China’s Outward Foreign Direct Investments and Impact on the World Economy

China has achieved great economic success since the launch of the ‘Open Door’ policy in 1979. Up to 2009, China’s annual average growth rate of gross domestic product (GDP) was 9.9 per cent, which is around four times as much as the comparable figures for the rest of the world (2.9 per cent), the US (2.7 per cent), the UK (2.1 per cent) and Japan (2.3 per cent).¹ China surpassed Japan as the second largest economy in 2010, even though Goldman Sachs (2003) predicted that this would occur no earlier than 2016. To quote Bloomberg:

The country of 1.3 billion people will overtake the U.S., where annual GDP is about $14 trillion, as the world’s largest economy by 2027, according to Goldman Sachs Group Inc. chief economist Jim O’Neill … China overtook the U.S. last year as the biggest automobile market and Germany as the largest exporter. The nation is the world’s No. 1 buyer of iron ore and copper and the second-biggest importer of crude oil, and has underpinned demand for exports by its Asian neighbors. (Bloomberg, 16 August 2010)

China’s outward foreign direct investment (OFDI) is a new phenomenon, and studies related on this issue are largely underdeveloped. Existing descriptive and empirical studies generally conclude that China’s OFDI is relevant to mainstream FDI theories. In other words, the general motivations and determinants of OFDI discussed in the FDI literature are also relevant for understanding China’s OFDI. This chapter therefore reviews several mainstream theories on FDI, as well as the theories on OFDI from the perspectives of developing countries. This chapter also provides a critical review of the existing empirical studies on China’s OFDI.

The failed advance of Chinalco on Rio-Tinto and the quick success of Minmetals’ acquisition of Oz Minerals within a week in June 2009 represented China’s persistent thirst for natural resources such as iron ore and bauxite. However, the eagerness and scale of acquisitions of foreign mining companies by China’s large state-owned enterprises cannot be satisfactorily explained by existing investment or business theories. As a result, it is imperative to propose alternative theories on the motivation of Chinese big businesses making OFDI. Using Chinalco as a case study, this chapter makes the following theoretical propositions and conclusions. First, unlike western transnational corporations (TNCs), Chinese big businesses going global are part of the country’s powerbuilding globalisation strategy. Second, with soft budget constraints and extended protection by the government beyond the nation’s boundary, these business champions can outstrip their foreign competitors in taking risks and raising investment capital. The on-going world financial crisis has become a catalyst for them to catch up with gigantic TNCs of the most advanced industrial economies. Third, foreign TNCs need be aware of these differences to benefit from Chinese OFDI.

One important motivation of outward foreign direct investments from a less advanced country such as China is technology seeking. This chapter studies the development of China’s automotive industry in the past 60 years and uses the case of Geely’s acquisition of Volvo to demonstrate the increasing importance of technology-seeking related to OFDI.

China has been acknowledged as an important recipient of inward foreign direct investment (IFDI) since the ‘open-door’ policy was launched in 1979. However, the rapid integration of China into the world economy has also led it to become a major source of outward foreign direct investment (OFDI).¹ China’s OFDI developed from a very limited scale and has surged over the last decade. China’s entry into the World Trade Organization (WTO) in 2001 and the launch of the ‘Go Global’ strategy in 2002 greatly shifted the landscape of China’s OFDI (Voss et al., 2009). UNCTAD (2010a) reported that China will be the second most promising OFDI source country in the next three years. Indeed, it became the largest source country of FDI among all the developing countries and one of the five largest foreign investors in the world in 2009, accounting for 5.1 per cent of the world’s total FDI outflows (MOC, 2009). Figure 5.1 presents this surge. China’s OFDI flow rose dramatically from $913 million in 1991, to $56.5 billion in 2009, and to $76 billion in 2012. China’s OFDI stock grew from $5.4 billion in 1991 to $245.8 billion in 2009.

The previous chapter examines the underlying motivations and the locational determinants of China’s outward FDI (OFDI). Like the majority of existing empirical studies on China’s OFDI, the previous chapter focuses on the effects of host country characteristics in a static framework.¹ This chapter extends the discussion and analysis made in the previous chapter to examine the adjustment of China’s OFDI in a dynamic framework. In a related study, Cheng and Kwan (2000) identify the determinants of China’s inward FDI (IFDI) stock, using a partial stock adjustment model to examine the dynamic adjustment process of IFDI across the Chinese provinces. Cheng and Kwan (2000) and Campos and Kinoshita (2003) argue that the existing IFDI stock has ‘positive feedback’ on future investment, triggering the adjustment towards a long-term equilibrium stock. In other words, the partial stock adjustment model is in line with self-perpetuating growth or natural growth. It can be reflected by the lagged IFDI stock as the lagged dependent variable. Thus, the partial stock adjustment model is naturally fitted in a dynamic framework, just like any other standard partial adjustment model. The partial stock adjustment model addresses several issues that cannot be explained in a static framework. For example, this model exclusively integrates with an adjustment process, implying that IFDI stock is adjusted gradually towards its long-term equilibrium level because of cost convexity.

In the foregoing two chapters, we have studied China’s outward FDI (OFDI) by examining the underlying motivations and the locational determinants in a static framework, and by investigating the dynamic adjustment of China’s OFDI and its relation to China’s inward FDI (IFDI) in a dynamic framework. We have shed some lights on the causes of China’s OFDI, but the question remains as to what are the consequences of China’s surge in overseas investments? To quote The Economist:

In its drive to secure reliable supplies of raw materials, it is said, China is coddling dictators, despoiling poor countries and undermining Western efforts to spread democracy and prosperity. America and Europe, the shrillest voices say, are ‘losing’ Africa and Latin America. (The Economist, 13 March 2008)

This book deals with a series of important issues on China’s OFDI. The case studies, Chinalco and Geely, are presented to demonstrate the difficulty of and experiences about Chinese MNCs to become global. In the Chinalco case, it shows that Chinese MNCs require state support to become competitive with their foreign counterparts. It also reveals that the lack of international experiences, shortage of human resources and skills, and the lack of understanding of foreign laws and culture are many important factors restraining Chinese MNCs to successfully target merger and acquisition (M&A) activities to implement the country’s national strategy for resource-seeking purposes. International politics is also an important factor that may jeopardise the efforts of China’s OFDI.