This is a rich volume on a vital topic. The authors and editors are to be commended
on a timely, fascinating, and intriguing book on a vital current phenomenon
– Peter J Buckley, Professor of International Business and Director of
the Centre for International Business, University of Leeds,
UK & Cheung Kong Scholar Chair Professor, University of
International Business and Economics (UIBE), China
This is one of the first books to take a close and informed look at Chinese foreign
direct investment. With its clear and timely portrayal of the multi-faceted nature
of these investments, it will prove highly useful for policy-makers, executives, and
professionals
– Dr Christian Casal, Officer Manager & Director,
McKinsey & Company, Switzerland
This book provides important new evidence and insights on foreign direct investment from China, a now-dominant feature of the international economy. Its coverage is unusually comprehensive, examining both macro- and micro-determinants
as well as a wide range of host regions, and it is therefore a major source of reference
– John Child, Emeritus Professor of Commerce, University of
Birmingham, United Kingdom
At a time when media hoopla on Chinese FDI is tremendous but solid scholarly
analysis is rare, this book provides much-needed multidimensional analysis on
this important phenomenon associated with the recent globalization. I expect this
book to be widely read, cited, and debated
– Mike W Peng, Provost’s Distinguished Professor of Global Strategy,
University of Texas, Dallas, United States
Are Chinese foreign direct investors different from investors from emerging markets?
This book tells us that they are in some ways like others, but also that they have
some very special and important characteristics. In developing its themes, the book
provides insights for academics interested in the theory of foreign investment, but
also help for Western managers who face new and little-understood competitors
around the world
– Louis T. Wells, Herbert F. Johnson Professor of International
Management, Harvard Business School, United States
The rise of Southern multinationals in general and the Chinese ones in particular
are reshaping the global investment landscape. By offering a timely insight in this
important phenomenon, the book gives just the perspective we need and helps us
understand exactly what is at stake. It is a must-read for anyone seeking to understand the drivers and determinants of FDI from China, and its implications for
host countries around the world
– James X Zhan, Director, Investment & Enterprise Division, United
Nations Conference on Trade & Development (UNCTAD), Switzerland
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Chinese International
Investments
Edited by
Ilan Alon
Rollins College, United States
Marc Fetscherin
Rollins College, United States
Philippe Gugler
University of Fribourg, Switzerland
Selection and editorial content © Ilan Alon, Marc Fetscherin
and Philippe Gugler 2012
Individual chapters © the contributors 2012
Foreword © Peter J. Buckley 2012
Softcover reprint of the hardcover 1st edition 2012 978-0-230-28096-0
All rights reserved. No reproduction, copy or transmission of this
publication may be made without written permission.
No portion of this publication may be reproduced, copied or transmitted
save with written permission or in accordance with the provisions of the
Copyright, Designs and Patents Act 1988, or under the terms of any licence
permitting limited copying issued by the Copyright Licensing Agency,
Saffron House, 6–10 Kirby Street, London EC1N 8TS.
Any person who does any unauthorized act in relation to this publication
may be liable to criminal prosecution and civil claims for damages.
The authors have asserted their rights to be identified
as the authors of this work in accordance with the Copyright,
Designs and Patents Act 1988.
First published 2012 by
PALGRAVE MACMILLAN
Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited,
registered in England, company number 785998, of Houndmills, Basingstoke,
Hampshire RG21 6XS.
Palgrave Macmillan in the US is a division of St Martin’s Press LLC,
175 Fifth Avenue, New York, NY 10010.
Palgrave Macmillan is the global academic imprint of the above companies
and has companies and representatives throughout the world.
Palgrave® and Macmillan® are registered trademarks in the United States,
the United Kingdom, Europe and other countries.
ISBN 978-1-349-32795-9
ISBN 978-0-230-36157-7 (eBook)
DOI 10.1057/9780230361577
This book is printed on paper suitable for recycling and made from fully
managed and sustained forest sources. Logging, pulping and manufacturing
processes are expected to conform to the environmental regulations of the
country of origin.
A catalogue record for this book is available from the British Library.
A catalog record for this book is available from the Library of Congress.
10 9 8 7 6 5 4 3 2 1
21 20 19 18 17 16 15 14 13 12
Contents
List of Figures
vii
List of Tables
ix
Foreword
xii
Acknowledgments
xiii
Notes on Contributors
xv
Introduction
Ilan Alon, Marc Fetscherin, and Philippe Gugler
1
Part I Macro-Environmental Determinants of
Chinese FDI
1 An Institutional Perspective and the Role of the State for
Chinese OFDI
Bing Ren, Hao Liang, and Ying Zheng
11
2 Home Country Macroeconomic Determinants of Chinese
OFDI
William Wei, Ilan Alon, and Liqiang Ni
38
3 The Role of Country of Origin and Chinese OFDI
Paz Estrella Tolentino
4 Chinese SWFs: At the Crossroad between the Visible and the
Invisible Hand
Michael Keller and Laura Vanoli
54
81
Part II Micro-Environmental Determinants of
Chinese FDI
5 Motives and Patterns of Reverse FDI by Chinese
Manufacturing Firms
Xiaobo Wu, Wanling Ding, and Yongjiang Shi
107
6 A Two-way Causal Link between Internationalization and CEO
Equity Ownership in Chinese Firms
Xiaohui Liu and Jiangyong Lu
122
v
vi
Contents
7 Effects of Absorptive Capacity on International Acquisitions
of Chinese Firms
Ping Deng
137
Part III Chinese FDI in Europe and North America
8 Push and Pull Factors for Chinese OFDI in Europe
Yun Schüler-Zhou, Margot Schüller, and Magnus Brod
157
9 The Rise of Chinese OFDI in Europe
Jan Knoerich
175
10 Chinese M&A in Germany
Yipeng Liu and Michael Woywode
212
11 Chinese SMEs in Prato, Italy
Anja Fladrich
234
12 Chinese State-Controlled Funds and Entities in Canada
Xiaohua Lin and Qianyu Chen
257
Part IV Chinese FDI in Africa
13 Chinese OFDI in Africa: Trends, Prospects, and Threats
Gayle Allard
279
14 Chinese OFDI in Sub-Saharan Africa
Raphael Kaplinsky and Mike Morris
300
Part V Cases of Chinese FDI
15 The Case of Florida Splendid China
Wenxian Zhang
329
16 Benelli and Q J Compete in the International Motorbike Arena
Francesca Spigarelli, William Wei, and Ilan Alon
355
17 Geely’s Internationalization and Volvo’s Acquisition
Marc Fetscherin and Paul Beuttenmuller
376
Final Reflections
Ilan Alon, Marc Fetscherin, and Philippe Gugler
391
Author Index
396
Subject Index
405
Figures
1.1a Evolution of state’s examination and approval processes for
China’s OFDI
1.1b Evolution of state’s foreign exchange control for China’s
OFDI
1.1c Evolution of state’s inspection and evaluation processes for
China’s OFDI
1.1d Guidance and support on China’s OFDI by state
1.1e Evolution of China’s international investment protection
mechanism
1.2 Bureaucratic system in regulating China’s OFDI
1.3 Chinese OFDI stocks’ distribution by different types of
investors (2009)
1.4 The role of state and Chinese multinationals’
institution-based OFDI
3.1 Orthogonalized impulse responses of FDI to one standard
error shock in each system variable equation
3.2 Orthogonalized impulse responses of each system variable
to one standard error shock in the FDI equation
4.1 Sovereign wealth funds and government activities
4.2 The accumulation of Chinese foreign exchange reserves
(1981–2009)
4.3 Targeted regions of Chinese sovereign wealth funds
(2007–2010)
4.4 Targeted sectors of Chinese sovereign wealth funds
(2007–2010)
4.5 Number of deals by targeted regions and sectors, CIC
(2007–2010)
4.6 Number of deals by targeted regions and sectors, SAFE
(2007–2010)
4.7 Sovereign wealth funds: strategy and transparency
5.1 Summary of cross-case analysis: patterns
7.1 An absorptive capacity model of acquisition of strategic
assets via M&A
8.1 Industries recommended for investment in Western and
Eastern EU member countries
8.2 Incentives offered by IPAs to Chinese investors in the EU
9.1 Chinese OFDI into the EU (2003–2009, US$ billion)
9.2 Share of Chinese OFDI stock by region (2009)
vii
20
20
21
21
21
22
24
31
69
71
82
85
88
89
90
90
100
118
139
163
166
176
182
viii List of Figures
9.3 Share of Chinese OFDI stock in the EU by country or
country groups (2003–2009)
10.1 A conceptual model of absorptive capacity
11.1 China’s dual approach toward sustainable economic
development
11.2 Landmarks of China’s ambition to global leadership
12.1 Game structure
14.1 Four types of Chinese investors in SSA
14.2 Size, sector, and ownership of Chinese investors in SSA
15.1 Florida Splendid China’s miniature replica of the
Forbidden City
15.2 The Great Wall at Florida Splendid China, which was
constructed brick by brick by Chinese craftsmen,
comprising 6.5 million one- and two-inch bricks, 16th of
the original size. The dragonfly on top of the stick in the
foreground provides a sense of the scale of the structure
15.3 Entrance to Florida Splendid China on US Highway 192
15.4 Trolley ride at Florida Splendid China. Note the few
patrons, an indication of poor attendance
16.1 Market share of top 10 motorbike producers in the
USA (sales estimates, 2008)
16.2 Market share of top 10 motorbike producers in Italy (share
per year to month as number of registrations from
March 1, 2008, to February 28, 2009)
17.1 Main car-producing countries
17.2 Geely automobile corporate structure
17.3 Sedan sales and breakdown by models (2009)
17A.1 Product portfolio
17A.2 Example of Geely car
183
220
235
236
267
301
302
332
334
336
342
363
363
378
382
383
389
389
Map
17A.1 Geely automobile production plants
388
Tables
1.1 The policy regime of China’s OFDI
1.2 The bureaucratic administration regime of China’s OFDI
1.3 Top 50 non-financial Chinese enterprises ranked by
OFDI stocks (2009)
2.1 Regression results
3.1 Some empirical evidence on the macroeconomic
determinants of inward FDI
3.2 Some empirical evidence on the macroeconomic
determinants of OFDI
3.3 Autocorrelation coefficients of the variables (sample period
from 1982 to 2008)
3.4a Tests for stationarity around a level using the KPSS test
3.4b Tests for stationarity around a trend using the KPSS test
3.5 The vector autoregressive model of China
3.6 Exogeneity tests for FDI and other system variables
3.7 Estimated system covariance matrix of errors
3.8 Decomposition of the orthogonalized forecast error
variance
4.1 CIC’s foreign investments (2007–2010)
4.2 CIC’s domestic investments (2007–2010)
4.3 SAFE’s foreign investments (2007–2010)
5.1 Sany Group’s OFDI projects
5.2 Wanxiang Group’s OFDI projects
5.3 Geely Holding Group’s OFDI projects
5.4 Summary of cross-case analysis: motives
6.1 Correlation matrix
6.2 Results from the panel causality test
6.3 Results from the panel system equations
8.1 European countries and industries recommended for
Chinese OFDI in 2004 and 2005 (based on the 2004 and
2005 ‘catalogs’)
8.2 European countries and industries recommended for
Chinese OFDI in 2007 (based on the 2007 ‘catalog’)
8.3 Chinese OFDI flows and stocks (in total and in the EU,
2005–2008)
8.4 Geographical distribution of the Chinese OFDI in the EU
(2003–2008)
8.5 Sectoral distribution of the Chinese OFDI stock in the EU
at the end of 2008
ix
17
23
25
47
56
57
60
61
62
64
66
67
68
91
94
95
111
113
116
117
129
130
131
160
162
168
169
170
x
List of Tables
8.6 Comparing pull and push factors in Western and Eastern
EU countries
9.1 Characteristics and types of Chinese investments in
Europe: exploitation and sourcing of competitive
advantages
9A.1 Chinese OFDI stock and flows into the EU by member
states (2003, 2008, and 2009, US$ million)
9A.2 List of contacted European IPAs
9A.3 List of questions posed to European IPAs
9A.4 Overview of IPA survey results on Chinese OFDI in the EU
(2007–2008)
9A.5 Examples of Chinese companies in the EU and typical
sectors of investment
9A.6 Bilateral investment treaties concluded between China and
EU countries as of June, 1, 2010
10.1 Samples in case studies
11.1 Top 10 recipient countries of Chinese ODIs flows in Europe
(US$ million)
11.2 Respondent gender and age
11.3 Company size and industry
11.4 The Chinese community in Italy between 1991 and 2007
11.5 Comparison of Chinese firms in Prato, Veneto, and
Hamburg (1991–2009)
11.6 Chinese SOEs, MNEs, and SMEs compared
12.1 China’s outward FDI flows and stocks (2002–2009, US$
billion)
12.2 Change of investment Canada Act
12.3 Canada: geographical distribution of inward FDI stock
(2000–2008, US$ million)
12.4 Strategy combinations
12.5 Canada: inward FDI flows (2000–2008, US$ billion)
13.1 Main sectors for Chinese OFDI in selected Sub-Saharan
African countries
13.2 Chinese OFDI projects in 20 African countries by sector
(2001–2008)
13.3 Chinese OFDI stocks in African countries as a percentage of
host-country GDP (2005)
13.4 Chinese OFDI stocks in African countries in comparison
with world stocks (2005)
13.5 Growth of Chinese OFDI flows in Africa (current US$,
2004–2007)
13.6 Growth of Chinese OFDI stocks in Africa (current US$,
2004–2007)
13.7 Descriptive statistics
13.8 Correlation matrix
171
192
194
195
196
198
202
205
221
235
241
242
243
243
246
259
261
262
268
270
283
284
286
287
288
288
289
289
List of Tables
13.9 Regression results
13A.1 Chinese OFDI stocks in African countries as a percentage of
host-country GDP (2003)
13A.2 Chinese OFDI stocks in African countries as a percentage of
global OFDI (2003)
13A.3 The countries included in the regressions
13A.4 Results of regression of corruption perception index on
dummy variable of missing values
14.1 Chinese OFDI flows and stocks, excluding HK, CI, BVI
(2003 and 2008)
14.2 Distribution of China’s OFDI stock in Africa, 1990, 2005,
and 2008 (%)
14.3 Significance of Chinese FDI in key sectors in selected
SSA economies
14.4 Chinese, Indian, South African, and northern
FDI compared
14.5 Africa’s share of global production and reserves (%)
14.6 Chinese SOEs and Northern MNC FDI in SSA: major
features
15A.1 Chronology of major events of Florida Splendid China
16.1 Main facts and trends before the acquisition
16.2 Registrations in Italy (2008)
16.3 Top 10 motorbikes sold in Italy in 2008 (number of
registrations)
16.4 Motorbike and scooter (more than 50 cc) registrations per
year
16.5 The full range of Benelli products in 2009
16A.1 Outlook for China
16A.2 China’s main macroeconomic data: projections (as in 2009)
16A.3 Outlook for Italy
16A.4 Italy’s main macroeconomic data: projections (as in 2009)
17.1 Geely’s milestones
xi
291
294
295
296
297
304
305
307
309
312
316
349
357
364
364
365
365
372
372
373
373
381
Foreword
At some point, variously estimated to be between 2016 and 2025, China
will become the largest economy in the world. Despite this, the Chinese
economy is under-internationalized compared with other large economies
(USA, EU countries). It is inconceivable that large economies can remain for
long without extending their international reach.
Chinese international investment is therefore a crucial aspect of the global
economy. For that reason alone, this volume is timely. In this book, an
international group of experts concentrate mainly on foreign direct investment from China – an emerging and under-researched but vital aspect of
China’s internationalization. The macroeconomic and institutional aspects
of Chinese outward foreign direct investment (OFDI) are fascinating and
crucial in this analysis because the relationship between ‘private’ and various
forms of state ownership are important in our understanding of the amount,
direction, and motivation of OFDI from China. At the micro level, the
motives, patterns and causality of individual direct investment are analysed
in Part 2. Managerial aspects of Chinese OFDI are central to explanations
of success and failure of all FDI, and the determinants of success (or otherwise) are brought to the fore throughout this volume. It is particularly
important to see cases of failure (often under-reported and under-researched
in the international business literature) for the particular insights that such
studies bring. We should expect high degrees of failure in early internationalizing companies (and source countries), and China is no exception. The
case studies in this volume are illuminating and provide much food for further thought. Parts 3 and 4 represent interesting contrasts – investments
in Europe, largely market- and asset-seeking, and those in Africa, largely
resource-seeking, although full of intriguingly mixed motives (and mixed
categories too – and FDI, trade, institutional support).
This is a rich volume on a vital topic. The authors and editors are to be
commended on a timely, fascinating, and intriguing book on a vital current
phenomenon.
Peter J. Buckley
Professor of International Business and
Director of the Centre for International Business,
University of Leeds, United Kingdom
Cheung Kong Scholar Chair Professor in the University of
International Business and Economics, China
xii
Acknowledgments
At Rollins College, we are particularly thankful to the institutional support
provided by President Lewis Duncan, Provost Laurie Joyner, Dean Craig
McAllaster, and Dean Deb Wellman. We would also like to thank Kirra
Hughes for her assistance as book project manager, Kimberley Petersen for
administrative support, and Nanci Healy for her editing services.
At the University of Fribourg, we would like to thank Laura Vanoli,
Xavier Tinguely, and Michael Keller for administrative support and for their
assistance in the reviewing process for the chapters.
We would also like to thank the Swiss National Science Foundation for
having supported this research.
All the chapters in our book were double-blind reviewed, and we are
thankful to the reviewers who put numerous hours of their time into
improving the quality of the paper submissions. It has been a truly international effort with experts from all over the world. Specifically, we would
like to thank the following reviewers:
Gayle Allard, IE Business School, Spain
Nadia Almaraz, Tecnológico de Monterrey, Mexico
Diana Bank, Universidad de Las Américas, Puebla, Mexico
Magnus C. M. Brod, GIGA Institute of Asian Studies, Germany
Doren Chadee, University of Southern Queensland, Australia
Qianyu Chen, China Agricultural University, China
Ping Deng, Maryville University of St Louis, USA, and Shanghai Lixin
University of Commerce, China
Wanling Ding, Zhejiang University, China
François Duhamel, Universidad de Las Américas, Puebla, Mexico
Anja Fladrich, Monash University, Australia
Juan Carlos Gachúz, Tecnológico de Monterrey, Mexico
Françoise Hay, Université de Rennes, France
Dirk Holtbrügge, Friedrich-Alexander-University Erlangen-Nuremberg,
Germany
Raphael Kaplinsky, Open University, UK
Michael Keller, University of Fribourg, Switzerland
Jan Knoerich, United Nations Conference on Trade and Development,
Switzerland
Heidi Kreppel, Friedrich-Alexander-University Erlangen-Nuremberg,
Germany
Edmir Kuazaqui, Escola Superior de Propaganda e Marketing, Brazil
Hao Liang, Tilburg University, Netherlands
Xiaohua Lin, Ryerson University, Canada
xiii
xiv Acknowledgments
Xiaohui Liu, Loughborough University, UK
Yipeng Liu, University of Mannheim, Germany
Jiangyong Lu, Peking University, China
Christian Milelli, Université de Rennes, France
Mike Morris, University of Cape Town, South Africa
Aloysius Newenham-Kahindi, University of Saskatchewan, Canada
Liqiang Ni, University of Central Florida, USA
Bing Ren, Nankai University, China
Yun Schüler-Zhou, GIGA Institute of Asian Studies, Germany
Margot Schüller, GIGA Institute of Asian Studies, Germany
Yongjiang Shi, University of Cambridge, UK
Francesca Spigarelli, University of Macerata, Italy
Xavier Tinguely, University of Fribourg, Switzerland
Paz Estrella Tolentino, University of London, UK
Laura Vanoli, University of Fribourg, Switzerland
William Vlcek, University of St Andrews, UK
William Wei, Grant MacEwan University, Canada
Loong Wong, Murdoch University, Australia
Michael Woywode, University of Mannheim, Germany
Xiaobo Wu, Zhejiang University, China
Ren Yi, University of Southern Queensland, Australia
Wenxian Zhang, Rollins College, USA
Ying Zheng, Nankai University, China
Notes on Contributors
Gayle Allard is a native of California who has spent most of her adult life
working and living in Europe, especially in Spain, where she is Professor of
Economics at the IE Business School in Madrid. She has a PhD from the
University of California, Davis, and a Master’s in international affairs from
the Johns Hopkins School of Advanced International Studies. Her research
interests range from the effects of labor market institutions on employment
and productivity in developed countries to the determinants of economic
success (growth, foreign direct investment inflows, science and technology
capabilities) in developing regions, especially Africa. In Madrid she directs
the IE’s Africa Forum, which promotes research and disseminates information about business opportunities on the continent. Gayle is married with
five children.
Ilan Alon is Cornell Chair of International Business and Director of the
China Center at Rollins College, and Visiting Scholar and Asia Fellow
at Harvard University. He has published 27 books and more than 100
peer-reviewed articles. His recent books on China include Chinese Culture,
Organizational Behavior and International Business Management (2003), Chinese
Economic Transition and International Marketing Strategy (2003), Business and
Management Education in China: Transition, Pedagogy and Training (2005),
The Globalization of Chinese Enterprises (2008), Biographical Dictionary of New
Chinese Entrepreneurs and Business Leaders (2009), China Rules (2009), and
A Guide to the Top 100 Companies in China (2010). He has taught courses
as part of top Chinese MBA programs, including those at Shanghai Jiao
Tong University, Fudan University, East China University for Science and
Technology, and China Europe International Business School. He is also an
international business consultant, with experience in China as well as other
countries in Asia, the Middle East, Europe, and America, and is a featured
speaker in many professional associations.
Paul Beuttenmuller is a recent MBA graduate with a concentration in international marketing from the Crummer School of Business at Rollins College,
where he completed a five-year advanced management program. He has
participated in a semester abroad at Shanghai Jiao Tong University, completed an internship with East China University of Science and Technology,
and traveled to Istanbul to research its business environment. Paul also
served as an organizer for Harvard’s 2009 China Goes Global Conference
and for the Rollins College 2010 and 2011 International Colloquium on
Consumer Brand Relationships. He has published three other book chapters.
xv
xvi
Notes on Contributors
Paul hopes to continue studying Mandarin and the Chinese business environment while working in an international business environment within
the marketing and branding fields.
Magnus Brod is currently pursuing his Master’s degree in sociology at the
London School of Economics, UK. He received a BA in social science from
the Philipps University Marburg, Germany, with a minor in law studies. He
has worked as project staff at the Institute of Asian Studies of German Institute for Global and Area Studies in Hamburg, Germany, where he conducted
research on Chinese foreign direct investments in Europe and development
aid in Southeast Asia. His research interests include quantitative methods, the economic sociology of trade, and socio-economic transformation
and development processes of Asia, especially China. He has published on
Chinese foreign direct investments in Europe and presented conference
papers at the University of Toronto, Canada, and the Middle East Technical
University Ankara, Turkey, among others.
Qianyu Chen is a PhD candidate at the College of Agronomy and
Biotechnology at the China Agricultural University, Beijing, and Visiting
Scholar at the International Research Institute, Ryerson University. Her educational background has covered international economics and trade (BA in
economics), rural sociology (MA in sociology), and farming systems (doctorate in agronomy). She has published several articles and conference papers
on rural sociology and international business. Her current research focuses
on Chinese outward foreign direct investment in developed countries,
especially in Canada.
Ping Deng is Professor of Business Administration in the John E. Simon
School of Business at Maryville University of St Louis, USA, and he also
serves as Eastern Scholar (Professor of Special Appointment at Shanghai
Institutions of Higher Learning) at Shanghai Lixin University of Commerce,
Shanghai, China. His current research interests focus on the internationalization of Asia Pacific firms and outward foreign direct investment by multinational corporations from emerging economies and particularly China.
The research is supported partially by the Program for Professor of Special
Appointment (Eastern Scholar) at Shanghai Institution of Higher Learning. Deng’s numerous publications have appeared in refereed journals such
as Journal of World Business, Journal of Leadership and Organization Studies,
Thunderbird International Business Review, Business Horizons and Asian Survey.
Wanling Ding is a PhD candidate at the School of Management, Zhejiang
University, Hangzhou, China. Her research focuses on global strategy,
international management, and technological innovation. For more than
three years she has participated in the national research project – Chinese
Manufacturing Firms’ Outward FDI Strategy. She has published several
Notes on Contributors
xvii
peer-reviewed articles and conference papers on the topic of Chinese manufacturing firms’ outward foreign direct investment and internationalization.
She was a teaching assistant for the course on strategic management in
MBA programs at the School of Management, Zhejiang University, in 2007.
She was a visiting doctoral student at the University of Cambridge from
October 2008 to October 2009.
Marc Fetscherin is Associate Professor at the Crummer Graduate School
of Business and the International Business Department at Rollins College.
He is also an associate of the Rollins China Center as well as an Asia
Fellow at Harvard University. He received his PhD from the University
of Bern, Switzerland. He holds two Master’s degrees: from the University
of Lausanne, Hautes Etudes Commerciales, Switzerland, and the London
School of Economics, UK. He has published the book China Rules: Globalization and Political Transformation (2009) as well as numerous peer-reviewed
articles, book chapters, and conference papers. Fetscherin’s articles have
appeared in refereed journals such as Management International Review, International Business Review, Thunderbird International Business Review, Asian
Business & Management, Chinese Management Studies, International Journal
of Emerging Markets, International Marketing Review and European Journal of
Marketing.
Anja Fladrich is Senior Lecturer in Management and National Program
Manager Higher Education at Holmes Institute, Australia. She studied international management and Chinese (Mandarin) in Germany, China, and
Australia. She is currently a PhD candidate at Monash Asia Institute, Monash
University, Australia. Her thesis is concerned with the Chinese and Chinese
entrepreneurship in Prato, Italy. Other research interests include higher education and graduate employment in China and Australia. Anja has published
several articles and book chapters, and presented at various conferences in
Australia, Hong Kong, and the USA.
Philippe Gugler holds the Chair of Economics and Social Policy in the Faculty of Economics and Social Sciences and is the Director of the Center for
Competitiveness at the University of Fribourg, Switzerland. He is an affiliate MOC faculty member of the Institute for Strategy and Competitiveness
of the Harvard Business School, USA, and Guest Professor at the National
Institute for Development Agency, Thailand, and at the Università di Roma,
Italy. He is Vice-Chairman of the European International Business Academy
as well as a member of the boards of several academic and economic associations in Switzerland and abroad. Philippe has published mainly in the
fields of trade and competition, trade and investment, competition policy,
multinational enterprises, and competitiveness.
xviii Notes on Contributors
Raphael Kaplinsky is Professor of International Development at the Open
University, UK. Building on extensive research and operational experience
in the related fields of industrial development, technology and innovation,
since the late 1990s he has focused and published on global value chains and
the unequalizing characteristics of globalization. Within this, his primary
research interest has been on the historical significance of the rise of China
and India (the ‘Asian Drivers’) and their impact on low income economies
in general, and Africa in particular. As part of this he has worked closely with
the African Economic Research Consortium’s Asian Driver programme and
on the impact of the Asian Drivers on the commodities-manufactures terms
of trade. His new research focus is on the potential which China and India
have for producing pro-poor innovations and how this might facilitate the
emergence of a new pro-poor growth strategy in low income economies in
general, and in Africa in particular.
Michael Keller is a research assistant and PhD candidate at the Chair of
Economics and Social Policy, Faculty of Economics and Social Sciences,
University of Fribourg, Switzerland. His Master’s degree in economics and
social sciences from the University of Fribourg, Switzerland, was obtained in
2009 (summa cum laude). He has been working as a researcher and consultant at the Center for Competitiveness, University of Fribourg, Switzerland,
since 2008.
Jan Knoerich is Departmental Lecturer in the Economy of China at the
School of Interdisciplinary Area Studies, University of Oxford. He previously worked for the United Nations Conference on Trade and Development
(UNCTAD) in the area of foreign direct investment and its development
implications. He contributed to numerous UNCTAD publications, including studies on international investment agreements and the World Investment Report, and he has published several peer-reviewed articles and book
chapters. His PhD research, undertaken at the School of Oriental and African
Studies, University of London, focused on Chinese outward foreign direct
investment in the European Union. He also received an MA in diplomacy
and international relations from Seton Hall University in the USA, where he
studied as a Fulbright scholar.
Hao Liang is an MPhil student in finance at Center for Economic Research,
Tilburg University, Netherlands. He received his Bachelor’s degree in management from Nankai University in China, and he was a visiting student
at Singapore Management University and Cornell University in the USA.
His research interests are in entrepreneurial finance, behavioral finance, corporate governance, and international business. As a Master’s student, he
has presented papers at several high-level academic conferences and seminars in top business schools in the USA, Europe and China. Currently he
Notes on Contributors
xix
is working on several research projects, including private equity in emerging markets, executive compensation in China, and the role of the state in
Chinese multinational firms’ outward foreign direct investment.
Xiaohua Lin is Professor of International Business and Entrepreneurship
at the Ted Rogers School of Management and Director of the International Research Institute at Ryerson University, Canada. He received
his PhD from Oklahoma State University, USA. He currently serves as
Chair of the Academy of International Business’s Canada Chapter and
Vice President (research) of the Canadian Council for Small Business and
Entrepreneurship. His publications have appeared in journals such as Strategic Management Journal, Journal of International Business Studies, Management
International Review, and Journal of World Business.
Xiaohui Liu is Chair of International Business at the School of Business
and Economics, Loughborough University. She received her PhD in international economics from the University of Birmingham. She has published
widely, with publications in Journal of International Business Studies, Research
Policy, Entrepreneurship Theory and Practice, Management International Review,
Journal of World Business, International Business Review, International Journal
of Human Resource Management, and Management and Organisation Review.
She has received the Best Paper awards from the Academy of International
Business (UK) and the International Association for Chinese Management
Research. She is Editor of the International Journal of Emerging Markets and
Secretary-General of the Chinese Economic Association (UK).
Yipeng Liu is a PhD candidate and lecturer at the Center for Research
of Small and Medium-Sized Businesses at Mannheim University. He has
been Visiting Scholar at Columbia Business School and China Europe International Business School. He obtained his BSc from Shanghai Jiao Tong
University, his MSc from the Technical University of Munich, and professional education in Harvard participants-centered teaching methods at the
IESE Business School. His research interests center on the intersection of
organization theory, entrepreneurship, and strategy with a focus on emerging economies. Moreover, he explores the emerging phenomenon of the
globalization of Chinese firms, especially Chinese cross-border M&A in
Europe. Yipeng presents his research at various international conferences.
His work has appeared in international academic journals as well as practitioner outlets, such as Journal of Chinese Entrepreneurship, Prometheus: Critical
Studies in Innovation, and Business Forum China.
Jiangyong Lu is Associate Professor of Strategic Management in Guanghua
School of Management, Peking University. He obtained his PhD in
xx
Notes on Contributors
economics and strategic management from the School of Business, University of Hong Kong. His research interests include Multinational Enterprises
(MNEs) strategies in China, outward foreign direct investment and export
strategies of Chinese firms, and knowledge flow between MNEs and local
firms. His articles appear in international journals such as Journal of International Business Studies, Management International Review, Journal of Business
Venturing, Management and Organizational Review, American Economics Review
(Papers and Proceedings), Journal of International Economics, Journal of Urban
Economics and Journal of Comparative Economics. He has also published papers
in leading Chinese economics journals, including Economic Research Journal,
China Economic Quarterly, China Journal of Economics, and Management World.
Mike Morris is Director of the Center for Social Science Research, Head of
Policy Research in International Services and Manufacturing, and Professor in the School of Economics at the University of Cape Town. He has a
PhD from the Institute of Development Studies at the University of Sussex.
He has significant experience working with national, regional, and international policymakers. He has been the recipient of a number of major
international research grants and has managed a large number of research
projects. Mike has published widely in the fields of development, political
economy, international competitiveness, industrial restructuring and industrial policy, global value chains, social differentiation, and economic growth.
He is also a director of a private sector company (Benchmarking and Manufacturing Analysts), which assists firms and government with upgrading,
competitiveness and industrial strategies.
Liqiang Ni is an associate professor in the Department of Statistics at the
University of Central Florida. He received his BSc from Fudan University,
China, and his PhD from the University of Minnesota, USA.
Bing Ren is an associate professor in the Business School at Nankai University. She received her PhD from the Chinese University of Hong Kong.
She has published a number of peer-reviewed articles, book chapters, and
conference papers. Currently she is undertaking two research projects: one
about the entrepreneurial growth and legitimation strategy of Chinese new
ventures, the other about corporate governance and its relation to corporate
social responsibility and sustainability of Chinese listed companies during
institutional transitions. Bing visited the Jönköping International Business
School, Sweden, and RMIT University, Australia. She is a reviewer for various
journals and a member of various professional associations.
Yun Schüler-Zhou is a PhD candidate at the Institute for Marketing and
Media, University of Hamburg, and a research assistant in the Institute
of Asian Studies of the German Institute for Global and Area Studies in
Hamburg, Germany. She holds a Master’s degree in business administration
Notes on Contributors
xxi
from the University of Hamburg. Her research interests center on the internationalization of Chinese enterprises, particularly on the impact of government policies on the decision-making of companies and the mechanisms
applied in the control of foreign subsidiaries by Chinese headquarters.
Margot Schüller is a senior research fellow in the Institute of Asian Studies
of the German Institute for Global and Area Studies in Hamburg, Germany.
She holds a master’s degree in economics from the University of Paderborn
and studied Chinese at the University of Liaoning during 1983–1985. For
more than two decades she has closely followed China’s economic development. Her work covers a broad range of publications on economic transition,
including specific topics such as the globalization of Chinese companies,
banking sector reform, innovation policy, and China’s regional economic
cooperation.
Yongjiang Shi is Research Director and a lecturer in the Centre for International Manufacturing, University of Cambridge, UK. His research interests
include technology transfer and manufacturing mobility, manufacturing
strategy, designing effective manufacturing systems, international strategic
alliances and foreign market entry modes, global supply chains, and value
network management. He has published numerous peer-reviewed articles
and conference papers. He joined the Cambridge manufacturing research
group in 1994. He gained his PhD at Cambridge for work on international manufacturing network configurations and has taken a leading role in
the conceptualization and delivery of the center’s research program. Before
that he taught production and operations management at the School of
Economics and Management in Tsinghua University, Beijing, China.
Francesca Spigarelli is an assistant professor at the University of Macerata.
She teaches economics and managerial economics in the Faculty of Law.
She received her PhD from the University of Pescara, Italy, in banking and
finance. She was Visiting Professor at the Toulouse Business School. She has
taught courses in several MBA and PhD programs in Italy. She has published
peer-reviewed articles, book chapters, and conference papers. Francesca is
a reviewer for various journals and she is a consultant for national bodies
and agencies in the international management and economics areas. Her
main research topics are SMEs’ internationalization processes, foreign direct
investments, and multinational companies from emerging countries.
Paz Estrella Tolentino is Lecturer in International Business at the School
of Business, Economics and Informatics at Birkbeck, University of London.
She received her PhD from the University of Reading, UK. She holds a
Master’s degree in international business and economic development, also
from the University of Reading. She is the author of the books Technological Innovation and Third World Multinationals (1993) and Multinational
xxii
Notes on Contributors
Corporations: Emergence and Evolution (2000). Her PhD dissertation received
the 1989 Academy of International Business Richard N. Farmer prize for
the best PhD thesis on international business. She has published a number of peer-reviewed articles, book chapters, and conference papers. She is a
reviewer for various academic journals and member of several professional
associations.
Laura Vanoli is a PhD student affiliated to the project on Chinese foreign direct investment at the Center for Competitiveness, University of
Fribourg. She obtained a Bachelor’s degree in economics from the University of Fribourg, Switzerland, and a Master’s in economics from Hautes
Etudes Commerciales Lausanne. She has worked as an academic assistant in
microeconomics and macroeconomics at Ecole Hôtelière de Lausanne.
William Wei is Chair, Asia Pacific Management Program, Institute of Asia
Pacific Studies, and faculty member in International Business at Grant
MacEwan University Business School. He is Vice Chair, Sino-Canada Asia
Pacific Economics Research Institute, jointly established by Jiangsu University of Science and Technology and MacEwan in Jiangsu, and also a senior
research associate at the Center for China and Globalization, Beijing. He is
a founding member of the International Association for Chinese Management Research and member of the Academy of International Business and
Academy of Management. He has published over 40 publications, including
journal articles, books, book chapters, business cases, conference proceedings, and presentations. His recently published book on China is EU Foreign
Direct Investment to China: Location Determinants and Lessons from an Enlarged
European Union (2008) and his recent business case book is Cross-cultural
Business Cases (2011).
Michael Woywode is Professor of Small and Medium Sized Business
Research and Entrepreneurship at the Faculty of Business and Director of
the Center of Small and Medium Sized Business Research (ifm Mannheim)
at Mannheim University. Previously he held professorship positions in
international management and innovation management at Aachen University (RWTH Aachen) and Karlsruhe University. He is co-author of the
book Erfolgreich in China: Strategien für die Automobilzulieferindustrie (2006)
with Garnet Kasperk. Michael received his habilitation in business administration from Mannheim University and holds a PhD in economics. He
has been a visiting scholar at Stanford University for two years. His academic research has been published in the Academy of Management Journal,
Organization Studies, American Journal of Sociology and Journal of Industrial
Economics.
Xiaobo Wu is Executive Dean of the School of Management and Director of
the National Institute for Innovation Management at Zhejiang University,
Notes on Contributors
xxiii
Hangzhou, China. He has taught courses on strategic management and technological innovation in graduate programs, including MBA and EMBA programs. He has participated in more than 20 national research projects and
four international projects on global manufacturing, sustainable development, and regional policy. He has published widely on the topics of strategic
management and technological innovation, co-authoring several books on
this subject. He received his PhD in management of technology innovation
from Zhejiang University. He was a visiting professor at the University of
Cambridge, UK, and a Fulbright Senior Visiting Fellow at the Sloan School
of Management, MIT, USA.
Wenxian Zhang is a research associate at the Rollins China Center, a recipient of the Cornell Distinguished Faculty Service Award and is Arthur Vining
Davis Fellow of Rollins College. He has taught courses on Chinese culture
and frequently taken students on field study trips to China. Zhang is also
a recipient of the 2010 Patrick D. Smith Award for his academic work with
Dr Maurice O’Sullivan on A Trip to Florida for Health and Sport. In addition to
editing the books The Biographical Dictionary of New Chinese Entrepreneurs and
Business Leaders (2009), A Guide to the Top 100 Companies in China (2010),
and The Entrepreneurial and Business Elites of China: The Chinese Returnees
Who Have Shaped Modern China (2011), he has published many scholarly
articles on information studies, historical research, and Chinese business
management.
Ying Zheng is a Master’s student in the Business School at Nankai University. Her research interests are in the areas of international business and
Chinese firms’ globalization. Currently she is undertaking a research project
on liability of foreignness and Chinese firms’ internationalization.
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Introduction
Ilan Alon, Marc Fetscherin, and Philippe Gugler
Chinese International Investments, edited by Ilan Alon, Marc Fetscherin, and
Philippe Gugler, contributes to the literature on the internationalization of
Chinese enterprises with a special focus on Chinese Foreign Direct Investments (FDI), including its macro- and micro-environmental determinants,
its development in Europe, North America, and Africa, and a number of case
studies.
Complementing the series of books available on the globalization of the
Chinese political economy, including The Globalization of Chinese Enterprises
(2008) and China Rules (2009), this book provides authoritative academic
and professional insights into the strategies of Chinese FDI in Europe,
Asia, Africa, and the Americas. Distinguished authors from across the world
make a contribution to the growing literature on Outward FDI (OFDI) from
China, offering a wide range of up-to-date academic insights and findings. Those findings are rounded off with lessons learned from historical
developments (success and failure stories), an evaluation of current trends
and the motives and modes of entry that Chinese companies use. Contributions on OFDI from China in different regions of the world, and
specific industry studies, case studies, and theoretical contributions, highlight the need for additional research on this emergent area in international
business.
Part 1: Macro-Environmental Determinants of Chinese FDI
Bing Ren, Hao Liang, and Ying Zheng, all Chinese academics, provide an
institutional perspective on the role of the state in China, which serves
as a good overview for readers. This first chapter assesses the role of the
state and how associated institutional factors shape Chinese firms’ OFDI.
To analyze the role of the state, the authors discuss the wider economic
and social context of China and how formal and informal institutional elements shape the role of the state and the unique features of Chinese OFDI.
The authors find that formal institutions play crucial roles in determining
1
2
Introduction
OFDI motives of Chinese firms through policy influence and bureaucratic
administration. State ownership also maintains a large presence. Informal
institutions such as state ideology and national pride also play a role in
shaping corporate OFDI trajectories. These formal and informal institutional
factors lead Chinese firms to choose different investment modes, locations,
and industries.
Chapter 2 complements the introduction with an empirical analysis of
the determinants of Chinese OFDI between 1987 and 2009. William Wei,
Ilan Alon, and Liqiang Ni review the literature on Chinese outward foreign direct investment and its determinants by testing seven home country
macroeconomic determinants. Based on Dunning’s investment development path (IDP) theory, regression results confirm that exchange rates,
imports, interest rates, and foreign currency reserves are the most significant environmental home-country factors in determining Chinese OFDI.
Research of home market determinants of Chinese OFDI explains the
indigenous policies and the institutional environmental factors discussed in
Chapter 1 that affect Chinese internationalization.
Chapter 3, like Chapter 2, examines China’s OFDI from the countryof-origin perspective. Paz Estrella Tolentino’s research analyzes the relationships among a range of macroeconomic factors specific to the home
country and the level of China’s OFDI flows, using data from 1982 to
2008. The focus is on the inference of Granger causality as well as on
the determination of the endogenous structure and dynamic relationships
of the multiple time series. The methodology employs a vector autoregressive (VAR) model which assesses the relationships of the endogenous
variables. Her chapter also investigates the impact of the changes in one
variable on the other system variables. Apart from OFDI itself, the openness of the Chinese economy to international trade, domestic technological
innovation, and domestic interest rates and exchange rates is a significant home country-specific determinant of China’s OFDI flows. These
variables contain useful information for predicting China’s OFDI (in the
linear least squares sense) over and above the history of OFDI itself.
China’s OFDI flows in turn are essentially exogenous to all system variables other than itself. The research explains the direction of causality
between a range of home country-specific macroeconomic factors and
China’s OFDI flows where common sense, theory, or previous empirical
studies do not provide clarity. China’s rapid advancement and its growing multinationals provide a basis for re-evaluating current views and
perceptions, and for re-examining and augmenting old theories in new
contexts.
Another type of investment driven by the state are sovereign wealth funds
(SWFs), examined by Michael Keller and Laura Vanoli in Chapter 4. The
chapter identifies the objectives of Chinese SWF investments and the role
of the government in their investment decisions based on the question,
Ilan Alon, Marc Fetscherin, and Philippe Gugler
3
do Chinese SWF investments reflect only a pure financial consideration
(i.e. the maximization of return on investment) or a strategic and geopolitical objective? An affirmative answer to the latter question would raise
concerns about SWFs. To answer this question, the authors identify and
analyze Chinese SWF investments in terms of targeted countries/regions
and targeted sectors to understand the investment strategy. They compare the strategy with the objectives defined in the ‘Go Global’ policy to
assess the possible involvement of the Chinese government. An analysis
of the investment deals shows that China Investment Corporation (CIC),
the Chinese SWF, invests domestically as well as abroad. Its foreign investments are primarily concentrated in the US in financial companies and in
resource-rich regions such as Canada, Eurasia (Russia) and Oceania (Australia
and Indonesia). Comparing the targeted sectors with government objectives, the authors conclude that the Chinese government influences SWF
decisions, reinforcing the thesis of strategic behavior. In fact, access to
natural resources, scarce in China, is the main motivation for OFDI supported by the government. But Chinese SWFs also make purely financial
investments. Due to the lack of transparency, it is difficult to classify
the funds either as financial or strategic investments. Recipient countries thus have concerns and have established SWF legal and regulatory
frameworks.
Part 2: Micro-Environmental Determinants of Chinese FDI
While the first section of the book broadly examines the macroenvironmental determinants of Chinese OFDI, section two shows how
micro-environmental determinants, or firm-specific factors, can influence
Chinese investments abroad.
In Chapter 5, Xiaobo Wu, Wanling Ding, and Yongjiang Shi explore
the motives and patterns of Chinese manufacturing firm investments in
developed countries. Their study uses the resource-based view as the fundamental theoretical perspective to explain the ‘asset exploration’ motive
of OFDI from emerging economies and ‘resource augmentation’ dimension of investment patterns. By using an exploratory case study method
comprising both single case and cross case analysis, the authors show that
Chinese manufacturing firms have mixed motives for investing in developed countries, although market-seeking and strategic asset-seeking are
the two primary motives. The chapter classifies the patterns of Chinese
manufacturing firm investments in developed countries based on two
dimensions: the degree of resource augmentation and the degree of control, which are both high. Managers in Chinese manufacturing firms will
understand more about the different motives and patterns of OFDI after
reading this chapter. They can then make more informed investment
decisions.
4
Introduction
Going deeper into internal, managerial-specific factors, Chapter 6 by
Xiaohui Liu and Jiangyong Lu tests a two-way causal link between internationalization and CEO equity ownership in Chinese listed firms. The
chapter uses panel data analysis based on Granger causality tests and
finds a bi-directional relationship between internationalization and CEO
equity ownership. These two factors mutually affect each other, implying
that CEO equity ownership and internationalization should be treated as
interrelated issues. Any separate examination may produce biased results.
The chapter challenges existing studies that neglect the reverse causation
between internationalization and CEO compensation and helps enhance an
understanding of the complexities of these two issues.
Of course, the ability of Chinese firms to go global depends in part on
their ability to integrate knowledge and intangible resources into strategic
assets. Ping Deng, in Chapter 7, examines the ‘Effects of Absorptive Capacity on International Acquisitions by Chinese Firms.’ Chinese multinational
corporations (MNCs) increasingly use cross-border mergers and acquisitions
(M&As) to acquire strategic assets or knowledge for greater competitive
advantage in the global marketplace. This chapter considers the strategic
and performance dimensions of such M&As by drawing from an absorptive
capacity perspective. By comparing two international acquisitions by leading Chinese firms, Lenovo and TCL, the author uncovers some of the key
firm-level factors and mechanisms that may contribute to international
M&A outcomes. The author finds that firm-level mechanisms such as prior
related knowledge, combinative capabilities, and strategy execution are critical factors that determine the success or failure of cross-border acquisitions
by Chinese MNCs.
Part 3: Chinese FDI in Europe and North America
While sections I and II cover the main external and internal determinants
of Chinese OFDI, section III shifts the focus to the host (recipient) countries
for Chinese investments. Yun Schüler-Zhou, Margot Schüller and Magnus
Brod, in Chapter 8, discuss the pull and push factors of Chinese OFDI in
the European Union. Their chapter investigates the factors explaining the
pattern and development of Chinese OFDI in Europe. In applying the concept of structural and institutional pull and push factors, they describe the
policy guidelines of the Chinese government toward investments in the
European Union, taking into account policies toward specific industries and
countries and the incentives which EU countries provide to attract Chinese
OFDI, with a particular focus on European investment promotion agencies
(IPAs). To understand the specific incentives offered by IPAs, the authors
conducted a survey among the 92 IPAs in Europe in 2009. The Chinese government has introduced a bureaucratic tool to direct investments toward
specific industries and countries in the EU that is similar to its policy tool
Ilan Alon, Marc Fetscherin, and Philippe Gugler
5
for inward FDI. For Europe, to some extent the pattern of Chinese OFDI corresponds to the government’s recommendations. The analysis of IPA policy
for Chinese investments shows that Eastern European countries have more
complex incentive schemes compared to Western European countries. By
analyzing the IPA incentive schemes, the authors add a new perspective to
analyze the pull factors for Chinese OFDI.
Dovetailing with Chapter 8 is Chapter 9 where Jan Knoerich also examines
the rise of Chinese OFDI in the European Union. He focuses on location choice, investment decisions, entry mode, and firm competitiveness,
juxtaposing the exploitation and sourcing of competitive advantages by
Chinese outward investors in the EU and assessing their relative importance. The study draws on descriptive statistics derived from Chinese data
and qualitative information obtained primarily from a survey of investment promotion agencies (IPAs). Chinese OFDI in the EU is undertaken for
both the exploitation and sourcing of competitive advantages. Exploitation
occurs through incremental internationalization, based on pre-existing competitive advantages derived from low-cost production in China. Small-scale
investments are sufficient for such purposes while sourcing of competitive
advantages often requires larger-scale projects. The chapter explores the early
stages of internationalization from emerging economies in mature markets,
which is valuable for companies in developing countries as they expand
internationally.
The authors of Chapters 8 and 9 are among the first to consider the EU
as one entity when analyzing Chinese OFDI and European investment promotion agencies. The literature on competitive advantages of developing
country firms in mature markets has more room for growth, however.
Chapters 10 and 11 provide a detailed country description of Chinese
investments in Germany and Italy, respectively. In Chapter 10, Yipeng
Liu and Michael Woywode investigate Chinese M&A in Germany. Departing from the strategic intent perspective in the new literature on Chinese
OFDI, the authors focus on the integration approach of Chinese crossborder M&As in Germany and identify possible causes of the light touch
approach. This qualitative study includes seven Chinese M&A cases in
the German machine tools industry. Semi-structured interviews were conducted with German managers and CEOs from the acquired companies.
In addition, governmental institutions and Chinese CEOs and managers
involved in Sino-German business cooperation were interviewed. Crosscase analysis was conducted to test and illustrate the explanatory power
of the conceptual framework. Contradicting the conventional wisdom on
M&A integration, the authors find that Chinese cross-border M&As in
Germany adopt light touch integration. A conceptual framework integrating individual-, organizational-, and national level dimensions into the
concept of absorptive capacity is proposed to explain the light touch integration approach. This study suggests that for maximum value creation by
6
Introduction
unleashing the potential of realized absorptive capacity, managers should
consider cross-border M&A from a multidimensional perspective. In addition, the authors stress the important roles played by intermediaries, such
as professional firms, to smooth Sino-German cooperation in general and
cross-border M&A in particular.
In Chapter 11, Anja Fladrich links the Chinese diaspora in Northern Italy
to trade and investment. By looking at small and medium enterprises in Italy
rather than the large multinationals most other chapters concentrate on,
this chapter provides a fresh look into the ‘bamboo capitalism’ of expatriate
entrepreneurs. The chapter asks two key questions: First, to what extent do
Chinese SME investment paths and patterns mirror those of their larger
brothers, and, second, what is the significance of the relatively large ethnic enclave in Prato, Italy? Building on the concept of cluster theory, the
authors interview 36 Chinese entrepreneurs in Prato. The study suggests
that Chinese investment in Italy is linked with immigration, that Chinese
entrepreneurs have had a large economic impact on the region, serving both
the ethnic enclave and local clientele, and that trade in textiles has formed
a cluster within the industrial enter of Prato, breeding new life into this
traditional sector.
Shifting from Europe to North America, Xiaohua Lin and Qianyu Chen
examine investment by Chinese state-controlled entities in Canada in
Chapter 12. Chinese OFDI through state-controlled funds and entities
(SCFEs) is increasing, but progress in the developed nations is slow. The
chapter examines the interests, concerns, and strategic options associated
with OFDI in Canada. Game theory perspective is invoked in the chapter,
involving the developed nations, local enterprises and SCFEs. The authors
analyze their interactions and predict the future role and extent of SCFEs
in developed nations. Using a model from a game perspective to analyze
SCFE investments in the developed nations, with Canada as an example, the
authors predict a mode of restrictive investment. The model is applied to a
case based on the resources sector in Canada, which has substantial SCFEs.
A win-win situation could emerge if all players in the game, including the
developed nations’ governments and SCFEs, can compromise to ensure a
conditioned deal. The chapter helps to fill the research void by analyzing
strategic situations where developed nations encounter SCFEs.
Part 4: Chinese OFDI in Africa
In Chapter 13, Gayle Allard investigates whether Chinese OFDI is different in Africa. China’s highly visible presence in Africa is one of the most
commented-on facets of globalization in the twenty-first century. To understand not only trends in global OFDI but the prospects of Africa itself,
it is important to analyze the features, the motivations and the implications of this investment push. Data limitations, however, make this difficult.
Ilan Alon, Marc Fetscherin, and Philippe Gugler
7
Official OFDI data is used from the Chinese government to explore differences between Chinese and global OFDI to African countries. A ratio for
Chinese/global OFDI is used as the dependent variable in a generalized least
squares regression. The independent variables are corruption, metal/ore and
fuels exports, and GDP growth for the period 2000–2005. Allard finds that
Chinese OFDI in Africa has not only risen much faster than global OFDI, but
appears to be more resource-driven and more closely associated with corrupt
environments. Limitations to research exist. For example, reliable data is
irregular and long time series cannot be constructed to permit more sophisticated analyses. Some key countries and years are missing from the data set,
but despite the limitations, the chapter sketches a global picture rather than
a partial and anecdotal view of Chinese investment in Africa.
Focusing more narrowly, in Chapter 14 Raphael Kaplinsky and Mike
Morris examine large scale Chinese OFDI in Sub-Saharan Africa, where natural resources are concentrated, along with deep social and political divides.
The authors focus on Sub-Saharan Africa, where large state-owned Chinese
companies have invested mainly in the resource and infrastructure sectors.
They identify streams of Chinese FDI and place them in a historical context,
with a focus on large and predominantly state-owned enterprises (SOEs). The
authors show that Chinese investments are often integrated with Chinese
aid and trade projects. The authors conclude that China should establish
suitable policy responses to allow for net gains to be maximized in the
continent’s intercourse with these SOE investments from China.
Part 5: Cases of Chinese FDI
The last section of the book presents three cases on Chinese investments
around the world. Wenxian Zhang in Chapter 15 discusses Chinese investments in the State of Florida, United States, in building Splendid China.
Despite the rapid growth of the Chinese economy and its OFDI, researchers
have not paid enough attention to failed overseas ventures by Chinese firms,
especially during the early part of the reform era. One such case is Florida
Splendid China, which represents not only a major fiasco in the history of
Florida tourism, but one of the most disastrous international investments
ever made by a Chinese company. Through a historical review, the chapter
examines the development of Florida Splendid China to understand why the
theme park designed to promote cultural understanding failed. The author
looks at why the investment group misread the tourism culture of the mature
American market. Opened in 1993, Florida Splendid China was one of the
first and largest joint investment ventures by a state-owned enterprise at
the time. The theme park, optimistically conceived yet poorly researched,
well-executed but improperly managed, never flourished in the competitive
Central Florida market. Political controversies and demonstrations plagued
the park during its 10-year history, and it finally fell victim to the region’s
8
Introduction
struggling tourism business following the 2001 terrorist attacks. The chapter
contains the first and only study that examines the lessons learned from
Florida Splendid China.
Chapter 16 describes a struggling Chinese acquisition by a motorcycle
company in Italy. Benelli was acquired by Qiang Jiang to compete on an
international scale and to bring both technical expertise and the European
market into the company’s portfolio. Written by Francesca Spigarelli,
William Wei, and Ilan Alon, the chapter shows what can go wrong with
a Chinese acquisition. The case study provides a practical example of difficulties in integration when the M&A encounters major cross cultural
differences. Among the factors identified are: different national cultures,
different fiscal rules, different operating philosophies, and lack of a common vision. This chapter points out that, with M&As between Western and
Chinese companies, problems in communications and cultural differences
can create a rift between management and employees, impeding or delaying
the implementation of strategy, and limiting the company’s profitability.
The concluding case, in Chapter 17, was written by Marc Fetscherin and
Paul Beuttenmuller, who examine the competitiveness of the Chinese automotive industry with a specific focus on Geely’s internationalization efforts
and their acquisition of the Volvo brand. The chapter discusses the different
drivers of automobile industry competitiveness as well as the underlying
challenges and opportunities Chinese automotive companies encounter
when going global. Specifically it discusses the challenges and opportunities when a developing country brand (Geely) acquires a developed country
brand (Volvo).
The book concludes with comments on the major themes and findings
presented in the five areas and identifies areas for future research.
References
Alon, Ilan and John McIntyre, eds. (2008), The Globalization of Chinese Enterprises,
New York: Palgrave MacMillan.
Alon, Ilan, Julian Chang, Marc Fetscherin, Christoph Lattemann, and John McIntyre,
eds. (2009), China Rules: Globalization and Political Transformation, New York:
Palgrave Macmillan.
Part I
Macro-Environmental
Determinants of Chinese FDI
1
An Institutional Perspective
and the Role of the State for
Chinese OFDI
Bing Ren, Hao Liang, and Ying Zheng
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).
China launched its ‘Go Global’ policy in 1999 to encourage highperforming Chinese firms to invest abroad and upgrade their global competence. Since then, outward foreign direct investment (OFDI) flows reached
US$55.91 billion in 2008, equal to the FDI inflow in 2003. The annual
growth rate of OFDI averaged 65.7 percent from 2002 to 2008 (Ministry
of Commerce of China). OFDI flows via mergers and acquisitions (M&As)
accounted for 54 percent of the total volume of OFDI (US$30.2 billion) and
an annual increase rate of 379 percent (from 2002 to 2008). China’s OFDI
volume reached USD52.15 billion in 2009 (excluding Hong Kong, Macao,
and Taiwan), equaling 3 percent of global OFDI (World Investment Report,
2009).
How are Chinese firms able to ‘go global’ so quickly – given their relatively
weaker competencies in technological know-how and management skills
and weak ability in integrating global value chains (Deng, 2004; Sun, Peng,
Ren, & Yan, 2010)? According to multinational enterprise (MNE) theories
based on Western firms, such as the Ownership-Location-Internalization
(OLI) paradigm (Dunning, 1980, 1993), it is difficult to explain why this
aggressive international expansion by Chinese firms works so well despite
weaker firm-specific ownership advantage. We also note that China’s international expansion is largely undertaken by state-owned enterprises (SOEs).
State policies have played a key role in pushing Chinese firms to go abroad,
which poses a challenge to existing MNE and FDI theories (Dunning &
Lundan, 2008; Sun et al., 2010).
11
12
Macro-Environmental Determinants of Chinese FDI
To answer these questions one must examine the driving forces of Chinese
firms’ internationalization, especially the institutional forces and the role of
the state that the literature has not yet explored. As China’s economic development involves a high degree of state involvement, it constitutes a unique
institutional foundation that shapes OFDI trajectories at the level of both
the country and the firm. Integrating the recent literature on how formal
and informal institutions such as state policies and national pride influence the OFDI of emerging market enterprises (EMEs) (e.g., Buckley, Clegg,
Cross, Lin, Voss, & Zheng, 2007; Buckley, Cross, Tan, Liu, & Voss, 2008; Luo,
Xue, & Han, 2010; Hope, Thomas, & Vyas, 2011), we argue that the fast
growth of China’s OFDI is a consequence of the state’s involvement and
formal and informal institutional motivating forces. We define the formal
institutional drivers as governmental policy, the bureaucratic administrative system, and the government ownership arrangement in firms. Informal
institutions include the state ideology and national pride (Hope et al., 2010).
Driven by these institutions, Chinese firms are highly motivated to conduct
OFDI for country-level political and economic objectives, or for firm-level
global competence.
The importance of this study is as follows. Most studies on international
business have focused on OFDI by mature market enterprises through studying the motivations, processes, and outcomes of their internationalization
(Johanson & Vahlne, 1977; Hennart, 1982; Dunning, 1988; Dore, 1990).
More recent studies explore the motivations for internationalization of EMEs
(Luo & Tung, 2007; Witt & Lewin, 2007; Rui & Yip, 2008). However, except
for a few studies (e.g., Buckley et al., 2008; Luo et al., 2010), the role of
the state in the OFDI of EMEs is largely ignored. Similarly, among the studies emphasizing the institutional perspective of EMEs’ internationalization,
there is no in-depth discussion of how macro-level institutional foundations
shaped by the state could influence micro-level firm strategic choices. Our
study helps fill these gaps by analyzing the specific roles of the state and
the broader economic and social contexts that may influence how the state
performs its role. We also analyze how these state institutions might become
sources of comparative ownership advantages and help shape Chinese firms’
OFDI trajectories.
The remainder of the chapter is organized as follows. Section 1 reviews
the literature. In Section 2 we analyze the role of the state and the formal
and informal institutions by looking at their influence on Chinese firms’
OFDI motivations and strategies. We also discuss contingency views of our
theoretical propositions and provide our conclusions.
1. Literature review
1.1. Motivations for OFDI
There is a vast literature examining the motivations for FDI (see Meyer &
Nguyen [2005] for a survey). The theory of capital movements suggests that
Bing Ren et al. 13
FDI is a part of the firm’s portfolio investments (Iversen, 1935; Aliber, 1971).
Hymer (1960), Kogut and Zander (1993) argue that FDI is a means of transferring knowledge and other tangible and intangible firm assets to organize
production overseas. Vernon (1966) uses the concept of product lifecycle
to theorize that firms set up production facilities abroad for standardized
mature products in their home markets. Other literature sees FDI as a motive
for risk diversification (Rugman, 1981) and a bandwagon effect exhibited by
MNEs when they follow their rivals into new markets as a strategic response
to oligopolistic rivalry (Knickerbocker, 1973).
The international business (IB) literature, especially Dunning’s OLI
paradigm, sees OFDI as a primary means by which firms can appropriate rents in overseas markets by exploiting their idiosyncratic resources
and capabilities (Dunning, 1958; Caves, 1971). The internalization theory (McManus, 1972; Buckley & Casson, 1976; Rugman, 1981; Hennart,
1982) sees OFDI as a way to reduce the transaction costs associated
with coordinating activities across national boundaries, while the resourcebased view (Lippman & Rumelt, 1982; Dierickx & Cool, 1989; Teece,
Pisano, & Shuen, 1997) argues that firms enter foreign markets to create value. The literature suggests that the OFDI of EMEs is different from
that of enterprises from developed economies (e.g., Makino, Lau, & Yeh,
2002).
Studies on comparative ownership and governance suggest that the
unique mode of governance and control in emerging economies is particularly important in determining the OFDI decision (Claessens, Djankov, &
Lang, 2000; Filatotchev, Strange, Piesse, & Lien, 2007). Other studies on
EME international strategy emphasize the institutional perspective (e.g.,
Tihanyi, Griffith, & Russell, 2005; Witt & Lewin, 2007; Dunning & Lundan,
2008; Peng, Wang, & Jiang, 2008; Seyoum, 2009; Ge & Ding, 2011), suggesting that institutions, both formal and informal, influence EME OFDI
behavior – either through positive or negative effects (Luo & Tung, 2007;
Witt & Lewin, 2007). Formal institutions, such as policy, influence EME outward investment: this has been manifested in the home and host country
markets (e.g., Loree & Guisinger, 1995; Lien, Piesse, Strange, & Filatotchev,
2005; Buckley et al., 2008; Seyoum, 2009; Luo et al., 2010). Informal institutions may determine OFDI flows and strategies such as choice of location
and entry mode (Buckley et al., 2007; Elango & Pattnaik, 2007; Yiu, Lau,
& Bruton, 2007; Lu & Ma, 2008). Examples include institutional distance
or cultural proximity between the home and host country markets (e.g.,
Buckley et al., 2007; Seyoum, 2009), and host and home country business networks. Formal and informal institutions together may influence
OFDI strategy in a more dynamic way (Dunning & Lundan, 2008; Peng et al.,
2008).
Chinese firms that invest abroad, especially large multinationals, are
typically state-owned or state-controlled. Recent studies on Chinese and
Indian multinational cross-border M&As reveal that SOEs constitute a bigger
14
Macro-Environmental Determinants of Chinese FDI
proportion among the main players conducting cross-border M&As in China
than in India (Sun et al., 2010). As China’s global push accelerates, many
observers believe that institutional factors should act as advantages for generating more aggressive OFDI activities (Luo et al., 2010; Sun et al., 2010),
which is usually not the case for mature market economies (Dunning, 1988;
Gomes-Casseres, 1990; Hennart & Park, 1994). Many even suggest that
Chinese firms’ OFDI is to a large extent designed to follow the state’s policy guidance, especially now (Child & Rodrigues, 2005; Buckley et al., 2007;
Boisot & Meyer, 2008; Deng, 2009; Sutherland, 2009; Yao & Sutherland,
2009; Luo et al., 2010). Chinese OFDI trajectories are likely shaped by
the specific institutional regime developed under the state, although little
research on the topic exists.
2. Framework
2.1. The role of the state
To some extent, China is still a state-controlled political economy where the
state plays a dominant role in driving economic transactions and performance (Chang, 1994; Deng, 2004; Dunning & Pitelis, 2009; Huang, 2010;
Nee, 2010). The state designs and influences formal institutions and regulates economic and business activities through the formal policy at the
central and local government levels. The state also establishes the administrative system and arranges government ownership within various industrial
sectors. The state helps shape informal institutional frameworks such as
firm–government relationships, political connections and inter-bureau or
inter-firm network ties that influence business behavior (Peng & Heath,
1996; Xin & Peace, 1996; Keister, 1998; Yiu et al., 2007). The rise of China
on the global political and economic stage cultivates the role of the state in
shaping China’s national pride and ideology.
The state’s role is even more significant when considering the wider economic and social context into which China has stepped. China is now facing
both external and internal pressure to develop better and stronger economic
and social systems. Internally, the state faces pressure to enhance national
wealth. Although the economy has sustained a high growth rate in the past
several decades, the government is yet not sure about the sustainability of
future growth. Externally, China’s economy and society now depend heavily on other economies and societies, for more successful participation in the
global economic and social stage.
The Chinese state has aimed to develop both hard and soft power for
coping with these challenges and to construct long-term development
goals (‘The Economic Observer’ [in Chinese], May 31, 2010). The state has
tried to maintain strategic control over national-level formal and informal
institutional development.
Bing Ren et al. 15
2.2. Formal institutional regime
Policy
The Chinese government has, to a great extent, played a crucial role in shaping the structure of China’s approved outward investment through external
policy influence. However, the OFDI policies went through an evolutionary process. According to Luo et al. (2010) and others such as Buckley et al.
(2008), Chinese OFDI policies moved through three major phases: the initiation of OFDI policy; the enrichment of the institutional frameworks; and
setting up ‘going global’ as a country-level strategy.
In Phase 1 (1979–1990), the Chinese state played a key role in initiating the OFDI policies. In 1979, with the launch of the ‘open door’ policy
by Deng Xiaoping, the State Council came up with the concept of ‘setting up enterprises overseas’ (Zhao, 2007, p. 56). The state issued concrete
policies and principles to guide OFDI. In 1984, the Ministry of Foreign
Trade and Economic Cooperation (MFTEC, today’s MOC) released the first
regulations on OFDI, called ‘Circular concerning approval authorities and
administrative principles for opening up non-trade joint venture overseas’.
The State Administration of Foreign Exchange (SAFE) also published the first
regulations on administration of foreign exchange: ‘Measures for foreign
exchange control relating to overseas investment’ (1989). Since then, a primary structure of policy and administration of OFDI was established. During
this period, the Chinese government was perceived as taking the plunge in
OFDI activities.
In Phase 2 (1991–2000), the Chinese state enriched the institutional
framework of OFDI policy. On 12 October 1992, Jiang Zemin, the representative of third-generation leaders of the Chinese Communist Party, gave a
report to the Fourteen Chinese Communist National Congress, emphasizing
the deepening of reform and opening up policy to ‘expand OFDI and multinational operations of Chinese enterprises’ (Jiang, 1992). Following Jiang’s
talk, more specific and detailed provisions were added to formulate the regulatory and administrative system on firms’ OFDI activities. For example, the
Administration of Overseas Investment Projects (National Planning Commission [NPC], March 1991) normalized the approval procedure and gave
more specific requirements for OFDI.
In Phase 3 (2001–present), the state set the ‘Going Global’ policy as a
country-level strategy to enhance competitive advantages through OFDI
strategies. The Chinese government initiated the ‘going abroad’ policy
as country-level strategy in 2000. (This was reflected in ‘Suggestion on
Constructing the 10th Five Year Plan for National Economic and Social
Development’.)
In 2003, the State Development and Reform Commission (SDRC) specified the boundaries for key OFDI projects, including: (1) seeking natural
resources in areas where China is lacking; (2) investing in manufacturing
16
Macro-Environmental Determinants of Chinese FDI
that promotes export of technologies, products, and equipment; (3) setting
up R&D collaborative projects which could bring in advanced technologies, managerial experience, and specialized talents; (4) conducting M&As to
increase international competitiveness and market exploration of firms.
The Chinese government encouraged firms to pursue the above projects to
upgrade firm-level competence.
In the meantime, joining the World Trade Organization demanded a
higher level of openness, and this also encouraged the Chinese government
to modify the existing strict policies to create a friendlier institutional environment for OFDI. For example, the central state deregulated investment
approval and foreign exchange controls. The government provided support for finance, credit, and insurance (Enterprise Institute of Development
Research Center of the State Council, 2006) and strengthened supervision
of multinational operating performance to monitor the effectiveness of the
‘go global policy’. Table 1.1 provides a detailed illustration of major policies
released by the state on Chinese firms’ OFDI.
Five important institutional elements are particularly emphasized by the
state and successfully advanced the OFDI of Chinese firms. The first institutional element refers to the approval process. The state streamlined the
approval procedure and decentralized approval authority for OFDI. The state
relaxed foreign exchange control gradually, especially in the examination of
capital resource and exchange risks. In providing concrete investment support, the state supported investment projects for credit, capital, information,
subsidies, and tax collection. The state also aimed to set up more efficient
supervision mechanisms on post-investment performance of OFDI enterprises. Lastly, the state has been seeking better international protection for
firms’ overseas investment through setting up bilateral investment treaties
and multilateral and regional protection mechanisms (for more straightforward descriptions of the five institutions’ evolution, see Figures 1.1a–1.1e).
Bureaucratic administration
Bureaucratic administration policy is usually made by important players in
particular bureaucratic systems, and important operating systems are also
implemented by the administrators to utilize the policy effect. In general,
the bureaucratic administration related to Chinese OFDI is complex due to
the multiple bureaucratic players involved in decision-making, regulation
and, supervision for OFDI. In the bureaucratic administration system, the
first layer is the State Council, which plans China’s overall OFDI for the long
term. Under the leadership of the State Council, the State Development and
Reform Commission (SDRC, formerly the National Planning Commission)
is the major institution of the second layer responsible for studying and
advancing strategies and plans for OFDI, and examining the optimization of
the policies. Guided by the strategic plan of the SDRC, the Department of
17
Table 1.1 The policy regime of China’s OFDI
Examination
and
approval
Key policy
Key point
Approval Authorities and
Administrative Principles
for Opening up Non-trade
Joint Venture Overseas
(MFTEC, May 1984)
1. Authorize MFTEC to approve OFDI;
prior to this, all OFDI has to be
approved by State Council
2. Major projects concerning resource
and projects exceeding
US$10 million to be approved by
State Council
3. Projects concerning state property to
be approved by NPC and METEC
Opens OFDI for all economic entities
with financial resources, foreign
joint venture partners, and relevant
capabilities
Approval Procedures for
Setting up Overseas
Subsidiaries (MFTEC, July
1985)
Administration and
Approval of Establishing
Non-trade Enterprises
Overseas (MFTEC, July
1985)
Administration of
Overseas Investment
Projects (NPC, March
1991)
Verification and Approval
Procedures for
OFDI (SNRC, October
2004)
Examination and
Approval of Investment to
Run Enterprises Overseas
(MOC, October 2004)
1. Approval result should be handed
down in no more than 3 months
2. Chinese OFDI should focus on using
overseas technologies, resources, and
markets
1. Projects exceeding 1 million to be
approved by NPC, exceeding
30 million to be approved by the
State Council.
2. Projects concerning state-owned
assets must be approved by State
Council
3. Project proposals, feasibility reports,
corporate contracts, and articles
should be provided by OFDI
enterprises
4. Approval result should be handed
down in no more than 60 days
1. Projects exceeding US$10 million to
be approved by SNRC (except
projects concerning resources),
exceeding US$50 million approved
by State Council
2. Approval result should be handed
down in no more than 20 days
1. All companies are permitted to run
enterprises overseas
2. Project proposals, feasibility reports
are substituted by project application
3. Approval result should be handed
down in no more than 15 days
18
Table 1.1 (Continued)
Foreign
exchange
control
Key policy
Key point
Administration of
OFDI (MOC, May 2009)
Projects exceeding US$100 million
to be approved by MOC
Foreign Exchange
Administration of
Overseas Investment
(SAFE, March 1989)
1. SAFE evaluates the source of
funds to be invested abroad as
well as the foreign exchange risk
2. Five percent of the OFDI sum
has to be deposited in a special
account
3. Profit earned abroad should be
remitted back to China
Supplemental Provisions
on Administration
Measures on Foreign
Exchange for Overseas
Investment (SAFE,
September 1995)
Chinese investors are allowed to
purchase foreign exchange for an
OFDI project; prior to this, a
Chinese investor had to earn the
foreign exchange
Canceling the Deposits
that Guarantee Profits
from Investments
Abroad (SAFE,
November 2002)
Deposits that guarantee profits are
no longer needed
Simplifying
Foreign Exchange
Administration Relating
to OFDI (SAFE, March
2003)
1. SAFE will only investigate
domestic foreign exchange
sources
2. Foreign exchange obtained from
a source outside of mainland
China no longer examined
Further Measures on
Foreign Exchange
Administration
Stimulating OFDI (SAFE
May 2005)
1. Local SAFE named as authority
on OFDI projects with a higher
threshold (from US$3 to US$10
millions) all over the country
2. Total foreign exchange available
for all investors is increased from
USD3.3 to USD5 billion
Administration
Measures on Foreign
Exchange for Overseas
Investment (SAFE, 2009)
The necessary foreign exchange for
the domestic investors to invest
abroad may be self-owned foreign
exchange, the foreign exchange
purchased by RMB or entity,
intangible assets, the domestic and
overseas foreign exchange loans,
and other permitted source
19
Inspection
and
evaluation
Guidance
and support
International
investment
protection
mechanism
Interim Measures for the
Joint Annual Inspection
of Overseas Investments
(MFTEC, October 2002)
Provides post-investment evaluation
of OFDI projects
Measures for
Comprehensive
Assessment of
OFDI Performance
MFTEC (October 2002)
Clarification of standards and
procedures for evaluating
OFDI projects which have been
operating overseas
Annual Report System on
Operational Obstacles in
Major Target Countries
(MOC, November 2004)
Using annual reports from
enterprises investing abroad, MOC
collects all kinds of obstacles
and problems confronted by
OFDI companies
Providing Credit Support
to Key OFDI Projects
Encouraged by the State
(SNRC, May 2003)
OFDI projects fulfilling specified
requirements will be provided with a
lower lending rate credit fund
Guiding Directories
of Target Nations
and Industries for
OFDI (MOC, July 2004;
MOC, October 2005;
MOC, January 2007)
Provides industries and countries
information for enterprises to
conduct investment encouraged by
the state through preferential
treatment concerning funding, tax
collection, foreign exchange,
customs and others
Using and Managing
Special Funds for Foreign
Economic Cooperation
(MOC; MOF, December
2005)
1. Sets up special funds to
encourage Chinese enterprises to
invest abroad
2. Special funds may be used to
support foreign economic
cooperation by the following
means: (1) subsidies for
pre-operational fees; (2) interest
discounts for medium- and
long-term loans; (3) subsidies for
operational fees
Bilateral Investment
Treaty
1. In 1980s, China signed BITs with
most developed countries, but in
this period, most treaties are
raised by developed countries to
protect their investment in
China
2. In 1990s, China began to
conclude BIT positively with
developing countries to protect
investment in these countries
20
Table 1.1 (Continued)
Key policy
Key point
Multilateral investment
protection measures
Acceding to WTO in 2001, China could
enjoy the multilateral investment
protection provided by agreements
abided by WTO members, such
as, Agreement on Trade-Related
Investment Measures (TRIMS), General
Agreement on Trade in Services (GATS)
Regional protection
mechanism
China-ASEAN Free Trade Area, founded
in 2002, providing adequate protection
to investment in this area, benefits
more and more investors both from
China and ASEAN
Sources: www.mofgov.com; He (2009); Luo et al. (2010).
1985
2004
Examination and approval of investment to
run enterprises overseas
Approval procedures for setting
up overseas subsidiaries
1985
1991
Administration and approval
of establishing non-trade
enterprises overseas
1984
Approval authorities and
administrative principles for opening up
non-trade joint venture overseas
1979
Approval and administration
of non-trading overseas enterprises
1991
Examination and approval
of OFDI project proposals
and feasibility reports
Initial regulations on OFDI
1990
Strict examination of projects
Highly centrally controlled authority
Figure 1.1a
2004
Verification and approval
procedures for OFDI
2003
Reply on decentralization authority
reforming pilot of non-trade
investment overseas approval
2009
Administration of OFDI
Normalization of the approval and
Further procedure simplification
administration system
2000 and decentralization of authority 2009
Decentralization of authority
Relaxed examination of projects
Evolution of state’s examination and approval processes for China’s OFDI
1990
Rules for implementation of measures on
foreign exchange control in investment abroad
2005
Enlarging the reform pilots regarding
the administration of foreign
exchange for overseas investment
2002
Canceling the deposits that guarantee
2003
profits
from
investments
abroad
1993
Rules for implementation of
Procedural and approval standards on
measures
on
foreign exchange
OFDI-related foreign exchange
1989
2009
control in investment abroad
risks and capital resources
Opening special account of
Administration measures on
1995
deposits that guarantee profits
foreign exchange for
2003
Supplemental provisions on
overseas investment
1989
administration measures
Simplifying foreign exchange
Foreign exchange administration
on foreign exchange
administration relating to OFDI
of overseas investment
for overseas investment
Rigid control on capital resource and
foreign exchange risk
Profit deposits are required
1979
Figure 1.1b
1990
More standard control on foreign
Streamlining the examination on
exchange risk, source of investment
risk and capital resource,
2000
fund Chinese investors are allowed to
canceling deposits and 2009
purchase foreign exchange
decentralization authority.
Evolution of state’s foreign exchange control for China’s OFDI
Bing Ren et al. 21
2005
2004
Notice on adjusting the management
Guiding directories of target
nations and industries for OFDI mode of overseas financial guarantees
2000
for overseas investment enterprises 2005
Measures of capital support for
2004
Providing more financing support
small and medium enterprises to
Notice on setting up a risk
to key overseas-invested projects
develop international markets
prevention mechanism for key
1999
overseas investment projects
2005
2003
Guidance on granting credit
for overseas processing
Providing credit support to key OFDI
Using and managing special funds
and assembling
projects encouraged by the state
for foreign economic cooperation
1979
Support on capital, credit, and finance, guidance on target
nations and industries are provided to encourage OFDI
2000
Figure 1.1c
2009
Evolution of state’s inspection and evaluation processes for China’s OFDI
2003
2002
Circular on setting up an information
2004
Measures for comprehensive bank of overseas investment
assessment of OFDI performance intention of enterprises Annual report system on
operational obstacles
2002
in major target countries 2005
2002
Provisions on statistical
Interim measures for the joint annual
Report requirements for overseas
report of OFDI
inspection of overseas investments
mergers and acquisitions
Annual inspection, comprehensive assessment, and other report systems are set up
1979
2000
2009
Figure 1.1d Guidance and support on China’s OFDI by state
2000
Signed BIT with 54
1996
developing countries by 2000
Signed BIT with most
2004
developed countries by 1996
2001 China-ASEAN
1985
First BIT with developing countries
Thailand
1982
First BIT with developed countries
Sweden
As investment host country, most BITs
WTO free-trade area
As investment output country, most BITs
1979 were concluded with developed countries were concluded with developing countries
1990
2000
Seeking multilateral and
regional protection
2009
Figure 1.1e Evolution of China’s international investment protection mechanism
Foreign Capital and Overseas Investment drafts the catalogs of guidance for
foreign investment industries, and approves key OFDI projects. The Ministry
of Commerce, formerly the Ministry of Foreign Trade and Economic Cooperation and Ministry of Domestic Commerce, is the primary government
unit responsible for conducting multilateral negotiations on investment and
trade treaties. Finally, the Department of Outward Investment and Economic
Cooperation drafts concrete regulations on OFDI and administrates and
supervises OFDI.
Other important governmental departments in the second layer include
the People’s Bank of China, which is responsible for making monetary policy
and foreign exchange policy; the Ministry of Foreign Affairs, responsible for
22
Macro-Environmental Determinants of Chinese FDI
drafting the catalog for guiding the target countries of OFDI in cooperation
with other agencies; and the Ministry of Finance and Ministry of Taxation,
responsible for drafting policies of taxation related to OFDI. The Ministry of
Taxation is also responsible for providing financial support to OFDI through
special funds. A special organization, the State-owned Assets Supervision
and Administration Commission, was established under the State Council to
manage and supervise the national state-owned assets in the non-financial
sectors, including those that invest in overseas markets.
In the third layer are several departments and units that implement the
policies made by the above authorities. For example, the State Administration of Foreign Exchange helps supervise and check the authenticity
and legality of the receipts and payments involved in OFDI and regulates
management of overseas foreign exchange accounts. Three policy-oriented
financial institutions help to provide credit and insurance for OFDI firms:
these include the China Development Bank, the Export-Import Bank of
China, and the China Export & Credit Insurance Corporation. Figure
1.2 and Table 1.2 illustrate the Chinese OFDI bureaucratic administration
system.
The government ownership
The third formal OFDI institutional regime relates to the wide presence of
government ownership of firms in the economy. Since market reform in the
late 1970s, the Chinese government has maintained control of the economy. The central and local government bureaux provide funding to the SOE
State council
Ad hoc
organizations
SDRC
MOC
PBC
SASAC
DFCOI
DOIEC
SAFE
MOF
MFA
MOT
CECIE
Policy financial
institution
EIBC
CDB
SOE
Figure 1.2 Bureaucratic system in regulating China’s OFDI
Notes: MOC – Ministry of Commerce; DOIEC – Department of Outward Investment and Economic Cooperation; SDRC – State Development and Reform Commission; DFCOI – Department
of Foreign Capital and Overseas Investment; MFA – Ministry of Foreign Affairs; MOF – Ministry
of Finance; PBC – People’s Bank of China; SASAC – State-Owned Assets Supervision and Administration Commission; MOT – the Ministry of Taxation; SAFE – State Administration of Foreign
Exchange; SOE – State-Owned Enterprise; EIBC – Export-Import Bank of China; CDB – China
Development Bank; CECIE – China Export & Credit Insurance Corporation.
Sources: www.gov.cn; www.mofcom.gov.cn; zcq.mofcom.gov.cn; www.sdpc.gov.cn (2010).
Bing Ren et al. 23
Table 1.2 The bureaucratic administration regime of China’s OFDI
Department
Main functions
State council
MOC
1. Blueprinting China’s overall OFDI in the long term
1. Bilateral and multilateral negotiations on investment and
trade treaties
DOIEC
1. Drafting concrete regulations on OFDI
2. Administrating and supervising OFDI activities
3. Examining and verifying non-financial enterprises’ OFDI
4. Statistics for OFDI
SDRC
1. Studying and putting forward strategies and plans for OFDI
2. Studying policies concerning aggregate balance and
structural optimization
DFCOI
1. Drafting the Catalogue for the Guidance of Foreign
Investment Industries in cooperation with relevant agencies
2. Examining and approving key OFDI projects, major
resources related and consuming substantial amount of
foreign currency
SAFE
1. Supervising and checking the authenticity and legality of
receipts and payments
2. Regulating management of overseas foreign exchange
accounts
SASAC
1. Managing and supervising the nation’s state-owned assets in
non-financial sectors
MFA
1. Drafting the Catalogue for the Guidance of Foreign
Investment Countries in cooperation with relevant agencies
MOF
1. Providing financial support to OFDI though special fund, etc
2. Drafting policies of taxation related to OFDI in cooperation
with MOT
MOT
1. Drafting policies of taxation related to OFDI in cooperation
with MOF
PBC
1. Designing the monetary and foreign exchange policy, etc
EIBC; CDB
1. Providing credit for OFDI firms as policy banks
CECIE
1. Providing insurance for OFDI firms as policy insurance
corporation
Source: www.gov.cn
sector; the state also directs funds to SOEs via state-owned banks. As the
market economy develops further, SOEs seek financing from domestic and
international financial markets. Through listing their stocks on the stock
exchange markets, SOEs are transformed into corporations and joint stock
companies. In a joint stock company, government ownership comprises
one type of shares and, as the dominant shareholder, the state exerts tight
control over both political and economic objectives. For example, SOEs are
24
Macro-Environmental Determinants of Chinese FDI
Joint stock company
5.6%
Foreign investment enterprise
0.5%
Joint equity cooperative
enterprise
1.0%
Limited liability company
22.0%
Enterprise funded from
Hongkong, Macao, Taiwan
0.1%
Collectively owned enterprise
0.3%
Others
0.3%
Private enterprise
1.0%
State owned enterprise
69.2%
Figure 1.3 Chinese OFDI stocks’ distribution by different types of investors (2009)
the main players in OFDI, relative to other types of enterprises, and behave
aggressively in their internationalization. Figure 1.3 describes the presence
of SOEs within Chinese OFDI. Table 1.3 lists the top 50 SOEs ranked by
FDI outflow.
SOEs, in their drive toward globalization, have encountered strong criticism from global stakeholders for their lack of accountability, transparency,
and trustworthiness (Pistor and Xu, 2005; Luo & Tung, 2007; Li, 2009).
When Chinese SOEs invest overseas, their strategies may be purely economic, such as maximizing profits, or they may include political goals
that take priority over economic ones. In fact, the influence of the state
and adoption of the administrative governance framework in SOE business activities make economic efficiency largely unclear. The literature
argues that the highly concentrated ownership gives the state substantial
discretionary power to use the resources of companies and results in problems such as insider control and the exploitation of minority shareholder
interests (Young, Peng, Ahlstrom, Bruton, & Jiang, 2008). Control by the
government may also create a fertile soil to nurture corruption (Luo &
Tung, 2007). A recent study suggests that the newly transformed SOEs are
‘dynamic dynamos’ rather than ‘dying dinosaurs’ (Ralston, Tong, Terpstra,
Wang, & Egri, 2006), suggesting that government ownership may influence
the performance of Chinese firms positively, including OFDI.
2.3. Informal institutional regime
The state also plays a role in cultivating, advocating, and strengthening informal institutions to enhance its economic and political objectives
through OFDI. Except for the formal institutional frameworks discussed
above, informal institutions – especially when non-existent or non-enforced
legal systems fail to support business – influence firms’ overseas investments.
25
Table 1.3 Top 50 non-financial Chinese enterprises ranked by OFDI stocks (2009)
No. Enterprise name
Main business
Firm type
1
China National
Petroleum Corporation
Crude oil and gas
exploitation, petroleum
refining, engineering
Centrally controlled
SOE
2
China National
Offshore Oil
Corporation
Crude oil and gas
exploitation, petroleum
refining, engineering
Centrally controlled
SOE
3
China Petrochemical
Corporation
Crude oil and gas
exploitation, petroleum
refining, engineering
Centrally controlled
SOE
4
Aluminium
Corporation of China
Bauxite, rare-earth metal,
engineering
Centrally controlled
SOE
5
China Resources
(Holdings) Co., Ltd.
Consumer goods, power,
property, cement, gas,
medication, finance
Centrally controlled
SOE
6
China Ocean Shipping
(Group) Company
Water transportation,
shipbuilding, logistics
Centrally controlled
SOE
7
China National
Cereals, Oils &
Foodstuffs Corporation
Foodstuffs, grain and oil,
hotel, real estate
Centrally controlled
SOE
8
Sinohem Corporation
Oil, fertilizer, gas, hotel, real
estate
SOE
9
China Merchants
Group
Transportation,
infrastructure, finance, real
estate
Centrally controlled
SOE
10
China National
Aviation Holding
Corporation
Air transportation
Centrally controlled
SOE
11
China Shipping
(Group) Company
Water transportation,
shipbuilding, logistics
Centrally controlled
SOE
12
SinoSteel Corporation
Metallurgy, engineering
Centrally controlled
SOE
13
SINOTRANS
Changjiang National
Shipping (Group)
Corporation
Transportation, recreation,
real estate
Centrally controlled
SOE
14
China Minmetals
Corporation
Metal and mineral,
transportation
Centrally controlled
SOE
15
CITIC Group
Finance, real estate,
engineering, resource,
manufacture, information,
commercial service
Limited liability
company
26
Table 1.3 (Continued)
No. Enterprise name
Main business
Firm type
16
China Unicom
Corporation
Telecommunications
Centrally controlled
SOE
17
China State Construction
Engineering Corporation
Civil construction
Centrally controlled
SOE
18
China Power Investment
Corporation
Electric power,
investment, engineering
Centrally controlled
SOE
19
China Huaneng Group
Electric power, finance,
resource, finance
Centrally controlled
SOE
20
China National Chemical
Corporation
Chemical engineering
Centrally controlled
SOE
21
China Mobile
Communications
Corporation
Telecommunications
Centrally controlled
SOE
22
China Metallurgical
Group Corporation
Metallurgy, resource, real
estate, engineering
Centrally controlled
SOE
23
Shum Yip Holdings
Company Limited
Real estate, infrastructure,
transportation
Locally controlled
SOE
24
Legend Holdings Ltd.
IT, investment, real estate
Limited liability
company
25
Hunan Valin Iron & Steel
(Group) Co., Ltd.
Iron and steel
Limited liability
company
26
GDH Limited
Investment
Locally controlled
SOE
27
Huawei Technologies
Telecommunication
service
Limited liability
company
28
China Noferrous Metal
Mining & Construction
(Group) Co., Ltd.
Non-ferrous metal,
engineering
Centrally controlled
SOE
29
China Norh Industries
Group Corporation
Military supplies
Centrally controlled
SOE
30
Baosteel Group
Corporation
Steel, resource, finance,
manufacture, service
Centrally controlled
SOE
31
Shanghai Baosteel Group
Corporation
Steel
32
Shanghai Overseas United
Investment Co., Ltd.
Investment
Limited liability
company
33
Guangzhou Yuexiu
Holdings Limited
Investment
Limited liability
company
34
Anshan Iron & Steel
Group Corporation
State Grid Corporation of
China
Iron, steel
Centrally controlled
SOE
Centrally controlled
SOE
35
Power grid
Bing Ren et al. 27
36
Shanghai Automotive
Industry Corporation
Auto manufacture
Limited liability
company
37
Shougang Corporation
Steel, resource, service
Limited liability
company
38
Sinohydro Co., Ltd.
Water conservancy,
investment, engineering,
service, trade
Centrally controlled
SOE
39
Nam Kwong (Group)
Company Limited
Consumer goods, real
estate, hotel, logistics
Centrally controlled
SOE
40
Shenzhen Investment
Holdings Co., Ltd.
Investment
Limited liability
company
41
Shenhua Group
Corporation
Resource
Centrally controlled
SOE
42
China Poly Group
Corporation
International trade, real
estate, culture, resource
Centrally controlled
SOE
43
TCL Group Company
Electronic products
Limited liability
company
44
Aviation Industry
Corporation of China
Aerospace manufacture,
military
Centrally controlled
SOE
45
Jinchuan Group Limited
Resource
Locally controlled
SOE
46
Xinjiang Zhongxin
Resource Co., Ltd.
Resource
Locally controlled
SOE
47
Guangdong National
Shipping Corporation
Transportation, logistics,
real estate, recreation
Locally controlled
SOE
48
Wuhan Iron & Steel
(Group) Co., Ltd.
Metallurgy, engineering
Centrally controlled
SOE
49
ZTE Corporation
Telecommunication
service
Limited liability
company
50
China Guangdong
Nuclear Power Holding
Co., Ltd.
Nuclear resource
Centrally controlled
SOE
Sources: 2009 Statistical Bulletin of China’s OFDI (MOC, 2010); www.sasac.gov.cn.
The state helps to create two important informal institutions that generate
ideological influence on Chinese OFDI: state ideology and national pride.
State ideology is a set of ideas that constitutes state goals, expectations,
and actions, and it can be thought of as a comprehensive vision of the
state held by all members of society. According to Smith and Kim (2006),
national pride is ‘the positive effect that the public feels towards their country, resulting from their national identity (P127)’. These two factors are
to some extent interrelated. A strong state ideology may increase national
28
Macro-Environmental Determinants of Chinese FDI
pride, and national pride can also enhance state ideology. While the economic organization is intertwined with the ideological state, major Chinese
multinationals usually incorporate national missions and national pride in
conducting overseas strategies. Such ideology and pride may stem from the
collective expectation of ‘carrying a great torch and striving to better develop
the country’. Sometimes, a particular strategy at the firm level (such as a
cross-border acquisition) is economically irrational (Hope et al., 2010). This
could stem from an individual enterprise leaders’ greater ambition to pursue a successful ‘country image’ to foreign counterparts and infiltrate the
‘Chinese brand’ into a global market.
We argue that state ideology and national pride are two soft power institutions that may function as growth engines for Chinese firms to compete
with international players. The effect of state ideology and national pride are
more likely to be cultivated in the Chinese context because the Chinese culture is strong in collectivism and nationalism in comparison with the West.
Such national culture allows the state to communicate ideology and pride
through tangible and intangible social and cultural platforms as well as to
create incentives and enforcement mechanisms. To fulfill its country-level
strategies and thus have greater influence on the international investments
of Chinese firms, the government stresses such state ideologies throughout
its policy and administration process, as well as directly implements them
in its wholly controlled SOEs. Hence, the formal OFDI institutional regimes
further ensure the efficiency of the informal institutional-enforced effects on
OFDI in China.
2.4. Institutional and Chinese MNE-based OFDI
We argue that the state plays important roles in shaping Chinese OFDI
institutional regimes, including the formal and informal institutions. It is
important to explore more thoroughly what theoretical implications we can
draw from this phenomenon. Dunning and Lundan (2008) suggest that
institutions influence multinational ownership, internalization, and location advantages, and thus determine the internationalization strategy of a
company. Integrating institutions into the OLI paradigm offers a profound
tool to understand how institutions help the formation of emerging multinational firms. Sun and colleagues (2010) propose a comparative ownership
advantage framework to explain why EMEs such as those from China and
India can internationalize and conduct specific cross-border M&As. The theory suggests that EMEs in developing countries can leverage country-specific
advantages and combine them with firm-specific advantages to form comparative ownership advantages to drive their internationalization.
Combining the ideas of Dunning and colleagues (Dunning, 2001;
Dunning & Lundan, 2008) with those of Sun and colleagues (Sun et al.,
2010), we argue that not only the factor endowment structure but also the
Bing Ren et al. 29
institutional structure help EMEs generate comparative ownership advantages. Hence, we can broaden the country-specific advantages concept to
include an institutional dimension, suggesting that institutions could be
leveraged by EMEs to combine with company advantages to form specific
ownership advantages. These institutional factors could be the formal and
informal ones shaped under the role of state. For example, formal institutions (such as favorable credit and financing policies and the establishment
of resource and information platforms overseas) can be combined with company production and entrepreneurial capabilities to exploit international
market opportunities. From the informal institutional perspective, managing the state ideology and national pride institutional elements in the
strategic management processes of companies can help them better co-opt
the formal institutional regimes, thus maximizing globalization benefits.
In essence, through a successful integration of the national level institutional advantages and the company level advantage, EMEs can build
‘institution-based comparative ownership advantages’. With this institutionbased comparative ownership advantage, EMEs can cultivate business opportunities in specific host country markets and conduct institution-based
OFDI.
Proposition 1: The formal and informal institutions developed under the role
of the state are sources of comparative ownership advantage for Chinese firms, to
‘pull’ Chinese firms to conduct institution-based OFDI.
2.5. The strategic choices of OFDI by Chinese multinationals
While institutions are helpful for developing firm-specific ownership advantage, corporate executives may view the institutional framework as a favorable pull factor for internationalization (Lewin, Long, & Carroll, 1999).
On the one hand, they increase EME confidence in internationalization.
On the other hand, they can be exploited to change the cost and benefit
structure in a multinational’s potential OFDI activity in a host country market. We will discuss Chinese multinational strategic choices in
OFDI below.
Choice of OFDI mode
In contrast to mature market multinationals, EMEs have fewer incentives
for efficiency-seeking and cost-minimizing outward investments, as the EME
itself has ample supplies of low-cost, productive labor and inexpensive land.
Rather, Chinese firms have higher incentives for asset-seeking and marketseeking OFDI. In comparison to independent OFDI and contractual joint
ventures, M&A strategy can help Chinese firms to more quickly access
strategic assets and potential markets, and thus upgrade their global competence more efficiently. However, in these aggressive cross-border M&As,
the pressures of managing strategic and operating risks are much higher
30
Macro-Environmental Determinants of Chinese FDI
than when seeking only cost efficiency (Kumar, 2009). We believe the formal and informal institutions mentioned above will help overcome the risks
and facilitate adopting the M&A mode.
Formal institutional support will help the resource and domestic market
demand of potential multinationals and thus facilitate more entrepreneurial
and aggressive international exploration. Formal institutional support also
allows firms to focus on managing the strategic and operating risks in
M&As with greater efficiency. The informal institutions can help intrinsically reinforce political or strategic objectives of the involving parties. These
arguments suggest that formal and informal institutional supports can help
Chinese multinationals adopt more aggressive OFDIs such as M&As.
Proposition 2: In relation to independent OFDI and greenfield joint ventures,
Chinese multinationals are more likely to adopt acquisition in their internationalization.
