Antony Chuang, an investor from Taiwan who has been operating a toy business in Shenzhen City, has not spent much of his time on his business these days.

Chuang, who is also deputy head of a 2,000-member association of Taiwan investors in Shenzhen, Guangdong Province, has devoted most of his time to organizing tours for members to inland provinces or even overseas as they seek new business locations.

He believes that the shift of small and medium-sized overseas-backed enterprises out of the Pearl River Delta, where Shenzhen is located, is only natural.

"Going back two decades, when Taiwan-invested businesses first appeared in the Pearl River Delta, the pattern of management was sloppy," said Chuang. "Plenty of investors, with compasses in hand, decided on factory locations according to wherever they had their hearts set on," said Chuang.

"Some conventional enterprises built then can hardly meet the present requirements for fire safety and environmental protection, and for them, the suggestion is either to upgrade or leave."

Many small and medium-sized overseas-backed companies have left sites in the Delta, mainly Shenzhen, Dongguan, Guangzhou, Foshan and Shunde. Since 2005, more than 500 have left Shenzhen alone. Most of those firms were making electronic, plastic and metal products or toys and furniture.

Ding Li, a fellow at the Guangdong Provincial Academy of Social Sciences, cited rising costs as a prime factor for the flight by investors from Hong Kong, Macao and Taiwan.

"Rising labor and environmental costs have exacerbated the pressure on conventional manufacturers," said Ding, "Labor-intensive businesses have been forced to make a transition or go where labor is cheaper."

Further, most of the long-established overseas-backed factories in the Delta, which were export-oriented, saw profits dwindle as the central government repeatedly slashed export rebates to prompt economic transition.

"To flee the Pearl River Delta has become inevitable when there is little profit to make or not any profit at all," said Ding.

Yin Yong, deputy chief of the trade and industry department of Shenzhen City, believed that the industrial structure in the Delta had improved: from labor-intensive to technology-intensive and from sweatshops to the services and high-technology sectors.

Although Delta cities have lost smaller overseas ventures, they have still seen growth in paid-in foreign investment in the past two years.

"The closure or flight of small and medium-sized overseas ventures has, in a sense, opened up space for development on the part of big companies," said Yin.

According to Yin, Shenzhen approved 243 overseas-invested projects last year, with each investment exceeding 10 million US dollars.

In the conventional manufacturing sector, previously strong overseas companies have grown bigger during the industrial transition. For example, Sewco Toys, a Hong Kong-invested venture, planned to continue expanding this year and adding 5,000 people to its 10,000-strong payroll.

"In the long run, China's advantage should be the opportunity for more innovation instead of cheap labor," Yin added.