China Goes Global

The Impact of Chinese Overseas Investment on its Business Enterprises

Huiyao Wang, Miao Lu

• Publisher: Palgrave Macmillan
• Year: 2016
• ISBN:
  9781137578136
• Topic: Business
• Subtopic: International Business
• Index: Business

Mainland China businesses are going global, transforming the country from a manufacturing export platform into an overseas investment powerhouse. China Goes Global is the most thorough and up-to-date empirical analysis of the accelerating effort of Chinese companies to go global by investing overseas. It details the overall trends of this activity with respect to its sectors, channels, overseas targets, and particular firms, along the role of Chinese Government policy in facilitating business enterprise globalization. The book offers readers an enterprise level of view outward expansion by Chinese firms that is focused not only on the big-names, but also less well-known, but equally important trailblazing enterprises. In doing so it offers practical suggestions on how firms can tackle the challenges encountered when expanding outward.

1

Scholarly Context of This Book

Chinese business enterprises are going global. By doing so, they are reinventing China economically once again, transforming the country from being merely a platform for exporting low-grade manufactured goods such as textiles and apparel into a major force for overseas investment. The rise of China, along with its emerging economy counterparts Brazil and India as major sources of overseas investment, is arguably the biggest unfolding business story today. According to Goldman Sachs, these three emerging giants will account for half of all global business activity by 2050.¹

The rapid growth of Chinese overseas investment activity, which has included direct investment and numerous mergers and acquisitions, many of them of a very high-profile nature, has created a scholarly cottage industry. This opening chapter first reviews the arguments within that industry regarding the sources, individual business strategies, and targets of Chinese outbound investment. It then situates China Goes Global within the context of this work, setting forth how it provides a new and unique angle on Chinese business enterprise globalization. This includes setting out an evaluation ranking, based on systematic criteria, that gauges the globalization of Chinese companies. In so doing, it outlines existing patterns and emerging trends with respect to leaders among Chinese companies going global. In this and other respects, China Goes Global provides a comprehensive report card on the outbound investment of Chinese firms. This report card identifies both the progress and problems that characterize such activity. In dealing with the latter issues, the book offers a range of useful policy suggestions. Last, China Goes Global provides the most up-to-date book-length analysis of Chinese Government policies on business enterprise globalization, including a detailed discussion of the massive new “One Belt, One Road” initiative on China’s overseas investment. This chapter concludes with a brief overview of the rest of the book.

The secondary literature on Chinese outbound investment and this book

Chinese outbound direct investment: causes and business firm strategies

Older theories of overseas direct investment (ODI) emphasize three main motivations driving such activity within companies. These are for foreign direct investment (FDI) to expand a firm’s markets, boost its efficiency, or acquire resources.² The last factor clearly dovetails with China’s “going out” strategy for ensuring natural resource security, especially with regard to energy. That strategy has fueled extensive FDI activity on the part of large Chinese state-owned resource enterprises in Africa, Latin America, the Middle East, and parts of Asia. Such firms are also prominent in our list of leading established globalizing Chinese companies. However, long-standing explanations of FDI have largely been formulated based on the experiences of advanced economies, which may limit their explanatory power with respect to emerging economies, like that of China.

Scholars have thus put forward a number of other potential factors driving Chinese overseas investment. One is capital market imperfections in China. In this explanation, these imperfections, which make capital available to certain firms at below-market rates for considerable periods of time, create a semipermanent disequilibrium in the capital market that outward investors can exploit. This factor, along with other imperfections in the Chinese economic system, is prominently cited by Huang Yasheng in one of the first, few book-length studies on rising FDI from China.³ China’s flawed capital markets are also emphasized by P. J. Buckley and other scholars as a main force driving Chinese outward FDI.⁴

Such scholars are right to note that Chinese capital markets do not function properly. In particular, these markets channel money at below-market rates to state-owned enterprises, which enjoy privileged access to cheap bank loans and financing at the expense of private firms.⁵ As the disequilibrium in the capital market created by such practices largely benefits state-owned enterprises, these companies ought to, according to this theory, dominate Chinese ODI. This was certainly the case when China began investing heavily overseas and such firms, particularly ones involved in resource extraction and infrastructure building, are still prominent in the mix of Chinese companies going global. But our findings point to the rising prominence of private companies in the globalization of China’s business enterprises. These include not just light manufacturing, but also makers of high tech products, Internet firms, and financial and real estate companies.