Choice of OFDI location
Multinationals invest in the most advantageous locations to fulfill the firm’s
efficiency, asset- and market-seeking strategic objectives (Dunning, 1980,
1988). In Chinese OFDI, the endogenous formal and informal institutions,
shaped by the role of the state, help determine location choice. Regarding formal institutions, the government encourages firms to target resource
and strategic asset-intensive regions through various preferential policy supports such as credit and tax incentives, as well as other administrative
methods. For example, Chinese SOEs enter countries such as Africa and
South America more extensively because they are resource-intensive countries where the Chinese state can acquire strategic raw materials to enhance
the country-level resource endowments. Examples include Capital Iron &
Steel’s acquisition of Hierro Peru Mining and Baosteel’s investment in a steel
plant in Brazil. Informal institutions also influence which countries Chinese
firms enter, including those helpful for maintaining Chinese national pride.
The Chinese prefer to invest in regions where national pride and state ideology can be better maintained and leveraged. For example, regions such as
Japan, South Korea, Taiwan, Singapore, Hong Kong (the so-called ‘four dragons’), as well as Malaysia, one of the new ‘four tigers’, give better location
advantages (Sun et al., 2010). These institutional enforcements will help set
the boundaries of locations for Chinese OFDI.
Proposition 3: Chinese multinational firms tend to invest in countries or regions
where both formal and informal institutions developed under the role of the state
are more likely to play a role.
Choice of OFDI industry
We believe formal institutions play a major role in guiding OFDI industry choice. As the Chinese government views OFDI as an important means
Bing Ren et al. 31
of integrating global resources and value chain markets, its aim is carried
out mainly through securing stable sources of raw materials and obtaining technological assets scarce in China. The government has specifically
encouraged OFDI in the resource exploration and extraction industries (Cai,
1999) as well as the manufacturing (processing and assembling) industries where Chinese companies have a competitive edge. But these Chinese
industries are weak in designing, researching and developing (R&D) and,
through preferential policies and direct administrative control, the government is encouraging OFDI. The government has recently favored more
investments in the financial sector overseas. China Investment Corporation (CIC) invested in Blackstone and Morgan Stanley to use the global
financial crisis to leverage China’s huge foreign currency reserves. However,
we do not regard these overseas investments as traditional MNE behavior
explained by theory. Informal institutions support formal institutions in
deciding which sectors should be involved in OFDI. Some target OFDI industries may involve greater elements of national pride and state ideology to
help generate greater political benefits. Because of the ideology concern, it
may be hard for Chinese multinationals to conduct OFDI in industries that
generate ideology conflicts such as the media sector. Figure 1.4 synthesizes
the above propositions in this chapter.
Proposition 4a: Chinese multinational firms tend to invest in overseas manufacturing (design and R&D) industries that can help upgrade their domestic industrial
structure and global value chains.
Proposition 4b: Chinese multinational firms tend to invest in overseas resource
exploration and extraction industries that can help China pursue and secure scarce
natural resources.
Hard power (economic)
The state
Formal institutional
determinants
State policy
Soft power (political)
Informal institutional
determinants
Chinese multinationals’
comparative ownership
advantages
State ideology
Administrative
system
Government
ownership
Chinese multinationals’
OFDI:
motivation
strategy
National pride
Figure 1.4 The role of state and Chinese multinationals’ institution-based OFDI
32
Macro-Environmental Determinants of Chinese FDI
3. Discussion and conclusion
As China emerges as an important player in the world economy, the
role of the state is crucial through the promotion of OFDI by Chinese
multinationals. The Chinese state executed its role through constructing
formal and informal institutions to influence OFDI trajectories. Under such
circumstances, we observe an extensive interplay between the macro-level
state policy and institutional frameworks and the micro-level firm and OFDI
strategic choices. In both cases, formal and informal institutional factors
drive Chinese firms to conduct OFDI in different investment modes, location
choices, and types of industries.
Due to space limitation, there are some important issues our chapter did
not capture in detail although they deserve attention. Institutions do not
matter to all firms, and they do not matter in similar ways (North, 1990;
Scott, 1995). This suggests that the institutions derived from the role of the
state may generate contingent effects on OFDI by Chinese firms. The first
contingent factor is related to a stratified structure that the state constructs
in developing the formal and informal institutional OFDI regime. In such
a structure, the institutional regime is exclusive in nature where the state
renders the advantageous institutions only to certain groups of firms: not all
Chinese multinationals enjoy the benefits in their internationalization. The
state makes such exclusions using criteria such as how important the firm is
to the whole economy. Only influential firms such as large firms or firms in
more important industries benefit from the supportive regime.
The second contingency factor is related to a ‘double-edged sword’ or ‘dark
side’ of the institutional influence. In contrast to the ‘benefits’ generated
by institutional regimes for ‘some’ firms, there may be ‘costs’ or ‘liabilities’
assigned by similar institutions to other firms. While we discuss the pull role
of the state and institutional regimes on Chinese OFDI, we cannot ignore the
push role of the same institutional regime to some OFDI activities (e.g., Luo
& Tung, 2007; Witt & Lewin, 2007). The ‘supporting’ institutional regime
may create costs and disadvantages to some firms’ domestic market competition, and thus crowd them out to the international markets to pursue
growth. This is reflected by the large number of Chinese overseas investments in Latin America, many of them in three tax havens (Witt & Lewin,
2007).
The third contingency factor is related to the ‘mixed’ objectives that the
state sets for OFDI (Luo and Tung, 2007; Luo et al., 2010). Except for the
economic driving forces (mostly efficiency and effectiveness from the firm’s
perspective), Chinese firms are also pulled to conduct political OFDI that
mostly satisfies country-level objectives. Key Chinese multinationals are
forced to exert ‘helping hand’ behaviors to fulfill the country-level political
goals such as strengthening inter-governmental political ties (Luo and Tung,
2007). This was particularly evident in China’s investment in some Third
Bing Ren et al. 33
World countries (Luo and Tung, 2007). The state is more likely to mandate
SOEs to conduct such OFDI activities because the state has a direct control
of the SOE sector. Such political mandates may also be possible with private firms, especially when the private parties’ interests are intertwined with
the state’s interests. However, compared with SOEs, private sector firms are
more likely to act independently in OFDI and be driven by economics, even
when such OFDIs result from exploiting the state’s supportive institutional
regime.
The last contingency is that to leverage better the advantageous OFDI
institutional regime, firms must have specific internal conditions. The most
important internal conditions are capabilities that can facilitate successful
integration of company resources and OFDI objectives with the countryspecific institutional supports. Such capabilities include strong adaptation
capabilities in relation to the external institutional environments (Elango &
Pattnaik, 2007; Yiu et al., 2007); cross-border learning and absorptive capacity (Johanson & Vahlne, 1997; Teece et al., 1997); and creativity and innovation in company integration of global value chains (Sun et al., 2010). Other
factors can be managerial intentionality (Hutzschenreuter, Pedersen, &
Volberda, 2007; Kumar, 2009) and international entrepreneurship (Yiu et al.,
2007). Given the supporting institutional environments, these factors are
important for generating effective strategic choices and adjustments in
exploiting international market opportunities. The capability factor is more
important than resources (Deng, 2007; Sun et al., 2010) because firms with
unique capabilities can obtain essential resources that they lack, either
through exploiting the home country institutional environments or through
integrating the global resource platform.
These four contingency views suggest future research directions on
Chinese firms’ internationalization, to derive better predictions on the path
and trajectory of Chinese OFDI: these need to include other theoretical
approaches such as political economy perspectives; views on resource and
capability; evolutionary theory; and the institutional perspective.
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2
Home Country Macroeconomic
Determinants of Chinese OFDI
William Wei, Ilan Alon, and Liqiang Ni
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.
Theory suggests that home country market imperfections can exert a significant impact on the decisions of foreign investors (Dunning, 1988). In
addition, the location advantages of the FDI host country may account
for determinants to invest in foreign countries, which offer superior markets or production. However, Chinese government policy and special
macroeconomic conditions may have led to a distinctive pattern of Chinese
OFDI in terms of home country determinants. Therefore, in this chapter
we analyze Chinese OFDI from the perspective of China’s economic development. On the basis of Dunning’s investment development path (IDP)
hypothesis, we test the macroeconomic determinants of Chinese OFDI from
a home country perspective from 1987 to 2009. We first review recent studies
on Chinese OFDI and its determinants. Then, we propose a model and test
seven home country macroeconomic variables as determinants of Chinese
OFDI and discuss the results.
38
William Wei et al. 39
1. Literature review
Chinese OFDI has been analyzed from various theoretical and empirical perspectives since the middle of the 1990s (Zhan, 1995; Wang, 2002; Child &
Rodrigues, 2005; Buckley et al., 2007; Alon & Mclntyre, 2008). Generally,
the studies concentrate on the regulatory framework and the influence of the
government regarding OFDI growth, sectoral patterns, geographical distribution, and the investment motives of Chinese companies (e.g., Zhan, 1995;
Wang, 2002; Taylor, 2002; Hong & Sun, 2004; Wu, 2005). Other studies take
an international management perspective and focus on the internationalization strategies of Chinese companies (e.g., Warner, Ng, & Xu, 2004; Liu &
Tian, 2008; Rui & Yip, 2008; Deng, 2009).
A variety of explanatory variables may account for growing Chinese
OFDI and its global economic and political impact. These include firm-level
variables which belong to the specific ownership advantages of each firm and
mainly refer to the organization and management know-how the firm is able
to apply. The firm acquires, trains, and coordinates research to develop methods, technologies, and products that enable it to supply markets (Dunning,
1993). Macro-level variables include both host and home country variables.
The host country variables focus on location advantages, including market characteristics, natural resources, and comparative advantages. Home
country variables involve factors such as institutional environment, capital
market imperfections, exchange rates, and level of economic development.
The mainstream perspective on FDI, developed by Dunning (1981, 2001),
draws together elements of previous theories to identify ownership, location, and internalization (OLI) advantages that motivate OFDI. It assumes
that firms conduct OFDI on the basis of a definable competitive advantage
to secure enough return to cover the additional costs and risks associated
with operating abroad (Caves, 1993; Buckley & Ghauri, 1999). According
to Dunning’s theory, known as the Eclectic Paradigm Theory, OFDI firms
should possess internally transferable ownership advantage such as superior proprietary resources or managerial capabilities that they can apply in
a foreign country (Barney, 1991). Studies on firms in developed economies
examine many firm-specific factors, such as age (Autio, Sapienza, & Almeida,
2000), size (Akoorie & Enderwick, 1992; Chetty & Hamilton, 1993), capabilities (Autio et al., 2000; Zahra, Ireland, & Hitt, 2000), financial and
physical resources (Bloodgood, Sapienza, & Almeida, 1996; Westhead et al.,
2001; Zucchella, Palamara, & Denicolai, 2007), location (Leonidou, 1998;
Zhao & Zou, 2002), technological advantages (Chang & Grubb, 1992;
Evangelista, 1994), and products (Akoorie & Enderwick, 1992). However,
other studies suggest that firms move across geographic boundaries for
resource and knowledge acquisition as well as capability enhancement
(Bartlett & Ghoshal, 1988; Madhok, 1997; Luo, 2000). With the rise of Asian
multinationals, an asset-augmenting or asset-seeking perspective can explain
40
Macro-Environmental Determinants of Chinese FDI
how these latecomers are employing international expansion as a way to
seek resources and overcome their competitive disadvantages (Makino et al.,
2002; Mathews, 2002, 2006; Child & Rodrigues, 2005). This view indicates
that there may not be a direct relationship between firm-specific ownership
advantages and the pursuit of FDI. Instead, firms from developing economies
may engage in OFDI to improve competitiveness rather than to exploit
their existing set of advantages. Accordingly, market characteristics, natural resources, and comparative advantages of host countries are considered
significant factors for Chinese OFDI. First, for market-seeking, host market
characteristics are considered a significant determinant. Numerous studies
show that FDI flow and market size are associated positively, and this also
applies to Chinese OFDI. For example, a 1 percent rise in host market size
increases Chinese OFDI by 0.35 percent (Buckley et al., 2007). Second, the
natural resource endowment of the host country is also a significant determinant of Chinese OFDI, especially after 1992 (Buckley et al., 2007). Third,
for asset-seeking OFDI, Deng (2007) examines its motivation and rationale by conducting a detailed analysis of both primary and secondary data
sources. The author suggests that when investing in advanced economies,
Chinese multinationals are motivated primarily by the quest for strategic
resources and capabilities. The underlying rationale for asset-seeking OFDI is
strategic need. Deng (2007) finds that a quest for strategic resources is the
primary motivation behind Chinese firms’ investments in industrial countries. Cui and Jiang (2009a) analyze survey data collected from a sample of
138 Chinese firms. The authors find that Chinese firms prefer wholly owned
subsidiary entry mode when adopting a global strategy, facing severe host
industry competition, and emphasizing asset-seeking in OFDI. Firms prefer
joint ventures when investing in a high-growth host market. But Buckley
et al. (2007) indicate that asset-seeking variables (patents) are insignificant,
which suggests that Chinese firms were not motivated to acquire strategic
intellectual capital assets over the period of the study. In addition, Boisot
and Meyer (2008) examine the motivation behind early stage internationalization of small Chinese firms and conclude that domestic limitations such
as local protectionism and inefficient domestic logistics increase the costs of
doing business domestically in China. This, combined with decreased costs,
associated with entry into foreign markets, encourages firms to exit domestic
markets via internationalization.
Child and Rodrigues (2005) argue that the Chinese case conforms more
closely to the latecomer perspective than to the analyses derived from the
exploitation of firm-specific advantages in the developed economy. Voss
et al. (2008) indicate that Chinese firms internationalize when domestic
institutions are sufficiently well-developed and the institutional environment allows them to exploit their competitive advantages across borders.
From this point of view, some macro-level factors relating to the government, such as government support and government finance, appear to
William Wei et al. 41
be more distinctive variables in the Chinese case. For example, a favorable relationship with the government exists for most firms with overseas
activities, such as Haier, Lenovo, and TCL (Child & Rodrigues, 2005). An
‘acquisition fund’ and cheap loans from state-owned banks influence investment decisions of Chinese firms and constitute an invaluable source of
competitive advantage (Child & Rodrigues, 2005). Zhao and Wang (2008)
find that firm-specific advantages such as governance advantage and bank
loan access are at work simultaneously, driving the internationalization of
Chinese private firms. However, in a more recent empirical study, Södermana
et al. (2008) identify 12 ‘key driving forces’ of Chinese OFDI, and find that
‘improved quality of production’ and ‘improved customer service’ were the
most significant drivers, and ‘government support and finance’ became less
important.
From an institutional perspective, the legislation and regulation in
the host country may be determinant variables in explaining Chinese
OFDI (Child & Rodrigues, 2005). Host country culture proximity also has a
highly significant and positive effect on Chinese OFDI (Buckley et al., 2007).
In a non-empirical study based on host country characteristics, Deng (2004)
categorizes five investment motivations for Chinese firms to go overseas:
seeking natural resources, technology, the markets and strategic assets of the
host country, as well as diversification of investment.
Many studies on firm-level analysis focus on Chinese offshore mergers and
acquisitions (OMA) since Chinese mergers and acquisitions (M&As) jumped
from US$7 billion to US$21.8 billion from 2004 to 2009 (MOFCOM, 2010).
Cross-border M&As by Chinese firms are primarily motivated by market
development (i.e., increasing market share) to enable faster entry into new
markets, promote diversification, and to access foreign advanced technology
and other resources. M&As also create value (wealth creation) for Chinese
acquiring firms. Rui and Yip (2008) explore how Chinese firms strategically
use cross-border acquisitions to achieve their goals. They suggest a strategic
intent perspective, supported by data collected from dozens of interviews
conducted in three firms, including Lenovo. They propose that Chinese
firms use cross-border acquisitions to achieve goals such as acquiring strategic capabilities to offset their competitive disadvantages and leveraging their
unique ownership advantages while using institutional incentives and minimizing institutional constraints. Building on institutional theory and using
data collected from a multiple-case study of three leading Chinese firms
(TLC, BOE, and Lenovo), Deng (2009) proposes a model of resource-driven
motivation behind Chinese M&As. He concludes that the unique Chinese
institutional environment allows cross-border mergers and acquisitions by
Chinese firms to acquire strategic assets.
Since Chinese OFDI entails active government involvement, both through
ownership and regulation (Peng, 2001), most studies on home country variables of Chinese OFDI adopt an institutional perspective to explore the role
42
Macro-Environmental Determinants of Chinese FDI
of the government and the OFDI firms. Buckley et al. (2007) find that the
policy liberalization variable is positive and significant for Chinese OFDI.
Voss et al. (2008) develop an analytical framework based on the institutional
change and test its effects on transactions costs and market imperfections.
Based on non-empirical research, Voss et al. (2008) argue that the institutional environment of China’s OFDI has undergone significant change over
the last 30 years. These two studies believe that the qualitative changes in
Chinese policy that took place in 1992 liberalized a number of OFDI-related
areas and increased the amount of Chinese OFDI. Cui and Jiang (2009a,
2009b) examine the differences between Chinese firms and multinational
corporations (MNCs) in developed countries in OFDI ownership decisions
and ask what factors influence decisions. The authors conclude that Chinese
firms place a stronger emphasis on strategic intent than strategic fit, enjoy
government support that eases their asset constraints, and are influenced by
institutions in the host country and their own government. Cui and Jiang
(2009c) develop a conceptual framework that integrates resource-based and
institutional-based international business strategy perspectives, using data
collected from an examination of existing literature as well as an analysis
of data collected from their case study of ten Chinese outward-investing
firms. The authors propose that, according to the resource-based perspective,
Chinese OFDI both exploits and augments assets. Thus, transaction costs and
strategic intent affect Chinese OFDI ownership decisions. According to the
institution-based perspective, in order to attain institutional legitimacy in
foreign markets and host countries, Chinese firms adjust their entry strategies when investing overseas, while at the same time adhering to domestic
government restrictions and incentive regulations.
Since studies on the OFDI positions of countries show that the mix of
ownership, location, and the internationalization advantages of a country’s
firms differs depending on the country’s economic development (Dunning,
1993, pp. 76–86), it is argued that OFDI should be considered a function
of home country-specific characteristics such as income, exchange rates,
technology, interest rates, and so on (Kyrkilis & Pantelidis, 2003). Thus it
is necessary to explore the relationship between OFDI and the home country’s economic development variables. More recently, a few empirical studies
have sought to model and analyze features of Chinese OFDI in this direction. For example, Liu et al. (2005) use Dunning’s IDP theory to analyze a
narrow set of data on Chinese OFDI published by MOFCOM, while Buckley
et al. (2007) use project data collected by the State Administration of Foreign Exchange (SAFE). However, such research is rare and the statistics are
outdated.
Based on Dunning’s IDP theory, we therefore propose a model and test
the hypotheses based on home country macroeconomic variables to explain
Chinese OFDI. These variables include income, technology, interest rates,
exchange rates, openness of the economy, and foreign currency reserves. The
William Wei et al. 43
data used cover the period from 1987 to 2009. The model and hypotheses
are discussed in the following section.
2. The model and hypothesis
2.1. Dependent variable
Annual OFDI outflows from China during 1987–2009.
2.2. Independent variables
Technology
Technological capability is positively related to OFDI and this receives theoretical and empirical support (Cantwell, 1981; Prugel, 1981; Grubaugh, 1987;
Pearce, 1989; Dunning, 1993). Under Dunning’s ownership competitive
advantage theory, if technology is information-intensive in a country, the
exploitation of technologically intermediate goods across national boundaries is achieved by firms via OFDI. With the dramatic development of the
Chinese technology market, high-tech firms that have already captured the
domestic market want to exploit the market abroad. In addition, we can
use the technology variable to test whether Chinese OFDI is asset-seeking
or not. We expect that Chinese MNEs would direct such asset-seeking
OFDI toward economies with significant levels of human and intellectual
capital, especially the industrialized countries, to help them strengthen their
competitiveness elsewhere (Dunning, 1998; Dunning, 2006). Many Chinese
companies use M&A to access high-tech companies for internal technology
upgrading. The Lenovo–IBM deal and the TCL–Thompson deal are examples. We use the number of patents issued in China annually to evaluate the
technological capability of Chinese firms and derive the first hypothesis:
Hypothesis 1: The number of patents issued annually in China reflects the technological input of Chinese firms and therefore is positively related to Chinese
OFDI.
Income
The crude relationship between OFDI and gross national product (GNP) per
capita can be criticized as mere common sense. The income of a country
reflects its economic structure and competitive advantages. As a growing
share of GNP comes from manufacturing and services, the capital intensity
of production increases, demand patterns move toward the consumption of
differentiated products, and markets grow. OFDI flow and market size are
associated positively (Buckley et al., 2007). When referring to China, the
level of economic development, which is proxied by GNP per capita plus
refinements, is still the main factor explaining China’s rate of OFDI (Liu
et al., 2005). Dunning et al. (2001) present a modern refinement of the IDP
44
Macro-Environmental Determinants of Chinese FDI
hypothesis: based on types of product and industry, mainly measured by
GNP per capita, they analyze the effect of inward and outward FDI in four
stages. Kyrkilis and Pantelidis’ empirical study of macroeconomic determinants of OFDI finds that the income level of a country is associated with
outward FDI. In our research, we use real GNP as the variable to reflect the
income of the country. A higher-income level (GNP) allows a country to
invest abroad. We therefore derive the second hypothesis:
Hypothesis 2: The higher the income level of China, the bigger the amount of its
OFDI.
Exchange rate
In international trade, exchange rates, which are the most important financial tool to adjust imports and exports, also affect OFDI. Aliber (1970)
argues that firms from countries with strong currencies can support financial investments more successfully than firms from countries with weak
currencies. A low or undervalued exchange rate encourages exports but
discourages imports and OFDI (Kohlhagen, 1977; Stevens, 1993). The real
effective exchange rate of the home country is the proposed approximation
of the same currency’s external value. The appreciation of the home country
currency reduces the capital requirement for foreign investments in home
country currency terms (Pantelidis & Kyrkilis, 2005). As the home country
exchange rate appreciates, more profitable opportunities for OFDI occur as
foreign-currency-denominated assets become cheaper. It is possible that a
rapid appreciation of the exchange rate, from a low or undervalued position, will more than proportionately increase OFDI (Buckley et al., 2007).
Further, the appreciation of home country currency will motivate the home
country and companies to invest abroad with lower transaction costs.
However, the economic reality of the Chinese government’s regulation
of foreign exchange means that China should neither continue its existing currency regime nor opt for a freely floating RMB and thus completely
open capital markets. Instead, China has undertaken a ‘two-step’ currency
reform. In 1994, it reformed its double-track exchange rate system and
introduced the unification of exchange rates. China next instituted a managed floating exchange rate regime based on market supply and demand.
Before 1997, RMB exchange rates were stable with a slight rise. After China
became a member of the World Trade Organization in 2001, liberalizing the
exchange rate system and basing it on market supply and demand have
become the most urgent tasks for the Chinese government. Looking back
on the development of China’s economy over the last three decades, RMB
is evolving as a high credit currency and a hard one at present. This stimulated the globalization of Chinese companies. We therefore derive the third
hypothesis:
William Wei et al. 45
Hypothesis 3: The lower the US dollar exchange rate against the RMB (e.g., if the
RMB appreciates), the bigger the amount of Chinese OFDI.
The openness of the economy
The liberalization of a country’s international trade is expected to positively
influence OFDI (Kyrkilis & Pantelidis, 2003), since the more a country is
open to foreign economic transactions, the easier it is for domestic firms
to invest abroad. Policies on international capital transfer are more likely
to influence patterns and trends in Chinese OFDI (Buckley et al., 2007).
Exports and imports are tightly connected with the government’s open policy, including FDI. Exporting has been a particular priority of government
policy in China, which has urged foreign partners in joint ventures to build
commitments into their agreements to maximize exports and local sourcing
(Buckley et al., 2007). These variables reflect the economic explanation for
China’s OFDI activity. We use total trade (exports plus imports) to reflect the
degree of openness of Chinese economy and add trade surplus as a variable
to examine the nature of substitution of FDI to international trade surplus.
We can derive the fourth and fifth hypothesis as:
Hypothesis 4: Total trade positively correlates with OFDI.
Hypothesis 5: A trade surplus negatively correlates with OFDI.
Interest rate
Interest rates are a sensitive factor influencing the flow of capital. Capital
abundance is associated with low interest rates, which in turn decrease the
opportunity cost of capital domestically and make investments abroad profitable (Prugel, 1981; Clegg, 1987; Grubaugh, 1987). The lower the cost of
borrowing, the higher the leverage exposure a firm may consider acceptable, and, consequently, the greater the investment rate the firm may
pursue. If the same reasoning is applied to OFDI, as the opportunity cost
of capital becomes lower at home, the equity or debt financing of a foreign investment becomes easier (Pantelidis & Kyrkilis, 2005). In general,
the marginal productivity of capital is associated with interest rates. Low
interest rates declare low marginal productivity of capital, and vice versa
(Pantelidis & Kyrkilis, 2005). The interest rate of the country is proposed as
an approximation of the margin efficiency of capital and denominates the
evaluation of the cost of capital in the home country. If interest rates in
the home country decrease, the capital will be invested abroad to earn more
profit, and the OFDI will consequently increase. Here, we derive the sixth
hypothesis:
Hypothesis 6: The lower the interest rate, the higher the amount of the OFDI.
46
Macro-Environmental Determinants of Chinese FDI
Foreign currency reserves
We know that foreign currency reserves correlate with national strength.
Chinese companies are going global to invest in the next generation of
global business and the government supports international relations and
policy and financial loans based on its huge foreign currency reserves.
China’s high savings rates and abundant foreign reserves lead Chinese banks
to encourage OFDI. There were foreign currency reserves worth US$2.5 trillion in China by mid-2010 which needed to be invested. OFDI is a logical
choice for the Chinese government since it owns most of the banks in
China. Chinese banks form a conglomerate supporting global outreach and
expansion. We thus introduce this variable for analysis and to measure the
degree of Chinese government intervention in OFDI. Wu (2008) states that
the increase in the foreign currency reserve is the reason for the increase in
China’s OFDI. We therefore derive the seventh hypothesis as follows:
Hypothesis 7: Foreign currency reserves are positively related to Chinese OFDI.
3. Methodology and data
We conduct multiple linear regressions. We first try the full model:
LnOFDI = a + β1∗ LnPATENTS + β2∗ LnGNP + β3∗ LnEXRATE
+ β4∗ LnTRADE + β5∗ LnSURPLUS + β6∗ LnINTERATE
+ β7∗ LnFR
where:
a = constant or intercept
OFDI = Outward FDI from China annually
PATENTS = the annual number of patents registered in China
GNP = Chinese annual GNP
EXRATE = US dollar annual exchange rate against RMB
TRADE = the annual total import and export amount
SURPLUS = the annual international trade surplus
INTERATE = Chinese annual interest rate
FR = Year-end foreign currency reserves in China.
We selected our data from 1987 to 2009 based on the annual statistical
book and statistics data published by NBS (National Bureau of Statistics of
China). The figures of Chinese OFDI between 1987 and 2001 come from
official Chinese data in MOFCOM (Ministry of Commerce), and the data
from 2002 to 2009 come from NBS. The sources of interest rates and foreign
William Wei et al. 47
currency reserves are from SAFE (State Administration of Foreign Exchange).
The patents variable comes from MOST (The Ministry of Science and Technology of the People’s Republic of China). Exchange rates, annual GNP,
exports and imports come from NBS’s year-end statistical books.
For better efficiency and interpretation, we select a subset of predictors
based on well-known Akaike Information Criterion (AIC), which leads to
the selected model:
LnOFDI = a + β1∗ LnPATENTS + β3∗ LnEXRATE + β5∗ LnSURPLUS
+ β6∗ LnINTERATE + β7∗ LnFR
4. Discussion on results and concluding remarks
In Table 2.1, on regression results, the second row of the model summary
suggests that there is no significant advantage to adopting the full model
over the selected. For simplicity, we prefer the selected sub-model. R2 is
generally used in explaining the variance in FDI stock and inflows, which
is accounted for by the explanatory variables. The values of the R2 and
adjusted R2 are 0.9516 and 0.9344 respectively for the selected model, suggesting that the overall explanatory power of the model is very strong.
Despite shortcomings due to the short time span of available data, this pioneer study gives a first insight into Chinese OFDI determinants in home
country macroeconomic variables. The regression results show that foreign
Table 2.1 Regression results
Predictors
Full model
Selected model
β
t
VIF
36.842
−1.207∗∗
−1.371
−5.553∗∗∗
1.055
−3.544
−0.973∗
2.085∗∗
3.267
−2.737
−1.208
−3.255
0.903
−1.762
−2.072
2.219
19.366
50.553
27.428
107.788
5.530
7.272
274.573
Model
R2
Adjusted R2
Selected
Full
0.9516
0.9577
0.9344
0.9330
(Constants)
LPATENTS
LGNP
LEXRATE
LTRADE
LSURPLUS
LINTERATE
LFR
df1
5
2
β
t
VIF
33.521
−1.2342∗∗
7.138
−2.831
19.318
−5.8975∗∗∗
−5.884
9.666
−3.7820∗∗
−0.7992∗
2.2570∗∗∗
−2.718
−1.851
6.413
2.703
6.277
39.309
df2
F-Stat
p-Value
14
12
55.09
0.856
0.000
0.449
Notes: ∗ Significant at the 10 percent level; ∗∗ significant at the 5 percent level;
∗∗∗ significant at the 1 percent level.
48
Macro-Environmental Determinants of Chinese FDI
reserves are positive and highly statistically significant at the 1 percent level.
Exchange rates (US dollar exchange rates against RMB) are negatively related
and statistically significant at the 1 percent level. Patents and trade surplus
are negative and significant at 5 percent. Interest rates are negatively related
and significant at 10 percent.
Patents and surplus variables are negative and significant (at 5 percent),
indicating that Chinese firms with ownership advantage mainly focus on
serving domestic markets as well as promoting international trade. Overseas,
the motives of those firms include asset- and technology-seeking. Liu et al.
(2005) find that per capita GDP, exchange rates, and inward FDI together
affect the magnitude of Chinese OFDI in the long run. Institutions, location, and networks have an indirect impact on OFDI through per capita
GDP. According to Dunning’s IDP hypothesis, GDP per capita is an important determinant of OFDI and a high level of OFDI results from IDP stage 3.
However, GNP represents the national income level of a country and may
not influence OFDI directly, since the larger the GNP, the greater the opportunity for firms in the domestic market, thus decreasing their motivation for
investing abroad. In our research, we did not find GNP and trade variables
to significant determinants of Chinese OFDI.
Interest rates are negative and significant at 10 percent in determining
China’s OFDI in our research. Interest rates can increase capital inflow and
outflow internationally, but China’s capital market has strict control over
the flow of foreign currency in order to ensure the safety of the capital markets. Government interference plays an important role in OFDI. Our result
disclosed that interest rates have a negative correlation with Chinese OFDI.
When referring to OFDI, if the capital source comes from domestic borrowing, interest rates will be negative with the outward investment, and if the
capital source comes from outward borrowing, the result is the opposite.
The negative coefficient means that the capital sources of China’s OFDI are
largely domestic. The trillion foreign currency reserves are the key point.
Pantelidis and Kyrkilis (2005) state that interest rates are significant determinants for the OFDI in the case of Italy, the Netherlands, and Korea. The
capital markets in those countries are more mature than China’s and have
less government interference. The correlation between interest rates and
OFDI and the maturity or openness of the capital markets is a topic for future
research.
In our study, the coefficient of the exchange rate is negative and significant (at 1 percent), confirming Aliber’s capitalization theory. Pantelidis and
Kyrkilis (2005) point out that the statistical significance of the exchange rate
variable implies that OFDI offers an effective solution to the strong currency
in the home country. Although exchange rate is not based purely on market
supply and demand, it still influences imports and exports significantly. The
appreciation of the RMB motivates Chinese state-owned enterprises (SOEs)
and private companies to invest abroad. The shift to an ‘exchange rate
basket’ management system may lead to a gradual appreciation of the RMB
William Wei et al. 49
in the long run, which will increase the purchasing power of Chinese currency, making the acquisition of overseas assets more attractive to Chinese
firms.
Foreign currency reserves are a significant determinant factor for China’s
OFDI (at 1 percent). To explain this variable, we need only consider the
Chinese government’s ‘going global’ policy and the special status of SOEs.
Only SOEs and local-government-owned enterprises were allowed to invest
overseas before 1985.
Although private enterprises were permitted to apply for OFDI projects,
the government gave only SOEs strong support in international relations,
policy, and financial loans (such as the relaxation of foreign currency
control in 2003 by the State Administration of Foreign Exchange), direct
and indirect subsidies, and offering favorable financing in the form of
credit lines and low interest loans from state-owned financial institutions.
Cheng and Ma (2007) argue that the bulk of China’s OFDI comes from
SOEs, especially large multinationals administered directly by the central government’s ministries and agencies. The share of FDI outflows by
these SOEs was 73.5 percent in 2003, 82.3 percent in 2004, and 83.2
percent in 2005. Their share of OFDI stocks by the end of 2004 and 2005
were 85.5 percent and 83.7 percent, respectively. Deng (2004) observes
that the Chinese government played a crucial role in shaping the structure of approved outward investment. Child and Rodrigues (2005) find
that the Chinese government gave encouragement and support to key
firms to globalize within the rationale of their own needs and policies, particularly in the context of dramatic increase of foreign currency
reserves.
The literature analyzes the background and motives for Chinese OFDI with
a focus on government initiatives. Conventional wisdom suggests that there
are three principal reasons for Chinese companies to expand abroad. One is
to secure natural resources to meet China’s high demand for raw materials
and energy as illustrated by the global expansion of CNOOC or Sinopec. Second is to identify and secure foreign technology and know-how, illustrated
by Haier and its use of overseas messaging centers and overseas design centers or Huawei’s globally dispersed research and development laboratories.
Third is the desire to escape home market saturation and ruthless price wars,
as illustrated by Ningbo Bird and Galanz.
Our chapter reveals that macroeconomic variables such as patents, interest
rates, exchange rates, the trade surplus, and foreign reserves are important
determinants of Chinese outward FDI. Child and Rodrigues (2005) argue
that the specific characteristics of Chinese internationalization (mainly the
active role of the government and its support to companies, and the Chinese
culture) require a different perspective for analysis. Chinese government
policies influence some variables such as exchange rates, interest rates, and
the openness of the economy. First, the government has, to a great extent,
played a crucial role in shaping China’s approved outward investment.
50
Macro-Environmental Determinants of Chinese FDI
Second, OFDI by Chinese multinationals, in contrast, has been triggered primarily by ‘pull’ factors, such as the desire to secure natural resources, raise
foreign exchange income, circumvent host country trade barriers, penetrate
new markets, acquire advanced technology and management expertise, and
seek strategic assets. Third, in contrast to most other MNCs in the world,
Chinese MNCs do not seek efficiency in terms of cost minimization in OFDI.
The crucial role the Chinese government plays in OFDI reflects the
country’s current political and economic systems. According to a survey
conducted by the Asia Pacific Foundation of Canada (2005), government
policy is one of the most important driving forces of Chinese OFDI. The
Chinese Communist Party and the state still play a central role in the country’s economy and exert close control on Chinese companies and MNEs
doing business in the country. Some state-dominated companies have been
granted monopoly positions in China’s economy and have become very
profitable. These companies are concentrated in energy, resources, infrastructure, telecommunications, and finance industries. The State-Owned Assets
Supervision and Administration Commission’s goal is to better manage and
promote companies in the ‘strategic and heavyweight’ industries.
During the past three decades, there has been a dramatic change in
China’s role in the global economy, including the evolution of Chinese businesses from isolation to internationalization, and even global integration.
Although there have been major shifts in corporate strategy, technology
management, and human resource and talent management practices, especially among a small set of globally competitive, leading-edge Chinese firms,
the macroeconomic conditions of China will still play an important role in
Chinese OFDI.
Note
An earlier version was published as William Wei and Ilan Alon (2010), “Chinese
Outward Direct Investment: A Study on Macroeconomic Determinants,” International
Journal of Business and Emerging Markets, 2(4): 352–369.
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3
The Role of Country of Origin
and Chinese OFDI
Paz Estrella Tolentino
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.
The roles of country, industry, and firm on the ownership and internalization advantages of firms and location advantages of home and host countries
have been analyzed extensively in the international business literature (see
Dunning, 1982; Gray, 1982). At the core of a firm’s competitive advantages
and performance are internal influences associated with internal assets and
competencies (Hawawini, Subramanian, & Verdin, 2004). External or environmental factors associated with a firm’s country of origin play a critical,
albeit partial, role in the development of a firm’s competitive advantages
and international expansion (Kumar & Kim, 1984; Porter, 1990; Nachum &
Rolle, 1999; Nachum, 2001). Accordingly, the current research examines
the relationships among macroeconomic factors specific to China, including openness of the economy to international trade, national technological
capability, domestic interest and exchange rates, and the level of China’s
OFDI flows using multiple time-series data from 1982 to 2008.
These real and financial factors define some of the home country determinants and effects of the competitiveness of all MNCs in a country, but
have remained unexplored in analyzing Chinese MNCs. This study adopts
a vector autoregressive (VAR) model to assess the causal relationships of the
endogenous variables through exogeneity and Granger causality analyses.
We study the contribution of changes in each variable in the system of equations to the variance in each variable through innovation accounting, and
54
Paz Estrella Tolentino
55
we investigate the dynamic impact of the changes in one variable on the
other system variables through impulse response functions (IRFs) analysis.
The chapter begins with a literature review and presents the conceptual
basis for selecting the variables included in the estimated VAR model. We
introduce the empirical model, describe the data, and present the results of
the integration tests on the variables. The exogeneity and dynamic analysis
follow and we conclude by reflecting on the contribution of the research and
its implications.
1. Literature review
Over the last 15 years or so, scholars have explored the emergence and
growth of Chinese MNCs, including their defining characteristics, motivations, and future prospects (see, for example, Young, Huang, & McDermott,
1996; Cai, 1999; Wu & Yeo, 2002; Deng, 2004; Fung, Liu, & Kao, 2007).
Among case studies on Chinese MNCs (Liu & Li, 2002; Warner, Ng, & Xu,
2004), limited academic literature exists on the determinants of Chinese
MNCs and home country, host country, and firm factors (Cai, 1999; Hong &
Sun, 2006; Rugman & Li, 2007; Boateng, Qian, & Tianle, 2008; Morck,
Yeung, & Zhoa, 2008). Some studies either reformulate existing conventional
theories or advance emerging perspectives to explain either Chinese MNCs
(Low & Hongbin, 2006; Li, 2007; Rui & Yip, 2008) or Chinese OFDI (Liu,
Buck, & Chang, 2005; Yang, 2005; Buckley, Clegg, Cross, Xin, Voss, & Ping,
2007).
The review of the determinants of Chinese MNCs and Chinese OFDI
focuses attention again on the debate over how much country and industry factors in the ‘location-bound’ approach predominate over firm-specific
factors in the ‘universalist’ approach in elucidating the nature of MNCs
from developing economies (see Tolentino, 2006, 2008). The first of these
emphasizes the interaction between the emergence and evolution of the
Chinese MNC and the environment or location-specific (national) context
(the location-bound approach). The second strand reflects the intellectual
endeavors in search of universal aspects of the determinants of Chinese
MNCs that apply equally across different national contexts (the universalist approach). The location-bound approach clearly predominates over the
universalist approach in the current academic literature on the determinants
of Chinese MNCs. This is not surprising, given their recent emergence, early
stage of development, and wide scope for further growth.
Studies that emphasize the role of home country-specific factors include
the rapid pace of China’s economic growth, industrial restructuring, savings rates, and corporate ownership structures and capital allocation, along
with other institutional factors in explaining the distinctive features of
Chinese MNCs as well as the rapid growth of Chinese OFDI. The current
study aims to expand the boundaries of empirical research in analyzing
56
Macro-Environmental Determinants of Chinese FDI
the relationship between a range of previously unexplored home countryspecific macroeconomic factors and the level of China’s OFDI flows. The use
of VAR modeling helps to enhance the current study’s novel contribution
from an empirical perspective, since it is rarely used as a methodological
and analytical tool in previous studies on the determinants of FDI.
The current research examines the relationships between a range of
macroeconomic factors specific to China, including openness of the economy to international trade, national technological capability, domestic
interest and exchange rates, and the level of China’s OFDI flows using multiple time-series data from 1982 to 2008. The length of the available time
series restricted the number of variables we could select for analysis. The
academic literature, which identifies the selected factors as some of the key
macroeconomic determinants of FDI, provides the theoretical justification
for the specific variable selection in the estimated VAR model. Tables 3.1
and 3.2 summarize the results of some of the empirical studies on the
macroeconomic determinants of inward and outward FDI. In analyzing the
Table 3.1 Some empirical evidence on the macroeconomic determinants of
inward FDI
Potential
macroeconomic
determinants
of inward FDI
Observed effect on inward FDI in different studies
Positive
Negative
Openness of the
economy to
international
trade
Kravis and Lipsey
(1982)
Culem (1988)
Edwards (1990)
Pistoresi (2000)
Interest rate
Billington (1999)
Yang, Groenewold,
and Tcha (2000)
Jeon and Rhee
(2008)
Hong and Kim
(2003)
Exchange rate
Edwards (1990)
Blonigen (1997)
Georgopoulos
(2008)
Caves (1988)
Froot and Stein
(1991)
Klein and
Rosengren (1994)
Blonigen (1995)
Guo and Trivedi
(2002)
Jeon and Rhee
(2008)
Insignificant
Schmitz and
Bieri (1972)
Wheeler and
Mody (1992)
Calderon-Rossell
(1985)
Sader (1993)
Tuman and
Emmert (1999)
Yang,
Groenewold,
and Tcha (2000)
Chowdhury and
Wheeler (2008)
Paz Estrella Tolentino
57
Table 3.2 Some empirical evidence on the macroeconomic determinants of OFDI
Potential
macroeconomic
determinants of
OFDI
Observed effect on OFDI in different studies
Positive
Openness of the
economy to
international
trade
Pantelidis and Kyrkilis
(2005)
Technological
capability
Dunning and Buckley (1977)
Wolf (1977)
Pugel (1978, 1981)
Bergsten, Horst, and Moran
(1978)
Swedenborg (1979)
Lall (1980)
Cantwell (1987)
Clegg (1987)
Grubaugh (1987)
Pearce (1989)
Kogut and Chang (1991)
Kyrkilis and Pantelidis
(2003)
Pantelidis and Kyrkilis
(2005)
Interest rate
Barrell and Pain (1996)
Exchange rate
Barrell and Pain (1996)
Gopinath, Pick, and
Vasavada (1998)
Kyrkilis and Pantelidis
(2003)
Pantelidis and Kyrkilis
(2005)
Bolling, Shane, and Roe
(2007)
Choi and Jeon (2007)
Georgopoulos (2008)
Negative
Insignificant
Chiou Wei and
Zhu (2007)
Clegg (1987)
Clegg (1987)
Pearce (1989)
controversial studies on the macroeconomic determinants of inward FDI,
Chakrabarti (2001) notes:
The lack of a consensus over the conclusions reached by the wide range
of empirical studies as to the relative importance and the direction of
impact of the potential determinants of FDI can be explained, to some
extent, in terms of the wide differences in perspectives, methodologies,
sample-selection and analytical tools. (pp. 89–90)
58
Macro-Environmental Determinants of Chinese FDI
To these may be added differences in the size of investing firms, the time
periods, proxies and indicators, and the level of analysis, among others.
In contrast, the results of empirical studies on the macroeconomic determinants of OFDI are more consistent, as indicated in Table 3.2. The majority
of studies show a positive effect on OFDI of the selected home countryspecific macroeconomic factors. But other studies focus on the reverse
causality. For example, some examine the impact of OFDI on trade creation (see Barrell & Pain, 1999; Blonigen, 2001; Pantulu & Poon, 2003;
Farrell, Gaston, & Sturm, 2004). Accordingly, recent studies analyze the relative importance of the direction of causality in evaluating FDI determinants
(Aizenman & Noy, 2006; Ghosh, 2007). It would be necessary to consider
this in the specification of the empirical model.
2. The empirical model specification and data description
A multiple time series for China from 1982 to 2008 forms the basis of the
current study, with the period determined by the availability of data to construct consistent measures of the selected variables over time. The data come
from a number of international sources. The use of relevant price indices
enabled the conversion of all nominal data series to real data series. The Data
Appendix provides detailed descriptions of the variables and information on
data sources.
Given the presence of multiple variables, either the simultaneous or structural equation (SEQ) model or the VAR model is appropriate. Three main
criticisms of SEQ modeling led Sims (1980) to pioneer the VAR methodology:
the zero-order identification restrictions on SEQ parameters; the tenuous
assumptions concerning the exogeneity and endogeneity of the variables;
and additional identification problems arising from temporal restrictions
when variables are themselves policy projections. ‘The main difference in
the VAR approach is that it is built on creating a complete dynamic specification of the series in a system of equations’ (Brandt & Williams, 2007,
pp. 9–10).
A VAR model is an extension of an autoregressive model when there is
more than one variable. Such models have more than one dependent variable and thus have more than one equation. Each equation in the multiple
equation model uses as its explanatory variables lags of all the variables
under study (and possibly a deterministic trend). The term autoregressive
refers to the inclusion of the lagged value of the dependent variable on the
right-hand side of the equation, and the term vector refers to the existence
of a vector of two (or more) variables.
The current study adopts a VAR model because it provides a robust
methodological tool for assessing the causal relationships of the endogenous
variables through exogeneity and Granger causality analyses. It allows us to
study the contribution of changes in each variable in the system of equations
Paz Estrella Tolentino
59
to the variance in each variable through innovation accounting. Further, we
can investigate the dynamic impact of the changes in one variable to the
other system variables through IRFs analysis. The strength of the VAR modeling is particularly useful where common sense, theory, or empirical evidence
do not provide clarity on the exact direction of causality. The VAR model
simply assumes that the current value of a dependent variable in a VAR can
be explained by past values of a range of variables. It therefore considers that
the past might influence the present, but not vice versa.
There are other advantages in VAR modeling. It does not draw heavily on
existing conceptual models or theories, but the results can have implications
for models or theories. The results may contribute to advancing empirical
debates about multiple time-series data. Regarded as ‘atheoretical’ (Koop,
2000), the use of theory in VAR modeling is limited to the selection of the
variables. In the current research, the simply stated VAR model is as follows:
the OFDI flows of China and a range of factors specific to China as a home
country are related. The study models the relationship as implying only that
each variable depends on lags of itself and all other variables. The aim is to
focus on the underlying correlation and dynamic structure of the multiple
time series.
The test statistics of the parameters of the VAR model parameters
will have a non-standard distribution in the presence of a unit root in
one of more of the variables (Sims, Stock, & Watson, 1990), which will
seriously compromise the assessment of Granger causality. Accordingly,
Table 3.3 presents the autocorrelation coefficients on all the variables as
follows:
• LFDI = Natural logarithm of real FDI outflows from China, US$ million
(2005 = 100), 1982–2008.
• LO = Openness of the Chinese economy to international trade variable as
measured by the natural logarithm of the annual sum of real exports and
imports of China, US$ million (2005 = 100), 1982–2008.
• LTE = Technology innovation variable as measured by the natural logarithm of the annual number of patent applications by China to the
United States Patent Office, 1982–2008.
• LI = Home country interest rate variable as measured by the natural logarithm of the annual real lending rate of China (2005 = 100), percent per
annum, 1982–2008.
• LER = Home country exchange rate variable as measured by the natural
logarithm of the annual real effective exchange rate index of China based
on relative consumer prices (2005 = 100), 1982–2008.
There seems to be short-term correlation in the LO, LTE, and LI series,
while LFDI and LER are random series. Table 3.4 shows the results of
60
Table 3.3 Autocorrelation coefficients of the variables (sample period from 1982
to 2008)
Order Autocorrelation Standard error Box-Pierce statistic Ljung-Box statistic
coefficient
1. LFDI
1
2
3
4
5
6
7
8
9
0.27104
−0.070971
−0.048542
−0.10365
−0.23698
−0.0010109
0.024766
−0.031767
−0.022462
0.19245
0.20610
0.20701
0.20743
0.20934
0.21905
0.21905
0.21915
0.21932
1.9835 [0.159]
2.1195 [0.347]
2.1831 [0.535]
2.4732 [0.649]
3.9895 [0.551]
3.9896 [0.678]
4.0061 [0.779]
4.0334 [0.854]
4.0470 [0.908]
2.2124 [0.137]
2.3701 [0.306]
2.4470 [0.485]
2.8128 [0.590]
4.8116 [0.439]
4.8116 [0.568]
4.8356 [0.680]
4.8772 [0.771]
4.8992 [0.843]
0.87491
0.74371
0.62080
0.50993
0.39937
0.30063
0.22227
0.14832
0.066506
0.19245
0.30617
0.36703
0.40405
0.42722
0.44083
0.44836
0.45242
0.45422
20.6677 [0.000]
35.6013 [0.000]
46.0069 [0.000]
53.0278 [0.000]
57.3342 [0.000]
59.7744 [0.000]
61.1083 [0.000]
61.7023 [0.000]
61.8217 [0.000]
23.0524 [0.000]
40.3754 [0.000]
52.9489 [0.000]
61.8012 [0.000]
67.4779 [0.000]
70.8477 [0.000]
72.7818 [0.000]
73.6884 [0.000]
73.8808 [0.000]
0.82164
0.67157
0.51176
0.36169
0.28668
0.20054
0.13347
0.066152
0.011521
0.19245
0.29503
0.34706
0.37397
0.38671
0.39450
0.39826
0.39991
0.40032
18.2275 [0.000]
30.4046 [0.000]
37.4758 [0.000]
41.0080 [0.000]
43.2270 [0.000]
44.3129 [0.000]
44.7939 [0.000]
44.9121 [0.000]
44.9156 [0.000]
20.3307 [0.000]
34.4562 [0.000]
43.0004 [0.000]
47.4541 [0.000]
50.3792 [0.000]
51.8788 [0.000]
52.5762 [0.000]
52.7565 [0.000]
52.7623 [0.000]
0.89694
0.82771
0.73865
0.63727
0.52620
0.41550
0.28917
0.19245
0.31085
0.38390
0.43335
0.46677
0.48825
0.50117
21.7216 [0.000]
40.2193 [0.000]
54.9505 [0.000]
65.9155 [0.000]
73.3915 [0.000]
78.0529 [0.000]
80.3106 [0.000]
24.2279 [0.000]
45.6853 [0.000]
63.4854 [0.000]
77.3109 [0.000]
87.1657 [0.000]
93.6029 [0.000]
96.8765 [0.000]
2. LO
1
2
3
4
5
6
7
8
9
3. LTE
1
2
3
4
5
6
7
8
9
4. LI
1
2
3
4
5
6
7
Paz Estrella Tolentino
8
9
61
0.15334
0.030755
0.50731
0.50903
80.9455 [0.000]
80.9711 [0.000]
97.8455 [0.000]
97.8867 [0.000]
0.80021
0.56556
0.37430
0.24038
0.15137
0.10324
0.028689
−0.097140
−0.15621
0.19245
0.29064
0.32888
0.34430
0.35046
0.35287
0.35399
0.35407
0.35506
17.2892 [0.000]
25.9253 [0.000]
29.7081 [0.000]
31.2682 [0.000]
31.8868 [0.000]
32.1746 [0.000]
32.1968 [0.000]
32.4516 [0.000]
33.1104 [0.000]
19.2841 [0.000]
29.3019 [0.000]
33.8728 [0.000]
35.8400 [0.000]
36.6554 [0.000]
37.0528 [0.000]
37.0851 [0.000]
37.4739 [0.000]
38.5354 [0.000]
5. LER
1
2
3
4
5
6
7
8
9
testing for stationarity and integration order using the Kwiatkowski–
Phillips–Schmidt–Shin (KPSS) test. Tables 3.4a and 3.4b report the KPSS test
results for stationarity around a level and stationarity around a trend, respectively. It is evident that the integration order of the variables is sensitive to
the deterministic trend. When analyzing the residuals of alternative empirical models that include or exclude a deterministic trend, the results favor
the empirical model that includes a deterministic trend at the margin. The
results of the testing for stationarity and integration order imply the need
to be conservative in interpreting the VAR test statistics and in considering
a co-integrating relationship in the data.
Table 3.4a Tests for stationarity around a level using the KPSS testa
Truncation lags
0
1
2
3
4
0.0000
0.0000
0.0000
0.0000
0.0000
1.3944
0.8167
1.3911
1.2754
0.2618
0.9627
0.6016
0.9797
0.9135
0.2532
0.7467
0.4979
0.7748
0.7352
0.2538
0.6189
0.4383
0.6532
0.6323
0.2624
0.0000
0.0000
0.0000
0.0000
0.1705
0.3833
0.1534
0.4460
0.1869
0.4005
0.1733
0.3830
0.2051
0.4310
0.1636
0.3162
0.2090
0.4016
0.1601
0.2961
Ho: I(0), H(1): I(d)
LI
LER
LO
LTE
LFDIb
Ho: I(1), H(1): I(d)
LIb
LERb
LOb
LTEb
a The critical values are 0.347, 0.463, and 0.739 at the 10 percent, 5 percent, and 1 percent significance levels, respectively.
b The variable is therefore I(0), and testing for higher integration is unnecessary.
62
Macro-Environmental Determinants of Chinese FDI
Table 3.4b Tests for stationarity around a trend using the KPSS testa
Truncation lags
0
1
2
3
4
0.0000
0.0000
0.0000
0.0000
0.0000
0.1460
0.2648
0.2457
0.1986
0.0823
0.1135
0.2068
0.1824
0.1467
0.0834
0.0990
0.1798
0.1530
0.1242
0.0851
0.0917
0.1628
0.1390
0.1125
0.0887
0.0000
0.0000
0.0483
0.0719
0.0617
0.0845
0.0877
0.0832
0.0908
0.0850
Ho: I(0), H(1): I(d)
LIb
LER
LO
LTEb
LFDIb
Ho: I(1), H(1): I(d)
LER
LO
a The critical values are 0.119, 0.146, and 0.216 at the 10 percent, 5 percent, and 1 percent significance levels, respectively.
b The variable is therefore I(0), and testing for higher integration is unnecessary.
The study does not use the vector error correction model for two reasons.
First, the co-integration relationship is not the central focus of the current
research but the analyses of exogeneity and short-term dynamics, of which
inferences will be robust. Second, the resulting VAR system will be stationary
and any test statistics asymptotically valid if there is co-integration among
the variables containing a unit root.
A combination of fit statistics and formal statistics for lag length usually
determines the appropriate VAR order. The Akaike Information Criterion,
Hannan-Quinn Criterion, and Scharwz Criterion unanimously select the
order 3. In light of these, the VAR (3) model is chosen for estimation in the
current study.1 Moreover, since the current research involves five variables,
the unrestricted VAR will estimate five equations which depend on p = 3 lag
of the dependent variable and q = 3 lag of each of the four other variables.
Therefore the lag length is set such that p = q. The estimated VAR (3) model
is as follows:
LIt = α1 + δ1 t + φ11 LIt−1 + φ12 LIt−2 + φ13 LIt−3 + β11 LERt−1 + β12 LERt−2
+ β13 LERt−3 + β14 LOt−1 + β15 LOt−2 + β16 LOt−3 + β17 LTEt−1 + β18 LTEt−2
+ β19 LTEt−3 + β20 LFDIt−1 + β21 LFDIt−2 + β22 LFDIt−3 + e1t
LERt = α2 + δ2 t + φ21 LI t−1 + φ22 LI t−2 + φ23 LI t−3 + β21 LERt−1 + β22 LERt−2
+ β23 LERt−3 + β24 LOt−1 + β25 LOt−2 +β26 LOt−3 + β27 LTEt−1 + β28 LTEt−2
+ β29 LTEt−3 + β30 LFDI t−1 + β31 LFDI t−2 + β32 LFDI t−3 + e2t
Paz Estrella Tolentino
63
LOt = α3 + δ3 t + φ31 LI t−1 + φ32 LI t−2 + φ33 LI t−3 + β31 LERt−1 + β32 LERt−2
+ β33 LERt−3 + β34 LOt−1 + β35 LOt−2 + β36 LOt−3 + β37 LTEt−1 + β38 LTEt−2
+ β39 LTEt−3 + β40 LFDI t−1 + β41 LFDI t−2 + β42 LFDI t−3 + e3t
LTEt = α4 + δ4 t + φ41 LI t−1 + φ42 LI t−2 + φ43 LI t−3 + β41 LERt−1 + β42 LERt−2
+ β43 LERt−3 + β44 LOt−1 + β45 LOt−2 + β46 LOt−3 + β47 LTEt−1 + β48 LTEt−2
+ β49 LTEt−3 + β50 LFDI t−1 + β51 LFDI t−2 + β52 LFDI t−3 + e4t
LFDI t = α5 + δ5 t + φ51 LI t−1 + φ52 LI t−2 + φ53 LI t−3 + β51 LERt−1 + β52 LERt−2
+ β53 LERt−3 + β54 LOt−1 + β55 LOt−2 + β56 LOt−3 + β57 LTEt−1
+ β58 LTEt−2 + β59 LTEt−3 + β60 LFDI t−1 +β61 LFDI t−2 +β62 LFDI t−3 + e5t
where:
α = constant or intercept;
t = deterministic trend;
e = the stochastic error term, or innovation or shock in the VAR.
3. Tests for exogeneity
Table 3.5 shows the OLS estimation of the unrestricted 5-equation VAR (3)
model for China. A series of univariate and multivariate diagnostic tests of
the residuals establish the robustness of the results. The absence of residual
serial correlation confirms the correct lag specification of the VAR model.
There is also evidence of normality in the multivariate distribution of the
residuals in the model as a whole. However, there seems to be residual serial
correlation in the LFDI equation. A close examination of the residuals suggests considerable volatility of China’s LFDI over the period of analysis.
Therefore, it is likely that the remaining serial correlation in the residuals
of the LFDI equation may be due to a confluence of factors affecting China’s
OFDI flows.
A test of block Granger causality in the VAR results in the acceptance of the
null hypothesis that the coefficients of the lagged values of LI, LER, LO, and
LTE are zero in the equation explaining the variable LFDI at the 5 percent significance level. A further test shows no instantaneous causality between LI,
LER, LO, LTE, and LFDI. To begin to assess the specific Granger causal relationships between the endogenous variables, we conduct exogeneity tests
based on a series of bivariate VAR models between LFDI and LI, LER, LO,
or LTE. Since there is a bias against the null hypothesis when there is a
possible unit root (Hamilton, 1994), it would be necessary to use levels
and differences and compare the test results at different lag lengths. The
LI (–1)
LI (–2)
LI (–3)
LER (–1)
LER (–2)
LER (–3)
LO (–1)
LO (–2)
LO (–3)
LTE (–1)
LTE (–2)
LTE (–3)
LFDI (–1)
LFDI (–2)
LFDI (–3)
p-Value
0.805
0.979
0.951
0.534
0.664
0.310
0.071
0.251
0.946
0.339
0.648
0.920
0.454
0.602
0.637
Coefficient
−0.149
−0.017
0.034
−0.259
0.214
−0.470
1.084
−0.818
0.038
0.159
0.055
0.015
0.017
0.012
−0.011
Dependent
variable LI
−0.615
0.350
−0.504
0.749
−0.569
0.062
0.461
−0.504
0.842
0.025
0.000
−0.020
0.001
−0.004
0.014
Coefficient
0.248
0.540
0.304
0.042
0.192
0.879
0.386
0.425
0.092
0.864
0.998
0.881
0.975
0.850
0.503
p-Value
Dependent
variable LER
Table 3.5 The vector autoregressive model of China
0.018
0.158
0.114
−0.170
0.301
−0.050
1.164
−0.692
0.174
0.068
0.097
−0.126
−0.004
−0.001
−0.012
Coefficient
0.974
0.790
0.823
0.655
0.506
0.906
0.035
0.291
0.736
0.654
0.378
0.358
0.849
0.970
0.584
p-Value
Dependent
variable LO
−0.772
−2.407
0.087
−1.065
0.979
1.227
−0.205
2.742
−1.359
−0.407
0.529
0.675
0.031
0.036
0.003
Coefficient
0.570
0.099
0.945
0.257
0.379
0.241
0.879
0.088
0.286
0.276
0.050
0.045
0.554
0.474
0.953
p-Value
Dependent
variable LTE
3.856
−5.563
4.770
−2.636
1.594
0.067
0.989
5.299
−0.890
−0.434
0.229
−0.409
0.042
−0.288
−0.010
Coefficient
0.730
0.643
0.643
0.738
0.862
0.994
0.929
0.690
0.932
0.888
0.918
0.883
0.922
0.486
0.982
p-Value
Dependent
variable LFDI
64
Jarque-Bera test of
normality
Chi2 = 0. 8284
(p-value: 0.6609)
0.451
0.042
0.366
0.431
Residual analysis
2.206
0.071
−6.219
−0.334
Chi2 = 0. 1840
(p-value: 0.9121)
Chi2 = 5. 3760
(p-value: 0.0680)
0.300
0.134
Chi2 = 0. 0129
(p-value: 0.9936)
Lütkepohl
Joint test statistic: 8.1305 (p-value: 0.6161)
Degrees of freedom: 10.0000
Skewness only: 5.7923 (p-value: 0.3270)
Kurtosis only: 2.3382 (p-value: 0.8006)
Doornik and Hansen
Joint test statistic: 47.8133 (p-value: 0.0000)
Degrees of freedom: 10.0000
Skewness only: 15.6429 (p-value: 0.0079)
Kurtosis only: 32.1704 (p-value: 0.0000)
−1.775
−0.178
Tests for
non-normality
0.273
0.047
Test statistic: 302.8307 (p-value: 0.8062)
Adjusted test statistic: 464.5378 (p-value: 0.0000)
2.913
−0.197
Portmanteau
test of
residual serial
correlation
Constant
Trend
0.283
0.863
Chi2 = 34. 7777
(p-value: 0.0000)
−53.089
−0.317
65
66
Macro-Environmental Determinants of Chinese FDI
Table 3.6 Exogeneity tests for FDI and other system variables
Hypothesized Block of
exogenous
coefficients
variable
restricted
LFDI
LFDI
LFDI
LFDI
LO
LTE
LI
LER
DLFDI
DLFDI
DLFDI
DLFDI
DLO
DLTE
DLI
DLER
LO
LTE
LI
LER
LFDI
LFDI
LFDI
LFDI
DLO
DLTE
DLI
DLER
DLFDI
DLFDI
DLFDI
DLFDI
Three lags
Two lags
One lag
Test
statistic
p-Value Test
statistic
p-Value Test
statistic
p-Value
1.5633
0.2861
1.4183
0.2505
0.6726
1.0970
0.5368
0.0514
0.9394
0.0387
0.4224
0.3251
0.3900
0.0975
0.4766
0.0592
0.2174
0.8351
0.2555
0.8603
0.5752
0.3646
0.6604
0.9843
0.4339
0.9896
0.7383
0.8072
0.7610
0.9608
0.7009
0.9807
0.1105
0.5317
0.1382
0.8387
0.6380
0.4292
0.9193
0.9719
0.2709
0.8734
0.6652
0.6851
0.9254
0.9837
0.6990
0.9833
0.0343
0.3400
0.0814
0.6134
0.2486
0.4789
0.7170
0.8819
0.2867
0.8799
0.4176
0.7614
0.5025
0.8915
0.9071
0.9645
2.3352
0.6423
2.0858
0.1767
0.4548
0.8648
0.0843
0.0286
1.3546
0.1359
0.4123
0.3822
0.0777
0.0164
0.3616
0.0169
4.7694
0.9305
3.1810
0.2589
1.3673
0.5101
0.1330
0.0223
1.1647
0.0231
0.6703
0.0934
0.4574
0.0188
0.0138
0.0020
Note: Results based on bivariate VAR models.
exogeneity tests’ results indicate that LO or LI plays a role in the endogenous
determination of LFDI, but not LTE or LER. In turn, LFDI or DLFDI does not
endogenously determine the other system variables (Table 3.6).
4. Dynamic analysis: Forecast error variance decomposition
and impulse response analysis
To examine the impact on system variables of typical shocks, the study
considers forecast error variance decomposition and IRFs. Decomposition
analysis estimates the percentage of the error variance in forecasting each
variable in the system of equations at a given horizon due to an unexpected
or unpredictable change in one of the VAR equations. More technically, the
variance decomposition of the k-step-ahead forecast is the proportion of the
total forecast variance of one variable caused by a shock to the moving average representation of another variable. The analysis of IRFs complements
decomposition analysis by determining, over a forecast horizon, the direction of the expected responses of current and future values of each system
variable to a specific innovation shock in a system equation. We focus the
investigation on the path taken by OFDI flows in responding to a shock to
Paz Estrella Tolentino
67
Table 3.7 Estimated system covariance matrix of errors
LI
LER
LO
LTE
LFDI
LI
LER
LO
LTE
LFDI
1.3817 e–02
1.4187 e–03
7.4330 e–03
–4.4532 e–03
4.7911 e–02
1.4187 e–03
1.0853 e–02
–5.1730 e–05
–3.5143 e–03
8.0913 e–02
7.4330 e–03
–5.1730 e–05
1.1647 e–02
–1.7789 e–02
–5.9085 e–02
–4.4532 e–03
–3.5143 e–03
–1.7789 e–02
7.0463 e–02
–2.1214 e–02
4.7911 e–02
8.0913 e–02
–5.9085 e–02
–2.1214 e–02
4.7855
each system equation, as well as the path taken by each system equation in
responding to an OFDI equation shock.
The estimated system covariance matrix of the errors reveals a diagonal
matrix, which implies the absence of contemporaneous correlation of the
stochastic error terms (e1t, e2t, e3t, e4t, e5t ) or innovations in the VAR (Table 3.7).
It would therefore be possible to consider the effect of a shock to one system equation in isolation of other system equations. The orthogonalized
and generalized impulse responses (and the associated forecast error variance decomposition) would not be very different. Accordingly, the current
study chooses to impose a standard VAR model with a recursive unidirectional causal structure from the higher order variables to the lower order
variables: LI, LER, LO, LTE, LFDI. Consistent with the primary focus of the
current study, LFDI is last on the ordering to allow shocks to all system variables to have a contemporaneous impact on LFDI, but not vice versa. The
financial variables LER and LI occupy higher orders in relation to the real
variables LO and LTE to allow the real variables to respond contemporaneously to changes in the financial variables. LI occupies a higher order relative
to LER, which allows LER to respond contemporaneously to changes in LI.
LO occupies a higher order relative to LTE, which allows LTE to respond
contemporaneously to changes in LO. Table 3.8 presents the orthogonalized
forecast error variance decomposition for the standard VAR (3) model over a
four-year forecast horizon.2
We can draw two main conclusions from the decomposition analysis with
respect to the role of home country macroeconomic factors as a cause and
effect of China’s OFDI flows. First, shocks to LFDI itself account for at least 40
percent of the forecast error variation in LFDI after four years, while shocks
to the other system variables collectively explain at most 60 percent of the
forecast error variance of the LFDI sequence. At the four-year horizon, the
most important home country-specific determinants of Chinese FDI other
than LFDI are in declining order: LO (24%), LTE (13%), LI (13%), and LER
(11%). Clearly, a shock to each of the real and financial variables considered
in this study leads to a change in the level of China’s outward FDI flows.
Secondly, unexpected changes in LFDI affect LFDI the most, of all the system
68
Macro-Environmental Determinants of Chinese FDI
Table 3.8 Decomposition of the orthogonalized forecast error variance
Forecast error
variation in
LI
LER
LO
LTE
LFDI
Horizon
0
1
2
3
4
0
1
2
3
4
0
1
2
3
4
0
1
2
3
4
0
1
2
3
4
Explained by innovations in
LI
LER
LO
LTE
LFDI
1.00
0.79
0.75
0.65
0.63
0.01
0.07
0.10
0.10
0.15
0.34
0.33
0.37
0.37
0.35
0.02
0.10
0.12
0.12
0.17
0.03
0.08
0.07
0.12
0.13
0.00
0.04
0.07
0.11
0.12
0.99
0.86
0.81
0.78
0.52
0.01
0.04
0.05
0.05
0.06
0.01
0.07
0.09
0.17
0.22
0.11
0.12
0.12
0.11
0.11
0.00
0.12
0.11
0.10
0.10
0.00
0.07
0.06
0.09
0.27
0.65
0.61
0.54
0.54
0.53
0.46
0.34
0.29
0.25
0.23
0.17
0.16
0.25
0.25
0.24
0.00
0.01
0.01
0.09
0.09
0.00
0.00
0.00
0.00
0.04
0.00
0.01
0.04
0.04
0.05
0.51
0.47
0.48
0.41
0.35
0.13
0.12
0.12
0.11
0.13
0.00
0.04
0.05
0.05
0.06
0.00
0.00
0.03
0.03
0.03
0.00
0.00
0.00
0.00
0.01
0.00
0.03
0.03
0.04
0.04
0.55
0.52
0.44
0.41
0.40
variables. In all other system variables, unexpected changes in LFDI have a
small effect, accounting for no more than 6 percent of their variance at the
four-year forecast horizon. Thus, LFDI is essentially an exogenous variable
in explaining all system variables other than itself.
These findings based on Granger causal analysis (which depend on the
dynamics of the system variables in a multivariate VAR) complement the
exogeneity analysis (which depend on a series of bivariate VAR models)
in assessing the role of these macroeconomic factors as determinants and
effects of China’s OFDI flows.3 On the one hand, although China’s OFDI is
exogenous to all system variables other than LO or LI, Granger causal analysis deduced from the innovation accounting tests indicates that a shock
to LO, LTE, LER, and LI explains a considerable proportion of the variance in LFDI. On the other hand, Granger causal analysis confirms the
exogeneity analysis that all system variables are exogenous to LFDI other
than LFDI itself.
Paz Estrella Tolentino
69
The orthogonalized IRFs in Figure 3.1 establish the direction of the current and future impact on China’s LFDI of one standard error (SE) shock
to each system variable’s equation. The figure presents the IRFs alongside their 95 percent Hall confidence intervals derived with the use of
2000 bootstrapping replications. The ordering of the variables follows that
in forecast error decomposition. An LER shock leads to a one-off statistically significant contemporaneous increase in LFDI of around 0.7 percent.
A shock to LI will also lead to a statistically significant increase in LFDI of
around 0.5 percent in the first and third years, and so will an unexpected change in LO which causes a statistically significant increase in
LFDI of about 0.9 percent around the second year of the forecast horizon.
1.8
l_log –> TFDI_log
1.4
1.0
0.6
0.2
–0.2
–0.6
–1.0
0.0 0.4 0.8 1.2 1.6 2.0 2.4 2.8 3.2 3.6 4.0
2.0
ER_log –> TFDI_log
1.6
1.2
0.8
0.4
–0.0
–0.4
–0.8
–1.2
–1.6
0.0 0.4 0.8 1.2 1.6 2.0 2.4 2.8 3.2 3.6 4.0
Figure 3.1 Orthogonalized impulse responses of FDI to one standard error shock in
each system variable equation
Note: The dashed lines show 95 percent Hall percentile confidence intervals derived by
bootstrapping with 2000 replications.
70
0_log –> TFDI_log
2.0
1.5
1.0
0.5
0.0
–0.5
–1.0
–1.5
–2.0
–2.5
0.0 0.4 0.8 1.2 1.6 2.0 2.4 2.8 3.2 3.6 4.0
1.2
TE_log –> TFDI_log
0.8
0.4
–0.0
–0.4
–0.8
–1.2
–1.6
–2.0
0.0 0.4 0.8 1.2 1.6 2.0 2.4 2.8 3.2 3.6 4.0
3.5
TFDI_log –> TFDI_log
3.0
2.5
2.0
1.5
1.0
0.5
0.0
–0.5
–1.0
0.0 0.4 0.8 1.2 1.6 2.0 2.4 2.8 3.2 3.6 4.0
Figure 3.1 (Continued)
Paz Estrella Tolentino
71
By comparison, an unexpected change in LFDI results in about a 0.4 percent
decline in LFDI around the second year of the forecast horizon. Finally, a
shock to LTE elicits a shifting LFDI response from a negative one in the first
10 months in the region of 0.8 percent at most, to a statistically significant
positive one in the second and fourth years of 0.4 percent.4
The orthogonalized IRFs in Figure 3.2 ascertain the reverse effect: the
direction of the current and future impact on each system variable of one
SE shock in the LFDI equation. There is no contemporaneous response in
any of the other system variables following an LFDI shock. In fact, LO
does not have a statistically significant response to an LFDI shock, given
that its 95 percent confidence interval includes zero throughout the forecast horizon. However, LI will eventually increase by around 0.02 percent
in the first two years of the forecast horizon, and so will LTE of around
0.08
TFDI_log –> I_log
0.06
0.04
0.02
0.00
–0.02
–0.04
–0.06
–0.08
0.0 0.4 0.8 1.2 1.6 2.0 2.4 2.8 3.2 3.6 4.0
TFDI_log –> ER_log
0.06
0.04
0.02
0.00
–0.02
–0.04
–0.06
–0.08
0.0 0.4 0.8 1.2 1.6 2.0 2.4 2.8 3.2 3.6 4.0
Figure 3.2 Orthogonalized impulse responses of each system variable to one standard
error shock in the FDI equation
Note: The dashed lines show 95 percent Hall percentile confidence intervals derived by
bootstrapping with 2000 replications.
72
Macro-Environmental Determinants of Chinese FDI
TFDI_log –> 0_log
0.02
0.01
0.00
–0.01
–0.02
–0.03
–0.04
–0.05
0.0 0.4 0.8 1.2 1.6 2.0 2.4 2.8 3.2 3.6 4.0
TFDI_log –> TE_log
0.16
0.12
0.08
0.04
0.00
–0.04
–0.08
–0.12
–0.16
0.0 0.4 0.8 1.2 1.6 2.0 2.4 2.8 3.2 3.6 4.0
Figure 3.2 (Continued)
0.04 percent in the first 1.4 years of the forecast horizon, but this reverses
rapidly in both cases. LI and LTE eventually decline after three years, and
between 2.8 and 3.4 years in the forecast horizon, respectively. By contrast, there will be a statistically significant decrease of about 0.02 percent
in LER around two years in the forecast horizon, given an LFDI shock.
Thus, although all system variables are largely exogenous to LFDI other than
LFDI itself based on innovation accounting, a shock to LFDI elicits a statistically significant response in all the system variables other than LO, however
small.
5. Conclusions and implications
Given the rapid growth of Chinese MNCs, conventional wisdom assumes
the causal relationships between the level of OFDI flows and a range of
Paz Estrella Tolentino
73
macroeconomic factors specific to China as a home country such as the
openness of the Chinese economy to international trade, domestic technological innovation, and domestic interest rates and exchange rates. However,
the short history of these MNCs does not allow us to confirm or deny these
causal relationships based on empirical research. In the current study, a
recursive causal VAR (3) model provides the framework for testing the relationships among the endogenous variables over a 27-year period between
1982 and 2008. The VAR modeling enables the inference of Granger causal
relationships among the system variables, and the determination of the
endogenous structure and dynamics of the multiple time series.
The examination reveals that the most important home country determinants of the level of Chinese OFDI flows consist of real variables (openness
of the national economy to international trade and national technological capability) and financial variables (domestic interest rates and exchange
rates). These account collectively for at least 45 percent of the forecast error
variance of China’s OFDI flows sequence over a four-year horizon. Chinese
OFDI flows increase contemporaneously following a national exchange rate
shock, and they also increase given a shock to either domestic interest rates
or the openness of the national economy to international trade anywhere
within the first three years of the forecast horizon. On the other hand,
China’s OFDI flows decline in the first 10 months, and then increase after a
delay of two and four years, given a national technological capability shock.
Since the shock happens before the OFDI response, the shock to each of
these variables is Granger causing the OFDI response. Alternatively, these
variables have ‘predictive causality’ (Diebold, 2007) which contains useful
information for predicting OFDI (in the linear least squares sense) over and
above the history of OFDI itself.
In turn, unexpected changes in OFDI flows affect it the most, of all the
system variables. In all other system variables, unexpected changes in outward FDI flows have a small effect, accounting for no more than 6 percent of
their variance at the four-year forecast horizon. However, although all system variables are essentially exogenous to OFDI flows other than OFDI flows
itself, an OFDI flows shock causes a small statistically significant response
over the forecast horizon in all system variables other than the openness of
the national economy to international trade. There is therefore evidence of
dual causality between national technological capability, domestic interest
or exchange rates, and China’s OFDI flows. A shock to OFDI flows will generate small increases in domestic interest rates and national technological
capability within the first two years of the forecast horizon. However, this
reverses rapidly to small declines in both variables within the second half
of the forecast horizon. By comparison, there will be a small depreciation of
the exchange rate around two years out in the forecast horizon following a
shock to OFDI flows. These results are not surprising, considering the still
relatively modest level of China’s OFDI.
74
Macro-Environmental Determinants of Chinese FDI
The findings of the current research could change with a longer time series.
This might allow the estimation of a revised VAR model to better explain the
volatility in the OFDI sequence. A revised model might assess any structural
change in the relationship between the variables or both. How these relationships will evolve with the further growth of Chinese MNCs would be a
fascinating proposal for future research.
We believe the results of the current research are valuable to international
business scholars and practitioners as well as policymakers. There are at least
four main implications of the research results.
First, the determination of the endogenous structure and Granger causal
relationships is particularly helpful in better understanding the relevance of
a combination of home country-specific real and financial factors in explaining and predicting China’s OFDI flows. We can attribute the divergent results
of the current research in relation to other empirical studies on MNCs based
in other home countries employing the same methodology and analytical
tool as well as similar periods (Tolentino, 2010a, 2010b) to sample selection.
The current study modifies Franko’s idea (1976) by suggesting that
the uniqueness of MNCs arises partly from the influence of specific
macroeconomic factors of their country of origin in determining the level
of their OFDI flows. Equally, the uniqueness of MNCs arises partly from
the influence of their international expansion, including the level of their
OFDI flows, in determining specific macroeconomic factors of their country
of origin. This will become more important over time. The results support
those of other studies that acknowledge the role of contingent factors which
vary by home country in explaining the process of international expansion of MNCs, to include modes of market entry, investment patterns, and
decision-making. Domestic firms and MNCs build on a platform of home
country advantages (or disadvantages) broadly defined to generate enduring firm-specific advantages within and across a value chain. Collectively,
these studies underscore the importance of recognizing context and examining firms and their development patterns in situ (Beamish, Hitt, Jackson, &
Mathieu, 2005; Redding, 2005).
Second, the national openness of the Chinese economy to international trade as the most important determinant of the level of China’s
OFDI flows strengthens the claims of previous studies establishing an association between this factor and the growth and expansion of Chinese MNCs
(Wu & Yeo, 2002; Hong & Sun, 2006).
Third, the findings enable a re-evaluation of current views and perceptions
on the role of advanced technological advantages in examining Chinese
MNCs. The progression of technology creation of the Chinese economy
in research and patenting activity increases the relevance of innovation in
the growth and development of Chinese MNCs. This makes the theory of
technological accumulation, extended by Cantwell and Tolentino (1990) to
the analysis of third-world MNCs, highly relevant to the study of Chinese
Paz Estrella Tolentino
75
MNCs. Chinese MNCs will increasingly develop the capacity to build on
home country advantages in innovation to generate more firm-specific
advantages in R&D.
Fourth, macroeconomic policies which affect the openness of the Chinese
economy, national technological capability, domestic interest, or exchange
rates can influence the level of Chinese OFDI flows positively or negatively. These changes in the level of OFDI flows in turn can have domestic
macroeconomic repercussions as Chinese MNCs grow in importance. Rising
levels of OFDI flows neutralize any changes in the exchange rates, and lead
to short-run increases in domestic interest rates and national technological
capability, all of which deserve further attention from a policy standpoint.
The VAR models estimated in the current study have far wider implications for the analysis of the relationships of macroeconomic variables and
economic theory.
Appendix: Measurement and data sources
Variables
Measurement
Data sources
FDI
Real FDI outflows from China, US$
million (2005 = 100)
Nominal FDI outflows from China
Calculated
Chinese GDP deflator (2005 = 100)
O
IMF, International Financial
Statistics
IMF, International Financial
Statistics
Sum of real exports and imports of
China, US$ million (2005 = 100)
Nominal sum of exports and imports of
China, US$ million
USA GDP deflator (2005 = 100)
Calculated
TE
Number of patent applications to the
United States Patent Office
OECD, Main Science and
Technology Indicators
I
Real lending rate of China, 2005 = 100
(% per annum)
Nominal lending rate of China
Calculated
Chinese GDP deflator (2005 = 100)
ER
Real effective exchange rate index based
on relative consumer prices (2005 = 100)
IMF, International Financial
Statistics
IMF, International Financial
Statistics
IMF, International Financial
Statistics
IMF, International Financial
Statistics
IMF, International Financial
Statistics
76
Macro-Environmental Determinants of Chinese FDI
Notes
1. To ensure the standard asymptotic distribution of the test statistics, the current
study considered the procedure developed by Toda and Yamamoto (1995) which
uses a modified Wald test when a VAR (k + dmax) is estimated (where k is the lag
length and dmax is the maximal integration order suspected to occur in the system). Adopting this procedure would mean estimating a VAR (4), which on testing
resulted in a large relative inefficiency given the small sample properties of the
data.
2. VAR models at long horizons produce inconsistent impulse response functions and
sub-optimal predictions in the presence of unit roots and co-integration.
3. In two-variable VARs, incorrect or spurious findings of causality are likely when
testing causality versus exogeneity.
4. It may be necessary to adjust the bootstrap confidence intervals to prevent the
computed bands from failing to include the estimated IRF.
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4
Chinese SWFs: At the Crossroad
between the Visible and the
Invisible Hand
Michael Keller and Laura Vanoli
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).
Chinese FDIs are usually made by large state-owned companies and, more
recently, by private firms. Besides these two categories of investors, the government created the China Investment Corporation (CIC) in 2007, which
is its sovereign wealth fund (SWF). The goal was to diversify China’s foreign exchange reserves. Due to the rapid accumulation of reserves, CIC,
like other SWFs, began to expand abroad (UNCTAD, 2008, p. 20) through
OFDIs and portfolio investments (Keller, 2012). Domestically, CIC competes
with another large institutional investor, the State Administration of Foreign
Exchange (SAFE) Investment Company, whose role consists of supervising
and managing the foreign exchange market.
The presumed Chinese government influence on these funds raises concerns about its underlying intentions. The purpose of our research is to
analyze the geographical and sectoral distributions of Chinese SWF investments to assess the investment strategy and motivations. This systematic
analysis supports the hypothesis that the Chinese government is highly
involved in SWF investment decisions. We also highlight the main concerns
about SWFs in terms of transparency and governance (Altbach & Cognato,
2008; Gugler & Chaisse, 2009).
81
82
Macro-Environmental Determinants of Chinese FDI
1. SWFs: Their main features
1.1. Definition
As confirmed by UNCTAD (2008, p. 20), ‘there is no universally agreed-upon
definition of such funds, but their original objective was wealth preservation.’
Their objectives may be different from one fund to the other. However, their
investment strategies are different from those of private equity funds and
multinational enterprises (MNEs) (UNCTAD, 2008, p. 20). Miracky and colleagues (2008, p. 11) consider SWFs a government vehicle that meets three
criteria: ‘It is owned by a sovereign government, managed separately from funds
administered by the sovereign government’s central bank, ministry of finance, or
treasury, and it invests in a portfolio of financial assets of different classes and
risk profiles, including bonds, stocks, property, and alternative instruments.’ SWFs
usually have higher expected returns on investment as well as a higher risk
tolerance than traditional financial instruments managed by the monetary
governmental institutions (UNCTAD, 2008, p. 22).
Sovereign wealth funds may be considered ‘part of a continuum of sovereign
government investment vehicles that runs along a spectrum of financial risk from
Central Banks as the most conservative and risk-averse, to traditional pension
funds, to special government funds, to SWFs, and finally to state-owned enterprises, which are the least liquid and highest-risk investments’ (Miracky et al.,
2008, p. 14) (Figure 4.1).
1.2. Types of SWFs
Sovereign wealth funds can be classified according to criteria such as the
nature of the fund, dominant objectives, and the type of investments.
With respect to the nature of the fund, there are two types of orientation
for SWFs. Some act purely as fund managers that do not own the funds they
manage, ‘but manage them on behalf of clients’ (a government, for example)
(Zhang & He, 2009, p. 8). According to Zhang and He (2009), SWFs of this
type neither hold the fund as capital nor as debt.
State-owned
enterprises
Central bank
Development
bank
Pension fund
State
FDI
SWF
Other public
entities
Portfolio
Figure 4.1 Sovereign wealth funds and government activities
Source: Adaption based on Steffen Kern (2008), SWFs, and foreign investment policies – an update,
Deutsche Bank Research, p. 2.
Michael Keller and Laura Vanoli
83
The second type of SWF can be an investment fund, accumulating revenue
on its own (taxes on oil mining and export duties, for example). In this case,
the fund is the capital of the SWF (Zhang & He, 2009).
With respect to the objectives of the funds, Zhang and He (2009) distinguish two kinds of institutional investors: Financial investors, who want
to maximize investment income, typically have no interest in controlling the targeted company. Strategic investors, on the other hand, want to
influence the management of the targeted company through seats on the
boards of directors, for example (Zhang & He, 2009). The IMF (2007, p. 46)
distinguishes five types of funds based on their dominant objectives:
Stabilization funds are set up by countries rich in natural resources to insulate the budget and economy from volatile commodity prices (usually
oil). The funds build up assets during years of ample fiscal revenues to
prepare for leaner years.
Savings funds are intended to share wealth across generations. For countries rich in natural resources, savings funds transfer non-renewable assets
into a diversified portfolio of international financial assets to provide for
future generations.
Reserve investment corporations are established as separate entities, either
to reduce the negative cost-of-carry of holding reserves or to pursue
investment policies with higher returns.
Development funds allocate resources for funding priority socioeconomic
projects, such as infrastructure.
Pension reserve funds hold identified pension and/or contingent-type
liabilities on the government’s balance sheet.
Finally, SWFs may be divided into two categories based on investment
type: FDI and portfolio investments. Most SWF investments do not enter
within the definition of FDIs. In 2007 FDI by SWFs was US$10 billion,
accounting for around 0.2 percent of their total assets and only 0.6 percent
of total FDI flows. In the same year private equity funds invested more than
US$460 billion in FDI, despite being much smaller in size (UNCTAD, 2008,
pp. 20–21). However, FDIs by SWFs are growing continually. As highlighted
by UNCTAD (2009, p. 27), ‘Since 2005, SWFs have embarked on a conspicuous
quest to participate in OFDI or cross-border M&A. [ . . . ] Cumulative cross-border
M&A investments by SWFs over the past two decades totalled US$65 billion by the
end of 2008, of which US$57 billion was invested just in the past four years.’
Most SWF investment is in portfolios with professional management to
generate a sustainable income stream. Portfolio investments include financial instruments such as equities, bonds, and other asset classes (UNCTAD,
2008). Since 2007, SWFs have invested heavily in financial services in developed economies, in particular in Europe and the United States where banks
were lacking liquidity as a result of the financial crisis. For example, the
84
Macro-Environmental Determinants of Chinese FDI
Government of Singapore Investment Corporation acquired a US$9.8 billion
stake in the Swiss bank UBS (UNCTAD, 2008, pp. 23–24).
1.3. Global trends
Increased integration among the world’s main regions has advanced the rise
of emerging countries in the past decade. As indicated by Subacchi (2007,
p. 2), ‘SWFs are not new, especially in countries rich in natural resources, but they
have recently gained prominence in several emerging market countries, reflecting
those countries’ large balance of payment surpluses.’ The major wave, starting in
2007, has led to the creation of around 20 SWFs, most of them funded by
capital incomes based on high energy prices (in the Middle East) or on large
trade surpluses (in China) ( Miracky et al. (2008, p. 16).
In October 2008, assets managed by Asian SWFs accounted for around
US$1 trillion, representing 30 percent of worldwide sovereign assets. This
makes Asia the second most important region in SWF assets, following the
Middle East, which was estimated to control almost half of SWF assets in
October 2008. Europe follows far behind, with 16 percent of total sovereign
assets, driven by SWFs from Russia and Norway (Kern, 2008). The volume of
assets as such provides a somewhat static picture of the importance of SWF
investments. To capture the degree of activity of SWFs in recent years it is far
more interesting to look at actual investments by SWFs.
Asian SWFs seem to be the most active sovereign investors in the world.
According to Kern (2008, p. 7), they contributed 66 percent of total global
SWF investments (value) between 1995 and 2008, whereas Middle Eastern
SWFs only contributed 34 percent. This is in line with Miracky and colleagues’s estimate (2008) for the period 2000–2008, assuming that Asian
SWFs invested US$150 billion worldwide over this period, while funds based
in the Middle East and North Africa (MENA) invested some US$100 billion.
However, there is a striking difference between Asian SWFs and funds
from the Middle East with respect to the targets of their sovereign investment. Asian SWFs invested heavily in their home region from 2000 to the
first quarter of 2008. US$75 billion, representing half of total investment by
value, took place in Asia. Most of the remaining Asian investment, $74 billion, went to Europe and the US. Middle Eastern SWFs, on the other hand,
only invested $19 billion inside their home region, while almost three quarters, US$72 billion, went to Europe and North America (Miracky et al., 2008,
pp. 37–38).
A study of publicly reported investments by SWFs within the European
Union by the Center for Competitiveness of the University of Fribourg
(Keller, 2012) finds that 23 percent of these transactions for the period January 2007 to December 2009 involved investments by Asian SWFs. Kern
(2008) estimates the share of Asian SWF investments in Europe between
1995 and 2008 at around 50 percent. According to Keller (2012), Chinese
SWFs accounted for almost 50 percent of all SWF transactions in Europe
Michael Keller and Laura Vanoli
85
between 2007 and 2009, in line with data from UNCTAD on the general rise
of Chinese OFDI.
2. Chinese SWFs
2.1. Reasons for the creation of a Chinese SWF
‘Sovereign wealth funds are state-owned investment funds created to invest excess
foreign exchange reserves or natural resource export surplus’ (SWF Institute,
2010). China’s foreign exchange reserves have tremendously increased since
2001, from US$215 billion to US$1500 billion in 2007, and they continue to grow, reaching nearly US$2400 billion in 2009 (Figure 4.2). This
accumulation of foreign reserves poses great challenges for China.
First, the opportunity cost of holding such large amounts is very high.
Most of China’s reserves are invested safely with a relatively low rate
of return on investment, mainly in US Treasury and agency (Altbach &
Cognato, 2008; Zhang & He, 2009). Second, the gradual exchange rate
appreciation of the RMB against the US dollar can result in a significant disadvantage for the purchasing power of China’s foreign reserves. Third, the
accumulation of foreign reserves has resulted in RMB inflation. To counteract it, the People’s Bank of China (PBOC), the Chinese central bank, issued
central bank bills (Zhang & He, 2009). To sustain China’s monetary policy,
the PBOC has to run a loss, because of the increasing path of the interest rate
for central bank bills.
To protect the value of China’s reserves, the government can follow
two approaches. The first consists of limiting the accumulation of foreign
3000
2500
2000
1500
1000
500
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
0
Foreign exchange reserves (in billions USD)
Figure 4.2 The accumulation of Chinese foreign exchange reserves (1981–2009)
Source: State Administration of Foreign Exchange (July 2010).
86
Macro-Environmental Determinants of Chinese FDI
exchange reserves, which requires more flexibility and further appreciation
of the RMB. The second approach is to consider more active ways to manage China’s foreign exchange reserves in order to obtain higher investment
income. This requires the establishment of a special entity, whose function consists of actively managing Chinese foreign exchange reserves, as,
for instance, an SWF. The success of Temasek and GIC, two investment companies owned by the government of Singapore, in managing the foreign
reserves of Singapore encouraged China to establish its own SWF in 2007, the
China Investment Corporation (CIC) (Altbach & Cognato, 2008; Zhang &
He, 2009).
China may also have established an SWF as an intergenerational transfer
of wealth. China is saving today to consume in the future, which seems puzzling. In fact, China is a relatively poor country that would be better off with
a higher consumption rate today to improve economic development, and a
higher savings rate in the future when it will be richer (Gugler & Boie, 2008).
It follows that the underlying reason for the establishment of a Chinese SWF
seems to be more strategic than it appears. Some Chinese economists argue
that economic development can be sustained by these savings since China
will use them to acquire international technologies, brands and resources.
Hence, China will upgrade its technologies and improve its competitiveness.
2.2. Characteristics of the Chinese SWFs
Before the creation of the CIC in 2007, Chinese foreign exchange reserves
were only managed by the SAFE Investment Company, a wholly owned subsidiary of the State of Administration of Foreign Exchange (SAFE). After the
establishment of the CIC, SAFE Investment Company continued to manage part of the Chinese foreign exchange reserves, although its investments
became less significant than CIC’s. Its major functions are supervising and
managing the foreign exchange market of the State and operating foreign
exchange reserves, gold reserves, and other foreign exchange assets (SWF
Institute, 2010). However, although SAFE acts as an SWF, it cannot be considered one under the definition proposed by Miracky and colleagues (2008)
since it is not managed independently of other state financial institutions.
Nevertheless, we do not exclude it because our objective in this study is to
compare CIC and SAFE in terms of investment strategies.
CIC is a wholly state-owned company headquartered in Beijing created
as a way to diversify China’s foreign exchange reserves, hold less in US
currency, and increase risk-adjusted returns. The capital of CIC is funded
through government bonds issued by the Ministry of Finance (MOF). These
government bonds are used to purchase the US$200 billion foreign reserves
from People’s Bank of China, which are subsequently injected into CIC (SWF
Institute, 2010). CIC is debt-based, which introduces additional constraints
on its returns. As Rozanov (2008, p. 1) noted, ‘The cost of local debt and the
expected appreciation of the local currency become the “hurdle rate” which the
Michael Keller and Laura Vanoli
87
fund must beat in order to be economically viable over the long-term.’ This financial constraint affects the asset allocation, the strategic investments, and
the level of transparency. CIC’s orientation to the different types of funds
defined in the previous section is vague since it is neither a fund manager
nor an investment fund (Zhang & He, 2009).
CIC’s internal structure has two distinct and separate entities: (1) the
global investment management operation (CIC) and (2) Central Huijin
Investment Ltd., previously a state-owned investment company, which
CIC purchased after its creation and which ‘invests exclusively in domestic state-owned financial institutions on behalf of the state in order to improve
governance and preserve and enhance the value of state-owned financial assets’
(CIC Annual Report, 2008, pp. 4–5). Central Huijin Investment Company
and its subsidiary, China Jianyin Investment Company, invest in the most
important financial institutions in China, which reflects their strategic, perhaps political, interest in acquiring these shares. Although CIC and Central
Huijin operate separately, strategic and political interference in CIC global
investment decisions by the government is a concern.
Another consideration highlights the potential political influence on CIC
investment decisions. The governance structure of CIC is composed of three
governing bodies: the board of directors, the board of supervisors, and the
executive committee. Based on the objectives and broad policy set by the
only shareholder, the State Council, the board of directors decides how to
implement the investment strategy. Analyzing the composition of the CIC
board of directors, one notes that the top management team includes mainly
people who work or have worked for the Chinese government, which supports the hypothesis of the government’s involvement in CIC investment
decisions (Altbach & Cognato, 2008; Martin, 2008; CIC Annual Report,
2009). In fact, the chairman of the board of CIC, Lou Jiwei, served as Deputy
Secretary General of the State Council. The board of directors also has ministry and vice ministry-level officials from the State Council, the National
Council for the Social Security Fund, the MOF, the National Development
and Reform Commission, the Ministry of Commerce, the People’s Bank of
China, and the SAFE as members (CIC Annual Report, 2009; Zhang & He,
2009).
The executive committee is responsible for translating the board’s decisions into effective operational activities. Finally, the board of supervisors
monitors the ethical behavior of directors and executives and recommends
more efficient investment management processes (CIC Annual Report, 2009;
Zhang & He, 2009).
2.3. Investment strategy
CIC and SAFE Investment Company have essentially the same objective:
to manage the excess of Chinese foreign reserves. However, the investment
approach and strategy can differ between the two entities. According to
88
Macro-Environmental Determinants of Chinese FDI
CIC’s Annual Report (2009, p. 28), its investment approach and strategy
are fourfold: ‘(1) to maximize long-term, sustainable, risk-adjusted returns for its
shareholder, the State Council of People’s Republic of China; (2) not to control firms
or sectors in which it invests or attempt to influence their operations; (3) to abide
by local laws and regulations in jurisdictions where it invests and to take corporate
social responsibility seriously; (4) to make research- and allocation-driven investments for sound investment decisions with a disciplined approach to investing’.
SAFE does not report its investment strategy and approach, which reflects
the ambiguous position of the SWF in terms of investments. To study their
investment strategy in depth, it is necessary to analyze their investment
deals.
Based on our own database of publicly reported investments by Chinese
SWFs worldwide from January 2007 through August 2010, we can identify
and compare their investment strategy in terms of the number of transactions. The data come from different sources such as the Financial Times,
the SWF Institute, and the CIC website. The database contains 34 effective
investments or deals in negotiation for CIC, and 14 for SAFE.1
The data analysis helps our understanding of the geographical and sectoral
distribution of Chinese SWF investments and indicates their investment
orientation.
The geographical distribution (Figure 4.3) indicates that CIC invests predominantly in North America (38%) – 29 percent in the United States and
9 percent in Canada – and in Asia (35%) – 23 percent in China and 12
percent in Hong Kong. Compared to CIC, SAFE invests mainly in Europe
(72%) – 58 percent in the United Kingdom, 7 percent in France and 7 percent in the Netherlands. The capital that CIC and SAFE manage is primarily
invested in developed regions such as North America and Europe, and an
important part is directly invested in China, especially in the financial sector.
9%
CIC
SAFE
6%
7%
22%
38%
12%
71%
35%
North America
Oceania
Asia
Europe
Europe
Oceania
North America
Eurais
Figure 4.3 Targeted regions of Chinese sovereign wealth funds (2007–2010)
Source: Elaboration based on the database of the Center of Competitiveness, University of Fribourg.
