Foreign investors are attracted to port cities and to big cities with large markets. But after taking account of that, we find that foreign investors are also attracted to cities with efficient services such as rapid customs clearance, relatively low bureaucracy and red tape, and good infrastructure.

The cities that score best in these areas are not the big flagship cities of China, but rather smaller cities that have to try harder to attract foreign investment.

Hence we find that some of the best locations for manufacturing production in China are cities such as Jiangmen, Suzhou, Hangzhou, Weihai, Qingdao, Linyi, Yantai and Shaoxing, which are not as much in the limelight as the mega-cities of Beijing, Shanghai and Tianjin.

Cities benefit from good investment climate through more investment and growth. Their populations also benefit through higher wages.

Manufacturing wages average 1,600 yuan (US$197) per month in the best one-fifth of investment climate cities, twice as much as the 800 yuan (US$98) in the worst fifth of cities. It is good for Chinese workers that wages are rising in the successful cities.

An important issue for China is, where will labour-intensive manufacturing move as wages rise in coastal cities? Will labour-intensive industries shift inland, or move to other Asian countries with lower wages (Viet Nam, Indonesia, Bangladesh, India)?

China still has a large amount of surplus labour in rural areas, especially in the centre of the country. It would be beneficial to China if more manufacturing shifted there. However, our analysis suggests that this development is held back by poor investment climate in many of the central and western cities.

The local governments need to develop an investor-friendly attitude and good public services if they are to attract more manufacturing investment.

A final conclusion from our study concerns the important issue of "harmonious society."

While China's overall growth has been very impressive, there is mounting concern in the country about some of the side effects, such as environmental degradation and social disparities.

Hence, for this 120-city survey we also collected information on environmental and social outcomes. Somewhat surprisingly, good investment climate for the private sector is highly correlated with good environmental and social outcomes.

For example, the best one-fifth of cities in terms of investment climate have 90 per cent clean air days per year, whereas in the worst fifth of cities less than 75 per cent of days meet China's air quality standards.

On discharge of industrial waste, nearly 100 per cent is properly treated in the good investment climate cities, compared to over 80 per cent in the poor investment climate cities.

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