Building on Beijing's efforts to encourage investments outside of China's coastal regions, Chengdu, in southwest China, is girding to become the world's next Silicon Valley, according to reports.

The city of 14 million -- once known only for its pandas and a local delicacy called hot pot -- has already begun to attract homegrown startup technology companies as well as big-name Western tech firms, mainly because of low labor costs and favorable local policies. The local government's pet project, the Tianfu Software Park Lab, is home to some 110 new startup firms.  The microchip giant, Intel, meanwhile has four factories near the Shiangliu International Airport, in Chengdu's High-Tech Industrial Development Zone.  The US multinational technology and consulting company IBM also has headquarters in Chengdu.

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While local authorities have been aggressively promoting the city as a tech innovation hub for some time now, many of the newer corporate investments into the metropolis started coming in after 2012.  In November that year, local authorities unveiled a set of tax breaks and preferential policy incentives for Western companies looking to build their headquarters in Chengdu.   At the time, local officials told the International Business Times (IBTimes) that companies in industries "actively encouraged by government" received a 15 percent corporate income tax rate, compared with the 25 percent levied in eastern China.   

Still, many analysts agree that Chengdu's biggest attraction is the low cost of labor.  In a symposium held in the city in 2013, the economist and Nobel laureate Robert Mundell said that cheaper labor is among Chengdu's most important competitive advantages, especially when viewed against rising labor costs in the east. "There will always be a low-end production comparative advantage here," Mundell said.

Speaking more recently with the Financial Times, Chen Bing, deputy head of the Chengdu Investment Promotion Commission, says workers in Chengdu are paid wages that are typically two-thirds to half of those paid in China's coastal investment hubs. Apart from this, local authorities likewise offer startup companies subsidies on office space.  In exchange for this unique perk, companies are asked to promise to remain in Chengdu even after they become profitable endeavors, according to Chen.  

Of course, profits do not always come rolling in, and Chen admits that the city government does have to tolerate certain risks.  The Financial Times suggests that hundreds of startup firms have come to Chengdu only to sputter out and drift into nameless mediocrity, or even outright failure. 

"We have to tolerate failures, because that is part of business," Chen says.  "Some will fail."

The possibility of failure notwithstanding, thousands of young entrepreneurs and technology innovators continue to flock to Chengdu in the hopes of making it big.  Jonathan Woetzel of the consultancy firm McKinsey says the urge to innovate comes as many Chinese cities outside the country's coastal regions jostle to move their economies up the value scale.  

This view is shared by other analysts, who say China's central and western cities are aggressively pursuing the transformation of their economic growth models, shifting from a previous reliance on scale and speed of production to a new model that builds on quality and efficiency, as well as private consumption.

"Each of these mega cities is starting to behave economically like little countries," Woetzel says.  Noting the scale and diversity China's central and western urban hubs, he then adds, "I don't see why in the future China wouldn't have 15-20 Silicon Valleys."  

TagsChengdu, Intel, Startups