Michael Keller and Laura Vanoli
89
Safe
CIC
6%
9%
14%
44%
50%
35%
Financials
Commodities & energy
Infrastructure, industrial, and engineering
Real estate Insurance
Technology
36%
Commodities & energy
Services & retail
Financials
Figure 4.4 Targeted sectors of Chinese sovereign wealth funds (2007–2010)
Source: Elaboration based on the database of the Center of Competitiveness, University of Fribourg.
This inflow of capital from foreign government-controlled institutions raises
some concerns in developed host countries.
The sectoral distribution (Figure 4.4) suggests that the preferred targets
for CIC and SAFE are the financial sector and the commodities and energy
sectors. According to Lyons (2008), these are key sectors that governments
from developing countries target to secure access to natural resources and
to transfer financial skills back home to help develop and improve domestic financial markets. The objectives behind these investments include a
strategic dimension.
Figures 4.5 and 4.6 combine the geographical and sectoral dimensions to
compare the targeted sectors in different regions. For CIC, North American
investments are primarily in the financial sector and in the commodities
and energy sectors, whereas Chinese investments are mainly focused on
the financial sector. SAFE invests in Europe mainly in the commodities and
energy sector.
To deepen the analysis, some characteristics of the targeted firms are
reported in Tables 4.1–4.3, which reflect the market position of the targeted firms as well as the percent of CIC ownership determining the level of
control in a specific firm. According to the IMF and OECD, 10 percent ownership is considered the threshold percentage for significant control (IMF,
1993, pp. 86–87; OECD, 1996, p. 8). However, this threshold is defined
arbitrarily and it does not mean that 10 percent ownership always carries
significant influence or, conversely, that less than 10 percent ownership
implies no control in the invested firm (IMF, 1993, pp. 86–87; OECD,
1996, p. 8).
Table 4.1 reports CIC’s foreign investments. Nearly all the targeted firms
are well-positioned and relatively large and important in the sector where
90
Macro-Environmental Determinants of Chinese FDI
Europe
Eurasia
Oceania
Asia
North America
0
2
4
Technology
6
Real estate
8
Insurance
Infrastrucure, industrial and engineering
Financials
Commodities & energy
Figure 4.5 Number of deals by targeted regions and sectors, CIC (2007–2010)
Source: Elaboration based on the database of the Center of Competitiveness, University of Fribourg.
Europe
Oceania
North America
0
1
2
Services & retail
3
4
Financials
5
6
7
8
Commodities & energy
Figure 4.6 Number of deals by targeted regions and sectors, SAFE (2007–2010)
Source: Elaboration based on the database of the Center of Competitiveness, University of Fribourg.
they operate. Further, CIC ownership is higher or equal to 10 percent for
62 percent of the targeted firms (including 9.9% in Blackstone and 9.9% in
Morgan Stanley), less than 10 percent for 8 percent of the targeted firms,
and undisclosed for the remaining 30 percent. It follows that CIC has an
important ownership in the majority of the invested firms. Does it mean
that CIC has an impact on the management of the invested firms? Difficult
to say.
Table 4.2 reports CIC’s domestic investments. Since absorbing Central
Huijin, CIC owns shares in a majority of China’s largest banks and financial
institutions, such as the Bank of China, the China Construction Bank, the
91
Table 4.1 CIC’s foreign investments (2007–2010)
Target
company
Headquarter
Sector
Market position
% CIC
ownership
AES Wind
Generation
USA
Commodities
Global firm active
in renewable
energy
15
Apax
UK
Financials
Equity firm –
majority and
minority stakes in
large companies
that have strong
and established
market positions
and the potential
to expand
2.3
Areva T&D
France
Commodities
World leader
15
Black Rock
USA
Financials
Leading
management firm
Complete
acquisition
of Barclays
Global
Investors
(UK)
Blackstone
Group
USA
Financials
Global investment
and advisory
firm – invest
locally
9.9
Chesapeake
Energy
USA
Commodities
One of the largest
natural gas
suppliers in the
USA
Undisclosed
Citic
Capital
Holdings
Ltd.
Hong Kong
Financials
Alternative
investment
management and
advisory company
40
Diageo
UK
Beverage
One of the world’s
largest producers
of alcoholic drinks
and among the
top 15 largest
publicly quoted
companies in the
UK
1.1
Fortescue
Metals
Group
Australia
Commodities
World leading
producer of iron
ore
Undisclosed+
agreement
with
Baosteel
92
Table 4.1 (Continued)
Target
company
Headquarter
Sector
Market position
% CIC
ownership
GCL-Poly
Energy
Holdings
Ltd.
Hong Kong
Commodities
One of the
leading
polysilicon
suppliers for
solar industry in
the world, as
well as a top
green energy
supplier in
China
20
Goodman
Group
Australia
Real Estate
Vertically
integrated
property group
Undisclosed
Intel Capital
USA
Technology
Subsidiary of
Intel – invests in
promising
technology
companies
worldwide
(especially in
energy and
communication
technologies)
Collaboration
agreement
International
Lease
Finance
Corporation
USA
Aircrafts
Active on the
five continents
100
JC Flowers
PE Fund
USA
Financials
Private equity
investment firm
focusing on
buyouts in
financial service
industries
80
JSC
KazMunaiGas
Exploration
Production
Kazakhstan
Commodities
Second largest
Kazakh oil
company
11
Lung Ming
Hong Kong
Commodities
Operations in
iron ore business
in Inner
Mongolia
Undisclosed
Morgan
Stanley
USA
Financials
Ranked 111 in
2010 Forbes
2000
9.9
93
Nobel Oil
Group
UK
Commodities Vertically integrated
oil and gas
company with a
Branch office
located in
Azerbaijan
45
Oaktree
Capital
Management
USA
Financials
Undisclosed
Penn West
Energy
Canada
Canada
Commodities Largest producer of
light and medium
oil in western
Canada
45
PT Bumi
Resources
Tbk
Indonesia
Commodities Operations in
Indonesia, UK,
Japan and Australia
Undisclosed
Songbird
Estates
UK
Real estates
Manage Canary
Wharf – a large
office and shopping
development in
East London and
surrounding areas
19
South Gobi
Energy
Resources
Canada
Commodities Coal exploitation in
Mongolia
13
Teck
Resources
Limited
Canada
Commodities Canada’s largest
company engaged
in mining, mineral
processing, and
metallurgical
activities
17.2
The Noble
Group
Hong Kong
Commodities Leading supply
chain manager of
agricultural,
industrial, and
energy products
14.9
Visa Inc.
USA
Financials
Undisclosed
Investment
management
company –
investing in
emerging markets
and Japan
World’s largest
firm active in
transaction
processing services
Source: Elaboration based on the database of the Center of Competitiveness, University of Fribourg,
and firms’ respective websites, as well as Datamonitor – Company profiles from Ebsco: Business
Source Premier
94
Macro-Environmental Determinants of Chinese FDI
Table 4.2 CIC’s domestic investments (2007–2010)
Target
company
Headquarter
Sector
Market position
% CIC
ownership
Agricultural
Bank of
China
China
Financials
One of the four
big Chinese
state-owned
commercial banks
50
Bank of
China
China
Financials
One of the
largest Chinese
state-owned
commercial banks
67.5
China
Construction
Bank
China
Financials
One of the four
big Chinese
state-owned
commercial banks
57
China
Development
Bank
China
Financials
Commercial bank
controlled by the
State Council
48.7
China
Everbright
Bank
China
Financials
Aims to become
an excellent listed
bank in China
71
China
Railway
Hong Kong
China
Infrastructures
In 2009: ranked
13 in China’s Top
500 enterprises
4
China
Reinsurance
China
Insurance
China’s largest
reinsurer
85.5
Industrial
and
Commercial
Bank of
China
China
Financials
One of the four
big Chinese
state-owned
commercial banks
35.4
Source: Elaboration based on the database of the Center of Competitiveness, University of Fribourg,
and firms’ respective websites, as well as Datamonitor – Company profiles from Ebsco: Business
Source Premier.
Industrial and Commercial Bank of China, and the China Everbright Bank.
Further, CIC restructured two banks – the China Development Bank and the
Agricultural Bank of China – through cash injections. Overall, banks controlled by CIC represent 58 percent of all bank assets and 59 percent of all
loans (Altbach & Cognato, 2008). CIC also invests in China’s largest insurer
with an ownership of 85.5 percent. CIC’s domestic investments receive more
attention, since CIC can indirectly influence the banking sector as well as the
whole economic system, especially in terms of FDI orientation.
95
Table 4.3 SAFE’s foreign investments (2007–2010)
Target
company
Headquarter
Sector
Market
position
% SAFE
ownership
Australia and
New Zealand
Bank
Australia
Financials
One of the
largest banking
groups in
Australia and
number one
bank in New
Zealand
Less than 1
Aviva
UK
Insurance
World’s fifth
largest
insurance
group – leading
position in the
UK (FTSE 100)
0.97
BG Group
UK
Commodities
Ranked in the
FTSE 100
0.7
BP Plc
UK
Commodities
One of the
largest
vertically
integrated oil
and gas
companies in
the world
(in FTSE 100)
1
Cadbury
UK
Services and
retail
Market leader
in global
confectionery
sector
Less than 1
Commonwealth
Bank of
Australia
Australia
Financials
One of the
Australian
leading firms
in financial
and insurance
services
Less than 1
Drax Group
Plc
UK
Commodities
Operates
primarily in
the UK
Less than 1
National
Australia Bank
Australia
Financials
0.33
Rio Tinto
UK
Commodities
Operates
primarily in
Australia
Ranked in the
FTSE 100 and
68 in the 2010
Forbes Global
2000
Less than 1
96
Macro-Environmental Determinants of Chinese FDI
Table 4.3 (Continued)
Target
company
Headquarter
Sector
Market position
% SAFE
ownership
Royal Dutch
Shell
UK
Commodities
One of the
largest oil
companies in
the world
0.9
Severn Trent
Plc
UK
Commodities
One of the
world’s leading
suppliers of
water and the
second largest
water company
in the FTSE 100
Less than 1
Tate & Lyle
UK
Services and
retail
Produces
renewable food
and industrial
ingredients
Less than 1
Total SA
France
Commodities
One of the
leading oil
companies in
the world
1.3
TPG Fund
USA
Financials
Leading
investment firm
Undisclosed
Source: Elaboration based on the database of the Center of Competitiveness, University of Fribourg,
and firms’ respective websites, as well as Datamonitor – Company profiles from Ebsco: Business
Source Premier.
According to the SWF Institute (2010), SAFE Investment Company makes
significant investments in the UK equity market. In fact, it reports a
total amount of US$6 billion invested in the FSTE 100, an index including the 100 leading companies traded on the London Stock Exchange.
Table 4.3 indicates that 58 percent of the invested firms are in the
United Kingdom, of which 62 percent are listed on the FTSE 100 (London
Stock Exchange), proving the importance of the firms on the UK market. The sector-based analysis suggests that 50 percent of the targeted
firms are active in commodities and energy, of which 57 percent are
in oil and gas. This reflects China’s need to access natural resources
since China is comparatively poor in the latter. In fact, China’s tremendous economic development requires a steady supply of natural resources
(Zhan, 1995, p. 88). Hence, SAFE focuses on resource-seeking investments.
The ownership percentage in the targeted firms is around 1 percent for
each deal.
Michael Keller and Laura Vanoli
97
3. Private and government strategy behind Chinese SWFs
Previous studies and our analysis of SWF investment activities suggest that
Chinese SWFs mix private (commercial) and government objectives in their
investment approach. To test whether the government influences Chinese
SWF investment decisions, we analyze the government’s policy toward
Chinese FDI (Sub-section 3.1) and compare this strategy with the investments by CIC and SAFE (Sub-section 3.2). The last sub-section (3.3) addresses
the main concerns raised by possible government involvement in Chinese
SWF investments, especially for developed countries.
3.1. Government policy behind Chinese FDI
The internationalization of Chinese firms began slowly in 1979 after the
implementation of the ‘open-door’ policy by the Chinese Government,
which considered outward investment a way to integrate China into the
world economy and invest overseas. However, in the 1980s, the institutional environment was very restrictive, leading to a number of approval
requirements that only a few firms were able to fulfil. Over time, the government relaxed the approval procedure and the number of Chinese outward
investments increased substantially. Even if the requirements for investing
abroad seem to be less restrictive, the Chinese government still influences
the sectoral and geographical orientation of outward investments through
the approval procedure. In fact, the approval procedure governing OFDI
involves different levels of the government, depending upon the type, the
scale, and the location of investments (Zhan, 1995). To analyze the evolution
of the institutional framework surrounding Chinese outward investments,
some researchers (Wong & Chan, 2003; Hong & Sun, 2006; Deng, 2007;
Poncet, 2007; Buckley et al., 2008) suggest dividing the period from 1979
until now into four sub-periods, described below.
During the first stage (1979–1985), the main objective of the government
was to ensure access to natural resources for the domestic economy and
improve national economic development. To attain these objectives, the
government adopted a cautious approach toward outward investments for
several reasons. First, it considered OFDI a substitute for domestic investments affecting economic development. Second, overseas investments were
difficult to monitor and could result in a loss of control of state property.
Third, the government feared the inexperience of Chinese firms at competing internationally (Zhan, 1995; Buckley et al., 2008). As a result, only
state-owned and local companies regulated by the State Economic and Trade
Commission were allowed to invest abroad, mainly in natural resources
(Wong & Chan, 2003; Poncet, 2007).
During the second phase (1986–1991), the approval process was gradually liberalized and more firms (including non-state firms) were allowed
to establish foreign affiliates. However, the government limited Chinese
98
Macro-Environmental Determinants of Chinese FDI
OFDI to firms meeting the following conditions: having enough capital,
basic technical and operational know-how, and an adequate foreign partner
(Buckley et al., 2008). In addition to these administrative requirements, firms
seeking to invest abroad had to meet specific objectives defined by the government, such as ‘ensuring a stable supply of natural resources that are scarce in
China, acquiring advanced technology and equipment and channelling these back
to China, or contributing to stronger economic relations with neighboring countries’
(Zhan, 1995, p. 69).
The third stage (1992–1998) was characterized by an expansion of outward investments, by local and provincial enterprises, and by the Asian
crisis in 1997, whose consequences were disastrous for the real estate sector. In addressing this situation, the Ministry of Foreign Trade and Economic
Cooperation (MOFTEC) adopted a stricter screening and monitoring process
(Wong & Chan, 2003; Poncet, 2007).
The fourth and last stage (1999–2010) is the most relevant in terms
of OFDI, since the government adopted and implemented a policy called
‘Go Global’. The strategy aims to encourage and promote the internationalization of capable Chinese firms through different preferential measures
(such as easing access to foreign exchange or preferential loans) in order to
enhance their international competitiveness (Poncet, 2007; Buckley et al.,
2008). In 2004, the Ministry of Commerce (MOFCOM) and the Ministry
of Foreign Affairs (MoFA) created an overseas investment guidance catalog that orients OFDI toward specific countries and industries. Schüler-Zhou
and colleagues (2010) highlight the main requirements defined by the government with the introduction of the catalog, which should ensure that
Chinese OFDI benefits the China’s economy by ‘securing access to natural
resources, enhancing companies’ technological capacity, and acquiring international brands’(Schüler-Zhou et al., 2010, p. 4). Host countries have to fulfil
several requirements: ‘(1) a close relationship with China, (2) be complementary
to the Chinese economy, (3) be important trading partners of China, (4) sign investment and taxation agreements, and (5) be part of an important economic region in
the global economy’ (Schüler-Zhou et al. 2010, p. 4).
The analysis of the institutional evolution highlights the strong government involvement in Chinese OFDI by state-owned firms, as well as by
privately owned companies, through the approval procedure and the introduction of the ‘Countries and Industries Overseas Investment Guidance Catalog’.
The next section investigates whether Chinese SWF investments are driven
by the ‘Go Global’ policy according to the government’s strategic objectives,
or by the pure financial maximization of the return on investment.
3.2. Private and government’s strategy
Combining the results found in analyzing the investment strategy of
CIC and SAFE with the objectives defined in the ‘Go Global’ policy by
Michael Keller and Laura Vanoli
99
the Chinese Ministry of Commerce, we can assess whether the Chinese
government plays an important role in shaping their investment strategy.
Since SAFE is not considered an SWF, it is obvious that the Chinese
government influences its investment decision process. The analysis of its
investment activities suggests that it primarily invests in commodities and
energy, in line with the ‘Go Global’ strategy. The main objective is to secure
access to natural resources (Zhan, 1995).
More interesting is the case of CIC which is run independently and considers itself a financial investor, maximizing investment return and having
little interest in influencing the management of the invested firm (CIC
Annual Report, 2008). On an international scale, CIC invests primarily in
the financial sector and in the commodities and energy sectors, which
corresponds to the sectors in which the government encourages FDI. Domestically, CIC, by acquiring Central Huijin, became the major shareholder of
the biggest Chinese banks. Hence, the strategic and political investments
of these banks are indistinguishable from CIC’s. Chinese banks have preferred sectors (defined by the government) to which they give preferential
loans and support the international expansion of Chinese firms operating in sectors such as commodities to achieve a strategic and political
objective.
To conclude, the fund is ambiguous. On one side, CIC follows economic
and financial objectives to maximize the return on investment; on the other
side, the Chinese government exerts an indirect but significant influence on
CIC investment decisions.
3.3. Concerns
The surge of the Chinese SWF raises concerns due to the large amount
of capital invested in US and Western companies in recent years. Two
main concerns have been highlighted by US policymakers and international organizations. The first one pertains to governance and transparency issues about SWF investments. The second, defined as ‘state
capitalism’ by some analysts, refers to ‘the potential use of governmentcontrolled investment vehicles to attain global strategic and political goals’
(Weiss, 2008, p. 2), especially in the financial, energy, information technology, telecommunications, and transportation sectors of the economy
(Hemphill, 2009). As illustrated in Figure 4.7, CIC has minimal transparency
and its investment approach seems to be rather strategic. This reinforces
the protectionist sentiment in the West toward the Chinese SWF (Lyons,
2008).
The governance issue is related to the fact that CIC is an independent
entity of the State, but its board of directors consists of people working or
having worked for the Chinese Government (CIC Annual Report, 2009).
The level of independence in CIC’s decision process is not clear, leading
100
Macro-Environmental Determinants of Chinese FDI
Top sovereign wealth funds
By investment approach and transparency
Investment approach
Conventional
Strategic
Commodity fund
Non-commodity fund
UAE (Dubai) - DIC
Qatar
Malaysia
UAE (Dubai) - Istithmar
China
Singapore-Temesek
Singapore-GIC
S Korea
UAE (Abu Dhabi) - ADIA
Brunei
Ornan
Kuwait
Taiwan
Venezuela
Kazakhstan
Chile
Russia
Norway
US (Alaska)
Canada (Alberta)
Low
High
Level of transparency
Figure 4.7 Sovereign wealth funds: strategy and transparency
Source: Standard Chartered (2008).
to a mix of economic and political objectives. As far as SWF transparency
is concerned, different approaches have been adopted to measure it. ‘The
Linaburg-Maduell Transparency Index developed at the Sovereign Wealth Fund
Institute by Carl Linaburg and Michael Maduell is based on ten essential principles,
each adding one point of transparency to the index rating’ (SWF Institute, 2010).
The scale goes from 1 (lowest transparency) to 10 (highest transparency).2
According to this scale, CIC has a Transparency Index of 7, while SAFE
has a score of 2 in the first quarter of 2010 (SWF Institute, 2010). Both
fail to meet the recommended minimum transparency rating of 8. Truman
(2007, 2008), in another measurement, constructed a scoreboard for 44
SWFs – 34 non-pension funds and 10 representative pension funds – to evaluate the structure, governance, accountability, transparency, and behavior
of SWFs. In the non-pension fund category, CIC ranks 21st with a score of
29. The average score of the non-pension fund category is around 46, which
clearly indicates that CIC scores below the average level. CIC also performs
poorly in accountability, transparency, and behavior. The accountability and
transparency category focuses mainly on the investment strategy implementation, investment activities, the publication of annual reports, and the
audit process. The behavior category is more concentrated on aspects of risk
management. CIC fails to meet requirements in these categories (Truman,
2008). To sum up, these studies highlight CIC’s weakness in governance
Michael Keller and Laura Vanoli
101
and transparency and reinforce the geopolitical dimension of its investment
activities.
The second big concern related to governance and transparency issues
reflects the possible non-commercial motivations behind SWF investment
decisions. According to Weiss (2008, p. 15), the two primary SWF strategic objectives are (1) to secure access to natural resources and (2) to develop
domestic financial markets. CIC’s recent deals suggest that the fund tends to
act strategically, even if it claims that it has no intention to invest in strategic
sectors. Therefore, CIC is criticized, over-regulated, and sometimes rejected
by developed countries who believe it threatens their national security.
These concerns require the adoption of a common approach and standards
toward SWFs at an international level, such as the Santiago Principles
defined by IMF (Hemphill, 2009).
4. Conclusion
SWF trends impressively reflect the key changes of the global economic
map. The analysis suggests an emergence of developing countries as dominant investors, notably including China from the list of the candidates to
become the main global economic pole. The particular role of Chinese SWF
investments is reflected in the special concerns they raise with respect to
their potential geopolitical objectives.
This chapter explores the role of the government in Chinese SWF investment decisions and discusses the main concerns of developed countries
about Chinese government involvement.
To determine the investment strategy of the Chinese SWFs, we have used
our own database of publicly reported Chinese SWF investments worldwide for the period January 2007–August 2010. Comparing the targeted
sectors with the government objectives, we can conclude that government influences significantly SWFs’ decisions, reinforcing the assumed
strategic behavior of the SWFs. In fact, the access to natural resources,
scarce in China, represents the main motivation for outward investments supported by the government (Zhan, 1995). But at the same time,
Chinese SWFs make pure financial investments. Moreover the Chinese
government has revealed a focus shift from the export-led sectors to
increasing domestic consumer demand in its 12th Five-Year Plan (March
2011). This shift might indicate a change of priorities in the use of
foreign exchange reserves in the future, with less scope for strategic
considerations.
Due to the lack of transparency, it is difficult to classify the funds either
as financial investors or strategic investors. This raises some concerns, especially for recipient countries, and leads to the establishment of an SWF legal
and regulatory framework.
102
Macro-Environmental Determinants of Chinese FDI
Notes
1. A survey of publicly available sources can never be exhaustive. Thus, the results and
their interpretation should be treated with caution, and can only be indicative.
2. According to the SWF Institute, the minimum rating for adequate transparency is 8.
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Part II
Micro-Environmental
Determinants of Chinese FDI
5
Motives and Patterns
of Reverse FDI by Chinese
Manufacturing Firms
Xiaobo Wu, Wanling Ding, and Yongjiang Shi
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.
Recently, Chinese manufacturing firms have become more active in
buyout activities in developed countries. Although Sichuan Tengzhong
Heavy Industrial Machinery Co Ltd (Tengzhong) failed to acquire Hummer
from General Motors (GM) in 2010, Geely Holding Group (Geely) successfully acquired Volvo from Ford, though many observers doubt the success of
this acquisition in the future.
Meanwhile, many Chinese manufacturing firms are flocking to developed countries to build plants. In November 2009, Suntec Power Holding,
China’s leader in the design and manufacture of solar products, decided to
build a solar panel assembly plant in Arizona. In April 2010, BYD Auto set
up its North American headquarters in Los Angeles, further reflecting the
accelerated pace of Chinese investment in developed countries.
Why are Chinese manufacturing firm investments in developed countries increasing rapidly? How are Chinese manufacturing firms invested in
developed countries? We answer the two questions by first proposing an
107
108
Micro-Environmental Determinants of Chinese FDI
analytical framework based on a literature review. Second, we choose three
Chinese manufacturing firms for single-case analysis. Third, we summarize
the findings based on cross-case analysis.
1. Theoretical foundation
1.1. Traditional theories based on FDI from developed countries
FDI theories emerged when firms from developed countries started to invest
overseas in the 1960s. Researchers such as Hymer (1960), Vernon (1966),
Dunning (1977), Johanson (Johanson & Wiedersheim-Paul, 1975; Johanson
& Vahlne, 1977), and Buckley and Casson (1976) contributed to the development of FDI theories. The main research topics include the nature of
multinational enterprises (MNEs), the relationship between exports and FDI,
the motives and determinants of FDI, foreign market entry modes, and the
impacts of FDI on host country productivity.
Until now the most widely accepted theoretical approach of FDI was
developed by Dunning (1977; Dunning & Narula, 1996): the ownershiplocation-internalization (OLI) theory, investment development path (IDP),
and categories of FDI motives. OLI theory argues that the international production activities of multinational corporations (MNCs) are motivated by
ownership, location, and internalization advantages. Investment development path (IDP) theory offers an explanation of which countries engage
in FDI and how the level and nature of these activities might be related
to the economic development of its home country (Dunning & Narula,
1996). Dunning (1998) classifies four kinds of FDI motives: resource-seeking,
market-seeking, efficiency-seeking, and strategic asset-seeking.
From a process perspective, Johanson and Wiedersheim-Paul (1975) define
four steps in the internationalization process based on a case analysis of four
large Swedish multinationals. They maintain that internationalization is an
incremental process in which firms can proceed with gradual acquisition and
use of information from foreign operations (Johanson & Vahlne, 1977). In
addition, they argue that internationalization is a learning process through
the development of experiential knowledge about foreign markets which
causes the reduction of ‘psychic distance’ (Johanson & Vahlne, 1977).
1.2. Theoretical extension based on FDI from developing countries
Some scholars criticize the limitations of traditional theories and extend
FDI theories by focusing on developing countries. Wells (1983), Lall (Lall &
Chen, 1983), and Cantwell and Tolentino (1990) make valuable contributions to the research on multinationals from developing countries whose
OFDI is classified into different waves. In the first wave, MNEs from developing countries were pushed to internationalize by the difficulties encountered
at home, such as market restrictions and export difficulties. In the second
wave, MNEs from developing countries were less driven by cost factors but
Xiaobo Wu et al. 109
by searching for markets and technological innovations to compete in the
global economy (Yeung, 1999).
In Dunning’s (1998) explanation, the first wave of investors from developing countries mainly invested in neighbor countries or other developing
countries for resource-seeking and market-seeking. The ownership advantages of these investors are more specific to country of origin, as, for example,
‘ethnic’ advantages, technology, and management adapted to other developing countries. There has been a shift in both the character and motives
of FDI from certain developing countries since the 1980s. MNEs started
to invest in developing countries for resource- and market-seeking and
in developed countries for asset- and market-seeking. Ownership advantages were not only country-of-origin-specific but also firm-specific, such as
limited marketing skills, product differentiation, and vertical control over
factor/product markets (Dunning 1998).
1.3. Theoretical perspectives on China’s OFDI
The phenomenon of China’s increasing OFDI has drawn attention from
researchers to investigate Chinese firms’ overseas expansion (Alon &
McIntyre, 2008; Alon et al., 2009). One of the key issues discussed in studies about China’s OFDI is what motivates Chinese firms. Buckley, Clegg,
and Cross (2007) test the extent to which mainstream theories based on
industrialized country FDI applies to emerging countries. They argue that
capital market imperfections, the special ownership advantages of Chinese
MNEs, and institutional factors may be the special theoretical dimension
nested within the mainstream theory. As Child and Rodrigues (2005) point
out: ‘While mainstream theory tends to assume that firms internationalize to exploit competitive advantages, Chinese firms are generally making
such investments in order to address competitive disadvantages.’ That is
because most Chinese firms have only limited ownership advantages to
exploit and many internationalization activities of Chinese firms reflect
attempts to acquire strategic assets (Ping, 2007; Rui & Yip, 2008; Xiaobo
& Wanling, 2009) such as technologies, brands, and distribution networks.
Mathews (2006) develops the LLL model (linkage, leverage, and learning) to
emphasize that ‘latecomer firms’ will use their global linkages to leverage the
low-cost advantage and learn for new competitive advantages.
While some attention has been devoted to the motives of Chinese firms’
OFDI, other researchers investigate how Chinese firms choose OFDI entry
modes, especially the choice between joint ventures and wholly owned subsidiaries (Cui & Jiang, 2009). These studies emphasize the extent of control
in different entry modes but ignore other dimensions. Meyer, Wright, and
Pruthi (Meyer et al., 2009) introduce a new categorization of entry modes
based on their potential to augment the resources of an entrant. They discuss entry modes from a resource-based perspective and argue that ‘foreign
entry is a means to augment a firm’s resource base by (internal) exploration
110
Micro-Environmental Determinants of Chinese FDI
of existing knowledge through organizational learning, and (external) access
to complementary knowledge’ (Meyer et al., 2009). Therefore, the mode of
acquisition has a higher degree of resource augmentation than greenfield
investment. The dimension of resource augmentation just fits above arguments that Chinese firms invest overseas for asset exploration and to address
competitive disadvantages.
2. Method
In this study, we adopt an exploratory case study method and conduct
case analyses of three Chinese firms: Sany Group, Wanxiang Group, and
Geely Holding Group. Based on the above theoretical foundation, we propose the conceptual dimensions for a single-case analysis. We analyze
investment motives according to Dunnings’ classification: resource-seeking,
market-seeking, efficiency-seeking, and strategic asset-seeking. We adopt
the two dimensions that Meyer (2009) suggests to analyze investment
patterns: degree of resource augmentation and degree of control. Then
the similarities and differences between three cases are discussed in
Section 4.
We considered several factors in selecting the cases. First, we limited our
study to manufacturing firms to minimize extraneous variations (Eisenhardt,
1989) that might arise from differences between the service and manufacturing sectors. Second, the three firms are representative of Chinese firms that
conducted OFDI after 2000. A third factor considered is the feasibility of
interviews with managers from the firms.
We collected data for this study from both interviews and archives. We
conducted face-to-face and telephone interviews with managers from the
firms. Most of our informants had positions in top management or departments of overseas expansion. In addition to interviews, numerous archival
data were collected for each case study, including annual reports, published
case descriptions, and newspaper and magazine reports.
3. Single-case analysis
3.1. Case A: Sany Group’s greenfield investment in Germany
Company overview
Sany Group (Sany), the largest concrete machinery manufacturer in the
world, and also one of the Global Top 50 Construction Machinery Manufacturers, was established in 1989 in Changsha, China. Sany mainly engages
in the research and development (R&D), manufacture and sale of construction machinery. At present, Sany Group has over 35,000 employees in more
than 120 countries. In 2009, sales revenue was RMB 30.6 billion, an increase
of 46.4 percent over 2008.
Xiaobo Wu et al. 111
Sany Heavy Industry Co., Ltd. (Sany Heavy), founded by Sany Group
in 1994, includes over 120 product types in 25 series, such as concrete
pumps, truck-mounted concrete pumps, concrete batching plants, asphalt
batching plants, rollers, asphalt pavers, motor graders, truck cranes, and
crawler cranes. Sany Heavy went public and was listed on the Shanghai Stock
Exchange on July 3, 2003. In 2009 the sales revenue of Sany Heavy was
RMB 16.5 billion, an increase of 20.01 over 2008. At present, Sany Heavy’s
market shares of truck-mounted concrete pumps, concrete pumps, and full
hydraulic rollers is number one in the domestic market. The output of pump
trucks is number one in the world. Sany Heavy is the largest manufacturer
of pump trucks with long booms and large displacement.
Overseas investments
Sany Group owns 30 foreign subsidiaries with more than 1300 employees working in overseas marketing and service departments. Among them,
nearly 300 are foreign employees. In the past, export was the main path of
Sany’s internationalization. Sany’s total exports now exceed US$1 billion.
In recent years, establishing overseas plants has been another internationalization path. Sany Group has established R&D and manufacturing bases
in the United States, India, Germany, and Brazil. On January 28, 2010, four
concrete mixers made in Sany’s India plant were delivered from the factory
in Pune, India, and exported to Sri Lanka. This was the first concrete mixer
made by the Sany India plant and exported. We focus on Sany’s investments
in Germany and analyze the motives and characteristics in the following
section (Table 5.1).
Motives for investment in Germany
Market-seeking. Sany’s concrete piling crawler crane and road header
machinery are the best-known products in China. Sany’s market share for
truck-mounted concrete pumps is as high as 57 percent, the highest in
the domestic market. But the domestic construction machinery market
Table 5.1 Sany Group’s OFDI projects
Year
Host country
Investment projects
2006
2007
India
USA
2009
Germany
2010
Brazil
Invested $60 million to set up a manufacturing base
Invested $60 million to set up an R&D and
manufacturing base
Invested ¤100 million to set up an R&D and
manufacturing base
Invested $200 million to set up a manufacturing base
Source: Annual Report of Sany Heavy Industry Co., Ltd. (2006–2009) and notes from interviews.
112
Micro-Environmental Determinants of Chinese FDI
just accounts for about 15 percent of the global market. Huge overseas
markets are attractive to Sany since it has become a leading company in
China. In 2007, Sany’s revenues reached 13.5 billion RMB while its profit
reached 4 billion RMB. Overseas sales increased from $60 million in 2006 to
$220 million in 2007. Though domestic markets still play a dominant role
for Sany, overseas markets represent an important expansion opportunity.
The R&D and manufacture base Sany invested in Germany was intended to
expand its market share in Europe.
Strategic asset-seeking. Sany ranked number three to produce concrete
pumping equipment in the industry, after two German enterprises,
Putzmeister (number one) and Schwing (number two). Germany is one
of the leading countries in machinery manufacturing, with products wellknown for high precision, excellent quality, and good performance. There is
a clear gap in technological capability between Sany and Germany’s leading
companies. Sany wanted to gain more technological talent and technology know-how through operations in Germany. Therefore, Sany Group’s
decision to invest in Germany demonstrated strategic asset-seeking.
Efficiency-seeking. In the past Sany needed to purchase automotive chassis, oil pumps, engines, and other components from Europe, nearly half
of them from Germany. The final products had to be shipped to Europe
after being assembled in China, with huge transportation costs for Sany.
The R&D and manufacture base established by Sany in Germany would
cover the entire European market and Sany would have local R&D, purchasing, production, sales, and service. Transportation costs, especially, would be
reduced.
Degree of resource augmentation and control
Technological talents and technology know-how are the strategic assets
that Sany wanted to gain through operations in Germany. These assets
are all knowledge-based and have the nature of externality. Sany could
access these assets from local knowledge spillovers. For example, Sany could
recruit local professionals, work with local experts, and develop networks
of contacts through personal ties of expatriate managers. Compared with
exports and M&As, Sany’s greenfield investment provided a medium degree
of learning about the local environment and a medium degree of resource
augmentation.
On the other hand, a 100 percent greenfield investment was a safer
way to invest overseas for Sany. First, Sany could control the scale and
schedule of investment projects to reduce investment risk. Second, Sany
could establish a new plant to increase local employment and pay government tax revenue to reduce cultural and social conflict. Unpredictable risk,
and cultural and social conflict caused by cross-border M&As, constituted
Xiaobo Wu et al. 113
higher investment costs for Sany, which chose the greenfield investment
and a high degree of control.
3.2. Case B: Wanxiang Group’s cross-border M&As in the USA
Company overview
Wanxiang Group (Wanxiang) was founded as a farm tool repair plant
in Xiaoshan, China, in 1969. It provides universal joints, bearings and
constant-velocity joints to customers in more than 40 countries. In addition
to the auto parts industry, Wanxiang Group also engages in large-scale agriculture, aquaculture, real estate development, and infrastructure development. With 40,000 employees and $4.2 billion in annual revenue, Wanxiang
Group is the largest auto parts maker in China and one of the Top 500
Chinese enterprises.
Wanxiang America Corporation (Wanxiang America), located in Chicago,
was formally established by Wanxiang Group in 1994 as the first wholly
owned overseas subsidiary of Wanxiang Group. It helped the company build
a global sales network covering both European and American markets and
has 18 overseas sales subsidiaries in more than 50 countries. It is the largest
Chinese-based company in the American Midwest.
Overseas investment
Wanxiang was far ahead of other Chinese companies in its efforts toward
internationalization, which had three stages: exports, building overseas sales
subsidiaries, and cross-border M&As. In the first stage, Wanxiang grew
through exporting universal joints. In the second stage, Wanxiang established subsidiaries in America, Europe, and South America for expanding
overseas sales. Since 1997, Wanxiang has made a series of cross-border M&As.
Most of the target companies acquired by Wanxiang are American and nearly
all are auto parts enterprises (see Table 5.2). Wanxiang has become the largest
shareholder of the target company in most deals, including LT, UAI, and
Table 5.2 Wanxiang Group’s OFDI projects
Year
Host country
Investment projects
1997
2000
2000
2001
2003
2005
2007
UK
USA
USA
USA
USA
USA
USA
Acquired 60% stake in AS Company
Acquired 100% stake in Zeller Corporation
Acquired 35% stake in LT Company
Acquired 21% stake in UAI
Acquired 33.5% stake in Rockford
Acquired 60% stake in PS Corporation
Acquired 30% stake in ACH
Source: Notes from interviews, newspaper, and magazine reports.
114
Micro-Environmental Determinants of Chinese FDI
Rockford. We analyze the common characteristics of Wanxiang’s US projects
below.
Motives for investment in the United States
Market-seeking. Unlike Sany Group, Wanxiang’s growth has depended on
overseas markets from the very beginning. When it entered China’s auto
parts industry at the end of the 1970s, Wanxiang was not in the country’s central economic plan. Only state-owned enterprises that were in the
central economic plan could supply products to automobile enterprises in
China. Wanxiang had to export products to survive. The export of universal
joints began in 1984 when Wanxiang got the first order from American auto
parts manufacturer Zeller Corporation. Later Wanxiang became an important OEM (original equipment manufacturer) enterprise for the American
auto parts industry. To extend its market share in America, Wanxiang broadened product categories and production scale by acquiring local auto parts
enterprises.
Strategic asset-seeking. Started as a farm tool repair plant 40 years ago,
Wanxiang did not have a long development history or sophisticated technology in the auto parts industry. Its target companies all had a long history
in the auto parts industry and many technology patents. Wanxiang wanted
to gain technological assets to improve its own technological capability.
But as a China-based company, it was difficult for Wanxiang to enter the
local market with the ‘Wanxiang’ brand in America. The target companies
owned local sales networks and had a brand reputation. ‘The company
with advantages on technology, local sales network, and brand reputation are the ones that attract us,’ said Ni Pin, the president of Wanxiang
America.
Degree of resource augmentation and control
In most of its acquisitions, Wanxiang used the same post-merger integration strategy of keeping the target company’s sales network and brand. The
acquisition agreements required the target company to purchase a certain
number of products from Wanxiang and sell these products under the local
brand. Wanxiang successfully gained access to local firms’ technology, sales
networks, and brand reputation by the majority stake acquisition. These
resources are organizationally embedded and also important strategic assets
for Wanxiang, making its degree of resource augmentation with cross-border
M&As very high.
Not intervening in the daily operations of overseas subsidiaries is a
general principle of Wanxiang. In America, the general managers, chief
operating officer, and chief financial officer were all recruited locally. Only
15 employees among the 4000 employees in the United States were from
China. Wanxiang built on the longevity of its acquired brands rather than
Xiaobo Wu et al. 115
promoting the Wanxiang name. It exercised control mainly by suggesting
performance targets at the board meetings of US subsidiaries. Wanxiang
chose a medium degree of control in these majority stake acquisition
projects.
3.3. Case C: Geely Holding Group’s acquisition of Volvo
Company overview
Geely Holding Group (Geely) was founded as a refrigerator component
maker in 1986 in Zhejiang province, China, launching its auto manufacturing business in 1997. Geely was the first private company qualified to
produce automobiles in China. Geely Automobile Holdings Limited (Geely
Auto) became listed on the Hong Kong Stock Exchange in 2005. Geely
located its headquarters in Hangzhou and six assembly and powertrain
manufacturing plants in Lanzhou, Linhai, Luqiao, Ningbo, Shanghai, and
Xiangtan. These facilities enable Geely to have a production capacity of
400,000 cars, 400,000 engines, and 400,000 transmissions per year.
Geely Auto was one of the fastest growing automobile enterprises in
China. It sold a total of 326,710 vehicles in 2009, an increase of 60 percent
over 2008. Total revenue increased by 228 percent to RMB 14.1 billion. Geely
Auto’s net profit was increased 35 percent to RMB 1.18 billion in 2009. Geely
Holding Group’s profit reached RMB 1.32 billion in 2009, an increase of
52 percent over 2008.
Overseas investment
Geely’s first overseas investment took place in October 2006 when it
acquired a 23 percent stake in Manganese Bronze Holdings, the leading
maker of London’s black taxis, and became its largest shareholder. In March
2007, Geely set up a new production joint venture called Shanghai LTI Automobile Components Company Limited with Manganese Bronze Holdings
Plc to manufacture the iconic London taxies and other limousines and taxis.
Also in 2007, Geely announced its strategic transformation. It began manufacturing and selling higher-end vehicles and made major investments to
improve its technology competence and product branding. The goal was to
transform Geely’s competitive advantages on low price on to technology and
quality. Geely gradually expanded its international operations to become a
leading supplier for the safest, the most environmental friendly, and the
most energy-efficient vehicles.
In March 2009 Geely acquired Australian auto parts maker Drivetrain Systems International (DSI) for AUS$54.6 million. DSI designs, develops, and
manufactures automotive transmissions for top global players like Ford,
Chrysler, and Ssangyong Motors.
On March 29, 2010, Geely Group acquired Swedish luxury car brand
Volvo from Ford for US$1.8 billion. Geely acquired 100 percent of Volvo
and its assets, marking the largest acquisition of an overseas carmaker by a
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Micro-Environmental Determinants of Chinese FDI
Table 5.3 Geely Holding Group’s OFDI projects
Year
Host country
Investment projects
2006
2007
2009
UK
Australian
Sweden
Acquired 23% stake in Manganese Bronze Holdings
Acquired Drivetrain Systems International (DSI)
Acquired 100% stake in Volvo
Source: Notes from interviews, newspaper, and magazine reports.
Chinese company. It is also China’s biggest foray into ownership of a big
luxury brand, seen as a milestone in the development of China’s automobile
industry. We analyze Geely’s motives in acquiring Volvo (Table 5.3).
Motives for acquisition of Volvo
Market-seeking. China overtook the United States as the world’s number
one auto market in 2009. China’s auto market has become a safe haven for
car makers battered by a steep global industry downturn. With the country’s fast economic development China’s luxury car market grew rapidly in
recent years. Geely is expected to use the Volvo brand to compete with Audi,
Mercedes-Benz, and BMW in China’s luxury car market.
Strategic asset-seeking. Though Geely is one of the fastest growing automobile enterprises in China, its success has hinged on selling inexpensive
sedans in China and other developing markets. Technology development,
quality improvement, and brand building are the critical factors for Geely’s
sustainable development. Li Shufu, the chairman of Geely Holding Group,
had targeted Volvo for eight years before acquiring it in 2010. It was not until
the global economic crisis that Ford decided to sell Volvo, which lost $2.6 billion during 2008 and 2009. Li Shufu thought that Volvo’s safety and green
technology, which are embedded in its brand reputation, were still valuable
for Geely. Volvo fits Geely’s new strategy to become a leading supplier of
the safest, the most environmentally friendly, and the most energy-efficient
vehicles.
Degree of resource augmentation and control
Geely’s acquisition of Volvo includes agreements on intellectual property
rights as well as supply and research and development arrangements among
Volvo, Geely, and Ford. Geely will improve its own product line and enhance
its image in China with Volvo’s high-end models, cutting-edge technology,
and luxury car brand image. Volvo as a top brand in the world has accumulated enormous technology know-how and is an important strategic resource
for Geely. The degree of resource augmentation in Geely’s full acquisition of
Volvo is very high.
Xiaobo Wu et al. 117
Geely chose a high degree of control in acquiring Volvo, buying a 100
percent stake, including all factories, cars and parts, R&D centers, production lines, and other assets. Geely has demonstrated a strong desire to utilize
Volvo’s resources as much as possible to shorten its learning curve. Geely
wants to compete with international brands not only in China’s auto market
but in the global auto market in the not too distant future.
4. Cross-case analysis
4.1. Motives behind Chinese manufacturing firms’ investments
in developed countries
Based on our single-case analysis, we find that market-seeking and strategic asset-seeking are the two most important motives. But there are several
motives at work in any OFDI by a Chinese manufacturing firm. For example, Sany invested in Germany for market-seeking, strategic asset-seeking,
and efficiency-seeking. Wanxiang and Geely both had market-seeking and
strategic asset-seeking motives when they acquired foreign companies. There
is no evidence of resource-seeking motives in our single-case analysis.
Even if they have the same basic motives, Chinese manufacturing firms
are different in how they act based on their motives (see Table 5.4). For
example, Geely wants to expand its share in the domestic luxury car market through cross-border acquisition, while Wanxiang wants to expand its
market share in the United States. Geely and Wanxiang want to use the
Table 5.4 Summary of cross-case analysis: motives
Resource- Market-seeking
seeking
Efficiencyseeking
Strategic
assets-seeking
Sany Group’s
investment
in Germany
–
To expand market
share in Europe
with Sany brand
To reduce
transportation
costs of
purchasing parts
from Germany
To gain
technological talent
and technology
know-how
Wanxiang
Group’s
investment
in USA
–
To be a first-tier
auto parts supplier
for top three car
manufacturers in
the USA
–
To gain advanced
technology, local
sales networks, and
brand reputation
Geely Auto’s
acquisition
of Volvo
–
To enter China’s
luxury car market
–
To gain Volvo’s
safety and green
technology, brand
reputation
Source: Case data.
118
Micro-Environmental Determinants of Chinese FDI
target company’s brand as a strategic asset, but Sany just wants to access
local advanced technology as a strategic asset in Germany. These findings tell us that the domestic market may also be an important target
market, even though Chinese manufacturing firms have invested overseas. Chinese manufacturing firms may expand overseas quietly, without a
‘Chinese brand’.
4.2. Patterns of Chinese manufacturing firms’ investments
in developed countries
Medium
High
Wanxiang’s
M&A
in the US
Geely’s
acquisition
of Volvo
Sany’s
investment
in Germany
Low
Resource augmentation
The two dimensions, resource augmentation and control, show the nature
of overseas investment, which allows firms to own new resources (control)
and have the resources for creating more value (resource augmentation).
Investment patterns can be classified into nine categories based on the
degree of resource augmentation (low, medium, high) and the degree of control (low, medium, high). Figure 5.1 shows our classifications and findings
from the cross-case analysis. Wanxiang and Geely, who were motivated by
strategic asset-seeking and chose cross-border acquisition as the entry mode,
showed a high degree of resource augmentation. Geely and Sany, who have
a 100 percent stake in overseas subsidiaries, showed a high degree of control. Wanxiang usually chose majority stake acquisition as the entry mode.
Compared with Geely’s 100 percent stake acquisition, Wanxiang’s degree
of control is medium. Sany chose to access advanced technology through
local knowledge spillover. Compared with acquiring advanced technology
by cross-border acquisition, the degree of resource augmentation in the case
of Sany is medium.
Low
Medium
Control
Figure 5.1 Summary of cross-case analysis: patterns
High
Xiaobo Wu et al. 119
In Figure 5.1 we see that, in general, Chinese manufacturing firms’ investments in developed countries show a comparatively high degree of resource
augmentation and control. Unlike their investment goals in developing
countries, Chinese manufacturing firms usually want to gain resources,
including advanced technology, brand reputation, and sales networks, when
they invest in developed countries. Chinese manufacturing firms tend to
choose investment patterns with a high degree of resource augmentation
and control to integrate with their low-cost production advantages.
5. Conclusion
We analyze the motives and patterns of three Chinese manufacturing firms’
investments in developed countries and find that market-seeking and strategic asset-seeking are the two most important motives. Europe and the United
States are now attractive for Chinese manufacturing firms looking for investments, not only because Chinese manufacturing firms are interested in
potential market demand, but because they wish to acquire local distribution networks, frontier technology, advanced manufacturing procedures,
and highly skilled people.
It is interesting to find one special motive along with conventional
motives in the cases. Since Chinese customers take the internationalization
of a firm as an indicator of a firm’s success, and since most competition in
the domestic market comes from MNCs founded in developed countries,
Chinese manufacturing firms want to enhance their brand reputation in the
domestic market by investing in developed countries.
We classified the patterns of investment into nine categories based on two
dimensions: the degree of resource augmentation and the degree of control. Chinese manufacturing firm investments in developed countries show
a comparatively high degree of both resource augmentation and control.
The higher the financial stake, the higher the degree of control. While the
mode of acquisition shows a higher degree of resource augmentation than
greenfield, in most cases Chinese manufacturing firms want to integrate
overseas advantages on advanced technology, brand reputation, and local
sales network with China’s advantages on low-cost production.
6. Implications
The theoretical implications and practical implications of this study are
limited but important. This study employs the resource-based view to analyze the motives and patterns of Chinese firms’ investments in developed
countries. It sheds light on the contribution of the resource-based view to
explain the ‘asset exploration’ motive of OFDI from emerging economies
and the ‘resource augmentation’ dimension of investment patterns. The
findings of this study challenge the traditional ‘gradual’ perspective of
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Micro-Environmental Determinants of Chinese FDI
firms’ internationalization process by emphasizing the mixed motives in any
single OFDI.
This study may be valuable for managers in Chinese manufacturing firms
planning to invest in developed countries. Managers should consider the
degree of control when they choose the pattern of investment, but a high
degree of control does not mean a high degree of resource augmentation in
some investment patterns. A pattern of investment with a high degree of
resource augmentation is more useful for a foreign subsidiary to access and
gain strategic assets that are embedded in developed countries.
7. Limitations and future research
This study has certain limitations. We focus on a comparatively specific
phenomenon in its infant stage, which limits the generalizability of the
study. The cases selected are pilots in the context of Chinese investment
in developed countries. More cases need to be included under the framework in future studies. The following themes represent valuable streams of
study to pursue: what factors determine a higher performance of resource
augmentation of China-based firms in developed countries? In the context of Chinese investment in developed countries, what is the relationship
between subsidiary capability and Chinese manufacturing firm competitiveness in domestic markets?
Acknowledgements
The authors are grateful for research funding from the National Natural
Science Foundation of China (Project Number: 70772047) and help from
employees of Sany Group, Wanxiang Group, and Geely Auto. We are also
grateful for the valuable suggestions given by our colleagues Bin Guo, Yongyi
Shou, Jian Du, Kaimei Wang, Ying Chen, Suli Zheng, Dong Wu, and the
reviewers’ comments.
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6
A Two-way Causal Link between
Internationalization and CEO Equity
Ownership in Chinese Firms
Xiaohui Liu and Jiangyong Lu
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.
Studies that examine the role of CEO compensation in internationalization (Filatotchev, Stephan, & Jindra, 2008; Musteen, Datta, & Herrmann,
2008; Datta, Musteen, & Herrmann, 2009; Lu, Xu, & Liu, 2009) treat it as a
growth strategy and an important channel for maximizing firm value and
enhancing firm performance (Hitt, Hoskisson, & Ireland, 1994; Lu, Xu, &
Liu, 2009). When corporate governance sets the optimal level of CEO compensation, it helps alleviate principal-agent conflicts and may encourage
internationalization.
However, most existing studies that focus on a one-way relationship
between CEO compensation and internationalization implicitly assume that
reverse causation from either internationalization or CEO compensation
is negligible. Assuming one-way causation may lead to overestimating the
effect of the two factors on each other. It is difficult to address the endogeneity between the two factors in studies based on cross-sectional data analysis
(Goranova, Alessandri, Brandes, & Dharwadkar, 2007).
Whether CEO compensation is an antecedent of internationalization or
the reverse remains almost completely unexplored. The interrelatedness
between these two issues and the research gap limit our understanding of
the determinants and consequence of CEO compensation. Failure to take
122
Xiaohui Liu and Jiangyong Lu 123
reverse causation into account may not only affect the statistical validity
of prior findings, but also lead to inappropriate theoretical propositions
based on biased empirical evidence. This paper takes a first step towards
investigating a two-way causation between internationalization and CEO
compensation by conducting Granger causality tests based on a sample of
Chinese listed firms. It aims to establish the direction of causation between
these two factors. Our study contributes to existing literature in several
ways. First, the paper is one of the first to systematically investigate the
bi-directional relationship between internationalization and CEO compensation, using panel data analysis to address the endogeneity between the
two variables. The study findings will help to fill an important gap in
the existing literature regarding the mutual reinforcement between internationalization and CEO compensation. Our research also challenges existing
studies which have neglected the reverse causation between internationalization and CEO compensation. Second, by conducting Granger causality
tests, we empirically isolate the effect of CEO compensation → internationalization from the effect of internationalization → CEO compensation,
based on agency theory. The findings provide evidence on the mutual effect
between these two factors. Finally, we extend prior studies on the internationalization of firms in emerging economies by using different measures for
internationalization, such as its degree and scope. Hence, we do not rely on
one uni-dimensional variable for measuring internationalization. We believe
that our measurements reflect the dynamic process of internationalization of
firms in emerging economies.
1. Theoretical framework and hypotheses
International diversification creates value and benefits firms, according to
many studies (Kim, Hwang, & Burgers, 1993; Hitt, Hoskisson, & Ireland,
1994; Liu & Buck, 2009). The advantages of internationalization are documented in the literature in terms of motives for internationalization
(Dunning, 1988), such as market-seeking, asset-seeking, and efficiencyseeking foreign direct investment (FDI). Some empirical findings indicate that internationally diversified firms perform better and have higher
returns than domestically focused firms (Kim, Hwang, & Burgers, 1993;
Hitt, Hoskisson, & Ireland, 1994). Internationalization gives firms the
opportunity to exploit and explore, especially when they face increasing
global competition at home (Wiersema & Bowen, 2008). In addition, firms
from emerging economies consider internationalization an effective way of
obtaining advanced knowledge and catching up with multinational enterprises (MNEs) in developed countries (Buckley, Clegg, Cross, Liu, Voss, &
Zheng, 2007; Deng, 2009).
Internationally diversified firms, however, face exposure that increases
the level of uncertainty, which may result in strategic errors such as
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Micro-Environmental Determinants of Chinese FDI
misunderstanding consumer tastes, regulations, retaliation from local and
multinational players, and problems in accessing distribution channels
(Mitchell, Shaver, & Yeung, 1992). International diversification may also lead
to higher monitoring costs due to increased size and complexity (Geringer,
Beamish, & daCosta, 1989; Hitt, Hoskisson, & Kim, 1997).
In examining the factors affecting international diversification (see a
review by Hitt, Tihanyi, Miller, & Connelly, 2006), researchers identify
corporate governance as one of the important determinants. While some
studies show that ownership, the board of directors, and CEO compensation affect firm internationalization strategies (Filatotchev, Stephan, &
Jindra, 2008; Lu, Xu, & Liu, 2009), other studies investigate how internationalization affects CEO compensation (Sanders & Carpenter, 1998;
Miller, Wiseman, & Gomez-Mejia, 2002). One neglected aspect in existing
studies, however, is assuming that the relationship between firm internationalization and CEO compensation is uni-directional, either running
from internationalization to CEO compensation or the reverse. Existing studies thus do not consider reverse causation explicitly, which may
flaw the validity of empirical findings from prior studies and lead to
inappropriate theoretical propositions, thus representing an important
research gap.
To analyze the underexplored two-way relationship between CEO compensation and internationalization, we adopt agency theory as our main
theoretical framework. Agency theory has been widely applied to examine
the relationship among firm performance, CEO compensation, and strategic
choices, such as diversification (Brush, Bromiley, & Hendrickx, 2000; GomezMejia, Wiseman, & Dykes, 2005; Datta, Musteen, & Herrmann, 2009), based
on the assumption that there may be a divergence in interests between
agents and principals, and agents may behave according to self-interest
(Gomez-Mejia & Wiseman, 1997; Gomez-Mejia, Wiseman, & Dykes, 2005).
Agency theory argues that executive pay is a means of aligning the interests
of executives with those of shareholders (Fama & Jensen, 1983). Executives
receive incentives to perform well on behalf of shareholders. By providing
incentives, the risk of deviation from the interests of the principal transfer
back to the agent. The optimal CEO pay package would minimize agency
cost as a trade-off between the costs of monitoring and incentives (GomezMejia & Wiseman, 1997). This approach can be used to examine the two-way
relationship between CEO compensation and internationalization, theoretically underpinning the two dimensions of incentive pay. On the one hand,
CEO pay in the form of long-term incentives, such as equity ownership, is a
motivational tool, since it encourages managers to exhibit desirable behaviors to maximise firm values through pursuing feasible growth strategies,
such as internationalization. International diversification is thus a function of CEO compensation. On the other hand, CEO equity ownership
helps owners reduce monitoring costs and divergence in the interests of
Xiaohui Liu and Jiangyong Lu 125
agents and principals. Increased complexity associated with the degree and
scope of internationalization makes it difficult to monitor senior executives.
Long-term incentives minimize monitoring cost by aligning CEO interests
with those of shareholders. CEO equity ownership thus becomes a reward
which links pay to share price performance. This type of equity reward is
expected to increase with the level of internationalization and the complex
tasks it entails. Building on these theoretical perspectives, we develop two
interrelated and testable hypotheses.
1.1. Internationalization → CEO compensation
International diversification is more uncertain and risky than domestic business, as many studies document (Nelson, 2000). When a firm expands
beyond the domestic market, it faces new cultures, customers, competitors, and regulations in foreign markets (Sanders & Carpenter, 1998). CEOs
have more complex and demanding tasks within international firms than
in domestic firms, which demand more information-processing for the
top management team and information asymmetry between managers and
shareholders. An increase in information asymmetry increases the cost
and difficulty of monitoring CEOs. Equity pay, as an incentive alignment
component of CEO compensation, is often referred to as a substitute for
monitoring, especially since monitoring CEOs is difficult and costly in international firms. Equity pay should increase in such cases, with firms using
long-term incentives to compensate or reward managers for undertaking
complex internationalization strategies. CEO equity ownership represents
reward through which CEOs are compensated for managing international
diversification.
In addition, international firms may be forced to pay their senior executives more if competitors do so. Long-term incentives such as equity pay
are widely adopted in the United States and the United Kingdom (Buck,
Liu, & Skovoroda, 2008). Other forms of remuneration cannot substitute
for equity pay, which becomes essential to attract and retain chief executives. A competitive labor market requires international firms to offer their
CEOs compensation packages with long-term incentives. We therefore predict that CEOs in Chinese listed firms with international diversification are
more likely to receive equity pay:
H1: There will be a positive association between the level of the international
diversification of a firm and subsequent CEO equity ownership, running from
internationalization to CEO equity ownership.
1.2. Internationalization ← CEO compensation
International diversification allows firms to augment their core competences, gain valuable knowledge and exploit potential growth opportunities
in foreign countries (Hitt, Tihanyi, Miller, & Connelly, 2006). It also helps
to maximize firm value and enhance performance since it enables firms to
126
Micro-Environmental Determinants of Chinese FDI
access foreign shareholders, resources, and institutions (Hitt, Hoskisson, &
Ireland, 1994). Several recent studies on outward foreign direct investment
(FDI) propose that firms from emerging economies tend to use outward
FDI as a springboard to acquire advanced technology and widely recognised
brands to catch up with technological leaders in the West (Makino, Lau, &
Yeh, 2002; Mathews, 2006; Luo & Tung, 2007).
Among the factors affecting international diversification strategies, CEOs
have an important role in strategic decision-making, and their pay structure may influence strategic decisions. Agency theory argues that the design
of an agent’s compensation structure reduces agency problems and associated costs by ensuring proper alignment of the interests of managers with
those of owners. CEO compensation thus acts as a mechanism to converge
interests between the agent and principal. An incentive system that encourages CEOs to take a long-term view is likely to result in different choices
than a system with a short-term focus (DeFusco, Zorn, & Johnson, 1991).
CEOs may take greater risks in pursuing growth via international diversification when their rewards are more closely linked to long-term performance
(Musteen, Datta, & Herrmann, 2008). CEOs receiving long-term incentives
may devote more attention to internationalization as an effective means of
improving firm performance and avoiding risks associated with a limited
domestic market.
CEO equity ownership is a motivational tool in aligning the interests of
managers and owner (Sanders & Hambrick, 2007). First, it helps overcome
the problem of short-sightedness since CEOs would remain eligible for future
gains in company share price even if their tenure ends. Equity pay helps
foster a long-term orientation because executives retain a financial interest
in the company even after they leave (Wong, 2010).
Second, CEO equity ownership linking pay with share value encourages
CEOs to choose appropriate growth strategies to maximise share value. It is
in CEOs’ own interests to pursue value-enhancing strategies such as internationalization (Rajgopal & Shevlin, 2002; Sanders & Hambrick, 2007) and
increased firm size through international diversification (Jensen & Murphy,
1990).
Some studies find that equity ownership imposes market discipline on
managers and motivates them to pursue more aggressively value maximization and improve firm performance (Pennings, 1980; Stearns & Mizruchi,
1993; Palmer & Wiseman, 1999). A positive relationship between managerial
incentives and wealth-enhancing corporate strategies has been observed
(Bethel & Liebeskind, 1993). Managers with equity ownership are more likely
to pursue internationalization strategies with the potential for higher longterm returns. In contrast, when equity ownership in the firm is unavailable
or is limited, CEOs have little incentive to pursue strategic options with
long-term gain such as internationalization. Therefore, we propose.
Xiaohui Liu and Jiangyong Lu 127
H2: There will be a positive association between CEO equity ownership and
subsequent international diversification, running from CEO equity ownership to
internationalization.
2. Data and methodology
2.1. Sample
The sample firms were drawn from publicly-listed Chinese firms on the
Shanghai and Shenzhen Stock Exchanges. We collected information on overseas subsidiaries from listed firms’ annual reports for 2002–2007, choosing
2002 as the starting year for two reasons: first, outward foreign direct investment (OFDI) by Chinese firms surged after China’s access to the World
Trade Organization (WTO) at the end of 2001, and, second, annual reports
for years before 2002 contain less detailed information on subsidiaries. We
focused on firms that have invested overseas in all six years, from 2002
through 2007, and whose annual reports can be obtained from Shanghai
and Shenzhen Stock Exchanges, the website of the China Security Regulation
Committee (CSRC), and the websites of listed firms. There were 191 firms
that established overseas subsidiaries in the sample period, the majority in
the manufacturing sector.
2.2. Variables
We use China’s OFDI to proxy the internationalization of Chinese listed
firms because OFDI from emerging economies, China in particular, has
recently grown substantially as part of an ongoing trend. Using an OFDI
measure allows us to capture the internationalization trend in Chinese
firms. We calculated two measures for China’s OFDI (Tihanyi, Johnson,
Hoskisson, & Hitt, 2003). The first internationalization
variable, Outward
∗
FDI (OFDI) Entropy, is defined as
c Sc ln (1/Sc ) , where Sc is the share of
investment in country c to total investment and ln(1/Sc ) is the logarithm
of the inverse of the investment share. The measure considers both the
number of countries where the firm operates and the relative importance of
each region to the firm (Hitt, Hoskisson, & Kim, 1997). The second measure,
Outward FDI (OFDI) Composition, combines both the FDI share in the total
investment and the number of overseas subsidiaries, in which we adopt a
factor analysis. The components were loaded on to one factor with the eigen
value exceeding 1.0. The cumulative variance explained was 77.5 percent.
We argue that these two measures represent an improvement in proxying
internationalization as they capture the different dimensions of internationalization and allow us to estimate how internationalization and CEO equity
pay affect each other. CEO equity ownership is measured as the percentage
of total equity owned by the CEO.
128
Micro-Environmental Determinants of Chinese FDI
2.3. Control variables
We included state shareholding as the percentage of shares owned by the
government and state-owned enterprises to control for the effects of state
ownership. We followed the methodology of Delios, Wu, and Zhou (2006)
to categorize ownership in Chinese listed firms according to the ultimate
identity of shareholders. The impact of board characteristics on executive
pay was considered. Outside director ratio was measured as the number of outside directors divided by the total number of board directors. Firm size was
controlled for, as larger firms typically have more slack resources for internationalization, which was measured by the logarithm of firm total assets. Firm
age was controlled for as a proxy of experience and resources. We controlled
for a firm’s previous performance as measured by return on sales. We used
industry dummies to control for industry effects in the manufacturing sector
and the primary sector. We controlled for time effects by using year dummies.
2.4. Methodology
To identify reverse causation from CEO equity ownership to internationalization, we conducted panel Granger causality tests, explained in detail in
the Appendix.
The dynamic interaction between CEO equity ownership and internationalization is our main focus since our sample period is relatively short, from
2002 to 2007. Based on the results of causality tests that denote two-way
relationships between the equity ownership and performance variables, we
go a step further to search for an appropriate model to estimate the strength
of these relations. For example, if reverse causation from CEO equity ownership to internationalization exists, the impact of internationalization on
CEO equity ownership would be overstated when estimating a single equation using ordinary least squares (OLS). Instead, panel system equations
should be applied, using the generalized method of moments (GMM) in
order to take reverse causation into account. This modeling strategy allows
us to examine how CEO equity ownership and internationalization are
interconnected and affect each other.
3. Empirical results
Table 6.1 presents the correlation matrix with means and standard deviations. Most of the variables have the expected signs. A positive correlation
exists between the variable for CEO equity ownership and the two measures
of internationalization, which suggests that there is a positive relationship
between CEO equity ownership and internationalization. However, correlations of this kind only measure contemporaneous relationships between
variables without reflecting the time dimension. In addition, the correlation
is symmetrical, with no evidence of the direction of causation. For these
reasons, causality tests are needed. Examining the link running from equity
0.001
0.141
1.474
3.240
12.188
14
0.029
11.998
0.005
0.196
2.015
1.107
1.459
4.744
0.076
18.550
SD
1.000
0.081∗∗
0.043∗
0.022
−0.029
0.113∗∗
0.065∗
0.037
1
2
1.000
0.899∗∗∗
0.004
0.066∗
−0.003
0.071∗
−0.060∗
Note: ***, ** and * represent significance at the 0.1%, 1% and 5% level.
1 CEO equity ownership
2 OFDI entropy
3 OFDI composition
4 Independent directors
5 Firm size
6 Firm age
7 Return on sales
8 State holdings
Mean
Table 6.1 Correlation matrix
1.000
0.025
0.065∗
−0.010
0.029
−0.081∗∗
3
1.000
0.076∗
0.036
0.053∗
0.084∗∗
4
1.000
0.060
0.341∗∗∗
−0.024
5
1.000
0.096∗∗
0.147∗∗∗
6
1.000
0.003
7
1.000
8
129
130
Micro-Environmental Determinants of Chinese FDI
Table 6.2 Results from the panel causality test
Causality
OFDI Entropy ⇒ CEO equity ownership
CEO equity ownership ⇒ OFDI entropy
OFDI composition ⇒ CEO equity ownership
CEO equity ownership ⇒ OFDI composition
Two-way causality
F test
3.08∗
3.434∗
3.131∗
10.845∗∗∗
Inferences
Yes
Yes
Yes
Yes
FDIENTROPY ⇔ CEOEO
FAFDI ⇔ CEOEO
Note: ***, ** and * represent significance at the 0.1%, 1% and 5% level.
pay → internationalization enables us to differentiate the pay reward effect
from the motivational effect, which previous studies neglect.
The results from the causality tests summarised in Table 6.2 reveal the
existence of significant two-way causality between executive pay and the
two measures for internationalization, suggesting that executive equity
ownership and internationalization mutually affect each other. The causation from internationalization to CEO equity ownership was established
in prior studies (Sanders & Carpenter, 1998) but the reverse causation running from CEO equity ownership to internationalization, shown with two
time periods, indicates that there is also feedback from CEO equity pay →
internationalization, thus supporting H2. This interplay between executive equity ownership and internationalization represents a novel feature
of our study and reveals that motivational effects, an important dimension of executive pay, should not be neglected. Previous studies on the
relationship between internationalization and CEO equity ownership may
have overestimated the reward effect of internationalization on CEO equity
ownership without taking into account reverse causation via motivations.
Our results show that CEO equity ownership is not simply a function of
internationalization, but also has a reverse effect on internationalization.
The results from the panel system equations presented in Table 6.3
show that the two measures for internationalization are statistically significant in CEO equity ownership (i.e. equity ownership is regressed on
internationalization variables), suggesting that CEO equity ownership is positively affected by international diversification proxied by FDI entropy and
FDI composition, thus supporting H1. This positive association between
executive pay and internationalization again indicates that an increase in
firm internationalization will result in a rise in executive equity ownership. The variable for state holdings has a negative impact on CEO equity
ownership, while firm age has a positive effect on CEO pay. The variables for
independent director, prior performance, and firm size are not statistically
significant.
In the internationalization equation (where internationalization is
regressed on CEO equity ownership), the variable for CEO equity ownership
Xiaohui Liu and Jiangyong Lu 131
Table 6.3 Results from the panel system equations
CEO equity ownership
equation
Dependent variable CEO
equity ownership
Coefficient (SE)
OFDI entropy
Dependent variable
CEO equity ownership
Coefficient (SE)
0.002
(0.001)∗∗
−0.0004
(0.0002)∗
5.39E − 05
(0.0002)
0.002
(0.002)
7.19E − 05
(2.32E − 05)∗∗
−6.29E − 05
(6.14E − 05)
−0.142
(0.046)∗∗
7.84E − 05
(4.87E − 05)∗
−0.0004
(0.0002)∗
5.40E − 05
(0.0002)
0.002
(0.002)
7.24E − 05
(2.32E − 05)∗∗
−6.09E − 05
(6.09E − 05)
−0.143
(0.046)∗∗∗
Internationalization
equation
Dependent variable
OFDI entropy
Dependent variable
OFDI composition
CEO equity ownership
0.311
(0.099)∗∗∗
−0.003
(0.002)
0.002
(0.002)
0.021
(0.020)
−0.001
(0.004)∗∗∗
0.004
(0.001)∗∗∗
2.707
(0.796)∗∗∗
955
0.125
0.899
(0.081)∗∗∗
−0.041
0.026
0.001
0.024
0.246
0.202
−0.015
(0.004)∗∗∗
0.049
(0.012)∗∗∗
2.561
(8.543)∗∗∗
955
0.173
OFDI composition
State holdings
Independent directors
Prior performance
Firm age
Firm size
Constant
State holdings
Independent directors
Prior performance
Firm age
Firm size
Constant
Observations
Adjusted R-squared
Note: Standard errors (SE) are in parentheses; ***, ** and * represent significance at the 0.1%, 1%
and 5% level.
positively affects the two internationalization measures, again supporting H2. The variable for firm size has a positive, significant association
with the two internationalization variables, but the variable for firm age
is negatively related to internationalization, showing that Chinese firms
132
Micro-Environmental Determinants of Chinese FDI
tend to internationalise at an early stage. The variables for state holdings, independent directors, and prior performance have little impact on
internationalization.
3.1. Discussion
This paper examines the two-way relationship between CEO equity ownership and international diversification based on a sample of Chinese listed
firms. By conducting Granger causality tests, we find that CEO equity ownership is positively associated with international diversification. Corporate
governance in Chinese listed firms plays an important role in internationalization strategies. CEO compensation motivates these executives to make
strategic decisions on behalf of shareholders. CEO equity ownership is only
a recent phenomenon in China but is an increasing trend even though ownership is relatively low by international standards. Our results on CEO equity
ownership, which are quite similar to those in developed countries, shows
how much marketization and corporate governance convergence between
China and the West has taken place (Buck, Liu, & Skovoroda, 2008). It may
reflect the fact that market-oriented CEO compensation has encouraged CEO
loyalty and subsequent willingness to make risky longer-term decisions on
issues such as internationalization (Kato & Long, 2006).
We find that the scope and extent of internationalization also affect CEO
equity ownership. Internationally diversified firms tend to use equity ownership to reward CEOs who take long-term views and manage complex
and demanding tasks associated with internationalization. Hence, there is
a feedback effect from internationalization to CEO equity ownership, consistent with previous studies that show internationalization as a function
of CEO equity ownership. Our results clearly demonstrate that internationalization and CEO equity ownership go hand-in-hand and mutually
reinforce each other. We also find that state ownership has a significant,
negative impact on CEO equity ownership, indicating that the state still
exercises significant control on CEO equity ownership through direct intervention. The state continues to influence enterprise structures and strategies,
including the design of executive pay packages. CEO equity ownership in
state-owned enterprises, to a larger extent, is not determined by market
forces.
Our findings indicate that previous studies may have overestimated the
impact of the two variables on each other without taking reverse causation into account. CEO equity ownership and internationalization should be
treated as interrelated issues and separate examination may produce biased
results.
Our study fills an important gap in existing research which has mainly
focused on the Anglo-American aspect of CEO compensation. By examining how CEO compensation affects the internationalization strategies of
Xiaohui Liu and Jiangyong Lu 133
Chinese firms, the study extends agency theory to a richer and more complex context beyond companies from developed countries where agency
theory was originally derived. Unlike prior research that assumes straightforward causation between CEO compensation and internationalization,
we adopt an appropriate empirical method to conduct panel data analysis
by taking reverse causation into account and thus provide a better understanding of the complex relationship between OFDI and incentive systems.
The results from our study show that previous empirical efforts to examine the link between CEO compensation and internationalization suffered
from methodological problems due to failure to take reverse causation into
account. This omission may limit our understanding of the complexity
between internationalization and CEO equity ownership.
Our study has some limitations. The sample only contains Chinese listed
firms, which prevents us from investigating two-way causation between
internationalization and CEO equity ownership in a wider context. Further
research should be extended to other emerging economies where marketization and internationalization strategies exist, but variations in governance
regimes suggest that there is scope for comparative international analysis.
In addition, we did not examine in detail how internationalization occurs in
organizations and how managers and boards of directors interact in deciding on significant international expansion due to data constraints and the
empirical setting of Granger causality tests.
4. Conclusion
Using panel data analysis, we test two-way causal links between internationalization and CEO equity ownership for a sample of Chinese listed
firms. Differing from previous studies, our study considers reverse causation
from internationalization to CEO equity ownership, an improvement over
previous studies that consider only a one-way relationship between internationalization and CEO compensation. The results from Granger causality
tests indicate a bi-directional relationship between internationalization and
CEO equity ownership, thus suggesting that there are inter-relationships
between CEO equity ownership and internationalization. Such complex relationships should be taken into account when examining how these two
factors affect each other.
Our study has policy implications. Corporate governance mechanisms,
such as CEO equity ownership, can play a positive role in the internationalization decisions of firms in emerging economies. Existing studies find
mixed results on the effectiveness of Western corporate governance mechanisms in emerging economies (Peng, 2004; Lau et al., 2007; Young et al.,
2008). Our study suggests that designing an appropriate level and structure
for CEO compensation, including CEO equity ownership, helps to mitigate the principal-agent conflicts in Chinese listed firms and facilitate their
134
Micro-Environmental Determinants of Chinese FDI
international diversification. Thus, governments of emerging economies
should encourage adopting long-term incentives as a major component of
CEO compensation.
Appendix
We conducted panel Granger causality tests using the following equations:
Xit = ϕ0 +
n
ϕ1j Xit−j +
j=1
Yit = θ0 +
p
j=1
θ1j Yit−j +
n
ϕ2k Yit−k +
n
ϕ3l Zit−l + uit ,
(1)
θ3l Zit−l + εit ,
(2)
k=1
l=1
p
p
k=1
θ2k Xit−k +
l=1
where i = 1, . . . , N; t= 1, . . . , T, n and p are lag lengths. In equations (1) and
(2), X and Y are the two variables (CEO equity ownership and international
diversification in this case) proposed to have interacting relationships, given
a set of control variables, Z. The null hypothesis ‘Y does not Granger cause
X, given Z’ is tested via a standard F test on the joint significance of ϕ 2k in
equation (1). Y is said to cause X in the Granger-sense if the ϕ 2k are jointly
significant. Similarly, if the θ 2k are jointly significantly different from zero,
the null hypothesis that X does not Granger-cause Y is rejected.
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7
Effects of Absorptive Capacity
on International Acquisitions
of Chinese Firms
Ping Deng
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 valuedestroying (Economist.com, 2007).
Given these M&A failures, and their frequency, we need to examine the
strategic and performance dimensions of such M&As with a new rigor.
By drawing on theories of absorptive capacity, we uncover some of the key
firm-level factors and mechanisms that may contribute to outcomes. The
absorptive capacity literature (Cohen & Levinthal, 1990; Zahra & George,
2002; Volberda, Foss, & Lyles, 2010) highlights the importance of taking in
external knowledge, combining it with internal knowledge and absorbing it
for commercial use. Firms with higher absorptive capacity tend to have a better foundation to create knowledge, assimilate and interpret opportunities,
and develop and apply explicit knowledge more effectively.
Building on the literature of absorptive capacity, we propose that Chinese
firms’ ability to acquire strategic assets and improve competitive advantage depends on their absorptive capacity at various levels. Guided by this
framework, we empirically analyze two M&As in leading Chinese companies
(Lenovo and TCL). These M&As differ substantially in their ability to source
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Micro-Environmental Determinants of Chinese FDI
strategic assets and resulting performance outcomes. For TCL, its 2004 acquisition of Thomson’s TV (France) business proved highly problematic and is
regarded as a typical example of a Chinese firm that ‘failed miserably in
overseas expansion’ (Economist.com, 2007). For Lenovo, its acquisition of
IBM’s PC unit in 2005 helped the company become one of the most internationally recognized Chinese brands (Fortune, 2009). As the first study that
applies the arguments of absorptive capacity to resource-driven M&As by
Chinese MNCs, we explain in detail why such M&A deals have different
outcomes and we encourage business practitioners and academics to think
about M&A strategy in innovative ways. By arguing that M&A represents a
way for Chinese firms to acquire strategic assets within the constraints of
their absorptive capacity, this study also draws lessons for other emerging
markets that are closely watching Chinese firms’ international expansion
strategy (Fortune, 2009).
1. Theoretical foundation and propositions
Knowledge, especially tacit knowledge, is the most important strategic asset,
according to the knowledge-based view (Kogut & Zander, 1992). Companies may use cross-border M&As to gain access to new knowledge and skills
controlled by indigenous firms (Stahl & Voigt, 2008). Using M&As for resolving knowledge deficiencies, however, does not necessarily result in superior
returns because strategic assets often are tacit, specific, and complex (Amit &
Schoemaker, 1993). In addition, in the early stages of internationalization,
firms tend to underestimate the complexities of foreign acquisitions and
exaggerate the synergies from a combination of the merging firms’ strategic assets (Child, Falkner, & Pitkethly, 2001; King, Dalton, Daily, & Covin,
2004). To succeed in overseas acquisitions, firms need to develop the knowledge and routines to overcome these problems – that is, they need absorptive
capacity (Kim, 1998).
The literature on absorptive capacity generally agrees that absorptive
capacity determines a firm’s ‘ability to recognize the value of new, external information, assimilate it and apply it to commercial ends’ (Cohen &
Levinthal, 1990, p. 128; Volberda et al., 2010). It derives from stocks
of knowledge within the firm and is a function of prior organizational
problem-solving (Kogut & Zander, 1992). The absorptive capacity construct
has emerged as an underlying theme in global strategy management to
explain organizational phenomena such as strategic alliances, organizational
learning, knowledge acquisition and transfer, and business performance
(Lane et al., 2006). Absorptive capacity, which represents an organization’s
dynamic capability, is a multidimensional construct, with each dimension playing a different but complementary role in influencing knowledge
acquisition and business outcomes. For example, Zahra and George (2002)
conceptualize it as a dynamic capability with a multidimensional construct
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involving a firm’s ability to acquire, assimilate, transform, and exploit
knowledge. Moreover, absorptive capacity itself is determined by a number
of organizational antecedents with differing influences on different components of absorptive capacity (e.g., Jansen, Van den Bosch, & Volberda,
2005; Puranam, Singh, & Chauduri, 2009). This clarifies why certain firms
are able to acquire and assimilate new external knowledge but are not able to
transform and exploit it successfully. For instance, Kim (1998) considers the
level of prior related knowledge the determinant of absorptive capacity. Van
den Bosch and his colleagues (1999) demonstrate how organizational forms
and combinative capacities influence the level of absorptive capacity. Other
researchers (e.g., Volberda et al., 2010) show how multilevel antecedents
influence future outcomes such as competitive advantage, innovation, and
firm performance.
In this paper, we propose an absorptive capacity model that highlights
the main building blocks and outcomes. The model integrates the accumulated knowledge across different research efforts in the field, particularly
cross-border M&As. Our framework consists of three key components that
shape absorptive capacity, with each component determined by a number of organizational factors, as summarized in Figure 7.1. In the first
dimension, antecedents of absorptive capacity, such as prior knowledge, are
critical for the firm to recognize and understand the strategic assets to be
acquired. The second dimension involves applying combinative capabilities
to assimilate and combine newly acquired assets with the firm’s existing
resources. The third dimension focuses on how the acquiring firms effectively transform and apply the acquired strategic assets. Below, we elaborate
Cross-border
M&A by
Chinese
multinationals
Acquisition of
strategic assets
and valuable
knowledge
Absorptive capacity
Ability to recognize, integrate
and assimilate knowledge
• Prior related knowledge (P1)
• Combinative capabilities (P2)
Competitive
advantage
and superior
performance
Absorptive capacity
Ability to transform and apply
knowledge into commercial ends
• Strategy execution & effort (P3)
Figure 7.1 An absorptive capacity model of acquisition of strategic assets via M&A
Note: The solid arrows indicate the causal connections between the elements that constitute the
focus of the current research, whereas the dashed arrows indicate the indirect and potential
causal connections between the elements that are beyond the scope of the current study and
may represent fruitful research opportunities in the future.
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Micro-Environmental Determinants of Chinese FDI
on each of the three components, focusing on some of the key determinants,
as shown in bold in the figure.
1.1. Ability to understand strategic assets and the key determinant:
Prior related knowledge
Recognizing and identifying the value of new external knowledge is the first
step toward acquisition of strategic assets. Much of the literature identifies
absorptive capacity as a knowledge base, especially prior knowledge in the
firm (Lane, Salk, & Lyles, 2001). ‘Organizations need prior related knowledge
to assimilate and use new knowledge’ (Cohen & Levinthal, 1990, p. 129)
and to help understand the industry, products, and customers related to the
knowledge held by the foreign firm. This facilitates knowledge absorption
and development (Kim, 1998). Firms with a high level of absorptive capacity
are likely to harness new knowledge from acquired firms to help their innovative activities because, without such capacity, it is hard for them to learn
or transfer knowledge from one unit to another (Szulanski, 1996). Managers
can help develop their firms’ absorptive capacity by building knowledge
stocks through investment in internal R&D and carefully analyzing the
potential target firm (Lei & Hitt, 1995). For firms in emerging markets, the
intensity of effort is crucial for accumulation of prior related knowledge
about the potential target firms (Kim, 1998). In sum, the extent of a firm’s
prior related knowledge may determine the magnitude of the M&A effect on
knowledge acquisition and serve as an important stepping stone for learning how to handle cross-border M&A activities (Shimizu, Hitt, Vaidyanath,
& Pisano, 2004). The greater the prior related knowledge, the more likely the
acquiring firm will acquire strategic assets. Based on the above discussions,
we propose:
Proposition 1. Whether and to what extent Chinese companies can acquire
strategic assets via cross-border M&As will be contingent on their absorptive capacity, determined by the acquiring firms’ related knowledge of target firms. The greater
the prior related knowledge, the more likely a firm will acquire strategic assets.
1.2. Ability to integrate strategic assets and its key determinant:
Combinative capabilities
Mere exposure to related external knowledge is not sufficient to ensure
that a firm will internalize it successfully. Companies need to develop
combinative capabilities to synthesize and acquire new knowledge (Zollo &
Singh, 2004). Combinative capabilities involve coordination capabilities and
socialization mechanisms for specific ways of dealing with different aspects
of absorptive capacity (Van den Bosch et al., 1999). Coordination capabilities deepen knowledge flows across disciplinary boundaries and lines of
authority and facilitate knowledge exchange by bringing together different
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sources of expertise and increasing interaction between areas of functional,
or component, knowledge (Jansen et al., 2005; Puranam et al., 2009). Coordination capabilities also let employees combine sets of existing and newly
acquired knowledge and generate commitment as well as decision-making
(Kogut & Zander, 1992). Socialization mechanisms, on the other hand,
may influence absorptive capacity by creating broad, tacitly understood
rules for appropriate action under unspecified contingencies. They may
contribute to effective communication and dominant values (Lane et al.,
2001). The rationale underlying the above studies is that absorptive capacity in terms of combinative capabilities combines resources in new ways
and serves as an effective governance mechanism, thereby contributing to
assimilation and integration of the sought-after strategic assets. Therefore,
we propose:
Proposition 2. Whether and to what extent Chinese companies can acquire
and integrate strategic assets via cross-border M&As will be contingent on their
absorptive capacity, which depends on the acquiring firms’ combinative capabilities. The higher the combinative capabilities, the more likely it is that they will
effectively integrate the acquired strategic assets.
1.3. Ability to apply strategic assets and its key determinant: Strategy
execution and effort
Acquisition of strategic assets does not automatically result in competitive advantage or high performance because ‘applying external knowledge
involves the ability to diffuse knowledge within the organization, to integrate it with the organization’s activities, and to generate new knowledge
from it’ (Lane et al., 2001, p. 1157). Research shows that an acquiring
firm’s post-acquisition strategies and what it does after the acquisition can
determine success or failure (Hitt, Harrison, & Ireland, 2001). Therefore,
effectiveness of strategy execution by an acquirer may influence absorptive
capacity and whether the acquirer can exploit the acquired new external
knowledge or not. Knowledge matters, but the acquiring firm’s strategy execution matters more (Hitt et al., 2001; King et al., 2004). Accordingly, a
concern for emerging market firms is how to manage acquired knowledge
and improve business performance. Ineffective strategy execution is one of
the primary reasons that acquisitions fail to create value for shareholders
(Child et al., 2001; Capron & Mitchell, 2009). Daimler Benz’s acquisition of
Chrysler, for example, failed because economies of scale were not realized
due to ineffective strategic execution.
Whether acquired knowledge can be deployed for competitive advantage depends on the acquiring firm’s strategy execution. Increased
absorptive capacity would provide a basis for more effective management (Hayward, 2002; Bjorkman, Stahl, & Vaara, 2007). With subsequent
increases in absorptive capacity there may be fewer errors, development of
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Micro-Environmental Determinants of Chinese FDI
specialized and standardized routines, and increased execution effectiveness
(Nadolska & Barkema, 2007). On this basis, we propose:
Proposition 3. Whether and to what extent acquired strategic assets can enhance
Chinese companies’ performance will be contingent on their absorptive capacity,
which depends on the effectiveness of strategy execution. The more effective the execution, the more likely it is that the acquired strategic assets will improve business
performance.
2. Method and data collection
To test empirically the above theoretical model, we employed a case study
research method. Case studies can provide valuable insights and richness
of information, especially when the researcher’s focus is on ‘how and why’
questions (Yin, 2003). This study employs a comparative case study method
of two high-profile Chinese cross-border M&A deals: TCL’s acquisition of
Thomson’s TV business in 2004, and Lenovo’s acquisition of IBM’s PC unit
in 2005. We focused on China because it is the largest emerging economy.
OFDI from China, especially its M&As, is growing exponentially (Alon &
McIntyre, 2008). Both companies had the same motivation for the M&A:
acquisition of strategic assets to compensate for their competitive disadvantage in the global marketplace (Deng, 2009). However, the subsequent
business performances are substantially different. Lenovo’s acquisition of
IBM’s PC unit is a success story, while TCL’s acquisition of Thomson’s
TV business was a disappointment (Economist.com, 2007; Fortune, 2009).
These performance differences provide a unique opportunity to apply the
absorptive capacity construct and understand differing M&A outcomes in
the same strategic context.
Our research relied on multiple sources of data. The primary data were collected through semi-structured interviews with senior executives from the
two firms in October and November of 2007. Owing to the secrecy and delicacy of the M&A processes, the interviewees were promised anonymity. The
secondary data are from internal and external documents, including memos
by key managers, corporate newsletters and press releases, strategic reports,
quarterly and annual reports, and media reports. The data were coded
according to accepted content analysis procedures, with specific events identified as the unit of analysis (Yin, 2003). We identified themes in the data
and compared them to relevant points in the absorptive capacity literature
(Eisenhardt, 1989).
3. Absorptive capacity approach and cross-border
M&As from China
Among major M&As by Chinese MNCs, the 2004 merger of TCL with the TV
division of France’s Thomson and the 2005 acquisition of IBM’s PC business
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by Lenovo are the biggest and most high profile, as well as similar in many
aspects. As two of the largest companies championed by the Chinese government, they are at the forefront of a new wave of Chinese MNCs (Morck,
Yeung, & Zhao, 2008; Deng, 2009). Both Lenovo and TCL explicitly declare
that their overseas M&A activities serve their goals of becoming first-class
multinationals. Lenovo’s goal was to become a Fortune 500 company by 2010
(Morck et al., 2008). And TCL’s chief financial officer declared that the company aimed ‘to be the next Sony or the next Samsung’ (Deng, 2007). To
achieve such ambitious goals, each company needed globally valued brands,
leading-edge technologies, and genuinely innovative and admired business
methods (Morck et al., 2008; Deng, 2009).
In spite of the same strategic asset-seeking motivation, their performance
outcomes are dramatically different. After acquiring Thomson’s TV business
in 2004, TCL suffered huge losses (with a cumulative loss of over RMB 6 billion, or $680 million as of 2006) and sought bankruptcy protection for its
European operations in May 2007. Conversely, for Lenovo, the IBM purchase emerged as the quickest and most efficient way to build up its global
presence and international competitive position (Newman, 2007). Since the
absorptive capacity construct explains why there are significant variations
between the firms in their ability to evaluate and utilize outside knowledge
(Capron & Mitchell, 2009; Volberda et al., 2010), this framework may provide new insights into their M&A performance differentials. In the following
two sections, based on primary and secondary data, we illustrate the theoretical approach through a comparative case study of these two prominent
cross-border M&A deals.
3.1. Lenovo’s acquisition of IBM’s PC unit – A success story
Lenovo (originally known as Legend Group) is the largest computer company and the second largest electronics manufacturer in China. It began in
1984 as a spin-off from a new technology unit at the Chinese Academy of Sciences (CAS). With its $1.75 billion acquisition of IBM’s Personal Computing
(PC) business in May 2005, Lenovo doubled its workforce and quadrupled
its revenue, with former IBM operations accounting for about 70 percent of
the combined firm’s revenue.
High prior related knowledge of the target firm
Initially, Lenovo achieved its competency in PC distribution through joint
ventures with well-established MNCs like AST Computers, IBM, and HewlettPackard. Through these international joint ventures, Lenovo started manufacturing its own hardware products and developed its own PC brand. In
1997, seven years after it started making its own PCs, Lenovo became the
best-selling PC in the country. Its prior related knowledge is reflected in its
ongoing R&D (at least 1 percent of its annual revenue is spent on R&D).
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Micro-Environmental Determinants of Chinese FDI
Lenovo uses its R&D resources in modification research, which is essential
to succeed in new markets. In addition, every employee receives training in
corporate strategy and related areas through Lenovo University. The management team is also hungry to learn what it takes to build a truly global
business. This commitment to learn and absorb successful techniques is a
potential strength as Lenovo ventures into other geographic regions and
cultural clusters.
In the IBM PC acquisition, Lenovo’s ability to identify and acquire strategic assets was preceded by a unique and intense effort before the deal.
Lenovo’s top executives were aware of the challenges that they faced in
combining two different cultures as well as managing highly complicated
logistics and supply chains. Moreover, IBM’s PC business had a cumulative
loss of $4 billion during the four years before it was sold to Lenovo. To fully
recognize and acquire the strategic assets from the deal, Lenovo’s top management team, supported by McKinsey & Company and Goldman Sachs,
analyzed potential challenges and risks by repeatedly asking: Are Lenovo’s
executives capable of running a complex global business? Will the new
Lenovo be accepted by IBM’s clients and the PC market? Can the two corporate cultures be successfully consolidated? Why was IBM’s PC business
unprofitable? Based on this in-depth analysis and thorough knowledge of
the target firm, Lenovo knew what it was buying. As one senior Lenovo
manager commented:
As discussions progressed, we gained confidence that many of the risks we
feared could be distributed or controlled. For example, we worried about
losing customers. So we worked out an agreement that would allow us to
continue using the IBM brand, to keep the IBM salespeople, and even to
keep the top IBM executive as CEO.
Equipped with valuable strategic assets, including IBM’s ThinkPad brand and
ThinkVantage technologies, the new company started from a good spot.
Strong combinative capabilities
In addition to thorough knowledge of the target firm, combinative capabilities were also important for Lenovo to integrate and assimilate new
knowledge. Shortly after the IBM PC takeover, the board created a powerful
strategy committee headed by Yang Yuanqing and supported by other strong
managers, including company co-founder Liu Chuanzhi. In the first year of
the combined company’s operation, the committee played a major role in
setting strategy and recruiting key corporate executives. Lenovo also assembled an international management team, which boasted a combination of
management savvy, technical expertise, and proven track record of diversity. One Lenovo executive commented, ‘These design steps are intended to
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create the best organization for extracting cross-border synergies and, at the
same time, protect IBM’s old value . . . Our cohesive team helped find ways to
turn diversity into competitive advantage.’
In the meantime, the IBM-ers, instead of rejecting their new corporate
parent, embraced Lenovo. One long-time IBM executive noted:
A lot of IBM managers expressed a kind of glee at being out from under
IBM. Compared with the plodding pace at Big Blue, we describe Lenovo
as if it were a Silicon Valley start-up. It’s a young, international, ambitious
company. It is also willing to change – a good base for cultural integration.
Further, the new company actively looked for opportunities within a
regional and geographic cluster by clarifying the accountability of key individuals and enforcing a common culture where needed. As one senior
manager said:
The benefits of regional clustering are numerous, including stronger
integration of the relevant functions across countries, the avoidance of
duplication and moving toward organization integration. The mechanism also helps us share best practices in formal and informal networks,
rotate key people from one country to another, and create a corporate
culture to develop common work patterns that facilitate cross-border
cooperation.
Effective strategy execution and effort
In the post-acquisition stage, effective strategy execution is one of the
key attributes for successful cross-border M&As (Child et al., 2001). With
the increasing pressure for faster cost-cutting and more effective decisionmaking, William Amelio, Dell’s former senior vice president for Asia-Pacific
and Japan, replaced Steve Ward as CEO of Lenovo. Amelio brought his extensive knowledge to Lenovo, whose top management possessed little experience on a global stage. Under the leadership of Amelio, Lenovo was relentless
in cutting costs from its PCs, but did so through production efficiencies, not
by cutting R&D or product features. In the meantime, Lenovo accelerated
its business expansion, largely in emerging markets. In July 2007, Lenovo
announced two new manufacturing plants and fulfillment operations centers in Monterrey, Mexico, and Baddi, India, at an investment cost of over
$30 million. The new product range offered in the Indian market included
notebooks such as the IdeaPad Y710, IdeaPad Y510 and Idea Pad U110, and
the desktops, Idea Center K200 and Idea Center Q200. As of March 2008,
Lenovo had service centers in 15 Indian cities. As its latest move in a string of
global expansions, in December 2007, Lenovo announced its first European
manufacturing site in Poland with a total investment of $20 million.
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Micro-Environmental Determinants of Chinese FDI
Before the M&A, Lenovo’s executives knew about the problems HP faced
after it acquired Compaq in 2002. But Lenovo–IBM had some advantages
that HP–Compaq did not; their resources complemented each other neatly.
This is well-summarized by a former IBM-er and now Lenovo’s top supply
chain executive:
Part of the reason that our strategy execution has gone so well is that
there is hardly any overlap between the Lenovo business and the old IBM
PC division. With the IBM PC unit, more than 60 percent of our business
was with notebooks. And when you look at Lenovo in China, 85 percent
of it was in desktops. IBM focused a lot on the large-enterprise market
and they were focused on consumers and small business. Note too that
Lenovo and IBM are each other’s biggest customer.
Such resource complementarity no doubt helps the combined firm successfully put the acquired knowledge and skills to commercial ends.
Further, Lenovo knew how to accommodate vastly different needs of
consumers and business customers in the newly competitive setting. The
company developed two distinct sales models, and products rally around
these models. The traditional Lenovo PC products are aimed at consumers
(outside the United States) and sold through a high-volume ‘transaction’
model. The ThinkPad brand of business products are sold through a lowvolume ‘relationship’ model. This dual business model enabled Lenovo to
quickly expand into the small-business and home-PC markets outside of
China, which is becoming more lucrative. This innovative business method
proved very successful in the United States, for example, where the old
IBM had an exclusive focus on serving large corporations. In early 2006,
Lenovo launched a new range of PCs targeted at small- and mid-sized entities (SMEs) in the United States. In January 2008, it launched a new line
of Idea Pad notebooks and desktops, its first-ever consumer computers for
the United States. By early 2008, Lenovo’s distribution networks in the
United States had 2600 partners focusing on the SME market. As one Lenovo
executive commented:
Lenovo has a very successful business model in China. A lot of it applies
to other markets, especially emerging markets; but not everything. So we
intensively discuss what makes sense to replicate, and what doesn’t make
sense. We want to extend the business model that was so successful in
China across the world.
Judged by several measures of absorptive capacity, Lenovo has acquired valuable strategic assets and, after two years, has begun to turn in superior
business results. The company has successfully reassured existing ThinkPad
customers of the brand’s high-quality reputation, and there has been
minimal drop-off in loyalty. On November 2, 2007, Lenovo finally severed
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ties with the IBM brand name two years earlier than planned, in a sign that
it was ready to stand on its own. For the three months ended September 30,
2007, Lenovo’s net profit nearly tripled to $105.3 million and surpassed
the forecast of $72.3 million. This was Lenovo’s fourth consecutive quarter
of dramatically increasing sales revenue and exceeding expectations. With
2007 global sales revenue of $16.8 billion, in July 2008 Lenovo became the
first Chinese private company to join the elite Fortune 500 list, an ambitious
strategic goal accomplished in just three years.