This trend also points to the limits of another older theory of FDI tailored to China and other emerging economies. This view focuses on the impact of state institutions and the regulatory environment in hindering or promoting Chinese ODI. As recently as 2002, such policies were seen in the scholarly literature as hindering Chinese outward investment.⁶ China Goes Global details how this has changed dramatically over the past decade and a half, during which the Chinese Government moved to actively encourage Chinese businesses to expand abroad. This shift matters a great deal, as Buckley (et al.) has argued that specific regulatory policies introduced by home country governments will encourage firms to go global, provided the policies are straightforward and supportive.⁷ This framework has been applied to empirical studies of China, including comparisons between it and other emerging economies. In the case of China, such work emphasizes the role of the state by pointing to the expansion activities of state-owned enterprises. Using a firm-level Chinese dataset, a 2012 study done by Wang et al. found that firms with high state ownership were more likely to expand overseas. That claim is echoed in a number of other recent articles done on Chinese ODI.⁸ However, such studies shed limited light on private Chinese firms, which are less tightly tied to the government, investing overseas. Although such activity on their part has certainly been facilitated by the loosening of state regulations on ODI, something which is explored at length in this book, their going global is also surely driven by other factors.

This book therefore not only charts the shifting state institutional context of Chinese outbound investment but also, as is the case with a growing body of scholarly work, examines this phenomenon at the individual firm level. One such explanation within the existing scholarly literature on China’s outbound investment stresses the ownership advantage of Chinese multinational companies, at least when investing in other emerging economies. This view argues that, when operating in such a context, Chinese firms can economize on the use of capital or resources, while maximizing their benefits, with these gains stemming from their “home country embeddedness,” or the greater familiarity of doing business in an emerging economy market context like that of China. Such work further emphasizes how these companies can leverage their relational assets when going global.⁹ This view suggests that Chinese outbound investment should flow mainly to other emerging economies or countries where Chinese firms might have strong connections and networks, such as neighboring ones in Asia. However, much of this work was published in 2007 or earlier, and Chinese outbound investment has undergone considerable change since then. The findings of this book show that, although such places remain important receptacles of Chinese ODI, more and more Chinese firms are going global to North America and Europe, where they do not accrue the advantages of “home country embeddedness” or relational assets.

A more relevant argument to current Chinese ODI activity stresses the role of “asset augmentation” in the decision of firms to engage in FDI and their mode or strategy for doing so. As applied to companies doing ODI from China, studies using this approach have noted that Chinese firms often seek to acquire firm-specific strategic assets, including R&D facilities, particular technologies or brands, distribution networks, and managerial competencies. In this view, Chinese FDI decisions and modes stem from the lack of ownership- or firm-specific assets on the part of companies. Work done under the “asset augmentation framework” also suggests that Chinese FDI differs with respect to developed and less developed countries. In the case of OECD countries, their comparative advantage in services, stemming from the more advanced nature of that sector, is associated with increased levels of Chinese FDI (a greater comparative advantage leads to greater FDI). But in non-OECD economies, the opposite relationship prevails, even among those with relatively advanced service sectors. This finding points to the continuing strong role of resource acquisition as a motivation for Chinese ODI in such countries.¹⁰

The arguments and findings from this perspective on Chinese outbound direct foreign investment dovetail with the newer and more up-to-date empirical results of this book. For example, we show that Chinese firms undertaking cross-border mergers and acquisitions in the U.S. are now heavily targeting American high-tech firms, with the objective of gaining access to their more advanced products and know-how in this sector. Our findings also suggest that other firm-level motivations are driving the decisions of Chinese companies to go global and their modes of doing so. One particularly important trend we find is the desire of these business enterprises to obtain greater integration and control over their supply and value chains. The focus in this book on the diversity of micro firm-level and macro-institutional factors driving FDI from China is in line with the recent systematic large-scale survey done by Wei and others of globalizing Chinese private enterprises. Their multidimensional analysis found that the decisions of these firms to invest overseas was affected by productivity, technology-based capability, export experience, industry entry barriers, subnational institutions, and intermediary institutional backing.¹¹

