Chinese International Investments

Napoleon called China a ‘sleeping dragon’, but recent economic developments as China enters the twenty-first century show that the dragon is awakening. China has maintained strong economic growth since 1979 and sustained a GDP increase of more than 9 percent over the years. The total volume of economic output increased from 2.8 percent in 1970 to 7.23 percent in 2008, ranking China as the third largest economy in the world (United Nation Statistics Division Statistical Databases).

Compared with foreign direct investment (FDI) inflows, Chinese outward foreign direct investment (OFDI) used to be quite small. According to UN statistics, China’s FDI inflow-outflow ratio was 6.4:1 in 2005 (Cheung & Qian, 2008). However, Chinese investment abroad has increased dramatically since 2007. In 2008, Chinese OFDI outflow reached US$52.1 billion, which equals China’s 2003 FDI inflow. In 2009, Chinese OFDI outflow was US$48 billion, more than double 2007’s outflow (US$22.5 billion) (UNCTAD, 2010). In 2010, it reached $57.9 billion. According to recent statistics from the Department of Outward Investment and Economic Cooperation of the Ministry of Commerce in the People’s Republic of China, US$255.4 billion has been designated for non-financial direct investment by Chinese investors to more than 15,000 enterprises in 174 countries and regions by the end of 2010.

China is currently the fourth largest home country of multinational corporations (MNCs) among developing economies, after Hong Kong, Singapore, and Taiwan. Its outward foreign direct investment (OFDI) stock accounted for around 3 percent of the OFDI stock of developing economies in 1990 and 2000, increasing to over 8 percent by 2009, when it reached almost US$230 billion (UNCTAD, 2010). The rapid growth, as well as the distinguishing features of new MNCs from China in recent years, set against a backdrop of the country’s strong economic performance, has intrigued the international business community.

China is one of the largest foreign direct investment (FDI) recipients in the world. Since the early 2000s, however, a new development has intensified and attracted considerable attention among politicians as well as academics: China’s outward FDI (OFDI). Statistics from UNCTAD confirm this trend. In 2003, Chinese OFDI accounted for only 0.5 percent of the world’s total FDI and China ranked 25th among OFDI countries. But, by 2008, China accounted for 2.8 percent of OFDI and ranked 13th (UNCTAD, 2009, p. 53). Although China’s OFDI is still marginal compared to total FDI, the growth path is impressive. China’s OFDI has increased more than 18-fold, from US$2854.65 billion in 2003 to US$52,150 billion in 2008 (UNCTAD, 2009, p. 53).

China’s outward foreign direct investment (OFDI) has increased rapidly and continuously since 2003. According to United Nations Conference on Trade and Development (UNCTAD), China’s OFDI flows exceeded US$10 billion for the first time in 2005, US$20 billion in 2006, and US$50 billion in 2008. China’s OFDI reached US$56.53 billion in 2009, according to the Ministry of Commerce (MOC) of China. China’s OFDI flows now stand first among developing countries and fifth among all economies. From 2002 to 2009, China’s OFDI grew by 54 percent annually. By the end of 2009, nearly 12,000 domestic investing entities had established about 13,000 overseas enterprises in 177 countries (regions). Though China’s investment in the developed countries represents a small percentage of overall OFDI, it has risen dramatically recently. China’s investment in Europe reached US$3.35 billion in 2009, an increase of 280 percent year-on-year. And China’s investment in North America was US$1.52 in 2009, 320 percent more than in 2008.

Internationalization is a critical strategic decision for firms in both developed and emerging economies. Research generally focuses on the driving forces and outcomes of internationalization, especially the impact on CEO compensation. Since internationalization increases managerial complexity and risk premium, CEOs must be compensated accordingly. Their increased pay creates a convergence of interests between shareholders and managers. The relationship of internationalization with CEO compensation has been established in existing studies (Sanders & Carpenter, 1998; Oxelheim & Randøy, 2005) but they do not take into account the fact that CEO compensation is also an antecedent of international diversification.

Outward foreign direct investment (OFDI) by Chinese multinational corporations (MNCs) continues to grow, with international mergers and acquisition (M&A) the primary mode of entry for Chinese firms (Alon & McIntyre, 2008). In the first quarter of 2008, cross-border M&A volume from China jumped to $28.5 billion, four times the previous year’s amount (Xinhua, 2008; Fortune, 2009). Although various motivations underlie Chinese overseas acquisitions, strategy asset-seeking predominates (Child & Rodrigues, 2005; Deng, 2007). Chinese MNCs use cross-border M&As to acquire strategic assets or knowledge to improve their competitive advantage in the global marketplace. However, such strategic-asset-driven M&As do not guarantee superior business performance, especially in light of the tacit and proprietary nature of knowledge. For a number of Chinese MNCs, international acquisitions have proven to be highly problematic and value-destroying (Economist.​com, 2007).

As Chinese companies have rapidly increased their outward foreign direct investment (OFDI) in the last decade, Europe has become a target for Chinese market-seeking and asset-seeking. The Chinese government plays a proactive role in guiding and supporting overseas investment, in part through its ‘going-global’ policy. The internationalization of Chinese companies is, however, to some extent a response to restrictive (domestic) market conditions. Within China, the growth of companies across provincial borders is still difficult due to regional protectionism (Child & Rodrigues, 2005, p. 388). Intense competition from foreign-funded enterprises in the domestic market also works as a driving force for the internationalization of Chinese companies (UNCTAD, 2006; Masron & Shahbudin, 2008, p. 6). These push factors are complemented by a number of pull factors that attract Chinese companies to the European Union (EU). Market-seeking companies want to explore the huge common market of the now 27 EU member states, while asset-seeking companies are most interested in buying high-tech companies and brand names in highly industrialized EU countries. But some of the very ambitious Chinese acquisition attempts involving well-known high-tech companies have not been realized due to legal, public or shareholder opposition.