3.2. TCL and Thomson’s TV Business – An acquisition failure
As China’s largest color TV and second largest mobile phone maker, TCL
began to aggressively promote its brand internationally in 2000. Its global
expansion culminated in January 2004 when it struck a $560 million deal
to merge its TV and DVD operations with those of French consumer electronics giant Thomson. The resulting venture, TCL–Thomson Electronics
Co. Ltd. (TTE), in which TCL held a 67 percent equity share, began formal operations in July 2004 and was totally acquired by TCL in 2006. When
the TCL–Thomson deal was announced, one business observer called it ‘the
latest and most dramatic example of China’s determination to put its own
stamp on the global marketplace . . . There’s no company that has a better
chance of becoming China’s first truly global corporation than TCL’ (Business China, 2004). The agreement was signed in the presence of the French
prime minister and Chinese president, highlighting its significance. But the
deal is now widely regarded as one more example that China ‘failed miserably in overseas expansion’ (Economist.com, 2007). Due to its highly
problematic and value-destroying European operations, during 2005 and
2006, TCL cumulatively suffered a total loss of RBM 5.07 billion ($680 million). As a result, its stock was put on a ‘star’ and became ‘*ST TCL’, indicating
that the stock was at risk of being delisted. In November 2007, TCL declared
its European operation ‘insolvent’ and overhauled its TV manufacturing
operations. TCL’s original goal in acquiring Thomson’s TV unit was to obtain
its technology, distribution channels, brand and network assets. With the
massive restructuring, TCL gave up Thomson’s original business model, distribution channel and even the Thomson brand. Since absorptive capacity
is one of the major requirements for acquiring firms to obtain external
knowledge, and since it has a direct impact upon business performance, our
framework may provide insights into why this high-profile M&A failed.
Lack of related knowledge of the target firm
TCL had prior knowledge related to the global TV industry and had served
other emerging markets similar to the home market before moving into
developed markets. In Asia, for example, TCL products are sold under its
own brand, claiming a 14 percent share in Vietnam and 8 percent in the
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Micro-Environmental Determinants of Chinese FDI
Philippines. However, TCL failed to recognize the true value of the acquired
firm because it had not carefully examined Thomson’s brands and related
products and services. Hu Qiusheng, a former TCL senior director who was
thoroughly involved in the entire negotiation process, was firmly against
the deal because of numerous ambiguities and unfavorable terms, including paying license fees for using Thomson’s trademark in Europe after 2008.
Consequently, he was not appointed the first CEO of TTE when it was set
up in July 2004. Moreover, throughout the negotiation process, TCL did
not even hire acquisition experts as its business and financial advisors. TCL
did spend 10 million Euros and hired Boston Consulting Group to do an
appraisal. Based on the appraisal, the outlook for the deal was not very optimistic due to the risk involved. However, TCL’s chairman, Li Dongsheng,
ignored the ‘pessimistic’ report and decided to gamble on the deal simply
because it appeared attractive; it was considered an ideal marriage between
TCL’s cost advantage and Thomson’s strengths in brands, distribution, and
research networks, in Europe and the United States.
Unlike Lenovo’s top executives, who were willing to take risks only if they
had thoroughly studied the situation and believed that they had a reasonable chance of prevailing, TCL’s top management team acquired Thomson’s
TV business without an appropriate financial and competitive justification.
As one former TCL executive noted, ‘Our internal review did not articulate
a rationale that fits the story line of the entire organization and also did not
spell out the economic requirements for integration.’ The Thomson brand
in Europe and its RCA brand in the United States were rather tired names.
Thomson’s TV and DVD operations lost more than $100 million in 2003.
In addition, the deal was highly complex because the joint venture had to
negotiate specific contracts for access to those parts of the business not being
transferred, including the sales and IP businesses from Thomson. To make
matters worse, in late 2004, Thomson surprised the market by announcing
that it was taking a small stake in Konka, a TCL rival. As one TCL executive
admitted, ‘The international setback occurred mainly because we did not
prepare well before the deal. We were not familiar with the local business
operations in Europe. We simply thought about the overseas market using
our Chinese logic. When we copied the Chinese business model abroad, it
did not work.’
Weak combinative capabilities
TCL not only lacked prior knowledge related to Thomson’s business operations, it lacked combinative capabilities to integrate and assimilate the
acquired knowledge. The shortage of TCL managers with international experience and expertise in global marketing was a major constraint. The new
company did not work well with people from different cultures with different experiences and routines. Because of language issues and disagreements
on compensation issues, it took a long time for the new company to develop
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a common production strategy. As one TCL senior manager said, ‘We failed
to grasp and address the barriers that might hinder the level of integration
we desired. In addition, we did not understand organizational barriers that
might obstruct the capture of cross-border value, destroying the sources of
local and international value associated with the acquisitions.’
In addition, TCL wanted greater management and hierarchical cultural
control of its European operations and so it imposed control structures suitable for China but not for France. Many French staff quit in frustration.
Some TCL French executives, for example, were unhappy to find that a
meeting was planned for the weekend (which occurs regularly in China)
and they just turned off their cell phones. TCL managers also failed to
understand changes in the industry, initially because they tried to assimilate new external knowledge through old cognitive models. Only after a
series of failed assimilation processes did they change their domesticallyoriented cognitive structures. There is no doubt that differences in cognitive
structures, value systems and behavioral norms all contributed to the new
company being less likely to acquire and assimilate capabilities. As one TCL
executive commented, ‘Obviously, TCL was not aware of the cross-border
opportunities and managers ignored the chance to collaborate in other parts
of the new joint venture. . . . Surprisingly, few people at the new company
had the knowledge to truly consider the cross-unit, cross-functional and
cross-cultural approach.’
Problematic strategy execution
When the deal was done, TCL executives believed that the synergy of
the M&A would benefit the firm in the long term, through economies of
scale, complementary resources, cost control, and shared R&D capacities.
But the challenges and difficulties were much more serious than anticipated. In essence, the M&A went far beyond typical arrangements that
shift a Western company’s high-cost manufacturing operations to lower-cost
China. Because of too many overlapping product lines and manufacturing facilities, it was not practical for TCL to easily shift production to
less expensive facilities in China and realize greater economies of scale.
In India, for instance, TTE products appeared under both Thomson and
TCL brands. It was hard to save money by using common designs for
chipsets and leveraging their buying power as a large customer. On the
other hand, the sources of TCL’s competitive edge in China – its relationship, local knowledge, distribution networks – could not be transferred
overseas.
Moreover, TCL’s international expansion strategy was too rapid and too
aggressive; hence, the company failed to develop its own absorptive capacity,
and it did not have enough time to integrate the new knowledge and apply
it to commercial ends. Besides the Thompson deal, in September 2002, TCL
acquired the German-based Schneider Corp. In 2003, it acquired GoVideo,
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Micro-Environmental Determinants of Chinese FDI
an Arizona-based US firm focusing on visual products and DVD players. In
August 2004, it created another majority-owned joint venture, TCL & Alcatel
Mobile Phones Limited (TAMP), to pursue mobile phone development, production, sales, and services. In 2005, it set up a third majority-owned joint
venture, with InFocus Corp., to produce rear-projection TV components.
As TCL adopted a course of almost unlimited international expansion, it
was unable to learn from its prior experiences and apply them throughout
the organization. An effective acquisition should ensure that every deal supports the corporate strategy (Hitt et al., 2001) but almost all TCL’s M&A deals
were only generally related to its strategic direction, and the connections
were neither specific nor quantifiable.
A major motivation behind the acquisition of Thomson’s TV unit was
acceleration of TCL’s development of TV technology, but Thomson’s CRT
and projection TV technologies were quickly replaced by new technologies.
As one TCL senior manager said:
Acquisition of Thomson didn’t help because its technical expertise lay
in projection TV sets. We had expected to sell a breakthrough design
by Thomson in large-screen TVs: a rear-projection model with a 61inch screen in our traditional market, China, but the market simply
disappeared for large-screen LCD TVs . . . . Our top decision makers also
underestimated the sheer difficulty of getting hundreds of people to cooperate on a common goal. They did not have clear accountability and
simply took a one-size-fits-all approach to all the M&A deals.
Finally, TCL not only failed to anticipate a boom in consumer demand for
flat panel TV sets but was slow to respond to a shift in consumer preferences.
Most TVs sold in the USA during the third quarter of 2006 were flat screens.
Japan and Europe also reached that milestone in 2006. When customers
started switching to new LCD screens and stopped buying old-fashioned CRT
and projection TV set, TCL’s European operations faced major restructuring
problems. In an effort to catch up, TCL announced plans in 2005 to buy
flat panels for its new flat-panel TV sets from LG.Philips LCD Co. Even so, it
already lost a key US distribution outlet when its contract expired with Best
Buy in 2006. As its CRT and projection TV sales slowed down sharply, TCL
not only lost its crown as the world’s largest TV maker to Korean rivals, but
it piled up big losses on TCL and Thomson television brands amid a series of
strategic missteps.
4. Conclusions and implications
Based on theories of absorptive capacity, firms want to improve their competitive advantage by acquiring strategic assets within the constraints of
their absorptive capacity. Following this logic, we compare two prominent
Ping Deng
151
cross-border M&A deals by Chinese MNCs and confirm that a strategy such
as an overseas acquisition requires the acquiring firm to know its own
absorptive capacity and its determinants. The calculus of acquiring firms’
absorptive capacity captures the extent to which Chinese companies may
utilize M&A strategy to acquire strategic assets and achieve superior business performance. Differences in absorptive capacity may therefore explain
why acquiring firms, facing similar competitive landscapes, may achieve
substantially different outcomes. Firms like Lenovo with strong absorptive
capacity have a better understanding of new knowledge and can harness it
for innovative activities and financial performance. Without such a capability, acquiring firms like TCL are not able to acquire and transfer new
knowledge from the acquired firm. Changing structures and practices of the
acquired firm suitable to the new markets destroys the source of competitive
advantage.
Our study offers practical guidance for decision-makers in formulating and
implementing a resource-driven acquisition strategy. A mere preoccupation
with the seemingly positive contribution of strategic assets to competitive
advantage is not likely to realize M&A potential. Rather, decision-makers
must evaluate their own absorptive capacity as the first step in international
acquisitions. Only then can they judge whether they can utilize cross-border
M&A deals for their global expansion strategy. Even if a firm internalizes
transactions through M&A, with weak absorptive capacity, it may be unable
to assimilate and successfully apply the benefits of acquired strategic assets,
as shown in the TCL case. Alternatively, a firm with strong absorptive capacity can internalize synergies to leverage the acquired strategic assets, thus
enhancing its competitive advantage, as shown in Lenovo’s acquisition of
IBM PC unit.
The biggest challenge that most firms face with overseas acquisitions is
not only getting the right deal, but having the capability to handle the integration. This has important strategic implications especially for emerging
MNCs eager to know whether acquisitions of foreign firms will allow them to
improve their international competitive edge over well-established Western
multinationals.
Acknowledgment
This paper is a revision of a previous version which was presented at the
Academy of Management Annual Meeting, August 7–11, 2009, Chicago,
USA. This research was supported in part by the Program for Professor of
Special Appointment (Eastern Scholar) at Shanghai Institutions of Higher
Learning. I am deeply grateful to the editors (Drs Ilan Alon, Marc Fetscherin,
and Philippe Gugler) and four anonymous reviewers for their constructive
comments and suggestions, which helped significantly in improving the
manuscript.
152
Micro-Environmental Determinants of Chinese FDI
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Part III
Chinese FDI in Europe
and North America
8
Push and Pull Factors for Chinese
OFDI in Europe
Yun Schüler-Zhou, Margot Schüller, and Magnus Brod
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 hightech companies have not been realized due to legal, public or shareholder
opposition.
Since the global financial crisis, the investment climate in Europe has
relaxed and Chinese investment has become more welcome. The incentive
policy of the state-related investment promotion agencies (IPAs) in Europe
aims to attract foreign direct investment (FDI), including that from emerging
economies such as China. In the competition for FDI, national and subnational governmental investment agencies in Europe have adopted various
incentive schemes, including tax exemptions and welcome schemes. These
pull factors differ from country to country since no harmonized policy on
FDI exists, in contrast to the EU’s common foreign trade policy. The same
holds true for the statistical reporting of FDI by EU member countries, which
makes the interpretation of FDI flows into the European Union difficult.
The debate on multinational company (MNCs) location choice has a long
tradition in international business research. Many studies center on the
157
158
Chinese FDI in Europe and North America
question of what drives location decisions. At the firm level, determinants
such as size, performance, and industry have been identified (Terpstra & Yu,
1988; Nachum & Zaheer, 2005) as well as the company’s relational linkages
(Chen & Chen, 1998). At the country level, home and host country characteristics play a crucial role in location choice (Dunning, 1998; Harzing &
Sorge, 2003). In this paper, we concentrate on exploring institutional factors
in the home and host countries that determine MNC location decisions.
Applying the concept of institutional and structural push and pull factors,
we focus on the Chinese government’s policy guidelines regarding investment in the EU in terms of countries and sectors and on the incentives that
EU countries offer to attract Chinese investors.
While much has been written about the evolution of the Chinese government’s ‘going-global’ policy through its various stages (Voss, Buckley, &
Cross, 2008; Luo, Xue, & Han, 2010), no research on the government’s policy on country and industry recommendations for OFDI exists. We consider
this aspect of the government’s policy an important push factor and contrast
it with the European IPA policy in attracting Chinese OFDI. This is the first
time such a study has been undertaken.
1. Push factors for Chinese OFDI
Several types of push factors contribute to the internationalization of companies from developing countries (UNCTAD, 2006, Overview). Masron and
Shahbudin (2008) differentiate between institutional and structural push
factors. While government policy belongs to the institutional push factors
category, structural push factors include the domestic economy and market.
The research on institutional factors in China focuses on the government’s
‘going-global’ policy, the role of specific incentives, and actors, and their
interplay (Scott, 2002; Wang, 2002; Peng, 2005; Voss et al., 2008; SchülerZhou & Schüller, 2009; Luo et al., 2010). Through the approval process for
OFDI projects and access to foreign exchange and preferential loans, the
government exerts a direct influence on the growth and patterns of OFDI.
Initially, only large state-owned enterprises from the natural resource sector
were supported to invest abroad. To help small and medium-sized enterprises (SMEs) develop their international markets, a government regulation
on capital support for SMEs was introduced in 2000, at the very beginning
of the ‘going-global’ policy. In contrast, the promotion of OFDI by privatelyowned companies was only approved in February 2006. The general trend
since 2001 has been a gradual relaxation of the investment project approval
process, easing access to foreign exchange and granting credit under preferential conditions (Luo et al., 2010, pp. 75–77). In sum, Chinese government
policy is intended to shape Chinese OFDI decisions (Voss et al., 2008).
To explain the geographical and sectoral distribution of Chinese OFDI,
including why Chinese companies invest in the European Union, we focus
Yun Schüler-Zhou et al. 159
on government policy for country and industry recommendations as an
important push factor.
With the introduction of the Countries and Industries for Overseas Investment
Guidance Catalog (Duiwai touzi guobie chanye daoxiang mulu; the ‘Catalog’)
in 2004, the Ministry of Commerce (MOFCOM) and the Ministry of Foreign Affairs (MoFA) established an instrument for directing OFDI toward
specific countries and industries. As a referential list for foreign economic
cooperation departments and companies, the catalog offered guidance for
investors on preferential policies related to financial support, exchange
rates, taxation, and other kinds of favorable treatment (Luo et al., 2010,
p. 76). When asked about the function of the catalog at a press conference in July 2004, a MOFCOM representative explained that it should
guarantee that OFDI serves China’s economy by securing access to natural resources, enhancing companies’ technological capacity, and acquiring
international brands. MOFCOM requested that companies invest in countries that (1) have a close relationship with China, (2) exhibit complementarities to the Chinese economy, (3) are important trading partners of China,
(4) have signed investment and taxation agreements, and (5) are part of an
important economic region in the global economy (MOFCOM, 2004).
The first version of the catalog, published in 2004, was a list of 67 recommended countries and seven recommended industries for OFDI. The country
recommendations included 26 Asian countries (three in Central Asia), 13
African countries, 12 European countries (ten of them in the European
Union), 11 countries in North and South America, and five countries in
Oceania. According to this breakdown, companies were advised to invest primarily in Asia, with Europe ranking second as a recommended destination.
The ten EU countries listed in the catalog included France, Germany,
Ireland, Sweden, the Netherlands, and the UK, all ‘old’ EU member countries. The catalog included three countries newly incorporated in 2004: the
Czech Republic, Hungary, and Poland. One EU applicant, Romania, was
also named (EU member as of 2007). The following year, the catalog was
extended by an additional 28 countries, of which ten were African countries, eight Asian countries and six were European countries. Two ‘old’ EU
member countries, Austria and Spain, and another EU applicant country,
Bulgaria (EU member as of 2007), were added (see Table 8.1).
An analysis of the types of industries suggested for investment in each EU
country in the 2004 and 2005 catalogs reveals that for manufacturing, the
most recommended industries were electric machines and consumer electronics, while for services, trade and distribution were suggested most often.
In the highly technologically developed EU member countries, France,
Germany, the UK, and Sweden, investment in R&D was advocated as well.
Rather surprisingly, investment in IT services was recommended in the
‘new’ EU member countries: the Czech Republic, Poland, and Romania.
In 2007 MOFCOM and the National Development and Reform Commission
160
Table 8.1 European countries and industries recommended for Chinese OFDI in 2004
and 2005 (based on the 2004 and 2005 ‘catalogs’)
Country
Agriculture1
and
mining
Manufacturing
Services
UK
Biotechnology, computers
Trade, distribution,
transportation and
storage, R&D, finance,
legal services
Germany
Electric machines and
electrical materials,
pharmaceuticals, chemical
products, electronic products
Trade, distribution,
transportation,
finance, R&D
France
Handicraft articles,
computers, white goods (air
conditioners, microwaves,
vacuum cleaners)
Trade, distribution,
R&D
Sweden
Electronic appliances,
computers, building
materials, precision
instruments
R&D, tourism
Netherlands
Equipment (office
equipment), computers
Trade, distribution,
transportation, and
storage
Ireland
Biotechnology, metal goods
Computer
programming,
infrastructure
Hungary
Consumer electronics, metal
goods, electrical tools,
suitcases
Trade, distribution,
tourism
Electric machines and
electrical materials, electronic
appliances, computers, TVs,
textiles, pharmaceutical
products and equipment
IT services,
infrastructure
Consumer electronics,
textiles, bicycles and
components, products made
of wood and plastic,
computers
Trade, distribution,
telecommunications,
infrastructure
Textiles, transport equipment
and components (for ships
and motorcycles), handicraft
articles, moulding machines,
electrical equipment
IT services
2004 catalog
Poland
Copper
Romania
Czech
Republic
Forestry
Yun Schüler-Zhou et al. 161
2005 catalog
Austria
Spain
Bulgaria
Fishing
Electronic appliances, spare auto
parts, equipment (measuring and
office equipment)
Trade, R&D
Textiles, apparel, shoes, building
materials, machinery
Trade, distribution
Food, transport equipment (ships),
communications equipment,
computers, other electronic
equipment
Construction
1 Including forestry, animal husbandry, and fishing.
Source: Authors’ compilation based on MOFCOM and MoFA (2004, 2005).
(NDRC) published a third, updated Catalog, which included 32 countries.
In Europe, 13 countries, ten of which were EU member countries, were
recommended as investment locations. In addition to the ‘old’ EU members, Belgium, Denmark, Greece, and Portugal, also included in the updated
catalog were the newly integrated Eastern European countries, Estonia,
Lithuania, Slovakia, and Slovenia.
Industries recommended for investment included capital- and technologyintensive industries such as chemicals, pharmaceuticals, precision instruments, and machinery (in Belgium, Denmark, and Finland), while in the
Eastern European countries investments in communications equipment and
electronic appliances were most recommended. In services, the suggested
fields for investment in Eastern Europe included tourism, trade, and distribution, while in the ‘old’ EU member countries, investment in R&D and
green technology was advocated (see Table 8.2). All together, there were
recommendations for 23 EU member countries; four EU countries are not
mentioned in the catalog (Italy, Malta, Latvia, and Luxembourg).
Due to European integration, the EU market is one of the most interesting destinations for Chinese investors. By entering one EU member country,
Chinese companies have access to the entire single European market. There
are, however, huge discrepancies between the ‘old’ and the ‘new’ EU member countries in terms of economic and social development levels as well as
political and cultural characteristics (Zhang & Filippov, 2009, p. 5). In order
to highlight the different strategies which MOFCOM suggested in the catalog regarding the mature, industrialized EU countries and the less developed
newer EU members, we divide the 23 EU countries into Western and Eastern
EU countries.1
Figure 8.1 shows the different industries MOFCOM suggests for the
Western and Eastern EU countries. First, Chinese companies are encouraged to invest in manufacturing in the EU, particularly the manufacture
of electronic products, textiles, apparel, and machinery. While Western EU
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Chinese FDI in Europe and North America
Table 8.2 European countries and industries recommended for Chinese OFDI in 2007
(based on the 2007 ‘catalog’)
Country
Agriculture1
and mining
Manufacturing
Services
Belgium
Chemicals and chemical
products
R&D, transportation
and storage, trade,
distribution, water
transport
Denmark
Machinery, pharmaceuticals,
handicraft articles
Green technology,
travel agencies
Greece
Suitcases, consumer
electronics
Transportation,
travel agencies
Cyprus
Textiles, apparel, shoes,
products made of plastic
Travel agencies,
tourism, hotels
Estonia
Textiles, apparel, products
made of wood, electronic
appliances (air conditioners
and refrigerators)
IT services, tourism,
hotels
Precision instruments
R&D, travel agencies
Finland
Forestry
Lithuania
Leather goods, textiles,
apparel, suitcases
Portugal
Communications
equipment, computers,
other electronic equipment,
machinery, building
materials
Trade, distribution,
travel agencies
Slovakia
Farming machines,
electronic appliances
Travel agencies,
tourism, hotels
Slovenia
Products made of wood,
communications
equipment, computers,
other electronic equipment
Travel agencies,
tourism, hotels
1 Including forestry, animal husbandry, and fishing.
Source: Authors’ compilation based on MOFCOM, MoFA and NDRC (2007).
countries like Germany and Sweden are preferred host countries for the manufacture of high-tech machinery and equipment, the Eastern EU countries
such as Hungary, Poland, and the Czech Republic are favored for the manufacture of consumer electronics, textiles, and apparel due to their lower
production costs. Second, MOFCOM suggests that companies invest in services in the European Union, particularly trade and distribution and tourism.
While the Western EU countries are recommended for investments in trade
and distribution, the Eastern EU countries are preferred for investments
Yun Schüler-Zhou et al. 163
Financial services
Transportation and storage
IT and telecommunications
R&D
Tourism (e.g. travel agencies, hotels)
Trade and distribution
Food processing
Manufacture of wood and of products made of wood
Transport equipment (e.g., ships, automobiles)
Chemicals, chemical products and pharmaceuticals
Manufacture of machinery and equipment
Textiles, apparel, and artwork
Communications equipment, computers, and other electronic
products
0
2
4
6
8
10
12
14
16
Western EU countries
Eastern EU countries
Figure 8.1 Industries recommended for investment in Western and Eastern EU
member countries
Note: Western EU countries include the UK, Germany, France, Sweden, the Netherlands, Ireland,
Austria, Spain, Belgium, Denmark, Finland, and Portugal. Eastern EU countries are made up of
Hungary, Poland, Romania, Czech Republic, Bulgaria, Greece, Cyprus, Estonia, Lithuania, Slovakia,
and Slovenia.
Source: Authors’ compilation based on the frequency of recommendations in the 2004, 2005 and
2007 ‘catalogs’.
in tourism development. Investments in R&D and financial services are
suggested only for highly industrialized Western EU countries.
2. Pull factors for Chinese OFDI
Like push factors, the pull factors can also be grouped into institutional
and structural factors. While international and regional investment and
trade agreements, as well as institutions such as banks or IPAs involved in
OFDI, are counted as institutional pull factors, structural pull factors include
low factor costs, markets, and opportunities for asset-seeking companies
(Masron & Shahbudin, 2008).
Gaining access to local or regional markets is the driving motivation
for market-seeking companies that tend to invest more in large economies
or economies that are difficult to enter due to the host country’s regulations (e.g., trade barriers). By investing in these economies, companies can
reduce operational costs, for instance, transportation costs (Dunning, 1993).
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Chinese FDI in Europe and North America
Chinese investors have realized the benefits of European integration, which
means they can access the entire European market by entering only one EU
member country.
The European Union is not only China’s most important trading partner,
but also the market where Chinese companies face many dumping charges.
Therefore, replacing exports with investment in the European Union is
a better option for some Chinese companies. Traditionally, the attraction
of the huge European market has been the major pull factor for Chinese
OFDI (Buckley et al., 2007; Nicolas, 2009). In order to further explore and
secure this market, Chinese companies invest in trade-related fields such
as logistics, maritime transport, transport insurance, financial services, and
distribution, as well as in the development of specific ‘commercial hubs’
in Europe. The Greek government’s announcement that China is going to
invest in container terminals, airports, and shipbuilding in Greece is a recent
example of this approach (Financial Times, 2010).
It is not only the markets but also the high level of technology in many
European industries that pulls Chinese companies to the European Union.
Strategic asset-seeking and efficiency-seeking investors usually aim to acquire
the newest technology, as well as marketing and management expertise,
in highly developed host countries (Makino, Lau, & Yeh, 2002, p. 404).
In the Western EU countries, Chinese investment targets advanced technology, well-known brand names, and management expertise for industrial and
technological upgrading of the Chinese companies through learning and
adoption, combined with exploration of the markets. For Mathews, Chinese
companies are an example of ‘skilful learning and adoption-cum-adaptation
of advanced technologies combined with relentless focus on penetrating
western markets’ (Mathews, 2006).
The high level of business development is another pull factor for Chinese
efficiency-seeking investors, who try to rationalize their business processes,
including production, distribution and marketing, by taking advantage
of country differences in the cost of factor endowments or by realizing
economies of scale and scope (Dunning, 1993). Efficiency-seeking companies tend to go to countries with the best business environment for fully
realizing the internalization benefits of the company’s comparative advantages. In contrast to the Western EU countries, Eastern EU countries offer
significant advantages of low-cost but skilled workforces combined with low
entry barriers for Chinese investment.
In addition to the structural pull factors mentioned above, institutional
pull factors are crucial in explaining Chinese OFDI in the European Union.
Host government policies have an indirect impact on most of the marketrelated factors, but the government-related IPAs offer direct incentives to
attract FDI.
IPAs are intermediaries that work between markets and the state to influence investor location choices. Although IPAs exist in various organizational
forms, they all aim to attract investment, including FDI; maintain contact
Yun Schüler-Zhou et al. 165
with investors and other institutions involved in the investment process;
and are semi-public or state-owned companies or service units. Although formally independent, IPAs are part of the social networks of the regions they
operate in (Drahokoupil, 2004). Within the European Union, there is competition for FDI, especially in the Eastern European countries. In order to be
competitive, IPAs try to match their FDI incentives with those of other countries and subregions (Bandelj, 2003, p. 381). As one of the players involved
in attracting FDI, IPAs have been analyzed as part of foreign-investment
related topics, for example, in the Czech Republic. Their role as intermediaries is especially important in the Eastern EU countries, where they
bridge state engagement in the economy with the markets (Drahokoupil,
2004, p. 352). Incentives for attracting FDI usually have to be in line with
the market systems in the EU member countries and should not undermine transparency standards (Graham, 2003). However, there exists a broad
spectrum of incentives for attracting FDI, which differ in quantity and
quality.
In order to study the policy approaches of European IPAs for investments
from China, we conducted a questionnaire-based survey. Beginning in June
2009, we sent questionnaires to all 92 national and subnational IPAs in the
27 EU member states. The survey focused on how the IPAs monitor Chinese
investment (registration of companies, job creation, and the use of these
investment data for policymaking) and on the incentives for and restrictions
on Chinese investors. We received responses from 35 IPAs (response rate of
38 percent), including 17 national IPAs, which limits the explanatory power
of the paper to some extent. Data obtained directly from these IPAs were
complemented by a content analysis of their websites and public relations
material.
Our survey revealed that approximately two-thirds of IPAs (23) have established a special China Desk or Investment Office for handling Chinese
investment, either within their home countries/regions or in China (a total
of 36 such offices). The IPAs with a subsidiary in China often have a regional
focus (48 percent) on economically more developed areas such as Shanghai,
Beijing, Jiangsu, and Xiamen. According to the results of the questionnaire,
Chinese companies are allowed to invest in almost all industries except for
the defense sector, legal advisory services, nuclear goods, and waste disposal. According to the Czech Republic’s IPA, foreign investors face some
restrictions in the aerospace, bio- and nanotechnology, and advanced renewable energy industries. In Finland, restrictions exist for foreign investors in
biotechnology and pharmaceuticals, while in France, the IPA lists recycling,
storage, metals, and construction as restricted industries.
With regard to the incentives offered by national and subnational IPAs,
some notable variations exist. Most Western EU countries with strong
economies and well-developed business infrastructures do not offer any
special incentives at all. Respondents stressed that all foreign companies
enjoy national treatment with the same rights and obligations as domestic
166
Chinese FDI in Europe and North America
5
Other incentives
2
Real estate-related services and grants
3
Access to local networks
Loans
2
Special economic zones 4)
2
6
Subsidies
4
IPA services 3)
5
State guarantees
4
EU-financed incentives
8
Employment-related incentives 2)
5
R&D-tax incentive
11
Grants 1)
0
2
4
6
8
10
12
Figure 8.2 Incentives offered by IPAs to Chinese investors in the EU
Note: The figures in the diagram represent the addition of the number of IPAs providing incentives
in specific fields.
1) Grants refer, for example, to investment grants totaling up to 50 percent of the eligible
investment costs or job creation grants. 2) Includes grants and training. 3) Includes immigration
consultancy, establishment of business contacts. 4) Refers to special tax conditions and industrial
parks.
Source: Based on the Questionnaire Survey with IPAs conducted by the authors in 2009.
companies. The IPAs that offer incentives said they apply to all companies without national preferences or discrimination. However, within the
Western EU countries, some IPAs rely on specific incentives to attract
Chinese investors, including consultancy services, grants for investments,
and R&D tax incentives, as well as rent, leasing, and wage subsidies (see
Figure 8.2).
Compared to the IPAs from Western EU countries, most Eastern Europe
IPAs offer stronger and more complex incentives to Chinese investors. They
are also allowed to include Chinese investors in the EU-financed structural
support programs, which are specially designed to support these new EU
member countries. Some of the new members are trying to become the ‘commercial hub’ for Chinese companies in Europe. Hungary’s IPA, for example,
courts Chinese investors with slogans like ‘Open Europe Through Hungary’,
‘Hungary, Your Bridge to Europe’ or ‘Set Off Opportunities in Europe with
Hungary’ (IDT Hungary, 2005a, 2005b). At the opening of a representative
office by the China Investment Promotion Agency in Budapest, the director
of Hungary’s IPA underlined the country’s crucial role: ‘China sees Hungary
as a regional distribution, manufacturing and logistics centre’ (ITD Hungary,
Yun Schüler-Zhou et al. 167
2005a). Poland’s IPA is also keen to attract Chinese investors and is courting companies with the ‘first Chinese industrial park in Europe’ (Special
Economic Zone Koszalin City). In addition to the description of its attractive country-specific investment environment (human capital and strategic
location), Poland’s IPA touts the huge advantages of companies (including
Chinese investors) getting support from the EU: ‘90 billion Euros of EU
Funds (2007–2013)’ (Komasa & Dalekowschodnia, 2006).
The IPAs claim there are no specific conditions Chinese investors have
to fulfil to receive favorable investment conditions. A viable business plan
is required for financial assistance or grants, while, for employment grants,
the company has to maintain a certain employment level. The majority of
IPAs (90 percent of 33 respondents) approach Chinese companies directly
and more than half organize ‘road shows’ of their home country, investment locations, and environment as well as on specific industries in China.
About 55 percent organize matchmaking seminars, while 12 IPAs rely on
other events such as exhibitions, fairs, state visits, and trade missions. One
third of the respondents employ at least three to four different vehicles to
attract Chinese investors.
To some extent, our findings agree with the insights of other authors.
Drahokoupil, for example, states that the IPAs operate in a very competitive
environment and are under pressure to offer specific incentives to attract
investment from transnational companies (TNCs). These companies ‘expect
that states or regions will assist and subsidise their activity. The reluctance
to do so, or “unpreparedness” ’ [sic], is enough reason to invest somewhere
else’ (Drahokoupil, 2004, p. 357).
3. Chinese investment in the European Union
In contrast to its importance as a destination for Chinese exports, the
European Union is not given the same consideration by Chinese companies when it comes to OFDI. Based on MOFCOM statistics for the period
from 2005 to 2008, the volume of Chinese investment in the European
Union compared to total OFDI remained very small in both flows and stocks.
Only the year 2007 saw an investment volume that exceeded US$1 billion,
which represented 3.9 percent of the total OFDI (see Table 8.3). If we take
the OFDI flows into financial offshore centers in Asia and Latin America
into account, however, the distribution pattern changes considerably, with
Europe receiving a much larger share of OFDI (Schüler-Zhou & Schüller,
2009).
Official OFDI statistics show that Chinese companies invest in all of the
now 27 EU member countries (see Table 8.4). In 2007, approximately 13,000
local employees were working for Chinese companies (MOFCOM, 2008).
In 2008, Chinese OFDI in the European Union declined by 55 percent
compared to 2007, while the total Chinese outflow nearly doubled in that
168
Chinese FDI in Europe and North America
Table 8.3 Chinese OFDI flows and stocks (in total and in the EU, 2005–2008)
Flow (US$ million)
2005
Total
EU
%
2006
2007
Stock (US$ million)
2008
2005
2006
2007
2008
12.260 17.630
26.510 55.910 57.200
75.020 101.190 147.280
189.54 128.73 1044.12 466.62 768.01 1274.51 2942.1 3173.85
1.5
0.7
3.9
0.8
1.3
1.7
2.9
2.5
Note: In the years 2005 and 2006 financial investments were not included. In 2005 and 2006 the
EU consisted of 25 member countries; since 2007 the EU has encompassed 27 member countries.
Source: MOFCOM (2009).
year. The main reason was the huge decrease in investments in the financial sector. In contrast to OFDI flows to the financial sector, investment in
manufacturing grew from US$100 million in 2007 to US$164 million in 2008
(MOFCOM, 2009).
EU countries attracted more than US$3 billion in OFDI stock by the end
of 2008 (see Table 8.5). At the end of 2008, the stock of OFDI in manufacturing accounted for 25.6 percent of the total OFDI. The last few years
have seen a rapid increase of investment in manufacturing, especially in the
UK, Germany, Poland, Hungary, Romania, and France. The stock of OFDI in
the financial sector amounted to US$775.28 million, accounting for 24.4
percent of the total outflow to the European Union. The most important
destinations for Chinese OFDI in the financial sector were the UK, Germany,
and Luxembourg. Trading accounted for 14 percent of total outflow. Sweden,
Germany, and the UK were the countries with the highest shares in this sector. The mining sector accounted for 7.2 percent; the main destination was
the UK (MOFCOM, 2009).
With regard to the geographical distribution of Chinese OFDI in the
European Union, the bulk of the investment (OFDI stock) by the end of
2008 occurred in two member states: Germany and the UK, which received
more than 50 percent of the total Chinese OFDI stock in the European
Union. Among the Eastern EU countries, Poland, Hungary, Romania, and
the Czech Republic have also become important destinations for Chinese
OFDI. By the end of 2008, these Eastern EU countries, together with small
but growing investments in Slovenia, Slovakia, Lithuania, and Latvia, contributed US$332.51 million or 10.5 percent to the total Chinese OFDI in
the European Union.
Filippov and Saebi (2008, pp. 20–24) note that Chinese companies are
using the new EU member countries as a backdoor to Europe. While Chinese
companies are especially attracted to the Western EU member countries due
to their large markets and highly developed technology base, the Eastern
EU countries are considered a manufacturing base for export to the Western
EU region. Investment in the Eastern European countries began years before
157.21
0.05
−7.78
29.39
27.5
10.31
–
3.1
1.91
0.2
1.7
–
0.35
0.1
0.37
0.1
2.68
2.64
–
0.46
–
–
145.03
0.3
73.88
2.11
25.06
0.45
0.14
0.29
4.47
–
–
0.4
0.35
1.18
–
1.55
0.61
0.17
1.58
–
–
–
2004
–
–
505.02
189.54
–
10.79
24.78
128.74
6.09
–
7.46
3.84
–
1.47
–
1.72
0.65
–
0.13
2.87
1
–
–
2005
–
–
597.71
128.73
0.13
−58.91
35.12
76.72
5.6
25.29
7.63
5.31
–
7.3
0.04
–
0.37
0.1
–
9.63
5.3
–
9.1
2006
4.19
0.01
1540.43
1044.12
4.91
0.27
566.54
238.66
9.62
0.2
8.1
106.75
0.03
6.09
0.08
–
8.63
–0.1
11.75
6.8
68.06
−1.74
4.97
2007
Note: Between 2003 and 2006, financial investments were not included.
Source: MOFCOM (2009).
Europe
EU
Belgium
Denmark
UK
Germany
France
Ireland
Italy
Netherlands
Greece
Spain
Austria
Bulgaria
Hungary
Malta
Poland
Romania
Sweden
Latvia
Czech Republic
Cyprus
Estonia
Finland
Lithuania
Luxemburg
Portugal
Slovakia
Slovenia
2003
Flow (US$ million)
42.13
2.66
875.79
466.62
–
1.33
16.71
183.41
31.05
42.33
5
91.97
0.12
1.16
–
–
2.15
0.47
10.7
11.98
10.66
–
12.79
2008
–
–
–
0.2
0.1
–
0.41
74.43
75.15
83.61
13.12
0.24
19.18
5.9
–
101.81
0.7
0.6
5.43
0.37
2.72
29.75
6.07
1.61
0.33
487.45
2003
Table 8.4 Geographical distribution of the Chinese OFDI in the EU (2003–2008)
–
–
–
0.2
0.1
–
1.64
67.2
108.46
129.21
21.68
0.04
20.84
8.97
0.35
127.67
0.7
1.46
5.42
0.37
2.87
31.1
6.44
1.61
1.11
676.65
2004
0.9
3.93
–
–
0.1
0.12
1272.93
768.01
2.34
96.59
107.97
268.35
33.82
0.04
21.6
14.95
0.35
130.12
0.07
2.99
2.81
1.37
12.39
39.43
22.46
1.61
1.38
2005
0.93
3.93
–
0.2
0.1
1.4
2269.82
1274.51
2.67
36.48
201.87
472.03
44.88
25.3
74.41
20.43
0.35
136.72
0.32
4.74
53.65
1.97
87.18
65.63
20.02
2.31
14.67
2006
Stock (US$ million)
0.94
3.93
67.02
1.71
5.1
1.4
4458.54
2942.1
33.98
36.75
950.31
845.41
126.81
29.23
127.13
138.76
0.38
142.85
4.04
4.74
78.17
1.87
98.93
72.88
146.93
0.57
19.64
2007
3.59
3.93
122.83
1.71
5.1
1.4
5133.96
3173.85
33.3
38.08
837.66
845.5
167.13
107.77
133.6
234.42
1.68
145.01
4.04
4.74
88.75
4.81
109.93
85.66
157.59
0.57
32.43
2008
169
170
Chinese FDI in Europe and North America
Table 8.5 Sectoral distribution of the Chinese OFDI stock in the EU at the end of 2008
Stock (US$
million)
Share of total stock
(US$ million)
Manufacturing
812.48
25.6%
Services
Financial
1791.29
775.28
56.4%
24.4%
Trade
444.27
Business
services
Transportation
& storage
Real estate
Agriculture1
Mining
14%
Main destinations
Germany, UK,
Romania, Poland,
Hungary, Italy, France,
Czech Republic
UK, Luxembourg,
France, Germany, Italy
Germany, Sweden, UK,
France, Italy, Romania
334.41
10.5%
170.38
5.4%
Netherlands, Ireland,
Germany
n.a.
66.95
138.49
2.1%
4.4%
n.a.
n.a.
227.59
7.2%
UK
1 Including, forestry, animal husbandry, and fishing.
Source: MOFCOM (2009).
their accession and has grown substantially since then (see Table 8.4). In
December 2003, the compilation of an Overseas investment guidance catalog
for processing trade of consumer electronics in Central and Eastern European countries was announced by China. The introduction of this catalog indicated
once again that the Chinese government acknowledged the benefits of the
European integration, pushing Chinese companies to invest in those Eastern
European countries expected to become EU members. Poland, Romania,
Czech Republic, Hungary, and Slovakia were suggested as the main sites
for investment in processing trade of consumer electronics. This policy recommendation was based on the belief that these countries have a cost
advantage and a skilled, educated workface.
4. Perspective
Chinese companies have discovered the European Union as an attractive
investment location. So far, the share of Chinese OFDI in the European
Union is still rather small and concentrated in only a few countries and
industries. Based on our analysis of the pull and push factors, we expect,
however, a notable increase of Chinese investment in the European Union
Yun Schüler-Zhou et al. 171
Table 8.6 Comparing pull and push factors in Western and Eastern EU countries
Push
Western EU countries
Eastern EU countries
•
• Recommended for the
manufacture of consumer
electronics, textiles and
apparel
• Recommended for
investments in the
development of tourism
• Special tax zones and
industrial parks
• Development of ‘commercial
hubs’
• EU-financed support
•
•
Pull
•
•
•
•
Recommended for investments
in high-tech machinery and
equipment
Recommended for investments in
trade and distribution
Recommended for investments in
R&D and financial services
Strong economies, high incomes
Well-developed business
infrastructure
Market-based services
Short-term grants, R&D incentives
in the medium term. The state guidelines for Chinese company investment
demonstrate a strategic approach based on the assessment of the particular
strengths of industries in each EU country. While Western EU countries are
recommended for high tech investment, financial services, and R&D, Eastern
EU countries are targeted for OFDI in manufacturing consumer electronics,
textiles, and tourism (Table 8.6).
In contrast to the non-compulsory nature of policy guidelines in the
West, Chinese companies must consider official recommendations in their
OFDI strategy, especially state-owned companies. At the same time, companies receive specific government incentives for investing in particular
countries and industries in the context of the ‘going global’ policy. Therefore we disagree with Nicolas (2009, p. 5) that the choice of the country is
partly opportunistic and depends on the availability of acquisition targets
and partly on the strategies of Chinese companies. We argue that Chinese
investment decisions are still heavily influenced by the state.
The strong interest of IPAs in attracting FDI from China will also contribute to faster OFDI growth in the medium-term. Eastern EU countries
are especially eager to absorb FDI in order to restructure their economies.
In addition to market-compatible incentives, they offer favorable conditions for Chinese investors, including the establishment of Special Economic
Zones (SEZ), industrial parks and EU-financed support. In the West, the
global financial crisis has relaxed the attitude toward Chinese OFDI and we
believe the investment climate in the Western EU countries will change in
the medium term to make Chinese investments more acceptable.
EU policymakers at the national and subnational levels should be
aware that the Chinese government’s ‘going global’ policy is a strategic approach to support the internationalization of domestic companies. This approach includes setting up specific country- and industryrelated investment guidelines based on a comprehensive assessment of the
172
Chinese FDI in Europe and North America
comparative advantages of each EU country, combined with a complex set
of incentives. It is doubtful that a similarly strategic attitude toward foreign
investment can be found on the EU side, especially with regard to which
kind of Chinese investments should be encouraged.
This study reveals a distinctive pattern of Chinese OFDI in Western and
Eastern EU countries. As a next step, research should focus on how much
the comparative advantages of each EU country correspond to the sectoral
and geographical distribution of Chinese OFDI and whether existing clusters
in the European Union play a role in Chinese investment decision-making.
Note
1. The division between Western EU countries and Eastern EU countries is based on
the National Geographic Society’s definition of ‘Western and Eastern Europe’. Due
to Greece’s low income level, we have included this country in the group of the
Eastern EU countries.
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9
The Rise of Chinese OFDI in Europe
Jan Knoerich
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.
Investments by Chinese companies in the European Union (EU) followed
the general surge of Chinese OFDI with a time lag of a few years. As shown
in Figure 9.1 (see also Table 9A.1), Chinese OFDI stock in the EU expanded
from US$422 million in 2003 to more than US$3.79 billion in 2009, a ninefold increase within only seven years. Most striking was a jump in annual
OFDI in the EU from less than US$129 million in 2006 to US$1.04 billion a
year later, though flows diminished later under the impact of the economic
crisis.
This surge raises several important questions. As little is known about
Chinese investments in the EU, it is important to identify their basic characteristics, including preferred destination countries, investment motivations,
and preferred entry modes. This chapter examines these characteristics in
detail.
Moreover, it is intriguing that Chinese investments in the EU constitute an investment flow from an emerging or developing economy to more
advanced, mature economies, which is still quite an unusual phenomenon.
The key question concerns the specific competitive advantages that make
such investments feasible. An alternative question may be to what extent
such advantages actually exist – Chinese firms may even invest in the EU
in order to source competitive advantages. On the basis of theoretical conceptualizations on the competitive advantages and internationalization of
firms investing abroad, this study assesses how investments from China to
175
176
Chinese FDI in Europe and North America
4
1.2
Flows
Stock
3.5
1
3
0.8
2.5
2
0.6
1.5
0.4
1
0.2
0.5
0
2003
0
2004
2005
2006
Stock
2007
2008
2009
Flows
Figure 9.1 Chinese OFDI into the EU (2003–2009, US$ billion)
Note: Excludes Luxembourg in 2009 (an outlier with unusually high amounts of Chinese OFDI,
most likely in transit).
Source: MOFCOM (2007, 2008, 2009, 2010) Statistical Bulletin of China’s Outward Foreign Direct
Investment.
more advanced economies become feasible and sustainable. Are Chinese
investments in the EU undertaken on the basis of existing competitive
advantages, or do they constitute the sourcing thereof? I explore whether
investments in the EU and other mature economies are an important avenue
for firms from developing economies to grow, develop, and catch up with
their counterparts from advanced economies.
This chapter provides one of the first analyses of Chinese OFDI in the
EU as a whole, considering the EU as a cohesive economic entity with its
own specific setting. The analysis relies primarily on statistical data and a
survey of investment promotion agencies (IPAs). The first seven years since
the surge of Chinese OFDI in 2003 form the time frame of analysis, which
begins with a discussion of relevant theories and literature, followed by a
set of prior assumptions and an explanation of the research design. The
body of this study has several analytical sections, ending with a conclusion
section.
1. Background and research design
1.1. Theoretical considerations
A glance at the development of theories on foreign direct investment (FDI)
reveals that they have gone through a set of stages in line with the prevalent
Jan Knoerich
177
global FDI patterns of the time. Early theories emerged on the basis of studies that examined FDI among developed countries, and soon after also took
FDI from developed to developing countries into account (e.g., Dunning,
1958; Vernon, 1966). Many studies of this era paid attention to a firm’s
possession of competitive, ownership, proprietary, or oligopolistic advantages that endowed it with a capability to invest, survive, and undertake
successful business in a foreign and less familiar environment (Caves, 1971,
1974a; Hymer, 1976). These advantages were seen as coming from a variety of sources, including product differentiation, technological capabilities,
marketing skills, managerial abilities, scale economies, and government
intervention (Kindleberger, 1969; Caves, 1974b). Dunning incorporated this
thinking into his widely acclaimed ‘eclectic paradigm’, adding location
and internalization advantages to the picture (Dunning and Lundan, 2008;
Dunning, 1993, 2000, 2001a, 2001b).
Internalization is the replacement of markets by hierarchies, resulting
in the expansion of a firm’s boundaries (Dunning, 1993). The concept of
internalization is strongly linked to transaction cost theory, which postulates that, under imperfect markets, the hierarchical form of economic
exchanges within the firm is preferred over reliance on the market mechanism if bounded rationality and opportunism constitute a major problem
in a transaction (Williamson, 1981; Barney & Hesterly, 1996). If internalization occurs in international markets, multinationals are formed (Buckley &
Casson, 1991).
Another theory of that time was the internationalization approach
(Johanson & Wiedersheim-Paul, 1975; Johanson & Vahlne, 1977). Scandinavian in origin, it suggested that firms internationalize sequentially (e.g.,
from the servicing of a market through exports via the establishment of
representative or sales offices to overseas production), driven by incremental acquisition of experiential knowledge about foreign markets and the
reduction of ‘psychic distance’ (i.e., unfamiliarity with norms, society, language, culture, politics, and so on of the host country), which enables
firms to gradually increase the level of their resource commitment to the
foreign market. This approach was considered particularly relevant in the
analysis of the early stages of internationalization (Johanson & Vahlne,
1990).
When South-South FDI became an inherent element of global FDI patterns, relevant explanatory theories emerged (Lecraw, 1977; Lall, 1983;
Wells, 1983; Pavitt, 1988; Cantwell & Tolentino, 1990; Tolentino, 1993;
Beausang, 2003). The major challenge was to identify the sources from
which developing country multinationals derived their competitive advantages to invest abroad. The findings emphasize flexible, small-scale, and
labor-intensive production and the generation of a relatively low-quality
output available for sale at fairly low prices (Lecraw, 1993). OFDI by firms
from developing countries was geared toward ‘neighbouring, “downstream,”
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Chinese FDI in Europe and North America
developing countries with lower levels of industrialization and technological
capabilities’ (Lecraw, 1993). Some findings even suggest that developing
country firms do not possess any such ownership advantages and need to
build them over time on the basis of inferior technologies and through
technology transfer from mature economies (Beausang, 2003). Studies of
developing country multinationals are comparatively rare, often case-based,
and tend to focus solely on South-South FDI (Yang, 2005). This suggests
considerable scope for further research, especially with regard to recent
OFDI from developing country multinationals in mature economies and the
role and nature of ownership advantages.
Perhaps most significant is the recognition during the last two decades
that firms also engage in FDI to secure valuable assets to create competitive advantages, termed created or strategic asset-seeking (Wesson, 1993;
Dunning, 1995, 1998a, 2001a; Wesson, 1999; United Nations Conference
on Trade and Development (UNCTAD), 2006). Several studies confirm the
presence of such motivations (Lecraw, 1993; Almeida, 1996; Dunning, 1996;
Shan & Song, 1997; Dunning, 1998b; Kuemmerle, 1999; Ivarsson and
Jonsson, 2003; Cantwell et al., 2004). Asset-seeking can occur out of a position of weakness with the purpose of overcoming competitive disadvantages
vis-à-vis other firms (Wesson, 1999). The concept has recently been used
to explain investments from developing country firms in more advanced
economies (Moon & Roehl, 2001; Makino et al., 2002; UNCTAD, 2006).
In fact, some evidence exists that Chinese firms have asset-seeking as a key
motivation when they invest abroad, which they often do from a position
of weakness (Zhan, 1995; Young et al., 1996; Child & Rodrigues, 2005; Wu,
2005; Yang, 2005; Deng, 2007, 2008; Ash, 2008; Rui & Yip, 2008).
This dichotomy between use of advantages on the one hand, and their
pursuit on the other, has become a major point of debate about Chinese
OFDI, especially if Chinese firms invest in mature economies. Accounts in
the literature of the competitiveness of Chinese firms vary. Some picture
Chinese firms either as internationally competitive or becoming increasingly
so, with potential to uproot existing global competitive structures (Raskin &
Lindenbaum, 2004; Zeng & Williamson, 2003; Sigurdson, 2005). More frequently, however, accounts show a lack of ownership advantages (e.g., in
technological, managerial, or innovative capabilities), suggest deficiencies
in productivity and company performance, question catch-up potential or
refer to strategic weaknesses (Andreosso-O’Callaghan & Qian, 1999; Child
and Tse, 2001; Nolan, 2001, 2002; Gilboy, 2004; Steinfeld, 2004; Wu, 2005;
Yang, 2005; Deng, 2008; McKinsey, 2008). Given these concerns about the
competitiveness of Chinese firms, it is intriguing that OFDI from China
to advanced economies in Europe and elsewhere is expanding at a fast
pace. Meanwhile, researchers are still struggling to identify what may be the
particular and possibly unique characteristics of Chinese OFDI, justifying
Jan Knoerich
179
its individual consideration and possibly even a special theory (Child &
Rodrigues, 2005; Buckley, Clegg, Cross, Liu, Voss, & Zheng, 2007; Buckley,
Cross, Tan, Xin, & Voss, 2008).
The body of literature on Chinese OFDI has been constructed only very
recently and with limited data availability and restricted access to detailed
and reliable information. Existing studies on the internationalization of
Chinese enterprises tend to focus on a select few larger and much publicized
cases of successful companies (e.g., Haier, Huawei, Lenovo, TCL and ZTE),
for which sufficient information exists in the public domain (e.g., Child &
Rodrigues, 2005; Wu, 2005; Deng, 2007; Bonaglia, Goldstein & Mathews,
2007; Deng, 2008; Rui & Yip, 2008; Liu & Buck, 2009; Yang, Jiang, Kang, &
Ke, 2009). Because they are frequently studied, these cases of larger greenfield
investments and mergers & acquisitions (M&As) gradually begin to represent the general pattern of Chinese overseas investments, even though they
are more likely special cases that do not reflect the typical experience and
situation of most Chinese companies abroad. A few interesting case studies of less well-known companies exist (e.g., Young, Huang, & McDermott,
1996; Zhang, 2003a; Zhang & Edwards, 2007; Knoerich, 2010), together
with some notable survey material (e.g., Keller & Zhou, 2003; Asia Pacific
Foundation of Canada, 2005, 2006; Liu & Tian, 2008; CCPIT, 2010). Nevertheless, the literature paucity remains, calling for further information from
the field. The collection of interview material for this chapter seeks to address
this need.
Finally, research on Chinese OFDI in Europe is also in its infancy, as it
only slowly emerged since inflows peaked in 2007. A key finding in most
studies is that Chinese companies primarily invest in Europe to gain market access (market-seeking), and to acquire competitive advantages through
asset-seeking with a focus on technology and know-how (Zhang, 2003a;
Zhang and Edwards, 2007; Ash, 2008; Filippov & Saebi, 2008; Hay, Milelli
& Shi, 2008; Liu & Tian, 2008; Milelli & Hay, 2008; Burghart & Rossi, 2009;
Nicolas, 2009; Knoerich, 2010). More needs to be done, however, to understand Chinese investment patterns in the 27 member states. In particular,
the above research fails to identify the avenues through which Chinese firms
in Europe source competitive advantages.
Previous research on inward FDI provides inspiration for the identification
of such avenues. The establishment of ‘listening posts’, for example, enables
a firm to gather information about the mature economy market and monitor competitors’ products and technologies. Firms may also benefit from
‘reverse spillovers’ (Driffield & Love, 2003; Driffield & Love, 2005; De Propris
& Driffield, 2006), which are backward and forward linkages with host economy firms that facilitate the transfer of know-how and skills (JBICI, 2002).
Host country competition may also motivate firms to enhance their performance (‘competition effect’) and imitate successful production and business
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Chinese FDI in Europe and North America
practices (‘demonstration effects’), while labor turnover can facilitate
diffusion of local skills to foreign firms (see JBICI, 2002; Saggi, 2002, 2004).
Finally, host country firms with desired technologies, brands, and capabilities can be purchased. In addition, OFDI can also stimulate exports from the
home economy, increase productivity, and in certain cases even enhance
employment (UNCTAD, 2010a). This chapter considers these avenues in its
examination of Chinese OFDI in the EU.
1.2. Assumptions and methodology
The theoretical conceptualizations of the previous section give rise to some
possible assumptions regarding the patterns and characteristics of Chinese
investments in the EU. For example, while an approximately equal spread
among EU member countries in proportion to size is the most straightforward assumption about the geographic location of Chinese investments
in the EU, theory would suggest preference for less developed (Eastern
European) EU countries, where costs are lower, or for countries with a
lower perceived psychic distance. Initial empirical findings, however, suggest large countries and major trading partners with China to be preferred
destinations (Milelli & Hay, 2008; CCPIT, 2010). The objective of entering a specific country for its individual market should be less significant,
given that the EU has established itself as a regional market and economic union. In terms of motivation, the literature suggests both marketand asset-seeking to be relevant, though it remains unclear how Chinese
firms undertake both concretely. Finally, large greenfield investments or
M&As would be likely entry modes, given the focus on respective cases in
the literature.
Overall, traditional theory would opt for the assumption that Chinese
firms have developed sufficient ownership advantages to invest in the EU,
based on competitive strengths developed over 30 years of economic reform
and internationalization. Theory suggests that asset-seeking can only have a
minor role, and that firms do not invest out of a position of weakness. Therefore, one expects investments by large and strong Chinese firms to undertake
productive activities in the host country.
To address these issues and verify the correctness of these assumptions, quantitative data was combined with qualitative evidence from field
research. Descriptive statistics were derived from the Statistical Bulletins of
China’s Outward Foreign Direct Investment, published by the Ministry of Commerce (MOFCOM) of China. The key source of qualitative evidence was
information made available from European IPAs. Having contact with many
Chinese enterprises that invest in the EU, the staff working for IPAs have a
unique kind of oversight, melding both aggregate and firm-level information
into their accounts. Hence, information obtained from IPAs forms an interesting middle ground between pure macroeconomic analyses and firm-level
or case-based approaches.
Jan Knoerich
181
In the summer of 2007, personal interviews of one hour on average
were undertaken at IPAs in Beijing and Shanghai, in English, Chinese, or
German, and tape recorded and transcribed. Subsequently, further information was requested from IPAs that did not have a representative office in
China by phone and email. Taken together, information was received from
a total of 27 European IPAs, ensuring sufficient coverage of the entire EU
(see Table 9A.2). For further verification, additional interviews were conducted at the China Investment Promotion Agency (CIPA) under MOFCOM
and at several Chinese companies in China, Germany, and the United
Kingdom.
The IPAs were approached with a list of questions (see Table 9A.3). The
answers obtained were complemented with material from IPA brochures
and websites. Taken together, the various collected materials allowed for
a sufficiently comprehensive and insightful assessment of Chinese investment activity in EU member states. A rigorous coding procedure yielded
a sizeable database of detailed information from different countries in
27 informational categories (see Tables 9A.4 and 9A.5 for summarized
excerpts).
To ensure consistency and make the analysis more insightful, all 27 EU
member states were included in the full analysis even if they had not yet
been EU members in 2003 or later years, and an idiosyncratic approach was
followed in dividing the EU into separate areas. Germany and the United
Kingdom are considered each as one separate area. The third area consists
of the next three large Western European economies, France, Italy, and
Spain. Adding the other ten Western European member states yields the next
group.1 The fourth group includes the ten economies that entered the EU in
2004.2 Finally, the last two accession states, Bulgaria and Romania, form the
fifth group.
2. Evidence on Chinese OFDI in the European Union
2.1. Location of Chinese investment
Figure 9.2 depicts Chinese OFDI stock in 2009 by geographical region,3
revealing the following ranking: Asia (35 percent of Chinese OFDI), Africa
(19 percent), Oceania (13 percent), Canada and the United States (11 percent), the Commonwealth of Independent States (CIS) and Eastern Europe
(10 percent), the EU (8 percent), and Central and South America including Mexico and the Caribbean (4 percent). The results show that Chinese
OFDI to the EU takes up slightly less than one tenth of all Chinese OFDI,
and is almost at par with North America and many other regions of the
world. Given that the EU was China’s largest trading partner in 2010 (DG
Trade, 2011), this is a relatively small share. But many Chinese investments in other regions target energy and mining sectors (MOFCOM, 2009),
which require larger-scale OFDI, and it is likely that Chinese OFDI in the
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Chinese FDI in Europe and North America
EU-27
8%
Latin America
4%
Rest of Europe
0%
CIS and Eastern
Europe
10%
Rest of Asia
35%
North America
11%
Oceania
13%
Africa
19%
Figure 9.2 Share of Chinese OFDI stock by region (2009)
Notes: Excludes ‘Greater China’ (Hong Kong, Macau, and Taiwan) and (offshore) financial centers
(Bahamas, Bermuda, the British Virgin Islands, the Cayman Islands, and Luxembourg). CIS = Commonwealth of Independent States (post-Soviet states).
Source: MOFCOM 2009 Statistical Bulletin of China’s Outward Foreign Direct Investment.
EU (a resource-poor but economically advanced region) exhibits its own
characteristics that deserve explicit analysis.
An analysis of the distribution of Chinese OFDI among EU member
states and the host country preferences of Chinese firms may inform about
Chinese firms’ approaches to internationalization and the importance of
competitive advantages. Figure 9.3 presents changes in the share of Chinese
OFDI stock held over the period from 2003 to 2009. Germany held the
largest share of Chinese OFDI in the EU during most of this period, followed
by the United Kingdom. Taken together, both countries jointly received the
majority of Chinese OFDI in Europe, between one third and two thirds, with
their joint share increasing over the years and peaking at 61 percent in 2007.
In 2009, the shares of Germany and the United Kingdom were 29 percent
(US$1.08 billion) and 27 percent (US$1.03 billion), respectively.
The share of Chinese OFDI held by France, Italy, and Spain together was
highest among the country groupings at the beginning of the period of
analysis (32 percent in 2003). However, their share declined over the sixyear period to 16 percent in 2009 while Germany and the United Kingdom
increased their share. The share of all the remaining Western European
economies was 18 percent in 2009, slightly above their average share over
the analyzed period. The Eastern European accession states of 2004 remained
below 10 percent in most years (8 percent in 2009), and were even surpassed
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183
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2003
2004
EU-27
2005
2006
EU-25
United Kingdom
2007
2008
EU-15
EU-5
2009
Germany
Figure 9.3 Share of Chinese OFDI stock in the EU by country or country groups
(2003–2009)
Notes: EU-5 = France, Italy, Spain; EU-15 = Austria, Belgium, Denmark, Greece, Finland, Ireland,
the Netherlands, Luxembourg (except for 2009), Portugal, and Sweden; EU-25 = Cyprus, the Czech
Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia; EU-27 = Bulgaria
and Romania.
Source: MOFCOM (2007, 2008, 2009, 2010) Statistical Bulletin of China’s Outward Foreign Direct
Investment.
by Romania from 2003 to 2005. The share of Bulgaria and Romania declined
over the analyzed period to 3 percent in 2009.
Estimates of the number of companies in each country, provided by
the IPAs, reinforce this picture (see Table 9A.4). Germany had the highest
number of Chinese companies among EU member states, followed by the
United Kingdom, with a few hundred companies each. These two countries were the focal point for Chinese investors. A second group of large
or medium-sized countries, including France, the Netherlands, and Sweden,
each received between 50 and 150 Chinese enterprises. However, the majority of smaller states, both in Western and Eastern Europe, received only a few
dozen Chinese companies, and some countries reportedly had fewer than
ten. Smaller economies hence appeared less attractive to Chinese companies. The respondents from the IPAs confirmed that Chinese OFDI in the EU
was a recent occurrence, as most companies arrived after 2003.
Chinese OFDI in the EU is clearly not equally distributed. Rather, Chinese
firms prefer large, advanced Western EU economies. Little attention is paid
to Eastern European transition economies even though investment costs
are lower and psychic distance to China could be less due to similarities
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Chinese FDI in Europe and North America
in economic and developmental history. For the newer member states, EU
accession has not made a substantial difference in number of Chinese investments received. Chinese firms may either possess competitive advantages to
invest in very sophisticated and advanced economies already, or they may
invest there to source them.
2.2. Investment motivation and other determinants
Market-seeking motivations help explain Chinese preferences for large, centrally located economies in the EU. These countries (e.g., Germany), and
those located in what may be considered as center-periphery (e.g., Belgium,
Luxembourg, the Netherlands, Poland, Spain, Sweden, and the United Kingdom), form the ‘Gateway to Europe’ – the larger, centrally located countries
because they border on many other states and are in themselves large markets, and the countries in the center-periphery because of their central
location with proximity to the sea, with shipping connections and efficient
logistics services for Chinese exports to Europe. Countries on the periphery, such as Ireland, Portugal, and many Eastern European countries, are
less likely to serve as hubs for Chinese enterprises to enter the European
market. This finding confirms Chinese OFDI in the EU to be, at least partially, an effort to exploit existing competitive advantages in advanced
markets.
Many countries are also at the ‘crossroads’ between the EU and other countries where Chinese enterprises seek business opportunities. Some countries
in the periphery (e.g., Cyprus for access to Northern Africa and the Middle
East) and the center-periphery (e.g., Italy for the Mediterranean region and
Spain for Northern Africa and Latin America) are important in this context.
In these developing country markets, Chinese firms can again play out their
competitive advantages more fully. However, even the center of Europe can
provide a stepping stone for Chinese companies to enter non-EU markets.
For example, high-tech products developed and made by a Chinese firm in
Germany are better sold worldwide due to the high quality and reputation of
products made in Germany, and conformity to German quality certification
requirements. Being an international company with a presence in advanced
markets also improves the reputation of a Chinese company not only in the
eyes of global customers, but also in China itself. Chinese companies are better able to compete in third country markets by simultaneously making use
of competitive advantages sourced in the EU host economy.
The reports of the IPAs indicated that Chinese companies often chose a
country as an investment location if it is known for its strengths in a particular industrial sector or business activity. For example, Belgium and the
Netherlands have a reputation for efficiency in logistics; Finland and Sweden
are known for research and development (R&D); Germany is important for
machinery and equipment; and Luxembourg and London are considered
Jan Knoerich
185
centers of excellence in financial services (see Table 9A.5). High-tech industrial sectors are interesting for Chinese companies. Strategic asset-seeking
motivations play a role next to market-seeking.
Within EU member states, a concentration of Chinese investments in
ports and major cities (especially Hamburg and London) was observable,
allowing ideal positioning for logistics and proximity to other businesses
and government. Other Chinese firms based themselves in clusters of their
specific industry, or located near national borders if the actual markets
sought were across those borders.
Whether individual Chinese firms invest in a specific EU member state
to access the EU market as a whole rather than only the market of the
host country remains an open question. Some IPAs suggested that Chinese
are unlikely to perceive the EU as one entity, but tend to consider each
country as a separate market with its own authorities, regulations, legal system, tax rules, language, investment incentives, and sometimes even visa
and work permit requirements. According to some IPAs, Chinese companies
tend to invest in the largest EU economies because they seek national markets, while Chinese companies hosted by smaller EU member states often
want to sell not only within the country of investment, but in neighboring
countries. A particular problem faced by smaller EU member states is a reputation deficiency, as they were relatively unfamiliar to people from a huge
country like China. While large countries are known for reasons which are
business-related (e.g., a strong economy, advanced technology, large markets, famous products), geographical (e.g., Paris, London, Berlin), or even
cultural and political (e.g., habits, football leagues, celebrities, Merkel and
Sarkozy), smaller EU member states to a much lesser degree enter the sphere
of knowledge and interest of a Chinese person. Managers felt more comfortable investing in places where they had some sort of familiarity, even if it
was not business-related.
Other economic and business factors influencing the decision of a Chinese
company to invest in a particular European country were investment incentives, which are more favorable in the transition economies (Invest in
Germany, 2007), the amount of trade with China, and the amount of EU
member state investment in China. China had also concluded bilateral
investment treaties with all EU countries but Ireland (see Table 9A.6). Such
treaties commonly address protection, treatment, promotion, and sometimes liberalization of foreign investment (UNCTAD, 2007). Specific business
opportunities for Chinese firms with experience from the Beijing Olympics
opened up in the United Kingdom in connection with the 2012 London
Olympics. In addition, interviewees emphasized non-economic, personal,
and emotional aspects that influence location decisions, especially in the
early stages of overseas expansion. These include free and personal support
provided by IPAs, personal recommendations, language (with the United
Kingdom as a preference because of English), visa requirements, the history
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Chinese FDI in Europe and North America
of diplomatic relations with China, the existence of personal relations
(guanxi) with Chinese or non-Chinese people in the host country, personal
experience with a country (e.g., from previous university enrolment there),
the possibility of emigrating and settling in Europe, and the prevalence of
a larger Chinese community, including Chinese schools, supermarkets and
restaurants. Many of these aspects appear to lower psychic distance and
suggest that concepts put forward by the internationalization school hold.
IPAs play an important role in determining Chinese companies’ emergence in Europe. In parallel with the surge of Chinese OFDI into the EU
in 2007, a substantial number of representative offices of Western European
IPAs sprung up in major Chinese cities. Each IPA had the goal of establishing
contact with Chinese firms as early as possible, to be the first in approaching Chinese companies and bringing them successfully into the country it
represented.
Most IPAs took a proactive strategy in reaching out. Instead of waiting
to be approached by interested firms, they established direct contact with
promising ones, introduced business opportunities in EU member states to
them, and offered various forms of support in case an investment decision
was made. Such an active marketing strategy was necessary as Chinese firms
did not often contact the IPAs on their own initiative, often unaware of the
business opportunities in Europe as well as the IPAs’ existence. For some
IPAs of smaller EU member states, active marketing was the only way to get
any Chinese investors interested in the country represented.
While the increasing presence of European IPAs in China indicates that
Chinese firms are hungry to invest in Europe, this engagement by IPAs in
reality reflects a rising interest among European governments in attracting
Chinese investors. No European country would accept missing out on the
potential benefits that the emergence of Chinese investments could offer its
economy in the future. The same few companies were often approached by
several IPAs from different EU member states, spurred by increasing competition among European IPAs in reaching out to potential Chinese investors.
Underlying this trend was the assumption that Chinese investments
would have a positive impact on the European economy, bringing additional capital, tax returns, employment, new business opportunities, and
performance-enhancing competition. Chinese companies had acquired
European firms in financial difficulty, supporting them in improving or
re-launching their business (Knoerich, 2010). IPAs preferred to focus on
attracting high-tech investments, and greenfield FDI was preferred to
M&As. However, concerns remained that Chinese firms did not sufficiently invest in manufacturing activities and sectors with a high added
value.
Chinese firms received special attention and treatment from European
IPAs because of the high expectations for their future performance. Unaware
of the opportunities that EU countries offered to Chinese firms, the
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187
personalized support provided by IPAs sometimes made a difference in
decisions on where to invest and what procedures and strategies to follow.
A new generation of IPAs emerged that actively engage in competition for
investments directly in their country of origin.
2.3. Entry mode of Chinese investors
Sales and representative offices, or occasionally larger distribution centers
(including warehouses), are the most common entry modes. These offices
tend to be small, involving limited activities with a minor amount of
employees. After years of simple export activity or engagement as original
equipment manufacturers (OEMs) for foreign firms in China, setting up representatives within their own export markets is the next step of expansion
for Chinese enterprises. The resulting proximity to their customers in the
EU enables Chinese firms to respond more directly to customer demands,
to market their products more effectively, and to provide satisfactory aftersales services. Moreover, having one’s own sales office reduces dependence
on Chinese or European trading companies and agents, which often charge
Chinese enterprises commissions for export and trade facilitation services.
Overall, these activities follow the objective to further exploit existing competitive advantages derived from domestic (home country) production, and
minimize transaction costs through internalization.
Greenfield investments establishing a plant or a factory through a larger
commitment of capital are less common. Production, manufacturing and
construction work by Chinese companies is largely confined to the new
member states of Eastern Europe, where wages are lower, whereas such activities in Western Europe normally involve not more than the assembly of
components manufactured in China. Hence, the exploitation of advantages
through foreign (host country) production is less common. Industrial parks
are popular investment locations for small greenfield investments and sales
offices.
More frequent in Western European countries is the establishment of
R&D centers, usually set up to adapt the features and design of Chinese
products to the European market, or to develop new products. Some R&D
centers operate on their own, for example by locating within industrial
clusters to take advantage of learning opportunities. Several Chinese companies decided to locate near large well-known Western firms (e.g., Philips in
the Netherlands, Ericsson in Sweden) in hope of benefiting from this proximity for their own organizational learning. Alternatively, companies seek
cooperation in R&D with a European company, laboratory, research institute, or university to take advantage of highly advanced and specialized
knowledge. Chinese companies even finance individual research projects
in European institutions. Some R&D addresses specific sectors where the
Chinese economy places importance on upgrading, such as renewable energies to enhance the environmental situation in China. The establishment
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Chinese FDI in Europe and North America
of R&D centers is a way to source assets and advantages overseas. For the
Chinese, R&D centers do not have to be large, as some operate with fewer
than ten and as little as three employees, making them attractive as an
approach towards asset-seeking. An R&D function may even be built into
a sales office so that R&D projects in Europe are not necessarily connected
with high cost.
Though often highly publicized in the media, M&A deals of Chinese firms
in the EU are still quite rare. A distinction exists between share deals and
asset deals. Share deals involve the purchase of shares in an EU firm, implying that business and production within Europe continues following the
acquisition. Asset deals involve the purchase of an EU firm’s assets, part or all
of which may be transferred back to China. Further business activity within
the EU is then not guaranteed. While share deals are usually publicly disclosed, asset deals are usually not, partly because they are occasionally quite
controversial (Wenk, 2005). IPAs mentioned that M&As are important for
asset-seeking, as they constitute a quick way to gain know-how, technologies and foreign brands (Inkpen, 1998). Cases such as the acquisition of MG
Rover (the United Kingdom) by Nanjing Automobile and TCL’s takeover of
Thomson (France) illustrate this (Hong & Sun, 2006). The Nanjing Automobile case is an example of an acquisition undertaken out of a position of
weakness for the purpose of organizational learning.4 Recent acquisitions
in the German machinery and equipment industry are similar in nature
(Knoerich, 2010).
In summary, most Chinese investment activities in the EU require relatively little investment capital. A typical sales or representative office might
have fewer than ten and sometimes as few as two employees, but IPAs indicated that sales offices would expand over time. Investments with more
than 100 employees are rare, confined to a few well-known companies (e.g.,
Huawei, Lenovo and ZTE) undertaking larger investment projects in several EU member states, and investments in Eastern Europe. Some M&As also
involve sizeable European target firms.
The above discussion suggests that small Chinese investments are made
almost entirely for the exploitation of existing advantages. Other modes of
entry – in particular, larger and more costly projects, such as M&As – are
more often undertaken with asset-seeking considerations in mind.
2.4. Competitiveness of Chinese investors
The accounts provided by the IPAs are in conformity with findings in the literature, suggesting a rather mixed picture on the competitiveness of Chinese
enterprises in Europe. Some Chinese firms in Europe are highly competitive or even world leaders, as in the white goods (e.g., Haier and Midea)
and information and communication technologies (e.g., Huawei and ZTE)
sectors. In these industries, Chinese firms are technologically advanced
Jan Knoerich
189
while able to offer competitive prices. However, other firms struggle with
ineffective sales and promotion efforts, poor branding, insufficient technological capabilities, low product standards, including a reputation for bad
quality, and lack of managerial capabilities or strategic thinking. Investments
out of a position of weakness certainly occur. Assessments by the IPAs of
the preparedness for foreign investments and international experience are
mixed at best, and familiarity with the EU is not strong. Europe, with
its fragmented structure composed of an array of individual nation-states,
cultural-linguistic diversity, and a traditional but less flexible approach to
business, is a major challenge for Chinese investors who may have already
succeeded in developing countries in Asia and Africa. North America, with
its large overseas Chinese population and English as a main language, is
an easier investment destination. Problems in Europe relate to administrative procedures, especially immigration, visas, work and residence permits,
and authorization to import certain uncommon products such as traditional Chinese medicine. Policy incoherence and inconsistency among EU
member states impinges upon Chinese business decision-making (Curran,
2009). However, Chinese investors in Europe do not face the kind of political opposition and criticism observed in the United States, where Chinese
investments have occasionally been reviewed and disallowed for national
security reasons (Schüller & Turner, 2005; Globerman & Shapiro, 2009).
Opposition in Europe remains confined to critical press coverage.
Chinese firms in the EU built their competitiveness mainly from a low-cost
production base in China, which placed them in a position to manufacture
very cheaply. This enables them to sell their products overseas at a low price
but with acceptable quality. The competitiveness of many Chinese firms in
Europe is based on domestic production rather than foreign production, an
anomaly to some extent as FDI is normally associated with foreign production (e.g., Dunning, 1980, 2001a). Manufacturing and production are mostly
maintained in China while only related services and other smaller activities
are outsourced to the European location. Most of these services and activities, such as after-sales support and distribution, product design, assembly,
and R&D, can be handled on a small scale and at low cost. As Chinese firms
draw competitive advantages from cheap production in China, overly large
investments in Europe may undermine this advantage. Due to the immense
cost difference between China and Europe, Chinese firms are more sensitive
to costs compared to investors from mature economies. Travel expenses, for
example, are kept at the lowest possible level and employees paid at comparatively low rates. The employment of Europeans is avoided in favor of
Chinese or depends on the availability of local personnel willing to work for
a low salary.
A second aspect making Chinese firms investing in Europe competitive is
specialized know-how, such as the ability to master an advanced technology
190
Chinese FDI in Europe and North America
or a China-related capability (e.g., expertise on Chinese medicine in the
pharmaceutical sector). In many cases, Chinese firms manage to develop
competitiveness in a product that fits into a niche within the European market, based on a technological advantage, but resulting also from the ability
to sell in a very low price segment or from some other specific feature of the
product that provides a unique selling point.
Familiarity with the Chinese market and easy access to it gives Chinese
firms an advantage. Products manufactured or assembled in Europe can easily be sold in the enormous Chinese market without major preparation.
Chinese companies can assist European partner firms in setting up business
in China in exchange for support in the EU market, using their privileged
access to the Chinese market as a bargaining tool for support in setting up
business in the EU.
Another competitive advantage of Chinese companies is their relatively
easy access to funding for foreign investments, obtained from vast domestic
sales, export earnings or governmental sources. Unlike many Western competitors, they exhibit a high degree of flexibility in doing business and strong
adaptability to new market conditions, acquired through prior experience in
the cut-throat Chinese market. Finally, Chinese firms benefit from overseas
networks of firms and individuals, relying on Chinese communities in the
EU for assistance in business matters.
In sum, strategic weaknesses exist and must be overcome. Competitive
advantages are derived mainly from home country production and product
differentiation for niche segments. Chinese investors rarely have a distinct
superiority in technological, managerial, or marketing capabilities, often
possessed by mature economy investors in developing countries. Moreover,
M&As often involve ailing EU firms, and even if synergies are promising, success is far from guaranteed. Essentially, the ability to sell at very low prices is
the main reason Chinese firms do not have to avoid competition in Europe.
Thus, sales offices set up only for the purpose of marketing and distributing
goods produced in China are likely the most competitive Chinese investments in Europe, as they rely on price competitiveness that existed long
before the investment.
3. Conclusion
This chapter has examined the emergence of Chinese OFDI in the EU.
Chinese companies prefer the large economies of Germany and the United
Kingdom, guided almost entirely by market- and asset-seeking objectives.
Many Chinese investments in the EU make use of pre-existing competitive
advantages that originate from low-cost production in China. Sales offices
suffice for the exploitation of these competitive advantages and to support
incremental internationalization. Chinese investments for the purpose of
Jan Knoerich
191
sourcing competitive advantages also exist, often requiring larger-scale entry
and even acquisitions.
Contrary to traditional theories of ownership advantages, investment is
not a result of any general superiority – technological or otherwise – but
an intensification of market access for domestically produced cheap goods
as well as entry into niche markets. Chinese investment in the EU is primarily an endeavor to expand export markets and existing business rather
than seeking entirely new markets. Small-scale activities in the EU in line
with early phases of internationalization usually suffice to exploit these
advantages and grow internationally. Except for R&D projects, such smallscale activity is not suitable for asset-seeking, one reason being the lack of
personnel to absorb knowledge or assets.
Beyond sales offices and R&D centers, Chinese activity in Europe is scant,
limited to a few larger greenfield projects and M&As. Greenfield projects may
assemble products in late stages of the production cycle, but rarely undertake
large-scale manufacturing. Benefits from reverse spillovers, backward and
forward linkages, competition, and demonstration effects are generally the
most significant with this entry mode. Moreover, the importance of M&As in
the sourcing of competitive advantages is confirmed by numerous firms, by
IPAs and by the literature. This overall picture, not counting small-scale R&D
with its benefits for organizational learning, suggests a certain paradox: the
pursuit of assets may well involve a larger commitment of capital than is
often needed for effective exploitation of ownership advantages. In particular, if firms investing out of a position of weakness wish to engage in the
sourcing of competitive advantages to support their own development and
catch-up, the requirement for a higher commitment of capital becomes a
challenge. Both this potential for development and catch-up with broader
benefits to the home economy, and the requirement for larger amounts
of capital, could explain the involvement of the Chinese government in
supporting, sometimes financially, overseas investments by Chinese firms
(Zhang, 2003b; Antkiewicz & Whalley, 2006; Voss, Buckley, & Cross, 2009;
Luo, Xue, & Han, 2010).
Table 9.1 provides a final overview of the nature and types of Chinese
investments in Europe and the key avenues for exploitation and sourcing
of competitive advantages. The various opportunities for exploitation and
sourcing of competitive advantages, if utilized effectively, will enable
Chinese enterprises to further internationalize, grow and expand, and benefit from organizational learning opportunities and access to technologies and
know-how. To some extent, this will allow Chinese firms to move forward in
their quest to catch up with their mature economy counterparts.
The economic impact resulting from Chinese OFDI in the EU has not been
felt until now. The nature of activities and scale of Chinese investments
in the EU are still too limited to make European competitors experience
heightened competition from Chinese investors beyond the competition
192
Chinese FDI in Europe and North America
Table 9.1 Characteristics and types of Chinese investments in Europe: exploitation
and sourcing of competitive advantages
Sales/
representative
office
R&D center
Greenfield
(production
or assembly)
M&A
Size
Small
Small to
medium
Medium to
large
Medium to
large
Capital
(amount)
Low
Low to
medium
Medium to
high
High
Main
Proximity to
location
markets
determinants
Clusters;
proximity to
research
institutions or
leading firms
Proximity to
markets;
low-cost areas;
skilled
workforce
Location of
partner firm
Exploitation
of
advantages:
main
avenues
Low-cost
production in
China; niche
products;
flexibility and
adaptability
–
Niche
products;
flexibility and
adaptability
Access to
finances (with
government
support);
Chinese
market backing
Sourcing of
advantages:
main
avenues
‘Listening
post’;
competition
effects
R&D
collaboration;
‘Listening post’
(market
research);
labor turnover
Reverse
spillovers
(backward and
forward
linkages);
competition
and
demonstration
effects;
labor turnover
Purchase of
capabilities
(technologies,
brands,
management
skills,
distribution
networks);
direct access to
a skilled
workforce
Development
benefit to
Chinese
firm: key
aspects
Growth of
firm;
market
expansion
Organizational
learning;
catch-up
Growth of
firm;
market
expansion;
organizational
learning;
catch-up
Growth of
firm;
market
expansion;
organizational
learning;
catch-up
already felt from international trade with China. However, this may well
change as Chinese companies raise their competitive presence in the world
stage.
This chapter’s findings open interesting paths for further research. More
research is needed on how developing country firms can effectively source
Jan Knoerich
193
competitive advantages in mature economies without running large investment risks. Moreover, studies on Chinese OFDI should refrain from focusing
only on the same few large firms, and analyze lesser-known investment
projects (see Table 9A.5 for examples). My findings further reveal that
Chinese investment decisions often involve a spontaneous or personal
element, including individual perceptions, relationships (guanxi), coincidence (e.g., which IPA approaches a company first), and even personal
motivations (e.g., immigration and citizenship). This poses a challenge to
business researchers who assume firm behavior based on strategic considerations, and may open up new research paths. Last but not least,
this research illustrates that (potential) Chinese investors in themselves
form a distinct group of clients, sought by non-Chinese government
institutions – foreign IPAs – in a competitive manner. This new generation of IPAs venturing into emerging markets to influence early investment decisions should receive more in-depth consideration in future
research.
Acknowledgments
This research was conducted while the author was conducting PhD research
at the School of Oriental and African Studies, University of London, UK. The
author thanks all interviewees and respondents from investment promotion
agencies and enterprises, whose cooperation was essential in making this
research project a success. Research funding from the University of London
Central Research Fund and the School of Oriental and African Studies was
gratefully received.
194
Chinese FDI in Europe and North America
Appendix
Table 9A.1 Chinese OFDI stock and flows into the EU by member states (2003, 2008,
and 2009, US$ million)
Stock
Austria
Belgium
Bulgaria
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Poland
Portugal
Romania
Slovakia
Slovenia
Spain
Sweden
United Kingdom
Total
2003
2008
0.70
0.41
0.60
–
0.33
74.43
–
–
13.12
83.61
–
5.43
0.24
19.18
1.61
–
–
0.37
5.90
2.72
0.20
29.75
0.10
–
101.81
6.07
75.15
421.73
4.04
33.30
4.74
1.36
32.43
38.08
1.26
3.59
167.13
845.50
1.68
88.75
107.77
133.60
0.57
3.93
122.83
4.81
234.42
109.93
1.71
85.66
5.10
1.40
145.01
157.59
837.66
3173.85
Flow
2009
2003
2008
2009
1.55
0.40
56.91
0.30
2.31
0.35
1.36
–
49.34
–
40.79
73.88
7.50
–
9.04
–
221.03
0.45
1082.24
25.06
1.68
–
97.41
1.18
106.82
0.14
191.68
0.29
0.54
1.58
3.93
–
2484.38
–
5.03
–
335.87
4.47
120.30
1.55
5.02
–
93.34
0.61
9.36
–
5.00
–
205.23
–
111.89
0.17
1028.28
2.11
6277.83
112.54
(3793.45*)
–
–
–
–
12.79
1.33
–
2.66
31.05
183.41
0.12
2.15
42.33
5.00
–
–
42.13
0.47
91.97
10.70
–
11.98
–
–
1.16
10.66
16.71
466.62
–
23.62
−2.43
–
15.60
2.64
–
1.11
45.19
179.21
–
8.21
−0.95
46.05
−0.03
–
2270.49
0.22
101.45
10.37
–
5.29
0.26
–
59.86
8.10
192.17
2966.43/
(695.94*)
Note: *Excluding the financial center of Luxembourg.
Source: MOFCOM ( 2007, 2008, 2009, 2010). Statistical Bulletins of China’s Outward Foreign Direct
Investment.
195
Table 9A.2
List of contacted European IPAs
Country
IPA or other
institution
Website
Austria
Advantage Austria
http://www.advantageaustria.org/
Belgium
Flanders
Investment & Trade
http://www.flandersinvestmentandtrade.
com/
Bulgaria
InvestBulgaria
Agency
http://www.investbulgaria.com/index.php
Cyprus
Cyprus Investment
Promotion Agency
http://www.cipa.org.cy/
Czech Republic CzechInvest
http://www.czechinvest.org/en
Denmark
Invest in Denmark
http://www.investindk.com/
default.asp?artikelID=9664
Finland
Invest in Finland
http://www.investinfinland.fi/
France
Invest in France
http://www.invest-in-france.org/de
Germany
Invest in Germany
http://www.gtai.com/web_en/homepage
Hungary
ITD Hungary
http://www.itdh.com/engine.aspx?page=
Itdh_Befektetes
Ireland
IDA Ireland
http://www.idaireland.com/
Italy
Italian Trade
Commission I.C.E.
http://www.italtrade.com/
Latvia
Investment &
Development Agency
of Latvia
http://www.liaa.gov.lv/eng/home/news/
Lithuania
Lithuanian
Development Agency
http://www.lda.lt/en/index_de.html
Luxembourg
Consulate General
(Shanghai)
Malta
Malta Enterprise
http://www.maltaenterprise.com/
Netherlands
Netherlands Foreign
Investment Agency
http://www.nfia.com/
Poland
Polish Information
and Foreign
Investment Agency
http://www.paiz.gov.pl/index/
Romania
ARIS Invest
http://www.arisinvest.ro/
Slovakia
SARIO Slovak
Investment and Trade
Development Agency
http://www.sario.sk/?home
Slovenia
Public Agency of
Republic of Slovenia
for Entrepreneurship
and Foreign
Investments
http://www.investslovenia.org/
196
Chinese FDI in Europe and North America
Table 9A.2
(Continued)
Country
IPA or other
institution
Website
Spain
Economic and
Commercial Office of
Spain in Shanghai
http://www.investinspain.org/
Sweden
ISA Invest in Sweden
Agency
http://www.investsweden.se/
United Kingdom
Scottish Development
International
http://www.sdi.co.uk/
United Kingdom
Think London
http://www.thinklondon.com/
United Kingdom
Advantage West
Midlands
http://www.advantagewm.co.uk/
United Kingdom
UK Trade & Investment
https://www.uktradeinvest.gov.uk/
Table 9A.3
List of questions posed to European IPAs
A) General Data and Information on China’s OFDI in [EU member state]:
•
•
•
•
•
•
•
Total amount of Chinese companies that have invested in [EU member state]
Names of Chinese companies that have invested in [EU member state]
Common type of entry mode (e.g., sales office, greenfield, merger & acquisition)
Average size of investments (e.g., capital invested, number of subsidiary
employees)
Common type of industrial sector (e.g., high-tech, low-tech)
Average age of investments
Average ratio of [EU member state] employees to Chinese employees
B) Questions on China’s OFDI in [EU member state]:
1) About what issues do Chinese companies consult you?
2) What kind of support do you provide to Chinese companies?
3) How well prepared are the Chinese companies for the foreign investment before
they approach you, how familiar are they with [EU member state]? How much
previous international business experience do the Chinese firms have?
4) How do Chinese firms become aware of OFDI opportunities in [EU member
state]?
5) How competitive domestically and internationally are the Chinese companies
on average before they invest abroad?
6) What competitive advantages and unique capabilities do Chinese companies
have that assure the competitiveness of their foreign investment in [EU member
state]?
7) What are the motivations, goals, and expectations of the Chinese companies
when they invest in [EU member state]?
197
8) Why do Chinese firms choose [EU member state] as investment location, what
are [EU member state]’s strengths and weaknesses as a location, in the view of
Chinese firms? Where in [EU member state] do Chinese firms prefer to invest,
for what reasons?
9) In view of the [EU member state] economy, what are the implications (positive
and negative) of Chinese investments in [EU member state]?
10) How strong is the competition that Chinese firms face in [EU member state] and
how do they deal with it?
11) How intensive are the contacts between Chinese firms in [EU member state] and
[EU member state] firms, and what kind of contacts are these commonly?
12) How satisfied are Chinese firms with their investments in [EU member state], are
expectations met, what are the major benefits?
13) What are the positive and negative experiences of Chinese firms in [EU member
state], how are difficulties dealt with?
14) Over time, do Chinese firms in [EU member state] improve their business due to
learning experiences made in the [EU member state] market?
15) To what extent do Chinese companies in [EU member state] plan to expand
their business or reverse their investments and leave the country?
16) Do Chinese firms in [EU member state] benefit from gaining access to know-how
or strategic assets? If so, what type of know-how and strategic assets, and how
are they obtained?
–
–
–
3 major
investments
Czech
Republic
–
Estonia
–
Cyprus
Greenfield
JV
M&A
SO/RO
R&D
7 major
investments
Bulgaria
SO/RO
R&D
Greenfield
JV
SO/RO
Common
entry
modes
Denmark 15–20;
2–4 per year
2–3
15–20;
< 5 per year
Belgium
Number of
investments
–
Small;
e.g., 3–7
30–300
e.g., 40, 280
Small;
e.g., 1 or 2
–
Size
(employees)
–
2–3
e.g.,
2005,
2006
–
e.g.,
2001
2–5
–
Age
(years
or date)
–
Market;
Know-how
–
–
–
Market;
Distribution;
Know-how;
Business
development
–
Main
motivations
Overview of IPA survey results on Chinese OFDI in the EU (2007–2008)
Austria
Table 9A.4
–
Promotion
–
Crossroads;
Incentives;
Promotion;
Know-how;
Reputation
–
Gateway;
Incentives;
Promotion;
Know-how
–
Main host
country
determinants
–
–
–
–
–
Low-cost;
Leading
position;
Strong finances
–
Main sources of
enterprise
competitiveness
–
Technology;
R&D;
Qualified
labor;
e.g., wind
energy
–
–
–
S&M;
R&D
–
Main areas
for sourcing
of advantage
198
–
Italy
–
0
3–4
Greece
Ireland
SO/RO
R&D
Greenfield
M&A
400–800
Germany
SO/RO
M&A
SO/RO
SO/RO
R&D
Greenfield
JV
M&A
60–100
or above
France
SO/RO
R&D
Greenfield
–
Finland
Small
Small
–
Small;
a few large
ones
Small;
15 in
SO/RO;
a few large
ones
–
3
–
–
from
1997
from
2000
–
–
–
–
Market;
Production;
Know-how;
Business
development
Market;
Know-how;
Business
development
Market
Incentives;
Promotion;
Know-how
Crossroads;
National
market;
Promotion;
Know-how
–
Crossroads;
National
market;
Incentives;
Promotion;
Know-how;
Reputation
Crossroads;
National
market;
Incentives;
Promotion
Gateway;
Promotion;
Know-how
–
–
–
Flexibility
Low-cost;
Leading position
Niche
Brands
–
S&M;
Technology;
R&D;
Brands;
Management;
Qualified labor;
e.g., consumer
electronics
S&M;
Technology;
Brands;
Qualified labor;
Competing
firms;
e.g., machine
building,
consumer
electronics
–
R&D
199
–
>100 related
to Chinese
holdings
130–150
75
–
2
117
Malta
Netherlands
Poland
Romania
Slovakia
Slovenia
5–10; a few
large ones
(>200)
–
–
Small;
a few large
ones
–
Size
(employees)
–
–
SO/RO
Small;
Greenfield large ones
M&A
with
e.g., 1276,
1200
–
e.g., 120,
150, 2000
R&D
e.g., 400
SO/RO
R&D
M&A
–
–
SO/RO
Common
entry
modes
0
34
above 10–20
Number of
investments
(Continued)
Latvia
Lithuania
Luxembourg
Table 9A.4
–
–
–
2–5
2–3
–
0
–
10–20
Age
(years
or date)
–
Market
–
Market;
Production
Market;
Know-how
–
–
Market;
Business
development
–
Main
Motivations
Crossroads;
Know-how
–
–
Gateway;
Incentives
Gateway;
Incentives;
Promotion;
Reputation
–
–
–
Gateway;
Incentives
Main host
country
determinants
–
–
–
Niche
Low-cost
–
–
–
Low-cost
Main sources of
enterprise
competitiveness
Qualified
labor
R&D
–
Technology;
R&D;
Management;
Qualified
labor;
Competing
firms
–
–
–
–
–
Main areas
for sourcing
of advantage
200
above 100
above 300;
50 per year
Sweden
United
Kingdom
SO/RO
Small;
R&D
some larger
Greenfield ones
M&A
SO/RO
1 to a few
R&D
hundred
Greenfield
M&A
Greenfield e.g., 20
M&A
4
3
8–10
Market
Know-how
Market;
Know-how
Market
Gateway;
Incentives;
Promotion;
Know-how
Gateway;
National
market;
Promotion;
Know-how
Gateway;
Crossroads;
National
market;
Incentives;
Promotion
Low-cost;
Niche;
Leading
position; Strong
finances;
Networks
Niche
Low-cost;
Leading position
S&M;
Technology;
R&D;
Brands;
Competing
firms;
e.g., financial
services,
renewable
energy,
low carbon
Technology;
R&D;
Brands;
Qualified
labor;
e.g., ICT,
biotechnology,
clean
environment
R&D;
Management;
Qualified
labor;
Competing
firms
Notes: Indications are all estimates and averages. SO/RO = Sales Office or Representative Office; JV = Joint Venture; Gateway = ‘Gateway to Europe’ (see text);
Crossroads = ‘Crossroads between EU and other countries’ (see text); S&M = Sales and Marketing.
Source: Information constitutes summarized and simplified excerpts of interviews and data collected (spontaneous or email answers by respondents from
IPAs) in 2007 and 2008.
50
Spain
201
202
Table 9A.5 Examples of Chinese companies in the EU and typical sectors of
investment
Chinese companies
Typical sectors
Belgium
AMOI/SPB, BBCA Group, Beijing
Gongmei Europe, China Coal, China
National Offshore Oil Corp. (CNOOC),
China Ocean Shipping (Group)
Company (COSCO), China Shipping,
Drakkar Holdings, Great Wall Library,
Hainan Airlines, Hisense, HWL,
Shantai, Tianjin Light, Torin Jacks,
Tianjin International Corp.