Like the work on the sources of China’s ODI, the scholarly literature analyzing the FDI modes and operation of Chinese companies has done so from an increasingly diverse set of angles. In addition to looking at this issue from the perspective of asset augmentation, such work has explored the effect of horizontal versus vertical linkages within globalizing firms, and the impact that has on whether they undergo asset-as opposed to market-seeking internationalization. Other studies have examined the autonomy of subsidiaries of Chinese multinational companies in Germany, and the vertical linkages established by such firms with local companies in Vietnam.¹²

This book aims to make its own contribution in this area by setting out ten strategies for Chinese firms going global. These are based on the globalizing experiences of a number of well-known flagship Chinese companies, which includes private firms, state-owned enterprises, and less well-known but emerging globalizing firms. The strategies and representative major firms are as follows:

•Establishing manufacturing operations overseas, or FDI (Haier);

•Moving from rural to urban, and less developed to developed markets (Huawei);

•Acquiring technological and name brand assets through overseas mergers and acquisitions (Lenovo);

•Setting up joint ventures (TCL);

•Natural resources acquisition (China National Offshore Oil Corporation [CNOOC]);

•Strategic equity participation, or sovereign wealth funds (China Investment Corporation [CIC]);

•Obtaining support from overseas Chinese (Kangnai Shoes);

•Overseas listing/global IPO (various major Chinese firms);

•Set up overseas R&D centers (Vipship);

•Overseas contract and labor cooperation (large Chinese infrastructure construction state-owned enterprises).

To be sure, a number of the above strategies, such as FDI, technological and resources acquisitions, and establishing joint ventures, are tried and true methods long used by businesses in expanding overseas. Our discussion, however, shows how Chinese firms have adapted these strategies to fit their own unique needs and particular circumstances. In addition, we set forth a number of other more novel and peculiarly Chinese modes of going global. These include the move from rural to urban, and from less developed to developed economies; strategic equity participation; use of overseas Chinese; and overseas contract and labor cooperation modes of going global.

Our work thus broadens the current understanding of those strategies by Chinese firms are using to go global, as well as providing comprehensive and recent empirical information on the nature and trends of this activity. This information has a bearing not only on the existing literature on the factors motivating Chinese ODI, but also on its targets.

Chinese outbound direct investment: location

In explaining the location of FDI, the existing scholarly work stresses changes in exchange rates, levels of inflation, as well as taxes, and the legal environment in potential host countries. Another key factor noted in this work is market size or potential in countries targeted for FDI.¹³

As is the case with the argument concerning businesses enterprises from China that are investing overseas, the existing work on Chinese ODI has noted its special characteristics with respect to location. This is emphasized in the earlier work done by Buckley (et al.)¹⁴ on FDI by Chinese business enterprises. Using official Chinese data collected from 1984 to 2001, they found that Chinese ODI differed with respect to location characteristics over the two periods – 1984–1991 and 1992–2001. From 1984 to 1991 they found Chinese outward FDI location was determined by the market size of potential host countries and their geographic proximity to China. In the second period, FDI location was most strongly influenced by the natural resource endowment of potential host countries. They also found that all through 1984–2001, the location choices of Chinese FDI were associated with higher levels of political risk and cultural proximity to China. The former and, to a lesser...

Table of contents

• Cover
• Title
• 1  Scholarly Context of This Book
• 2  Overview of Chinese Enterprise Globalization
• 3  Ten Strategies for Chinese Companies Going Global
• 4  Evaluation System and Rankings
• 5  CCG Recommended Rankings on Chinese Companies Going Global
• 6  Going Global Strategy and Global Talent
• 7  Challenges and Strategies of Going Global
• 8  One Belt, One Road and Future Directions for Chinese Outbound Investment
• Appendices: Statistical Overview and Analysis of Chinese Outbound Foreign Direct Investment
• China Enterprise Foreign Investment Cases (2012.12014.6)
• Notes
• Index