Dalian - In a nation known for pollution-choked cities and countless smoke-belching factories, Dalian, on China's rugged northeast coast, offers a pleasant respite. Fresh green spaces abound in the hilly city of 6 million that is often compared with San Francisco. Xia Deren, a former university dean and now Dalian's urbane Communist Party chief, waves his arm toward a leafy district of low-rise office buildings outside his window. Fifteen years ago, he says, "the area where we are now sitting was filled with chemical plants." Those factories, and many others that once ringed the city's picturesque harbor, have been shut or relocated, replaced by rapidly expanding software houses, green-technology plants, and service companies that are becoming Dalian's new economic pillars.
Cities from Chongqing in the southwest to Tianjin and Shanghai in the east are attempting similar makeovers. But while Dalian's transformation is hardly complete—just up the coast, a petrochemical company is building a controversial $700 million plant—it may be furthest along in implementing Beijing's vision of the economic future: replacing sooty, low-skill factories with innovative green industries. "We need to change the way our economy grows and embark on a new road of industrialization," says Xia.
Dalian's economy has been propelled largely by companies that do outsourced work for Japan and other Asian neighbors. The city boasts 400 software companies accounting for $1 billion in annual exports and 60,000 jobs—a figure that's expected to reach 200,000 in three years. Oracle (ORCL), Fidelity Investments, Nippon Telephone & Telegraph (NTT), Citigroup (C), and Minolta have all invested in Dalian, and Intel (INTC) is building its first Asian silicon wafer fabrication plant just outside the city.
Local officials are pioneering new strategies to spur innovation. They stress collaborations among universities, government institutes, and private companies in emerging technologies such as solid-state lighting devices, hydrogen fuel cells for cars, and nanomaterials. Dalian's leaders "clearly know what is needed to succeed in the innovation game," says Denis Fred Simon, a Penn State University professor who is helping set up a research center for clean coal technology in the city.
The 33 small business incubators in Dalian may be another key to growth. Modeled after similar initiatives in Silicon Valley, these outfits offer low-cost lab and office space for tech startups and help their founders hone business plans and find investors. "We have a new model of technology transfer from universities," says Liu Xiaoying, the energetic director of the city's science and technology bureau, who wrote her PhD thesis on incubators. "I want everything we fund to focus on products, not research papers."