White goods, X-ray systems,
TV screens, food, dumplings,
trading (chemicals, metals)
Bulgaria
Chongqing Lifan Weili Appliances Ltd.,
Huawei, SVA Group Co. Ltd., Tianjin
Dikuang International Trade Co.,
Wenzhou Huahang Electric Co. Ltd.,
Yatun, ZTE Corporation
TV and radio sets, sound and
image recording and
reproduction devices, electric
household appliances,
trading, computers,
electricity distribution and
control devices, auto parts,
textiles, renewable energy
(wind power parks)
Cyprus
–
Trade and repairs, real estate
Czech
Republic
Shanghai Maling, Shanghai Yuncheng
Plate-Making Group, Sichuang
Changhong Electric, Tatung
Food processing, fabricated
metal products, electrical
equipment
Denmark
Air China, ShangPharma
Travel agencies, logistics, IT,
telecommunications, life
sciences, traditional Chinese
medicine, wind energy
Finland
Huawei
ICT
France
Air China, BBCA Group, China
Aerospace Science and Industry
Corp. (CASIC), China Eastern, China
National Aero-Technology Import and
Export Corporation (CATIC), China
National BlueStar Group, China
National Chemical Corporation, China
Southern Airlines Co. Ltd., COSCO,
China UnionPay, The Export-Import
Bank of China, Haier, Hisense, Huawei,
Midea, Shengzhen Sailong Fiberglass
Co. Ltd., Shenzhen Yibo Electronics
Co. Ltd., TCL, Watchdata, Xiamen
Overseas Chinese Electronic Co.,
Zhejiang Wangbin Decorative Material
Co. Ltd., ZTE Corporation
Electronics, pharmaceuticals,
cosmetics, chemicals,
(financial) services,
international training,
telecommunications, aviation
203
Germany
Hungary
Advanced Technology and Materials
(AT&M), Beijing No. 1 Machine Tool
Plant, Carry Logistics, COSCO, D’Long
Group, Hangzhou Machine Tool
Group (HZMTG), Haerbin Measuring
and Cutting Tool Group Co. Ltd.,
Huasheng Enterprises, Huawei,
Lenovo, Lianyungang Zhongfu
Lianzhong Composites Group Co. Ltd.,
Sailstar Shanghai, Shanghai Electric
Corporation (SEC-Group), Shenyang
Machine Tool Group, Suntar Membrane
Technology, TCL, Technotronic
Industries, Zhong Qiang Electric Tools
(ZQ Tools), ZTE
Bank of China, Hisense, Huawei,
Lenovo
Ireland
Bank of China, Huawei
Italy
Chang’an Automotive Group, COSCO,
Haier, Huawei Technologies, Mindray,
Qianjiang Group
Latvia
Lithuania
Luxembourg Bank of China, Industrial and
Commercial Bank of China (ICBC)
Malta
Netherlands Bank of China, China National Machine
Tools Corp., China Shipping (Group)
Company, China Southern Airlines,
CIMC, eBao, Great Wall Airlines,
Haier, Hikvision Digital Technology
Co., Hisense, Huawei, Jade Cargo
International, Jiangsu Yoke Technology
Co., Lenovo, Netsun, Newland Group,
Mindray, Norco, Xiangtan Electric
Manufacturing Corporation (XEMC),
Xinhai Group, ZTE
Poland
Haier, Lenovo, TCL, TPV Technology
Renewable energy (solar
energy, wind turbines),
biotechnology, machinery
and equipment, trading,
digital radio technology,
automotive, IT
Banking, LCD
manufacturing, IT, desktop
manufacturing, wholesale
trade and logistics, tourism
Aviation, financial services
Automotive, logistics,
infrastructure (ports), ICT,
telecom, biotechnology,
nanotechnology, electronic
appliances, motorcycles
Food
Wholesale and retail trade
(food), consumer goods
Banking, textiles, consulting
Shipping, catering, trading
(import and export)
Container manufacturing,
machinery, ICT, logistics
Chemicals, motorbikes,
bicycles, TV, real estate,
infrastructure, IT, LCD
screens, electronics, sport
equipment
204
Table 9A.5
(Continued)
Chinese companies
Typical sectors
Romania
BYD, China Tobacco International
Europe Co., Huawei, Sinoroma
Wholesales, retailing,
construction, agriculture,
transport, tourism, tobacco
industry, electronics, metallic
constructions
Slovakia
Huawei, Lenovo
Telecommunications,
computer
Slovenia
Catering
Spain
Cheng Hai Fisheries, China Eastern
Airlines, China National Fisheries
Group, China Shipping, COSCO,
Huawei, Huipu Electronics (Shenzhen)
Co. Ltd., Li Ning, Shandong Group
Corporation of Fisheries Enterprises,
Shanghai Marine Spain, Shanghai
Fisheries General Corp. Group (SFGC),
Suntech, ZTE
Ports, renewable energies
(solar energy), textiles
(sportswear), logistics,
fishing, telecommunications
Sweden
Air China, China Minmetals Corp.,
Huawei, Shanghai Automotive Industry
Corp. (SAIC), State Grid Corporation of
China (SGCC), ZTE
ICT, biotechnology, trading,
automotive, pharmaceuticals,
energy
United
Kingdom
Air China, Bank of China, China
Central Television (CCTV), China
Eastern, China Export & Credit
Insurance Corp. (Sinosure), China
Petroleum & Chemical Corp. (Sinopec),
China Mobile, China National
Petroleum Corp. (CNPC), China
Netcom, China Shipping (Group)
Company, China Telecom, CNOOC,
COSCO, Crystal Digital Technologies
Co. Ltd., Haier, Haixin, Hangfeng
Group, Heilan, Huawei, ICBC, Lenovo,
Menshun Fireworks, Midea, Nanjing
Automobile (Group) Corp., SAIC,
Shenzhen China Tex, Shenzhen HYT
Science & Technology Co. Ltd, Smart
Act Technology, Sunmoon Education
Group, SVA Technologies Co. Ltd.,
Tianjin Pipe (Group) Corp. (TPCO),
Tiens Group Co. Ltd., ZTE
Biotech, automotive, ICT
(telecoms, IT, software,
computer devices, internet
technology), life sciences
(medical devices and
pharmaceuticals), creative
industries (computer games,
software, publishing, design,
media), financial services,
energy (renewable energy),
textiles, electronics, catering,
retail, white goods, black
goods, trading, logistics,
tourism
Source: Information provided by IPAs.
Jan Knoerich
205
Table 9A.6 Bilateral investment treaties concluded between China and EU countries
as of June, 1, 2010
Date of signature
Date of entry into force
Austria
Belgium
Bulgaria
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Poland
Portugal
Romania
Slovakia
Slovenia
Spain
Sweden
United Kingdom
12 September 1985
6 June 2005
27 June 1989
17 January 2001
8 December 2005
29 April 1985
2 September 1993
15 November 2004
26 November 2007
1 December 2003
25 June 1992
29 May 1991
–
28 January 1985
15 April 2004
8 November 1993
6 June 2005
22 February 2009
26 November 2001
7 June 1988
9 December 2005
16 April 2007
7 December 2005
13 September 1993
14 November 2005
27 September 2004
15 May 1986
11 October 1986
1 December 2009
21 August 1994
29 April 2002
1 September 2006
29 April 1985
1 June 1994
15 November 2006
–
11 November 2005
21 December 1993
1 April 1993
–
28 August 1987
1 February 2006
1 June 1994
1 December 2009
1 April 2009
1 August 2004
8 January 1989
26 July 2008
1 September 2009
25 May 2007
1 January 1995
1 July 2008
–
15 May 1986
Total number
26
24
Source: UNCTAD (2010b); available from: http://www.unctad.org/sections/dite_pcbb/docs/bits_
china.pdf. Accessed 27 October 2010.
Notes
The views expressed in this article are those of the author and do not necessarily reflect
the views of the UNCTAD Secretariat.
1. This group is comprised of Austria, Belgium, Denmark, Greece, Finland, Ireland,
the Netherlands, Luxembourg, Portugal, and Sweden. In this study, investments for
Luxembourg in 2009 are excluded – Luxembourg received an enormous amount
of Chinese OFDI in that year, which would distort any meaningful analysis of
respective investment trends in Europe.
2. The accession states of 2004 are Cyprus, the Czech Republic, Estonia, Hungary,
Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia.
206
Chinese FDI in Europe and North America
3. Methodologically, I exclude mainland Chinese OFDI to Hong Kong, Macao, and
Taiwan (‘Greater China’) and to the Bahamas, Bermuda, the British Virgin Islands,
and the Cayman Islands (the main offshore financial centers) from this analysis,
as investment flows to these economies are special cases that offer little analytical value and may even distort the findings. Luxembourg is excluded for similar
reasons.
4. Personal interview in Nanjing, Summer 2007.
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10
Chinese M&A in Germany
Yipeng Liu and Michael Woywode
China’s outward foreign direct investment (OFDI) has become a popular area
of research as its impact has widened. Buckley and colleagues (2007) investigate the determinants of Chinese OFDI and suggest that capital market
imperfections, special ownership advantages, and institutional factors are
potential arguments to be nested in the general theory of FDI. From the
political economy point of view, institutional escapism and governmental
promotion are logically complementary to each other to offset the disadvantages of emerging market enterprises in global competition (Luo et al.,
2010). A recent empirical study shows that the entry mode choice of Chinese
firms for OFDI depends largely on a firm’s strategic fit and its strategic intent
(Cui & Jiang, 2009). Cross-border merger and acquisition (M&A) has become
the primary mode of entry for Chinese firms (Alon & McIntyre, 2008).
However, researchers have not explored the M&A integration process
following the deal in the context of Chinese cross-border M&As. Research
also needs to investigate the concept of absorptive capacity as part of the
asset-driven M&A intent (Deng, 2009). Our research focuses on Chinese
firms entering Germany via cross-border M&As. Germany, as the worldwide leader in many technological areas, cultivates global companies in a
niche market – the so-called ‘Hidden Champion’ (Simon, 2009). China overtook Germany in 2009 to become world export champion (Atkins & Dyer,
2010), and they are strong trade partners. In 2009 China was ranked as
the second country for Germany’s imports, and as the eighth country for
Germany’s exports. Despite the financial crisis that began in 2007, Chinese
OFDI in Germany grew from 309 million Euros in 2006 to 428 million Euros
in 2007 and 568 million Euros in 2008 (Germany Trade & Invest, 2010).
From 2000 to the first half of 2010, Chinese M&A investments in Western
Europe totaled 120 transactions, and the upward trend continues (ZEW,
2010).
China needs to upgrade the technological capacities of its industries and
move up the value chain to better integrate into the global value creation
network. This study investigates integration in Chinese cross-border M&As
212
Yipeng Liu and Michael Woywode 213
by applying the absorptive capacity construct (Zahra & George, 2002) from
organizational learning research.
M&A studies mainly focus on developed economies (see Cartwright &
Schoenberg, 2006, for a review). Integration is important for synergy realization after deals are closed (Schweiger, 2002). In a recent empirical survey
of M&A deals in Asia (Cogman & Tan, 2010), the authors found that about
half of all Asian deals differ significantly from the western post-merger integration model. Over a third involve only limited functional integration
and an additional 10 percent no functional integration at all. We call this
the ‘light touch approach to M&A’. Our observations from our sample of
Chinese cross-border M&As in Germany confirm the light touch integration
approach. How can we explain this approach, even though the literature
clearly favors hard touch post-merger integration?
We conceptualize a model of absorptive capacity integrating various factors to distinguish potential absorptive capacity and realized absorptive
capacity. The model explains the light touch integration approach by
Chinese investors.
This chapter is structured as follows: first, we review the literature on
M&As and integration. We describe the light touch integration approach and
outline its potential advantages and disadvantages. Second, we review the
theory of absorptive capacity and the literature on organizational learning,
followed by a conceptual framework integrating multidimensional factors,
including individual-, organizational-, and national-level dimensions to
explain light touch integration. Third, the research methodology and data
sample are described. Fourth, two representative cases of Chinese crossborder M&As in Germany are analyzed to illustrate the explanatory power of
the conceptual framework. Fifth, we conclude with implications and future
research directions.
1. M&As and integration
1.1. Literature review
Strategic management scholars study M&As from a diversification approach,
focusing on the motives of merging firms (Walter & Barney, 1990) and
performance effects of different management objectives (Lubatkin, 1987).
Finance scholars focus on acquisition performance by relying primarily on
stock market-based measures (Jensen & Ruback, 1983). Organizational and
human resource management scholars emphasize the post-merger integration process (Pablo, 1994) and highlight the importance of effective communications, cultural clashes, and conflict resolution. King and colleagues
(King et al., 2004) conducted a meta-analysis of 93 published studies and
found that none of the most commonly studied antecedent variables were
significant in predicting post-acquisition performance. Their findings signal
the complexity of the M&A puzzle and call for an integrative approach.
214
Chinese FDI in Europe and North America
One case survey of synergy realization reflects a strategic, organizational,
and human resource perspective (Larsson & Finkelstein, 1999). A tentative
model examines how cultural differences affect integration benefits from
M&As (Stahl & Voigt, 2008).
The existing wisdom on M&A states that integration is where the synergetic value can be realized. Schweiger (2002) argues that the execution of
a well-designed integration process is critical to maximizing value creation
and minimizing value destruction. Integration should occur at several levels, such as procedures, physical assets, and corporate culture (Shrivastava,
1986). In addition, a quick integration program to catch the momentum of a
deal is suggested, where the firms can capture the synergies that justified the
deal. Managers need to implement a systematic integration process, which
may include a post-merger integration (PMI) office and a 100-day program
(Uhlaner & West, 2008).
Two aspects of the integration process are critical for synergy realization:
socio-cultural integration and task integration (Birkinshaw et al., 2000). Task
integration is measured by transfer of capabilities and resource sharing while
human integration involves developing a sense of shared identity and positive attitudes toward the new organization. Integration is an interactive
process, requiring both socio-cultural and task integration efforts.
The M&A literature devotes little attention to cross-border M&As (Hitt
et al., 2001; Haleblian et al., 2006) and more theoretical and empirical
research on the topic is necessary (Shimizu et al., 2004). An integrative
model of the impact of cultural differences on capability transfer in crossborder M&As emphasizes the mediating roles of capability complementarity,
absorptive capacity, and social integration (Björkman et al., 2007).
1.2. The light touch approach of integration
A recent study investigates 120 acquisitions for controlling stakes from the
beginning of 2004 through the third quarter of 2008 in Asian cross-border
M&As (Cogman & Tan, 2010). Over one-third of the Asian deals involved
only limited functional integration and focused on capturing synergies in
areas such as procurement, with an overwhelming emphasis on business
stability. Ten percent of the cross-border deals involved no integration efforts
at all.
What integration strategy will Chinese investors realize in Sino-German
cross-border M&As? Unlike most studies emphasizing the importance of the
post-merger integration process for M&As as one of the critical value generation mechanisms, this study illustrates the light touch approach adopted
by Chinese investors in cross-border M&As. As we define it, light touch
integration consists mostly of (1) keeping the domestic management team
intact, (2) keeping the brand, (3) offering advice while giving local entities a
high degree of freedom in decision-making, and (4) the acquirer joining the
advisory board.
Yipeng Liu and Michael Woywode 215
The light touch approach, we argue, carries several advantages which
we illustrate by focusing on two challenges, as suggested by Larsson
(Larsson & Finkelstein, 1999): organizational integration and employee resistance. Organizational integration can be divided conceptually into (1) the
degree of interaction between joining firms, and (2) the extent of coordination to improve the quality of that interaction. Although the degree of
interaction is relatively low for the light touch approach, the coordination
is performed by the interface communicator between the acquired company
and the acquiring company.
As for employee resistance, the light touch approach helps to compensate for the resistance from employees of acquired firms. It reduces negative
consequences stemming from ‘we versus they’ antagonism (Levinson, 1970;
Astrachan, 1990). When the Chinese investors keep the management team
intact, it helps to maintain the motivation and team morale of the original
German team. Visits by Chinese investors and high-profile political figures
can create a friendlier environment. Investment plans and job creation for
the regional economy also help to alleviate employee resistance.
Even though we acknowledge the importance of integration for realizing
synergy during M&As, we want to highlight the special characteristics of
Chinese cross-border M&As, to identify explanatory antecedents.
2. Absorptive capacity
Organizational learning scholars characterize firms as routine-based, historydependent systems that encode inferences from experience into routines or
knowledge (Levitt & March, 1988). Over time, these routines occur with less
conscious effort to bind the firm’s search for alternatives to previous actions,
which reinforces path-dependent learning (Nelson & Winter, 1982; March,
1991). In M&As, firms develop acquisition process knowledge and skills
with regard to due diligence, deal negotiation, financing, and integration
(Finkelstein & Haleblian, 2002).
Absorptive capacity is the ability to recognize the value of new information, assimilate it, and apply it to commercial ends (Cohen & Levinthal,
1990). Firms must have the capacity to absorb the new knowledge available.
If the knowledge bases of the two firms are substantially different, neither
firm may have the appropriate absorptive capacity to learn the knowledge stocks of the other. The transfer of knowledge requires cooperation
between the parties involved (Hitt et al., 2000). Absorptive capacity is categorized as potential absorptive capacity and realized absorptive capacity along
four dimensions: acquisition, assimilation, transformation, and exploitation
(Zahra & George, 2002). In essence, firms can acquire and assimilate knowledge as potential absorptive capacity (potential ACAP), but may not possess
the capability to transform and exploit the knowledge as realized absorptive
capacity (realized ACAP).
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Chinese FDI in Europe and North America
A recent process-based definition states that absorptive capacity is a firm’s
ability to utilize external knowledge through the sequential processes of
exploratory, transformative, and exploitative learning (Lane et al., 2006).
Lichtenthaler (2009) illustrates the multidimensional nature of absorptive
capacity by identifying technological and market knowledge as two critical
components in the organizational learning processes of absorptive capacity. We agree on the multidimensional nature of absorptive capacity and
integrate a multilevel perspective into the concept of absorptive capacity.
2.1. A multilevel perspective on absorptive capacity
In this section, we conceptualize the individual-, organizational-, and
national-level elements into the absorptive capacity framework. A multilevel
approach to the absorptive capacity concept can be helpful in explaining the
complexities and ambiguities of the reality in the business world, especially
for Chinese business. To illustrate our idea we report the following findings
from other management research studies that report significant multilevel
effects to explain Asian business realities. Managers’ micro-interpersonal ties
with top executives at other firms and with government officials help to
improve macro-organization performance. The nature of a micro-macro link
is tested by using survey data from China (Peng & Luo, 2000). A comparative
study of corporate social responsibility between India and China investigates
the corporate social responsibility communication intensity from a threelevel perspective, considering country-, industry-, and firm-level factors, and
finds significant correlations (Lattemann et al., 2009). We distinguish among
three different levels of influence (individual, organizational, and national).
Individual level
On the individual level, we focus on the capability and experience of individuals. We do not claim that these are the only individual characteristics
deserving consideration, but we believe they are important in converting
potential absorptive capacity into realized absorptive capacity.
The Chinese higher education system has a huge capacity to produce graduates. Economic performance is improved by producing more human capital
and a more educated workforce (Heckman, 2003). In the past, the competition to enter universities was fierce. After the expansion of higher education,
however, it has become easier, but the consequent oversupply of Chinese
graduates is a big concern since job market growth is way behind the growth
of new graduates. Nevertheless, the educational system focuses on theoretical training instead of practical training, which results in limited practical
capabilities of graduates. Additionally, professional and vocational training
systems are less developed. In China, formal education and pre-employment
training remain the dominant practices. Greater emphasis is given to preemployment training than to in-employment training, although increasing
Yipeng Liu and Michael Woywode 217
attention is being paid to the latter (Cooke, 2005). Chinese firms do not offer
comprehensive training to employees whereas German firms routinely do so
(Ausbildungsysteme in Germany) (Grollmann & Rauner, 2007).
Hence, there is a lack of capability in China in product development
knowledge, project management, and team work skills. China must produce more graduates fit for employment in world-class companies if it wants
to avoid the talent crunch and sustain economic growth (Farrell & Grant,
2005). Moreover, Chinese employees have relatively few international experiences, although the ‘reform and opening policy’ was implemented in
China 30 years ago, and China has been a member of the World Trade Organization since 2001. International experience, however, is a prerequisite to
absorb knowledge and know-how for success in global business.
To address this lack of international experience, Chinese overseas students, once they return and join a large corporation, may fill the gap
in cross-border M&A strategy experience. When the reverse brain drain
happened, many overseas returnees left developed countries to pursue
career advancement and expanding opportunities in their home countries
(Wadhwa, 2009). But Chinese returnees with international experience are
unlikely to join a large Chinese corporation, such as a state-owned enterprise
(SOE), when the opportunity for entrepreneurship is available and encouraged by the government (Liu, 2011) with monetary and prestige rewards.
According to Kshetri (2007), China recently earned a reputation as one of
the world’s most entrepreneur-friendly countries. Only a few employees of
established Chinese firms have practical international working experience.
Hence, readiness for international collaboration at the individual level is not
adequate, which constrains both knowledge transfer and the potential for
joint product development between Chinese firms and their international
counterparts (or entities via cross-border M&A).
Organizational level
At the organizational level, the corporate governance functions in both the
host and the target country of the merging firms affect the ability of the
acquirer to reorganize the target (Capron & Guillén, 2009). Two papers provide a good overview of corporate governance historical development and
practices in China (Liu, 2006; Kang et al., 2008). They show that, although
progress has been achieved in corporate governance, there are still many
challenges.
We pinpoint two traits that this study considers. One is the organizational
structure, and the other is the communication style. Although companies
went public to be listed on either the Shanghai Stock Exchange or the
Shenzhen Stock Exchange, some firms, mainly SOEs, are only partially listed.
Not all shares are tradable, and the tunneling effects are extensive, which
hurts minority interests (Liu & Lu, 2007). The organizational structure of
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Chinese FDI in Europe and North America
the parent company that owns the listed firms is not clear. The same is true
for firms not listed yet. Moreover, even with an organizational structure in
place, firms tend to name only functions instead of individuals associated
with clear responsibilities.
Investor relations of listed companies are relatively weak and listed firms
often switch auditors to weaken the monitoring role of auditing firms
(Lin & Liu, 2009). Non-public Chinese firms have even fewer incentives to
communicate. Leadership appointment is also problematic. Under Chinese
company law, senior management is appointed by the board of directors,
but the board’s decision may be greatly influenced by government intervention in both former and current SOEs. Although managers of SOEs are no
longer government bureaucrats (Hua, Miesing, & Li, 2006), state and local
governments still influence appointments.
Hence, we argue that the unclear structure of the organization, communication styles, and shifts of leadership may present obstacles to joint
project work and collaboration between Chinese firms and their international counterparts (or entities via cross-border M&A). Scholars agree
that prior acquisition experience influences acquisition behavior (Haleblian,
et al., 2006) but, until recently, M&As in China, especially cross-border deals,
were rare, because foreign entry was discouraged. By contrast, joint ventures
were promoted in the 1980s and wholly owned foreign enterprises (WOFEs)
were promoted in the 1990s. M&As in China gained strength as the new
wave of FDI began (Peng, 2006). But it was not the Chinese companies that
made these experiences but the foreign companies entering China. The lack
of M&A experience of most Chinese companies was an additional hurdle for
their cross-border M&A endeavours.
National level
At the national level, we consider Chinese business systems (Whitley, 1991)
and institutional settings. Chinese businessmen and officials hold on to
their own values and the business system functions differently from Western
counterparts. A dense network of long-term individual, corporate, and political relationships influences Chinese business culture. Today, confucianism
and capitalism are the main ideologies of Chinese society blended with
selected socialist ideals.
Moreover, emerging economies such as China undergo profound institutional transformations (Wan, 2005; Tan et al., 2009). It is worth noting the
dynamic characteristics in viewing the institutional environments in emerging economies. Albeit that tremendous improvements of institutions from
the national level have occurred, China, arguably, is still undergoing the
early stage of market transition at present (Yang & Li, 2008).
According to the type of capitalism theory (Hall & Soskice, 2001), there
are two extreme capitalism systems: the liberal market model of capitalism
Yipeng Liu and Michael Woywode 219
with the United States and United Kingdom as Anglo-Saxon examples and
the coordinated market model of capitalism with Germany as an example.
Many countries can be distributed along the spectrum defined by these two
extremes. Moreover, the Asian economies exhibit special characteristics.
Asian capitalism is co-evolutionary (Carney & Gedajlovic, 2002) and
emphasizes both institutional perspectives and the reciprocal impact of firm
strategies. Different institutional settings shape how networks and learning
affect M&As within a comparative study of the United States and China (Lin
et al., 2009). In the context of this study, labor laws in Germany and China
affect M&As. While in Germany a complex and costly system of labor laws
and industrial relations has evolved over time, which gives workers, work
councils, and unions important information, decision, and control rights,
China has a much less elaborate system of labor laws and industrial relations in place. Hence, we believe that the differences in business systems and
institutional settings between Chinese firms and their international counterparts (or entities via cross-border M&A) might constrain potential synergy
realizations for Chinese cross-border M&As.
2.2. Absorptive capacity from a multidimensional perspective
Through the theoretical lens of absorptive capacity, we conceptualize a
framework to identify the underlying reasons for the integration approach
adopted by Chinese companies in their cross-border M&As. Responding to
the call for further research by Deng (2009), we integrate absorptive capacity
into asset-seeking M&A intent to draw a complete picture of the process for
acquiring strategic assets for sustainable competitive advantage.
A process-based perspective categorizes absorptive capacity into an
exploratory learning and an exploitative learning process. Exploratory learning corresponds to the notion of potential absorptive capacity, while
exploitative learning incorporates the idea of realized absorptive capacity
(Zahra & George, 2002). Technological knowledge and market knowledge
from overseas companies are targeted by Chinese companies during their
strategic analysis prior to an M&A. We argue that the asset-seeking strategic intent results in exploring the technological knowledge base, including
technical know-how, product knowledge, technical capabilities, and experiences of employees. Market knowledge includes reputation, brand equity,
distribution channels, and sales services. This exploratory dimension refers
to potential absorptive capacity, but other factors such as organizational
structure, communication approaches, cultural differences, and institutional
differences are generally not investigated before the M&A transaction closes.
Yet they significantly influence exploiting the acquired knowledge and
know-how that results in realized absorptive capacity.
We propose a conceptual framework to understand the light touch
approach of integration adopted by Chinese investors for their M&A activities in Germany.
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Chinese FDI in Europe and North America
A model of absorptive capacity
Individual level
• Capability
• Experience
• Strategic intent
• Industry
complementarity
Potential
ACAP
Organizational level
• Structure
• Communication style
Realized
ACAP
Light touch approach
• Keep brand
• Keep management team
• Chinese as coordinator
National level
• Business system
• Institutional settings
Figure 10.1
A conceptual model of absorptive capacity
As shown in Figure 10.1, even though cross-border M&As offer Chinese
acquirers the opportunity to absorb technological know-how, market knowledge, and management skills, the potential absorptive capacity (potential
ACAP) is not realized. There are many differences between Chinese acquirers
and German acquired firms. Applying our conceptual framework, all three
factors may constrain realized absorptive capacity to some extent. The different types of absorptive capacity (individual, organizational, and national)
act as a filtering process, and realized gains influence which integration
mode Chinese investors prefer.
3. Data and methods
3.1. Methods
The nature of the research questions of this study suggests fine-grained case
studies as the preferred research method (Eisenhardt, 1989). It is generally
best to obtain this information through qualitative interviews. We conducted in-depth interviews with CEOs and top-level managers from German
companies acquired by Chinese investors. In addition, semi-structured
interviews were conducted with people closely involved in Sino-German
cooperative initiatives.
The interviews, which were tape recorded and transcribed, were structured
and analyzed using the software tool ATLAS.ti.
3.2. The sample
This research focuses on cross-border acquisitions by Chinese companies in
Germany. All the sample companies are in the machine tools industry, where
many cross-border M&As occurred. The acquired companies are privately
owned middle-sized firms (Mittelstand in Germany). Of the seven Chinese
acquirers, five are SOEs. The transactions took place from 2004 to 2009 (see
Table 10.1).
Yipeng Liu and Michael Woywode 221
Table 10.1 Samples in case studies
Case
Chinese firms
German firms
Ownership
Structure1
1
State
11 companies
Yes
2
State
12 companies
Yes
3
State
40 companies
4
State
500 companies
5
Private
10 companies
Yes
Yes
6
State
168 companies
Yes
Yes
7
Private
5 companies
Experience in Experience in Branch
cross-border international
M&A2
business3
Yes
Yes
Yes
Yes
Machine
tools
Machine
tools
Machine
tools
Machine
tools
Machine
tools
Machine
tools
Machine
tools
Deal
year
2004
2005
2005
2006
2008
2008
2009
1 The number of companies in the group, including joint ventures and fully owned companies.
2 Refers to the experience of the company which transacts the cross-border M&A, not the group
level experience.
3 Refers to group-level experience, including import/export and international subsidiaries.
3.3. Data collections
Data were collected mainly via the contacts and networks of the authors.
We first looked at news, press releases, websites, and company announcements to gather information. Then we checked with the SDC Platinum from
Thomson Financials and expanded the samples. Only the strategic M&As
are considered for this study. Invitation letters invited German CEOs and
top managers to participate in this study.
The semi-structured interviews contained three sections: (1) Where did
pre-M&A contacts with Chinese firms come from? How long did the contacts exist? What are the motivations for M&A? (2) Who are the involved
stakeholders? What does the decision-making process look like? (3) Are
there any integration activities post-M&A? What are they? How are Chinese
acquirers involved in your daily business?
At the end of the interview, we asked the interviewees to name three
major challenges regarding cooperation with Chinese companies and the
M&A. The insights provided by each interviewee were compared with what
is known from the research. After each interview, the conceptual framework was adapted incrementally, based on the new information provided
and then discussed with the next interviewee for validation and additional
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comments (Eisenhardt, 1989). This replication logic (Yin, 2003) uses multiple cases to build an understanding of a relatively new domain and in
supplying direct application of the information.
For data collection, in the first phase, August/September 2008, one
native Chinese researcher and a German researcher conducted interviews
in German. The questions were co-designed in English by a native Chinese
researcher and German consultants who have Chinese experiences. The
interviews in this phase were principally conducted in German except
when the interviewee did not speak German well. The data collection
approach combines face-to-face interviews and telephone interviews. The
initial results were discussed with more than 15 German and Chinese managers at a China Forum Bayer meeting at the end of September 2008 in
Munich, Germany.
In the second phase, September, October, and December 2009, more
semi-structured interviews were conducted with people closely involved in
Sino-German cooperation. In the third phase, we conducted some interviews
with Chinese companies in the summer of 2010 to obtain more observations
and to validate the observations from Germany. If the interviews were conducted in Mandarin Chinese, the interview protocols were translated into
English. One of the authors is a native Chinese speaker and conducted the
translations.
4. Results and cases in point
This section contains the aggregated results of the observations from our
study, linking the evidence to our multilevel conceptual framework of
absorptive capacity. Then we look at two representative cases to offer
more in-depth insights through the theoretical framework of absorptive
capacity.
Most acquirers kept the existing management of the German company
after the acquisition. Almost no integration took place after the acquisitions,
let alone the M&A specific concept of ‘100 Day’ program. Unlike the conventional wisdom of integration, Chinese companies apply the light touch
approach. They are passively involved in the operation of the company but
influence the strategic direction of the German companies by retaining seats
on the supervisory boards to keep the management team intact and maintain local employee morale. The current management knows the company
and also knows the local suppliers and customers well. But lack of integration
means that the benefits such as joint project development or skill transfer
occur only to a very limited extent. Further, the uni-directional technologic
advancement is slow and frictions occur.
Within our sample, most of the Chinese companies have prior international exposure, such as the import/export business, overseas subsidiaries,
or joint ventures in China, but very few have cross-border M&A experience.
Yipeng Liu and Michael Woywode 223
Our observations illustrate that there is a higher propensity for Chinese firms
to integrate if they were previously involved in cross-border M&A activities.
A marketing director of a German firm explains (Case 4: the Chinese firm
is state-owned):
There was no integration, and the Chinese partner is too passive. They
can be more active besides the monthly and yearly reporting. Although
the Chinese employees are very curious and engaged in learning, they
need time to accumulate experience.
The CEO of a German company states (Case 6: the Chinese firm is stateowned):
We had some integration such as restructuring the organization, personnel changes and communication. From my perspective, it was quite
positive. The Chinese had some international experience before, and this
definitely helped.
As the Chinese company was becoming international, it built up tacit knowhow which helped individuals broaden their international experience and
later apply it to cross-border M&As. This may help to convert potential
absorptive capability into realized absorptive capacity.
On the organizational level, it is worth noting the difference between
Chinese cross-border M&As and multinational M&As from developed
economies. The ‘Go Abroad’ policy promoted by the Chinese central and
local governments speeded up the entry of Chinese companies onto the
global M&A scene. Within our samples of seven Chinese firms, five are
SOEs, including some national champions. This reflects the strong willingness of the Chinese government to push the Chinese firms going global with
financial support. Generally, the Chinese companies have adequate cash and
prefer thinking from a long-term perspective.
The CEO of a German firm explains (Case 3: the Chinese firm is stateowned):
We needed capital, and Chinese investors brought the money. But it looks
to me like equity investment instead of M&A involvement. They didn’t
integrate.
However, the SOEs often have complex organizational structures and sophisticated corporate governance mechanisms. By contrast, privately owned
enterprises are relatively more transparent. In addition, the decision-making
process of privately owned enterprises is faster, and they have a stronger
willingness to learn. One acquiring privately owned Chinese firm succeeded
in convincing the German entity to undertake a cost optimization program.
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Chinese FDI in Europe and North America
Although it might have been caused by the financial crisis, which offered
the Chinese companies the opportunity to implement more active advice
to the German counterparts, the ownership type and willingness to learn
might also be a potential explanation.
The CEO of the Europe Division of a Chinese firm says (Case 7: the Chinese
firm is privately owned):
German production lines are not very cost effective but Chinese firms
are good at cost savings. So, some practices have been transferred and
accepted by the German company.
The organizational differences between the acquiring and acquired firm form
additional obstacles to integration. Relatively less developed organizational
functions hinder the Chinese firms from integrating the German entity.
A sales director of a German firm states (Case 5: the Chinese firm is
privately owned):
They [Chinese] cannot integrate after the M&A transaction. We have ERP
(Enterprise Resource Planning) systems in place, but they only use Excel.
We are one-step more advanced.
On the national level, huge institutional differences create hurdles to
realized absorptive capacity. Although professional service firms, such as
accounting, financial advisory, and law firms, are involved in cross-border
M&A transactions, they generally leave after the transactions close. The
advice on paper needs to be implemented. One Chinese firm brought private
equity firms on board after the cross-border transactions. The private equity
firms’ rich cross-border experiences and long-term commitments might have
helped to close the institutional distance to some extent, which might result
in a larger realized absorptive capacity of the Chinese firm. The institutional
distance varies according to the country bases of the acquiring and acquired
firms. The national differences between China and other European countries may also influence the realized absorptive capacity as suggested in the
conceptual framework.
After seeing the big picture, we investigate two cases with different
outcomes. This comparative approach is helpful to look for what really
influences the M&A integration strategy and outcomes. We adopt a descriptive approach in analyzing the two cases. Due to a confidential issue, the
company names in the cases are hidden.
4.1. Case study of MachineA
MachineA, a German company, specializes in manufacturing advanced
metal cutting tools used in the automotive and aerospace industry. In the
early 1990s, it had about 30 employees and revenues of approximately
Yipeng Liu and Michael Woywode 225
2 million Euros. The first contact of MachineA with a Chinese company
was in 2001 when the contractor for constructing a machine ordered from a
Chinese company.
Later, the CEO of MachineA realized the potential of the Chinese market
and hoped to diversify via a strategic partnership to gain access in China.
A Chinese company, ChineseM, at that time was searching for a strategic
partner in the West with key know-how in manufacturing. ChineseM first
met MachineA at a trade fair and shortly after a deal closed in April 2005.
ChineseM owned a majority stake of MachineA with the CEO of MachineA
owning the remaining shares. The deal included the provision that the CEO
of MachineA owned extended rights in decisions on management, selection
of production location, and sale of stakes in MachineA, despite the fact that
he was the minority shareholder.
ChineseM allowed these conditions and adopted a light touch approach
at the very beginning. Both sides aimed for ‘Win-Win’ cooperation, hoping to leverage valuable assets, from the advanced technology in Germany
to the market potential in China. Considering the complementary strategic
meaning, the potential absorptive capacity was huge.
After the transaction, there was almost no involvement in daily business
from ChineseM except for routine meetings on monthly and annual reports
as well as planning sessions. Investment in production facilities in Germany
was readily accepted by Chinese shareholders.
Firms’ absorptive capacity depends on the individuals who stand at the
interface of the firm and the external environment. In the context of crossborder M&As, it relates to the individuals who are closely involved in the
deal on both sides. Without an effective interface function, achieving realized absorptive capacity is difficult. This affirms the concept of transactive
organizational learning (TOL) proposed by Kieser and his associates (Kieser &
Koch, 2008). Collaboration is feasible by involving specialists, and specialists
can help to reduce learning (Grunwald & Kieser, 2007).
MachineA employed one native Chinese engineer, mainly acting as
the translator to communicate with the Chinese company. Although
MachineA tried to install one Chinese employee as an interface, the new
graduate, who had no experience dealing with Chinese companies, could
not offer too much help. Moreover, the project manager at ChineseM, who
was responsible for negotiating the deal, left the company shortly after the
deal closed. This created communication obstacles between the two companies. The project manager position had not been filled yet when we
conducted the interview in 2008.
Regarding technology transfer, the initial agreement was to transfer knowhow to China to produce less specialized machinery at a lower cost.
However, this plan proved difficult to realize due to a lack of competence
of technical engineers from China. Although ChineseM also invested in
absorptive capacity directly by sending personnel to Germany for advanced
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Chinese FDI in Europe and North America
technical training, it was a small-scale initiative. Relying on a small set
of technical gatekeepers may not be sufficient; the group of workers as a
whole must have an elevated level of background knowledge to absorb new
technological know-how.
On the organizational level, the CEO of ChineseM was appointed to lead
another Chinese company after the deal closed. The momentum associated
with the arrival of a new leader may have affected the strategy consistency.
Also, the vision of the new leader was not aligned with his predecessor’s.
The special properties of corporate governance in this case negatively influenced the integration activities of ChineseM. Moreover, the differences in
organization structure of Chinese and German companies led to misunderstandings and frictions. The Chinese organizational structure mainly
represents functions without denoting the responsible individuals explicitly, whereas German companies appoint individuals responsible for each
function and make them transparent.
The CEO of MachineA complained:
After almost three years of cooperation, I still don’t understand their
organizational structure and I don’t think I will understand.
There was a lack of cultural understanding on the Chinese side regarding
the German leadership style. Used to the ‘follow the command’ approach,
ChineseM expected MachineA to listen passively to the parent company.
They assumed that the know-how transfer from a daughter company to
the parent company could easily be implemented. In addition, MachineA
employees lacked motivation to engage in the know-how transfer because
they saw a lack of cooperation from the parent company.
Although there were many problems after the transaction occurred,
MachineA still managed to increase the number of employees to 165 and
had over 35 million Euros in revenue in 2008. From this standpoint, the
light touch approach benefited the acquired company. But company growth
mostly originated from the internal strengths of the German company and
not from collaboration with the Chinese partner. Knowledge transfer to the
Chinese partner was scant.
This not-so-successful case in terms of synergy realization reveals some
useful lessons that Chinese companies can learn. We suggest:
• More interactive communications are needed as well as a more hands-on
approach.
• Achieving cross-cultural understanding and lowering the institutional
distance are important conditions for knowledge transfer from German
to Chinese corporations.
• Understanding the organizational structure as well as the roles and
responsibilities of leading managers in the German organizations are
Yipeng Liu and Michael Woywode 227
important prerequisites for successful collaboration, interaction, and
integration.
• Chinese companies need to enhance their absorptive capacity (the realized ACAP).
4.2. Case study of MachineB
MachineB was a traditional family business focusing on machine tool manufacturing before it was acquired by a US machine manufacturing company
in the mid-1980s. Since the American firm and the acquired German firm
MachineB had product overlaps, there were many restructuring activities.
MachineB product development and regional market channels were constrained by the US parent. The US firm filed for Chapter 11 bankruptcy
in 2003. Hence MachineB was searching for new opportunities. A German
machine tool company took over MachineB. The unhappy international
merger experience was the start of the next journey for MachineB with a
company from the Far East.
The Chinese firm MachineCN is a SOE ranked in the top three in the
machine tool industry in China. Although it bears the characteristics of a
SOE, it began international collaboration with MachineB in 1984. At the
beginning, the cooperation was structured so that MachineCN was merely
a customer of MachineB, ordering products and procuring maintenance
services. The Chinese firm realized the importance of advanced technology and started looking for acquisition opportunities. In 2005, when the
German machine tool company lost interest in MachineB, the Chinese firm
MachineCN acquired it.
From the learning perspective, prior experience with the seller-buyer relationship allowed both parties to know each other. After negative experiences
by MachineB during two handovers, the morale of employees was quite
low. It needed a clear direction and a strategy. MachineCN always was very
explicit in describing its intentions, as the CEO of MachineCN says:
We will not move the German manufacturing plant at all but will keep
and grow the company in Germany.
As usual with most Chinese firms, MachineCN did not have much international experience before this deal. They clearly realized the risks involved
with the complex and cross-continental task. On the individual level, the
lack of experience limited the potential of realized absorptive capacity of
MachineCN, although the prior cooperation experience may have offset this
shortcoming.
MachineCN kept the management team and jointly developed a new
strategy, utilizing the technological and market know-how from MachineB
to expand into international markets. In China, they explicitly used the
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‘Made-in-Germany’ brand to market the products by combining the Chinese
sales force and channels with German technologies. MachineCN made its
operational structure clear enough to facilitate smooth communications
between MachineB and MachineCN. MachineCN let the management team
of MachineB concentrate on their core competencies, namely market knowledge and technology.
On the national level, MachineCN was aware of the business system differences and tried to cultivate a culture to understand the differences. They
invited the management team to visit China and MachineCN factories,
explained the historical and recent economic development of China, and
imparted Chinese cultural and historical stories to the MachineB delegates.
Mutual respect for cultural differences and commonalities were ongoing and
frequent. They used external media, such as local newspapers, to report the
success of the cooperation. As a success story, the facts speak for themselves.
MachineB increased revenues from 64 million Euros in 2005 to 172.5 million
Euros in 2009, while the number of employees grew from 500 in 2005 to
750 in 2009.
This successful case illustrates the explanatory power of the model of
absorptive capacity. We conclude:
• Prior working experience and the frequent exchange of employees diminish individual constraints on absorptive capacity.
• The clear structure of the organization on the operational level and
interactive communications smoothed cooperation and unleashed the
realized absorptive capacity.
• Awareness, respect, and mutual understanding of business system differences may enhance the chance of converting potential absorptive
capacity to realized absorptive capacity.
5. Discussion
5.1. Managerial and policy implications
Different factors influence the conversion from potential to realized
absorptive capacity. Managers from both Germany and China should
be aware of the differences from a multidimensional perspective. Light
touch integration may be explained by the conceptual framework we propose. Keeping the light touch approach and finding an optimal way to
maximize the synergy from cross-border endeavours are challenges for
managers. One possible way is to understand the different dimensions
of absorptive capacity, and invest in absorptive capacity. Not just the
potential absorptive capacity from a strategic perspective, but also the
process-based view on collaboration, might enhance the realized absorptive
capacity.
Yipeng Liu and Michael Woywode 229
Although the proposed framework was developed based on the German
machine tool industry, it may apply to upcoming Chinese cross-border
M&As in Europe. The latest high profile case is Geely Automobile, which
purchased the Swedish brand Volvo for US$1.5 billion from Ford Motor Co.,
who paid US$6.45 billion for Volvo in 1999 (Reed, 2010). To enhance the
realized absorptive capacity, we suggest the Chinese acquirer should involve
European private equity investors, specialized automotive consultants, and
automotive service companies in the M&A. Their understanding of the
institutional environment, local laws and regulations, and professional experiences may substantially shorten the institutional distance encountered by
Chinese companies.
By joining forces, European financial investors can structure a deal before
the transaction, and European investors may complement and be more
actively involved in the operational management of the acquired firms in
Europe after the deal, given the light touch integration approach adopted
by the Chinese companies. This type of collaboration can only generate synergy if both the Chinese strategic investors and European financial investors
can trust each other and align their interests accordingly.
As for policy implications, it is necessary for both countries to expand
existing collaboration across different levels. A variety of intermediaries,
such as governmental agencies, industrial associations, educational institutions, international organizations, and consulting firms can contribute
to meet the critical challenges and prepare business leaders with the
mutual understandings before they become involved in the cross-border
M&A activities.
5.2. Limitations and future research directions
Due to the characteristics of the case study research, the framework cannot
be simply generalized, although it may reflect the reality of Chinese M&As in
the German machine tool industry. Since more and more cases are available,
our propositions can be tested via quantitative methods, such as surveys.
The consequences of the light touch approach are difficult to evaluate
due to the relatively short history of Chinese cross-border M&As. It will be
valuable to monitor the further development of these M&As and measure
the organizational performance through a longitudinal study. Researchers
can test this framework in other industries and other countries in the
cross-border M&A context. A quantitative approach can be used to test
the framework and validate the propositions, even with small samples but
multiple observations in each cross-border M&A case.
6. Conclusion
Departing from the strategic intent perspective in the literature on Chinese
OFDI, this study focuses on the integration approach of Chinese cross-border
230
Chinese FDI in Europe and North America
M&As in Germany and explores the light touch approach. Unlike the conventional approach to M&A integration, Chinese cross-border M&As in
Germany adopt light touch integration. A conceptual framework integrating
individual, organizational, and national level dimensions into the concept
of absorptive capacity explains the light touch integration approach.
This qualitative study includes seven Chinese M&A cases in the German
machine tools industry. Cross-case analyses were conducted to test and illustrate the explanatory power of the conceptual framework. Although we
believe in the explanatory power of the conceptual framework based on finegrained case studies, we suggest further research to test it in the cross-border
context, covering different countries and different industry sectors.
We contribute to a better understanding of Chinese cross-border M&As in
three ways. First, we focus on the integration approach from the theoretical lens of absorptive capacity; second, a multilevel approach covering
individual-, organizational-, and national level dimensions is adopted to
analyze this complex issue; third, based on organizational learning theory, we emphasize the importance of understanding the absorptive capacity
concept from a multidimensional perspective. Our theoretical contributions
include the illustration of the multidimensional traits of absorptive capacity
in cross-border M&As.
The proposed conceptual framework may help managers and policymakers to understand the light touch integration approach and to realize the
potential synergy from Chinese cross-border M&As.
We encourage Germany and China to further expand their existing collaboration by leveraging the know-how and experiences from different types of
organizations, such as governmental agencies, industrial associations, and
professional firms.
Acknowledgments
The authors would like to thank the participants of the ‘China Goes Global
Conference’ at Harvard University for the helpful feedback. We appreciate
the kind support from CEOs and managers who offered us the opportunity to conduct this research study. Financial support from the University
of Mannheim is greatly acknowledged.
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11
Chinese SMEs in Prato, Italy
Anja Fladrich
China’s ongoing ambition of global leadership includes its growing
investments outside China. Although China has the reputation for being the
world’s factory, manufacturing up to 70 percent of electronics, toys, textiles,
clothing, and footwear (Lardy, 2002; Gu, 2006; Harney, 2008), a growing
number of Chinese have set up businesses outside the country, most recently
in Europe. Today, China not only runs the world’s workshop but operates workshops around the world, a phenomenon resulting from increased
Chinese outward foreign direct investment (OFDI), which has doubled to
US$52 billion between 2007 and 2008 (Roberts & Balfour, 2009, p. 42). Key
players in China’s global push are Chinese state-owned enterprises (SOEs)
and Chinese multinational enterprises (MNEs). Their goal is to open new
markets, access natural resources, and buy Western brands overseas.
However, besides the ‘investment hunger’ of large Chinese companies, it
is the growing number of small-to-medium-sized enterprises (SMEs) set up
in Europe by Chinese migrants (xin yimin)1 that also contribute to China’s
global advancement. They have stayed in the shadow of larger Chinese
enterprises so far but they deserve more attention as part of Chinese international migration. Moreover, they are labor rather than capital intensive.
This chapter draws upon interviews with more than 30 Chinese
entrepreneurs in Prato, Northern Italy, investigating the business rationale
and strategies of these Chinese SMEs.
1. China’s long march to become a global investor
China’s change from an inward-looking self-reliant country toward becoming more globally integrated determined its two-pronged investment policy: to attract foreign investments and become an investor overseas. The
flow of foreign direct investment (FDI) into China, as one of the largest
FDI recipients in the world over the past three decades (OECD, 2008;
Sauvant & Devies, 2010; UnctadStat, 2010), has witnessed a ‘counter-flow’ –
investment by China and Chinese enterprises in other parts of the world
234
Anja Fladrich
Other parts of the world
235
Other parts of the world
Foreign direct
Investment
(yin jin lai )
Overseas direct
Investment
China
(zou chu qu)
China
Figure 11.1 China’s dual approach toward sustainable economic development
Note: Figure by author, see also Fuchs (2007), Kurihara (2008), and Tang et al. (2008).
(see Figure 11.1). These two investment streams are referred to as ‘coming
in’ (yin jin lai) and ‘going out’ (zou chu qu) and are complementary forces in
China’s sustainable economic development and global advancement (Tang
et al., 2008; Ge & Ding, 2009).
Chinese OFDI has over the past decades mainly targeted Asia and the
United States. More recently, however, a growing number of Chinese SOEs
and MNEs have begun to invest in Europe (Gugler & Boie, 2008). Starting
from a small base and representing only a fraction of Chinese OFDI worldwide, Chinese investments in Europe have grown modestly but steadily.
Most investments have gone into the service industries, information communication technology (ICT), and automobile manufacture (see Table 11.1
below).2 Amongst European countries, the United Kingdom and Germany
Table 11.1 Top 10 recipient countries of Chinese ODIs flows in Europe (US$ million)
World
Europe
(excl.
Russia)
Germany
Italy
UK
France
Spain
Sweden
Netherlands
Flows
2003
Flows
2004
Flows
2005
Flows
2006
Flows
2007
Flows
2008
2,854.65
114.41
5,497.99
79.90
12,261.17
189.54
17,633.97
128.73
26,506.1
1,062.82
55,907.2
480.56
25.06
0.29
2.11
0.45
n.a.
0.17
4.47
27.50
3.10
29.39
10.31
1.70
2.64
1.91
128.74
7.46
24.78
6.09
1.47
1.00
3.84
76.72
7.63
35.12
5.60
7.30
5.30
5.31
238.66
8.1
566.54
9.62
6.09
68.06
106.75
183.41
5
16.71
31.05
1.16
10.66
91.97
Source: Pietrobelli, Rebellotti, and Sanfilippo (2010).
236
Chinese FDI in Europe and North America
receive most Chinese OFDI, while Italy, like most other European countries, has only over the past few years attracted more investment from
China. Although Chinese investment in Italy has multiplied more than 20
times since 2003, Italy is still a minor recipient (Pietrobelli, Rebellotti, &
Sanfilippo, 2010, p. 8). The 2008 global financial crisis (GFC) is expected
to result in a further influx of Chinese OFDI in Europe as ailing European
companies offer attractive investment opportunities. As Roberts and Balfour
(2009, p. 40) describe it, China is ‘bottom-fishing’, which leaves struggling European firms vulnerable to the Chinese ‘insatiable appetite’ (Nicolas,
2009).
Although China’s investment in Europe remains limited, it is nevertheless an integral strategic part of and destination for China’s global ambition,
and should increase further (Deutsche Bank Research, 2006; Gugler & Boie,
2008; Nicolas, 2009). Two landmark events mark China’s long march to
global leadership and investment: the Open Door Policy (Kaifeng zhengce)
in 1978, and China’s accession to the World Trade Organization (WTO) in
2001. The Chinese government is instrumental in China’s investment overseas, including the expansion strategy ‘Going Global’ (zou chu qu) initiated
by Jiang Zemin. In effect since 1999, this strategy gained additional impetus
from members of the Chinese Politburo in mid-2009 (Fuchs, 2007; Roberts &
Balfour, 2009) (Figure 11.2).
Over the past three decades, China has gradually moved from prohibiting OFDI to actively promoting it, with the zou chu qu strategy as a core
element (Cai, 1999; Voss et al., 2008). This strategy was designed for large
Chinese SOEs such as Baosteel and Sinopec but selected MNEs, including
Lenovo, Haier, and Huawei, also benefited. These firms are all amongst the
30-to-50 companies that have already built up a significant resource base
and have been involved in international competition. The Chinese government has been committed and eager to build these companies into ‘Global
Champions’ (Gu, 2006; Fuchs, 2007, p. 30; Alon & McIntyre, 2008; Tang
et al., 2008; Yang & Stoltenberg, 2008). While an estimated 30,000 Chinese
companies operate outside China today, the Global Champions have a
1978:
China’s open
door policy
1999: Expansion
strategy: zou chu qu
Figure 11.2
2001:
China’s
WTO
accession
2009: Reiteration of
zou chu qu strategy
Landmarks of China’s ambition to global leadership
Anja Fladrich
237
special role representing model enterprises and constituting the flagship
of China’s global ambitions. The government hopes that these companies
will equal the standard of the world’s top 500 companies. Support mechanisms by the Chinese government for the Global Champions have been
designed to make overseas investment attractive to more Chinese companies
and increase their international competitive position. These mechanisms
include easier access to start-up capital at favorable interest rates, government subsidies, and insurance protection from the Bank of China, the China
Development Bank, and Sinosure (China Export and Credit Insurance Corporation). Approval processes for investment projects have been simplified
to accelerate their execution. Provincial governments now become involved
only if the investment exceeds US$ 100 million, while smaller investment
projects are approved at lower levels (Deutsche Bank Research, 2006; Fuchs,
2007; Nicolas, 2009). The reasons for this preferential treatment include
China’s strategy for independence in key industries (including energy, natural resources, and food) as well as the emergence of a ‘. . . new patriotism and
self-confidence . . .’ (Fuchs, 2007, p. 22).
Despite the growing number of Chinese SOEs and MNEs now operating
in Europe that are strategically important to China’s global advancement, a
growing number of micro-enterprises and small-to-medium-sized enterprises
(SMEs) have also contributed to China’s global expansion – outside government initiatives, strategy, and scope. Set up by ‘new’ Chinese migrants
(xin yimin) in a ‘bottom-up’ approach, these small Chinese firms often operate in the shadow of China’s large SOEs and MNEs. They may sometimes
even be hidden from the host country’s authorities. These Chinese microenterprises and SMEs have only recently started to attract scholarly interest
(Ceccagno, 2003, 2007, 2009; Wu & Zanin, 2007; Fladrich, 2009b). Unlike
the large Chinese companies eager and able to acquire foreign companies
which we read about on the front pages of business newspapers, the Chinese
micro-enterprises and SMEs attract coverage and controversy in local newspapers of the host country only. The attention given to the small enterprises
by Chinese migrants originates from the large influx of Chinese migrants
into Europe over the past ten years, as well as allegations of labor exploitation and unfair competition by Chinese micro-enterprises and SMEs. Since
we have only nascent knowledge on the smaller firms and their investments
in Europe, questions arise as to what their motivation and business rationale
is, what entry mode Chinese migrant entrepreneurs adopt, what business
strategies, and which industries. To what extent do Chinese SME investment
paths and patterns mirror those of their ‘larger brothers’, that is Chinese
SOEs and MNEs? What significance do the ethnic enclave and Prato, as
one of Europe’s most concentrated Chinese enclaves, have as a traditional
industrial district for Chinese SME investments?
Against the background of these questions, the following section reviews
the literature on Chinese OFDI and addresses the concepts of industrial
238
Chinese FDI in Europe and North America
districts, cluster theory, and ethnic enclaves to explain the development
of Chinese SMEs in Prato. This chapter draws on the five dimensions of
business rationale, investment strategy, preferred industries, and financial
and human capital to illustrate the differences among Chinese SOEs, MNEs
and SMEs.
2. Characteristics and development of Chinese OFDI
Research on China’s investment overseas has long remained in the shadow
of the literature on FDI flows into China. As part of China’s reform policy
over the past three decades, Chinese OFDI has also been characterized by a
gradualist approach. China, once it became aware of international concerns,
was eager to avoid the perception by companies and governments overseas
of being too ambitious and aggressive in its global asset pursuits.
For the last decade, scholars have been exploring the characteristics and
development of Chinese OFDI. Luo et al (2010); Voss et al. (2009), Wong
and Chan (2003), and Wu and Chen (2001) assess the scale and pace
of Chinese investment overseas and identify different stages or phases.
Starting from a small number of projects concentrated in a few industries and driven by political motives of fostering international relationships,
Chinese OFDI has become more economics-driven, fast-paced, and focused
on large-scale investments. Cross and Voss (2008) show that prior to 2000,
OFDI followed trade and were defensively market-seeking, while, after 2000,
Chinese OFDI targeted markets with substantial growth potential, and thus
trade followed OFDI.
Recent scholarship (e.g., Liu, Buck, & Shu, 2005; Hong & Sun, 2006;
Buckley et al., 2007; Deng, 2007) examines the motives and dynamics of
Chinese OFDI. Employing Dunning’s (1992, 2000) theory, according to
which the search for foreign markets, resources, efficiency, and strategic
assets motivates foreign investment, Buckley et al. (2007) conclude that,
in the case of Chinese OFDI, the host countries’ resource endowments,
institutional environment, and policy liberalization in the home country
constitute influential factors. The authors identify cultural proximity and
political risk as significant drivers and suggest that Chinese firms investing overseas prefer an environment comparable to their home environment.
Deng (2007) and Pietrobelli, Rebellotti, and Sanfilippo (2010) emphasize that
China is a latecomer on the global stage, prompting the country to catch up
with global competition by engaging in strategic asset-seeking. Deng (2007,
p. 74) argues that, unlike traditional exploitation and transfer of resources to
the home country, the asset-seeking approach of Chinese foreign investment
‘. . . is undertaken . . . to access new resources and . . . gain new capabilities
or acquire necessary strategic assets in a host country’. Luo et al. (2010)
advocate that the dual forces of competence-constraint and institutional
Anja Fladrich
239
escapism, usually discussed separately, in actuality both influence enterprises from emerging countries to expand globally. Analyzing the role of the
Chinese government in OFDI, the authors admit that China’s OFDI policies
and initiatives are not necessarily transferable to other countries.
Spurred by the desire for rapid economic development, China has been
eager to access natural resources, mature technologies, management skills,
and brands, all of which it lacks but which are vital for its economic growth.
This has prompted inquiry on how Chinese OFDI occurs, including entry
mode and strategies. Wu and Chen (2001, p. 1243) identify five investment
vehicles as modes of entry: equity joint ventures, contract joint ventures,
wholly owned enterprises, branch offices, and full or partial acquisitions. The
China National Offshore Oil Company (CNOOC) is an example of the global
reach of Chinese SOEs that had signed petroleum contracts with more than
70 foreign oil companies in 21 countries by 2006 (Johnson, 2008). Gugler
and Boie (2008) emphasize joint ventures (JVs) and mergers and acquisitions (M&As) as the preferred investment forms for Chinese firms. However,
greenfield operations and research and development (R&D) centers in host
countries are also crucial in China’s ambition (Buckley et al., 2007; Deng,
2007; Fuchs, 2007; Kurihara, 2008; Simmons, 2008; Tang et al., 2008).
Against the background of Western businesses and countries viewing
Chinese ODFI as a threat3 and hence eager to counter these initiatives,
scholars ask how much Chinese OFDI follows conventional FDI investments
or whether it takes an idiosyncratic approach, that is constitute FDI ‘with
Chinese characteristics’. Scholarship increasingly supports this latter view
(Child & Rodrigues, 2005; Buckley et al., 2007; Gugler & Boie, 2008; Luo
et al., 2010). While the literature on Chinese OFDI in Europe mostly focuses
on the United Kingdom and Germany as the main European destinations,
Pietrobelli, Rebellotti, and Sanfilippo (2010) provide an additional perspective in their work on Chinese OFDI in Italy. They argue that although
Chinese OFDI in Southern Europe is still in its infancy, Chinese MNEs
are eager to tap core competencies in Italy’s industrial districts. Pietrobelli,
Rebellotti, and Sanfilippo (2010) emphasize that the Italian and Chinese
economies share certain features, including strong location advantages due
to the agglomeration of firms in the automotive, textiles, and home appliances sectors. The authors support Buckley’s et al. (2007) view that similarity
between home and host environment constitutes a vital factor for Chinese
OFDI. The following section discusses the concepts of industrial districts,
clusters, and ethnic enclaves.
3. Industrial districts, clusters, and ethnic enclaves
The concept of the industrial district originates from the work of Alfred
Marshall (1920) and his theories on localized industries. Marshall (1920)
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Chinese FDI in Europe and North America
identifies three drivers of industrial localization: pooling of labor, availability of specialized inputs, and spillover effects of technology that allow SMEs
to compete with large companies due to their geographical agglomeration
(Krugman, 1991). Geographical factors reduce transaction costs and allow
higher productivity and more specialized inputs and services. Geographical proximity enhances the flow of information on products and markets.
According to Marshall (1920), industrial districts with amalgamations of
SMEs rely less on economies of scale but have flexibility, short distances, and
the pooling of resources. Hence many localized SMEs specialize in various
stages or phases of the same production process. When scholars (Becattini,
1990, 2000; Pyke & Sengenberg, 1990; Harrison, 1992; Markusen, 1996;
Fioretti, 2001; Sforzi, 2002) revisited Marshall’s concept, Becattini (1990,
p. 19) referred to the industrial district as ‘. . . a socio-territorial entity, which
is characterized by the active presence of both a community of people
and a population of firms in one naturally and historically bounded area’.
Becattini (1990, 2000) emphasizes that the value system in the industrial
district is shared and handed down over generations, acting as source of productivity and innovation. Pyke and Sengenberg (1990) point to the closer
relationships among the social, political, and economic spheres in industrial
districts, while Markusen (1996) confirms that not only relationships but
intentional cooperation among competing firms, including staff exchanges
between customers and suppliers, characterize the industrial district.
While Marshall’s theory is vital for the development of cluster theory,
Porter (1998a, 1998b, 2000) is arguably the most influential contemporary
scholar on the concept of clusters, which is often referred to as ‘. . . neoMarshallian cluster concept . . .’ (Martin & Sunley, 2001, p. 6). Porter (1998a,
2000) conceptualizes an industrial or business cluster as a group of interconnected corporations operating in a similar field and located in close
geographical proximity. They are linked by commonalities as well as complementarities. Companies in a cluster usually operate in the same sector
or sub-sector, have strong interdependent relations in the value chain,
and share cost and risks (OECD, 2001). As Markusen (1996) points out,
the growth of clusters results from networking and the twin-concept of
cooperation and competition, which can be found in developed as well
as developing economies. Porter (2000), however, argues that clusters in
developed countries tend to be more advanced.
Portes (1981, pp. 290–291) cites characteristics of industrial districts and
clusters as vital for migrant communities in host societies, terming the situation of migrants in a geographical agglomeration an ethnic enclave, which
according to Portes:
. . . consists of immigrant groups which concentrate in a distinct spatial
location and organize a variety of enterprises serving their own ethnic
market and/or the general population. Their basic characteristic is that a
Anja Fladrich
241
significant proportion of the immigrant labor force works in enterprises
owned by other immigrants.
The Chinese community in Prato appears to be a ‘cluster within a cluster’. As a traditional industrial district hosting a large number of SMEs in
the textile sector (Dei Ottati, 1994; Fioretti, 2001), Prato has witnessed the
emergence of a Chinese enclave nested within the industrial district. The
emergence and development of Chinese firms in the enclave appear to differ from the Chinese SOEs and MNEs discussed in the literature, and their
business rationale and strategies are of particular interest and value to the
discourse on Chinese OFDI.
4. Methodology
This chapter is based on a scoping study of 36 interviews (including repeat
interviews) with Chinese entrepreneurs undertaken by the author in Prato in
2008 and 2009.4 The interviews lasted up to two hours and were conducted
in Chinese (Mandarin). Notes were taken during each interview and transcribed into a research journal. The respondents were approached employing
an opportunistic approach by visiting their business outlets in the Chinese
enclave. All the respondents were owner-operators and 15 percent operated
the firms as co-preneurs. As Table 11.2 shows, almost half of the respondents
were female, with an average age of 29 for male and female respondents. This
mirrors the demographic of the overall young Chinese community in Prato
that has in recent years seen an increase in its female population (Denison
et al., 2009).
Most of the respondents operate their business in the services and retail
industry. Although the manufacturing of textiles has been vital to Chinese
companies and the community for more than two decades, the services
and retail sectors have gained importance only recently, and by 2008 dominated the Chinese businesses in manufacturing (Ceccagno, 2009). With
usually fewer than half a dozen employees, most of the respondent firms
were micro-entrepreneurs or SMEs. The small number of manufacturing
companies included in the research employed between 10-to-25 workers
on average, many of whom were contractual and hence these firms had a
Table 11.2
Respondent gender and age
Number
Percentage
Average age∗
Male interviewees
Female interviewees
Total
18
53
29 years
16
47
29 years
34
100
29 years
Note:∗ includes five respondents who did not reveal their age.
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Chinese FDI in Europe and North America
Table 11.3
Number
Percentage
Size
Company size and industry
Manufacturing
Services and retail industry
Total
6
18
> 8 employees
28
82
< 8 employees
34
100
n/a
more volatile workforce determined by industry demand. The dominance of
small workforces applies also to Chinese SOEs and MNEs in Italy (Pietrobelli,
Rebellotti, & Sanfilippo, 2010, p. 10) (Table 11.3).
The majority of Chinese firms in Prato are located along Via Pistoiese, Via
Fabio Filzi, and neighboring streets outside the medieval town center. Several large old textile manufacturing factories are also located here that the
Chinese bought from the Italians during and following the crisis of the fashion industry in Prato in the late 1980s. This area has since become the focal
point of the Chinese community, with the market square on Via Pistoiese as
the center. Starting from the square, where initial interviews were conducted,
the author visited, at times repeatedly, business outlets in the Chinese
enclave in 2008 and 2009. During each visit, the researcher addressed market entry and business set-up, and the use of financial, human, and social
capital as well as current and future opportunities and challenges. The interview results follow and the author contrasts them with the approach used by
Chinese SOEs and MNEs. The next section first gives an overview of Chinese
enterprises in Italy followed by an introduction to the research site that has
long been known as the industrial district for woolen fabrics and textiles
(Sforzi, 2001), and more recently as Europe’s most concentrated Chinese
community.
5. Chinese enterprises in Italy
At the beginning of the new millennium, the total number of Chinese
in Europe was estimated at approximately one million, including illegal
Chinese migrants. Although this is only a small proportion of the more than
35 million overseas Chinese, it has grown during the past decade. Chinese
people have migrated especially to Southern Europe, and Italy in particular, making it Europe’s gravity center for Chinese migrants. The difficulty of
ascertaining the number of Chinese migrants in Europe, and especially Italy,
is due to the large number who are illegal and undocumented. Known in
Italy as the clandestini, they may augment the official number of Chinese
by up to 50 percent. Despite variations in the estimates of Chinese in different Italian locations, Chinese migrants in Italy accounted for 5 percent
of the Italian population by the end of 2007. In several Italian cities the
Anja Fladrich
243
percentage of Chinese is even higher. For example, in Rome the Chinese
account for 7.5 percent of the total population, about 1.5 times the national
average (Cristaldi, 2002), Prato, in Tuscany, hosts the most concentrated
Chinese community in Italy and second largest in Europe – after Paris – with
a conservative estimate of 12 percent (Nadeau, 2007) (Table 11.4).
Nascent scholarship on Chinese migrants in Italy suggests that they
migrate (especially to Prato) with the long-term ambition of setting up
their own businesses (Denison et al., 2009). Bond (1998, p. 81) refers to
the goal of becoming an entrepreneur as a part of Chinese culture reflecting ‘. . . a widespread hunger . . .’ while Leung (2004, p. 93) claims Chinese
entrepreneurial aptitude is driven by gongzhi buchutou, or the belief that
‘. . . working for others [is] a dead end street’. In Prato, this entrepreneurial
spirit has resulted in more than 3,500 micro-enterprises and SMEs that have
grown exponentially over the past decade, accounting for more than half of
all Chinese firms in Tuscany and more than half of all SMEs in Prato (population 180,000). Compared with the number of Chinese companies in the
Italian region of Veneto and the German city-state of Hamburg, with more
than four million residents between them, Prato has many more Chinese
business start-ups (see Table 11.5).
The number of Chinese SMEs in Prato also dwarfs the investment of
Chinese MNEs that Pietrobelli, Rebellotti, and Sanfilippo (2010, p. 9)
Table 11.4 The Chinese community in Italy between 1991 and 2007
Year
Number Of Chinese
Growth (in nos.)
Growth (in %)
1991
2000
2007
18,700
48,650
168,750
n/a
29,950
120,100
n/a
260
347
Sources: Blangiardo (2007), Ceccagno (2003, 2007), calculations by author.
Table 11.5 Comparison of Chinese firms in Prato, Veneto, and Hamburg (1991–2009)
Year
Chinese firms in
the city of Prato
Chinese firms in the
region of Veneto
Chinese firms in the
city-state of Hamburg
1991
2001
2007
2009
212
1,753
3,177
3,500
35
312
2,903
n/a
n/a
330
>360
+400
Sources: The figures for the region of Veneto were captured for a period of time and not a point in
time. Table compiled by the author with data from Ceccagno (2003), Denison et al. (2009), HWF
(2009), Kynge (2006), UIP, interview July 2009.
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Chinese FDI in Europe and North America
quantify, with 61 projects intended to open in Italy as a new and sophisticated market, acquire strategic assets in the areas of design, product
development, technology, and management. According to the authors, these
investments are mainly concentrated in Lombardy and Piedmont in the
North of Italy, as is Prato. Unlike the Chinese in Prato, who appear to
come to Prato deliberately to set up their own businesses, Chinese SOEs and
MNEs, according to Pietrobelli, Rebellotti, and Sanfilippo (2010) do not view
Italy as their first location preference. Although the first Chinese investment
project in Italy occurred as the Chinese began arriving in Prato (i.e., when
Air China opened its first office in Rome in 1986), the growth patterns of
Chinese SOEs and MNEs in Italy and SMEs in Prato differ. While Chinese
policy liberalization and the zou chu qu-strategy accelerated SOEs and MNEs
from 2000 onward, the growth of Chinese SMEs in Prato gained momentum
approximately five years earlier.
The exponential growth of Chinese firms in Prato is of particular interest
given that the Chinese entrepreneurs are migrants who, unlike employees in Chinese SOEs and MNEs, operate in what can be described as a
hostile environment. The Chinese migrants were often ridiculed by the
Italians, and resistance and resentment from the host society toward Chinese
migrants followed, partially fuelled by negative media coverage (Lee-Potter,
2007; Thomas, 2007). A different scenario applies to the Chinese Global
Champions as these firms usually enjoy a positive reception in the host
country, benefit from host and home government endorsement and assistance, including access to financial capital and human capital. On the
contrary, the Chinese entrepreneurs in Prato often face multiple obstacles
in the host country due to their migrant status, which are compounded
by the fact that the Chinese rarely bring any significant human or financial capital when they arrive. They usually have a basic education only,
are often unskilled, and arrive not only with empty hands but often with
debts incurred from the passage to the host country (Ceccagno, 2003). While
some of the Chinese MNEs and SOEs may also encounter difficulties with
access to human capital, their overseas investment is partially and deliberately driven by their global ‘hunt for talent’. Roberts and Balfour (2009)
find that Chinese Global Champions employ up to 60 percent staff locally.
Hence many of their human resources come from the host country, allowing
the Chinese Global Champions to tap into employees’ local knowledge and
business intelligence, which provides the company with a competitive edge.
This approach stands in stark contrast to Chinese SMEs in Prato, who almost
exclusively recruit a co-ethnic workforce (Fladrich, 2009a). Transaction costs
are lower as a result of similar values, work ethic, and ease of recruitment
and the co-ethnic workforce is vital for the Chinese companies’ success, and
especially for the growth of the Chinese economy in Prato, where employment within a Chinese firm provides a critical springboard or launching pad
to future Chinese entrepreneurs.
Anja Fladrich
245
As conceptualized by Portes (1981), Chinese firms in the enclave serve
both the local and the ethnic clientele, while Chinese SOEs and MNEs serve
the local market in the host country in their pursuit of global expansion. The
ethnic enclave depends on geographic proximity, which in the case of Prato
extends to half a dozen streets. While Chinese SOEs and MNEs overseas are
not necessarily confined to the small scale found in Prato, they nevertheless
gravitate to locations that host sectors of specialization: Turin for automotives, Varese for white goods, Emilia Romagna for machinery, and Campania
and Liguria for logistics (Pietrobelli, Rebellotti, & Sanfilippo (2010). In a similar manner, Prato is the preferred location for Chinese SMEs, initially only in
the textile manufacturing sector, but increasingly for the services and retail
sectors directed mainly toward the local Chinese, but more recently to the
local Italian clientele (Fladrich, 2009b).
6. Prato: A Chinese enclave within an industrial district
Prato, in Tuscany, is one of Italy’s largest and oldest industrial centers,
well known as one of Italy’s main producers of textiles and Europe’s most
important fashion centers. Located between Florence and Pistoia, Prato has
developed into a center for commerce and trade comprising more than
6000 mostly small- and medium-sized firms (Piscitello & Sgobbi, 2004).
Prato has a long history as a textile town, with woolen fabrics first being
manufactured and traded in the twelfth century. Prato continued its textile
prominence with the introduction of mechanization in the nineteenth century (Becattini, 2000; Dei Ottati, 2003). After World War II, Prato’s textile
industry flourished and its labor force increased from 22,000 to 60,000 textile workers. This new dynamic changed Prato into one of the fastest growing
economic centers and industrial districts5 in Italy, relying on traditional
design and craftsmanship performed by many small businesses engaged in
all aspects of textile production (Dei Ottati, 2003; Khosravian & Bengston,
2006).
In the mid-1980s, however, Prato’s textile industry experienced a severe
crisis as the demand for carded wool dwindled and 37 percent of the Italian
textile businesses closed down. The textile sector managed to reposition
itself in the early 1990s and developed again into a pillar industry in Prato.
Critical for the turnaround of Pato’s textile industry was the availability of
migrant labor including the Chinese, who first arrived in the early 1980s,
and continued to migrate there ever since. Indeed, the increase in Prato’s
population appears entirely due to the influx of migrants from 3091 in
1995 to 24,153 in 2008, an increase in the foreign population of 8 percent.
Prior to the mid-1990s, foreigners in Italy constituted a negligible minority since Italy was an emigration country (Cristaldi, 2002), where foreigners
accounted for 0.6 percent only.
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Chinese FDI in Europe and North America
In Prato, the Chinese today live and work outside the old city, on Via
Pistoiese and adjacent streets, where a Chinese enclave has emerged, of
which the market square outside Xiaolin Supermarket embodies the focal
point. While the Chinese introduced their so-called Pronto Moda business
model of ready-to-wear fast fashion into the Pratese textile sector, they have
also begun to diversify into other industries, especially the service industries,
including hospitality, communication, travel, and retail, which represent the
majority of Chinese businesses in Prato (Ceccagno, 2007).
7. Insight from Chinese enterprises in Prato
This section analyzes the business operations of Chinese entrepreneurs in
Prato and compares them with those employed by Chinese SOEs and MNEs.
Employing the five dimensions of business rationale, investment strategy,
industry preference, and financial and human capital, Table 11.6 highlights
the differences among SOEs, MNEs, and SMEs.
Upon their arrival in Prato, the Chinese are not ‘ready-made’
entrepreneurs able to access resources and open new markets for existing
Table 11.6
Chinese SOEs, MNEs, and SMEs compared
Dimension
I. Business/
investment
rationale
Chinese SOEs/MNCs in Europe
Chinese SMEs in Prato, Italy
Implementing expansion zou
chu qu strategy
Following ‘dream’ of setting up
own business as avenue unable
to pursue at home (in China).
•
•
II. Investment
strategy
SOEs: political-driven to
secure energy and general
resources supply;
MNEs: commercial-driven to
open new markets, acquire
and build brands.
Mergers & Acquisitions, R&D
centers:
•
Gradual and slow opening
of markets with low level of
visibility and media
coverage where possible.
Start-up as Greenfield
operations, at times buying out
existing firms in the host
country.
•
•
Rapid expansion and
growth of number of
Chinese firms initially
in cluster only, more
recently diversified, also
geographically with Chinese
firms highly visible in Prato.
At individual firm level,
slow acquisition of market
share per firm due to limited
financial capital.
Anja Fladrich
247
III. Preferred
industries
firms
operate in
Natural resources,
manufacturing, services
industries.
Initially textile and leather
manufacturing;
IV. Financial
capital
Financial incentives and access
to funds for overseas operations
partially provided by the
government.
Restricted to migrant’s own
savings:
Resorting to existing skills base
and experience from domestic
operations employing a
combination of Chinese
expatriates’ overseas and local
staff.
Relying almost exclusively on
Chinese staff in the host
country;
V. Human
capital
• Firms are eager to expand
skills base, especially
acquiring technical and
managerial know-how
overseas (‘hunt for talent’).
• Stronger diversification
away from manufacturing
toward services sector.
• from past paid employment;
• equity from family and
friends; and
• reinvestment of
profit/earnings.
•
occasional relocation of staff
from China;
• usually un- or semi-skilled
only; commonly not
possessing relevant skills.
products and/or services. According to the respondents in the survey, the
Chinese in Prato usually start as employees in companies of fellow Chinese –
not necessarily in Prato, though – and use their employment with other
Chinese as a springboard to set up their own business. Although the Chinese
government has helped these Chinese through regulations that allow easier
access to obtain passports and travel permits, the rationale and impetus of
the Chinese to invest in Europe goes back to the individual, in some cases for
generations, and the tradition of chain migration. While the set-up of one’s
own firm constitutes a dream for many (Bond, 1998), Chinese chain migration goes back to the fourteenth century and has mainly been driven by
Chinese from ‘sending communities’ or qiaoxiang – poor regions in Zhejiang,
Guangdong, and Fujian provinces. People from these regions turned to
internal and external migration as a way to make a living and support
their families through remittances. Hence Chinese migrant entrepreneurs in
Prato are not expanding an existing business and relying on entrepreneurial
know-how, but starting as novice entrepreneurs from scratch and from a
limited resource base. They often have only their entrepreneurial drive and
determination.
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Chinese FDI in Europe and North America
I migrated to Italy in 1998 on recommendation of a friend of mine. He had
migrated to Milan earlier and told me that I could find a job, save money and
run my own business. This convinced me. However, I did not think it would
take me almost 10 years to set up my own business. It has taken long hours, but
today I have three businesses in Prato, and my son has followed me to Prato,
where he is also running a business.
(Interview January 7, 2009, Prato)
Emigration is prompted by the prospect of, and hope for, business opportunities relayed back to China by migrant success stories, remittances, and
donations to their hometowns. A push-pull situation exists where the socioeconomic situation in China necessitates emigration, while the positive
experience of Chinese migrants overseas – often family and/or friends – lures
the migrant to invest in a business career overseas. These Chinese are part
of the Chinese diaspora and benefit from pioneer family members’ accommodation and/or work for the new arrivals. Lancee (2010, p. 203) contends
that these arrangements using family networks allow migrants to ‘get by’,
while pointing to the limitations of these networks to help migrants with
job advancement. The growth and increased diversification of the Chinese
community in Prato has somewhat limited these arrangements.
All Chinese entrepreneurs interviewed in Prato were novices who set up
a business for the first time. The first Chinese entrepreneurs in Prato in the
early 1980s bought out existing Italian textile firms, most of which were family businesses of small and medium size caught up in the crisis of the textile
industry at that time. While the majority of the Chinese micro-enterprises
in Prato today appear to be set up as greenfield operations, the Chinese
entrepreneurs in Prato reinvigorated the local textile industry through the
introduction of the innovative Pronto Moda business model of ready-to-wear
fast fashion. Starting as sub-contractors to local Italian textile companies
manufacturing textiles to order, the Chinese became involved in textile
design over the past several years, and are now involved in all stages of textile
production (Ceccagno, 2007). Moreover, the Chinese introduced lighter fabrics instead of the often heavy woolen fabrics traditionally used and gained
competitive advantage through their fast production. Employees often reside
on the premises and work up to 16 hours per day, seven days a week.6 The
recruitment of a co-ethnic workforce has a number of additional advantages.
including a similar work ethic, communication, and values that have a positive impact on cost and productivity. Efficiency has been a contributing
factor to the competitive advantage of Chinese SMEs in Prato.
For employees and the development of the Chinese enclave in Prato, the
co-ethnic workforce has also been important since it has served as a platform
for on-the-job training that gives employees skills for future business ventures. However, the innovation of Pronto Moda was the single most important
development and helped Prato evolve into one of the most concentrated
Anja Fladrich
249
Chinese communities in Europe, with more than 40,000 Chinese running
more than 3,000 businesses today.
This development was only possible due to the specific local context, that
is Prato as a traditional industrial district where a large number of SMEs work
on a homogenous product, namely woolen fabrics and textiles. The ItalianChinese agreement for economic cooperation from 1985 on that allowed
the Chinese to set up their companies in Italy and employ a limited number of Chinese workers was instrumental for Prato’s development. Several
amnesties granted to migrants since 1996 by the Italian government reflect
their acknowledgment of the value of migrant labor.
The majority of Chinese firms in Prato are run as micro-enterprises by
one or two people, at times by couples (co-preneurs), father and son, or siblings. Larger firms usually have not more than ten employees, similar to
the Chinese form of geti gongshang hu or, in short, getihu: a single industrial
or commercial business unit employing up to eight people (Garnaut et al.,
2001). Chinese enterprises in Prato are usually staffed by Chinese who have
been recruited via existing personal networks (guanxi). Since 2007, and as a
result of the further growth and diversification of the Chinese community
in Prato, an enclave labor market has emerged that complements, at times
substitutes for, personal networks through hand-written and electronically
displayed job announcements and classified ads in local Chinese newspapers
(Fladrich, 2009a). While most Chinese firms in Prato were mainly engaged
in the manufacturing of textiles and leather until 2007, the growth of the
Chinese enclave has made more services for the Chinese community necessary since they often continue to live separately from the local host society.
The service sector has now exceeded in number the Chinese firms engaged
in manufacturing. It comprises restaurants, travel agencies, hairdressers, and
internet cafes as well as translation and migration services. Textile manufactures today have also started to engage in forward vertical integration
and open retail clothes outlets in and outside the Chinese enclave (Fladrich,
2009b).
In comparison, Chinese SOEs and MNEs act with the endorsement and
support of the Chinese government. In many host countries, governments
are eager to attract Chinese investments by providing tax incentives, assistance with business set-up, and networking opportunities. Chinese migrant
entrepreneurs, however, operate under very different circumstances, without any government incentives or encouragement. Many entrepreneurs face
resistance and resentment in the host society as well as bureaucracy. Unlike
Chinese SOEs and MNEs overseas building on existing physical, financial,
and human capital, Chinese micro-entrepreneurs in Prato often start with
debts incurred from the expenses of their migration passage. They often
cannot rely on any resources other than their social capital in the form
of personal networks. These are of vital importance in providing Chinese
entrepreneurs with access to human and financial capital. Personal networks
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Chinese FDI in Europe and North America
(guanxi) have been important tools and the lifeblood of Chinese chain migration since its inception, linking migrants in the host society to one other and
back home.
As enforceable relationships among family, kin, and friends, personal
networks are reciprocal obligations largely based on trust (Weidenbaum &
Hughes, 1996; Seligman, 1999). Guanxi were vital for Chinese migration as
this bond allowed new migrants to find shelter, food, and often work at their
destination – all the necessities to start their lives at the new place (Lancee,
2010, p. 203). Using these networks, success stories, some of them exaggerated, traveled back and forth, acting as strong, unofficial communication
tools driving the growth of the Chinese community in Prato. These networks
are usually only accessible to people from family, kin, or the same hometown, but may at times include school or workplace and Chinese speaking
the same dialect:
I am new to Prato. I am not from Wenzhou as many Chinese here are, but from
Fujian. There is a fairly strict separation between the Chinese from different
provinces and we speak different dialects. We can only ask people from our
hometown for help, but there are not many Fujianese in Prato now and this
makes it difficult for me.
(Interview January 4, 2008, Prato)
Personal networks can also have a strong sub-ethnic dimension. In Prato,
this applies to Chinese migrants from Wenzhou in Zhejiang, from where
the majority originate. While arrangements for newly arriving Chinese
migrants today are not necessarily comprehensive anymore, they can still
result in employment and business opportunities. The latter often arise from
a Chinese employee working in a company where they acquire necessary
skills for a particular industry. Chinese personal networks are of vital importance in financing business ventures. Chinese entrepreneurs in Prato resort
to internal as well as external funds, including their own savings from paid
employment as well as money they borrow from family, kin, and friends.
I would not consider borrowing money from a bank but I can borrow money
from my friends almost any time. If they do not have the money themselves,
they will borrow money from their friends to give it to me. If a friend wants
to borrow money from me and I do not have money, I am expected – I have
to – borrow money from other friends and give it to my friend. If I would not,
I would lose face, possible future business and investment opportunities. I have
no choice since it is my obligation and that of other Chinese.
(Interview July 17, 2009, Prato)
This financing mechanism represents the only option for Chinese
entrepreneurs since neither the Chinese nor the Italian government will
Anja Fladrich
251
grant Chinese migrants loans. All respondents claimed that even if they
could, they would not approach a bank to borrow money, in contrast to
most Chinese SOEs and MNEs. However, to Chinese migrants this comes as
no surprise since funds sourced via personal networks usually require neither documentation nor interest and are obtained faster. But in borrowing
money using guanxi, one enters a lifelong obligation to the lender, not only
to pay the money back, but also to render money and/or other favors in
return in the future. For Chinese migrants in Prato, social capital embodied
in their personal networks is often invaluable and the gateway to the acquisition of human and financial capital. Without social capital, the ‘dream’ of
owning a business would remain just a dream. In Prato, the Chinese enclave
is conducive toward the emergence and growth of entrepreneurship. However, beyond this, the individual ability to master guanxi finally decides on
entrepreneurial success or failure.
8. Conclusion
The discourse on Chinese OFDI has an under-researched facet – the thousands of SMEs set up by Chinese migrants. This chapter profiles the Chinese
enclave in Prato, Northern Italy, where Chinese SMEs outnumber SOEs and
MNEs. The author investigates the differences in motivation and strategies employed by Chinese migrants. Unlike Chinese SOEs and MNEs, the
Chinese SMEs in Prato reflect grassroots entrepreneurship. Chinese originating from poor regions in China lacking business opportunities and capital
are driven by a combination of economic necessity at home and opportunity
abroad. Emigration to Prato has become a strategy for an increasing number
of migrants, who are less eager to acquire strategic assets and resources or
exploit efficiency and open markets, but motivated by a dream of opening
up their own business, most often as greenfield operations. With no support
from the home country government, the growth of Chinese SMEs in Prato
is facilitated by amnesties of the Italian government, Chinese embracing the
industrial district, and the entrepreneurial spirit of Prato’s strong and growing Chinese enclave. The latter provides labor, and financial and human
capital accessible to the Chinese employing their social capital.
While Chinese SOEs and MNEs are increasingly perceived as economic
and political threats by Western businesses and governments due to their
acquisition of strategic assets worldwide, Chinese SMEs in Prato, according to some researchers, constitute ‘hidden carriers’ of China’s global push
that pose a challenge to the social fabric of the host society. With more
than 3,000 Chinese firms accounting for 10 percent more than the local
Italian companies in Prato, the large number of Chinese SMEs and their
success have caused social envy and resentment amongst the local Italians
(Donadio, 2010). Italian politicians addressing prevailing socio-economic
tensions have increased their scrutiny of Chinese SMEs.
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Chinese FDI in Europe and North America
China’s global push will continue to be met with attention and apprehension as it becomes more visible. This challenges economists, politicians, and
sociologists in the home and host countries alike to embrace the complexity and dynamics of Chinese OFDI, which mirrors China’s size and diversity.
This complexity defies the one-model-fits all-approach and has ramifications
beyond the economic and political sphere. We need to widen the discourse
on Chinese OFDI to include the socio-cultural perspective.
The case of Prato points to an additional, significant driver of Chinese
OFDI: the ambition of individual Chinese migrants to set up their own
business overseas. The risk propensity, innovative capability, and determination that Chinese migrants in Prato demonstrate could be a powerful
force if mobilized, and if migrants had, for example, easier access to capital and the support of the home and host governments. To date, however,
the Chinese government has mostly ignored the business ventures set up by
Chinese migrants in Europe. This is surprising since certain areas of China’s
countryside have greatly benefitted from migrants’ remittances. The extension of China’s zou chu qu policy and government assistance to include
Chinese SMEs could bring desirable results. In the same way that Chinese
private enterprises have been the engine of the Chinese economy, Chinese
SMEs overseas could help China’s ambition to accelerate the growth of its
OFDI. The perception of the ‘China threat’ could ease as small-scale business
operations are usually less prominent, unless they outnumber indigenous
enterprises, as it is the case in Prato.
Finally, more host countries should embrace investments by Chinese
SMEs and attract and channel investments into designated areas and industries through monetary and non-monetary incentives and cooperation
arrangements – to the benefit of Chinese migrants and the host countries.
Notes
1. Wong (2008) referred to the Chinese who have mainly migrated to Southeast Asia
since the late 1970s as xin yimin (new migrants). This term is argued to also apply
to the Chinese who have migrated to Europe almost two decades later.
2. For an elaborate overview of the distribution of Chinese OFDI flow and stock by
industry, see Gugler and Boie (2008, p. 3).
3. Schortgen (2009) provides a valuable analysis of reasons behind the perception of
China and its global ambitions as a threat.
4. This scoping study was undertaken to assess the feasibility of more detailed
research needed for a doctorate. Interviews undertaken included conversational
and in-depth interviews, the latter of which were conducted as repeat interviews.
5. The industrial districts in Italy and Prato in particular have been discussed in varying contexts including Andall (2007), Dei Ottati (1994), Fioretti (2001), Piscitello
and Sgobbi (2004), Sabel (2006), Sforzi (2001), and Trigilia (1995).
6. See Ceccagno (2003, 2007, 2009) for further details on the Pronto Moda business
model.
Anja Fladrich
253
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12
Chinese State-Controlled Funds and
Entities in Canada
Xiaohua Lin and Qianyu Chen
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 impact of these deals could change the rules. SCFEs from China have
not been successful in North America. In mid-2005, the China National
Offshore Oil Company (CNOOC), another oil giant with state affiliation,
withdrew its bid for Unocal after failing to navigate the US political environment. Indeed, the rise of Chinese SCFEs has added to the already
heated debate over growing outward foreign direct investments (OFDI) from
emerging market economies because the investing firms tend to be closely
associated with the government (Sauvant, 2009). Sovereign welfare funds
(SWFs) are particularly scrutinized for their outright government ownership
(OECD, 2007). The failed attempt of China Minmetals to acquire Noranda
in 2004, along with the withdrawal of the China National Offshore Oil
Company bid and other abortive attempts, has generated public debate over
government policy concerning SCFEs in the United States and Canada. The
ongoing economic recession pushes the debate to an even more heated level
as the world now understands that countries such as China are probably
the richest sources of capital investment. Indeed, the Chinese government
257
258
Chinese FDI in Europe and North America
has speeded up its OFDI through SCFEs, most noticeably with the newly
established CIC.
However, despite its importance and timely nature, academic researchers
have not paid enough attention to this phenomenon. It is not clear, for
example, why Canada banned Chinese SCFEs but let deals such as those
involving CIC and PetroChina go through. The lack of scholarly interest
and appropriate theoretical frameworks to guide scholarly research has prevented international business (IB) researchers from engaging in such public
discourse.
The current study takes a step to fill the literature void. We first review
the literature on SCFEs, Canada’s foreign direct investment (FDI) policy, and
Chinese investment in Canada. From a game perspective, yet without taking
a mathematical approach, we then consider the national governments and
local enterprises of developed nations and emerging market-based SCFEs as
three major players in a game concerning a potential investment. We begin
by describing the interests and move options of each player in the bargaining
arena where investments take place, and then translate those interests into
strategic combinations. We assess the combinations and make predictions
using various assumptions. Finally, we apply the model to the PetroChina
case and illustrate its utility. We discuss implications of the current study
and conclude the chapter with an agenda for moving this line of research
further.
1. Literature review
1.1. State-controlled funds and entities
The accelerated globalization of Chinese firms signifies China’s deepening
involvement with the outside world as well as its economic transformation from within (Buckley et al., 2007). Until recently, most scholars looked
at China as a destination of FDI but not the origin. Today, both scholars
and practitioners are considering prospects for the country to become a
major source of FDI (Meyer & Boisot, 2008). Some scholars even consider
China’s OFDI a new feature of globalization (Alon et al., 2009) and suggest
that the global playing field is being reshaped by internationalizing Chinese
firms (Williamson & Yin, 2009). Table 12.1 shows the progress of China’s
OFDI between 2002 and 2009.
The recent surge in China’s OFDI has much to do with the fact that it
is primarily carried out by state-controlled entities, including conventional
state-owned enterprises (SOEs) and newly formed Sovereign Wealth Funds
(SWFs) (Khana, 2009). About 80-to-90 percent of China’s FDI activities have
been carried out by SOEs. While global FDI has fallen, China’s has doubled
since the recent worldwide economic downturn, indicating that the position of SOEs from China may be strengthening (Davies, 2009). SOEs are
subject to substantial government influence and control, and were the main
Xiaohua Lin and Qianyu Chen 259
Table 12.1
billion)
China’s outward FDI flows and stocks (2002–2009, US$
Year
Flow
Stocks
2002
2003
2004
2005
2006
2007
2008
2009
2.7
2.85
5.5
12.26
21.16
26.51
55.91
56.63
29.9
33.2
44.8
57.2
90.63
117.91
183.97
245.75
Source: 2009 Statistical Bulletin of China’s Outward Foreign Direct Investment,
Ministry of Commerce of the People’s Republic of China.
vehicle the government used to carry out both economic and political agendas in China, where they remained dominant until the early 1980s. When
making FDIs, SOEs are likely driven by imperatives beyond just economics
(Child & Rodrigues, 2005). Among many institutional influences, the government’s global expansion strategy has a direct impact on Chinese SOEs’
internationalization drive (Luo, Xue, & Han, 2010).
Besides SOEs, government can also impact a country’s FDI through
sovereign wealth funds (SWFs), defined as ‘government-owned investment
vehicles that are funded by foreign exchange assets’ (OECD, 2007). SWFs
can be divided into two subcategories: sovereign private equity funds and
government investment companies, the aggressive investment vehicles that
assume management stakes, rely on leverage, and target high returns. Generally speaking, SWFS function as tools for foreign investment and are
owned by the state government, with the typical owners being emerging
economies and oil-producing countries. So far, 22 countries and regions have
set up SWFs. The most recent example, CIC, was established by the Chinese
government on September 2007, with its first investment of US$3 billion
used to buy shares in the Blackstone Group in the United States (Martin,
2008).
SOEs and SWFs are not identical, but they are similar as far as state
ownership and control are concerned. The questions raised about both are
also similar in terms of FDI (Bordonaro, 2010). SCFEs have distinctive features: strong government background, rapid expansion, high risk, and low
transparency. These features concern developed countries in areas such as
national security and conflicting commercial and non-commercial interests
(Miao, 2008). While most developed nations offer a favorable environment
for FDI, SCFEs cause concern because they are government-owned and controlled. For instance, the launch of CIC, which has US$200 billion in China’s
foreign exchange reserves at its disposal, has fueled speculation about the
260
Chinese FDI in Europe and North America
link between Chinese OFDI and the country’s wider geopolitical goals (Kwan
& Sauvant, 2008). The incident involving CNOOC, on the other hand,
shows that developed nations tend to attach strategic importance to their
resource industries and become suspicious when SCFEs try to enter this
industry.
SOEs are believed to maintain lower standards in areas such as labor
relations, environmental issues, and community practice than developed
nations due to the nature of governments in developing nations (Conference
Board of Canada, 2004). However, faced with SCFEs’ exploding appetite for
lucrative market opportunities in the developed world, the latter may have
to reconsider its FDI terrain, which has thus far been largely closed to countries such as China. Could the PetroChina and CIC cases presented at the
beginning of the paper signal such a change, at least in Canada?
1.2. Canada’s FDI regime
Canada, like many other countries, depends on investment and capital
formation to stimulate economic growth, innovation, and sustainable development. FDIs bring higher productivity and efficiency, enlarge the pool
of capital for investment, create jobs, and increase government revenues
(Hodgson & Paris, 2006). However, Canada has not been an attractive place
for FDI due to its small market size, relatively high resource cost, low operational efficiencies, and, especially, its regulatory barriers. Until recently,
Canada was considered one of the world’s most restrictive regulatory regimes
for foreign investment (Government of Canada, 2008). While Canada clearly
needs more foreign investment and FDI in Canada has grown in absolute
terms since the 1980s, its share of world FDI has fallen during the same
period (Conference Board of Canada, 2004).
Canada adopted its formal FDI policy, the Investment Canada Act (ICA), in
1985. Non-Canadians who acquire control of an existing Canadian business
or who wish to establish a new unrelated Canadian business are subject to
this Act, and they must submit either a notification or an application for
review. But during the Act’s 20-year existence, all foreign acquisitions were
cleared except for one. Since the Act reviews only major FDIs, most large
foreign investors, including China Minmetals (which entered an exclusive
negotiation to purchase mining giant Noranda in 2004), could easily meet
the economic criteria applied to the so-called net benefit test. The public
concerns that essentially forced China Minmetals out of the deal were not
so much economic as political, reflecting concern about selling a national
icon to a ‘foreign government-controlled’ company. Although the Noranda
case was probably the most visible, it was not the only one that involved
SOEs from foreign countries (Bhattacharjee, 2009).
In response to public concern about increasingly active FDI by foreign
SOEs – especially those from the Middle East, China, India, and Russia –
the Canadian federal government ultimately issued guidelines under the
Xiaohua Lin and Qianyu Chen 261
Act In December 2007, these guidelines were announced for the review
of acquisitions of control by investors that are owned or controlled, either
directly or indirectly, by a foreign government (Franklyn & Glossop, 2009).
On March 12, 2009, the Canadian federal government amended the ICA to
include a broadly worded ‘national security test’. Clearly, this new test,
alongside the existing net benefit test, is a further response to public concerns about FDIs that involve SCFEs, as the idea emerged immediately after
the Noranda incident (Bhattacharjee, 2009). Although a final definition of
national security remains to be clarified, the creation of the test may further
liberalize the country’s foreign investment policy, with a more transparent
and less uncertain framework. The Investment Canada Act and changes to it
are summarized in Table 12.2.
