EAI Fellows Program Working Paper Series No.39
 

Author  

Min Ye is Director of the East Asian Studies Program and Assistant Professor of International Relations at Boston University. She earned B.A. at Beijing University, M.A. at University of South Carolina, and Ph.D at Princeton. Her specialization includes China politics, comparative political economy, and Asian international relations.

Min Ye’s teaching and research interests include foreign direct investment policies and regional integration in East Asia. Her dissertation examines how economic liberalization in developing countries is shaped by external linkages and domestic interest group politics with a focus on economic reform in China and India since the late 1970s. In studying Asian regionalism, she centers on China and examines how local governments and transnational corporations serve as the driving force for regional cooperation in East Asia.

Ye coauthored (with Kent Calder) The Making of Northeast Asia, Stanford University Press, 2010. She has published articles in various journals and presented papers at professional conferences. She is the recipient of various grants at Princeton, including the Bradley Scholarship and Bobst Peace Foundation. External grants include Japan ’s Millennium Education Scholarship and the Pacific Forum Fellowship in Hawaii. She has been a visiting fellow at Waseda University in Japan, Chinese Academy of Social Science in Beijing, SAIS John Hopkins University in Washington DC, and Rajiv Gandhi Foundation in New Delhi.

Abstract

China has become an influential source of foreign direct investment in the last decade. The growth coincides with a series of regulatory reforms governing China’s outbound direct investment (CODI). Current analyses of CODI and its regulatory environment are largely missing in the literature on China’s political economy, however. This woking paper studies the new regulation of CODI and explains distortion and disjuncture in CODI, particularly the under-representation of private companies, the market-defying geographic and sector concentration, and generally low profitability of China’s outbound investment. The paper uses statistics published by Chinese government and international organizations, as well as a number of interviews at investing companies.

China has the world’s second largest economy and largest accounts surpluses and is becoming an important source of global foreign direct investment. Chinese investors’ footprints have spread to 188 countries on the globe. Yet more publicity than prognosis has been offered in studying CODI. In the former category, the U.S is home to much criticism of investing China, stressing the strong role by the central government. It has been argued that, Chinese companies, due to their government connections, not only create unfair competition to investors of other home origins but also are “Trojan Horse” with unwanted challenge to norms, economy, and security in receiving nations. Such critiques and fears underlie American public opinion and politicians’ position on China’s corporate investments in the U.S, directly leading to the defeat of Chinese oil company CNOOC’s bid for Unocal in 2005, Chinese IT maker Huawei’s bids for Sprint, 3Leaf, and many other big contracts in the past five years. The high publicity, however, has not examined how China’s home institutions have shaped CODI and whether government connection strengthens China’s aspirant companies abroad.

On prognosis, two empirical works, both published in The China Quarterly, are particularly worth re-accounting here. Kevin Cai published the early study of China’s outbound investment and found that by 1997 China was already a leading investor among developing countries and at the time the Chinese government was yet to announce any encouraging policies toward outbound investment. Cai finds, for example, the Chinese share of outward FDI stock among developing economies increased from 0.5 percent in1985 to 6.4 percent in 1996, after only Hong Kong, Singapore, and Taiwan in the developing world. By analyzing the sector and geographic distribution of China’s outbound investment, as well as the motivation of investing companies, Cai concluded that CODI’s patterns were “generally similar to those from other developing and developed market economies.” Indeed, Cai used a general FDI theory, the Dunning theory, to account for China’s rapid progress in outbound investment.

At the time of publication, Cai was optimistic, and argued that three factors would ensure China’s continual improvement in outward FDI. First, Chinese economy has performed quite well and will continue to grow and create very favorable background conditions for Chinese companies going abroad. Second, the Chinese industrial structure has been upgrading significantly and will continue to do so, making Chinese companies more competitive. Third, an increasingly strong political commitment on the part of the Chinese government to further liberalize its policies and to promote outward investment, in pursuing “world class” industrial-commercial conglomerates, “will surely be conducive to the further development of Chinese outward FDI.”

Confirming Cai’s optimism, Eunsuk Hong and Laixiang Sun published a 2006 article in The China Quarterly, investigating China’s “going out” strategy and companies in exploring global markets. They remarked, “in parallel with success in attracting inward FDI, China has achieved initial success in implementing its ‘going out’ [zouchuqu] strategy, which encourages domestic enterprises to play a part in international capital markets and to invest overseas.” In the early 2000s, Chinese companies scored many gains in overseas market. Haier, after succeeding in the U.S, acquired the microwave division of Japan’s Sanyang and formed strategic alliances with Sony and Toshiba. Lenovo acquired IBM’s notebook division in 2004. Other cases included Konka (color televisions), TCL (multi-electronics), Jianlibao (beverage), Tsingtao (beer), Galanz (microwave), and others. Hong and Sun’s overall assessment of CODI was similar to Cai’s 1997 conclusion, “Generally speaking, China’s outward FDI is similar in character to that of other third-world multinationals.”

Hong and Sun meanwhile stress the importance of government policies, especially the “going out” policy announced in the Tenth Five-Year Plan in 2001. Although no clear regulatory documents were inaugurated in connection to the policy, visible changes took place, according to them. Government officials in charge of screening and approval changed their attitude and became friendlier to commercial investment overseas, aiming to acquire resources, technology and strategic assets acquisition, and at the firm level, companies were increasingly interested in reputation and brand building, and in innovative investment mechanisms and financing channels. These trends, Hong and Sun argue, “will continue to deepen in the future,” as the government continues to liberalization outbound investment policies and companies make internationalization an imperative to acquire strategic assets and proprietary knowledge in developed economies...(Continued)