SPEAKING FREELY Inward look at Chinese outward investment
By Jean-Marc F Blanchard
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Chinese outward foreign direct investment is increasingly a focus of business
people, journalists, and policymakers. The attention is especially high now
given the ongoing 15th China International Fair for Investment & Trade
(CIFIT) in Xiamen, Fujian where participants have been discussing rising
Chinese outward investment flows and the issues surrounding it, and steps the
Chinese government can take to facilitate overseas investment by Chinese firms.
A China-Africa Investment Cooperation symposium
concurrent with the 15th CIFIT has boosted interest.
Ultimately, the foundation for greater interest is China's dramatically
changing profile as an outward investor. Annual flows of foreign direct
investments by China hit a startling $68 billion in 2010, according to the
UNCTAD World Investment Report. This compares to a scant $12 billion as
recently as 2005. According to UNCTAD data, China's total outward foreign
direct investment (FDI stock) now tops $300 billion. This is a far cry from
2005 when China's total FDI stock was "only" $185 billion. At present, China is
the world's 5th largest outward foreign direct investor, occupying a rank
higher than Japan and the United Kingdom.
There are many anxieties about Chinese direct investments. To paraphrase the
headline of a recent editorial in the Chinese paper Global Times, they are
often seen as a "harbinger of doom." Specific worries include the
neo-colonization of the developing world (in particular Africa and smaller
Latin American countries), Chinese dominance over energy supplies, farms, and
fisheries, the displacement of local businesses, increased unemployment, and
the stripping of precious knowledge and technology from acquired firms.
Furthermore, many argue that Chinese firms wantonly damage the environment,
abuse local workers, and ignore traditional customs. On top of this, there is
the more diffuse fear that countries have of being displaced by China.
Often, though, anxieties are based on an ignorance of the facts or context. For
example, while China's outward FDI has hit new heights, China's total stock
pales in comparison to FDI from the developed world or as a proportion of
China's trade with select countries. It also may be quite small as a share of a
host country's overall economy. In addition, notable percentages of FDI flow to
developed world destinations such as Australia, Canada, and Europe. Regarding
Chinese investment in natural resources, it must be acknowledged that Chinese
firms have poured substantial amounts of money into non-resource sectors like
banking and finance, electronics, and manufacturing. Moreover, even where
Chinese firms have invested in the energy sector, they have not monopolized the
production for China.
Aside from these misunderstandings, the potential contribution of China's
outward FDI often is overlooked. For instance, Chinese natural resource
investments may boost the supply of resources thus decreasing prices and
resource competition. In addition, investments such as Chery Automobile's
investment in Venezuela and Geely Automobile Holding's expansion of its
operations in Indonesia will inject capital into the local market, create jobs,
and boost the two countries production potential and exports. Likewise, Chinese
corporate investments in Africa expand the continent's infrastructure stock,
bolster African access to international markets, and make goods available to
the local populace that might not otherwise be affordable.
The Chinese government seems to be stressing foreign (investment) protectionism
as one of the main hindrances to more rapid or greater outward investment,
highlighting some well known cases like CNOOCs failed acquisition of Unocal and
Huawei's attempted purchase of 3Com. Chen Deming, China's Minister of Commerce,
for example, noted at the aforementioned 15th CIFIT that "some developed
nations have tried to block Chinese investment citing national security." To
surmount these problems, the Chinese government is proposing, to quote another
commerce ministry official at the 15th CIFIT, "more effective support in terms
of policy and service."
While it is true that many countries have unwarranted anxieties about Chinese
outward investment flows, the danger in focusing on external barriers is that
it emphasizes a problem that is a relatively small one, potentially at the cost
of focusing on factors that are a greater hindrance to Chinese firms building
up operations abroad. These factors include inexperience in investing overseas
or operating abroad, the value of the Chinese currency, and decreasing
high-return investment opportunities in certain sectors. In fact, an increased
role for the Chinese government in outward FDI could be counterproductive by
exacerbating the fears of others who already see, irrationally in numerous
cases, Beijing lurking behind every Chinese investment transaction.
In future years, China's overseas investments will only increase in quantity
and variety. Macroeconomic factors (huge Chinese savings, for example), the
rising sophistication of Chinese companies, intense domestic competition,
Chinese resource requirements, and Chinese firms' need to tap external markets
ensure this will be the case.
Unfortunately, there is much misunderstanding of the actual nature of Chinese
outward investment as well as an exaggeration of the strengths of Chinese firms
operating abroad. The UNCTAD World Investment Report noted that Chinese firms
often "have neither real global production systems or complete industry
chains." Beyond this, there often is a lack of appreciation of the contribution
to host countries, Chinese competitiveness and innovation capacity, and the
global economy. A clearer understanding of FDI from China, though, is much
needed at a time when China is becoming a major player on the international
investment frontier. China's outward FDI is hardly a "harbinger of doom," but
misunderstanding undoubtedly will be a harbinger of poor decision making in
regards to a rising tide.
Jean-Marc F Blanchard, PhD is associate professor of international
telations and associate director of the Center for US-China Policy Studies at
San Francisco State University.
(Copyright 2011 Jean-Marc F Blanchard.)
Speaking Freely is an Asia Times Online feature that allows guest writers to have
their say.
Please click hereif you are interested in contributing.
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