1.3. Chinese investment in Canada
So far, Chinese investments in North America represent a small percentage of total FDI. However, China has become a significant FDI source for
Canada since the Chinese government shifted its policy to support outward investments in 2002. Chinese direct investment in Canada increased
from US$54 million in 1991 to US$220 million in 2004, and then to
US$1.3 billion in 2006. China ranked 16th in 2006 out of all countries with
Table 12.2 Change of investment Canada Act
Year
Policy
Focus
1985
Investment Canada Act
Using economic criteria when considering
whether a foreign investor will be allowed to
acquire control of a Canadian company.
2007
Guidelines – Investment
by state-owned
enterprises – Net benefit
assessment
The Net Benefit Test, while retaining the
economic focus, is aimed at SOEs. The six
economic criteria concern adherence to
Canadian laws and governance standards,
influence of foreign government,
continuation of commercial orientation,
Canadian influence in corporate
governance, Canadian influence in
management, and status of the new
business/acquiring company.
2009
ICA Amendments –
National Security Review
of Investment Regulation
Added a stand-alone national security review
test to review sovereign investments and any
other foreign investments with potential
threats to national security.
Source: Investment Canada Act, Industry Canada, http://www.ic.gc.ca/eic/site/ica-lic.nsf/eng/
home.
262
Chinese FDI in Europe and North America
Table 12.3
million)
Canada: geographical distribution of inward FDI stock (2000–2008, US$
Economy
2000
2008
Growth (%)
World
Developed economies
European Union
United States
Emerging economies
India
Russian Federation
Brazil
China
214,893
210,599
64,579
130,405
4,139
12
6
418
129
473,606
435,973
124,376
275,430
22,683
959
348
11,182
2,582
120.4
120
98
111
448
7,809
5,642
2,574
1,897
Source: Statistics Canada: CANSIM, Table No. 376–0051.
FDIs in Canada, while its ranking was 27th in 2004. According to Statistics Canada, cumulative Chinese FDI in Canada reached US$2582 billion
in 2008, representing a 1897 percent increase over the number in 2000
(Table 12.3).
The federal government and some provinces, including Quebec,
Saskatchewan, and Ontario, have welcomed Chinese investment, while the
creation of a ‘strategic partnership’ between Canada and China indicates
deep cooperation in the future. According to a recent survey (APF and CCPIT,
2009), Canada ranked sixth out of the ten top destinations for Chinese outward direct investment, following Hong Kong, Macau, the United States,
Vietnam, and Australia. As the second largest economy in the world, China,
with 1.3 billion people, is Canada’s second biggest individual trading partner. A rapidly growing China has the potential to become a significant source
of FDI in Canada.
Like the United States, Canada has imposed certain limitations on
FDI from China, mostly due to national security and national interest concerns. When the bidding companies have ties with the Chinese state and
when the FDI involves strategic assets or sensitive industries, these limitations are closely observed. There is the suspicion that FDI, especially
acquisitions by Chinese state-owned companies, is driven not by commercial motives only, but also by political or strategic goals. More recently,
Canada has expressed concern over the governance (e.g., non-transparency)
and political agenda of SWFs from China.
The China Minmetals–Canada Noranda case was typical. In 2004, China
Minmetals Corporation attempted to buy Canada’s largest mining company.
With revenues of US$4.65 billion, Noranda is the ninth largest copper producer in the world and produces 96 percent of Canada’s lead, 54 percent
of its zinc, and 14 percent of its nickel. Even though the Cold War is long
Xiaohua Lin and Qianyu Chen 263
over, fears remain that the Chinese government might attempt to use politics and business to overpower the economic benefits that Canada would
gain. Largely under political pressure, China Minmetals quickly withdrew
from its exclusive negotiation with Noranda.
1.4. Game theory and applications
Game theory was originally developed by John von Neumann and Oscar
Morgenstern in their book, The Theory of Games and Economic Behavior
(1944). In a typical game or competition with fixed rules, ‘players’ try to
outsmart one another by anticipating the others’ decisions or moves. A solution to a game prescribes the optimal strategy or strategies for each player
and predicts the average, or expected, outcome. Until a highly contrived
counterexample was devised in 1967, it was believed that every contest had
at least one solution (Encyclopedia Britannica, 2010).
According to Vega-Redondo (2003), there are two forms in any given
game: the extensive and the strategic. The former is the most general since
it explicitly describes the players’ order of moves and the information available to them at each point in the game. It embodies a formal specification
of the tree of events, where each of the intermediate nodes has a particular
player associated with it who decides how the play (i.e., the ‘branching process’) unfolds. Eventually, a final node is reached that has a corresponding
vector of payoffs that reflect how the different players evaluate such a path
of play. In contrast, the strategic form of a game is based on the fundamental notion of strategy. A player’s strategy is a contingent plan of action that
anticipates every possible decision point of the player in the course of game.
Given a profile of players’ strategies, the path of play is uniquely defined
as well as the corresponding outcome and pay-offs. In essence, the strategic
form of a game is a compact description of the situation through corresponding mapping from strategy profiles to pay-offs. This can be further extended
into the four categories applied in game theory: the static game of perfect
information, the dynamic game of perfect information, the static game of
incomplete information, and the dynamic game of incomplete information.
The classification depends on the time series and the comprehensiveness of
the information.
Traditional applications of game theory attempt to find equilibriums in
these games. In equilibrium, each player adopts a strategy they are unlikely
to change. There have been many equilibrium concepts, each with a different motivation, depending on the field of application, although they often
overlap or coincide. This methodology is not without criticism, and debates
continue over the appropriateness of particular equilibrium concepts. Scholars have applied game theory to a wide range of FDI-related issues, such
as multinational enterprise strategic choice between FDI and export facing
varied tax regimes (Davies, Egger, & Egger, 2010); incentive competition
between two countries vying for FDI (Luski & Rosenboim, 2009); and the
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Chinese FDI in Europe and North America
probability of FDI formation as a result of interaction between transnational
investors and host countries (Lee & Wang, 2006).
Applying game theory to FDI, one study (Mueller & Lovelock, 2000) identifies four players – the Chinese state, China’s responsible Ministry/China
Telecom, China Telecom’s domestic rivals, and foreign strategic investors –
who negotiate for access to foreign capital and technology in China’s
telecommunication services. Based on the complete information assumptions, the authors predict that China would not have opened up to FDI in
telecom services without the need to bargain for WTO accession. An analysis
of their preference assumptions then suggests the chosen strategy combination, that is, the equilibrium: the state retains a ban on foreign direct
investments, China Telecom (the dominant domestic firm) continues as
a developmental arm of the state, smaller domestic competitors continue
to survive, and foreign investors continue participating in the market via
non-equity instruments. However, a review of the inter-disciplinary literature suggests that most research has treated FDI formation as a decision by
international investors, with the interests, concerns, and behaviors of host
countries merely one factor in the former’s consideration set (Lee & Wang,
2006).
2. Research questions and game modeling
The current study addresses several related questions: Why have Chinese
SCFEs had little luck in Canada until recently? Do cases such as CIC and
PetroChina signal changes in Canada’s FDI scene? What has to happen for
deals to be successful? Clearly, we are looking at a strategic situation where
one party’s success in making choices depends on the choices of others.
This is a classic case where game theory is most applicable (Lee & Wang,
2006). In this exploratory study, we consider a simple model to account for
three key players and their strategic combinations. We take only the general
approach from a game perspective without resorting to game theory in the
technical sense.
We assume that, in this game arena, all the players know one another’s
characteristics and will adjust their strategies according to the other’s actions
by the time sequence, such as the scale of investment or the investment policy. We can thus define the negotiation among developed countries, local
enterprises, and the SCFEs as the dynamic game of perfect information.
Generally speaking, this means that when the attacker makes a move, the
incumbent responds.
As most SCFEs consist of state funds representing the national interests of
developing countries and are less transparent, they easily arouse protectionism in developed nations. Considering the national security implications
and political influence of these investment funds, developed nations would
set up a variety of restrictions on market entry. But for the requisite
Xiaohua Lin and Qianyu Chen 265
globalization, developed nations need various investment flows into their
own market while maintaining a high degree of sensitivity.
Through the game lens, we identify key players, their interests and concerns, available strategies, and the structure of the game in the following
discussions.
2.1. Key players
We consider three players – developed nations, local enterprises, and SCFEs – in
the negotiation of potential investment by SCFEs. By developed nations we
mean the governments in developed nations, usually national governments.
However, in certain situations such as that of Canada, ‘governments’ could
mean both federal and provincial or other territorial legislative jurisdictions.
We further assume that, in most cases, local enterprises are non-government
commercial entities. In a free enterprise, market-based economy, such enterprises are assumed to function autonomously but have to comply with the
state’s FDI regime.
2.2. Players’ interests and concerns
Developed nations’ main interests include national economy (domestic market, employment, and enterprises, etc.), community and society (public
opinion, human rights, environment, etc.), and relations with SCFE nations.
With globalization and open markets, FDI has increasingly become a much
sought-after resource to generate growth. Most developed nations recognize
the benefits of FDI to generate such benefits as higher productivity and
efficiency, increasing the pool of capital for investment, enhancing labor
markets. On the other hand, the national government can use its jurisdiction
over the matter as leverage in dealing with a foreign state.
Local enterprises in developed nations may have these interests and concerns: survival, growth, profitability; and legitimacy. As profit-driven commercial entities, local enterprises are largely concerned with how FDI can
contribute to their business growth. In a typical M&A case, for instance, a
target firm might be mostly interested in capital injection. However, they
will have to also take into account local interests and concerns such as
implications for employment and tax revenues, as evidenced in the recent
case involving a bid by BHP (Australia) for Potash Co. of Saskatchewan
(Whittington, 2010).
SCFEs are interested in profit maximization and policy imperatives.
Although SCFEs bear the burden of state ownership and can be heavily influenced by government mandates, they have fiercely defended themselves as
commercially driven. Indeed, their motives, including gaining access to foreign resources and markets, can be seen both as profit-driven (e.g., due to
rising prices) and policy-driven (e.g., securing resource supplies on behalf of
national government).
266
Chinese FDI in Europe and North America
2.3. Player strategies
We project three possible moves by the developed nations:
A. Remain closed to SCFEs
B. Open up to SCFEs with restrictive conditions
C. Open up to SCFEs without restrictive conditions.
Strategy A retains the ban on SCFEs’ FDI, representing a protectionist
approach against firms owned by foreign governments. With strategy B, a
developed nation will put restrictive conditions in place to address the influence of SCFE home countries. By restrictions, we mean measures beyond
those already applied to FDI. So if an SCFE proposal is subject to reviews
based on, but not beyond, criteria applicable to all foreign investments,
then it is a situation ‘without restrictive conditions’. As an example of
restrictive investment concerning SCFEs, Industry Canada issued the ‘Guidelines – Investment by state-owned enterprises – Net benefit assessment’ as an
amendment to the Investment Canada Act in 2009. When assessing whether
acquisitions benefit Canada, the Minister will examine the corporate governance and reporting structure of the non-Canadian SOE as well as the ability
to operate on a commercial basis (Industry Canada, 2007).
Local enterprises may choose one of the following options concerning
SCFEs:
D. Remain closed to SCFEs
E. Open up to SCFEs with conditions
F. Open up to SCFEs totally.
We assume that local enterprises, like for-profit commercial entities, act on
economic rationality. Thus, these enterprises should negotiate an investment deal based on considerations such as control and, in a partial acquisition case, managerial integration, without particular attention to the
investor’s political affiliation, to the point when such affiliation may be
seen as detrimental to business performance, and so on. Inevitably, local
enterprises are influenced by the limitation of restrictive policy made by the
national government.
Finally, SCFEs may adopt the following strategies:
G. No investment
H. Restrictive investment
I. Investment without limitation.
SCFEs bear a certain level of duality in terms of commercial and political
interests. Developing nations are likely to tie business and politics together
Xiaohua Lin and Qianyu Chen 267
as far as SCFEs are concerned. For example, the ‘largest outward investments
by Chinese MNEs are undertaken by SOEs, and all investment projects follow
a scheme that ensures that they are in strict line with government policies’
(Gugler & Boie, 2008, p. 23). As such, when deciding whether or not to
proceed with an investment, SWFs tend to be heavily burdened by political factors above and beyond commercial concerns. Even if faced with an
investment environment where both national government and local enterprises are completely open to SCFEs, the specific SWF will have to consider
factors such as the relations between the two national states involved.
2.4. Game structure
Figure 12.1 maps the different situations under which the game is played.
Although SCFEs tend to initiate investment projects, they have to negotiate the possibilities and terms with local enterprises, which in turn need
to act (often proactively) within the FDI policy of the national state where
sovereignty resides.
Table 12.4 lists the strategy combinations or situations that make up
the ‘consideration set’ by all the players when they bargain toward an
investment deal. We explain the meaning of each combination.
Devoloped
nations
Close
A
Local enterprise
close
D
SWFs&E
No investment
ADG
Totally open
C
Limited open
B
Local enterprise
close
D
SWFs&E
No investment
BDG
Local enterprise
limited open
E
SWFs&E
No investment
BEG
SWFs&E
Restrcitive
investment
BEH
Local enterprise
close
D
SWFs&E
No investment
CDG
Local enterprise
limited open
E
Local enterprise
totally open
F
SWFs&E
No investment
CEG
SWFs&E
No investment
CFG
SWFs&E
Restrcitive
investment
CEH
SWFs&E
Restrcitive
investment
CFH
SWFs&E
totally
investment
CFI
Figure 12.1 Game structure
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Chinese FDI in Europe and North America
Table 12.4
Strategy combinations
Strategy
combination
Meaning
ADG
Developed nations remain closed to SCFEs, local enterprises are not
open to SCFEs, and no investment comes from SCFEs
BDG
Developed nations open to SCFEs with restrictive conditions, local
enterprises remain closed to SCFEs, and no investment from SCFEs
happens
BEG
Developed nations open to SCFEs with restrictive conditions,
local enterprises limited open to SCFEs, but SCFEs do not make
investment
BEH
Developed nations open to SCFEs with restrictive conditions, local
enterprises limited open to SCFEs, and SCFEs make restrictive
investment
CDG
Developed nations open to SCFEs without restrictions, but the local
enterprises remain closed to SCFEs, and no investment from SCFEs
happens
CEG
Developed nations open to SCFEs without restrictions, local
enterprises limited open to SCFEs, but no investment from SCFEs
happens
CEH
Developed nations open to SCFEs without restrictions, but local
enterprises limited open to SCFEs, and SCFEs make restrictive
investment
CFG
Developed nations open to SCFEs without restrictions, local
enterprises open to SCFEs totally, but no investment from SCFEs
happens
CFH
Developed nations open to SCFEs without restrictions, local
enterprises open to SCFEs totally, but SCFEs make restrictive
investment
CFI
Developed nations open to SCFEs without restrictions, local
enterprises open to SCFEs totally, and SCFEs make investment
without limitation
3. Model interpretation
We analyze the motives, behaviors, and outcomes under each strategy combination or ‘situation’. We assume that national states (i.e., ‘developed
nations’) have the decisive influence in SCFE investment formation and that
other players (i.e., ‘local enterprises’ and ‘SCFEs’) will react to the decision of
the national state. In the case of foreign acquisition of a Canadian resource
company, for example, the jurisdiction would reside in Ottawa. We further
assume that the national state can potentially choose to make three different decisions: keep the FDI field closed to Chinese SCFEs, open it with
Xiaohua Lin and Qianyu Chen 269
restrictions, or open it fully. The application of our model is limited to the
industries deemed to be of strategic and national interest to the developed
nations.
3.1. When markets are open
Why would Canada be open to Chinese SCFEs? No examples of politically
charged SWF investments have been reported since SWFs became active 50
years ago (Fotak & Megginson, 2009). There is a long-held assumption that
SOE investors may not follow the laws, rules, or norms of Western developed
countries and thus will not be good employers or good corporate citizens.
But no evidence shows difficulties in compelling a Chinese-owned firm to
obey local laws, at least not from Canada’s experience (Conference Board of
Canada, 2004). However, investment from China, which is still considered a
Communist regime, is new. Canada, as well as other developed countries, is
still not ready to accept China in full. In short, the possibility that developed
nations open completely to SCFEs seems remote.
3.2. When market is closed
This was the status quo as of late 2008, prior to the global financial turmoil.
Although Canada needed FDI and began to view China as a possible source
country, it had alternative sources of foreign investment, chiefly from the
United States. This created a state of equilibrium, preventing Canada from
seriously considering China as a viable source of FDI. For this reason, Canada
expressed its discomfort with Chinese government influence and actually
kept selected industries closed to Chinese investment. Under this scenario,
local enterprises would have no choice but stay away from potential Chinese
state investors. When China Minmetals announced its intention to purchase
mining giant Noranda in 2004, the deal was killed within a month even
without the Canadian government getting formally involved (as a reference,
the Investment Canada Act has been used only once to deny a takeover
application). However, the united, intense opposition from all corners of
Canadian society signaled that the deal would have been rejected by Ottawa
if a proposal were sent to the government for review. Essentially, the door is
closed to Chinese SCFEs.
3.3. When restricted access is allowed
Deals involving CNOOC and China Minmetals were dead, but the issue
was not going away. Although China, along with other emerging market
economies, has steadily enhanced its FDI profile during the past decade or
so (see Table 12.3), the ongoing economic recession has moved Chinese
SCFEs to the forefront of the global stage. As shown in Table 12.5, inward
FDI flows in Canada have dramatically decreased from 2007 to 2009. While
worldwide FDI has fallen 43 percent, FDI from China has broken a new
record: net flows in 2009 reached US$56.53 billion, increasing by 1.1 percent
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Chinese FDI in Europe and North America
Table 12.5
Canada: inward FDI flows (2000–2008, US$ billion)
Economy
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Canada
66.8
27.7
22.1
7.5
–0.4
25.7
59.8
108.3
44.8
19.3
Source: UNCTAD’s FDI/TNC database, available at: http://stats.unctad.org/fdi/; Acharya et al.
(2010).
compared to 2008. Since the benefits of a low-barrier FDI policy are recognized by developed nations and SCFEs have become a major source of FDI,
developed nations had to seriously consider how to take advantage of SCFEs
while controlling possible negative effects. This has opened the possibility of
restrictive investment through actively seeking solutions to address the key
concerns about SCFEs. These concerns existed but were unexplored in the
past, for example, when China Minmetals was bidding for Noranda in 2004.
We model three situations where developed nations are open to SCFEs
with restrictive conditions. The investment cannot occur when the local
enterprise remains closed to SCFEs (BDG). As noted earlier, we assume that
local enterprises behave based on economic rationality. Thus, the reason
for the rejection is likely due to commercial/financial concerns. When local
enterprise is open to SCFEs, investment may not occur (BEG). As with the
situation BDG, the SWF’s decision is likely to arise from business concerns.
For example, the SWF investment could be restricted to a certain size, which
may prevent the project from reaching its optimal scale. As explained fully
in the next section, the most likely scenario will be BEH; that is, investment
occurs with concessions from all involved parties.
3.4. Prediction
With SCFEs offering an attractive option for capital-hungry developed
nations, their federal governments will have to move toward relaxing FDI
rules. However, unless concerns about SCFE adverse effects can be fully
addressed (i.e., assurances of no state influence), there is no possibility of
opening countries to SCFEs in the near future. Thus, among the three strategies available to developed nations, restrictive investment has the greatest
likelihood for adoption. Next, between the two strategies available to local
enterprises, opening to SCFEs is more likely than not opening. In fact, one
should assume that any investment is likely to be initiated by the enterprise. Our discussions then boil down to two situations where the developed
nation allows for restrictive investment and the local enterprise is open to
SCFEs. As discussed earlier, an SCFE should enter a negotiation with interest
but could end the negotiation for either commercial or political concerns.
In light of mutual interest in the deal and the likely dynamics, for example,
in the political arena, the ‘no investment’ outcome is relatively unstable and
could be replaced by a deal through further negotiation or due to changes of
Xiaohua Lin and Qianyu Chen 271
a non-commercial nature. In sum, according to the various assumptions we
set out above, including the complete information assumption of our game
model, we predict situation BEH (realized SCFEs investment under restrictive conditions) will be the favored choice by the developed nation, the local
enterprise, and the SCFEs. A concession to some degree of all players – majority control from local enterprises and managerial control from SCFEs – makes
it possible for investment to move forward. The task, then, is to identify the
equilibrium point at which the three players can draw maximum benefits
from cooperation.
4. Model application: The Petro-China case
In December 2009, the Canadian government approved a deal to allow
PetroChina, the market arm of the state-owned China National Petroleum
Corp., to invest US$1.7 billion for 60 percent ownership in two Canadian
tar-sand deposits in Alberta. According to the government, the investment
is of net benefit to Canada. It will also increase local employment.
However, the PetroChina deal for the largest acquisition by a Chinese
SCFE in North America is not without conditions. Except for concessions of
an economic nature (e.g., contributions to the projects’ development costs),
PetroChina promises to (1) maintain a regional head office for the next five
years, (2) allow Canadians to hold a majority of the senior management
positions associated with the project, and (3) retain the public company
status while controlling these oil projects. It appears that Canadian interests will be well protected by these conditions. While the Canadian side
has ceded majority ownership, it has effectively maintained management
influence. Without a regional office staffed by local managers, there would
be no possibility for Canadian management to exert such influence. The
third condition is more crucial since it speaks directly to concerns about the
role of the Chinese government. As a public company listed in New York
and Hong Kong, the Chinese parent will be subject to monitoring by stockholders, thus canceling potential adverse interference from the Chinese
state.
In sum, the outcome of the PetroChina case is consistent with our model
prediction that SCFEs will invest in developed nations as they formulate
regulatory responses to the capital needs of domestic industries and resolve
concerns about SCFE state ownership. Chinese SCFEs have stalked Canadian
oil projects for years, but Ottawa’s conclusion that this particular investment
‘is likely to be of net benefit to Canada’ (Minister Clement) could only take
place at a time when China is recognized as vital source of FDI to Canada.
The rest of the game between local target firms and Chinese SOEs should
be easier as they identify each party’s concerns and assure the integrity of
both parties’ interests. Although ongoing accumulation of knowledge about
SCFEs and their impact may lead to a more relaxed FDI regime, restrictive
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Chinese FDI in Europe and North America
investment (i.e., BEH) is what we are going to see in the years to come, or the
equilibrium of our model from a game perspective.
5. Discussion
SCFEs have become the dominant form of outward FDI from emerging
economies and other developing nations. Compared with their relative success in the developing world, however, SCFEs in the developed economies
represent only a small percentage of the total. On the surface, the situation
can be explained by looking at the investment target countries, the developed nations. Most of the developed nations face a dilemma while looking
for inbound FDI since SCFEs are the richest source currently available in the
world market, yet they are considered the most problematic with regard to
their state ownership and control.
To account for this emerging and understudied phenomenon, we propose
and find evidence that SCFE investment formation in developed nations
can be investigated from a game perspective. We argue that a ‘win-win’ situation will emerge if all players in the game, including but not limited to the
developed nations’ governments and SCFEs, can make reasonable compromises to ensure deal results. Indeed, our game model could have predicted
the happenings in the recent PetroChina case or similar deals since it offers
an understanding of the domestic (in Canada) and bilateral (Canada-China)
bargains that move toward that solution.
Timing is the key. Following the crisis involving China Minmetals in 2004,
Canadians started wondering about the consequences of allowing foreign
government-controlled firms to invest, even with certain restrictions. However, the Canadian government was not proactive since China was viewed as
having only the potential to become an important source of foreign investment in Canada (Conference Board of Canada, 2004). It was not until China
proved to be a real player in FDI that Canada sought new rules of the game
to engage Chinese SCFEs.
We take a first step toward modeling SCFE investment in developed
nations from a game perspective. To explore the model’s utility, we adopt
a simplified approach and we limit consideration to three players. In reality,
however, the game tends to involve more players and additional situations. For example, Canada has the largest oil reserve outside the Mid-East
and is the main supplier of crude oil to the United States. For this reason, the United States has a clear and significant interest in the Canadian
oil sector. If the investment by SCFEs involves acquisition of an existing
firm in a developed nation, a distinction could be made even between
the national and provincial government. In the recent instance of BHP’s
(Australia) bid for Potash Corp. of Saskatchewan, the Premier Minister of
Saskatchewan claimed that potash is owned by its people. He appealed to
Xiaohua Lin and Qianyu Chen 273
the federal government, which is known for its red carpet policy toward
FDI (Whittington, 2010). By taking into account additional players, future
research can take better advantage of game modeling in understanding SCFE
investment situations.
Another venue for extending the current study would employ a game
model in a specific industry. Besides the oil industry, agriculture would be
worth investigating from a game perspective. After the recent crisis in the
world financial systems, SCFEs are looking for investment opportunities in
less risky sectors than volatile financial commodities, as well as traditional
manufacturing and even the real estate industry. Agriculture seems to be
a safe haven since the prices for agricultural products have continued to
rise and the number of people lacking basic food supplies is at a record
high worldwide. Indeed, there is a call for Chinese investment in Canada’s
agricultural sector. Besides policy and managerial implications, the examination of specific industries is necessary for enriching a game theory of SCFE
investment.
The current study suggests that SCFE investment is possible if players compromise. Future research should explore the areas where compromises are
likely and perhaps the way players reach such compromises. The ultimate
goal of a game theory-guided investigation is to inform the establishment of
the ‘rules of the game’ so that an investment can be easily negotiated and
safely implemented. In this regard, we echo Fotak and Megginson (2009),
who call for accumulating knowledge about SWFs and their local impact to
guide proper regulatory response.
Finally, the uniqueness of SCFE investments lies in the role of the
state. It may be useful to compare it to investments involving non-statecontrolled entities from China. Evidence shows that privately owned firms
have already surpassed SOEs in the pace of internationalization (Chen, 2006)
and many are favorably positioned to become global players over the next
decade alongside SOE counterparts (IBM, 2006). Although relatively small
in scale, Chinese private firms have also entered resource sectors in Canada.
State-affiliated and privately owned Chinese firms behave differently when
expanding overseas since their motivations and capabilities often differ (Lin,
2010). It would be interesting to see how private Chinese firms are received
and what kinds of deals they can negotiate in Canada, in contrast with the
experience of SCFEs.
6. Conclusion
Canada faces a dilemma: SCFEs from China have become a major source of
sorely needed FDI, but the government is suspicious of these state-controlled
entities. Triggered by the ongoing world economic recession, however,
Canada has taken a step toward loosening its restrictions on Chinese SCFEs
274
Chinese FDI in Europe and North America
in its resource sectors, which have been mostly closed to FDI from China
until recently. Experience will show whether Canada can take full advantage
of Chinese investments while resolving its hesitations and whether SCFEs
from China and other transition economies can be accepted as a sustainable
source of FDI in the developed nations.
Acknowledgments
The paper was presented at the 5th China Goes Global Conference, Harvard
University, 6–8 October 2010. The authors thank Eva Woyzbun for her help
in improving the paper.
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Part IV
Chinese FDI in Africa
13
Chinese OFDI in Africa: Trends,
Prospects, and Threats
Gayle Allard
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.
China is not a new arrival to Africa, however. Chinese companies have
been entering the continent since 1949, with their focus moving from ideologically driven support for decolonizing states in China’s post-revolution
period, to broader and more market-oriented projects that range from
resource extraction and infrastructure to low-skilled manufactures and trading.1 Most recently, large-scale and highly publicized Chinese projects have
emerged across Africa, mainly in the resource sector. The visibility of these
projects and the fact that some are located in countries with authoritarian
and repressive governments raises the question: does China’s OFDI in Africa
have a different focus than the OFDI flowing into the continent from the rest
of the world? Specifically, is China more than other investors mainly securing resources in Africa to supply its fast-growing economy, and tolerating or
even bolstering corrupt governments in the process?
1. Theory and hypotheses
The profile of multinational investment has been undergoing a process of
transformation since the 1990s. The multinational enterprises (MNEs) from
North America, Western Europe, and Japan that once dominated OFDI flows
have been joined in recent years by large multinational companies from
other parts of the world. These ‘new’ MNEs come from upper-middle-income
279
280
Chinese FDI in Africa
economies (Spain, Portugal, South Korea, Taiwan), emerging economies
(Brazil, Chile, Mexico, China, India, Turkey), other developing countries
(Egypt, Indonesia, Thailand) and major oil producers (United Arab Emirates,
Nigeria, Venezuela), and their role in global investment flows and host
economies is increasingly important (Guillén & García-Canal, 2010). China
is of particular interest among these emerging investors, not only due to
its sheer size, but because it is one-of-a-kind in its social market economy
and the special interplay of government and market forces that it represents,
both at home and abroad (Alon & McIntyre, 2007).
The rise of MNEs from less prosperous and even undemocratic nations
raises important questions about how these investors behave and what motivates them to invest in developed and developing countries around the
world. Guillén and García-Canal (2010) suggest that the ‘new’ MNEs have
six characteristics that distinguish them from traditional foreign investors.
First, their speed of internationalization is accelerated rather than gradual,
perhaps due to their desire to quickly close the gap between their foreign presence and that of the traditional multinationals (Mathews, 2006).
Second, since they face the disadvantage of being latecomers, they have
been forced to undergo a rapid upgrading of their capabilities to reduce
the competitiveness gap (Mathews, 2006). Third, they generally have better political capabilities, since they are accustomed to dealing with unstable
political environments or a weak institutional context in their home countries (Cuervo-Cazurra & Genc, 2008). Additionally, the ‘new’ MNEs tend to
choose a dual expansion path, entering developed and developing countries simultaneously; they tend to expand through alliances and acquisitions
rather than wholly owned subsidiaries; and they have a high organizational
adaptability because of their limited international presence.
The third characteristic is of particular interest in a study of China’s presence in Africa. A concern that Western countries have voiced as China’s
presence has advanced on the African continent is that the Asian giant could
be fueling a ‘race to the bottom’ by lending tacit support to poor governance,
corruption, and even human rights violations across the region. Criticisms
range from the practice of using ‘rogue aid’ to finance projects that promote
China’s regional and international geopolitical aims even though they stifle real progress and hurt citizens in the host country, to turning a blind
eye to human rights issues when investing in order to secure resource supplies. Some recent examples of Chinese support for corrupt regimes include
its decision to double direct investment (from US$3 to US$6 billion) in
Nigeria, especially in its oil sector; and to invest US$7 billion in oil and
mining infrastructure in return for preferential treatment in mining projects
in Guinea, whose government took power in a military coup. Human rights
activists charge that Chinese aid and investment is propping up regimes with
severe human rights violations in countries like Zimbabwe, Sudan, and the
Democratic Republic of Congo.
Gayle Allard
281
China and many African nations, however, see this same situation in a
positive light. China committed itself in the Asian-African Bandung Conference in 1955 not to meddle in domestic African politics. Many Africans
believe that China’s non-interference allows it to play a necessary role in
combating poverty and promoting development in countries where Western
governments refuse to get involved. Paul Kagame, president of Rwanda,
recently told the German newspaper Handelsblatt: ‘The Chinese bring what
Africa needs: investment and money for governments and companies. China
is investing in infrastructure and building roads. European and American
involvement has not brought Africa forward. Western firms have to a large
extent polluted Africa and they are still doing it’ (BBC News, 2009).
When the investor is a Chinese SOE or the project is financed by Chinese
aid, these concerns may be justified. Due to its undemocratic system of government and its abundant cash, China can offer direct investment projects
that are bundled with huge foreign aid packages, which Western nations
currently cannot imitate (though the trade-OFDI-aid link is an invention of
their own colonial past). Often in these massive bundled projects, Chinese
‘aid’ funds never leave China but are instead transferred from the EXIM bank
to the Chinese SOE carrying out the project (Kaplinsky & Morris, 2009).
One example is China’s recent bid for access to 10 million tons of copper
and 2 million tons of cobalt in the Democratic Republic of the Congo,
in exchange for a US$6–9 billion package of infrastructure investments
(McKinsey, 2010). Although many international donors and multilateral
organizations promote a ‘rights-based’ aid agenda designed to promote freedom and economic progress in recipient countries, China does not agree
with all of these objectives and hence does not orient its aid and statedriven OFDI projects in that direction (Mohan & Power, 2008). This has led
to highly publicized criticisms of some Chinese decisions, most recently centered on Darfur in Sudan, where China is buying 60 percent of the country’s
oil output from a government accused of mass murder and severe human
rights violations.
These examples raise the question of whether China’s investment presence
in Africa might be markedly different from that of MNEs originating in other,
more traditional investor countries. China has a very different institutional
environment from developed-country investors, and might be expected to
place less emphasis on issues such as governance, absence of corruption, or
secure property rights in the host countries where it operates. In line with
the literature, the first hypothesis we explore is:
H1: Compared with global OFDI flows and stocks, Chinese OFDI will show a
stronger association with African countries that are ranked as more corrupt.
In addition to examining the characteristics of the new MNEs, business
scholars have also begun to explore the key motivations of investors from
282
Chinese FDI in Africa
emerging economies for their OFDI projects. Two of the key motivations
identified are the need to establish backward linkages into raw materials,
and to create forward linkages into foreign markets (Fields, 1995; UNCTAD,
2006).
In the case of China, media accounts give the impression that its OFDI
targets mainly natural resources on the African continent. Up until the
twenty-first century, it appears that this image was not correct. Chinese
OFDI in Africa seems to have been spread across sectors, with manufacturing and retail playing an important role alongside resource extraction and
infrastructure. Private enterprises that either come from China to Africa or
are founded in Africa by members of the Chinese diaspora operate mainly
in manufacturing and trade (Gu, 2009). Although many are SOEs and some
are large private concerns such as Huawei Technologies, Holley Group, and
Zhongxing ZTE Corporation, the vast majority are small- and medium-sized
firms, often family owned, that are involved in manufacturing or wholesale
or retail sales. For these firms, the primary driving forces behind their investments are the opportunities in the domestic market and in Africa’s export
markets, and the chance to escape intense competitive pressure among firms
within China (Gu, 2009). According to UNCTAD data, in the 1979–2000
period 46 percent of Chinese OFDI flows went to manufacturing (mainly
clothing), 28 percent to resource extraction, and 18 percent to services, principally construction. Table 13.1, from Kaplinsky and Morris (2009), shows
where Chinese investment is concentrated in the African countries where
it plays a significant role. Many of the sectors are dominated by small-scale
commerce or low-skilled manufacturing.
This profile has changed recently, however. Muekalia (2004) says that the
post-Mao era has witnessed a major shift in China’s relations with Africa:
rather than pursuing an ideological agenda, the Chinese government’s focus
has moved toward securing resources to promote its own economic growth
in the twenty-first century. This conclusion is supported by partial data for
a group of 20 countries where ‘scoping studies’ on Chinese OFDI were carried out for the African Economic Research Consortium for the period up to
2008.2 According to these studies, nearly half of the major Chinese investment projects in these countries since 2001 have been in the oil and gas
sector, and another 5 percent have been in the extraction of other natural resources. Close to a quarter is in general manufacturing, while nearly
18 percent is in the telecommunications sector.3 The breakdown is given in
Table 13.2.
Access to natural resources is likely to continue to drive Chinese OFDI in
Africa as its energy needs soar: it is expected to import 7.3 millions barrels of crude a day, equivalent to half of Saudi Arabia’s planned output, by
2020 (Kaplan, 2009). China is now the world’s leading consumer of aluminum, copper, lead, nickel, zinc, tin, and iron ore, which could boost
the importance of ores and metals in investment decisions in the future.
X
X
X
Source: Kaplinsky and Morris (2009).
Sudan
Zambia
Mauritius
Nigeria
Cotton
Sugar
Agriculture
Madagas-car
X
Mining
Poultry
X
X
Oil/Gas
Telecoms, technical
services
Financial, telecoms
Telecoms, electricity,
water
Telecom
Services
Small traders
Import-export
Small trader
Small traders
Import-export
Small traders
Import-export
Small traders
Small traders
Small traders
Retail
Sectors invested in
Main sectors for Chinese OFDI in selected Sub-Saharan African countries
Ghana
Ethiopia
Angola
Country
Table 13.1
Construction
Construction,
infrastructure
Construction,
infrastructure
Construction
Infrastructure
Agro-processing
Textiles, garments,
general spread
Agro-processing
Garments, general spread
Garments, shoes/leather
Garments, shoes/leather
Manufacturing
283
284
Chinese FDI in Africa
Table 13.2
Chinese OFDI projects in 20 African countries by sector (2001–2008)
Sector
Oil and gas
General manufacturing
Telecommunications
Other natural resources
Other services (including tourism)
Agriculture
Trade
Construction
% of reported Chinese OFDI for period
48.37
25.52
17.89
4.63
1.30
1.12
0.7
0.48
Source: AERC scoping studies for selected countries.4 Own calculations.
For government-driven investment decisions, China’s objective of securing
the energy, metals, and strategic minerals that it needs to support its huge
population and their rising living standards and to ensure its industrial competitiveness will continue to be important in years to come (Kaplan, 2010).
As the literature predicts, could this resource focus be more intense for
China, and other ‘new’ MNE investors, than it is for investors from developed nations? Specifically, is this new, heavily resource-oriented profile
for OFDI a distinguishing characteristic for China, which, due to its very
rapid growth rates and high population, requires an especially abundant
and secure supply of natural resources to fuel its expansion? In line with
this need, do public and private Chinese investors in Africa tend to prefer resource-abundant host countries more than global foreign investors do?
Again following the literature, this paper will empirically test the following
hypothesis:
H2: Chinese OFDI will show a stronger association than global OFDI with
African countries that are more oriented toward exploitation and export of natural
resources such as fuels, metals, and ores.
2. Data and methodology
2.1. Sample and measures
The dependent variable for this study is the ratio between Chinese and global
FDI (both stocks and flows, in alternate models) as a percent of GDP in the
recipient nation. A higher ratio indicates a greater concentration of Chinese
investment in a given country compared to the world overall.
Obtaining the data for this variable involves a key challenge, which is
the paucity and/or irregularity of data on China’s OFDI in foreign countries,
and particularly in Africa. It is difficult to discern from public sources the
Gayle Allard
285
magnitude of Chinese investment in individual African countries, since
both Chinese and African recording practices can be unreliable (Kaplinsky &
Morris, 2009). The most recent UNCTAD data in theory cover the 1995–2006
period, but for Chinese OFDI, data are reported mainly for 2003–2005. The
Chinese Ministry of Finance and Commerce (MOFCOM) publishes data for
2003–2007 only. For some countries (Burkina-Faso, Burundi, Central African
Republic, Comoros, Djibouti, Eritrea, Gambia, Guinea-Bissau, Madagascar,
Malawi, Mozambique, Namibia, Nigeria,5 Sao Tome and Principe, Somalia,
South Africa, Swaziland, Zambia), either no OFDI information for China is
provided, or only stocks or flows are given, but not both. (Mauritius was
eliminated from the data set as an outlier due to its extraordinarily high
levels of Chinese OFDI.)
Keeping these serious limitations in mind, Tables 13.3 and 13.4 present
2005 figures on OFDI stocks in the African countries for which data were
available from MOFCOM, as a percent of host-country GDP and as a percent
of all global OFDI stocks in the country. The countries are ranked by the
importance of Chinese OFDI stocks in their economies. Tables 13.3 and 13.4
show that, even in the countries where it bulks largest as a percent of GDP,
Chinese OFDI stocks generally are small relative to the size of the receiving
economies (less than 4%). They are also small (less than 10%) in relation
to global OFDI stocks in most countries, with the exception of Niger and
Madagascar. The figures do underline, however, the magnitude of China’s
presence in troubled countries like Sudan. Data for 2003 are presented in the
Appendix (Table 13A.1 and Table 13A.2) for the purpose of comparison.
These same figures indicate that China’s OFDI in Africa is increasing much
faster than that of other countries. Both UNCTAD and MOFCOM data show
that the growth in Chinese investment in Africa was explosive during the
first decade of the twenty-first century. Keeping in mind the limitations of
the data set, and recalling that local inflation and currency movements could
have an impact on the stock figures, the numbers show dramatic nominal increases in Chinese OFDI in Africa in the 2003–2007 period, which
are usually many times higher than those for the world as a whole in the
region. By 2005, the stock of Chinese OFDI in Africa was nearly three and
a half times the size it was in 2003, based on UNCTAD figures; according to
MOFCOM figures, the stock of Chinese OFDI in Africa was 420 percent larger
in 2006 than it was in 2003. In contrast, the growth rates in OFDI stocks from
all world sources to Africa were 11.9 percent (2003–2005) and 60.8 percent
(2003–2006). Despite this growth, the total is still a small fraction of China’s
total OFDI abroad, which the Economist Intelligence Unit projects to reach
US$72 billion in 2011 (EIU, 2007) (Tables 13.5 and 13.6).
The availability of data for the dependent variable determined the sample
size for this regression experiment. The MOFCOM figures were chosen, since
they included more countries than the UNCTAD series (32–36 countries in
286
Table 13.3 Chinese OFDI stocks in African countries as a percentage of host-country
GDP (2005)
Country
Zambia
Liberia
Sudan
Sierra Leone
Guinea
Madagascar
Niger
Zimbabwe
Benin
Tanzania
Congo, Democratic Republic
Seychelles
Mauritius
Gabon
Mali
Kenya
Congo, Rep
Togo
Ethiopia
Mozambique
Gambia
Central African Republic
Equatorial Guinea
Rwanda
Côte d’Ivoire
Botswana
Algeria
Nigeria
Mauritania
Ghana
Chad
Cape Verde
Libya
Cameroon
Uganda
Djibouti
Lesotho
Angola
South Africa
Egypt
Senegal
Malawi
Morocco
Tunisia
Comoros
OFDI stocks (US$ million)
OFDI stocks/GDP
160.31
15.95
351.53
18.45
44.22
49.94
20.44
41.63
19.00
62.02
25.11
4.19
26.81
35.36
13.28
58.25
13.32
4.78
29.82
14.68
1.19
2.00
16.56
4.72
29.11
18.12
171.21
94.11
2.40
7.33
2.71
0.60
33.06
7.87
4.97
0.40
0.60
8.79
112.28
39.80
2.35
0.73
20.59
2.15
0.01
3.92
3.01
2.10
1.53
1.22
1.15
0.94
0.75
0.69
0.49
0.48
0.47
0.43
0.41
0.40
0.38
0.33
0.32
0.30
0.25
0.23
0.22
0.20
0.20
0.18
0.17
0.17
0.16
0.13
0.12
0.10
0.09
0.08
0.07
0.06
0.06
0.06
0.06
0.05
0.04
0.04
0.04
0.03
0.01
0.00
Source: MOFCOM and World Bank. Own calculations.
287
Table 13.4 Chinese OFDI stocks in African countries in comparison with world stocks
(2005)
Country
Niger
Madagascar
Benin
Sudan
Gabon
Guinea
Kenya
Sierra Leone
Rwanda
Zambia
Mauritius
Mali
Botswana
Congo, Democratic Republic
Algeria
Zimbabwe
Tanzania
Libya
Central African Republic
Ethiopia
Congo, Democratic Republic
Senegal
Togo
Côte d’Ivoire
Mozambique
Ghana
Seychelles
Nigeria
Liberia
Cameroon
Uganda
Gambia
Djibouti
Cape Verde
Equatorial Guinea
Malawi
Chad
Lesotho
Angola
Mauritania
South Africa
Egypt
Morocco
Comoros
Tunisia
Chinese OFDI stocks
(US$ million)
20.44
49.94
19.00
351.53
35.36
44.22
58.25
18.45
4.72
160.31
26.81
13.28
18.12
13.32
171.21
41.63
62.02
33.06
2.00
29.82
25.11
2.35
4.78
29.11
14.68
7.33
4.19
94.11
15.95
7.87
4.97
1.19
0.40
0.60
16.56
0.73
2.71
0.60
8.79
2.40
112.28
39.80
20.59
0.01
2.15
Source: MOFCOM and UNCTAD. Own calculations.
Chinese OFDI stocks as
a % of total world
stocks
31.17
23.16
9.75
7.48
7.24
6.89
6.48
6.21
6.20
5.19
3.33
2.45
2.25
2.24
2.05
1.85
1.58
1.55
1.48
1.29
1.19
1.03
0.94
0.75
0.64
0.60
0.52
0.50
0.47
0.34
0.29
0.29
0.28
0.25
0.22
0.21
0.20
0.16
0.15
0.15
0.14
0.14
0.10
0.07
0.01
288
Chinese FDI in Africa
Table 13.5
Growth of Chinese OFDI flows in Africa (current US$, 2004–2007)
Year
% change of Chinese
OFDI flows in Africa
(year/year)
2004
2005
2006
2007
324.31
23.39
32.73
202.83
% change of all
OFDI flows in Africa
(year/year)
−19.65
30.42
6.44
61.96
Source: MOFCOM and UNCTAD. Own calculations.
Table 13.6
Growth of Chinese OFDI stocks in Africa (current US$, 2004–2007)
Year
% change Chinese OFDI stocks
in Africa (year/year)
% change all OFDI stocks
in Africa (year/year)
2004
2005
2006
2007
83.14
77.32
60.18
74.56
21.32
19.03
11.88
20.81
Source: MOFCOM and UNCTAD. Own calculations.
each of the four models used). Lists of the countries in the sample set are
included in the Appendix (Table 13A.3).
For the independent variables, this paper focuses on the two factors
described above that might distinguish Chinese OFDI into Africa from global
OFDI flows overall, which are the resource abundance of the host country
and the presence or absence of corruption there. For resource abundance,
two measures from the World Bank’s Data Catalog were used: one was metal
and ore exports6 as a percent of total merchandize exports, and the other
was fuel exports as a percent of total merchandize exports. While neither
of these is a perfect measure of the resource intensity of the host country,
they do help reflect the relative importance of resources in national output, and hence a country’s attractiveness for foreign investors. Data for these
variables were available for 43 African countries for fuel exports and 45 for
ore and metal exports. The missing countries were Angola, Chad, Congo,
Democratic Republic of the Congo, Equatorial Guinea, Liberia, and Libya.
To represent corruption in the host countries, this paper uses the Corruption Perception Index produced annually by Transparency International to
rank countries from least to most corrupt, based on extensive surveys conducted by independent institutions. African countries generally rank poorly
on the CPI: in the 2007 CPI, which was used in this study, 7 of the 13
countries considered to be the world’s most corrupt were African. Since the
CPI relies on subjective responses to polls for its scores, it is an imperfect
indicator. However, empirical studies frequently use the CPI as a proxy for
Gayle Allard
289
different corruption levels across countries and over time. Data on all African
countries except one were available for this variable.
As an alternative to the CPI, both the Polity variable, which quantifies
the authority characteristics of states, and the World Governance Indicators
from the World Bank were considered and tested in several models. Due to
their special characteristics or their broader nature, however, only the CPI
was retained for the final models.
Finally, as a control variable, real GDP growth was used to represent the
attractiveness and dynamism of the host-country market for investors, following UNCTAD (1999) and many business scholars who consider it a key
determinant of OFDI flows (e.g., Asiedu, 2002 in her study of African OFDI).
To smooth out any volatility in OFDI flows, an average was taken of the
available data between 2000 and 2005 for the dependent variable. GDP
growth was also averaged for 2000–2005. The CPI indicator for 2007 was
used, since it incorporated the largest number of African countries and it
was considered to be stable enough over time that a later year would still
be a good reflection of the national situation in 2000–2005. The resource
variables were from the year 2005.
A description of the variables used and their correlation coefficients are
given in Tables 13.7 and 13.8 below.
Table 13.7 Descriptive statistics
1. Chinese OFDI flows as % of world OFDI flows
2. Chinese OFDI stocks as % of world OFDI stocks
3. Corruption perception index
4. GDP growth
5. Ore and metal exports as % of total merchandize exports
6. Fuel exports as % of total merchandize exports
Mean
Standard deviation
3.76
2.47
2.84
13.22
4.33
11.21
5.79
4.92
0.92
4.19
18.18
26.13
Table 13.8 Correlation matrix
1
1. Chinese OFDI flows as a %
of world OFDI flows
2. Chinese OFDI stocks as a %
of world OFDI stocks
3. Corruption perception index
4. GDP growth
5. Ore and metal exports as %
of total merchandize exports
6. Fuel exports as % of total
merchandize exports
2
3
4
5
6
1.00
0.87
1.00
−0.36
0.09
0.55
−0.29
−0.06
0.43
1.00
0.17
−0.33
1.00
−0.09
1.00
−0.04
0.03
−0.23
0.04
−0.15
1.00
290
Chinese FDI in Africa
2.2. Methodology
The regression used Generalized Least Squares to correct for heteroskedasticity and obtain robust standard errors. Four different models were used,
with different dependent variables in some cases and alternate independent
variables in others. They all conformed to the following general model:
Yi = α + βj Xij + δZi + εi
where Y = dependent variable
X = the set of independent variables j
Z = the control variable (real GDP growth)
i refers to the 26–36 countries included in the different samples
and ε is the error term for the regression.
The difference in the models was as follows:
Model 1 :
Chinese OFDI flows
= α + β1 (ore and metal exports)i
Global OFDI flows i
+ β2 (corruption perception index)i + δZi + εi
Model 2 :
Chinese OFDI flows
= α + β1 (fuel exports)i
Global OFDI flows i
+ β2 (corruption perception index)i + δZi + εi
Model 3 :
Chinese OFDI stocks
= α + β1 (ore and metal exports)i
Global OFDI stocks i
+ β2 (corruption perception index)i + δZi + εi
Model 4 :
Chinese OFDI stocks
= α + β1 (fuel exports)i
Global OFDI stocks i
+ β2 (corruption perception index)i + δZi + εi
2.3. Results
The results of the regression experiment for the four different models are
presented in Table 13.9.
Gayle Allard
291
Table 13.9 Regression results
Dependent
variable
Independent variables
Corruption
perception
index
Ore and metal
exports as %
merchandize
exports
1. China
OFDI flows
as % of
world flows
−1.138
(0.5985)∗
0.0166
(0.0275)
2. China
OFDI flows
as % of
world flows
−0.8735
(0.4413)∗
3. China
OFDI stocks
as % of world
stocks
−0.6306
(0.4095)
4. China
OFDI stocks
as % of world
stocks
−0.8533
(0.4589)∗
Fuel exports
as % of
merchandize
exports
0.0008
(0.0142)
0.0431
(0.0189)∗∗
−0.0045
(0.0148)
Sample
size
R2
GDP
growth
(%)
0.205
0.1851
33
0.038
0.0479
(0.155)
32
0.014
0.0177
(0.123)
36
0.036
0.0361
(0.1582)
35
0.017
The results confirm that China is, indeed, more closely associated with
corrupt environments than are global investors: the CPI variable was statistically significant in all models but one. On the resource side, however,
fuels and metals/ores present different pictures. For fuel there is no significant difference between OFDI from China and the world as a whole.
In contrast, the coefficient on ore and metal exports is strongly significant
in one model, indicating that China is a relatively larger investor in countries that are major exporters of metals and ores than are global investors.
GDP growth, in contrast, did not have a statistically significant coefficient,
indicating that this variable has roughly the same importance for Chinese as
for global investors.
2.4. Conclusions and discussion
This exercise offers some valuable insights into China’s current and
future role on the African content. The fact that Chinese OFDI is more
closely linked than global OFDI to corrupt countries in Africa, confirming Hypothesis 1, gives support to both the theories of business scholars
such as Cuervo-Cazurra and Genc (2008) and the popular impressions nurtured by the international press and many political observers. It should
be kept in mind as well that some of the most corrupt countries in Africa
according to Transparency International are missing from some or all of the
292
Chinese FDI in Africa
data sets used in the regression models, such as Burundi, Chad, Somalia,
and Sudan. A simple bivariant regression of the CPI on a dummy variable
to reflect missing countries shows that the omitted countries are in fact
more corrupt than those that are included in the sample (see Appendix,
Table 13A.4).
Hence China is favoring more corrupt countries to a larger extent than
global investors in Africa. Since China’s OFDI flows and stocks are still relatively small compared to those of global investors overall, it would be an
exaggeration in most cases to say that it was ‘propping up’ corrupt regimes.
But clearly Chinese investors, whether public or private, are more comfortable with corrupt environments in Africa than traditional investors are. This
fact, as China’s presence in Africa continues to grow, could pose risks for
human rights in the region and could frustrate efforts by the global community to promote better governance and thus promote human development
and freedom on a deeper level for African citizens.
Hypothesis 2 is also partially supported: Chinese OFDI is more resourceseeking in Africa than global OFDI overall when it comes to metals and
ores; while in fuels there seems to be no difference between Chinese and
global investors. Again, the impressions given in the popular press appear
to be correct. Although a broad base of small-scale Chinese investments
in services and manufacturing exists across many African countries, and
continues to flourish, much recent, large-scale Chinese OFDI is in fact
driven by resource opportunities in metals and ores. This fact has implications for Africa’s future. As many development economists have warned
(Easterly, 2002; Collier, 2008; Moyo, 2009), natural-resource wealth in countries with weak or underdeveloped institutional frameworks can undermine
governance and eventually put at risk long-term economic growth and
development. If Chinese OFDI is concentrated in resource extraction, especially in poorly governed countries, and a blind eye is turned to corruption,
it could end up aggravating the governance problems and bringing benefits principally to the national/political elites in the host country. China’s
determination to win these types of investment contracts also has implications for other foreign investors. The Chinese government, working through
its SOEs, can offer conditions and bundles of financing and aid which
are difficult to compete with. Hence there are justified concerns about
the characteristics and side effects of this type of Chinese investment in
Africa.
It is also clear, however, that much of the Chinese investment in Africa is
different from what makes headlines. There are reasons to believe that the
dense web of smaller-scale investors in the manufacturing and retail sectors
in many African countries, along with the large telecoms and technology
companies, have different objectives from the Chinese SOEs. This web is
being nourished by a substantial flow of Chinese immigration to Africa
Gayle Allard
293
(Alden, 2007; Mohan & Power, 2008). Private Chinese business owners,
especially the small ones, are likely to pursue objectives that are more similar to those of private foreign investors around the world. As their relative
weight increases, they could comprise a merchant class or lobby that could
become a force for social and even political change, and not necessarily in a
negative direction.
3. Limitations and future research
Much remains to be done in order to precisely quantify and correctly evaluate the impact of Chinese OFDI on the African continent. This exercise
shows that even the best official statistics are incomplete, and may fall
short of the numbers that are published in the international media on the
huge projects being carried out by Chinese firms. Better data could help
us to evaluate not only the governance implications of Chinese investment, but also their impact on environmental protection/destruction in
host countries, which is a concern that will take on increasing weight in
the future. Complete information on resource endowments rather than
exports could help to clarify the reasons that foreign investors select particular countries. One interesting focus for future research on Chinese OFDI in
Africa might be on the micro-level, to determine whether small and/or
private Chinese firms behave differently there than the government or
its SOEs.
China’s economy is growing at breathtaking speed, and it needs the
resources Africa can provide. Planned future investments on the continent
will be in transportation (railways linking the coasts of Africa from Zambia
to the DRC), financial services and banking, and natural resources. China
appears to have a forward-looking plan in Africa that is tied into its strategic
interests. In Moyo’s view, China’s role in Africa is wider, more sophisticated,
and more businesslike than any other country’s at any time in the post-war
period (Moyo, 2009).
Is China ‘conquering’ Africa with its aggressive investment policies? Does
it have a hidden agenda to counter the move toward democracy in the
region? Is it turning a blind eye to the environmental impact of its investments? Even if good data were available, questions about China’s intentions
would be impossible to answer. And only time will tell what the real effects
of its arrival in Africa will be for the continent. But even if China’s investments could be shown to damage the governance, social and environmental
objectives that the West holds dear, a similar criticism could be leveled at
the actions of Western countries in the region not only in recent years but
over decades of European colonial history. If China is a danger for Africa, the
West must beware and perhaps be poised to react; but it is hardly the best
party to point the finger.
294
Appendix
Table 13A.1 Chinese OFDI stocks in African countries as a percentage of host-country
GDP (2003)
Country
Zambia
Liberia
Madagascar
Niger
Zimbabwe
Guinea
Mali
Gabon
Togo
Benin
Equatorial Guinea
Mauritius
Kenya
Rwanda
Mauritania
Ghana
Tanzania
Nigeria
Seychelles
Côte d’Ivoire
Ethiopia
Senegal
Cameroon
Mozambique
Malawi
South Africa
Botswana
Lesotho
Uganda
Egypt
Gambia
Morocco
Algeria
Tunisia
Congo, Dem. Rep.
Sudan
Libya
Angola
OFDI stocks (US$ million)
OFDI stocks as % GDP
143.70
5.80
28.13
12.50
36.74
14.34
12.09
24.05
4.73
7.71
8.64
12.59
25.53
3.30
1.82
6.60
7.46
31.98
0.42
8.05
4.78
2.51
5.73
2.42
0.72
44.77
2.10
0.24
1.33
14.29
0.04
4.31
5.70
1.56
0.24
0.55
0.86
0.30
3.90
1.41
0.71
0.60
0.60
0.46
0.40
0.40
0.33
0.30
0.29
0.22
0.19
0.15
0.14
0.12
0.07
0.06
0.06
0.06
0.06
0.05
0.05
0.05
0.04
0.03
0.03
0.03
0.02
0.02
0.01
0.01
0.01
0.01
0.01
0.00
0.00
0.00
Source: MOFCOM and World Bank. Own calculations.
295
Table 13A.2 Chinese OFDI stocks in African countries as a percentage of global OFDI
(2003)
Country
Niger
Madagascar
Benin
Rwanda
Guinea
Zambia
Zimbabwe
Kenya
Mali
Mauritius
Togo
Senegal
Ghana
Mauritania
Cameroon
Ethiopia
Malawi
Côte d’Ivoire
Equatorial Guinea
Botswana
Tanzania
Liberia
Nigeria
Libya
Mozambique
South Africa
Uganda
Algeria
Egypt
Seychelles
Lesotho
Morocco
Sudan
Congo, Democratic
Republic
Gambia
Tunisia
Angola
OFDI stocks ($US million)
OFDI stocks as a % total
world stocks
12.50
28.13
7.71
3.30
14.34
143.70
36.74
25.53
12.09
12.59
4.73
2.51
6.60
1.82
5.73
4.78
0.72
8.05
8.64
2.10
7.46
5.80
31.98
0.86
2.42
44.77
1.33
5.70
14.29
0.42
0.24
4.31
0.55
0.24
20.56
15.08
5.14
4.43
4.37
3.64
3.47
2.66
2.54
1.57
1.02
1.00
0.50
0.46
0.26
0.25
0.24
0.23
0.23
0.18
0.17
0.16
0.14
0.14
0.10
0.10
0.09
0.09
0.07
0.06
0.06
0.03
0.02
0.01
0.04
1.56
0.30
0.01
0.01
0.00
Source: MOFCOM and UNCTAD. Own calculations.
296
Table 13A.3 The countries included in the regressions
Model 1
(33 countries)
Model 2
(32 countries)
Model 3
(36 countries)
Model 4
(35 countries)
Algeria
Benin
Botswana
Cameroon
Cape Verde
Côte d’Ivoire
Algeria
Benin
Botswana
Cameroon
Cape Verde
Côte d’Ivoire
Egypt
Ethiopia
Gabon
Gambia
Ghana
Guinea
Kenya
Lesotho
Madagascar
Mali
Mauritania
Morocco
Mozambique
Niger
Nigeria
Rwanda
Senegal
Seychelles
Sierra Leone
South Africa
Sudan
Tanzania
Togo
Tunisia
Uganda
Zambia
Zimbabwe
Egypt
Ethiopia
Gabon
Gambia
Ghana
Guinea
Kenya
Lesotho
Madagascar
Mali
Mauritania
Morocco
Mozambique
Niger
Nigeria
Rwanda
Senegal
Seychelles
South Africa
Sudan
Tanzania
Togo
Tunisia
Uganda
Zambia
Zimbabwe
Algeria
Benin
Botswana
Cameroon
Cape Verde
Cent. African
Republic
Comoros
Côte d’Ivoire
Egypt
Ethiopia
Gabon
Gambia
Ghana
Guinea
Kenya
Lesotho
Madagascar
Malawi
Mali
Mauritania
Morocco
Mozambique
Niger
Nigeria
Rwanda
Senegal
Seychelles
Sierra Leone
South Africa
Sudan
Tanzania
Togo
Tunisia
Uganda
Zambia
Zimbabwe
Algeria
Benin
Botswana
Cameroon
Cape Verde
Cent. African
Republic
Comoros
Côte d’Ivoire
Egypt
Ethiopia
Gabon
Gambia
Ghana
Guinea
Kenya
Lesotho
Madagascar
Malawi
Mali
Mauritania
Morocco
Mozambique
Niger
Nigeria
Rwanda
Senegal
Seychelles
South Africa
Sudan
Tanzania
Togo
Tunisia
Uganda
Zambia
Zimbabwe
Gayle Allard
297
Table 13A.4 Results of regression of corruption perception index on dummy variable of missing values
Model
Missing value dummy
Model 1
−0.55
(0.25)∗∗
−0.60
(0.25)∗∗∗
−0.50
(0.27)∗
−0.55
(0.26)∗∗
Model 2
Model 3
Model 4
Note: * <0.10; ** <0.05; *** <0.01.
Acknowledgments
The author wishes to thank Jose Bolorinos for his contribution to this study.
Notes
1. Gu (2009) divides Chinese investment in Africa into five phases, with different
actors and sectors dominating in each one of them:
i. 1949–1980s, when firms launched investments mainly as part of Chinese aid
projects;
ii. 1980s to mid-1990s, when large SOE trading companies moved into Africa,
often to export goods to the United States or Europe and circumvent trade
barriers there;
iii. The mid-1990s to 2000, when large SOEs and private companies invested
in the manufacturing sector, with linkages to infrastructure and resource
investments;
iv. 2000–2005, when spillovers from the large-scale projects of the previous phase
became important;
v. Post-2005, when a new family of small-scale, private Chinese firms began to
enter the continent.
2. The countries covered by these reports are Angola, Cameroon, Chad, Congo,
Côte d’Ivoire, Ethiopia, Gambia, Ghana, Guinea, Kenya, Mali, Mauritius, Namibia,
Nigeria, South Africa, Sudan, Tanzania, Uganda, Zambia, and Zimbabwe. Not all
give information on specific projects and the data are not presented in a uniform
fashion. The reports are referenced in the bibliography.
3. Gu (2009) stresses the continuing importance of small-scale Chinese investments
across manufacturing and services, as part of the final phase of Chinese OFDI outlined above. In this stage, many firms are private and are thus not bound by the
country’s strategic concerns or its bilateral agreements. These firms are seeking to
either serve local markets or to export, and they are spawning a rich local infrastructure of Chinese business associations and contacts that create fertile ground for
private business investments in the future.
4. The countries covered by these reports are Angola, Cameroon, Chad, Congo,
Côte d’Ivoire, Ethiopia, Gambia, Ghana, Guinea, Kenya, Mali, Mauritius, Namibia,
298
Chinese FDI in Africa
Nigeria, South Africa, Sudan, Tanzania, Uganda, Zambia, and Zimbabwe. Not all
give information on specific projects and the data are not presented in a uniform
fashion. The reports are referenced in the bibliography.
5. One glaring omission is Nigeria, for which no data for flows are provided in the
UNCTAD report, even though it has been one of the largest beneficiaries of Chinese
OFDI in Africa since 2000 according to most reports; according to China’s own
accounts, it invested more than US$4 billion in Nigeria in 2004, which could be
more than a third of China’s investment in Africa in that year. Chinese MOFCOM
data does include Nigeria, however.
6. The World Bank definition of ore and metals exports includes SITC sections 27,
28, and 68, which comprises iron, copper, nickel, aluminum, uranium, silver,
platinum, lead, zinc, tin, and others.
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14
Chinese OFDI in Sub-Saharan Africa
Raphael Kaplinsky and Mike Morris
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’.
In this chapter we seek to refine our understanding of what is meant by
‘China’ in the phrase ‘Chinese FDI in SSA’. Here, emerging research suggests four distinct families of FDI flowing from China to SSA. We identify
these streams of FDI, and place them in historical context, noting both the
dynamism of these investment flows and the paucity of primary research
on their character and size. Then, in the context of a sustained rise in the
global demand for commodities, we focus on the family of large, predominantly state-owned Chinese firms (state-owned enterprises, SOEs) operating
in the resource and infrastructure sectors, pointing to their integration with
Chinese aid and trade. It is here that we place Chinese FDI into global context, suggesting that it is distinctive in comparison to northern FDI in the
resource and infrastructure sectors in SSA. This is followed by a discussion of
a suitable policy response by African actors to allow for net gains to be maximized in the continent’s intercourse with these large-scale SOE investments
from China.
1. The dynamics of Chinese FDI flows to SSA
China’s relations with Africa in the modern era have passed through three
overlapping phases. The first phase followed the Bandung Conference of
Non-Aligned Nations in 1955, and resulted in almost four decades of what
might be termed ‘Third World Solidarity’. Partly driven by its ideological
300
Raphael Kaplinsky and Mike Morris 301
rivalry with the Soviet Union, China offered decolonizing Africa moral and
political support, in some cases coupled with limited military support and
aid.2 The period from the mid-1990s onwards – the subject of the analysis below – represents the second phase of Chinese involvement with SSA.
Following a substantial growth in China’s trade with Africa, and China’s
growing need for resources, large and predominantly SOEs entered SSA as
investors and as contractors to Chinese-aid-funded projects in infrastructure
and public buildings.3 The third and emergent phase of Chinese interaction
with SSA is one involving small- and medium-sized, predominantly private
sector, enterprises. These comprise a mixture of firms. Some are incorporated
in China and have extended their operations from China to SSA. Others have
been started ab initio in SSA. In some cases this new vintage of investors
involves Chinese citizens who had previously been employed in large-scale
SOE activity in Africa and, through various legal and illegal means, had
stayed on to become autonomous entrepreneurs. In other cases, building
on family or community links, migrants have moved to SSA to join existing
enterprises or to start new ones (Mohan & Kale, 2007; Dobler, 2006).
These three ideal-types of overlapping Chinese investors in SSA are
characterized in Figures 14.1 and 14.2. The phrases ‘state-owned’ and
Central State
Provincial State
Normally accountable to State Council
Often loyal to Provincial rather than Central
Government objectives
Tender for Central Government-funded
EXIM Bank financing
Predominantly in resource sector,
infrastructure projects and construction
Predominantly
state-owned
Tender for Central Government funded
EXIM Bank financing
Predominantly in resource sector infrastructure
projects and construction
Involves formal State to State (i.e., China
host government) agreements
Generally well-documented, but not
always transparent agreements
Generally some from of twinning between
China provinces and SSA governments
Generally well-documented, but not always
transparent agreements
Incorporated in China and SSA
Incorporated in SSA only
Predominantly in manufacturing and
services
Predominantly in trading and services
Self-financed
Largely self-financed
Predominantly
private-owned
Act independently of Chinese central
government
Act independently of Chinese central and
provincial governments
May not be legally incorporated
May be supported by Chinese provincial
government
Familial contacts important
Figure 14.1 Four types of Chinese investors in SSA
Source: Adapted from Corkin (2011) and Gu (2009).
302
Chinese FDI in Africa
Central government SOEs
Provincial government SOEs
Private sector incorporated in China
Private sector
incorporated
in SSA only
Large
Predominantly resources
and infrastructure
services
Figure 14.2
Medium
Small
Manufacturing,
wholesale, and
services
Petty manufacturing
and retail
Size, sector, and ownership of Chinese investors in SSA
‘private’ require some qualification, since one of the unique features of
China’s recent growth trajectory has been the very fuzzy lines drawn on
ownership between the state and private sector. Many ‘SOEs’ function as
conduits for private gain, in the sense that profits are appropriated in part
by key individuals who are not formal owners of the firms. Similarly, the
returns from and decisions made in many apparently ‘private’ firms are in
part a reflection of the direct decision-making power of state bodies, particularly provincial governments. ‘Private’ in China means that the state
holds less than 50 percent of the equity. In addition, state officials may also
own companies, but in their ‘private capacity’, and often use the connections gained through their government positions. Thus ownership in China
reflects a complex and dynamic amalgam of property rights which Nolan
characterizes as an ‘ownership maze’ with ‘vaguely defined property rights’
(Nolan, 2005, p. 169).
The large SOEs, predominantly investing in resource extraction and
infrastructure, can be segmented between those owned by the Central Government and accountable to the State Council, and those accountable to
provincial governments. Central government SOEs tend to operate under
formal state-to-state agreements, whereas the provincially owned firms often
reflect the initiatives of their decentralized state administrations and often
build on regional diasporas in SSA (see Gu, 2009). The private sector firms
cover the spectrum of medium and small firms incorporated in China and
investing in SSA, perhaps as a first venture outside of their home base.
They also include a limited number of very large firms, such as Huawei in
telecoms. The large and medium China-based firms generally operate in the
Raphael Kaplinsky and Mike Morris 303
manufacturing and communications sectors, as well as in wholesale trading.
The other end of the private spectrum involves small to micro enterprises,
either in petty manufacturing or in small-scale retail.
These distinctions are, however, becoming increasingly blurred as new
dynamics come into play. The provincial government SOEs are under pressure to contribute revenue to provincial government and hence to operate
profitably, and hence they more and more resemble large private firms. By
contrast, central government SOEs have to carry the Chinese flag and are
expected to take the government’s strategic objectives into consideration
in their African operations. Furthermore, some national brand private firms
such as Huawei have attained the status of ‘national champion’. As a result
it is able to access major central state backing so much so that it is like a
central government SOE but with commercial independence. This paper is
primarily focused on the Chinese SOE FDI in SSA.
2. Chinese FDI in SSA
Estimates of FDI flows are notoriously inaccurate. Each country estimates
these flows in their annual balance of payments accounts and these data
are used by the IMF, UNCTAD and other agencies to record official flows.
In previous years, exchange control regimes meant that commercial banks
kept a record of FDI inflows, providing some consistent reporting procedure for estimating these flows. However, the removal of exchange controls
over the past few decades has made the reporting procedure much more
haphazard and inconsistent. The difficulty in measuring reinvestment by
existing foreign investors compounds these measurement problems. Relatively weak recording practices in SSA increase the unreliability of data on
Chinese investment flows to SSA.
In what follows we report four sets of estimates of the extent and nature of
these flows. The first draws on official estimates of flows. The second is based
on a series of country-studies in SSA made as part of the African Economic
Research Consortium’s Asian Driver program (www.aercafrica.org). The third
reports the results of a United Nations Industrial Development Organisation
(UNIDO) survey of FDI in SSA, and the final set draws on the limited number
of primary studies focusing on small-scale Chinese investors in SSA.
2.1. Official and public-domain estimates of the extent
and distribution of Chinese FDI in SSA
As China began to emerge in the international global scene, its outward
FDI (OFDI) flows remained small; equivalent to just US$916 million in 2000,
not much higher than the US$830 million registered in 1990. However, post2000, FDI outflows have been rising, reaching US$17.8 billion in 2006. The
flows are expected to continue to increase, and to reach US$72 billion by
2011 (EIU, 2007).
304
Chinese FDI in Africa
Official estimates of China’s FDI flows to SSA are contradictory, confusing, and almost certainly understate their true significance. Drawing on a
variety of official sources, Besada et al. estimate that Chinese FDI flows into
Africa exceeded US$500 million in 2006, rising from US$400 million in
2005 (Besada et al., 2008). The more widely used UNCTAD data, working
with country estimates of investment-flows, tells a similar story of rising
Chinese FDI into SSA, albeit with somewhat different numbers. This data
suggest inflows rising from US$1.5 million in 1991 to US$61 million in
2003. UNCTAD estimates that in 2005 the stock of Chinese FDI in 48 African
countries reached a value of US$1.6 billion.
Gelb (2010) draws on the Chinese Ministry of Commerce database
(MOFCOM) and his own data to differentiate Chinese FDI (as real investment) from flows and holdings in financial centers such as the Cayman
Islands (CI) and British Virgin Islands (BVI) as well as round tripping
through Hong Kong (HK). Much of the latter flows return to China again
as inward FDI since there are substantial Chinese government incentives
to be gained from ‘inward investment’. In 2008, 76 percent of flows and
80 percent of stocks were accounted for by these three destinations, whilst
Africa receives a very small share of Chinese OFDI. Once these three destinations are excluded, then the global distribution changes substantially. Africa
accounted for the largest share (40%) of Chinese OFDI in 2008 (Table 14.1).
The geographical dispersion of Chinese FDI in Africa is concentrated in
five countries (Table 14.2). In 2005 Sudan, Algeria, Zambia, Nigeria, and
South Africa accounted for 56 percent of the FDI stock. By 2008 the same five
countries now accounted for 71 percent of Chinese FDI in Africa. Primarily
as the result of a major flow of Chinese FDI to buy a share in Standard Bank,
Table 14.1
Chinese OFDI flows and stocks, excluding HK, CI, BVI (2003 and 2008)
Flows
Stocks
2003
2008
2003
2008
Total, $ billion
Percentage shares
Asia
Africa
of which: South Africa
Europe
Latin America
North America
Oceania
0.69
13.64
4.34
37.32
52
11
1.28
21
3
8
5
36
40
35.25
6
0
3
14
45
11
1.03
11
9
13
13
41
21
8.17
14
4
10
10
Total
100
100
100
100
Sources: MOFCOM (2008) and Gelb (2010).
Raphael Kaplinsky and Mike Morris 305
Table 14.2 Distribution of China’s OFDI stock in Africa, 1990, 2005, and 2008 (%)
Country
1990
Country
2005
Country
2008
Zaire
Nigeria
Mauritius
Guinea Bissau
Zambia
Gabon
Rwanda
Zimbabwe
Egypt
Tanzania
Madagascar
Central African Republic
Sierra Leone
Libya
18
15
14
9
7
6
6
6
4
4
4
3
2
2
Sudan
Algeria
Zambia
South Africa
Nigeria
Tanzania
Kenya
Madagascar
Guinea
Zimbabwe
Others
22
11
10
7
6
4
4
3
3
3
27
South Africa
Nigeria
Zambia
Sudan
Algeria
39
10.2
8.3
6.8
6.5
Source: UNCTAD (2007a); MOFCOM (2008); Gelb (2010).
South Africa now accounted for 39 percent of Chinese FDI stock followed by
Nigeria, Zambia, Sudan, and Algeria.
UNCTAD data suggest that China’s investment in Africa as a whole, and
SSA in particular, is fairly well distributed across different sectors. Between
1979 and 2000, 46 percent of investment was in the manufacturing sector. Most of this manufacturing investment was in the clothing sector,
initially taking advantage of quota access through the Multifiber Agreement and then, after 2001, also taking advantage of Africa’s preferential
access to US markets under the African Growth and Opportunities Act
(AGOA) scheme (Kaplinsky & Morris, 2008).4 Services, mainly construction, accounted for 18 percent of the FDI flows, with resource extraction
accounting for 28 percent. China’s FDI in oil and as exploration has been
concentrated in Nigeria, Angola, Equatorial Guinea, Sudan, and Gabon.
Investments valued at US$757 million in Sudanese oil and US$2.7 billion
in Nigerian oilfields have been made in the past few years by China (Africa
Frontier Advisory March, 2008). This is a dynamic picture however, and in
2007 the state-owned Industrial and Commercial Bank of China invested
US$5.4 billion to acquire a 20 percent strategic stake in Standard Bank,
a South Africa-based bank with extensive operations across the continent
with a view to leveraging investment in a range of sectors and in a range of
SSA economies.5
UNCTAD estimated that, in 2006, approximately 700 Chinese enterprises
were operating in Africa, including in three of its first eight overseas economic and trade cooperation zones in Africa located in Nigeria, Mauritius,
and Zambia (UNCTAD, 2007b). The first Sino-African Business Conference in
306
Chinese FDI in Africa
2003 in Ethiopia resulted in commitments to 20 projects with a total value
of US$680 million, although there are no reports of the extent to which
these commitments resulted in actual investment flows (Broadman, 2007,
p. 245).
2.2. AERC scoping study estimates of the extent and distribution
of Chinese FDI in SSA
In 2006–2007, the African Economic Research Consortium (AERC) undertook scoping studies in 21 SSA countries to assess their trade, aid, and
investment relations with China. On the basis of these scoping studies,
the AERC selected 14 countries6 for in-depth studies on aid, trade, and
FDI respectively. In 2009–2010 it commissioned a further 20 such studies –
with three on aid, eight on trade, and nine on FDI. Each of these studies
was undertaken by national researchers, and was based on national data
sources. This body of reports provides a substantial new base of firm level
data, although the quality of data-availability was patchy.
Drawing on these reports (www.aercafrica.org/publications/category.asp)
we can distinguish three groups of economies – those in which Chinese
FDI plays a relatively significant role, those in which it plays a relatively
moderate role, and those in which its significance is low. Table 14.3 below
summarizes the data from these scoping studies and identifies the key sectors
where Chinese investment is located.
The AERC studies show that oil-gas and mining investments are of considerable significance in some economies. However, there are economies where,
although Chinese FDI does take place in these sectors, its significance is low
(e.g., Cameroon in oil, and Kenya and Uganda in mining). In agriculture, the
primary sector of Chinese involvement is cotton, but only in Zambia does it
play an important role in this sector. Chinese FDI in telecoms is widespread
throughout the 20 economies, and where this occurs, it plays a relatively
important role. There are also significant investments in utilities (notably
in Ethiopia and Mali). It is the construction and infrastructure sector where
Chinese FDI is most pervasively evident, with much of the physical infrastructure investment in showpiece construction – government buildings and
sport stadiums. FDI in manufacturing is primarily in labor-intensive activities – garments dominate. But there is also a spread of investments in smallscale manufacturing enterprises, which do not surface in official statistics
but, like Chinese retail traders, may have a more substantial socio-economic
impact. Small-scale petty-trading by Chinese migrants is widespread in
almost every economy, but is almost always unrecorded. Finally, South
Africa is something of a special case. On the one hand, Chinese FDI into
South Africa is relatively insignificant as a proportion of total FDI in the
country. But, on the other hand, the size of this FDI is large relative
to Chinese FDI in other SSA countries. Moreover, since 2006, the asset
stocks have grown very substantially, driven by the purchase of a minority
Services
X
X
Sudan
Zambia
X
X
X
X
S. Africa
Mauritius
Nigeria
Madagascar
Ghana
Ethiopia
Cotton
Poultry
Fish
Sugar
Education logistics,
IT
Finance
Business services
Consumer services
Electricity training,
Transportation,
engineering services,
restaurants
Telecoms technical
services, electricity
Financial, telecoms
Tourism
Telecoms, electricity
Water, real estate
Economies where Chinese FDI plays a significant role
Angola
X
Telecoms, logistics
Freight forward
Agriculture
Small traders
Small traders,
Import/export
Small traders
Small traders,
Import/export
Small traders,
Import/export
Small traders
Small traders
Restaurants, internet
cafes
Small traders
Retail
Oil gas
Country
Mining
Significance of Chinese FDI in key sectors in selected SSA economies
Table 14.3
Construction
Infrastructure
Infrastructure
Irrigation
Construction
Construction,
infrastructure,
Transport
Construction,
Infrastructure
Construction
Infrastructure
Infrastructure
Construction
Roads
Bridges
Construction
Infrastructure
Physical
infrastructure
Agro-processing
Textiles
Textiles,
garments,
Electronic goods
machinery
Automobiles
Plastics, leather,
furniture,
electronics
Garments, shoes/
leather
Garments,
general spread
Agro-processing
Garments, shoes/
leather
Cars
Air conditioners
Manufacturing
307
X
Cotton
Telecom, Electricity
Health equipment
Business training
Small traders
Source: Based on Ajakaiye et al. (2008), AERC China-Africa economic relations policy briefs (2010).
Economies where Chinese FDI plays a relatively insignificant role
Cameroon
X
Rice,
Small traders
cotton,
timber, fish
Chad
Cote d’Ivoire
Gambia
Guinea
Namibia
Small traders
Tanzania
Cotton
Uganda
Economies where Chinese FDI plays a moderately significant role
Congo –
X
X
Health, telecoms
Brazzaville
Kenya
X
Coffee
Small traders,
Import/export
Mali
X
Cotton
Electricity, water
Construction
Construction
Construction,
infrastructure
Construction,
infrastructure
Construction,
infrastructure,
Transports
Government
buildings
Energy,
Construction
Agro-processing
General spread
Garments, shoes,
General spread
Food processing
308
Raphael Kaplinsky and Mike Morris 309
stake in South Africa’s Standard Bank by Industrial and Commercial Bank of
China, providing Chinese firms with a platform for extended FDI in other
SSA economies where the Standard Bank has a large presence.
The AERC studies also reveal limited gains in local employment creation. The Chinese companies are not required to maintain a minimal
expatriate labor force. When regulations do exist, it appears difficult to
confirm whether they are enforced in practice and regulated by domestic
authorities. Firms repeatedly report a resistance by Chinese FDI to joint
ventures with local entrepreneurs.
2.3. UNIDO’s survey of FDI in SSA
In 2005, UNIDO conducted a survey of 1216 foreign enterprises operating
in 15 African economies.7 This was a base-survey establishing a platform
for future repeated surveys of a much larger sample of firms, and although
it does not comprise a stratified sample of investments, it does provide
insights into the relative positioning of Chinese FDI in SSA. Comparing
Chinese, Indian, and South African and northern investors (Table 14.4),
Chinese firms were younger, had lower sales per worker (but with higher
sales growth), were more export-oriented and had low investment rates and
low annual wages. The data suggest that Chinese respondent firms were
disproportionately clustered in low value-added export-oriented low-wage
assembly operations (no doubt taking advantage of AGOA and Everything
but Arms [EBA] incentives in the United States and Europe). In fact, nearly
one-third of the Chinese reporting firms produced textiles and garments,
whereas the Indian firms in the survey tended to cluster in metals- and
chemicals-manufacturing and the South African firms in the service sector.
However, because this survey was a pilot of an ongoing program and no
attempt was made to interview a stratified sample of firms, it is not clear
from this data whether these differences in FDI characteristics are a function
of the country of origin of the investors, the countries in which they are
Table 14.4 Chinese, Indian, South African, and northern FDI compared
Sample size (number of firms)*
Age (years)
Sales/worker ($)
Sales growth 2005 (%)
Export/sales (%)
Investment/sales ($)
Annual wages ($)
China
India
S. Africa
North
27–46
7
15,300
48.3
33.7
27.9
1,104
41–64
12
38,000
13.0
13.5
70.7
2,106
51–82
13.1
96,800
17.6
3.3
27.4
7,428
430–632
21.6
90,100
14.6
18.9
32.7
5,869
Note: *represents the range of firm responses, given that not all firms responded to all questions.
Source: Henley et al. (2009), drawn from UNIDO (2007).
310
Chinese FDI in Africa
investing (15 of 54 African economies) or the particular sectors in which
respondents operated. The response rate between source country firms also
varied, particularly in the case of Chinese firms (see Table 14.4). Moreover,
there is no data on the population of Indian, South African, or northern
investors – let alone of Chinese investors – so we do not know whether the
survey respondents provide an accurate picture of these different sources of
FDI in SSA.
2.4. Primary studies of small private sector Chinese FDI
The source of Chinese FDI that is much harder to track, but with increasingly significant socio-economic impact, is the growth in private sector
investment. Gu (2009) reports Chinese EXIM Bank estimates of around
800 China-incorporated firms who have established operations in SSA as a
whole.8 However, on the basis of her own primary research in China and in
SSA, she estimates the number of private firms to be more than 2000, predominantly operating in manufacturing and trade. Although no numbers
are provided on employment, most of these firms appear to be on the smallsize-of-medium, with only a few large firms such as Huawei Technologies
and the Holley Group.
A second set of primary research on Chinese private sector firms is that
on Mauritius (Brautignam, 2008). Brautignam builds on various reports of
small-scale investments, predominantly in light engineering, in a number
of SSA economies (including Angola, Benin, Kenya, Mozambique, Nigeria,
Sierra Leone, South Africa, Tanzania, and Zambia) to focus on private sector
investments in Mauritius. She shows how this in large part results from a
long history of Chinese immigration, reinforcing the importance of diasporas in private sector FDI. Chinese firms investing in the export processing
zones (predominantly in clothing) alone numbered 89 in 2000–2006, with
an additional 50 from Hong Kong. Chinese private investors are also to be
found in other sectors of the economy such as in sugar processing. Mauritius
(as is South Africa) is something of a special case, however, due to the
longevity of the Chinese community, with reports of Chinese firms dating
from as far back as 1874. The special nature of Mauritius is evident from
Brautignam’s matching case study of Nigeria, where she shows that Chinese
influence in the small-scale manufacturing sector is high, but as a source of
imported technology and inputs rather than investment or skills.
The AERC studies provide a third window into China’s small-scale
investors through their links as suppliers to large-scale SOEs in the infrastructure and resource sectors. Many small-scale Chinese investors have
entered into manufacturing and service businesses. These firms are often
sub-contracted by other Chinese firms in order to provide supplies and
auxiliary services. Sudan is a particularly illuminating case in this respect.
Between 2000 and 2007, 97 Chinese SMEs provided inputs for 13 SOEs in
the oil sector. Over 75 percent of these private Chinese SMEs (employing
Raphael Kaplinsky and Mike Morris 311
3914 workers) were supplying manufactures (construction, plastics, leather,
furniture, electronics, etc.) with the rest involved in various service functions
(transportation, engineering services, restaurants, etc.) employing 712 workers. In Angola many Chinese private investors have gone into freight and
logistics services to transport Chinese imported consumer goods, building
material, and other products.
The final set of research on private sector investment relates to smallscale individual or family owned firms operating predominantly in SMEs
in manufacturing and services, small construction firms, small-scale trade,
and petty manufacturing. A large and almost entirely unrecorded number of Chinese individuals operate as small-scale entrepreneurs in selected
countries (Mohan & Kale, 2007; Dobler, 2006; Mohan & Power, 2008), for
example, in Angola, Namibia, and Madagascar. A relatively new and significant, but as yet small, set of trading entrepreneurs are Chinese wholesalers
in Kenya, South Africa, Uganda, and Ghana, who act as a platform for
associated retailing activities in neighboring countries by other Chinese
small-scale migrant entrepreneurs (so-called ‘platform economies’).9 These,
too, are widely observed but are not systematically recorded. Recently,
Chinese entrepreneurs seem set to use the SEZ constructed in Mauritius as a
hub to access a broad range of African markets.
3. How distinctive is Chinese FDI in SSA?
Despite the paucity of the research surveyed in the previous section, there
are reasons to believe that the SOE category of Chinese FDI in SSA is
predominantly clustered in large-scale resource-oriented ventures (Burke &
Corkin, 2006; Broadman, 2007, p. 275; Ajakaiye et al., 2008). The reasons for
this sectoral concentration are discussed below, before we show how these
SOE investments are predominantly bundled with Chinese aid in projects
designed to meet China resource needs. This then allows us to consider
the distinctive nature of Chinese SOE investment on the continent in the
concluding discussion.
3.1. Terms of trade reversal and the growing importance of resources
Since at least the 1870s, there has been a long-run trend for the terms of
trade to turn against the commodities sector. That is, prices of manufactures
have risen faster than (or fallen slower than) those of commodities. There
have been occasional spikes in the general prices of commodities, notably in
the 1950s and the 1970s. But in each case these were short-lived price rises
(‘cycles’) reflecting commodity demands in periods of wars, or in postwar
reconstruction. Both of these generalized booms, and most of the individual
commodity spikes, were short-lived and arose from temporary interruptions
to supply (Kaplinsky, 2009). Specific commodities have seen more frequent
price rises, such as in the price of coffee, cocoa, and other commodities.
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Chinese FDI in Africa
These have largely arisen as a consequence of environmental and climatic
factors.
However, between 2002 and 2008 prices boomed across the spectrum
of commodities. This comprised a longer period than previous commodity
price spikes and represents a ‘super-cycle’. There are sound reasons to believe
that this will remain the case for some years to come (a ‘secular shift’ or
‘structural break’ in the terms of trade) despite the financial-sector induced
bust after August 2008.10 This is because, unlike previous periods of price
rise, the current boom is fueled by a massive augmentation of demand in
the very large Asian Driver economies which have a high income-elasticity
of demand for commodities (IMF, 2007; Farooki, 2010). Inter alia, this affects
the demand for energy (and has spin-offs into agriculture due to the resulting drive toward bio-fuels), for minerals (largely for infrastructure, but also
for manufactures) and food crops (as Chinese and Indian demand grows for
meat products, and hence animal feeds) (FAO, 2007; Freeman, Holslag, &
Weil, 2009). Primary commodities are therefore likely to remain in relatively
short supply globally, and prices are likely to be sustained for some years
to come.
How does this demand for commodities affect SSA? Africa is especially
well favored by these developments, not so much in terms of its existing
commodity exports, but rather in terms of its potential exports. Table 14.5
shows that in many mineral commodities, Africa is the primary resource
base for the future. In energy, it is not so much Africa’s share of global
reserves which is so strategically important, but its reserves of unallocated
reserves. New hydrocarbon discoveries off the west coast of Africa, as well
as in Uganda, and the potential for oil discoveries in other parts of Africa,
make it an exceptionally attractive region for countries with rapidly growing
energy needs. Significantly, the African continent is only poorly prospected,
so the likelihood is that the estimates of reserves in Table 14.5 (as well as in
Table 14.5 Africa’s share of global production and reserves (%)*
Mineral
Platinum Group Metals
Gold
Chromium
Manganese
Vanadium
Cobalt
Diamonds
Aluminium
Production
Reserves
54
20
40
28
51
18
78
4
60+
42
44
82
95
55+
88
45
Note: *These are known reserves. However, given the underdevelopment of
prospecting in SSA, the actual reserves are likely to be significantly higher.
Source: African Development Bank (2008).
Raphael Kaplinsky and Mike Morris 313
regard to commodities not in this Table 14.5) are a significant underestimate
of Africa’s resource potential.
These growing constraints in the resource sector have considerable importance in explaining the nature and growth of Chinese FDI into SSA. As we
have seen, a large component of this FDI has been in the resource and
infrastructure sectors (see, also Burke & Corkin, 2006: Broadman, 2007;
Ajakaiye et al., 2008). According to McKinsey, nearly one-quarter of Chinese
FDI in the extractive industry also involved infrastructure development
and resource processing (McKinsey Global Institute, 2010). Much of these
infrastructure investments is focused on providing transport routes for the
export of resources. For example, there have been large investments in an oil
pipeline and associated port facilities in Sudan. In Gabon, CEMEC (a large
state-owned enterprise) is constructing a special purpose deep-water port at
Santa Clara, a railway track running 560 km from Belinga to the coast, and
a hydro-electric power plant to facilitate the energy required for the operations. It is a long-term project, intended to extend over 15–20 years, and
will involve not only the extraction of the iron ore but the development
of auxiliary products (Burke & Corkin, 2006, p. 94). China has made extensive commitments to construct a rail route to facilitate the exploitation of
mineral ores and timber. In Angola, the refurbishment of the rail network
is also linked strategically to the export potential of resources. The railway
line will run 1300 km from Benguela to Luau in the DRC and also has a link
to Lobito in Angola, 700 km south of the capital city Luanda. This is significant as there is a strong possibility that extensions will be added to Uige
and Zambia, providing a direct line of transport from the Zambian copper
mines to the Angolan ports. The project, while restoring an important transport backbone to Angola, will also thus facilitate the access to Angola’s ports
for Zambia’s extracted copper (Burke & Corkin, 2006, p. 49). Since 2005,
Chinese total infrastructure commitments to SSA have exceeded those of
the World Bank (McKinsey Global Institute, 2010).
3.2. The strategic integration of Chinese operations in SSA
With the exception of small-scale copper mining smelters in Zambia and the
DRC, virtually all of these resource-based Chinese investments have been
large in scale and have involved Chinese SOE (both central state SOEs and
provincial government SOEs). In all these sectors China has become a significant global importer (http://www.commodities. open.ac.uk/cpd). In all these
sectors, particularly in infrastructure for trade (Foster et al., 2008), Chinese
aid has complemented these trade and FDI flows.
The close link between trade, FDI and financial flows has historical precedents. In the colonial era these three vectors were fused and the imperial
powers’ interests in SSA were closely coordinated. For example, in the immediate postwar period, British colonies were seen as providers of traded commodities for UK consumers, involving FDI from UK firms (e.g., producing
314
Chinese FDI in Africa
tea in Kenya), with infrastructure to support this trade provided by the UK
Colonial Office (roads and ports to transport the tea to the United Kingdom).
French and Portuguese presence in SSA was coordinated in a similar way.
But as Africa was decolonized in the second half of the twentieth century,
the aid, trade, and FDI vectors were increasingly separated. This separation
occurred for a number of reasons. First, there was increasing opposition from
SSA countries who saw this integration as being very costly. Tied aid generally led to much higher-cost inputs. Second, new economic actors were
entering the field (notably the United States) and they complained that the
integration of vectors locked them out of markets. Third, there was growing
public opposition in the OECD economies against what was seen as a framework for the exploitation of many low income economies. Fourth, multilateral aid grew in importance and the International Financial Institutions
have increasingly insisted on the delinking of aid, trade, and FDI.
China’s presence in SSA provides a departure from this recent orthodoxy
of the separation of aid, trade, and FDI and represents a reversion to the
historical precedent of colonial links between mother countries and SSA
colonies. Particularly in the case of large-scale infrastructural and mining
projects, this takes the form of the strategic integration of various inputs
from China. It is for this reason that it is virtually impossible to unbundle
what constitutes Chinese ‘aid’ and ‘FDI’ (Ajakaiye et al., 2008). The so-called
‘Angola-model’ has become a framework for much of China’s SOE activity in
SSA. It describes an integrated package in which China’s EXIM Bank provides
a line of credit, generally at subsidised interest rates. Large Chinese firms
then tender for large infrastructural and resource projects, such as those in
Angola which cover mining, oil, and railways. Most of these funds are tied to
the use of Chinese inputs, and make intensive use of Chinese skills; they also
involve investment by Chinese firms in Africa. The bulk of these ‘aid’ funds
never leave China but are transferred directly from the EXIM Bank to the
(largely SOE) firms which have won the tenders for the work. These funds
are not grants, but are repaid by the recipient country as a drawdown on
commodity exports back to China. Although the costs of these large infrastructural projects are typically 20–30 percent lower than those of northern,
South African, and Brazilian competitors, local content in the African recipient economies is low (Burke & Corkin, 2006). But not all aid follows the
Angola-mode. China also provides aid for politically sensitive and prestigious projects but these are often in economies where it has a direct resource
interest and where seeks to build a long-term presence such as sports stadia
in the DRC and Angola.
3.3. China’s investment in SSA: A departure from trend?
The most widely used framework for assessing the drivers of FDI is that developed over the years by Dunning (see, for example, Dunning, 2000) in his
‘eclectic theory of foreign investment’. Dunning identified three primary
Raphael Kaplinsky and Mike Morris 315
explanatory factors, the so-called OLI (ownership, location, internalization)
framework.
The ‘ownership’ factor describes motivations which reflect the nature of the
firms involved, analyzing their particular special competences which provide
them with a global reach, the power to control their foreign affiliates, and
the capabilities which they possess which make them an attractive source
of finance and technology to other countries. The ‘location’ factor explains
why foreign firms operate in a particular country. This may because of market possibilities for the output of the foreign ventures (‘market-seeking FDI’),
because the country possesses scarce natural resources (‘resource-seeking
FDI’), or because the country has low operating costs (‘cost reducing FDI’)
which make it an attractive export platform. The ‘internalization’ factor
explains why foreign firms prefer to own their operations in other countries, as opposed to licensing out, or selling their technologies and skills to
domestic firms or other foreign firms.
In recent years, a fourth factor has been suggested as explaining a new
form of outward FDI from the Asian Tigers, and especially in relation to
their investments in high-income economies (Mathews, 2002). This is the
‘linkages’ driver, in which firms invest abroad not so much to exploit their
firm-competences (as in the OLI explanation), but in order to augment these
competences by learning from their overseas operations. Whilst there is a
debate about whether this ‘leveraging’ FDI is really a new form of FDI (since
it arguably reflects firm-competences in business strategy and technology
acquisition) (Dunning, 2006; Narula, 2006), there certainly does seem to
have been a distinctly new flow of OFDI from low income economies such as
China, India, and Brazil. New, that is, in relation to their previous outward
investments which have predominantly exploited firm-specific advantages
in product and process technologies and competed on price rather than
product differentiation (Lecraw, 1977; Wells, 1983; Lall, 1984;).
Utilizing the Dunning framework (as augmented by Mathews) and also
considering the issue of the bundling of aid, trade, and FDI, is it possible
to compare these large investments by Chinese SOEs into SSA’s resourcesector and related infrastructure with those of the historically dominant
northern firms which have until recently been the primary resource and
infrastructure investors in SSA? Our conclusions are as follows (and are
summarized in Table 14.6). First, with respect to the strategic integration
of aid, trade, and investment, Chinese SOE FDI in SSA is distinctive. Over
the past decades, despite some differences between different nationalities
of Northern investors, in general there has been an unbundling of Northern investment from aid and trade. Where investment has taken place in
export sectors, these exports have been into global markets, rather than to
the domestic markets of the investors. By contrast, most incoming FDI from
China has reflected a relatively tight bundling of investment with tied-aid,
designed to facilitate the export of natural resources, predominantly directly
to China.
