hardware industry from
Yongkang that brought several hundred million Yuan industrial output yearly, but the eco-environmental
quality became to decline even accelerate as the same time as the industrial economic growth
accelerated. The declining of the environmental quality in Wuyi will not be able to meet the further
requirement of people’s living and social economic development (Guoqiang Ma, 2008). Therefore, in
recent year, Zhejiang Province increases the efforts in environmental protection. Currently, Zhejiang
Province has the lead in the eco-environment protecting in China. Especially the less developed regions,
based on the reality, combined economic development and environmental protection, issued and
implemented the eco-city (county) strategy and achieved good results in eco-economy development.
When these areas cooperate with the developed areas, they no longer introduce any industry; instead
they take account of the environmental protection requirements and set up some restrictive measures of
environmental protection as well as strictly controlling the high-polluting industries and enterprises
moving in while undertaking the industrial transfer.
3.3 The comparison of the development strategy of industrial upgrading between Guangdong
Province and Zhejiang Province
The industrial transfer modes in Guangdong Province and Zhejiang Province reflect two different
approaches of traditional industries transfer in eastern developed provinces, that are whether to retain
the traditional industries through policy or to adjust the industry structure adapt to the market rules,
which shows a lot of differences.
3.3.1 The differences in understanding the industrial transfer
Guangdong Province considers the industries outwards transfer as the resources outflow that may
directly affect the development of local economy, so they try to retain the enterprises. The purpose to
transfer the industry in the developed region to the less developed areas is to adjust the geographical
structure of the industry without reducing the province’s total economic output. While Zhejiang
province used to have such understanding such as government’s panic once caused by outwards transfer
of Wenzhou’s enterprises (Haifeng He, 2007), but finally the understanding of government and society
becomes rational and the government has a correct understanding of the industrial transfer, adjusting the
strategy timely to combine the industrial transfer and the industry upgrading and forms the policy idea
of industry transformation.
3.3.2 The dominant difference of industrial transfer
The industrial transfer in Guangdong Province is strongly promoted by the government. The
construction of transferring industrial zones are entirely government-led from financing to the
development, construction, recruitment companies etc... Since very few companies are involved in the
construction of industrial zone that result a situation that the local government enthusiasm but the
enterprises apathy. The industrial transfer in Zhejiang Province is enterprises-led and the government
plays a guiding role only, they did not intervene in too much even the industrial transfer within the
province.
3.3.3 The direction difference of industrial transfer
The industrial transfers in Guangdong Province are mainly the in-regional transfer, the aim of which is
trying to transfer the industry from developed region to the less developed area to fill the depression of
regional industry development and to narrow the economic difference within the areas without affecting
the total economic amount. But this industry policy tends to be ‘one-side wish’ that is also conformed by
reality. The industrial transfers in Zhejiang Province are mainly the outwards transfer and take into
account of the in-regional transfer to the less developed areas. This industrial transfer mode considers
both long-term and short-term development goals and reflects the reasonable and scientific of industry
policy.
4 Conclusion
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,
According to the mentioned research we could reach some conclusions:
Firstly, The industrial transfer is an enterprises-oriented market behavior and the role of the government
could not be extended infinitely. The government excessive interventions in the industrial transfer, not
only cause the short-term behavior in industrial transfer, but also miss the best opportunity for the
traditional industrial transfer and may lead the resource waste since the less developed regions may
invest too much resource while undertaking the traditional industrial transfer but the result is not
satisfactory.
Secondly, Regional industrial policy must be based on the principles of sustainable development. The
fragile eco-environment in less developed areas mainly requires ecological compensation and takes the
development of the green industry as the supplement. Any large-scale industry moving in may result in
the eco-environment damage in the mountainous less-developed areas and lead the results of the loss
outweighs the gain.
Thirdly, the less developed regions within the province are difficult to undertake the complete industry
chain since their regional divisions are too small. Therefore the traditional industries in the coastal
developed areas could be mainly transferred into the central and western areas. The eastern less
developed mountainous regions could moderately develop small-size ecological industry zones to
ensure that the environment is not affected by the industry development. A very important premise for
the eastern less developed mountainous regions to develop the small-size ecological industry zone is that
the traditional industries in developed regions could continue to maintain a good momentum of
development, thus even the industries transferred into the small industry zone may be incomplete, but it
will not reduce its advantages in external cost because it is connected with the industry in the developed
areas outside. This can also be regarded as industries extension from the developed regions to the less
developed regions.
:
Author in brief
Professor Xie Jian, born in Nov. 1964 in Wenzhou Zhejiang Province of P.R.China, is executive vice
president of City College, Wenzhou University. He also works as vice chairperson of Chinese Industrial
Economic Association, vice chairperson of Zhejiang Province Institute of Business Administration,
executive vice chairperson of Zhejiang Province Economy Association, vice president of Wenzhou
Economy Association. His research is mainly about regional economy and enterprise system. He has six
books and more than sixty essays published in academic magazines such as ‘China Industrial Economy’,
‘Economic Theory and Business Management’, ‘The Journal of Quantitative & Technical Economics’,
‘Statistical Research’ and Finance & Trade Economics’.
,
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