The year 2003 was a watershed for Chinese outward foreign direct investment (OFDI). Since then, Chinese OFDI has reached record levels year by year, increasing from US$33.22 billion of FDI stocks (US$2.85 billion FDI flows) in 2003 to US$245.75 billion of FDI stocks (US$56.53 billion FDI flows) in 2009 (Ministry of Commerce of People’s Republic of China (MOFCOM), 2009, 2010). As it took 25 years since China initiated its reforms to reach the level of OFDI stock achieved in 2003, these recent increases are particularly striking.

In July 2009, Teck Resources Limited, Canada’s largest mining company, approved the purchase by China Investment Corporation (CIC) of 101.3 million Class B subordinate voting shares of Teck through a wholly owned subsidiary. The CIC would indirectly hold approximately 17.5 percent of Teck’s outstanding Class B subordinate voting shares, representing 17.2 percent equity and 6.7 percent voting interests in Teck (Bouw, 2010). By the end of 2009, CIC’s stake in Teck was worth US$3.5 billion, making Teck its largest single equity holding (Perkins, 2010). At about the same time, in December 2009, Canada and China signed a deal for PetroChina to invest US$1.7 billion in two Canadian tar-sand deposits in Alberta (Polzcer, 2009). If successfully implemented, these two deals will become the largest acquisitions so far by China’s State-Controlled Funds and Entities (SCFEs) in North America.

The African continent has become an important target for foreign investors. Since 1985, outward foreign direct investment (OFDI) inflows to the region have risen from US$2.4 to US$62 billion, and stocks have soared from US$40 billion in 1980 to US$315 billion in 2006 (UNCTAD, 2008; McKinsey, 2010). Africa’s lure for foreign investors lies in its demographic and economic growth with the resulting rise in consumer markets, its abundant natural resources, and an improving business environment in many countries that makes them more attractive to investors. The Chinese have joined investors around the world in taking important positions on the continent.

Chinese Foreign Direct Investment (FDI) into Sub-Saharan Africa (SSA) has grown rapidly in recent years. Despite the paucity of evidenced research on its magnitude and character, a stream of general papers¹ has noted its rapid growth and significance and has identified key policy challenges designed to enable SSA to maximize the potential gains and minimize the potential losses from this incoming FDI. A general theme in these various contributions has been with ‘the impact of China on Africa’, generally marching under the banner ‘Whilst China has a strategy for Africa, Africa lacks a strategy for China.’ But the problem with this formulation of the China challenge is that it assumes an homogenous ‘China’ and an homogenous ‘Africa’.

The history of Florida Splendid China (FSC) is linked to the original miniature attraction in Shenzhen, China. Designed as a showcase to promote tourism in China, the amusement park, located near Hong Kong, was the brainchild of Ma Zhimin (Ma Chiman), general manager of China Travel Service (CTS) Ltd. Listed on the Hong Kong Stock Exchange, CTS, the largest tourism firm in mainland China, owns travel agencies, theme parks, and performing arts groups. In 1989, Ma reflected on the conception of Splendid China:

During my trip to Europe in 1985, I visited the famous Madurodam ‘Lilliputian Land’ in Holland when an idea came to me and I thought how great it would be if we could build a miniature scenic spot in which China’s renowned scenic attractions and historical sites could be concentratedly displayed so that people could admire and know more about China’s beautiful scenic wonders, splendid history and culture as well as various national customs and habits in a shorter time. (Ma, Liu, & Au, 1989, p. 3)

With sufficient funding from CTS, the idea quickly turned into reality.

Marta, the young Chinese Managing Director, was sitting in her office in Pesaro contemplating the purchase of the Italian bike manufacturer Benelli. QJ had purchased Benelli in 2005. After the Chinese beat out the Russians in a bid to acquire the company, QJ was off to a very good start: the local authorities helped to create a welcoming environment, the two production lines were operational, new motorbikes were being projected by skilled engineers, and the new scooters were so attractive!

The recent wave of high-profile acquisitions of Western brands by Chinese companies has caused consternation around the world. China has become the manufacturer of the world in some industries, now making about 70 percent of toys, 60 percent of bicycles, 50 percent of microwave ovens, 50 percent of shoes, clothing and televisions, and 33 percent of air conditioners and mobile phones (Alon & McIntyre, 2008). The export of those products resulted in a significant trade surplus and accumulation of foreign reserves to about US$2.5 trillion by June 2010.

While China is recognized as one of the world’s leading destinations for foreign direct investments, Chinese outward foreign direct investments (OFDI) have only recently taken off. In the early 1990s, Chinese OFDI was marginal — about US $800 million (UNCTAD WIR, 2009). But since China joined the World Trade Organization (WTO) in 2001, its OFDI has had an impressive growth, going from US $2.8 billion in 2003 to US $48 billion in 2009 (UNCTAD WIR, 2010). It should be mentioned that this is, however, still small relative to other countries, as in 2006 Chinese OFDI accounted for 1.5 percent of the world’s total FDI (UNCTAD WIR, 2010). In 2008, China’s share of world FDI reached 2.8 percent (UNCTAD WIR, 2009) and the country’s OFDI will grow significantly in the next few decades, in both absolute and relative terms.