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Chinese FDI in Africa
Table 14.6
Chinese SOEs and Northern MNC FDI in SSA: major features
Historic northern FDI
Bundling of aid, trade, and investment
Strategic integration
Low and falling
of aid, trade, and FDI
Incoming large-scale Chinese
SOE FDI
High – aid and FDI bundled
tightly, particularly in
countries with natural
resources
Ownership specific factors
Location-specific factors
Resource-seeking
Market-seeking
Export platforms
Learning linkages
Short-term, profit
oriented
Long-term, resource-seeking,
integrated with Chinese
government aims
Natural resource-seeking
Natural resource-seeking with
utilization of bilateral aid
agreements
Producing for domestic
market and trading
Tariff preferences in the
US and EU
Virtually non-existent
Trading
Tariff preferences in the
US and EU
SSA as a test-bed for future FDI
Internalization factors
Agricultural
commodities – beverages,
cotton, autos in South
Africa
Garment exports under
AGOA to the US
In terms of ownership characteristics, in general, northern firms investing
in SSA have been funded, directly or indirectly, through stock markets.
The growing emphasis on ‘shareholder value’ over the past two decades
has generally meant that this funding regime has had a short-term profit
objective and has been very risk-averse. By contrast, with access to cheap
(and often subsidised) long-term capital, Chinese SOEs firms operate with
distinctive long-term time-horizons and are less risk-averse than their northern counterparts (Tull, 2006; Zeng & Williamson, 2007). It is significant
that the exception to this has been small investments by Chinese privately
owned firms, for example in Zambian and DRC copper smelting. These private firms are much more like the risk-averse and short-term-profit-oriented
northern firms. When the global copper price fell in early 2009, more
than 40 small smelters in the DRC were abandoned over a weekend with
their owners vanishing without paying taxes or paying their staff (Jopsom,
2009). Finally, most northern firms’ operations in SSA are constrained
in various envelopes of conditionality including the Paris Declaration,
the Accra Accord and various specific agreements and standards affecting,
Raphael Kaplinsky and Mike Morris 317
inter alia, labor rights, the environment, product specifications, and the
transparency of investment decisions. By contrast, Chinese SOEs operate in
a relatively unfettered environment. They are able, for example, to continue
investing and operating oil and infrastructure activities in Sudan as part of a
bilateral agreement. This is despite the international pressures exerted on the
Darfur problem, which forced a Canadian oil firm to divest from the Sudan.
With respect to the location-specific factors, resource-seeking investments
are found in both Northern and Chinese FDI in SSA. However, unlike
Chinese FDI, many large northern TNCs have operations in SSA which are
focused on meeting the needs of domestic consumers in local markets, and
occasionally also in regional markets. Many of these investments are longlived, and reflect previous decades of protected import-substituting industrialization. By contrast, a relatively small component (by overall value) of
Chinese FDI – particularly by large Chinese firms and especially by SOEs –
has been market-seeking. A notable exception has been in telecommunications, involving the SOE ZTE. The use of SSA as a low-cost export platform
is largely confined to the garments sector, and reflects tariff preferences in
major northern markets, predominantly AGOA to the United States but also
Cotinou and EBA preferences in the European Union. Here Asian investors
in general, and some Chinese firms in particular, have a distinctively larger
presence than do northern foreign investors. Finally, SSA provides protected
space (i.e., from many northern competitors) to firms which are not subject
to various codes of behavior.11 This provides special incentives to Chinese
foreign investors to locate their resource-sector and other investments in
SSA rather than in more regulated environments
Learning factors also play a more important role in respect of Chinese
SSA investment than Northern FDI. Chinese firms are distinctive in their
use of SSA as a testbed for overseas investments in general. For many firms,
SSA is an important proving ground in the industrial and service sectors.
As a Chinese hotel manager in Sierra Leone observed, ‘Africa is a good environment for Chinese investment, because it’s not too competitive’ (Hilsum,
2005). The substantial but minority investment in Standard Bank of South
Africa is an example of using a partnership to gain valuable expertise in
respect of northern financial service provision. There is little evidence that
such learning-oriented investments are evidenced for previous generations
of northern FDI, at least not over the past three to four decades.
Finally, although some Chinese garment exporters incorporate their SSA
garments operations in their clothing exports to the United States, these are
only very isolated examples of their integration of SSA subsidiaries in global
value chains. By contrast, although relatively limited, some northern firms
do integrate their African subsidiaries in their global value chains. These are
most notable in the beverages and agricultural commodities sectors and, in
South Africa, in the automobile and mining-equipment and mining-services
sectors.
318
Chinese FDI in Africa
4. Conclusion: Policy implications for engaging with large
Chinese dragons
FDI makes both positive and negative contributions to the host economies.
The balance of outcomes is generally determined contextually, reflecting a
variety of sectoral, temporal, and geo-strategic factors, often determined at
a global level. However, the outcomes, and the balance of developmental
advantage, also reflect the particular policy-environment which host countries adopt. Hence, what conclusions can be drawn about optimal policy
responses by SSA economies to ensure that the threat posed by the entrance
of Chinese FDI is turned into developmental opportunity? This requires
a focus both on the development of strategic capabilities, and the roles
played by key developmental actors. Its also necessarily places a focus on
the patterns and effectiveness of governance and its legitimacy. The discussion which follows relates specifically to the very large state-orchestrated
investments from China in SSA’s resource and infrastructure sectors.
4.1. Developing strategic capabilities
SSA, as we have seen, is not without its attractions to Chinese investors, particularly with regard to its potential as a source of natural resources. The key,
therefore, is for SSA to use this power in commodities to its best advantage
in its relations with the new emerging powers, particularly in the exploitation of these mineral resources and in the provision of related infrastructure.
The agreement which the DRC negotiated with China between 2007 and
2010 shows the potential for using this power to leverage advantageous
terms, particularly as China and other emerging economies seek to muscle their way into territories which were previously the domain of northern
economic powers. It also shows the threat which China poses to traditional
investors, and their response which forced a scaling-back of some of the
original commitments.
The original agreement was constructed to crowd-in aid-assisted Chinese
investments in infrastructure and training, and to ensure minimum local
content, with local co-ownership (though a DRC-state-owned enterprise)
in mineral exploitation. The context is one in which the DRC possesses
extensive mineral resources, but lacks the resources or technology to exploit
these. The total DRC state budget in 2007 was only US$1.3 billion, most
of which was used to pay salaries. Before the elections in 2006, the DRC
government had approved a large number of 35-year mining contracts in
agreements which were not transparent. The new government began a process of reviewing 61 mining contracts entered into between 1997 and 2003
(Vandaele, 2008; Komesaroff, 2008; Wild, 2009). The ability to review these
contracts was strengthened by the existence of an alternative path to exploiting the DRC’s extensive mineral deposits, in large part by the Chinese
aid-trade-FDI package signed in 2007 and 2008.
Raphael Kaplinsky and Mike Morris 319
The agreement constituted two large, but related, initiatives, utilizing the
‘Angola mode’. The first, entered into in late 2007, involved a loan for
US$8.5 billion from the Chinese EXIM Bank. This was to promote exploitation of the mining sector, and was supplemented with a commitment of
a further US$5 billion loan in early 2008. Together, these loans were to
be securitized by providing China with access to, and security provided
by US$14 billion of copper and cobalt reserves. This aid was tied to an
investment package to exploit these mineral resources by a jointly owned
company, Socomin, owned by a Chinese (68%) and Congolese (32%) stateowned company. The US$3 billion investment in the mines would be repaid
out of future profits. By agreement, not more than 20 percent of the workforce would be Chinese, 0.5 percent of investment would be allocated to
training, a further 1 percent would be spent on social investments, and 3
percent on environmental projects in the surrounding areas. In addition, at
least 12 percent of the work would be sub-contracted to local firms.
In addition to these investments in mines, China committed to provide
support for investments in five key areas identified by the DRC state –
in water, electricity generation, education, health, and transport. US$8.5
billion was to be allocated to a variety of projects which included a highvoltage power distribution network, highway and railway extensions, and
the construction of 31 hospitals, 145 health clinics, 5000 houses, and two
universities. Additional resources were to be allocated to rehabilitate and
expand water supplies. Supplementing all of this were a range of additional
aid projects, including training programs in China for poverty reduction and
subsidised loans to construct the national People’s Palace (the parliament)
and the Stadium of the Martyrs outdoor and sports complex.
Reacting against this ‘new kid on the block’, in early 2009 the IMF and
bilateral sought to block this investment, arguing that the DRC could not
enter into a new arrangement with a privileged preferential creditor when
it still owed northern creditors US$11.5 billion. The DRC government and
the Chinese investors however reaffirmed their commitment to this large
investment in March 2009. As a consequence of these pressures from traditional donors and investors by 2010, the project had been scaled down to
around US$6.5 billion, a sizeable reduction in scale but still a major initiative. More importantly, although the traditional donors had enforced this
downscaling of ambition in this particular project, they had not been able
to undermine the commitment of the DRC government to obtain a higher
share of revenues and a share in equity. There were a number of highprofile casualties, notably the squeezing out of a large Canadian firm from an
investment in Katanga in 2010 in favor of a Kazakhstan firm which offered
equity to the state, as well as higher taxes. Without the leverage provided
by Chinese investors waiting in the wings, the DRC government would not
have been able to affect the terms of mineral exploitation in sectors in which
the Chinese were not currently investing.
320
Chinese FDI in Africa
SSA countries can learn from the DRC experience (which is, of course, not
without its flaws, most notably in the criteria to be utilized to value resource
exports in the context of fluctuating global prices). In developing a strategic
agenda, SSA countries can benefit from adopting a similar strategy of integrating the aid, trade, and FDI vectors to that which is being pursued most
clearly by Chinese SOEs entering SSA. Increasingly, also, the same strategy
is being pursued by large Indian firms investing in SSA’s resource and infrastructure sectors. Meeting China’s trade needs – SSA as a source of primary
commodities and, to a lesser extent, as a market for their exports – should be
conditional upon their providing aid to exploit these commodities, as well
as to meet SSA’s complementary developmental and infrastructural needs.
Where appropriate, it should also incorporate Chinese FDI, and participation in Chinese firm’s value chains which serve global markets. For example,
Chinese firms exporting garments to the United States and the European
Union (as well as footwear and other sectors where SSA has resources which
are relatively easily transformed into final products) may be induced to
include SSA subsidiaries and SSA firms into their global value chains. Embedding this bundling in formal agreements would of course be WTO-illegal.
But the scale of these SOE resource-based investments is so large that SSA
governments are inevitably drawn into the negotiations. An agreement on
bundling can be reached in an informal manner through government-togovernment discussions without running up against WTO rules. After all,
China is a member of the WTO itself and manages to informally adopt a
bundling strategy without any adverse affect on WTO procedures.
4.2. Policy actors
The issue is who in SSA is going to drive this strategic agenda toward
FDI inflows from China? At the most basic level, this must necessarily involve individual SSA governments. Although they do not generally
directly control inward FDI and trade flows, they hold the key levers which
determine access to their economies. Each of the governments needs to make
a cool, informed assessment of its country’s specific attractions to incoming
Chinese large-scale FDI, to situate this in the context of global oligopolistic
competition for access to resources, and then to coordinate an integrated
strategic response to offer access to resources in a way which best meets
their country’s needs. This will involve extensive background analysis, but
also the convening of appropriate stakeholder groups to ensure an integrated
approach providing clear signals to emerging country partners. But formal
written strategies which are not implemented effectively are much less use
than dynamic and active coalitions of local interests interacting effectively
amongst themselves and with emerging country partners.
Another arena for integrated response is in regional and all-Africa organizations for example such as SADC, ECOWAS, NEPAD, and the AU. These
multi-country organizations are important for three major and related
Raphael Kaplinsky and Mike Morris 321
reasons. First, by aggregating African countries in the bargaining process,
they help to avoid contradictory bargaining positions and wars of incentives.
As has been evident for many decades in the diamonds sector, there is enormous power in cartelized bargaining. This is not just a matter of achieving
the best price for SSA’s resources, but also of ensuring that wider objectives
can be met, such as the construction of regional infrastructural networks to
provide access for non-commodity exporters. Second, and related to this, as
observed earlier, not all SSA countries have extensive commodity deposits or
are significant commodity producers. Their interests need to be protected by
those economies which do have primary resources and markets of interest
to China and competitor investors. Including these marginalized economies
is not just a matter of altruism for the commodity exporters. Intra-regional
trade may be a primary area for the development of the capabilities which
are required for long-term and sustainable growth. Hence it is in the interests
of all parties – commodity exporters and non-commodity exporters alike –
that these intra-regional links are strengthened as a consequence of engaging
with the emerging economies. A final reason why the multi-country organizations are important is that the emerging economies themselves see these as
important organizations for bargaining access to SSA’s resources and markets.
This is most evident in the case of the Forum for China African Cooperation
(FOCAC), but it is also relevant for other emerging economies as well.
In conclusion, although we have pointed to the distinctive character of
Chinese SOE-driven FDI in SSA, and the opening this creates to negotiating bi- and multi-lateral aid and economic assistance agreements with
China, this only addresses part of the problem. It is all very well undertaking
the necessary research, developing appropriate policy, and then negotiating advantageous technical agreements with China at either a country or
regional level. But the larger problem facing SSA governments is: how do
they ensure that such policy and strategies stick? The real issue is whether
SSA countries have the human resource capacity and institutional capability to design and negotiate these agreements effectively, and then (perhaps
more importantly) the political will and legitimacy to enforce, and gain
maximum advantage from them. We know from the new institutional economics that institutional governance matters, but this is the very area that
SSA faces the greatest challenges. Without this implementing capacity, the
agreements are likely to be notional, nothing more than granting strategic
advantage to China in its interaction with Africa and its global diplomatic
strategic initiatives under the cloak of a developmental agenda.
Acknowledgments
This chapter augments, with new data, an earlier version of this chapter
originally published in the European Journal of Development Research, Vol. 24,
No. 1, 2009. We are indebted to Masuma Farooki, Jeane Hefez, Julia
322
Chinese FDI in Africa
Tijaja, Anne Terheggen for their assistance in the compilation of much of
the data in this chapter.
Notes
1. For example, Broadman (2007); Kaplinsky and Messner (2008); World Development (2008); Review of African Political Economy Special issue (2008).
2. The most visible project was the Tanzam railway linking Zambia with Tanzania
in an attempt to free Central Africa from dependency on Apartheid South Africa’s
transport infrastructure.
3. This phase mirrors Chinese FDI in general: ‘The bulk of China’s FDI was made by
country’s (sic) state-owned enterprises (SOEs), in particularly those large multinational companies that were administered by the Central Government’s ministries
and agencies. The shares of FDI flows in 2003–2005 made by SOEs under the
Central Government were 73.5%, 82.3%, and 83.2%, respectively. Their shares
of FDI stocks by the end of 2004 and 2005 were 85.5% and 83.7%, respectively’
(Cheng & Ma, 2007, pp. 9–10).
4. The African Growth and Opportunities Act, AGOA, provides preferential market
access to qualifying African firms in the US market. SSA economies which are
in the ‘Least Developed’ category benefit from additional preferences of relaxed
rules of entry in the clothing sector.
5. http://www.moneymorning.com/2007/12/04/china-drills-into-africa-with-54billion-investment/. This investment has two objectives – to gain experience in
global banking and to use the Standard Bank’s independent status and financial
reputation to facilitate Chinese FDI in other sectors.
6. These were Angola, Cameroon, Congo, Ethiopia, Ghana, Kenya, Madagascar,
Mali, Mauritius, Nigeria, South Africa, Sudan, Uganda, and Zambia.
7. UNIDO (2007) and Henley et al. (2009).
8. This compares with the UNCTAD estimate of 700 firms in total (see above).
Brautignam cites sources which suggest that around 700 of these are small-scale
firms run by individuals and not incorporated in China.
9. Private communication, Chris Burke.
10. The latter half of 2008 saw a dramatic fall in the prices of many commodities,
prompting some observers to conclude that, at best, the post-2001 rise in commodity prices represented a super-cycle rather than a structural break in the terms
of trade. However, this fall in commodity prices reflects the implosion of the
financial sector. Just as the very large price upswing of 2006–2008 in part resulted
from speculation in commodities by hedge funds, the very large fall in prices
in late 2008 and early 2009 represented an accentuated downswing as, in the
search for liquidity, hedge funds unwound their speculative bets on commodities. The underlying fundamentals driving the demand for commodities suggest
that the long-term structural break in the terms of trade will be sustained, albeit at
a less extreme pace than in the super-cycle boom of 2006–2008 (UNCTAD, 2006;
Farooki, 2010; Kaplinsky, 2009).
11. Various codes of conduct such as those governing labor and environmental standards and financial transparency affect the operations of northern investors in
SSA. In the clothing sector, one of the reasons why US buyers were reluctant to
completely switch sourcing from SSA to China after the MFA quota removal in
2005 was that SSA producers had much higher labor standards and these were
important in certain US niche markets (Kaplinsky & Morris, 2008).
Raphael Kaplinsky and Mike Morris 323
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Part V
Cases of Chinese FDI
15
The Case of Florida Splendid China
Wenxian Zhang
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.
Opened in November 1989 with an admission price of approximately
US$11, the original Splendid China was an immediate success in Southern China, attracting more than 3.5 million visitors in its first year and
recouping its entire original investment. In November 1991, Ma opened the
Chinese Folk Culture Villages nearby, where visitors could tour replicas of
21 villages representing 24 of China’s 56 nationalities, including Mien, Yao,
Hmong, Uyghurs, Bai, Mongols, and Tibetans. Shortly afterward, a 119-acre
park, the Window of the World, was built beside Splendid China, featuring
models of 118 famous world sites, including the Eiffel Tower, the Egyptian
pyramids, and the Kremlin. The cluster of theme parks made Shenzhen a
top tourist attraction in China. In 1992, Deng Xiaoping, the 88-year-old
Chinese leader, toured Splendid China in a golf cart, further enhancing the
park’s prestige (Magagnini, 1993). It was during this trip to Southern China
329
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Cases of Chinese FDI
that Deng made his famous speech advocating the acceleration of China’s
privatization effort following the economic collapse of Communism in the
former Soviet Union.
Under Deng, acquiring wealth became a positive goal in the reform era,
and Splendid China served as a shining example. Its huge success made
CTS leaders very confident and eager for business expansion. It was within
this framework that FSC was conceptualized. The new business venture,
according to The Economist (1994), signaled China’s headlong plunge into
western-style capitalism.
1. Theme park design and construction
1.1. Conception of the Florida Splendid China
Frank and Josephine Chen, who migrated to the United States in 1968, built
their fortune through real estate development. During a 1986 trip to Central
Florida, they bought a barren strip of 560 acres located off US Highway 192,
just west of Disney World. After visiting the original Splendid China, they
began to consider a similar park in Florida. For them, FSC would be the centerpiece of a larger development project to include 500 single-family houses
with a price range of US$100,000 to US$250,000, 240 condominium apartments, 1400 hotel and motel rooms, 900 restaurant seats, and more than
300,000 square feet of shopping space (Jacobson, 1991).
The proposed FSC was a 50–50 joint venture between CTS and Chen’s family business, the Florida-based American Eastern International (AEI), with a
total investment that eventually reached over US$100 million. Under the
agreement, AEI provided the land and management services, while CTS
supplied the building materials, the architects, and the personnel. In the
venture’s first public announcement on August 21, 1991, George Chen, a
computer dealer and Los Angeles businessman recruited by his parents to
run the project, outlined a 76-acre theme park that would attract tourists
from Asia as well as school groups and Disney visitors in search of something different. ‘We think it’s going to be unique enough that it’s going to be
a complement to Disney or Sea World,’ noted Chen, ‘It’s a static park rather
than a dynamic park. It’s a pensive, walk-through kind of thing’ (Jacobson,
1991). Though refusing to estimate the cost of the project, he valued the
replicas alone at US$40 million.
Citing reports from marketing consultants, Chen was confident in the
success of the new park. Optimism for FSC rested on the success of similar attractions that featured miniatures of famous shrines or cultural icons.
Miniature parks in Europe, for example, drew approximately one million
visitors annually. Market studies of similar sites convinced the partners
that the new attraction would be successful in Orlando. ‘We could make
every mistake in the books and still come out ahead,’ predicted Chen
(Jacobson, 1991). In addition to American tourists, he expected the park to
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attract Chinese visitors through CTS-arranged charter tours. Chen hoped the
project would divert some Chinese travelers from their primary US destinations of New York, Los Angeles, and San Francisco and bring them to Central
Florida (Murphy, 1992).
The competition for tourist time in Central Florida has always been fierce,
and industry analysts believe that the toughest market to crack may not be
the top tier of theme parks, such as Disney World and Sea World, but the secondary market. While the largest parks compete for visitors from around the
world, the smaller, less expensive attractions pursue the ‘leftovers’, tourists
who come for Disney but have a few spare hours afterward. According to a
market expert, a new theme park ‘will have to be unique. It must be so different, so appealing and set at such a price that people will have to say, “I’ve just
got to get over there to see what this is all about” ’ (Vaughan, 1991). Despite
studies indicating that the region had reached its limit, the partners believed
a well-financed and well-executed park, one they could afford to keep operating through the usually tough first years, could succeed. Although a small
British-themed park named Little England failed to materialize fully in the
early 1980s, Chen and CTS remained confident that the variety of tourists
visiting Orlando annually made Central Florida an ideal location for their
planned attraction.
1.2. Park design
Intended as both a tourist attraction and an advertisement for travel to
the real China, its developers conceived FSC as an ‘outdoor educational
museum’ (Strother, 1991). Visitors to the attraction would have the experience of a National Geographic tour of China. ‘It is a journey to China,
similar to Gulliver’s Travels to Lilliput. We want the visitor to discover and
experience the history, culture and customs of China, which date back 5,000
years’ (Flores, 1993a). Unlike Disney World and other attractions designed
for entertainment and family fun, FSC would use culture and history as its
key themes. From the outset, the partners clearly understood that the new
park would be ‘somewhat more passive and reflective compared to Walt
Disney World, leaping dolphins, performing whales, thrill rides and fireworks in the sky’ (Magagnini, 1993). But as Chen explained: ‘If you want to
do an attraction at the doorstep of Disney, you need to complement them,
not compete with them. We hope to appeal to some of the families that go
to Disney’ (Strother, 1991).
In designing the park, AEI and CTS wanted to give visitors a genuine experience of China, and planned to populate the park with Chinese entertainers,
acrobats, Mongolian wrestlers, and martial arts experts. In response to the
dark images associated with the 1989 suppression of student demonstrations in China, the project sought to cast China in a more favorable light
and ‘show off some of the positive things of China culture’ (Flores, 1993a).
The park would serve as a showcase for Chinese culture, a microcosm of
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Cases of Chinese FDI
Figure 15.1
Florida Splendid China’s miniature replica of the Forbidden City
the real China, reflecting the country’s ancient history, cultural heritage,
scenic wonders, diverse lifestyles, and artistic and architectural accomplishments. Unexpectedly, this public relations rationale generated substantial
controversy and made people question the justification for the park and
the ownership of the company. Although critics denounced CTS as a
government-funded travel agency, the general manager insisted that his
company was a private entity which brought its own funds to the project.
He asserted that the only Chinese government support came in the form of
necessary permission to create replicas of sites such as the Forbidden City
and Tibet’s Potala Palace (Agence France Presse, 1993).
On December 18, 1991, a number of state officials attended the groundbreaking ceremony. Grey Farmer, Florida Secretary of Commerce, declared
that the project represented the largest Chinese investment in the state
(Strother, 1991). Barry Kenney, Florida’s Director of Tourism, believed the
park would foster better relations between the United States and China, and
possibly lure more investment from other Asian countries (Tin & Strother,
1993). With this optimistic outlook for a bright future, construction began
in earnest in 1992.
1.3. Construction
Constructing FSC proved to be a unique experience that exposed Americans
to the Asian work ethic and introduced Chinese workers to American
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333
culture. Some 120 Chinese artists were recruited to the United States to
work on the exhibits. To fulfill the requirement of both governments, each
had to file a stack of immigration documents. No women were included,
and most men were masters in their artistic fields, including calligraphy,
painting, stone carving, bonsai sculpting, and pottery.
Each day began right after breakfast. The Chinese artisans worked until
noon and went back to their dormitory for lunch and a nap until 2:30,
then returned to work until 6:30 or 7 p.m. (Langley, 1993). Although their
work style seemed unconventional to Americans, they convincingly proved
their effectiveness. When they started work on the Great Wall exhibit,
American contractors projected a 12-month construction period. But it took
the workers only seven months to finish the project. Paid at the American
union wage, they lived on-site in a customized, air-conditioned trailer park
until work was completed. To ensure productivity and lessen homesickness,
two chefs from China prepared meals, and the recreation area featured a
television, VCR, and a wide assortment of Chinese videos that included
everything from music to soap operas. The rooms were equipped with bunk
beds for two, four, and six men; George Chen occupied one of the beds. He
also bought each worker an annual pass to Disney, and trips to the Magic
Kingdom, Epcot Center, and Disney-MGM Studios were frequent.
Every Chinese province would be represented in the meticulously
designed Florida park. Leading exhibits included the Great Wall, comprising
6.5 million one-by-two-inch bricks, one-sixteenth the original size; and a
full-size reproduction of a street scene in Suzhou, a city known as the Venice
of the East. Much of the construction and tens of thousands of figurines were
built on a scale of 1 to 15 – everything was handcrafted, carefully detailed
and sculpted by Chinese artists. Reporters visiting the construction site frequently were astounded by the craftsmanship and the marvelous attention
to detail that was given to the tiny structures. The workmanship was so
exacting, and the colors so enticing, that one easily became absorbed in the
construction. As Chen explained:
We are using individually glazed, kiln-fired tiles, teakwood, gold leaf,
granite; some of the carvings are done under magnifying glass. The
domino-sized bricks are terra cotta. We even imported stones from
Lake Taihu, which are very valuable. We want to capture the sense of
excitement and feeling of Marco Polo’s journey to China. (Flores, 1993a)
Since authenticity was the trademark of the park, and great emphasis was
placed on construction details, the escalating project budget became a
frustrating issue for developers. Chen later reflected:
When we undertook this project, we were under the impression that our
total budget would be about $12 million. Of course, we knew there would
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Cases of Chinese FDI
be overruns, and we expected to as much as double that figure. The red
flags began waving when the figure reach $50 million, and we are now
exceeding $100 million. I only wish I had enough money for all the bottomless holes and unending stream of wants and needs. I am responsible
not only to my family but also to my partners in China. (Langley, 1993)
A year into construction, the owners were persuaded to invest another
US$20 million to make the attraction more exciting. Several new features
were designed to enhance the overall experience. A 150-seat movie theater
was constructed near the entrance to introduce visitors to China’s history in
preparation for their journey through the miniatures. A 1000-seat amphitheater offered live shows, including Mongolian wrestling, kungfu demonstrations, and dance performances. Shortly before the park opened for business,
two additional investments were made: an adjacent tract of 26 acres was
purchased for US$3.9 million, and the nearby Days Inn with 365 rooms was
acquired for US$8.1 million (Tin, 1993a). The goal was to offer tour packages
that would include accommodations, recreation, and admission.
During construction, a number of problems arose between the partners
and between CTS and federal authorities. It became increasingly apparent
Figure 15.2 The Great Wall at Florida Splendid China, which was constructed brick
by brick by Chinese craftsmen, comprising 6.5 million one- and two-inch bricks, 16th
of the original size. The dragonfly on top of the stick in the foreground provides a
sense of the scale of the structure
Wenxian Zhang
335
that CTS and the Chens differed in their perceptions of the park’s goals,
and rumors circulated that negotiations were underway for CTS to buy out
the Chen family interests. At the same time, although state and local governments had approved the project, the Federal Bureau of Investigation
remained concerned that some of the laborers might have been tapped
by the Chinese intelligence services to spy on the nearby Cape Canaveral
military base and the Kennedy Space Center. An unscheduled, midnight
inspection was conducted to ensure that large containers imported from
China did not contain high-tech equipment.
1.4. Preparation for the opening
Despite those troubling signs, the project moved forward. The park planned
to employ between 300 and 400 people. Half would be Chinese entertainers, tour guides, chefs, and artisans. In the end, the attraction brought 550
jobs to the local economy, 250 of which were part-time. Four hundred jobs
were held by Central Floridians and 150 were Chinese entertainers and crafts
specialists. Once construction began in December 1991, nearly 2000 local
contractors, surveyors, landscape architects, electricians, and rock sculptors
were hired to work on the project, with half of the US$100 million investment spent on labor. By the first year of operation, FSC had become a top
taxpayer in Osceola County (Tin, 1993b).
As construction wound down, management focused on the park’s ability
to attract ‘educated’ tourists, people who would most appreciate the park’s
offerings. In November 1993, FSC kicked off its US$500,000 introductory
campaign with a motorized billboard (AD Week, 1993). The marketing campaign included television, radio, newspaper, and magazine coverage and a
bus painted in Splendid China graphics. While an elaborate strategy targeting potential visitors from Europe, South America, Japan, and other
countries, Chen’s original estimate of three million visitors a year already
seemed overly optimistic. Six months before the opening, projected attendance was revised to about one million in the first year (Flores, 1993a).
On the eve of the opening, Ma Zhimin, FSC chairman, still expressed confidence in the future of the attraction, citing the large numbers of American,
European, and Latin American tourists who visited the state annually. He
hoped that the park’s miniature sights would persuade more people to visit
China to experience the real thing. Despite such public expressions of optimism, by opening day the projected target for the first year of operation had
been revised downward to 500,000–750,000 visitors (Schnedler, 1993).
A final challenge was to set an appropriate price structure for admission.
The original suggested price was one-half to one-third of the Disney admission, which would place FSC in the US$11–$16.50 range. However, with
mounting project deficits, and after some deliberation, the price was set
at US$23.55 for adults and US$13.90 for children under 13 years of age.
In addition, there was a charge of US$5 per person for a guided walking tour,
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Cases of Chinese FDI
and US$9 for a tour by golf cart. Since the 76-acre park was packaged as a
half-day attraction, some observers raised eyebrows over what they viewed
as a full-day theme park price. Market experts also warned that the miniature recreations of Chinese landmarks provided a more passive experience
than many vacationers were prepared for, and park managers would have
to contend with a basic lack of American understanding of Chinese culture.
Nonetheless, the partners remained convinced that the park would draw
crowds of ‘educated’ travelers more likely to appreciate the ‘beauty that’s all
its own’. When FSC finally opened its doors, Orlando Sentinel dubbed the
region’s newest theme park ‘a $100 million gamble’ (Tin & Strother, 1993).
2. Management and operation
2.1. Opening of the park
On Saturday, December 18, 1993, hundreds of public officials, local dignitaries, and special guests attended the grand opening ceremony. Through his
emissary, Charles Wright, Governor Lawton Chiles proclaimed December 18
Splendid China Day. Former US President Richard Nixon, Governor Chiles,
Nobel laureates C. N. Yang, T. D. Lee, and C. C. Ting, former Secretary
Alexander Haig, US Representatives John Mica and Bill McCollum, and
Orlando Mayor Glenda Hood served on the honorary opening day committee. Chinese President Jiang Zemin, former President Yan Shangkun,
Figure 15.3
Entrance to Florida Splendid China on US Highway 192
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337
Premier Li Peng, and Chinese Ambassador Li Daoyu sent their congratulatory remarks. Vice Premier and Foreign Minister Qian Qichen and three
other Chinese officials attended the ceremony. President Jiang’s invitation,
‘Let the world learn about China’ was chosen as the park’s mission statement. Qian Weichang, vice chairman of the PRC Political Consultative
Conference, commented on the occasion:
Chinese culture does not only belong to the Chinese people, it is the
common wealth of people of the world. An opening China needs to
know more about the rest of the world, and the world needs to know
more about China as well. The Splendid China Theme Park, reflecting the
characteristics of Chinese culture and ideology, can serve as window of
Chinese history and culture. (Ming, 1993)
On the following day when FSC officially opened for business, more than
3000 tourists flocked to the new attraction (Tin, 1993c). Across the country,
newspapers praised the new park. The Chicago Sun Times commented: ‘There
are no rides and no glitz, but there is a marvelous immersion in Chinese culture and history, including performances by 165 of China’s top entertainers’
(Dunlop, 1994). The Houston Chronicle noted: ‘Strictly from a visitor’s standpoint, Splendid China is a remarkable achievement . . . Attention to detail is
mind-boggling . . . Throughout its 76 acres, the facility is awash with color
and beauty’ (Shattuck, 1994). The New Orleans Times Picayune called the
attraction an ‘exquisite, monumental work’ (Ball, 1995). The Tampa Tribune
enthused, ‘Walking among even miniature replicas of Chinese landmarks,
one begins to feel a figure in a Chinese painting – a tiny part of an expansive
space, a pinpoint in a timeline 5,000 years long’ (Rupert, 1994). One reporter
noted:
from an artistic point of view, much of Splendid China is so good it really
doesn’t belong here. There are no rides, no light shows, no water slides,
no monsters, and no trips to outer space at this park. You’re supposed
to walk through it quietly and admire it. Set against all the other thundering tourist attractions of Central Florida, Splendid China shines like a
small jeweled Faberge Easter egg in the middle of Jurassic Park. (Browning,
1993)
Complaints about the malfunctioning sound system, cold food, and too few
activities for children were lost in the amazement that characterized the
impressions of most visitors.
Amid the enthusiasm, one news release caught the attention of the
tourist industry. Two weeks after being recognized as a ‘mover and shaker’
in Central Florida, George Chen abruptly sold his half interest for US$26
million to CTS (Tin, 1994a). On January 15, 1994, an announcement cited
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Cases of Chinese FDI
philosophical differences over how to run the attraction as the cause of the
split that left CTS the sole owner of FSC. Two years later, Chen reflected on
the experience of dealing with his Chinese partners: ‘We were banging heads
a year before we opened. We already felt that the bureaucracy was overwhelming. It was a tremendously frustrating experience’ (Shenot, 1996a).
According to Chen, their differences existed in almost every area, from CTS
reluctance to bid out certain construction projects to Chinese views on marketing, including the rejection of his proposal to put a shop in the Orlando
International Airport. Unable to reconcile his entrepreneurial instincts with
the slow, bureaucratic approach of his Chinese partners, Chen bailed out
days after the park opened for business.
2.2. First few years
The split notwithstanding, the new attraction continued operation. The park
was promoted as an opportunity to witness the beauty and complexity of
China’s culture and art at a leisurely pace in an easily accessible location, and
management aimed to break even in the first year. To boost attendance, FSC
eagerly offered discounts. A half-price special was offered to all visitors during the opening week, and in spring 1994, Florida residents who purchased a
full-price ticket gained unlimited return visits through Memorial Day. After
weeks of trial operation, CTS claimed that business had been good: weekday
attendance averaged 1000 visitors per day, and as many as 2500 on weekends (Gavin, 1994). However, by the end of the first year, managers admitted
publicly that the attraction had not met its 1994 goals. FSC President Zhang
Yuanxing noted: ‘While we had disappointments in the number of guests we
welcomed, we take comfort in knowing that we shared this disappointment
with every other attraction in Central Florida, due to an extremely depressed
tourism year’ (Krueger, 1994).
FSC’s problems began at the top. Although several Americans served on
the Board of Directors and held many administrative positions, the chairman and general manager were Chinese. The president had no background
in tourism and spoke very little English. While meticulous attention to
detail characterized the construction of the project, management failed to
understand what it would take to lure Americans into the theme park. CTS
stuck to its successful Shenzhen Splendid China blueprint and ignored the
fact that the passive experience of a walk-through outdoor museum park
had limited appeal to Central Florida tourists. Moreover, CTS resisted the
flashy, in-your-face advertising and promotions that dominated tourism
in Orlando, considering those tactics undignified. One market advisor
observed: ‘They hired the wrong kind of top executives, and they refused
to listen to the consultants’ advice after they opened’ (Shenot, 1996a).
Although the attraction became known as a quiet park where visitors
could stroll leisurely and enjoy the scenery, management acknowledged
that ‘the entertainment is our biggest draw. We needed more places for
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339
performances’ (Doolittle, 1994a). Recognizing the need for more live entertainment, CTS approved an additional investment of US$3 million to build
a new theater and replace folk dancers with acrobats, jugglers, and martial
artists. In 1995, the park opened its US$2 million Golden Peacock Theater
and in connection with the Chinese New Year celebration, the attraction
extended operating hours, offered new discounts, and gave away a grand
prize of a trip for two to China (Business Wire, 1995).
CTS also made some administrative and marketing changes. Yu Jiannian,
a Harvard-educated executive with a background in tourism, was appointed
the new president, and Bob Morgan, a marketing veteran with 20 years of
experience in theme parks, was named marketing director. As a result, new
public relations campaigns were launched to broaden FSC’s appeal beyond
its niche of older, more educated, and affluent visitors. Fresh advertisements
targeted the mainstream family market of Central Florida. Among other
enticements, FSC offered a holiday two-for-one admission with a Sprite®
coupon; negotiated a marketing alliance with Coca-cola® and Tsing Tao
Beer; and offered discounts for events such as lunar new year celebration
and kite festival. FSC sponsored many martial arts and karate competitions,
and managers made an effort to enhance the appeal for youth groups,
conventioneers, and senior citizens (Diaz, 1994). Advertisements promoting ‘Splendid China Learning Adventures’ appeared across the state, and
consequently business increased 15 percent (Shenot, 1996b). Although management stabilized, and the park seemed to be headed in the right direction,
the fundamental problem of a mismatch between what FSC offered and what
tourists looked for when they came to Orlando remained.
To the surprise of the park managers, food service also presented a problem. Although FSC made genuine efforts to bring authentic cuisine to
Central Florida, Americans were apparently not ready for exotic Chinese
dishes; initial responses were lukewarm at best. Jellyfish was compared with
shredded plastic by a restaurant critic, who also complained that the whole,
boned grouper tasted as if it had arrived on a slow boat from Asia. Roast
duck was greasy and fatty, squid snapped back, Mongolian beef was salty,
and the vegetables in Buddha’s delight were soggy and flavorless (Joseph,
1994; Orlando Sentinel, 1994). As the attraction continued to struggle, food
services further deteriorated. In 1998, one journalist sniped: ‘If the restaurant I ate at served authentic Chinese food, then I feel sorry for the billion
Chinese who eat this stuff every day’ (Thomas, 1998).
In spite of early problems, CTS remained committed to the Central Florida
tourism market. On May 5, 1994, it was reported that CTS had paid a record
US$15 million in a cash transaction to add 274 acres to its land holdings for
future development in conjunction with FSC. The price tag of US$54,700 per
acre was the highest price paid on a tract that size in the history of Osceola
County (Tin, 1994b). Although attendance figures lagged, park officials confidently entertained a number of ambitious proposals for expansion. One
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Cases of Chinese FDI
proposal added a luxury hotel, which would offer its customers tour packages to Florida and FSC; another idea proposed an Asian trade center, which
would feature an exhibit hall and office complex for Asian and Western companies engaged in East-West trade (Doolittle, 1994b). Upon completion, with
500,000 square feet of space, 200 showrooms, and 400 exhibition booths,
the proposed $50 million trade center would be nearly one-and-one-half
times the size of the Orlando Arena and would mark over US$200 million of
total investment by CTS in the Central Florida economy (Tin, 1994c).
In 1996, CTS presented a modified proposal to state and county officials.
The master plan included an Asian Trade Center with one million square feet
of space, plus a 75,000 square-foot culture village as a natural extension of
the park, and a 70,000 square-foot Hong Kong Village mixing shops, restaurants, and entertainment. In addition, the plan called for the construction of
100 villas, 360 single family time-share units, and hotels with a total of 1000
rooms (Sargent, 1996). As late as 1997, CTS remained enthusiastic about its
20-year massive expansion plan for Central Florida (Orlando Sentinel, 1997a).
Nevertheless, an official cautioned: ‘We need to walk before we run’, noting
that future development would be monitored carefully as the needs of the
existing park changed (Sargent, 1997).
Disney Chairman Michael Eisner was among the high-profile visitors to
FSC. In August 1996 when Eisner and his top executives toured the neighboring Chinese park, rumors spread that Disney wanted to acquire a panda
for its Animal Kingdom and sought CTS assistance with the Chinese government. Another rumor speculated that Disney wanted to collaborate with
CTS in the development of a theme park in China. Some even claimed that
Disney was considering the purchase of FSC at whatever the asking price
in order to ease relations with China that had been damaged by a Disney
movie about the Dalai Lama (Dillon, 1996). Although these rumors proved
to be groundless, the theme underlying the gossip was the public perception
of close business ties between CTS and the Chinese government.
2.3. FSC under Sunny Yang
In the same year, FSC underwent sudden changes. President Yu Jiannian
returned to Hong Kong along with Vice President Wu Xian and General
Manager Ma Qimou. Yang Guang (Sunny) was named the new president for
the park, the Gateway Tours that owned Days Inn, and CTS Investments
(USA), the development company that held the 400-acre expansion area
adjacent to FSC (Doolittle, 1996). The move was seen as a step to reduce
bureaucracy and consolidate the decision-making process. To further trim
operating expenses, Yang fired the park’s comptroller and director of administration, who disagreed with management changes, and cut the marketing
staff from 12 to 7 (Spitz, 1996a). Moreover, in order to give the park more
exposure in the competitive market, hours were extended to 11 p.m., and the
Wenxian Zhang
341
front courtyard, renamed Chinatown, was designated an area where visitors
could shop, dine, and watch performances without paying admission fees
(Shenot, 1996c). However, after five months and US$400,000 in advertising,
FSC reconsidered since the promotion only attracted people to the free area
staffed by independent vendors.
Recognizing the need to break into the region’s lucrative family market,
management added animal shows and miniature cities carved out of ice to
attract children and families (Spitz, 1996b). In addition, FSC teamed up with
Cypress Gardens, Fantasy of Flight, and Bok Tower to offer a new multi-pass
for AAA members (Sargent, 1997). When the park partnered with Tiger’s Eye
Productions in Oviedo, Florida, to present exotic animals, including lions,
tigers, leopards, and pythons, the admission price was raised for the first
time in FSC history to US$28.88 per adult (Orlando Sentinel, 1997b). With a
renewed concentration on entertainment, good Chinese food, and a ‘very
relaxed cultural experience’, the price covered park admission, a refurbished
show, and dinner. Visitors could pay a reduced price of only US$16 for dinner
and show.
Despite the changes, by 1998, attendance showed no substantial improvement, and FSC continued to lose money. Tampa Tribune called the attraction
a dose of tranquility, a place of serene reflection, or a meditation garden;
sporadic visitors felt it was a peaceful place to see (Morgan, 1999); Orlando
Business Journal described FSC as a ‘ghost town’ (Mervine, 2002); a journalist
called it ‘Central Florida’s forgotten theme park’ (Thomas, 1998), the sarcastic columnist felt the attraction was either too real or too fake, claiming to
be an everyman as shallow as one of the miniature ponds, he would rather
be blown away by ‘Twister’ than visit Splendid China. The situation further deteriorated in 1999 as attendance dropped to a few hundred patrons
per day. FSC was reportedly losing US$9 million annually, although management insisted it was ‘very close to breaking even’ (Far Eastern Economic
Review, 1999). A year later there was still no upturn in sight. Daily attendance dropped to 200 per day, mostly senior citizens, and even a drop in
admission prices failed to improve matters.
2.4. Struggles for survival
With 160 full-time staff on payroll and more than half of its multi-milliondollar investment loan still outstanding to the Bank of China, FSC was
rumored to be up for sale. In May 2000, Massachusetts-based Brookhill LLC
struck an agreement for FSC at a bargain price of US$56.5 million. However
the deal quickly fell through when word of the sale and the possibility that
the park would be razed for housing sparked angry protest among Chinese in
both China and the United States (Byrd, 2000a, 2000b). FSC’s top executive,
Yang Guang, was summoned back to China and mysteriously disappeared,
reportedly under house arrest for mismanaging the park’s finances (Byrd,
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Cases of Chinese FDI
2000c, 2001). Although some insiders claimed that he spent park proceeds
on himself rather than on maintenance, others believed Yang was a scapegoat for his bosses’ business mistakes. Around the time Yang was negotiating
to sell the park, the CTS chairman in Hong Kong came under investigation
by Beijing and was quickly replaced. Disgruntled by the chaos, Brookhill
sued to force the sale. However, the suit stalled in the Osceola Circuit Court
as the company’s attorney could not get Yang back to the United States for
deposition (Barnett, 2001).
Following the aborted sale, CTS renewed its commitment to FSC. Cao
Xiaoning, vice president of entertainment at Shenzhen Splendid China, was
appointed president and CEO of FSC (Byrd, 2001). Cao, a ballet dancer who
eventually moved into choreography and management, determined to turn
the troubled park around. With a reduced staff of 90 employees, the workaholic chief ordered everyone to perform maintenance duties in addition to
their job requirements; employees from performers to managers, including
the CEO, were assigned sections of the park for ground keeping duties.
Cao planned to convert FSC into a show-based attraction with a US$2
million upgrade and sponsor a series of events, including the reunion of former US diplomats to China, a gathering of American families with adopted
Chinese children, and international martial arts festivals. FSC also sent performance groups to other parts of the country to promote Chinese culture
Figure 15.4 Trolley ride at Florida Splendid China. Note the few patrons, an
indication of poor attendance
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343
and the Florida attraction (McCoy, 2001). With the renewed effort, attendance gradually rose from fewer than 100 per day to a daily average of 300,
an improvement but still some distance away from the break-even point of
500 (Barnett, 2001). A year later, Cao was replaced by Lin Bochun, former
managing deputy general of CTS (Miller, 2001).
The effect of frequent changes in management and direction and the low
morale among employees that accompanied poor attendance were evident
in the physical landscape. Peeling paint gave some replicas a shabby appearance, and dozens of figurines were broken or toppled over. Grass pushed
through cracks in the sidewalks, and many of the kiosks had been abandoned. The few remaining staff members congregated around the entrance
and talked to one another (Lee, 2002a). The attraction was so shoddily
managed that one reporter described his disappointing visit to the park in
stark terms: ‘These potentially magical reproductions are as one-dimensional
as the park’s poorly written guidebook’ (Lee, 2002b). Clearly, the management problems had become so severe, it was unlikely anyone could save the
doomed attraction.
3. Controversaries and protests
3.1. Early controversy regarding the Tibetan display
Like any business, tourism is not immune to controversy. Columbus Day celebrations have been criticized for years by Native Americans, and Florida’s
Sea World is called an ‘abusement park’ by People for the Ethical Treatment of Animals (PETA). Years ago, when Disney announced its intention
to build a new American history theme park in Virginia, cultural historians expressed their concerns about what they perceived as the ‘cleaning
up’ of historical facts. Likewise, it was debatable whether Chinese history
should be presented as theme park material, and controversy materialized
in the opening days of the attraction. Despite a considerable number of
studies and extensive preparation, no one anticipated the controversy that
emerged over FSC’s rendering of the Potala Palace, the official residence of
the Dalai Lama. Furious over the exhibit, the Washington, D.C.-based International Campaign for Tibet claimed that FSC had whitewashed history and
demanded removal of the replica (Constantine, 1993; International Campaign for Tibet, 1993). FSC management refused, insisting that the park
was not constructed to make a political statement but to promote cultural
understanding. Unappeased, the Tibetan group proceeded with its planned
opening day protest, labeling FSC part of a Communist plot.
On Sunday, December 19, 1993, several Buddhist monks staged a demonstration outside FSC, holding signs reading ‘End Chinese Genocide in Tibet!’
and ‘No Communism in Kissimmee!’ Four monks paid admission and quietly walked through the park to the Potala Palace, where they stood in
silent prayer and wept. The protestors became an attraction themselves as
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Cases of Chinese FDI
a throng of reporters and photographers followed them past the exhibits
(Bakkalapulo, 1993; Griffin, 1993a). A spokesman later commented: ‘We feel
the inclusion of the Potala Palace hides the atrocities the Chinese have
committed in Tibet. We feel it is a false attempt to beautify something that
is totally ugly’ (Browning, 1993). From the perspective of the demonstrators, FSC was nothing more than a propaganda device that used fantasy
and entertainment to improve China’s image. According to the protestors,
patronizing the re-creation of China’s past would subsidize the Communist
regime: ‘We would hope that the state of Florida would not spend taxpayers’
money to indoctrinate American schoolchildren with what is essentially a
propagandized view of Chinese history’ (Browning, 1993).
Although the number of demonstrators was small, the controversy and
protest received widespread media coverage and some heated responses.
One reader expressed her ‘great sense of loss at seeing the Potala Palace
in a place called ‘Splendid China” ’ (Hodges, 1993). Another person angrily
commented:
While I understand China’s desire to promote tourism, I find it hard to
believe that Orlando is allowing itself to be part of China’s ploy to legitimize its invasion of Tibet. . . . It’s as if Saddam opened a park to promote
Iraqi tourism and included Kuwait as one of its provinces. (Meikie, 1993)
A local resident wrote: ‘Though China may indeed be beautiful, its splendor
is stained with the blood-red blotches of the massacres of its sons and daughters. Somehow I doubt that is of focus in this theme park. I guess Orlando
really is fantasia’ (Musselle, 1993). While the Miami Herald (1993) dubbed the
attraction the ‘torturers theme park’, the Economist (1994) described the controversy as ‘Chinese Culture: Prettified’. The widely publicized controversy
attracted supporters from all walks of life. Adam Yauch, of the rock group
Beastie Boys, spoke against FSC at his performances (Bankston, 1995). One
16-year-old student asked: ‘Why should Florida schools send students to see
Chinese propaganda?’ (Churchward, 1993). A Clearwater teacher petitioned
the school board to ban field trips to FSC (St. Petersburg Times, 1995). The son
of a Flying Tigers pilot argued, ‘The Potala Palace of Splendid China is a gory
trophy of war. It has no business on American soil’ (Baisden, 1993). Upset
by the ‘sanitized, doll-house version of China’, one columnist declared:
‘What they need here is Tiananmen Square – miniature tanks squashing little
ceramic students’ (Thomas, 1998).
3.2. Other issues and organized protests
In addition to the Tibetan protest, some Mongols and Mongolian Americans
also resented their culture being presented as a Chinese tourist attraction
(Griffin, 1993b). Next to Genghis Khan’s mausoleum exhibit, porcelain figurines showed a Mongolian wedding ceremony and a jousting tournament.
Wenxian Zhang
345
All together, some 20 ethnic and religious minorities from Mongols to
Muslims were represented in FSC. Human rights groups charged that
the park portrayed a false picture of social harmony and contentment
among China’s persecuted religious and ethnic minorities. A spokesperson
remarked: ‘It’s an outrage that they would use religion and minorities in a
theme park to entertain Americans, when in fact they are destroying these
groups in China’ (Rohter, 1994). Protesters claimed the park was not placed
in attention-rich Florida simply to make money; it was a political statement. In addition to their opposition to several replicas featured in the park,
human rights groups also voiced their displeasure over the apparent role of
the Chinese government in funding the attraction, claiming that CTS was a
‘quasi-government’ corporation, a viewpoint shared by some visitors (Booth,
1993; Ackerly, 1995; Schneider, 1999). Recognizing FSC as principally an
educational experience and acknowledging the unprofitable nature of operation, one visitor commented: ‘I don’t know who else besides the government
would sponsor this, because it’s obviously not a profitable enterprise. . . . You
wonder how long they can keep it up’ (Morgan, 1999).
Amid the mounting controversy, another concern was raised regarding
the treatment of 150 Chinese entertainers and artisans. An anonymous letter asserted that performers were ‘treated like animals’ (Central Florida Future,
1995), as several employees stated that their activities and ability to move
around freely after work were ‘regulated’. While management claimed park
employees lived in the company-owned Days Inn for convenience, some
believed the arrangements reflected a fear that workers might defect and
request political asylum (Rohter, 1994). In 1998, one group of protesters
reported that they had assisted several Chinese workers in their escape and
in securing political asylum (Clark, 1998). Three of them were identified
as former dancers from the Xinjiang Autonomous Region. Another report
asserted that as many as 42 Chinese employees had escaped from the park
(Timmerman, 1999).
Faced with criticism and protests, park managers insisted that FSC was
intended to generate tourism in China, and the attraction was not a political park. ‘There is a lack of understanding overseas of China,’ commented
Ma Zhimin, adding that he hoped FSC would be ‘a way for people of the
world to better understand China’ (Flores, 1993b). The FSC public relations
director stated: ‘To a certain extent, Florida Splendid China was a victim of
politics between China and the United States. Some people, unfortunately,
still have a cold war mentality – anything related to China is bad’ (Morgan,
1999). According to another park official, ‘The recent tensions between the
USA and China make the cultural exchange more important than ever. Both
the East and the West have advantages and disadvantages. The only way
the human race can go forward is to learn from each other. That’s what
Splendid China Florida is about’ (Barnett, 2001). CTS claimed the park was
designed to be neutral, and the Potala Palace was selected as one of the visual
346
Cases of Chinese FDI
highlights because of its architectural beauty and its historical and religious
significance.
While the debate raged in the press, various groups continued their
protests at the park. In March 1996, a crowd of Taiwanese Americans organized a demonstration outside FSC to protest China’s policy toward the
island (Associated Press, 1996; Jacobson, 1996). During this event five students from the Students for Free Tibet formed a human chain to block
the entrance and were arrested (Foushee, 1996). A year later, T. J. Norbu,
elder brother of the Dalai Lama, led another demonstration in front of
FSC, accusing China of flaunting its conquest of Tibet, Mongolia, and
eastern Turkestan. Fed up with the protests, management refused to respond
(Stratton, 1997). After China cracked down on the Falun Gong religious
movement, its practitioners also joined the picket line (Falun, 2002).
In time, the protesters became better organized. Among the groups regularly voicing their opposition to FSC, the Citizens against Communist
Chinese Propaganda (CACCP) stood out. Formerly the Citizens against Backyard Communism, the group was headed by Jack Churchward, a former
US Navy technician from Clearwater, Florida, who converted to Tibetan
Buddhism in the 1980s. Beginning in the mid-1990s, the CACCP set up
a web site, appealed to Florida school boards not to send schoolchildren
to FSC, and complained to the US Department of Justice that Splendid
China had not registered as an agent of a foreign government as required
by the Foreign Agents Registration Act of 1938. The group wrote to the management offering to suspend demonstrations in return for negotiations on
five contested exhibits. As the proposal went unanswered, CACCP routinely
organized protests on politically significant days, attracting approximately a
dozen people each time. Sometimes only two or three showed up, as happened on the 40th anniversary of the Tibetan conflict with the Chinese
government. Nevertheless, the protesters managed to keep their issues in
the media. CACCP centered its protest on the alleged false representations
fostered by FSC exhibits and deliberately avoided the promotion of hatred
or the advocacy of an anti-China position. The group used students, seniors,
and mothers with babies effectively to catch public attention and generate sympathy (Byrd, 1999). In addition to 50 demonstrations in a 10-year
period, the group videotaped statements in front of contested exhibits and
launched a letter-writing campaign. In the end, Churchward believed that
CACCP-sponsored protests ‘were the ultimate nail in the coffin that closed
Florida Splendid China’ (Churchward, 2004).
4. Final closure
Though protesters claimed responsibility, tourism analysts denounced their
claims and countered with depictions of culturally complacent American
Wenxian Zhang
347
vacationers: ‘Your typical visitor is not interested. Cultural curiosity would
completely compensate for any concern about oppressed people’ (Barnett,
2001). Instead, FSC fell victim to the erratically recovering tourism industry
in Central Florida, a situation exacerbated by management’s poor decisions.
Its demise ‘marked the latest in a Darwinian shakeout in Central Florida’s
tourism market, where only the biggest and strongest have survived two
years of stagnant growth since the Sept. 11 terrorist attacks’ (Schneider,
2004). By the time FSC closed on December 31, 2003, it had a skeleton crew
of 40 employees; half were performers who would return to China. The original $100 million investment was valued at only $12.8 million by the county
property appraiser (Pino, 2003).
On the last day of business, the park attracted approximately 750 visitors,
although attendance had dropped to fewer than 200 people per day before
the announcement (Blank, 2004). Some of the final visitors expressed their
sadness: ‘It’s a pity. It’s a big park, beautiful, but it’s a wasted investment,’ a
Delaware couple commented (Jackson & Hunt, 2003); a season-ticket holder
from Mount Dora stated: ‘I think a lot of people don’t even know it exists,
but once you see it, you can see how special it is’; another woman noted, ‘It’s
different than just entertainment here. You come away from here with a bigger understanding of history’ (Hunt, 2004). The spokesperson from the local
Convention and Visitors Bureau remarked: ‘Every trip there was a good one.
I enjoyed the opportunity to tell the media we had something of that culture here. It was a plus for us’ (Pino, 2003). A Vietnamese American observed:
‘In anything Asian, there is a part of us in there’ (Mariano, 2004a). A retired
Illinois couple described their experience:
We loved it more than Disney or Sea World. We are crushed that it is
closed . . . It was about the culture of China; there was no propaganda that
we saw. Most displays dealt with ancient China. We went away from the
park with a good feeling that was more about the Chinese people than
the government. (Cotner, 2004)
After China entered the World Trade Organization, CTS reportedly decided
to liquidate its non-core businesses, like FSC, and concentrate on its domestic market (Barnett, 2001). After searching for a year to find a suitable buyer
for the idle park, CTS put it on the auction block. By that time, a year of
neglect had taken its toll: bonsai trees were ragged, weeds had overgrown the
flower beds, algae clogged the peaceful ponds, and cracks marred the curving
tile roofs. In addition, three hurricanes had toppled trees in the gardens, and
thieves and vandals had trashed exhibits (Mariano, 2004b).
The final bargain sale was handled by Lakeland auctioneer Randy Kincaid,
whose company spent six weeks cataloging 40,000 items that many artisans
labored over two years to create (Mariano, 2004c). All the items, including
348
Cases of Chinese FDI
the replica of the Great Wall, were sold within three days, and successful bidders had 60 days to remove their ‘as is’ purchases from the park (Diamond,
2004). While some regretted that they had not visited the park before its closing, a few made last-ditch efforts to save the most notable exhibit, the Great
Wall (Mariano, 2005). However, regrets and 11th-hour efforts had no effect,
and park officials issued a final statement on the closing: ‘To our friends and
supporters, we express extreme regret that this action has become necessary’
(Pino, 2003).
Several factors contributed to FSC’s failure. CTS management certainly
bore the major responsibility for the park’s demise. It is ironic that the
managers of a park constructed for the promotion of cultural understanding
failed to understand the tourist culture of American society. CTS’s successes
in its original park in Shenzhen did not prepare them for operating an
American theme park in the highly competitive Florida market. CTS failed
to recognize that vacationing Americans would choose thrills over cultural
enlightenment and stuck to its blueprint. However, unlike the dominant
position the company enjoyed in China, CTS was competing as one of
the region’s many second-tier attractions, and the passive experience of a
walk-through outdoor museum park had limited appeal to Central Florida
tourists. CTS’s fundamental error was the construction of a park based on
their own notions of entertainment rather than a careful study of American
tastes. Focusing on the details of workmanship during the construction
phase, CTS leadership lost sight of what it would take to get Americans into
the park. FSC’s advertising and marketing campaigns were poorly sustained
and largely ineffective.
Day-to-day operations also suffered from poor management. Frequent
changes of managers made it impossible to develop successful long-term
strategies. Allegations of corruption marred relations between CTS and AEI.
George Chen, resentful of what he saw as high-handed action by CTS,
described the Chinese managers as paranoid and dictatorial. He publicly
acknowledged that he had been pressured to provide high-paying jobs and
work visas to children of high-ranking officials, and claimed that many of
the jobholders could not speak English and a few were not qualified to work
at the park (Barnett, 2001).
More than a year after the park closing, CTS sold 366 acres of land and the
Days Inn to Rolling Oaks Investment Properties LLP for a reported US$40.2
million (Snyder, 2005). After ten years of struggle, FSC regretfully dimmed its
lights and faded away. Although the project had originally signaled China’s
plunge into Western-style capitalism, the attraction was a complete failure in
every sense. Labeled as the state’s most troubled theme park, associated with
passive attractions, poor management, and continual protests, it represents
not only a major fiasco in the history of Florida tourism, but also one of
the most disastrous overseas investments ever made by a Chinese company
(Table 15A.1).
Wenxian Zhang
349
Appendix
Table 15A.1 Chronology of major events of Florida Splendid China
1985
1986
1989
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
CTS General Manager Ma Zhimin visited Madurodam – the Lilliputian City
of Holland, and was inspired to build a miniature scenic park in China.
Frank and Josephine Chen purchased 560 acres off US192, next to Disney
World in Florida.
Original Splendid China opened in Shenzhen, Guangdong Province in
November.
Joint venture on FSC between CTS and the Chens’ AEI was announced on
August 21; ground was broken on the construction of FSC on December 18.
Deng Xiaoping toured Splendid China in Shenzhen; some 120 Chinese
artists worked on the construction of FSC; construction cost far exceeded
original estimate.
FSC launched its first promotion campaign of US$500,000 in November;
CTS purchased adjacent 26 acres for US$3.9 million; nearby Days Inn with
365 rooms was acquired for US$8.1 million; FSC was dedicated on
December 18 with Vice Premier and Foreign Minister Qian Qichen in
attendance; the day was proclaimed as the Splendid China Day by
Florida Governor Lawton Chiles; FSC officially opened for business on
December 19, with admission set at US$23.55 per adult and US$13.90 per
child; more than 3000 people visited the park; Tibetan monks staged a
protest.
CTS purchased the half interest held by Chen for US$26 million on
January 15 and became the sole owner of the park; CTS acquired 274 acres
near FSC for US$15 million; an Asian Trade Center was proposed; FSC
failed to meet its attendance goal during the first year of operation.
Yu Jiannian was named FSC president; new PR campaign launched;
Golden Peacock Theater was added to FSC.
Yang Guang was named new president; development plan for Asian Trade
Center and cultural village expansion was presented to state and county
officials; new promotion campaign of US$400,000 launched; the front
courtyard renamed Chinatown and opened to public free of charge; Disney
Chairman Michael Eisner visited FSC; Taiwanese Americans organized
protest against FSC; members of Students for Free Tibet were arrested.
Ticket price was raised to US$28.88 per adult; Dalia Lama’s brother led
demonstration against FSC.
Several performers from FSC sought political asylum.
FSC reportedly lost US$9 million annually; CACCP marked the 40th
anniversary of the Tibetan conflict with China by organizing protest.
Attendance dropped to 200 per day; admission price was reduced;
Brookhill LLC agreed to purchase FSC for US$56.5 million; Yang Guang
was summoned back in China; Brookhill sued to enforce the sale.
Staff reduced to 90 employees; Cao Xiaoning was appointed new president
of FSC.
350
Cases of Chinese FDI
Table 15A.1 (Continued)
2002
2003
2004
2005
Lin Baochun became president of the theme park; Falun Gong religious
movement picketed against FSC.
Attendance dropped below 200 per day; FSC had only 40 people on
payroll; 750 people visited the park on December 31, the last day of
business.
The remaining properties at FSC were auctioned off.
CTS sold 366 acres of land and Days Inn to Rollin Oaks Investment for
US$40.2 million.
Acknowledgments
The author would like to express his sincere appreciation to Drs Yusheng
Yao of Rollins College and Hong Zhang of University of Central Florida for
their constructive criticisms in reviewing the original manuscript. An earlier
version of this paper was originally published in the 84:3 (Winter 2006) issue
of Florida Historical Quarterly. Photo courtesy of Dr James Yu.
Note
Chinese names in this article are spelled in the standard pronunciation – Hanyu
Pinyin, and listed with family names first following Chinese customs.
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from Walt Disney World in Osceola County, will cost $50 million. Orlando Sentinel,
May 11: B1.
Tin, A. & Strother, S. 1993. A splendid attraction and a big challenge. Orlando Sentinel,
December 12: A1.
Vaughan, V. 1991. Themed out? New attractions pouring in despite “saturated”
market. Orlando Sentinel, September 16: Central Florida Business 1.
16
Benelli and Q J Compete in the
International Motorbike Arena
Francesca Spigarelli, William Wei, and Ilan Alon
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!
But since then . . .
. . . How many differences were emerging between China and Italy! . . .
cultural attitude, way of working, civil and fiscal rules, access to credit . . .
. . . Despite the industrial investments to gain efficiency and reduce prices,
penetration of the western markets was a hard competition versus the major
brands. The European and US press had welcomed the new motorbike
models very enthusiastically, but sales results were not coherent with such
technical success and with QJ’s plans.
. . . The technical departments in Pesaro and in China had not sorted out
the industrial plan to produce a new motorbike projected two years before
and already presented – with great success – to specialist public.
Knock, knock . . . Mario – the press office director – interrupted Marta’s
thoughts! Good news! The tests last month had produced brilliant results
with the press. Ultimate Motorcycling reported:
Retaining the original Benelli staff and leaving all design and manufacturing still in Pesaro, the combination of Asian work ethic and Italian
design flair has proven a potent combination, indeed. The result has produced several new Benelli models, and the Tornado, although identical
in appearance to previous iterations, has evolved into a superbike that
retains the design brilliance of the original but without its quirky nature.1
‘. . . Good sounds, good smell, and good engines: let’s go worldwide!’ – told Mario.
The products were there! And they were potentially successful! But how
355
356
Cases of Chinese FDI
could Marta integrate the new company, create a common corporate culture, help transfer the know-how, expand the business, and win out over the
strong Japanese competition?
1. The acquired company
Benelli was established as a family firm in Pesaro, Italy (in the Marche
Region on the Adriatic coast), in 1911. Initially specializing in automobile
and motorcycle repairs, as well as the manufacturing of spare parts, over the
years the firm also began manufacturing motorcycles that were successful in
various sports competitions, winning numerous national and international
titles.
Teresa Benelli, a widow, sank all of the family capital into the business, in
the hope that it would offer stable work for her six sons: Giuseppe, Giovanni,
Francesco, Filippo, Domenico, and Antonio (nicknamed ‘Tonino’). Initially,
it was just the ‘Benelli Garage’ that repaired cars and motorcycles, but it was
already able to produce all the spare parts it needed for the repairs. In 1920
the company built its first complete in-house engine, a single-cylinder twostroke 75 cc model, capable of adapting immediately to a bicycle frame.
A year later in 1921, Benelli built its first motorcycle with its own 98 cc
model engine.
Two years after that, using a model especially designed for competition,
Tonino ‘the terrible’ took to the track. He displayed an extraordinary natural
talent as a rider and embarked on a very successful career, which confirmed
the company’s exceptional capacity for development and production. Riding a Benelli 175, Tonino Benelli won 4 Italian championship titles almost
consecutively, in 1927, 1928, and 1930, with the single overhead camshaft
model, and in 1931, with the double overhead camshaft model.
Unfortunately, a bad crash during a race in 1932 cut short his smashing
career and on September 27, 1937, Tonino died following a ‘silly’ road accident.2 By 1962, Benelli and Motobi (established by Giuseppe Benelli in 1949
after disagreements with his brothers, but later attached to the parent company when the family problems were resolved) were producing some 300
motorcycles per day and had 550 employees.
Toward the end of the 1960s, growing competition with the Japanese led
to the sale of Benelli to De Tomaso Industries, Inc. Despite various attempts
to differentiate itself from its Japanese competitors, as well as a merger with
Moto Guzzi in 1988, the company’s manufacturing operations eventually
ceased.3
In 1989, an entrepreneur named Selci, also from the Pesaro area,
attempted to re-launch the company but his efforts were unsuccessful. Operations only resumed in 1995 when the Indesit Group4 purchased the brand
and again tried to revitalize the company. Although the group focused
immediately on the scooter sector (trying to gain profits from the high
Francesca Spigarelli et al. 357
volume of production despite the low margins), in 2001 the group decided
to enter the motorcycle sector in a niche market. However, the need for sizable investments, coupled with enormous financial difficulties, eventually
brought a halt to production in 2005 and sent the company into liquidation.
Following an intense period of negotiations for the acquisition of Benelli
by the sports car manufacturer John Galt Inv. Ltd., owned by the Russian
Nikolai Smolenski, the company was eventually purchased by the Chinese
QJ Group.5
An acquisition by the Russian group would have resulted in the company
being dismantled, with its machinery transferred to the United Kingdom,
and in the loss not only of the brand but also of local jobs. Instead, the
Chinese QJ Group intended to re-launch the company adopting an interesting industrial plan. Table 16.1 lists the most significant facts related to
Benelli in the five years prior to acquisition.
Table 16.1 Main facts and trends before the acquisition
2001
Events in Benelli:
• Launch of a new strategic plan. The main decisions concerned: focusing on high
displacement motorcycles; partnerships with other producers in the scooter
sector; and reducing costs to be more competitive in terms of sales prices.
• Cooperative agreement with Renault Sport in the scooter sector. The commercial
purpose was to sell Benelli’s products in both France and Italy through the
Renault network.
• Participation in the Superbike championship with the new Tornado 900 cc. Good
results helped the company win a consensus in the market (re-launching of the
image of the company).
Market trends: Italy, 34% decrease in scooter sales; 4.5% increase in motorbike sales.
2002
Events in Benelli:
• Cooperation with Renault Sport did not bring the expected results, because of
negative market conditions/trends.
• Management focuses on motorbike production. A new motorbike was launched:
the Tornado 900 Tre, with 101 units sold within several months (85% abroad).
• In the scooter sector, the company looked for more flexibility by reducing stocks
and outsourcing production. The most knowledge-intensive activities remained
inside. The new Velvet 400 cc was projected.
Market trends: Italy, high price competition in the scooter sector and a decrease in
sales (–32% from 1999). Increase in motorbike registrations (+7% in total and +32%
in the specific 750–1000 cc sector).
2003
Events in Benelli:
•
Benelli stopped production of scooters to focus exclusively on motorbike
production.
358
Cases of Chinese FDI
Table 16.1
•
(Continued)
The new Tornado (RS) model was launched, with production of 1600 units. A new
motorbike in the naked sector, the TnT, was projected, which was due to be
launched in 2004. Many orders from both Italy and abroad were placed by
customers due to the success in the press.
Market trends: Italy, low increase in motorbikes registration (–6% in the over 650 cc
segment) and strong competition in the scooter sector (high price competition).
2004
Events in Benelli:
•
•
The new Tornado Naked Tre was launched in the naked sector. Within 7 months
930 units were sold. Good results in race competition supported sales activities.
New versions of the Tornado Naked Tre were projected and due to be launched in
2005 (many orders already placed).
A new line of accessories and spare parts to enter the market: high margins on
those products would bring higher profits to the company.
Market trends: Stable worldwide market (+4% in registrations in the over 650 cc
segment). Italy, low increase of sales, but with a good +16% in registrations in the
over 650 cc segment.
Sources: Benelli Financial Statements and Balance Sheet.
2. The acquirer company
The China Qianjiang Group (QJ) was situated in southeast China, in
Wenling city, 480 km from Shanghai. The China Qianjiang Group was a
large-scale state-owned group, and one of the 520 key state enterprises certified by the Chinese State Council. The China Qianjiang Group was the
largest Chinese company producing and selling motorcycles, with an annual
output of more than 1,000,000 units. It was chosen by the Association of the
Motorcycle Industry as one of the ten best enterprises with strong competitive power in China. At the beginning of 2002, the ‘Qianjiang’ trademark
was given the award of ‘Famous Chinese Trademark’.6
The Qianjiang Group had formerly been the Chemical Engineering
Machinery Factory, established in 1971. The factory changed its line of
production to motorcycles in May 1985 and then moved to Wenling.
In January 1993, its name was changed to the Zhejiang Motorcycle Factory. After restructuring in 1996, the enterprise became Zhejiang Qianjiang
Motorcycle Group. With government support, the Qianjiang Group successively merged with and acquired the Wenling Saccharification Factory, the
Wenling Locomotive Factory, the Wenling Vehicle Repair Factory, and the
Wenling Electric Tools Factory, among others, allowing the group to achieve
low-cost expansion and to double its economic indicators within a short
time. Zhejiang Qianjiang Motorcycle Co., Ltd. was established in 1999 with
Francesca Spigarelli et al. 359
the approval of the People’s Government of Zhejiang Province. The group
was the primary founder, and the co-founders included the group’s subsidiary Zhejiang Wenling Motorcycle Sales Company and 75 percent equity
of Zhejiang Meikeda Motorcycle Co. Ltd. which the group owned together
with Bright Steel Pte. Ltd.7 Zhejiang Qianjiang Motorcycle Co., Ltd. had been
a public company listed on the Shenzhen Stock Exchange since May 14,
1999.
2.1. Strengths of the company
The primary business of Qianjiang Motorcycle Co., Ltd. was R&D, as well
as manufacturing and marketing of motorcycles and engine parts. The company’s motorcycle products constituted about 7 percent of market share in
China.
The Qianjiang Group designed, developed, and produced Qianjiang
machinery and electrical products. The China Qianjiang Group produced
motorcycles ranging from 50cc to 250cc, and also manufactured motorcyclerelated products such as engines and parts, as well as race cars, mini
motorcycles, ATV, gas scooters, generators, high-pressure water cleaners, garden tools, power pumps, vacuum pumps and lawn mowers. Forty percent
of the group’s products were exported to Europe, America, the Middle East,
Northeast Asia, and Africa – to a total of more than 110 countries throughout
the world.
In the eight years after the company went public, the company had produced and sold more than 7 million motorcycles (among which 0.93 million
were exported). Total sales reached 21.196 billion RMB, and 4.537 billion
RMB was paid in taxes.
In 2007, Qianjiang produced 1.2268 million finished motorcycles, among
which 1.2031 million were sold, achieving 20.07 percent year-on-year
growth of 2,011,000 million motorcycles. Among the total sales, 9,377,000
finished motorcycles were sold on the domestic market and 2,654,000 were
exported, earning US$140.38 million in foreign exchange.
The assets of Qianjiang Motorcycle Co., Ltd. totaled 3.6 billion RMB, with
a total investment of 260 million RMB. The company covered an area of
more than 7 million square feet in the Wenling Economic Development
Zone and was the largest-scale motorcycle production base in Asia and the
most advanced in China, with an annual production capacity of 1.5 million
finished motorcycles.
The Qianjiang Group had one joint-stock company and five joint venture companies. They included many sub-departments, such as a graduate
school, an R&D center, a testing center, a machine-processing factory, and
an assembly factory. The company possessed both high and new technology
and first-class equipment, and utilized advanced three-dimensional Pro/E,
CAD design manufacturing technology. At the same time, it also imported
360
Cases of Chinese FDI
advanced equipment (e.g., a processing-center machine, a line-cutting
machine) from the United States, Germany, Switzerland, and Japan to
develop its products and to process mouldings and machines.
The enterprise had a complete quality management system, and was
issued an ISO9001 international quality attestation certificate in 1997 by
the authorized international attestation organ – the German TUV Company.
The company’s series of products passed CE, GS, CSA, and UL standards
and received quality licenses from the national import and export product
testing bureau.
Qianjiang Motorcycle Co., Ltd. received ‘Chinese well-known brand’
‘Chinese reputed trademark’ ‘inspection-free product’ ‘state-level technical
center’, and ‘state-level laboratory’ awards.
2.2. International expansion
To upgrade its products, Qianjiang Motor cooperated with AVL, one of the
two most important European automobile and motorcycle research institutes, and with a French engine design corporation that was a cooperative
partner of Renault to develop motorcycle engines. Working with the world’s
most famous design company, Bluesky, Qianjiang Motor developed fashionable vehicles such as dune buggies, scooters, beam SUVs, and off-road
vehicles for overseas markets.
In 1999, Mr. Jiang Zuyun in Indonesia joined forced with Qianjiang to
sell motorcycles in the Indonesian market. Within two years, Qianjiang held
almost half of the Indonesian motorcycle market share. On August 20, 2001,
the largest joint venture between China and Indonesia, Sanex Qianjiang
Motor International, inaugurated a US$12 million motorcycle assembly
plant at Indonesia’s Modern Cikande Industrial Estate. Established in March
2000 as a joint venture, Sanex Qianjiang was owned by Qianjiang Motor
International, Malaysia’s Lion Group, and Taiwan’s CPI, which together held
35 percent of the shares, and Indonesia’s PT Sanex. Beginning in April 2000,
Sanex Qianjiang imported fully assembled motorcycles from its Chinese
principal and sold them in Indonesia. However, about two months before
the inauguration of the plant, the company gradually began to reduce its
imports when the local plant started producing 400–500 units per day. The
plant had a total production capacity of 30,000 units per month. Sanex
Qianjiang thus created many employment opportunities for Indonesians.
The company had 43 main dealerships and 273 sub-dealerships all over
Indonesia, and it also planned to set up a subsidiary called PT Sanex Agung
Motor Indonesia to produce spare parts for the company.
To target the European market, Qianjiang established a joint venture
with the Austrian AC company to create the ‘Generic’ brand that would
produce European-style motorcycle products. In the meantime, Qianjiang
also acquired an Hungarian company with the Keeway brand, setting up
Qianjiang Keeway Europe. In 2005, Benelli was acquired.
Francesca Spigarelli et al. 361
With these three leading brands, Benelli, Generic, and Keeway, Qianjiang
was planning to build and expand its markets in Europe and North America,
to accelerate technical innovations, and to establish itself in a more competitive position in the international market.
In terms of its strategic development, Qianjiang also targeted the Taiwan
market. Taiwan had the highest density of motorcycles in the world, with
more than 300 motorcycles every km2 . About 50 percent of the population owned a motorcycle, and due to the high labor costs for repairs
and maintenance, Taiwanese preferred to buy new motorcycles rather than
repairing them. Because of the new leadership in Taiwan, the relationship
with mainland China had become closer and it had opened up shipping,
postal communications, and trading connections with the mainland. At the
same time, the production costs of local Taiwan companies were increasing and the investment environment had deteriorated, thus providing a
great opportunity for the development of the mainland motorcycle industry. Qianjiang Motor, located in Taizhou of Wenling city, was situated to
the north-east of the Taiwan Strait. In addition to its geographical advantages, several senior executives of Qianjiang, who were dispatched by the
foreign shareholders, were Taiwanese and therefore were very familiar with
the Taiwan motorcycle market. Qianjiang opened up the Taiwan market
by relying on its geographical location, advanced techniques, and competitive pricing. Its gross profits almost doubled due to the rise in exports to
Taiwan.
3. Industry analysis
3.1. The industry
Benelli’s company was part of the motorcycle industry, which included
companies involved in manufacturing motorcycles and related equipment,
parts, accessories. Motorcycles were classified by their engine size and vehicle use. Engines were measured according to their displacement by cubic
centimeter (cc):
• scooters, from 0 cc to 50 cc;
• standard, from 50 cc to 650 cc;
• heavy, over 650 cc.
Moreover, motorcycles were usually classified for commercial purposes into
one of the following three categories: street, off-road, or dual-purpose,
depending on the surface on which they were intended to be used.
Street motorcycles were designed for riding on paved roads. Their engines
were generally in the 125 cc and over range. They included the following
categories: cruiser, sport bike, touring, sport touring, naked, and feet-forward
motorcycles, scooters, and mopeds.
362
Cases of Chinese FDI
Off-road, also known as dirt bikes, included motocross, rally raids, trials,
and track racing.
Dual sports were legal street motorbikes that were also designed for
off-road situations. This class included adventure-touring, enduro, and
supermotard.
Benelli had products in both the scooter sector and in the heavy segment
of the motorcycle industry, in the naked, sport, and touring segments.
QJ, with a wide range of scooters and standard products in a variety of
models, focused on the low price segment of the market. Its slogan was ‘Dedicated to a combination of European design, Japanese quality, and Chinese
cost.’ It also had several typical Chinese-style low-power motorcycles.
3.2. Global trends
Several key competitors in the motorcycle industry shared the majority of
worldwide sales. The industry could be described as global and highly competitive. Price, design, and engine performance were the key elements in
customer choice. Japanese manufacturers such as Yamaha, Suzuki, Kawasaki,
and Honda had large market shares in many countries by combining
innovative designs with low prices.
However, in certain geographic markets, a single producer may have
had a dominant position due to its specific core competencies or due to
customer loyalty. This was the case, for example, for Harley Davidson in
North America, where the company held about one-third of the market
(Figure 16.1), or of Ducati, in the sports or race segments, where the company offered high technical performance, supported by good sports-race
results.8
The G8 motorcycle market (in the United States, Canada, Germany,
France, the United Kingdom, Italy, Russia, and Japan) grew by 4.7 percent
between 2003 and 2007, reaching a value of US$24.3 billion. In 2012, the
market was projected to have a value of US$31.1 billion, an increase of
5.1 percent from 2007. The United States was the world’s largest market,
generating 41 percent of global revenue.9
More recently, some small motorcycle manufacturing companies from the
emerging markets had entered the competition. The BRIC motorcycle market grew by 14.5 percent between 2003 and 2007 to reach a value of US$27.2
billion. In 2012, the market was forecast to have a value of US$67.4 billion,
an increase of 19.9 percent from 2007. During the 2003–2007 period Brazil
was the fastest growing market, with a CAGR of 28.3 percent.10
3.3. Local trends: Italy
In Italy, the motorcycle industry was very competitive, with Japanese manufacturers having the biggest market share, especially in the motorbike
sector.11 In 2008, Honda and Yamaha held more than 30 percent of new
registrations (Figure 16.2) and gained a dominant position despite negative
363
Triumph
1% Victory Ducati
1%
1%
BMW
KTM 2%
Others
2%
1%
HarelyDavidson
27%
Suzuki
13%
Kawasaki
14%
Honda
21%
Yamaha
17%
Figure 16.1 Market share of top 10 motorbike producers in the USA (sales estimates,
2008)
Source: Dealernews, February 2009 (www.dealernews.com).
Honda
19%
Others
12%
Ducati
3%
BMW
4%
Piaggio
16%
Kawasaki
4%
Aprillia
5% Altre
7%
Suzuki
7%
Kymco
8%
Yamaha
15%
Figure 16.2 Market share of top 10 motorbike producers in Italy (share per year to
month as number of registrations from March 1, 2008, to February 28, 2009)
Source: http://www.ancma.it/it/publishing.asp.
364
Cases of Chinese FDI
Table 16.2
Registrations in Italy (2008)
Month
2007
2008
%
Standard, heavy
Scooter
151,457
279,538
135.183
268.138
–10.74%
–4.08%
Source: Italian Ministry of Transport, available at: http://www.ancma.it/common/file/articolo_
223sezione_7.pdf.
Table 16.3
1
2
3
4
5
6
7
8
9
10
Top 10 motorbikes sold in Italy in 2008 (number of registrations)
Producer
Product
Class
Number of registrations
Kawasaki
Honda Italia
BMW
Honda
Yamaha
Suzuki
Ducati
Suzuki
Kawasaki
BMW
Z 750
Hornet 600
R 1200 Gs
Xl 700 V Transalp
Fz6 Fazer
Gsr 600
M 696
Dl 650 U V-Strom
Er-6n
R 1200 R
Naked
Naked
Enduro
Enduro
Naked
Naked
Naked
Enduro
Naked
Naked
6,745
5,207
5,087
4,198
4,025
3,172
3,113
2,655
2,560
2,258
Source: http://www.ancma.it/it/publishing.asp.
market trends (Table 16.2). Kawasaki held top position on the list of most
sold products (Table 16.3). In the scooter segment, the Italian Piaggio Group
had a strong market share.
Benelli had a segment position in the Italian Industry. The company tried
to compete with Aprilia, Ducati, or Honda, but its real direct competitors
both on the Italian market and abroad were three Italian producers: Morini,
MV, and Triumph. Morini was its direct competitor, in terms of both proposed models and annual sales. Although it was in the same market segment,
MV produced more exclusive/luxury motorbikes, with higher prices and better performance. Benelli was Triumph’s only competitor because, aside from
Benelli, Triumph was the only three-cylinder Italian manufacturer. However,
in comparison to Benelli, its market share was much larger (see Tables 16.4
and 16.5).
3.4. Local trends: China
The Chinese motorcycle market was the largest in the world and accounted
for 59.1 percent of market volume in the Asia-Pacific. In 2006, the domestic
market grew by 7.9 percent to reach a value of US$5.8 billion and a volume
of 14.9 million units. By 2011, it was projected to have a value of US$9.9
Francesca Spigarelli et al. 365
Table 16.4 Motorbike and scooter (more than 50 cc)
registrations per year
Producers
2006
2007
2008
Benelli
Morini
MV
Triumph
262
340
1,987
3,781
401
356
1,891
5,233
484
351
1,274
5,978
Source: Italian Ministry of Transport, available at: http://www.
ancma.it/it/publishing.asp.
Table 16.5 The full range of Benelli products in 2009
Motorbike
TRE 899 K
TRE 1130 K
TRE 1130 K Amazonas
Tornado Naked Tre 899 T
Tornado Naked Tre 899 S
Tornado Naked Tre Sport Evo
Cafè 1130 Racer
Tornado Tre 1130
Titanium
BX 449 CROSS
BX 505 ENDURO
BX 570 MOTARD
Scooter
Pepe 50 Base
Pepe 50 Lx
QuattronoveX 50
Velvet 125
Velvet 150
Velvet 250
Caffènero 250
Displacement
898
1131
1131
898
898
1131
1131
1131
1131
449
505
569
Displacement
49
49
49
124
152
243
243
Source: www.benelli.com.
billion, an increase of 69.4 percent since 2006, and the forecast volume
would reach 24.6 million units, an increase of 65.7 percent since 2006.
Based on volume, Jiangmen Grand River Group Co. Ltd. was the leading
player in the Chinese motorcycle market, accounting for 16.2 percent of
market share in 2006. In the same year, Chongqing Loncin Industry (Group)
Co., Ltd. and China Jialing Industrial Co., Ltd. held 8.3 percent and 7.4 percent of market share respectively. Due to the lack of a dominant leading
player in the market, there were an increasing number of manufacturers,
including Qianjiang Motors and other emerging firms that competed for the
remaining 68 percent of market share.
366
Cases of Chinese FDI
To understand actual trends in the Chinese market and QJ’s position, some
background information on the Chinese legal and regulatory environment
is required.
Focusing on the exhaustion of traditional natural resources, the deterioration of the environment, and the excessive CO2 emissions, the
Chinese Ministry of Finance, Ministry of Science and Technology, Ministry of Industry and Technology Information, and the National Development and Reform Commission recently issued a financial compensation
plan for pure electric and fuel cell powered vehicles. Energy-saving and
environment-protecting vehicles were leading the R&D trend. Qianjiang
also put the development of new-energy motorcycles onto its agenda. The
company took the lead in releasing motorcycles with an engine management system, catering to national policies. Strengthening its technical input,
Qianjiang also introduced an electric-control injection system, reducing
noise and gas emissions to the maximum. At the same time, Qianjiang
was devoted to developing electric and liquid-gas-powered motorcycles, as
well as to participating in the formulation of national electric motorcycle
standards.
According to the ‘including motorcycles in the automobile to the countryside plan’ resolution of the 51st executive meeting of the State Council,
motorcycles would officially be included in the ‘to the countryside’ plan.
From March 1, 2009, to December 31, 2009, the state was to allocate 5 billion
RMB for farmers in the countryside to trade in motorcycles and new automobiles. This would mean considerable growth in the domestic motorcycle
market. In the countryside, motorcycles were indispensible vehicles for feed,
poultry, and product transport, as well as for commuting. Compared to computers and other home appliances, farmers most needed motorcycles. The
plan would be implemented over the course of four years, until 2013. As the
leading company in the domestic motorcycle industry, Qianjiang would
greatly benefit from this compensation policy.
4. The acquisition
Benelli and the QJ group made contact for the first time in June 2005. They
were looking for an agreement that matched their relative strengths. Benelli
had a trademark, knowledge of Western markets, as well as projection skills,
while QJ had high-efficiency plants and low production costs. In September 2005 a deal was reached with the founding of Benelli QJ srl. Industrial
activities began in October 2005.
The main reasons for QJ to purchase Benelli was to utilize a well-known
and recognized brand in terms of quality and sporting tradition, as well as
to capitalize on Benelli’s professionalism and knowledge, in order to offer a
high-quality product in segments that had not yet been penetrated by the
QJ Group.
Francesca Spigarelli et al. 367
Therefore, the strategic objective of the initiative was to re-launch the
Benelli brand by leveraging its history and tradition in order to achieve highquality production. Benelli’s products/spare-parts were also to be used in
China, so as to increase the quality of domestically manufactured products
and to further diversify production to new categories of clients. Increased
efficiency and a wide range of quality products would have helped QJ to
compete with the leading Japanese companies in the motorbike market.
At the time of the acquisition, with respect to Benelli’s geographic
location – in central Italy, in the Marche Region – there were no particular
expectations. But QJ actually found some competitive benefits in the Marche
Region area.
There was a lot of support from local public organizations, which facilitated negotiations and helped QJ win in the ‘competition’ with the Russian
entrepreneur to buy the company. The directors of QJ, which in part was a
publicly controlled company, welcomed the involvement of the local organizations, as well as the relationships forged between the Chinese local government and that of town, provincial, and regional organizations in Italy.
There was much unexpected common ground in terms of culture and society between Pesaro, the Marche, and the location in China. In addition to
being located in a Chinese coastal town, QJ appreciated that the people in
Pesaro were somewhat but not overly open, had a strong work ethic and an
approach to work that was similar to that in the home country.
5. The post-acquisition phase
5.1. Main organizational and operating changes introduced after the
acquisition
Operations relating to administration, production, and research and development were maintained in Pesaro. The main changes related to production
operations, which were restructured to increase capacity at the Pesaro site.
Innovations included an expansion of in-house operations, such as the
three-cylinder engine assembly that previously had been outsourced. As a
result, the original workforce of 45 at the time of purchase was increased to
100 employees.
The sales director and the parts quality manager were both Chinese, as was
the managing director (a 40-year-old woman). The sales director was working
on restructuring the sales network and expanding it to the West. The quality
manager was handling the production relationship with the parent company, in order to ensure a channel for technical communications to resolve
problems relating to the production of Benelli parts that were made in China
and then imported for assembly. All of the engineers, workers, and technicians were Italian. The previous technical director became vice managing
director.
368
Cases of Chinese FDI
Generally, Chinese from the QJ Group came to Pesaro and vice versa for
short periods of time, on a rotating basis, to learn from mutual experience
(especially for the testing of motors and designing).
The greatest positive changes after the acquisition, as perceived by Benelli
people, were:
• efficiency-building efforts to reduce some avoidable costs that had been
exploding with the previous owners and leading to huge losses;
• more rationality in company decision-making. The previous owner loved
motorcycles and sometimes made decisions that were driven by a passion
for motorcycles rather than by market needs;
• a new way of managing human resources. QJ gave more decision-making
power and more responsibility to the staff, including the young people
and women. QJ was attempting to let all of the staff (even the workers and
technicians) become involved in the ‘future’ of the company, by spreading a teamwork approach through periodical meetings and encouraging
suggestions and ideas ‘from the bottom to the top’.
5.2. Industrial activities: present and future
The QJ Group devised a challenging industrial plan for the development of
the company, with a resulting increase in the workforce.
Currently, two production lines were operating at the original industrial
plant: one for engine production/assembly and one for motorcycle production/assembly. Before the acquisition, engines were produced and tested by
outsourcing, so only one line of production was in use. The decision to outsource the engines had been a mistake on the part of the previous owners; it
resulted in high production costs and problems in quality and performance
control. The Chinese thus decided to bring production in-house, following
the suggestions of the Italian technical director.
In order to realize the new plan, an agreement was reached with local
professional technical schools, allowing apprenticeships and subsequent
placements of students. No changes were made in the relationships with
the local suppliers.
The industrial plan involved manufacturing new products within four
years. Motorcycle production had already increased from only three models prior to the company’s acquisition, to nine in 2007, and to ten in 2008.
Each motorcycle model was different, with three new engines. They were
designed in the Technical Department in Pesaro. Designs and prototypes
were then transferred to the QJ Technical Department, where the Chinese, in
cooperation with the Italian Technical Department, took care of the industrial development of the project. Once the industrial plan for the product
was completed, production began in Italy.
As for scooters, prior to the acquisition, Benelli produced only one model.
Since 2008 two new models were added to their product range. Currently,
Francesca Spigarelli et al. 369
there were four models. They were all projected in Italy, completely produced in China by QJ, and then imported with Benelli’s brand to Italy, for
distribution. Table 16.5 reports the full range of Benelli products in 2009.
A key factor in the re-launching of Benelli’s activities was to reduce production costs and sales prices. It was estimated that it would take ten years
to achieve a truly competitive price in relation to the Japanese manufacturers. More parts would be produced in China to reach this strategic goal,
maintaining its core competencies – high-value knowledge activities – in
Italy.
While trying to win competitiveness in terms of price, and building on
QJ’s strengths, Benelli’s people were working on QJ products to improve their
technical performance as well as their style/design.
With specific reference to China, Benelli’s products were expected to enter
the Chinese market in 2009–2010. In 2009 import restrictions on motorbikes
with a displacement of over 250 cc were abolished, so sales activities could
now be organized. Several dealers were ready to sell Benelli’s motorbike in
China. However, scooters would not be distributed in China because they
were not competitive in terms of price.
After the industrial plan was completed, the re-launching of Benelli would
also focus on racing activity: QJ was planning to have a new competitive
bike ready for the MotoGP in the next five years, followed by a World
Superbike.12
5.3. Sales activities abroad and the commercial network
Another key element for improving Benelli’s competitive position and
strengthening QJ’s competitiveness on international markets was the commercial network. Benelli’s business relationships abroad were being restructured, starting with the development of new branches in Europe and the
United States.
As for Benelli, a great part of sales came from Italy.
Germany was the most important foreign market. The second most important foreign market for Benelli should have been the United States. However,
there was a huge differential between sell in and sell out. The key problems
related to sales in the United States were customer-assistance services and
distribution channels. Great Britain was another important market.
The Italian commercial network was based on official sellers. They were
located in the following areas: Abruzzo (3); Basilicata (1); Calabria (8);
Campania (12); Emilia Romagna (15); Friuli Venezia Giulia (5); Lazio (10);
Liguria (6); Lombardia (21); Marche (8); Molise (1); Piemonte (9); Puglia
(9); Sardegna (9); Sicilia (23); Toscana (18); Trentino (2); Umbria (3); and
Veneto (9).
Benelli also set up ‘authorized workshops’ in the following Italian regions:
Basilicata (1); Campania (5); Lazio (2); Liguria (2); Lombardia (1); Veneto (1);
Piemonte (3); Puglia (2); Sicilia (2); Toscana (1); and Valle d’Aosta (1).
370
Cases of Chinese FDI
The distribution network abroad consisted, first, of joint subsidiaries with
Benelli and KW brand products. KW is a new brand launched by the group
after the acquisition of the Keeway system, the Hungarian company (now
Qianjiang Keeway Europe), to sell scooters. These brands were differentiated
by their price/quality, but they were sold through the same network.
Aside from the KW subsidiaries, the commercial network was based on
official importers (usually one for each country), who sold to different
dealers. The dealers usually did not operate as mono-brand sellers.
Benelli had importers in the following areas: Australia, Austria, Belgium,
Bosnia Herzegovina, Brazil, Canada, Cyprus, Colombia, South Korea,
Croatia, Denmark, Finland, France, Germany, the United Kingdom, Greece,
Luxembourg, Montenegro, Morocco, Norway, Holland, Poland, Portugal,
the Czech Republic, the Republic of San Marino, Reunion Island, Romania,
Russia, Serbia, Slovakia, Slovenia, Spain, the United States, Sweden,
Switzerland, Taiwan, and Uruguay.
With respect to QJ, as previously reported in the company profile, the
commercial strategy was differentiated on the basis of the geographic area.
While there was a strong sales network in Indonesia through dealers and
subdealers, Qianjiang Motor kept its sales away from the Southeast Asian
market where national brands huddled together to compete to force down
prices. Countries like Vietnam mainly relied on low prices to compete,
and Qianjiang’s prices were entirely uncompetitive. The company was now
turning to the North American and European markets.
Europe had very strict technical threshold, so it was difficult to enter the
market. In Europe, motorcycle repairs cost the company US$70 each hour,
so if a company sold a motorcycle and paid for one hour of repair or maintenance, the company would almost certainly lose all its profits, or even
more. Therefore, first-rate products with good quality were needed to enter
the European market.
6. Problem analysis
After the acquisition, some problems arose due to the cultural differences
between the Chinese and the Italians in terms of behaviour, in general, and
business approach, in particular. Human relationships were still not easy,
due to different mentalities, habits, and background. Problems stemmed
not only from differing organizational cultures, but also from the differing
working environments in China and Italy.
There were many examples of such communication problems in the technical area. The Chinese and the Italian Technical Departments should have
worked together in harmony to combine and optimize their complementary
skills. However, working together was difficult, due to language and cultural
differences. These problems were delaying the development of important
projects.
Francesca Spigarelli et al. 371
Another critical field was that relating to rules and laws. In some cases,
administrative actions were perceived as nonsense by both Italians and
Chinese. Behaviors relating to specific Italian fiscal or civil rules were sometimes judged as ‘wrong’ by the Chinese. Likewise, Chinese rules seemed
‘strange’ or unacceptable to Italian people.
In this sense, the problem facing Benelli and its new Chinese owners was
how to improve cross-cultural understanding. Problems in communications
and cultural differences created a rift between management and employees, impeding the implementation of strategy and harming the company’s
potential.
Other difficulties in managing the ‘new’ Benelli were due, first, to the great
focus on efficiency which had also negative consequences. Domestic consumers in China were price-oriented. In general, this resulted in Chinese
companies paying more attention to reducing costs and cutting investments
that had long-term or intangible returns. But QJ’s international expansion
required it to give up this traditional way of doing business and to reconsider
the low-cost approach. This focus on cost-savings led the company to give
less importance to sales promotion. A key problem for Benelli and its new
Chinese owners was to improve the worldwide strength of the brand as well
as the effectiveness of the sales network to increase market share. Benelli’s
products, especially its motorcycles, had a huge potential to compete with
the most important players in the market, but currently their market share,
both in Europe and in the United States, was low. QJ had expected fewer
problems in penetrating the western market through the Benelli brand. However, delays were caused as a result of having to rebuild and re-launch the
brand image internationally, as well as having to re-establish international
supplier relationships.
