China

China’s overseas investment: Opportunities and Challenges.

Written by Robert Taylor.

Aspiring to expedite the emergence of their country as a global economic power, in late 2000 the Chinese Communist Party (CCP) leaders launched the ‘going out strategy ‘ as one of the pillars of economic and social development, integral to which is the promotion of outward foreign direct investment. In the early years of China’s post-1978 reforms, overseas inward participation in the domestic economy had been invited to enhance managerial and technological competence. China’s outward investment now takes this process a stage further. In manufacturing, for example, the focus is on new advanced technology and expertise in specific managerial skills relating to marketing and branding.

In spite of a commitment to a market economy, however, the CCP led state remains preeminent in laying the foundations for the ‘go global strategy’, furthering the aim of transforming manufacturing from a labour to a technology-intensive base. China is advantaged by huge sovereign funds and foreign exchange reserves, even though recently there have been moves towards capital controls. In fact, a Bloomberg source calculated China’s foreign exchange reserves as totalling US $3 trillion in 2017. Legislation has been passed to facilitate Chinese bank lending to selected overseas investing companies, mainly, though not exclusively, in the state sector.

Brief statistics indicate China’s increasing involvement as a growing investment player. According to an UNCTAD report, in 2013 China had become the third largest foreign direct Investment (FDI) country in the world. Significantly, according to another UNCTAD source, Chinese overseas direct investment represented 4% of global flows in 2007 but 19% in 2014. As important as the Chinese investor relationship with Western countries  is, China’s investment in the advanced countries of North America and Europe more than doubled in 2016 to a record US$94.2 billion. (US-China Trade Council, 2017). An initial stimulus to Chinese overseas investment was the need to acquire minerals and raw materials to fuel China’s industries, thus the focus on resource-rich developing countries. While such demand continues, there is a trend towards manufacturing and services, with a greater global and regional diversification; thus, in 2013, according to the Economist Intelligence Unit, Chinese firms had invested in more than sixty countries and, in value terms, Australia, the United States and Canada were paramount. In summary, there has been a recent move from investment in mineral rich African countries to manufacturing partnerships in the advanced industrial European Union (EU) states and the United States. China’s ongoing investment in, for instance, African infrastructure remains.

Given China’s capital wealth and the advanced technology and service experience of Western countries, the EU states, as an example, provide manifold opportunities for Chinese investors. In addition, there is variation in the resource endowments and manufacturing capacity levels in the region, of which Chinese companies may take advantage, as reflected in the regional patterns of their involvement. Even though half of Chinese investment during the years from 2000 to 2014 was focused on core countries like the United Kingdom, Germany and France, there has been increasing diversification to peripheral countries in Eastern and Southern Europe.

Regarding motives for sectoral investment, there has been a differential focus as between the Chinese private and state sector investors. While state-owned enterprises have been involved mainly, though not exclusively, in the mineral resource and energy sectors, private companies have invested in industrial technologies and brands. Chinese state enterprises follow a national agenda, seeking economic and political influence through financing energy and infrastructural projects, raising national security concerns in EU states. A case in point is the negotiation regarding the Hinckley point nuclear power operation in the United Kingdom. Chinese manufacturers have contrasting motives, many being cognizant of increasing production costs at home and seeking to relocate operations to low-cost countries like Vietnam, although such a motive is less likely to apply to the high-tech manufacturing sites of Western Europe, in the latter the objective being to move up the value-added chain and also target concomitant business services. In summary, then, for Chinese investors, especially in the private sector, the aim is to acquire technology and management skills through their own wholly owned ventures, merger and acquisition (M&A) or partnerships. Such companies also seek new markets.

Chinese investors, however, whether located in developed or developing countries, face a number of challenges. China is only just tentatively implementing the rule of law as opposed to rule by law, and Chinese investors have to face, for instance, more stringent labour legislation in the EU. Labour costs in the EU are also generally much higher than in China and cultural differences impact on human resource management. Although it is gradually being introduced in China itself, initially by foreign ventures, Chinese companies still lack the extensive experience of Western-style human resource management, and this brings into focus issues like expatriation, localisation and repatriation, especially for manufacturing enterprises. Originally, for instance, prior to the post-1978 economic reforms, virtually all major manufacturing was state owned, with employees enjoying career tenure in a seller’s market, where material incentives and individual initiative were at a low premium. The market in China now has a much greater role, although the state in certain sectors remains predominant, with the residual influence of permanent employee job tenure. This and other vested interests still pose problems, as in the steel industry, where reform and restructuring are crucial, given complaints by the EU and the United States regarding a glut of allegedly low priced steel exports.

Against this background, Chinese overseas investors are faced with the issue of motivating managers and workforce in an alien context. Initial decisions must be taken regarding the expatriation of managers and their relationship with company headquarters in China. Managers must be motivated to work overseas; this is less of a problem in state enterprises where managers can be seconded, with personal tenure and promotion threatened by an employee’s refusal. But, as in the case of the private sector investors, training is crucial and surveys indicate that this has often proved deficient. Training by Chinese companies has been designed to inculcate awareness of a foreign culture and provide linguistic competence. In addition, incentives for Chinese managers being relocated include higher salaries than at home together with assistance with accommodation, often better than in China, and advice on family issues, even though spouses and children are not always expatriated. Incentives alone for managers are, however, insufficient to overcome the undoubted differences in foreign managerial style and ways of working, to which Chinese expatriates are unaccustomed.

This is why while Chinese expatriates are employed at top levels in subsidiaries, human resource areas are so often delegated to local managers, a practice typical of many other multinational companies, especially where cultural distance is great. In Southeast Asia, however, and to a lesser extent in Europe, Chinese investors have been advantaged in employing members of the Chinese diaspora as intermediaries. Additionally, more than a passing acquaintance with the relevant language is necessary; there is need also to adapt to local laws. Finally, normally, the expatriate will eventually be repatriated to China and have to adjust to a domestic company which may in the meantime have changed markedly.

Thus Chinese overseas investment, facing both opportunities and challenges, proceeds apace. In spite of the current populist reaction to globalization in Western countries, the Chinese leaders are projecting their country as the upholder and proponent of a global economic order in which they seek paramountcy, as witnessed by their creation of  the Asian Infrastructure Investment Bank to finance the One Belt One Road (OBOR), a modern version of the ancient Silk Road, designed to integrate the economies of East and Central Asia with the countries of the EU through  trade and investment.

Dr Robert Taylor, School of East Asian Studies, The University of Sheffield. Image credit: CC by David Dennis/Flickr.