Marketing investments, especially for sales promotion, post-sales assistance, and customer care, were needed.
Acknowledgements
An earlier version was published as Spirgarelli, Francesca, William Wei
and Ilan Alon (2009), “A Speed Race: Benelli and QJ Competing in a
Global Arena,” Ivey Publishing House (#9B09M097), with Teaching Note
(#8B09M97) data and information on the case are updated to 2009.
Appendix: Country analysis
China
China was the world’s second largest economy (in terms of GDP PPP) and
the world’s most populous nation. Huge trade surpluses (China was the third
largest world trader) and a large capacity to attract foreign direct investment
(China was the world’s number 2 recipient of FDI, after USA) provided China
372
Cases of Chinese FDI
with a huge amount of foreign reserves to be invested.13 Real GDP grew at
11 percent from 2003 to 2007 (Appendix 16A.1) and even after the current
economic crisis, the economy was projected to expand at very high rates
(Appendix 16A.2).
However, the extraordinary economic growth was unbalanced and,
according to some, even unsustainable. Problems included the growing pollution in urban and industrial areas, the unbalanced growth of the cities
compared to the countryside, social pressures, and human rights violations
and lack of democracy.14 In the business sector, many Chinese companies that had entered international markets were not profitable, and they
faced huge problems in terms of being competitive and adopting international management standards.15 They also had difficulties getting their
products accepted in Western countries. Moreover, some foreign companies
were redirecting their investments to other emerging nations or to developing countries where they could find lower labor costs (Tables 16A.1 and
Table 16A.2).
Table 16A.1 Outlook for China
Annual data
2007 Historical averages (%)
2003–2007
Population (m)
1,321.3 Population growth
GDP (US$ billion;
3,46 Real GDP growth
market exchange rate)
GDP (US$ billion; PPP)
7,316 Real domestic demand growth
GDP per head (US$;
2,62 Inflation
market exchange rate)
GDP per head (US$; PPP)
5,540 Current-account balance (% of GDP)
Exchange rate (av)
7.61 FDI inflows (% of GDP)
Rmb:US$
0.6
11.0
9.9
2.6
5.6
3.0
Source: Factsheet, 6 May 2009, Economist Intelligence Unit (Country ViewsWire).
Table 16A.2 China’s main macroeconomic data: projections (as in 2009)
Key indicators
2008
2009
2010
2011
2012
2013
Real GDP growth (%)
Consumer price inflation (%; av)
Budget balance (% of GDP)
Current-account balance
(% of GDP)
Commercial bank prime rate
(%; year-end)
9.0
5.9
−0.1
10.2
6.0
−0.2
−3.6
6.1
7.0
2.5
−2.1
4.5
8.4
3.5
−1.6
3.6
8.7
4.1
−1.1
2.9
8.9
4.1
−1.0
2.0
5.6
5.4
6.6
7.0
7.1
7.4
Source: Factsheet, 6 May 2009, Economist Intelligence Unit (Country ViewsWire).
Francesca Spigarelli et al. 373
Italy
Italy was part of the Group of Seven (G7) industrialized nations. Its economic
strength was in the processing and manufacturing of goods. Exports of luxury goods, consumer durables, and investment goods led its competitiveness
abroad. The industrial system was based mainly on small- and medium-sized
family owned firms.
Economic growth in Italy ranged from 1 percent in 1996 to a 3.7 percent
peak in 2000 and gradually slowed down thereafter in the two periods of
recession in 2003 and 2008. Recent growth rates were among the lowest of
the industrialized countries, due mainly to several years of low productivity
growth and loss of competitiveness.
Like many Western countries, Italy was now facing the consequences of
the global financial turmoil, with a strong decrease in output and a rise in
public spending after a period of substantial reductions in the budget deficit
(Tables 16A.3 and 16A.4).
Table 16A.3 Outlook for Italy
Annual data
2008
Historical averages (%)
Population (m)
GDP (US$ billion; market
exchange rate)
GDP (US$ billion;
purchasing power parity)
GDP per head (US$; market
exchange rate)
GDP per head (US$; PPP)
58.1
2,311
Population growth
Real GDP growth
0.1
0.9
1,797
Real domestic demand
growth
Inflation
0.9
Exchange rate (av)¤:US$
39,744
30,91
0.680
2004–2008
2.3
−2.2
Current-account balance
(% of GDP)
FDI inflows (% of GDP)
1.3
Source: Factsheet, 6 May 2009, Economist Intelligence Unit (Country ViewsWire).
Table 16A.4 Italy’s main macroeconomic data: projections (as in 2009)
Key indicators
2008
2009
2010
2011
2012
2013
Real GDP growth (%)
Consumer price inflation (av, %)
Consumer price inflation (av, %;
EU harmonized measure)
Budget balance (% of GDP)
Current-account balance (% of
GDP)
Short-term interest rate (av, %)
−1.0
3.4
3.5
−4.5
0.5
0.6
−0.5
0.8
0.9
0.6
1.7
1.8
0.9
1.9
2.0
0.9
1.6
1.7
−2.7
−3.2
−5.3
−2.2
−5.2
−2.0
−3.6
−3.0
−3.7
−2.8
−3.6
−2.7
4.6
1.7
1.8
2.6
3.5
4.1
Source: Factsheet, 6 May 2009, Economist Intelligence Unit (Country ViewsWire).
374
Cases of Chinese FDI
The economy weakened during 2008: exports fell sharply due to the
export structure. Investment demand fell sharply, as did consumer expenditures, especially for cars and durables.
The government faced challenges related to long-term budget consolidation. The key issues included the extension of the pension reform process
and reforms to improve the efficiency of public administration. At the same
time, measures to re-launch firm competitiveness were needed to sustain an
industrial system that was based mainly on SMEs.
Notes
1. Coldwells, A. 2009. Stormbringer: Benelli Tornado 3 1130, A Brilliant Return.
Ultimate Motorcycling, April/May.
2. See www.benelli.com.
3. Spigarelli, F., & Bellabona, P. 2006. La dimensione transnazionale dell’economia
cinese. In M. Abbiati, Propizio è intraprendere imprese. Aspetti economici e
socioculturali del mercato cinese: 157. Ca’ Foscarina, Venezia.
4. The Indesit Group, the largest company in the Marche Region (3438 million ¤in
turnover in 2007 and 17,418 employees), is based in Fabriano, producing electric home appliances. It belongs to the Merloni family. See www.indesitcompany.
com.
5. Israeli, J. 2007. China in Italy: Kick Start. Time, August 9, http://www.time.com/
time/magazine/article/0,9171,1651236,00.html.
6. All the information about QJ is from public sources, and precisely from
the following website: Qianjiang Motor. Company Profile, http://www.
qjmotor.com/qjmotor/JieShao/aboutus.jsp; Qianjiang Motor. Financial Report,
First Quarter 2009, http://www.qjmotor.com/qjmotor/newsAction.do?method=
view&id=4028882f20f0be69012108d4445e0019;
(March 21, 2009),
(2009).
(March 12).
; Syking (2007).
(April 30).
(2007).
(000913)
(April 4),
(2008).
(July 29),
(2008).
(000913)
(October 31),
(2008).
(4 April),
(2008).
(000913)
(March 26),
; Zhejiang Qianjiang Motor reports increased sales volume despite price
hikes (August 19, 2008), China Real News;
(000913)
21
(October 19, 2004),
; Sanex inaugurates US$12m assembly plant
(August 21, 2001), The Jakarta Post;
(2005).
?
(November 21),
(2004).
(3 December),
;
(April 7. 2006),
.
7. Zhejiang Meikeda Motorcycle Co., Ltd. was a joint venture of the Qianjiang
Group and Singapore Kedeng Investment Co., Ltd., with registered capital of
US$2.8 million; 75 percent of equity was held by the Qianjiang Group and
25 percent held by Singapore Kedeng Investment Co., Ltd.
8. Brown, D. J. 2009. What’s Next for the Motor Co.? Dealernews, February, http://
www.dealernews.com/dealernews/Research/Whats-Next-for-the-Motor-Co/Article
Standard/Article/detail/579349.
9. http://www.researchandmarkets.com/reportinfo.asp?report_id=706788.
10. http://www.researchandmarkets.com/reportinfo.asp?report_id=706787.
Francesca Spigarelli et al. 375
11. Ancma. 2009. Mercato Italiano dei motocicli-Market Share per brand. February,
www.marketweb.it.
12. See Dealernews, November 2006, www.dealernews.com.
13. EIU. 2009. Country Report, China, March, www.eiu.com; OECD. 2008. ‘China
Encouraging Responsible Business Conduct’, OECD Investment Policy Review, www.
sourceoecd.org/emergingeconomies/9789264053663.
14. EIU. 2009. Country Profile, China, www.eiu.com.
15. Accenture. 2005. ‘China Spreads its Wings: Chinese Companies Go Global’,
www.accenture.com; H. W. Yeung & Liu, W. 2008. Globalizing China: The Rise
of Mainland Firms in the Global Economy. Eurasian Geography and Economics,
49(1): 57–86; Alon, I. & McIntyre, J. R. 2008. Globalization of Chinese Enterprises.
New York: Palgrave Macmillan.
17
Geely’s Internationalization
and Volvo’s Acquisition
Marc Fetscherin and Paul Beuttenmuller
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.
Next to exporting, outward foreign direct investment (OFDI) has become
an important vehicle for the further development and expansion of
Chinese companies. Since 2003, “Chinese OFDI has demonstrated impressive growth, increasing from US$2.8 billion in 2003 to US$52.2 billion in
2008” (UNCTAD WIR, 2009, p. 53) and more is expected. Most Chinese
OFDI is in neighboring Asian countries, “especially members of the Association of Southeast Asian Nations (ASEAN)” (MOFCOM, 2008, pp. 67–68).
China’s Special Administrative Region, Hong Kong, attracts by far the
highest amount of OFDI. In 2008 it was the preferred recipient of 63 percent of Chinese OFDI (MOFCOM, 2008, p. 67). But Chinese companies also invest in developed countries. Its share of worldwide OFDI is
around 3 percent and expected to grow significantly in the next few
years.
Four main motives underlie OFDI (Dunning & Lundan, 2008, pp. 67
ff): market-seeking, efficiency-seeking, resource-seeking, and strategic assetseeking. Among a survey done with Chinese multinational enterprises
(MNEs), 85 percent regard market-seeking as the most important motive
for OFDI, followed by 51 percent strategic asset-seeking, 40 percent for
resource-seeking, and 39 percent for efficiency-seeking (UNCTAD WIR,
2006, p. 168). Strategic asset-seeking entails gathering “information and
knowledge on how to operate internationally. However, as the experience of Chinese firms in this area grows, their goal has turned toward
376
Marc Fetscherin and Paul Beuttenmuller
377
intangible assets, such as advanced proprietary technology”, patents, or
brand names (Buckley et al., 2007, p. 505). Chinese firms increasingly
use mergers and acquisitions (M&As) to acquire strategic assets, with a
view to building their competitive advantage (Gugler & Boie, 2009, p. 33).
The acquisition of foreign innovation technologies and brands is often
regarded as a shortcut to establishing a Chinese company as a global
player. Prominent examples include Shanghai Automotive Industry Corporation (SAIC) acquiring MG Rover in 2005, Lenovo acquiring IBM’s
PC division in 2008, and the acquisition in 2010 of Volvo by Zhejiang
Geely Holding Group. However, the success of these investments remains
to be seen, since buying and absorbing foreign technologies and innovation or acquiring a brand name are just starting points (Gugler &
Fetscherin, 2010). These acquirers need to fundamentally change their
corporate identity and culture in order to gain a sustainable competitive
advantage.
This case study looks at Geely, a large private Chinese automobile manufacturer, and its internationalization and competitiveness efforts, with a
specific focus on the acquisition of the Volvo brand.
1. China and the global automobile industry
While the automobile industry has historically been dominated by
manufacturers based in developed countries, the globalization of production and marketing has allowed developing countries to enter the
international market. Since the global financial crisis of 2008 and
2009, automobile manufacturers from China have pursued international markets to capitalize on opportunities and capture market share.
Firms including SAIC and Geely Automobile Holdings Limited have
entered international markets by exporting their products and acquiring world-renowned car brands to establish a positive brand association and improve their brand image. They want to compete with
internationally established companies such as Hyundai, Toyota, and
Ford.
However, as Chinese manufacturers begin entering developed markets,
they are encountering numerous challenges. Consumers have negative
perceptions associated with country of origin issues. Chinese companies
have to successfully integrate knowledge, corporate culture, and management styles. How Chinese manufacturers approach such challenges will
ultimately determine their success or failure in the international automobile
industry.
China is now the world’s largest and fastest growing passenger car automobile market in terms of cars manufactured and sold. It is estimated that there
are about 130 million private motor vehicles in China (which represents
378
Cases of Chinese FDI
Passenger car manufactured in million
12.00
10.00
8.00
6.00
4.00
2.00
0.00
2001 2002 2003 2004 2005 2006 2007 2008 2009
Year
Figure 17.1
Brazil
India
China
Iran
Spain
USA
France
Japan
Germany
South Korea
Main car-producing countries
Source: OICA (2010).
ownership by one out of ten people). Figure 17.1 illustrates the leading passenger car-producing countries for the years 2001–2009 (with over 1 million
cars produced).
Historically, the Chinese market built military and commercial vehicles,
but passenger car production began in the mid-1990s as firms sought to
reach China’s rapidly growing middle class. China’s automobile industry
is primary home-grown, very fragmented and likely to undergo consolidation. In 2006, there were more than 120 automobile manufacturers, with
12 national manufacturers. Sales are also concentrated amongst a few firms,
with the top five companies accounting for almost 70 percent of total domestic production. They all have multiple joint ventures (JVs) arrangements
with foreign partners.
Most automobile companies in China are either small local manufacturers or large national ones. Local manufacturers make and market cars
within their region or local community. Many are owned by the local government, where a few private companies have emerged, including Geely
Motors.
The national players make and market cars in multiple provinces
within China. Many also have international partners through JVs. These
Marc Fetscherin and Paul Beuttenmuller
379
partnerships are about access to international expertise and know-how and
allowing foreign companies to access the rapidly growing Chinese automobile market. Initially these JVs were constrained by government regulations
but China’s compliance with the WTO has eased some of these restrictions
(Alon, Fetscherin, & Sardy, 2008).
Since China joined the WTO, its automobile industry has primarily
been driven by an increase in passenger cars rather than heavy or commercial vehicles, with a total production in 2008 of 6.7 units, which
jumped to 10.4 million in 2009 (see Figure 17.1). These cars were mainly
sold in the growing and large domestic market. Four key reasons led
to the rapid growth in the domestic market: (1) an increase in per
capita wealth spurred by rapid economic growth, (2) heavy foreign investments in China and the requirement to form joint ventures with Chinese
companies, (3) massive infrastructure investments in roads, bridges, gas
stations, and ports, and (4) the liberalization of trade and investment
policies.
Auto exports have also grown: to 310,000 in 2008, also representing a
small fraction of cars manufactured in the country (Fetscherin & Toncar,
2009). In an effort to further capitalize on international opportunities, many
domestic firms have began to build or purchase sales, assembly and manufacturing facilities abroad, striving to follow in the footsteps of their Japanese
and Korean predecessors.
But most Chinese automobile companies face significant challenges, especially since the industry is still in its infancy in terms of quality, product
features, and research and development (R&D). Issues of product quality and reliability, inability to meet safety and emissions standards, poor
sales and distribution networks, and failure to develop effective after-sales
service/maintenance networks are not uncommon. Further, Chinese auto
makers suffer from a negative country of origin image which prevents them
from creating a positive brand perception among specifically consumers in
developed countries. Research shows that products from less developed or
developing countries are perceived less favorably among consumers since
they are considered to be of inferior quality and untrustworthy. A favorable
country image is critical for Chinese car brands that have yet to emerge and
enter international markets.
China, despite having one of the world’s fastest growing economies and
the largest automobile market, is considered to have products of inferior
quality by consumers in developed countries. Consumers also disdain the
political corruption and unethical company practices they hear and read
about. Consequently, domestic Chinese auto manufacturers need to gain
the trust of these consumers by implementing appropriate strategies such as
acquiring well-known international brands and partnerships.
Consumer perceptions of quality and their purchase decisions are influenced not only by a brand’s country of origin but also where the products
380
Cases of Chinese FDI
are manufactured or assembled (Pappu et al., 2006). Consequently, Chinese
auto manufacturers can position their brands positively through the establishment of an international value chain. Their products must be strategically positioned to maximize the effectiveness of their marketing activities,
increase overall brand awareness, influence brand image, and ultimately
build brand equity. The location of manufacturing or assembly can play a
pivotal role as consumers develop brand perceptions.
Chinese auto companies should strongly consider OFDI to establish not
only sales offices but manufacturing and assembly facilities in international
markets to overcome the negative country of origin perception. Honda and
Hyundai have executed a similar strategy in the past (Fetscherin & Toncar,
2009), but it requires significant time and investments in resources.
2. Geely automobile holdings limited
Based in Zhejiang province, Geely is a large manufacturing conglomerate. First it produced primarily motorcycles, scooters, and engines. The
company later added an import-export trade company, a real estate management company, several hotels, and a travel services company. In 1998,
a motorcar division was established in collaboration with Jia Auto Works
from Sichuan province. Table 17.1 outlines the key milestones of Geely
Automobile.
Two factories were initially set up, one in Quzhou, the other in Huzhou,
both in Zhejiang province. Geely Automobile Holdings is owned by
51 percent by Proper Glory and 49 percent is publicly held. Headquartered
in Hangzhou, near Shanghai, Geely has five major manufacturing plants and
eight assembly and power train manufacturing plants, with an annual production capacity of 460,000 units (see Map 17A.1). Figure 17.2 illustrates the
organizational structure of Geely Automobile Holding.
Among the initial car models was the Haoqing, a four-door sedan, followed by the LG-1 station wagon. Geely was the first Chinese private
enterprise to build passenger cars (Alon, Fetscherin, & Sardy, 2008). Since
then, they have regularly introduced new car models. Today, Geely is one of
China’s top ten automobile manufacturers and among the nation’s top 500
firms.
In order to complement rapid growth in the domestic market, the company invested heavily in manufacturing capacity, technological research,
product development, and first-class dealer networks through the establishment of long-term partnerships with leading overseas manufacturers
and suppliers. Through these investments, Geely has emerged as a domestic leader with unique technologies and breakthroughs in R&D. In 2010,
Geely sold its products in 55 countries, including the Middle East, Eastern
Europe, Africa, Southeast Asia, and Central and South America. Several of the
381
Table 17.1 Geely’s milestones
Date
Milestone
Nov. 1986
Geely founded on November 6, 1986.
Aug. 1998
The Geely Haoqing SRV rolled off the production line.
Aug. 1999
Construction of Geely’s new Ningbo production facility began.
Oct. 2001
Geely’s JI-6360 model certified by the government, making Geely the
first private company qualified to be producing automobiles in China
Aug. 2003
Geely exported its first car.
May 2005
Geely Automobile Holdings listed on the Hong Kong Stock Exchange.
Sep. 2005
Geely participated in the 61st Frankfurt Auto Show, becoming the first
Chinese automobile manufacturer to exhibit there. It exhibited the
China Dragon, Freedom Fleet, Vision, Haoqing, and Marindo models.
Dec. 2005
Geely launched the ‘Future Talent Fund’, a charitable program to help
students train as engineers.
Jan. 2006
Geely’s 4G18 engine, Geely’s self-developed automatic transmission,
and the Geely EPS intelligent steering booster displayed at the Chinese
national innovation exhibition.
Mar. 2007
Geely formed a joint venture with Manganese Bronze Holdings,
makers of the London Taxi. Geely owns a 52% stake in Shanghai
LTI Automobile Ltd. producing this iconic car in China.
May 2007
The Geely operations and management committee announced
international strategy to focus on new markets outside China.
Jan. 2008
Geely participated in the North American International Auto Show in
Detroit, winning the Special Contribution Grand Prize for Invention
and Creation for its Blow-out Monitoring and Brake System (‘BMBS’), a
unique safety system independently developed by Geely.
May 2008
Geely, together with its employees, suppliers, and marketing agents,
donated RMB 10 million to support relief efforts following the Sichuan
Wenchuan earthquake. Geely launched the ‘Geely Future Talent Fund’
and the ‘Li Shufu Education Fund’ with donations totaling RMB
12.5 million.
Jun. 2009
Geely acquired Australian firm Drivetrain Systems International Pty
Ltd.
Mar. 2010
Geely signed definitive Stock Purchase Agreement with Ford to
Acquire Volvo Car Corporation.
Jul. 2010
The creation of the Emgrand auto brand. Emphasizing ‘luxury, steady
and power’, the Emgrand brand released by Geely is medium-high end
product with core value of ‘Chinese wisdom, world quality’.
Source: Geely (2010a, 2010b).
382
Cases of Chinese FDI
Proper Glory
Public
51%
49%
Geely Automobile Holdings Limited
(Issued shares: 7,312 million shares)
20%
91%
91%
91%
91%
91%
Zhejiang
Kingkong
Zhejiang
Ruhoo
Zhejiang
Geely
Shanghai
Maple
Hunan
Geely
100% Luqiao
plant
100% Linhai
plant
100% Ningbo
plant
100% Shanghai
plant
100% Xiangtan
plant
Shanghai 48%
51%
LTI
(Taxi, limousine
& saloon cars)
100%
Zhejiang
Fulin
(Auto parts)
Manganese
Bronze
Holdings
PLC
90%
10%
100% Chengdu plant
100%
(Australia)
(Automatic transmissions)
Figure 17.2
100% Jinan plant
100% Lanzhou plant
Geely automobile corporate structure
Source: Geely (2010a, 2010b).
company’s models are sold abroad using contract manufacturing agreements
with local partners in Russia, Ukraine, Taiwan, and Indonesia.
2.1. An overview of Geely’s performance
As the only Chinese auto manufacturer to develop its own engines and other
technologies, Geely has concentrated mainly on organic (internal) growth
through existing brands and complementary partnerships. In 2009, company sales of Geely sedans increased 60 percent compared to 2008, with
a total of 326,710 units sold. The Free Cruiser sedan accounted for the
most sales (see Figure 17A.1). Figure 17.3 gives the breakdown of Geely’s
car models sold in 2009.
Geely Auto’s total net profit increased 52 percent to RMB 1.32 billion
(US$194.2 million) and total revenue for 2009 was RMB 14.1 billion
(US$2.07 billion) (Geely, 2010a, 2010b). Despite these positive overall
trends, Geely’s exports declined by 49 percent to about 19,350 units. While
export sales accounted for 19 percent of total sales in 2008, they represented
only about 6 percent of total sales in 2009 (Geely, 2010a, 2010b), probably because of a sharp decline in the Eastern Europe and Central American
markets due to the global financial crisis. As a result of negative export sales,
Geely restructured its distribution channels in some of its major markets and
sped up entry into a number of emerging markets such as Cuba and Taiwan.
Fortunately, positive signs began to appear by the end of 2009, as exports
doubled in the second half of the year. This trend may suggest that the
Marc Fetscherin and Paul Beuttenmuller
383
100% = 326,710
Emgrad EC
Geely Panda
3%
9%
Maple
12%
350,000
300,000
250,000
200,000
Free
Cruiser
34%
150,000
100,000
Vision
16%
50,000
2008
2009
2001
2002
2003
2004
2005
2006
2007
1999
2000
1998
0
Geely KingKong
26%
Figure 17.3 Sedan sales and breakdown by models (2009)
Source: Geely (2010a, 2010b).
export market is rebounding following the economic crisis, giving Geely
a major opportunity to expand and grow its international presence and
capture sales from major players worldwide.
2.2. Developing an international presence
Geely Auto began exporting to North Africa and Latin America in 2004. But
the company’s ultimate goal consisted of tapping into the US market. Geely’s
overseas business is currently supported by 50 distributors and 650 suppliers worldwide. This network extends to 50 countries across five continents
and includes over 500 retail distributors and 600 service stations (Geely,
2010a, 2010b). Additionally, Geely was the first Chinese auto manufacturer
to establish 24-hour after-sale service information and call centers.
With the goal of establishing 15 production plants worldwide and selling
two-thirds of its automobiles outside of China, Geely began to aggressively engage in overseas investments. The following outlines Geely’s key
international acquisitions in the last few years.
• In 2006, Geely acquired a 23 percent stake in Manganese Bronze Holdings, London’s leading taxi company, and, one year later, a joint production venture to manufacture the renowned London taxis and other
limousine and transportation services (Geely, 2010a, 2010b).
• In 2009, the company continued its aggressive acquisition strategy
by purchasing Australian auto parts maker Drivetrain Systems International, a firm engaged in the design, development, and manufacture of
automobile transmissions.
• In 2009, overseas assembling plants were established in Ukraine, Russia
and Indonesia to produce vehicles in SKD/CKD (Geely, 2010a, 2010b).
384
Cases of Chinese FDI
• While this strategy undoubtedly helped Geely improve its technological
capabilities and overall product quality, the company had yet to make
any big-name acquisitions. That changed in 2010 when Geely acquired
100 percent of Volvo and its assets for $1.8 billion from Ford Motor Company. This purchase represented the largest acquisition ever of an overseas
carmaker by a Chinese company. In doing so, Geely hoped to expand
its share in the domestic Chinese luxury car market and use the newly
acquired Volvo brand as a strategic asset. It also expects to derive positive brand associations and ultimately emerge as a legitimate player in
developed automobile markets such as the United States.
Today, with a vehicle product portfolio that ranges from Geely CK, MK, FC,
LC, FE, SL-1 to new sub-brands of GLEAGLE, EMGRAND, and ENGLON,
Geely is well on the way to a new round of overseas market expansion.
Through advanced information management systems such as ERP, DMS,
professional overseas sales and marketing teams, and continually improving
internal management, Geely expects to forge even better global partnerships
and consumer relationships and realize its dream: ‘Let Geely cars go all over
the world’ (Geely, 2010a, 2010b).
2.3. The Volvo acquisition
From 2008 to 2010, Volvo lost US$2.6 billion and displayed few signs of
long-term sustainability. While other companies may have been interested
in purchasing Volvo, Geely Auto eventually stepped in and acquired the
brand, representing a significant milestone in the Chinese auto industry. Li
Shufu, Chairman of Geely commented:
This is a historic day for Geely, which is extremely proud to have acquired
Volvo Cars. This famous Swedish brand will remain true to its core values
of safety, quality, environmental care, and modern Scandinavian design
as it strengthens the existing European and North American markets and
expands its presence in China and other emerging markets (Geely, 2010a,
2010b).
As Li implied, a variety of motives drove Geely’s acquisition of Volvo.
The Chinese market served as a safe-haven for automobile manufacturers
suffering from the economic recession, thereby intensifying competition
throughout the global market. By acquiring Volvo, Geely hoped to compete in China’s luxury car market against brands such as Audi, BMW,
and Mercedes-Benz and improve its brand awareness, image, and perception among consumers throughout international markets. Ultimately this
should allow Geely to balance out the negative country of origin effect by
establishing a positive corporate brand.
Marc Fetscherin and Paul Beuttenmuller
385
Nanjing Auto executed a similar strategy when it acquired certain assets
of MG Rover Group and Powertrain Ltd. in 2005. Since the Volvo buyout,
Geely has been setting up plans for a new Volvo China factory to be located
in Beijing, and also an R&D center that will be paired with the Geely R&D
center in Hangzhou, China. Geely also recently purchased Zhongyu Auto in
China to gain access to a specialist production line where Volvo vehicles will
be temporarily built until the Beijing factory is ready. However, the Chang’an
Volvo joint venture, which was set up by Ford, will continue to assemble the
S40 and S80 in China until the joint venture expires, which will probably
not be renewed by Geely.
Success in the Chinese automobile market has depended on a firm’s ability
to sell inexpensive sedans. As Geely strives to expand its brand internationally, it must expand its product portfolio and develop sustainable growth
by means of quality improvement, technology development, and brand
building. Volvo’s positive image of providing safe and green technology can
ultimately prove a valuable asset for Geely, since they hope to get a positive
brand spillover effect onto their own brand.
The acquisition will enhance Volvo’s strength in the international markets
and the increased size of its operations will have positive effects on costs and
(hopefully) profits.
2.4. Shift in strategy
Although the Chinese automobile market has witnessed remarkable growth
in recent years, the demand for exports remains weak in light of the current economic business environment. Consequently, Geely recently shifted
its strategy from competing on price to competing on quality, service, customer satisfaction and brands (Geely, 2010a, 2010b). The firm wants to be
seen over the long run as a leading supplier for the safest, most environmentally friendly and energy-efficient vehicles worldwide. In purchasing Volvo,
frequently called ‘the company that builds the safest cars in the world,’ Geely
may realize its goals ahead of schedule (China Daily, 2010). To reach its longterm ambitions faster, Geely officially announced a strategic transformation
through expansion into higher-end vehicles and major foreign investments
to enhance their technology competence and product branding. This would
allow Geely to shift its competitive advantage from price-competitive to
technology and performance-competent, with increases in profits and sales
volume, improvements in the product portfolio to higher-end cars, and price
stability (Geely, 2010a, 2010b). Further, Li Shufu implemented a multi-brand
strategy in product sales and marketing (see Figure 17A.2). By making major
investments to enhance the company’s technology competence and product branding, Geely wants to appeal to a wider consumer base worldwide.
Geely’s technology and performance-competent strategy is built upon six
key tenets:
386
Cases of Chinese FDI
1) Expansion of sales volume through broadening the product line and
gaining international exposure to better achieve economies of scale.
2) New product development focus through introducing 42 new models
by 2015.
3) A technology focus based on power-train processes to narrow the technology gap between Geely and key international players.
4) Expansion of production capacity through upgrading and expanding
existing facilities, building new facilities in developing countries, and
manufacturing abroad.
5) Focus on quality, service, customer satisfaction, and brands.
6) Expansion through additional mergers, acquisitions, and strategic
alliances.
These pillars of Geely’s new strategy clearly emphasize the concepts of quality improvement, technology development, and brand building. As part of
this strategy, the company established a quality control system in accordance
with international standards to reduce the number of defective vehicles by
50 percent in its first year (Geely, 2010a, 2010b). Additionally, the firm
restructured its supplier network based on its new emphasis on safety and
efficiency, eliminating 88 original suppliers and adding 69 new ones, 37 of
which were major international players. This shift in strategy has already
yielded visible results. Geely has made breakthroughs in safety, energy efficiency, and environmental protection while being granted more than 1200
patents, 30 of them international.
The company has introduced innovative technologies to differentiate
its brand in the international marketplace. Geely introduced China’s first
electronic power steering system and two unique technologies known as
the ‘blow-out monitoring and breaking system,’ and the ‘energy efficient
building system.’ The first of these consists of a process that safely controls the car and brings it to a halt in the event of a blowout. The energy
efficient system reduces noise during the production process and cuts gas
emissions by up to 35 percent (Geely, 2010a, 2010b). Finally, the company
plans to introduce five hybrid cars and other alternative fuel vehicles (such
as plug-in and electric) that are already under development by the end
of 2015.
2.5. Establish a global brand
Geely, through its multi-brand and platform strategies focused on technology and performance competence, is striving to improve its overall brand
awareness and brand image and favorably position the brand in the international marketplace. In order to further expose its brand, Li Shufu exhibited
Geely’s automobiles in the Detroit International Auto Show in the last few
Marc Fetscherin and Paul Beuttenmuller
387
years, one of the most important windows for entry into the global auto
industry. By participating in this event, Li felt he could convince American
consumers that Geely’s upgrades in technology, safety, and quality could
provide the market with a low-cost, reliable alternative. The acquisition of
the Volvo brand will further strengthen Geely’s argument from this perspective as well, potentially allowing the company to overcome its negative
country of origin perception. Should Geely surmount the negative connotation of Chinese-manufactured products, it will ultimately be capable
of creating a brand image that convinces and appeals to consumers in
developed markets.
According to a McKinsey study on the Chinese automobile market, emerging brands such as Geely could defy conventional wisdom and capture a
significant share of international automobile sales much more quickly than
expected (Barbosa, Hattingh, & Kloss, 2010). Chinese automakers already
enjoy a 35 percent cost advantage over competitors in developed markets.
However, to fully capitalize on overseas opportunities, Geely must overcome organizational and technological barriers as well as demand trends
worldwide. By surmounting these obstacles and leveraging China’s massive
infrastructure build-up, Chinese firms could leapfrog current technology
and develop a significant advantage in emerging clean technologies, such
as electric and hybrid vehicles, without incurring the costs that its competitors would encounter (Barbosa, Hattingh, & Kloss, 2010). In addition
to acquiring a world-renowned brand in Volvo, Geely has invested heavily
in emerging technologies, allowing the company to rapidly progress up the
learning curve, improve its brand image, and develop a more sophisticated
understanding of consumer needs.
3. Future outlook
In 2009, Geely was awarded the State Technology Achievement Class 2
Award for its achievements in technological innovation, making it the only
automobile company to ever receive the honor. However, the company is
still in an early stage of output, sales volume, brand awareness, and market share. Purchasing Volvo has already allowed Geely to improve its brand
image in the domestic Chinese market, but challenges abound. Constant
investment in R&D for new product platforms, new technologies, improved
quality control, and marketing and advertising will require large financial
resources. Additionally, the company will need to improve its distribution
and sales networks, satisfy the safety and emissions standards of developed
markets, and manage currency risk. Most importantly, however, Geely must
build trust with consumers and differentiate the brand in the most competitive marketplace in the world while overcoming China’s poor country of
origin effect.
388
Cases of Chinese FDI
Geely was declared one of the top 100 Chinese firms the government
would like to see emerge as an industry leader, thereby providing the firm
with opportunities to raise capital from government loans below market
rates. With the weakening of the US automobile industry, it appears that cars
from emerging countries are more likely to succeed. Geely will not be able
to compete on price alone. Li Shufu and his corporate management must
consider the challenges of entering international markets cheaply, quickly,
and safely, while providing customers with a high quality, reliable product
and with the necessary sales and service networks. By continuing to invest
in world-class technologies and positioning itself according to its newly
implemented strategy, Geely may be able to overcome the negative country
of origin effect and establish a positive strong brand awareness and brand
image, but that is a long road to go.
Acknowledgements
The authors are grateful for the support of the Swiss National Science
Foundation.
Appendix
Jinan plant
(100,000 units)
Shanghai plants
(100,000 units)
Lanzhou plant
(50,000 units)
Chengdu plant
(70,000 units)
Xiangtan plant
(50,000 units)
Total annual production capacity
by end of 2009 = 460,000 units
Map 17A.1
Geely automobile production plants
Source: Geely (2010a, 2010b).
Ningbo plants
(150,000 units);
Luqiao plants
(100,000 units);
Linhai plants
(60,000 units)
389
Free Cruiser
(1.3L, 1.5L) RMB 43–56K
Geely Kingkong/Jinyin
Old
Geely
(1.5L) RMB 52–70K
Vision
(1.5L, 1.8L) RMB 62–104K
Maple
Maple
Geely Panda
New
TX4
(1.5L, 1.8L) RMB 52–70K
(1.0L, 1.3L) RMB 40–58K
(2.4L, 2.5L diesel) RMB 208–228K
Englon
Emgrand
EC7
EC7-RV
Figure 17A.1 Product portfolio
Source: Geely (2010a, 2010b).
Figure 17A.2 Example of Geely car
Source: Geely (2010a, 2010b).
(1.5L–1.8L) RMB 76–112K
390
Cases of Chinese FDI
Note
This case has been developed by the authors solely for the purpose of class discussions. It is not intended to serve as endorsements or data source. A similar version
appeared in J. Zentes, B. Swoboda, & D. Morschett (eds), Fallstudien zum Internationalen
Management, 4th ed. Gabler, Wiesbaden.
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Nations Press.
Final Reflections
Ilan Alon, Marc Fetscherin, and Philippe Gugler
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.
This book provides a unique contribution to the literature on Chinese
OFDI. Distinguished authors from all over the world offer a wide range
of up-to-date findings and pepper them with examples of Chinese globalism. Topics include macro- and micro-environmental determinants of
OFDI and the evaluation of current trends and motives and modes of entry
that Chinese companies use. This book is part of a stream of research on
books about the globalization of Chinese enterprises, including Globalization of Chinese Enterprises (2008) and China Rules (2009), both published by
Palgrave. This book differs from others, however, because it focuses entirely
on Chinese OFDI. Among the core questions motivating our research exploration are: Why do Chinese firms invest abroad? How do they enter foreign
markets? What are the impacts of OFDI from China on host countries,
related industries and firms?
Part 1 examines the macro-environmental determinants of Chinese OFDI,
which, as Peter Buckley notes in the Foreword, are crucial in analyzing the
relationship between ‘private’ and various forms of state-owned enterprises.
Bing Ren, Hao Liang, and Ying Zheng provide a perspective on the role
of the state and how associated institutional factors shape Chinese OFDI.
The next chapter, by William Wei, Ilan Alon, and Liqiang Ni, reviews the
391
392
Final Reflections
literature on Chinese OFDI and its determinants by analyzing home country
macroeconomic determinants. Paz Estrella Tolentino’s research in Chapter 3
further examines the relationships among a range of home country-specific
macroeconomic factors and the level of China’s OFDI flows. The last chapter
in this part, by Michael Keller and Laura Vanoli, examines sovereign wealth
funds (SWF), another type of state investment. The authors outline the
objectives of Chinese sovereign wealth fund investments and the role of
the government in their investment decisions.
Part 2 explores the micro-environmental determinants of Chinese
OFDI and firm-specific factors. Xiaobo Wu, Wanling Ding, and Yongjiang
Shi explore the motives and patterns of Chinese manufacturing firm investments in developed countries. They show that Chinese manufacturing firms
have mixed motives for investing in developed countries, although marketseeking and strategic asset-seeking are the two primary motives. Xiaohui Liu
and Jiangyong Lu test a two-way causal link between internationalization
and CEO equity ownership in Chinese listed firms. They show that the two
factors mutually affect each other, suggesting that CEO equity ownership
and internationalization should be treated as interrelated issues, since any
separate examination may produce biased results. Chinese multinational
corporations (MNCs) increasingly use cross-border mergers and acquisitions
(M&As) to acquire strategic assets or knowledge for greater competitive
advantage in the global marketplace. Ping Deng examines that topic in light
of the effects of absorptive capacity on international acquisitions by Chinese
firms. By comparing two international acquisitions by leading Chinese firms,
Lenovo and TCL, Ping Deng uncovers key firm-level factors and mechanisms
that may contribute to international M&A outcomes. He finds that prior
related knowledge, combinative capabilities, and strategy execution are critical factors that determine the success or failure of cross-border acquisitions
by Chinese MNCs.
Part 3 of our book looks at Chinese OFDI in Europe and North America.
Yun Schüler-Zhou, Margot Schüller and Magnus Brod discuss both the
pull and push factors for Chinese OFDI in the European Union. They
describe the Chinese government’s policy guidelines for direct investments in the European Union, including policies toward specific industries
and countries and the incentives EU countries offer to attract Chinese
investments. They demonstrate that the European Investment Promotion Agencies (IPAs) policy toward Chinese investments results in Eastern
European countries relying on more complex incentive systems compared to the Western European countries. Jan Knoerich next examines
the rise of Chinese OFDI in the European Union. He focuses on location choice, investment decisions, entry mode, and firm competitiveness, juxtaposing the exploitation and sourcing of competitive advantages by Chinese outward investors in the EU and assessing their relative
importance.
Ilan Alon et al. 393
Focusing more narrowly on one European country, Yipeng Liu and
Michael Woywode provide a detailed country description of Chinese investments in Germany. They focus on the integration approach of Chinese
cross-border M&As in Germany and identify possible causes of the light
touch approach. Contradicting the conventional wisdom on M&A integration, the authors find that for maximum value creation, by unleashing the
potential of realized absorptive capacity, managers should consider crossborder M&As from a multidimensional perspective. The authors stress the
important role of intermediaries, such as professional firms, in smoothing
Sino-German cooperation in general and cross-border M&As in particular.
Looking at another European country, the next chapter, by Anja Fladrich,
links the Chinese diaspora in Northern Italy to trade and investment.
She looks at small and medium enterprises in Italy rather than large
multinationals. Her study suggests that Chinese investment in Italy is linked
with immigration, that Chinese entrepreneurs have had a large economic
impact on the region, serving both the ethnic enclave and the local clientele,
and that trade in textiles has formed a cluster within the industrial enter of
Prato, bringing new life into this traditional sector. The last chapter of Part 3,
by Xiaohua Lin and Qianyu Chen, examines investments by Chinese statecontrolled entities in Canada, including the interests, concerns, and strategic
options associated with OFDI.
Part 4 of our book looks at Chinese OFDI in Africa. China’s highly visible
presence in Africa is one of the most commented-on facets of globalization in the twenty-first century. Gayle Allard finds that Chinese OFDI in
Africa has not only risen much faster than global OFDI, but appears to
be more resource-driven and more closely associated with corrupt environments. Next, Raphael Kaplinsky and Mike Morris examine large-scale
Chinese OFDI in Sub-Saharan Africa (SSA), providing evidence on the extent
of different types of Chinese investments. Chinese investments are usually
closely bundled with aid and trade. The authors conclude that Sub-Saharan
countries should maximize the opportunities open to them by adopting an
integrated response to Chinese investors who seek to draw on the continent’s
natural resources.
Part 5, the last section, explores three cases of Chinese OFDI in different parts of the world. Wenxian Zhang analyses Chinese investments in the
state of Florida, USA, in building Splendid China, a theme park based on
landmarks of China in miniature form. This case represents a failed overseas
venture by Chinese firms, among several that occurred during the early part
of the reform era. Florida Splendid China represents not only a major fiasco
in the history of Florida tourism but one of the most disastrous international investments ever made by a Chinese company. The next case, written
by Francesca Spigarelli, William Wei, and Ilan Alon, is about the acquisition
by Qiang Jiang of Benelli in Italy, a practical example of difficulties in integration when an M&A encounters major cross-cultural differences. Among
394
Final Reflections
the factors identified as relevant to successful integration are national cultures, fiscal rules, operating philosophies, and common vision. The last
case in our book, by Marc Fetscherin and Paul Beuttenmuller, examines
the competitiveness of the Chinese automotive industry with a specific
focus on Geely’s internationalization efforts and its acquisition of the Volvo
brand. The author investigate the underlying challenges and opportunities
Chinese automotive companies encounter when going global and what happens when the country of origin effect involves a developing country brand
(Geely) acquiring a developed country brand (Volvo).
The chapters in this book form a crucial foundation for a better understanding of drivers, the processes, and the impact of Chinese OFDI.
Antecedents, or drivers, of Chinese OFDI can be classified into country or
institutional level, industry level, and firm level drivers. Institutional level
drivers are home country institutional factors and the role of government
(Chapter 1 or Chapter 2), the role of state controlled funds (Chapter 12)
or sovereign wealth funds (Chapter 4), host country institutional factors
(Chapter 3 or Chapter 13), or cultural components (Chapter 16).
Industry level drivers are industry structure, industrial policy (Chapter 8),
and industry competitiveness (Chapter 17). Firm level drivers include
type of firm and firm ownership (Chapter 6), CEO and overall leadership
(Chapter 6), relation to trade (Chapter 2), and the relationship to resources
capabilities (Chapter 7). Although the researchers look in detail at the
antecedents of Chinese OFDI, further research areas for analysis include
more ‘soft’ related variables on the institutional level, such as cultural factors
or country image perception, on the industry level industrial cluster related
OFDI as well as the relationship between inward FDI or exports and OFDI.
On the firm level, the book’s research examines inter-firm linking and
firm-government relationships as well as similarities and difference between
firm-related investments and sovereign wealth funds, exchange rates, foreign
currencies, among others.
The processes related to Chinese OFDI on the firm level can be classified
into mainly firm strategies and firm structure-related research. Firm strategies include strategic intent and fit (Chapter 10), competitive strategy and
firm competitiveness (Chapter 9), motives to engage in OFDI (Chapter 5),
location decision (Chapter 9), entry mode (Chapter 9) or ownership
choice (Chapter 6), as well as degree of internationalization (Chapter 6).
Firm structure related research includes organizational structure or culture (Chapter 16), the importance and role of the subsidiary, information
and knowledge transfer and dissemination (Chapter 7), as well as human
resources management (Chapter 11 or Chapter 15). As Peter Buckley notes
in the Foreword, managerial aspects of Chinese OFDI are central to explanations of success and failures of all OFDI. In that respect, future research
should highlight more cases of failure, which are often under reported and
under researched.
Ilan Alon et al. 395
Looking at the consequences or impact related to Chinese OFDI from a
firm’s perspective, the chapters can be grouped into those that impact the
firm’s competitiveness as well as those that impact the firm’s performance.
Firm competitiveness relates to the degree of competitiveness (Chapter 7
or Chapter 9), impact on the industry (Chapter 11), as well as impact on
home or host country’s competitiveness (Chapter 12 or Chapter 14). Firm
performance consists of two components: ‘hard’ factors such as market
share, profitability, degree of internationalization, and ‘soft’ factors such as
knowledge absorption, capability building and innovation (Chapter 7), or
brand value (Chapter 17).
Knowledge on Chinese OFDI drivers has expanded in recent years, but the
research mostly focuses on the processes related to OFDI. Very little research
explores whether Chinese OFDI is successful in terms of outcomes, such as
profitability and value creation for the shareholder, serving the state’s objectives, locking out other competitors, and securing global resources beyond
what is available on open markets. We encourage researchers to further
explore this and other research questions relating to the globalization of
Chinese enterprises in the coming years.
References
Alon, I. & McIntyre, J. (eds.) 2008. The Globalization of Chinese Enterprises. New York:
Palgrave Macmillan.
Alon, I., Chang, J., Fetscherin, M., Lattemann, C. & McIntyre, J. (eds.) 2009. China
Rules: Globalization and Political Transformation. New York: Palgrave Macmillan.
UNCTAD WIR. 2009. World Investment Report 2009. New York and Geneva: United
Nations Press.
UNCTAD WIR. 2010. World Investment Report 2010. New York and Geneva: United
Nations Press.
Author Index
Acharya, R., 270
Ackerly, A., 345
Ahlstrom, D., 24
Aizenman, J., 58
Ajakaiye, O., 308, 311, 313, 314
Akoorie, M., 39
Alden, C., 293
Alessandri, T., 122
Aliber, R. Z., 13, 44
Allard, G., 6–7
Almeida, J. G., 39
Almeida, P., 39, 178
Alon, I., 1, 2, 8, 39, 109, 137, 142, 151,
212, 236, 258, 280, 376, 379, 380,
391, 393
Altbach, E. G., 81, 85, 86, 87, 94
Amelio, William, 145
Amit, R., 138
Andreosso-O’Callaghan, B., 178
Antkiewicz, A., 191
Ash, R., 178, 179
Asiedu, E., 289
Astrachan, J. H., 215
Atkins, R., 212
Au, L. W., 329
Autio, E., 39
Baisden, D. R., 344
Bakkalapulo, A., 344
Balfour, F., 234, 236, 244
Ball, M., 337
Bandelj, N., 165
Bankston, J., 344
Barbosa, F., 387
Barkema, H., 142
Barnett, C., 342, 343, 345, 347
Barney, J. B., 39, 177, 213
Barrell, R., 57, 58
Bartlett, C. A., 39
Beamish, P., 74, 124
Beausang, F., 177, 178
Becattini, G., 240, 245
Benelli, G., 355
Benelli, T., 354
Bengston, M., 245
Bergsten, C., 57
Besada, H., 304
Bethel, J., 126
Beuttenmuller, P., 8
Bhattacharjee, S., 260, 261
Bieri, J., 56
Billington, N., 56
Bird, Ningbo, 49
Birkinshaw, J., 214
Björkman, I., 214
Blangiardo, G., 243
Blank, D. M., 347
Blonigen, B. A., 56, 58
Bloodgood, J. M., 39
Boie, B., 86, 235, 236, 239,
267, 377
Boisot, M. H., 14, 40, 258
Bolling, C., 57
Bonaglia, F., 179
Bond, M. H., 243, 247
Booth, W., 345
Bordonaro, F., 259
Bouw, B., 257
Bowen, P., 123
Brandes, P., 122
Brandt, P. T., 58
Brautignam, D., 310
Broadman, H. G., 306, 311, 313
Brod, M., 4, 392
Bromiley, P., 124
Browning, M., 337, 344
Brush, T., 124
Bruton, G. D., 13, 24
Buck, T., 55, 123, 126, 132, 179, 238
Buckley, P. J., 12–15, 13, 14, 15,
39–45, 40, 41, 42, 43, 44, 45,
55, 57, 97–8, 108, 109, 123, 158,
164, 177, 179, 191, 212, 238, 239,
377, 391, 394
Burgers, W., 123
Burghart, N., 179
Burke, C., 311, 313, 314
Byrd, A., 341–42, 346
396
Author Index 397
Cai, K. G., 31, 55, 236
Calderon-Rossell, J. R., 56
Cantwell, J., 43, 57, 74, 108, 177, 178
Capron, L., 141, 143, 217
Carney, M., 219
Carpenter, M., 122, 124, 125, 130
Carroll, T. N., 29
Cartwright, S., 213
Casson, M., 13, 108, 177
Caves, R. E., 13, 39, 56, 177
Ceccagno, A., 237, 241, 243, 244,
246, 248
Chaisse, J., 81
Chakrabarti, A., 57
Chan, S., 97, 98, 238
Chang, H.-J., 14
Chang, S. J., 55, 57
Chang, T., 39
Chauduri, S., 139
Chen, C., 238, 239
Chen, E., 108
Chen, F., 330
Chen, G., 330, 337, 348
Chen, H., 158
Chen, J., 330
Chen, Q., 6
Chen, T.-J., 158
Chen, X. H., 273
Chen, Y., 120
Cheng, L. K., 49, 204
Chetty, S. K., 39
Cheung, Y., 38
Child, J., 14, 39, 40, 41, 49, 109, 137,
138, 141, 145, 157, 178, 179, 239,
259
Chiou Wei, S. Z., 57
Choi, J. J., 57
Chowdhury, A. R., 56
Chuanzhi, Liu, 144
Churchward, C., 344
Churchward, J., 346
Claessens, S., 13
Clark, L., 345
Clegg, L. J., 12, 45, 55, 57, 109, 123, 179
Cogman, D., 213, 214
Cognato, M. H., 81, 85, 86, 87, 94
Cohen, M. W., 137, 138, 140, 215
Collier, P., 292
Connelly, B., 124, 125
Constantine, G., 343
Cooke, F. L., 217
Cool, K., 13
Corkin, L., 301, 311, 313, 314
Cotner, M. G., 347
Covin, J., 138
Cristaldi, F., 243, 245
Cross, A. R., 12, 55
Cuervo-Cazurra, A., 280, 291
Cui, L., 40, 42, 109, 212
Culem, C. G., 56
Curran, L., 189
daCosta, R., 124
Daily, M., 138
Dalekowschodnia, S., 167
Dalton, D. R., 138
Daoyu, L., 337
Datta, D., 122, 124, 126
Davies, K., 258
Davies, R. B., 263
De Propris, L., 179
DeFusco, R., 126
Dei Ottati, G., 241, 245
Delios, A., 128
Deng, P., 4, 11, 14, 33, 39, 40, 41, 49, 55,
97, 137, 142, 143, 145, 149, 178,
179, 212, 219, 238, 239, 329, 330,
349, 392
Denicolai, S., 39
Denison, T., 241, 243
Devies, K., 234
Dharwadkar, R., 122
Diamond, R., 348
Diaz, G., 339
Diebold, F., 73
Dierickx, I., 13
Dillon, P., 340
Ding, D. Z., 13, 235
Ding, W., 3, 392
Djankov, S., 13
Dobler, G., 301, 311
Donadio, R., 251
Dongsheng, L., 148
Doolittle, L., 339, 340
Dore, R. P., 12
Drahokoupil, J., 165, 167
Driffield, N., 179
Du, J., 120
Dunlop, J., 337
398
Author Index
Dunning, J. H., 2, 11, 12, 13, 14, 28, 30,
38, 39, 42, 43, 48, 54, 57, 108, 109,
123, 158, 163, 164, 177, 178, 189,
314, 315, 376
Dyer, G., 212
Dykes, B., 124
Easterly, W., 292
Edwards, C., 179
Edwards, S., 56
Egger, H., 263
Egger, P., 263
Egri, C., 24
Eisenhardt, K. M., 110, 142, 220, 222
Eisner, M., 340
Elango, B., 13, 33
Enderwick, P., 39
Evangelista, F. U., 39
Falkner, D., 138
Fama, E., 124
Farmer, G., 332
Farooki, M., 312, 321–22
Farrell, D., 217
Farrell, R., 58
Fetcherin, M., 1
Fetscherin, M., 1, 8, 151, 376, 377, 379,
394
Fields, K. J., 282
Filatotchev, I., 13, 122, 124
Filippov, S., 161, 168, 179
Finkelstein, S., 214, 215
Fioretti, G., 240, 241
Fladrich, A. M., 6, 237, 244, 245, 249
Flores, I., 331, 333, 335, 345
Foss, N. J., 137
Foster, V., 313
Fotak, V., 269, 273
Foushee, B., 346
Franklyn, P., 261
Freeman, D., 312
Froot, K. A., 56
Fuchs, H. J., 235, 236, 237, 239
Fung, H-G., 55
García-Canal, E., 280
Garnaut, R., 249
Gaston, N., 58
Gavin, M., 338
Ge, G. L., 13, 235
Gedajlovic, E., 219
Gelb, S., 304, 305
Genc, M., 280, 291
George, G., 137, 138, 213, 215, 219, 330,
333, 337, 348
Georgopoulos, G. J., 56, 57
Geringer, J., 124
Ghauri, P. N., 39
Ghosh, I., 58
Ghoshal, S., 39
Gilboy, G. J., 178
Globerman, S., 189
Glossop, P., 261
Goldstein, A., 179
Gomes-Casseres, B., 14
Gomez-Mejia, L., 124
Gopinath, M., 57
Goranova, M., 122
Graham, E. M., 165
Grant, A. J., 217
Gray, H. P., 54
Griffin, L., 344
Griffith, D. A., 13
Grollmann, P., 217
Grubaugh, S. J., 43, 45, 57
Grubb, P. D., 39
Grunwald, R., 225
Gu, J., 234, 236, 282, 301, 302, 310
Guang, Y., 338, 339, 347
Gugler, P., 1, 81, 86, 151, 235, 236, 239,
267, 377
Guillén, M., 217, 280
Guisinger, S., 13
Guo, B., 120
Guo, J. Q., 56
Haig, A., 336
Haleblian, J., 214, 215, 218
Hall, P. A., 69, 218
Hambrick, D., 126
Hamilton, J. D., 63
Hamilton, R. T., 39
Han, B., 12, 158, 191, 259
Harney, A., 234
Harrison, B., 240
Harrison, J. S., 141
Harzing, A. W. K., 158
Hattingh, D., 387
Hawawini, G. V., 54
Hay, F., 179, 180
Author Index 399
Hayward, M. L. A., 141
He, F., 82, 83, 85, 87
He, L., 20
Heath, P., 14
Heckman, J. J., 216
Hendrickx, M., 124
Henley, J., 309
Hennart, J. F., 12, 13, 14
Herrmann, P., 122, 124, 126
Hesterly, W., 177
Hilsum, L., 317
Hitt, M. A., 39, 74, 122–7, 141, 150, 214,
215
Ho, P. C., 61, 62
Hodges, H., 344
Hodgson, G., 260
Holslag, J., 312
Hong, E., 39, 55, 74, 97, 188, 238
Hong, S., 56
Hongbin, J., 55
Hood, G., 336
Hope, O.-K., 12, 28
Horst, F., 57
Hoskisson, R., 122–4, 126, 127
Hua, J., 218
Huang, C.-H., 55, 179
Huang, Y., 14
Hughes, S., 250
Hummer, 107
Hunt, A., 347
Hutzschenreuter, T., 33
Hwang, P., 123
Hymer, S. H., 13, 108, 177
Inkpen, A. C., 188
Ireland, R. D., 39, 122, 123, 126, 141
Ivarsson, I., 178
Iversen, C., 13
Jackson, J. W., 347
Jackson, S., 74
Jacobson, S., 330, 346
Jansen, J. P., 139, 141
Jensen, M., 124, 126, 213
Jeon, B. N., 56, 57
Jiang, F., 40, 42, 109, 212
Jiang, Y., 24, 179
Jiang, Z., 15
Jiannian, Y., 339, 340
Jindra, B., 122, 124
Jiwei, L., 87
Johanson, J., 12, 33, 108, 177
Johnson, J. P., 239
Johnson, R., 126, 127
Jonsson, T., 178
Jopsom, B., 316
Joseph, S., 339
Kagame, P., 281
Kale, D., 301, 311
Kang, R., 179
Kang, Y., 217
Kao, E. H. C., 55
Kaplan, R. D., 282, 284
Kaplinsky, R., 7, 281–3, 285, 305, 311,
393
Kato, T., 132
Ke, Y., 179
Keister, L. A., 14
Keller, M., 2, 81, 84, 392
Keller von, E., 179
Kenney, B., 332
Kern, S., 82, 84
Khan, G., 344
Khana, T., 258
Khosravian, C., 245
Kieser, A., 225
Kim, H., 124, 127
Kim, L., 139, 140
Kim, S., 27, 56
Kim, W., 123
Kim, Y. K., 54
Kincaid, R., 347
Kindleberger, C. P., 177
King, D. R., 213
King, R., 138, 141
Klein, M. W., 56
Kloss, M., 387
Knickerbocker, F. T., 13
Knoerich, J., 5, 179, 186, 188, 392
Koch, U., 225
Kogut, B., 13, 57, 138, 141
Kohlhagen, S. W., 44
Komasa, B., 167
Komesaroff, M., 318
Konka, 148
Koop, G., 59
Kravis, I. B., 56
Krueger, J., 338
Krugman, P., 240
400
Author Index
Kshetri, N., 217
Kuemmerle, W., 178
Kumar, K., 54
Kumar, N., 30, 33
Kurihara, J., 235, 239
Kwan, C., 260
Kyrkilis, D., 42, 44, 45, 48, 57
Lall, S., 57, 108, 177, 315
Lancee, B., 248, 250
Lane, P. J., 138, 140, 141, 216
Lang, L., 13
Langley, F., 333, 334
Lardy, N. R., 234
Larsson, R., 214, 215
Lattemann, C., 216
Lau, C.-M., 13
Lau, M., 133
Lecraw, D. J., 177, 178, 315
Lee, C. K., 264
Lee, J., 343
Lee. T. D., 336
Lei, D., 140
Leonidou, L. C., 39
Leung, M. W. H., 243
Levinson, H., 215
Levinthal, D. A., 137, 138, 140, 215
Levitt, B., 215
Lewin, A. Y., 12, 13, 29, 32
Li, J. T., 218
Li, K., 55
Li, M., 218
Li, P. P., 55
Li, W., 24
Liang, H., 391
Lichtenthaler, U., 216
Lien, Y.-C., 13
Lin, J. D., 12
Lin, X., 6, 273
Lin, Z. J., 218, 219
Lindenbaum, B., 178
Lippman, S. A., 13
Lipsey, R. E., 56
Liqiang, N., 2, 391
Liu, C., 329
Liu, L., 179
Liu, M., 179, 218
Liu, Q. W., 55, 217
Liu, X., 4, 43, 55, 122, 238
Liu, Y., 5, 217
Long, C. P., 29, 132
Loree, D., 13
Love, J. H., 179
Lovelock, P., 264
Low, S. P., 55
Lu, J. W., 4, 13, 122, 124
Lu, Z., 217
Lubatkin, M., 213
Lundan, S. M., 11, 13, 28, 177, 376
Luo, Y., 12, 13, 14, 15, 24, 32, 33, 39,
126, 158, 159, 191, 212, 216, 238,
239, 259
Luski, I., 263
Lyles, M. A., 137, 140
Lyons, G., 89, 99
Ma, C., 329
Ma, X., 13
Ma, Z., 49
Madhok, A., 39
Maduell, Michael, 100
Magagnini, S., 329, 331
Makino, S., 13, 40
March, J. G., 18, 101, 215
Mariano, W., 345, 346
Markusen, A., 240
Marshall, A., 239, 240
Martin, M. F., 87, 259
Martin, R., 240
Masron, T. A., 157, 158, 163
Mathews, J. A., 40, 109, 126, 164, 179,
280, 315
Mathieu, J., 74
McCollum, B., 336
McCoy, A., 343
McDermott, M., 55
McIntyre, J., 39
McIntyre, J. R., 109, 137, 142, 212, 236,
280, 376
McManus, J., 13
Megginson, W., 269, 273
Meikie, S., 344
Mervine, B., 341
Messner, D., 322
Meyer, K., 12, 109–10
Meyer, M. W., 14, 40, 258
Miao, Y. C., 259
Mica, J., 336
Miesing, P., 218
Milelli, C., 179, 180
Author Index 401
Miller, J., 124
Miller, K., 343
Miller, T., 124, 125
Ming, D., 337
Miracky, W., 82, 84, 86
Mitchell, W., 124, 141, 143
Mizruchi, M., 126
Mody, A., 56
Moon, H.-C., 178
Moran, T., 57
Morck, R., 55, 143
Morgan, B., 339
Morgan, P., 341, 345
Morgenstern, O., 263
Morris, M., 7
Moyo, D., 292, 293
Muekalia, D., 282
Mueller, M., 264
Murphy, K., 126
Murphy, M., 331
Musselle, K., 344
Musteen, M., 122, 124, 126
Nachum, L., 54, 158
Nadeau, B., 243
Nadolska, A., 142
Narula, R., 108, 315
Nee, V., 14
Nelson, C., 125
Nelson, R. R., 215
Newman, R., 143
Ng, S. H., 39, 55
Nguyen, H., 12
Ni, L., 2, 391
Nicolas, F., 164, 171, 179, 236, 237
Nixon, R., 336
Nolan, P., 178, 302
Norbu, T. J., 346
North, D. C., 32
Noy, I., 58
Oxelheim, L., 122
Pablo, A. L., 213
Pain, N., 57, 58
Palamara, G., 39
Palmer, T., 126
Pantelidis, P., 42, 44, 45, 48, 57
Pantulu, J., 58
Pappu, R., 380
Paris, R., 260
Park, Y. P., 14
Pattnaik, C., 13, 33
Pavitt, K., 177
Peace, J. L., 14
Pearce, R. D., 43
Pedersen, T., 33
Peng, L., 337
Peng, M. W., 11, 13, 14, 24, 41, 133, 158,
216, 218
Pennings, M., 126
Perkins, T., 257
Pick, D., 57
Piesse, J., 13
Pietrobelli, C., 235, 236, 238, 239, 242,
243, 244, 245
Pin, Ni, 114
Ping, D., 109
Ping, Z., 55
Pino, M., 347, 348
Pisano, G., 13
Pisano, V., 140
Piscitello, L., 245
Pistor, K., 24
Pistoresi, B., 56
Pitelis, C., 14
Pitkethly, R., 138
Polzcer, S., 257
Poncet, S., 97–8
Poon, J. P. H., 58
Porter, M., 54
Portes, A., 240, 245
Power, M., 281, 293, 311
Prugel, T. A., 43, 45
Pruthi, S., 109
Pugel, T. A., 57
Puranam, P., 139, 141
Pyke, F., 240
Qian, W., 55, 178
Qian, X., 38
Qichen, Q., 337
Qimou, M., 340
Qiusheng, H., 148
Rajgopal, S., 126
Ralston, D. A., 24
Raskin, A., 178
Rauner, F., 217
402
Author Index
Rebellotti, R., 235, 236, 238, 239, 242,
243, 244, 245
Redding, G., 74
Reed, J., 229
Ren, B., 1, 11, 391
Rhee, S. S., 56
Roberts, D., 234, 236, 244
Rodrigues, S. B., 14, 39, 40, 41, 49,
109, 137, 157, 178, 179,
239, 259
Roe, T., 57
Roehl, T. W., 178
Rohter, L., 345
Rolle, J. D., 54
Rosenboim, M., 263
Rosengren, E., 56
Rossi, V., 179
Rozanov, A., 86
Ruback, R. S., 213
Rugman, A. M., 13, 55
Rui, H., 12, 39, 41, 55
Rumelt, R. P., 13
Rupert, C., 337
Russell, C. J., 13
Sader, F., 56
Saebi, T., 168, 179
Saggi, K., 180
Salk, J., 140
Sanders, W., 122, 124–6, 130
Sanfilippo, M., 235, 236, 238, 239,
242–5
Sapienza, H. J., 39
Sardy, M., 379–80
Sargent, R., 340–1
Sauvant, K. P., 234, 257, 260
Schmitz, A., 56
Schnedler, J., 335
Schneider, A., 149
Schneider, M., 345, 347
Schoemaker, P. J. H., 138
Schoenberg, R., 213
Schüler-Zhou, Y., 4
Schüller, M., 4
Schweiger, D. M., 213, 214
Scott, W. R., 32
Seligman, S. D., 250
Sengenberg, W., 240
Seyoum, B., 13
Sforzi, F., 240, 242
Sgobbi, F., 245
Shahbudin, A. S., 157, 158, 163
Shan, W., 178
Shane, M., 57
Shangkun, Y., 336
Shapiro, D., 189
Shattuck, H., 337
Shaver, M., 124
Shenot, C., 338, 339, 341
Shevlin, T., 126
Shi, L., 179
Shi, Y., 392
Shimizu, K., 140, 214
Shou, Y., 120
Shrivastava, P., 214
Shu, C., 238
Shuen, A., 13
Shufu, Li, 116
Sigurdson, J., 178
Simmons, M. S., 239
Simon, H., 212
Sims, C. A., 58
Singh, H., 140
Smith, T. W., 27
Smolenski, N., 357
Snyder, J., 348
Södermana, S., 41
Song, J., 178
Sorge, A. M., 158
Soskice, D., 218
Spigarelli, F., 8
Spitz, J. J., 340, 341
Stahl, G. K., 138, 141, 214
Stearns, L., 126
Stein, J. C., 56
Stephan, J., 122, 124
Stevens, G. V. G., 44
Stoltenberg, C., 236
Strange, R., 13
Stratton, J., 346
Strother, S. G., 331, 332, 336
Sturm, J-E., 58
Subacchi, P., 84
Subramanian, V., 54
Sun, L. X., 39, 55, 74, 97, 188, 238
Sun, S. L., 11, 14, 28, 30, 33
Sunley, P., 240
Sutherland, D., 14
Swedenborg, B., 57
Szulanski, G., 140
Author Index 403
Vaara, E., 141
Vahlne, J.-E., 12, 33
Vaidyanath, D., 140, 153
van den Bosch, F. A. J., 139, 140
Vandaele, J., 318
Vanoli, L., 2, 392
Vasavada, U., 57
Vaughan, V., 331
Vega-Redondo, F., 263
Verdin, P., 54
Vernon, R., 13
Voigt, A., 138, 153, 214
Volberda, H. W., 33
von Neumann, J., 263
Voss, H., 12, 40, 42, 55, 123, 158, 179,
191, 236, 238
Vyas, D., 12
Wang, C. M., 264
Wang, D., 13
Wang, K., 120
Wang, M. Y., 39, 158
Wang, W., 24
Wang, Y., 41
Wanling, D., 3, 109, 392
Ward, S., 145
Warner, M., 39, 55
Wei, W., 8, 391
Weidenbaum, M., 250
Wiedersheim-Paul, F., 108, 177
Weil, S., 312
Weiss, M. A., 99, 101
Wells, L., 108, 177, 315
Wenk, K., 188
Wesson, T., 178
West, A. S., 214
Westhead, P., 39
Whalley, J., 191
Wheeler, D., 56
Wheeler, M., 56
Whitley, R. D., 218
Whittington, L., 265, 273
Wiersema, F., 123
Wild, F., 318
Williams, J. T., 58
Williamson, O. E., 177
Williamson, P. J., 178, 258, 316
Winter, S. G., 215
Wiseman, P. M., 126
Wiseman, R., 124
Witt, M. A., 12, 13, 32
Wolf, B. M., 57
Wong, J., 97, 98
Wong, S. R., 126, 238
Woywode, M., 5
Woyzbun, E., 274
Wright, C., 336
Wright, M., 109
Wu, B., 237
Wu, D., 120
Wu, F., 39, 55, 74, 178, 179
Wu, H., 46, 238–9
Wu, J., 128
Wu, X., 3, 392
Wadhwa, V., 217
Walter, G. A., 213
Wan, W., 218
Xian, W., 340
Xiaobo, W., 3, 109
Xiaoping, D., 15, 329
Tan, H., 12, 134, 179
Tan, J., 213, 214, 218
Tang, F.-C., 235, 236, 239
Taylor, R., 39
Teece, D. J., 13, 33
Terheggen, A., 322
Terpstra, R. H., 24
Thomas, D., 244
Thomas, M., 339, 341, 344
Thomas W. B., 12
Tian, Y., 39
Tianle, Y., 55
Tihanyi, L., 13
Tijaja, J., 321–2
Timmerman, K., 345
Tin, A., 332, 334, 335, 336, 337, 339
Ting, C. C., 336
Tolentino, P. E., 2, 392
Toncar, M., 379, 380
Tong, J. T., 24
Trivedi, P. K., 56
Truman, E. M., 100
Tse, D. K., 178
Tull, D. M., 316
Tulman, J. P.
Tung, R. L., 12, 13, 24, 32, 33, 126
Turner, A., 189
Uhlaner, R. T., 214
404
Author Index
Xin, L., 14, 55, 179
Xu, B., 122, 124
Xu, C., 24
Xu, X., 39, 55
Xue, Q., 12
Yan, D., 11
Yang, C. N., 336
Yang, D., 55
Yang, H., 179
Yang, J. Y. Y., 56
Yang, S., 340–1
Yang, X., 218
Yao, S., 14
Yao, Y., 350
Yauch, A., 344
Yeh, R.-S., 13
Yeo, H. S., 55
Yeung, B., 55
Yeung, H. W., 55, 109, 124, 143
Yin, E., 258
Yin, R. K., 142, 222
Yip, G. S., 12, 39, 41, 55
Yiu, D., 13, 14, 33
Yongjiang, S., 3
Young, M., 24, 133
Young, S., 55, 178
Yu, J., 350
Yuanxing, Z., 338
Zaheer, S., 158
Zahra, S. A., 39
Zander, U., 13
Zanin, V., 237
Zemin, J., 15, 336
Zeng, M., 178, 316
ZEW, 212
Zhan, J. X., 39, 178
Zhang, H., 350
Zhang, M., 82, 83, 85, 191
Zhang, W., 7
Zhang, Y., 161, 191
Zhao, H., 41
Zhao, X. D., 15
Zheng, P., 12
Zheng, S., 120
Zheng, Y., 1, 391
Zhimin, M., 335
Zhoa, M., 55
Zhou, N., 128
Zhou, W., 179
Zhu, Z., 57
Zollo, M., 140
Zorn, T., 126
Zou, S., 39
Zucchella, A., 39
Zuyun, J., 360
Subject Index
AAA, see American Automobile
Association (AAA)
absorptive capacity, 137–51, 215–20
conceptual model of, 220
cross-border mergers and acquisitions
and, from China, 142–50
Lenovo, acquisition of IBM Personal
Computing business, 143–7
TLC, failed acquisition of Thomson’s
TV business, 147–50
individual, 220
multidimensional perspective of,
219–20
multilevel perspective on, 216–19
individual levels, 216–17
national levels, 218–19
organizational levels, 217–18
national, 220
organizational, 220
preferred research method for, 220–2
data collection for, 221–2
results of, 222–8
theoretical model for, 138–42
case study research method, 142
strategic assets, 140–2
Academy of Management Annual
Meeting, 151
acquisitions
of Benelli, 356–8, 366–7
cross-border, 30
of IBM Personal Computing business,
143–7
of Thomson’s TV business, 147–50
of Volvo, 384–5
see also mergers and acquisitions
(M&As)
AD Week, 335
Administration of Overseas Investment
Projects, 15
AEI, see American Eastern International
(AEI)
AERC, see African Economic Research
Consortium (AERC)
AES Wind Generation, 91
Africa
future research on, 293
limitations of, 293
outward foreign direct investment in,
Chinese, 6–7, 279–98
future research on, 293
limitations of, 293
theory and hypothesis on, 279–84
dependent variables, 284–90
results on, 290–1
Africa Frontier Advisory, 305
African Development Bank, 312
African Economic Research Consortium
(AERC), 282, 303, 306–9
African Growth and Opportunities
Agreement (AGOA), 305
Agence France Presse, 332
agency theory, 124
AGOA, see African Growth and
Opportunities Agreement (AGOA)
Agricultural Bank of China, 94
AIC, see Akaike Information Criterion
(AIC)
Akaike Information Criterion (AIC),
47, 62
Aluminum Corporation of China, 25
American Automobile Association
(AAA), 341
American Eastern International (AEI),
330, 331
Anglo-American CEO compensation,
132
Animal Kingdom, 340
Anshan Iron & Steel Group Corporation
Apax, 91
APF, 262
Aprilia, 364
Areva T&D, 91
ASEAN, see Association of Southeast
Asian Nations (ASEAN)
Asia, 88
Asia Pacific Foundation of Canada, 50,
179
Asian-African Bandung Conference, 281
405
406
Subject Index
Asian capitalism, 219
Asian Driver program, 303, 312
Asian Tigers, 315
Asian Trade Center, 340
assembling industries, 31
asset exploration, 119
Associated Press, 346
Association of Southeast Asian Nations
(ASEAN), 376
AST Computers, 143
ATLAS.ti, 220
AU, 320
Audi, 116, 384
Australia and New Zealand Bank, 95
automobile industry, 8, 377–80
see also Geely Automobile Holdings
Limited (Geely Auto)
Aviation Industry Corporation of
China, 27
Aviva, 95
bamboo capitalism, 6
Bandung Conference of Non-Aligned
Nations, 300
Bank of China, 90, 94, 341
Baosteel Group Corporation, 30, 236
BBC News, 281
Beastie Boys, 344
Beijing Olympics, 185
Benelli, 8
acquisition of, 356–8, 366–7
post-, phase of, 367–70
industrial activities, 368–9
operational changes, 367–8
organizational changes, 367–8
sales activities, in commercial
network, 369–70
problem analysis of, 370–1
by Qianjiang Group, 358–61
international expansion of, 360–1
strengths of, 359–60
‘Benelli Garage,’ 356
BG Group, 95
BHP, 264, 272
Big Blue, 145
Black Rock, 91
Blackstone Group, 31, 91, 259
Bluesky, 360
BMW, 116, 384
Boateng, 55
BOE, 41
Bok Tower, 341
Boston Consulting Group, 148
BP Plc, 95
BRIC motorcycle market, 360
Brookhill LLC, 339–40
bureaucratic administration, 16–22
Business China, 147
Business Source Premier, 93
Business Wire, 339
BYD Auto, 107
CACCP, see Citizens against Communist
Chinese Propaganda (CACCP)
Cadbury, 95
CAGR, 362
Canada, 257–74
Chinese Investment Corporation
in, 88
Chinese outward foreign direct
investment in, 261–3
foreign direct investment in, 6,
260–1
game modeling in, 263–4
interpretation of, 268–71
key players, 265–7
Petro-China, 271–2
research on, 264–8
structure of, 267–8
investment by Chinese
state-controlled entities in, 6
state controlled funds and entities in,
258–60
closed, 269
open, 269
predictions of, 270–1
restricted access to, 269–70
Cape Canaveral military base, 335
Capital Iron & Steel, 30
capital movements theory, 12–13
capitalism
Asian, 219
bamboo, 6
liberal market model of, 218–19
theory of, 218
western-style, 330
CAS, see Chinese Academy of Sciences
(CAS)
Subject Index
CCPIT, see China Council for the
Promotion of International Trade
(CCPIT)
CDB, see China Development Bank
(CDB)
CECIE, see China Export & Credit
Insurance Cooperation (CECIE)
CEMEC, 313
Center of Competitiveness, 90, 93
Central Florida Future, 345
Central Huijin Investment Company,
87, 90, 99
CEO compensation
Anglo-American aspect of, 132
Granger causality tests for, 127–8
methodology for, 128
results of, 128–32
variables for, 127, 128
internationalization and, 125–7
reverse causation between, 125–32
Chemical Engineering Machinery
Factory, 358
Chesapeake Energy, 91
Chicago Sun Times, 337
China
automobile industry, role in
globalization of, 8, 377–80
Chinese Investment Corporation
in, 88
‘Go Global’ policy in, 11
gross domestic product of, 11
motorcycling industry in, 364–6
outward foreign direct investment
from, global, 109–10, 234–8
characteristics of, 238–9
development of, 238–9
theoretical perspectives on, 109–10
state in, institutional perspective on
role of, 1
two-step currency reform in, 44
China Construction Bank, 90, 94
China Council for the Promotion of
International Trade (CCPIT), 180,
262
China Daily, 385
China Desk or Investment Office, 165
China Development Bank (CDB), 22, 94
China Everbright Bank, 94
China Export & Credit Insurance
Cooperation (CECIE), 22
407
China Forum Bayer, 222
China Goes Global Conference, 230, 274
China Guangdong Nuclear Power
Holding Co., Ltd., 27
China Huaneng Group, 26
China Investment Promotion Agency
(CIPA), 166, 181
China Jianyin Investment Company, 87,
365
China Merchants Group, 25
China Metallurgical Group
Corporation, 26
China Mimetals Corporation, 25, 257,
260–263, 270, 272
China Mobile Communications
Corporation, 26
China National Aviation Holding
Corporation, 25
China National Cereals, Oils &
Foodstuffs Corporation, 25
China National Chemical
Corporation, 26
China National Offshore Oil Company
(CNOOC), 25, 49, 239, 257, 260, 269
China National Petroleum Corporation,
25, 271
China Noferrous Metal Mining &
Construction (Group) Co., Ltd., 26
China North Industries Group
Corporation, 26
China Ocean Shipping (Group)
Company, 25
China Petrochemical Corporation, 25
China Poly Group Corporation, 27
China Power Investment
Corporation, 26
China Railway Hong Kong, 94
China Reinsurance, 94
China Resources (Holdings) Co., Ltd., 25
China Rules, 1, 391
China Security Regulation Committee
(CSRC), 127
China Shipping (Group) Company, 25
China State Construction Engineering
Corporation, 26
China Telecom, 264
China Travel Service (CTS) Ltd., 329,
331, 340
China Unicom Corporation, 26
Chinese Academy of Sciences (CAS), 143
408
Subject Index
Chinese brand, 28, 118
Chinese Communist Party, 15, 50
Chinese EXIM Bank, 281, 310,
314, 319
Chinese Folk Culture Villages, 329
Chinese foreign direct investment
in Canada, 6
in Europe, 4–6
global, case studies on, 7–8
inflow-outflow ratio of, 38
macro-environmental determinants
of, 1–3
micro-environmental determinants of,
3–4
in North America, 6
outward, in Africa, 6–7
Chinese Government, ‘open-door’ policy
by, 97
Chinese ‘insatiable appetite,’ 236
Chinese Investment Corporation
(CIC), 3, 31, 81, 86, 87, 89,
257, 259
Annual Report by, 88
in Asia, 88
in Blackstone Group, 31
board of directors for, 87
in Canada, 88
in China, 88
establishment of, 81, 259
funding for, 86
global expansion of, 81
headquarters for, 86
in Hong Kong, 88
investment strategy of, 3, 98
in Morgan Stanley, 31
in North America, 88
ownership by, 90
purpose of, 86
SAFE, competition with, 81
Transparency Index of, 100
website for, 88
Chinese mergers and acquisitions, 41
cross-border, 142–50
Lenovo, acquisition of IBM Personal
Computing business, 143–7
combinative capabilities, 144–5
knowledge of business, 143–4
strategy for, effective execution,
145–7
TLC, failed acquisition of Thomson’s
TV business, 147–50
combinative capabilities, 148–9
knowledge of business, 147–8
strategy for, problematic execution
of, 149–50
Chinese Ministry of Commerce
(MOFCOM), 98–9, 285, 304
Chinese Ministry of Finance, 285, 366
Chinese Ministry of Industry and
Technology Information, 366
Chinese Ministry of Science and
Technology, 366
Chinese multi-national enterprises,
advantages of, 109
Chinese outward foreign direct
investment, 234–8
in Africa, 6–7, 279–96
future research on, 293
limitations of, 293
theory and hypothesis on,
279–90
in Canada, 261–3
characteristics of, 238–9
in China, theoretical perspectives on,
109–10
country of origin and, role of, 2,
54–75, see also vector
autoregressive (VAR) model
development of, 238–9
empirical analysis of determinants
of, 2
in Europe, 4–5
institutional perspective on
formal, 15–27
informal, 27–8
key driving forces of, 41
macroeconomic determinants of,
38–50
methodology and data for,
46–7
model and hypothesis for,
43–6
motivations for, 12–14
multi-national enterprises, 28–9
industry of, choice of, 31–2
institutional influence on, 28–9
location of, choice of, 30
mode of, choice of, 29–30
strategic choices of, 29–32
Subject Index
policy implications for, 318–21
strategic capabilities, development
of, 318–20
state for, role of, 14
in Sub-Saharan Africa, 7
vector autoregressive model, 58–63
analysis of, 66–72
exogeneity, tests for, 63–6
volume statistics of, 11
Chinese sovereign wealth funds, 85–96,
88, 98, 99, 101
characteristics of, 86–7
government policy behind, 97–8
investment strategies of, 87–96
issues concerning, 99–101
private policy behind, 98–9
purpose of, 85–6
Chinese State Council, 358
Chongqing Loncin Industry Co., Ltd.,
365
Chrysler, 115, 141
CIC, see Chinese Investment
Corporation (CIC)
CIPA, see China Investment Promotion
Agency (CIPA)
CIS, see Commonwealth of Independent
States (CIS)
Citic Capital Holdings Ltd., 91
CITIC Group, 25
Citizens against Communist Chinese
Propaganda (CACCP), 346
closed state controlled funds and entity,
269
cluster theory, 240
CNOOC, see China National Offshore
Oil Company (CNOOC)
Coca Cola, 339
combinative capabilities, 144–5
‘coming in’ investment streams, 235
Commercial Bank of China, 305
commercial hubs, 164
Commonwealth Bank of Australia, 95
Commonwealth of Independent States
(CIS), 181
competition effect, 179
Conference Board of Canada, 260, 269,
272
cost reducing foreign direct investment,
315
409
Countries and Industries for Overseas
Investment Guidance Catalog, 4, 159
country image, 28
cross-border Chinese mergers and
acquisitions, 28, 142–50
Lenovo, acquisition of IBM Personal
Computing business, 143–7
combinative capabilities, 144–5
knowledge of business, 143–4
strategy for, effective execution,
145–7
TLC, failed acquisition of Thomson’s
TV business, 147–50
combinative capabilities, 148–9
knowledge of business, 147–8
strategy for, problematic execution
of, 149–50
CSRC, see China Security Regulation
Committee (CSRC)
CTS, see China Travel Service (CTS) Ltd.
Cypress Gardens, 341
Daimler Benz, 141
Dalai Lama, 340, 343, 346
Darfur, 281
Data Appendix, 58
Datamonitor – Company, 93
Days Inn, 340, 348
De Tomaso Industries, Inc., 356
Dell, 145
demonstration effect, 180
Department of Foreign Capital and
Overseas Investment (DFCOI), 16,
21, 22
Department of Outward Investment and
Economic Cooperation (DOIEC),
22, 38
dependent variable, 43
Detroit International Auto Show, 386–7
Deutsche Bank Research
developed nations, 264
development funds, 83
DFCOI, see Department of Foreign
Capital and Overseas Investment
(DFCOI)
DG Trade, 181
Diageo, 91
Disney-MGM Studios, 333
Disney World, 330–1, 333, 347
diversification, international, 123–4
410
Subject Index
DOIEC, see Department of Outward
Investment and Economic
Cooperation (DOIEC)
double-edged sword, 32
Drax Group Plc, 95
Drivetrain Systems International (DSI),
115
Ducati, 364
dummies, 128
Eclectic Paradigm Theory, 39, 177,
314–15
Economic Intelligence Unit (EIU), 285,
303
‘Economic Observer, The,’ 14
Economist, The, 330, 344
Economist.com
economy, openness of, 45
ECOWAS, 320
educated tourists, 335
efficiency-seeking, 112
EIBC, see Export-Import Bank of China
(EIBC)
EIU, see Economic Intelligence Unit
(EIU)
EME, see emerging market enterprise
(EME)
emerging market enterprise (EME),
12–13, 28–9
Encyclopedia Britannica, 263
Enterprise Institute of Development
Research Center of the State
Council, 16
Epcot Center, 333
Ericsson, 187
ethnic enclave, 240
Europe
Chinese outward foreign direct
investment in, 4–6, 157–72
pull factors for, 163–7
push factors for, 158–63
rise of, 175–93
foreign direct investment in, Chinese,
4–6
Investment Promotion Agency in, 4
outward foreign direct investment in,
Chinese, 157–72
conceptualizations of, 180–1
pull factors for, 163–7
push factors for, 158–63
rise of, 175–93
theoretical models for, 176–80
small-to-medium-sized Chinese
enterprises in, 234–52
cluster theory, 240
ethnic enclave, 240–1
industrial districts, 239–40
Prato, 245–51
scoping study on, 241–2
European Journal of Development Research,
321
European Union, Chinese outward
foreign direct investments in, 5,
167–70
competition of, 188–90
entry mode for, 187–8
evidence of, 181–93
locations for, 181–7
perspectives on, 170–2
exchange rate, 44–5, 48–9
exogeneity tests, 63–6
Export-Import Bank of China (EIBC), 22
Falun Gong religious movement, 346
Fantasy of Flight, 341
FAO, 312
Far Eastern Economic Review, 341
FDI, see foreign direct investment (FDI)
Federal Bureau of Investigation, 335
financial investors, 83
Financial Times, 88, 164
firm age, 128
firm size, 128
Florida Historical Quarterly, 350
Florida Splendid China (FSC), 329–50
conception of, 330–1
construction of, 332–5
controversies in
protests for, 343–6
Tibetan display, 343–4
opening, 336–8
preparations for, 335–6
park design for, 331–2
promoting, 338–40
struggles of, 341–3
Sunny Yang as president of, 340–1
Flying Tigers, 344
FOCAC, see Forum for China African
Cooperation (FOCAC)
‘follow the command’ approach, 226
Subject Index
Forbidden City, 332
Ford, 107, 115, 116, 385
forecast error variance decomposition,
66–72
foreign currency reserves, 46
foreign direct investment (FDI)
in Canada, 260–1
Chinese
in Canada, 6
in Europe, 4–6
in Germany, 5–6
global, case studies on, 7–8
inflow-outflow ratio of, 38
macro-environmental determinants
of, 1–3
micro-environmental determinants
of, 3–4
in North America, 6
outward, in Africa, 6–7
by Chinese manufacturing firms,
107–20
case study method for, 110
cross-, analysis of, 117–19
Geely Holding Group, 115–17
motives for, 117–18
patterns of, 118–19
Sany Group, 110–13
single, analysis of, 110–17
Wanxiang Group, 113–15
cost reducing, 315
from developed countries
extension of, 108–9
theories, traditional, 108
leveraging, 315
market-seeking, 315
resource-seeking, 315
South-South, 177–8
theoretical foundation for,
108–10
foreign exchange policy, 15, 21
foreign government-controlled
company, 260
formal Chinese outward foreign direct
investment, 15–27
bureaucratic administration,
16–22
government ownership, 22–7
policies, 15–16
Fortescue Metals Group, 91
Fortune, 137, 138, 142
411
Forum for China African Cooperation
(FOCAC), 321
‘four dragons,’ 30
‘four tigers,’ 30
Fourteen Chinese Communist National
Congress, 15
FSC, see Florida Splendid China (FSC)
fund managers, 82
Galanz, 49
game modeling, 6, 263–4
interpretation of, 268–71
key players, 265
interests and concerns of,
265–7
Petro-China, 271–2
research on, 264–8
structure of, 267–8
‘Gateway to Europe,’ 184
Gateway Tours, 340
GCL-Poly Energy Holdings Ltd., 92
GDH Limited, 26
GDP, see gross domestic product (GDP)
Geely Automobile Holdings Limited
(Geely Auto), 115, 117, 377
Geely Holding Group (Geely), 107, 110,
115–17
future outlook of, 387–8
global brand, establishment of,
386–7
international role of, development of,
383–4
limited holdings in, 380–7
overseas investment by, 115–16
market-seeking and, 116
motives of, 116
Volvo, acquisition of, 116,
384–5
overview of, 115
performance of, overview of,
382–3
resource augmentation and control,
degree of, 116–17
strategic asset-seeking by, 116
strategic shifts by, 385–6
General Motors, 107
Generalized Least Squares, 290
generalized method of moments (GMM),
128
Generic, 360–1
412
Subject Index
Germany, Chinese mergers and
acquisitions in, 212–30
absorptive capacity of, 215–20
multidimensional perspective of,
219–20
multilevel perspective on, 216–19
preferred research method for, 220–2
foreign direct investment in, Chinese,
5–6
integration of, 213–15
Sany Group in, motives for, 111–12
GFC, see global financial crisis (GFC)
GIC, 86
global brand, 386–7
‘Global Champions,’ 236–7, 244
global financial crisis (GFC), 236
global foreign direct investment,
Chinese, 7–8
Globalization of Chinese Enterprises, 1, 391
GMM, see generalized method of
moments (GMM)
GNP, see gross national product (GNP)
‘Go Global’ policy, 3, 11, 15, 49, 98–9,
158, 236
‘going abroad’ policy, 15
‘going out’ investment streams, 235
Golden Peacock Theater, 339
Goldman Sachs, 144
Goodman Group, 92
Government of Canada, 260
Government of Singapore Investment
Corporation, 84
government ownership, 22–7
GoVideo, 149
Granger causality tests, 2, 127–8
control variable for, 128
methodology for, 128
results of, 128–32
variables for, 127
Great Wall, 333, 348
greenfield operations, 239
gross domestic product (GDP), 11
gross national product (GNP), 43–4
Guangdong National Shipping
Corporation, 27
Guangzhou Yuexiu Holdings Limited, 26
Gulliver’s Travels, 331
H2, 130–1
Haier, 41, 49, 236
Handelsblatt, 281
Hannan-Quinn Criterion, 62
Harley Davidson, 362
Harvard University, 230, 274
heavyweight industries, 50
Hewlett-Packard, 143
‘Hidden Champion,’ 212
Hierro Peru Mining, 30
Holley Group, 282, 310
Honda, 362, 364
Hong Kong, 88
Hong Kong Stock Exchange, 115, 329
Houston Chronicle, 337
HP-Compaq, 146
Huawei Technologies, 282, 310
Huaweik Technologies, 26, 49, 236
Hunan Valin Iron & Steel (Group) Co.,
Ltd., 26
Hungary, 166
IB, see international business (IB)
IBM, 43, 138, 143
IBM Personal Computing (PC) business,
143–7
ICA, see Investment Canada Act (ICA)
ICT, see information communication
technology (ICT)
Idea Center, 145
IdeaPad, 145
IDT Hungary, 166
IFR, see impulse response function (IRF)
IMF, 75, 83, 89, 101, 303, 312, 319
impulse response function (IRF), 69
impulse response analysis, 66–72
income, 43–4
independent variables, 43–6
exchange rate, 44–5
foreign currency reserves, 46
income, 43–4
interest rate, 45
openness of economy, 45
technology, 43
Indesit Group, 356
individual absorptive capacity, 220
individual influence, 216
industrial activities, 368–9
Industrial and Commercial Bank of
China, 94, 309
industrial districts, 239–40
Industry Canada, 266
Subject Index
inflow-outflow ratio of Chinese foreign
direct investment, 38
InFocus Corp., 150
informal Chinese outward foreign direct
investment, 27–8
information communication technology
(ICT), 235
‘insatiable appetite,’ Chinese, 236
institutional influence, ‘dark side’ of, 32
intangible resources, 4
Intel Capital, 92
interest rate, 45
internalization, 13, 316
international business (IB), 13, 258
International Campaign for Tibet, 343
international diversification, 123–4
International Lease Finance
Corporation, 92
internationalization, 12, 122–34, 125–7,
130
CEO compensation and
Granger causality tests for, 127–8
reverse causation between, 125–7
hypothesis for, 123–5
of multi-national enterprises, 108
theoretical framework for, 123–5
Invest in Germany, 185, 195
Investment Canada Act (ICA), 260, 261,
266, 269
Investment Development Path (IDP), 2,
38, 42, 43–4, 108
investment funds, 85
Investment Promotion Agency (IPA), 5,
157
in Europe, 4, 180–1
in Hungary, 166
in Poland, 167
investments
of Chinese Investment Corporation,
3, 98
by Chinese state-controlled entities, 6
inward, 304
in Italy, 6
return on, 3
for sovereign wealth funds, 87–96
inward investment, 304
IPA, see Investment Promotion Agency
(IPA)
Italian Piaggio Group, 364
413
Italy
foreign direct investment in, Chinese,
5–6
motorcycling industry in, 362–4
small-to-medium-sized Chinese
enterprises in, 242–5
trade and investment in, and Chinese
diaspora in, 6
Japan Bank for International
Cooperation Institute (JBICI),
179–80
JBICI, see Japan Bank for International
Cooperation Institute (JBICI)
JC Flowers PE Fund, 92
Jiangmen Grand River Group Co. Ltd.,
365
Jinchuan Group Limited, 27
joint venture (JV), 239
JSC KazMunaiGas Exploration
Production, 92
JV, see joint venture (JV)
k-step-ahead forecast, 66
Kawasaki, 362, 364
Keeway, 360–1
Kennedy Space Center, 335
knowledge, 4, 143–4, 219
KPSS, see Kwiatkowski-PhillipsSchmidt-Shin (KPSS) test
KW, 370
Kwiatkowski-Phillips- Schmidt-Shin
(KPSS) test, 61
latecomer firms, 109
Lee-Potter, 244
Legend Holdings Ltd., 26
Lenovo (Legend Group), 41, 43,
138, 236
combinative capabilities, 144–5
IBM Personal Computing (PC)
business, acquisition of, 143–7
knowledge of business, 143–4
strategy for, effective execution, 145–7
Lenovo University, 144
leveraging foreign direct investment, 315
LG.Philips LCD Co., 150
liberal market model of capitalism,
218–19
light touch approach, 214–15, 219
414
Subject Index
limited holdings, 380–87
Linaburg, Carl, 100
Linaburg-Maduell Transparency Index,
100
linkage, leverage, and learning (LLL)
model, 109
linkages driver, 315
Lion Group, Malaysia’s, 360
listening posts, 179
LLL, see linkage, leverage, and learning
(LLL) model
local enterprises, 264, 266
location-bound approach, 55
London Olympics, 185
London Stock Exchange, 96
Lung Ming, 92
MachineA, 224–7
MachineB, 227–8
MachineCN, 227–8
macro-environmental determinants of
Chinese foreign direct investment,
1–3
China, institutional perspective on
role of state in, 1
outward foreign direct investment,
Chinese, 2
sovereign wealth funds, 2–3
‘Made-in-Germany’ brand, 228
Magic Kingdom, 333
Manganese Bronze Holdings, 115
manufacturing firm investments,
motives and patterns of Chinese, 3
Marco Polo, 333
market knowledge, 219
market-seeking foreign direct
investment, 315
M&As, see mergers and acquisitions
(M&As)
McKinsey & Company, 144
McKinsey Global Institute, 313
MENA, see Middle East and North Africa
(MENA)
Mercedes-Benz, 116, 384
mergers and acquisitions (M&As), 239
Chinese cross-border, 41, 142–50
cross-border, 41, 212–13
Lenovo, acquisition of IBM Personal
Computing business, 143–7
combinative capabilities, 144–5
knowledge of business, 143–4
strategy for, effective execution,
145–7
TLC, failed acquisition of Thomson’s
TV business, 147–50
combinative capabilities, 148–9
knowledge of business, 147–8
strategy for, problematic execution
of, 149–50
MFA, see Ministry of Foreign Affairs
(MFA)
MG Rover Group, 188, 385
Miami Herald, 344
micro-environmental determinants of
Chinese foreign direct investment,
3–4
manufacturing firm investments,
motives and patterns of Chinese, 3
strategic assets, integration of
knowledge and intangible
resources into, 4
Middle East and North Africa
(MENA), 84
Ministry of Commerce (MOFCOM), 11,
21, 22, 38, 46, 87, 98, 107, 159, 180
Ministry of Domestic Commerce, 21
Ministry of Finance (MOF), 22, 86, 87
Ministry of Foreign Affairs (MFA), 21, 98,
159
Ministry of Foreign Trade and Economic
Cooperation (MOFTEC), 15, 21, 98
Ministry of Science and Technology of
the People’s Republic of China
(MOST), 47
Ministry of Taxation (MOT), 22
MNC, see multinational company (MNC)
MNE, see multi-national enterprises
(MNE)
MOC, 15
Modern Cikande Industrial Estate,
Indonesia’s, 360
MOF, see Ministry of Finance (MOF)
MOFCOM, see Ministry of Commerce
(MOFCOM)
MOFTEC, see Ministry of Foreign Trade
and Economic Cooperation
(MOFTEC)
monetary policy, 21
Morgan Stanley, 31, 92
Morini, 364
Subject Index
MOST, see Ministry of Science and
Technology of the People’s Republic
of China (MOST)
MOT, see Ministry of Taxation (MOT)
Moto Guzzi, 356
Motobi, 356
MotoGp, 369
motorcycling industry
analysis of, 361–2
global trends in, 362
local trends in
in China, 364–6
in Italy, 362–4
multi-national enterprises (MNE), 11,
28–9
Chinese, advantages of, 109
industry of, choice of, 31–2
institutional influence on,
28–9
internationalization of, 108
location-bound approach to, 55
location of, choice of, 30
mode of, choice of, 29–30
outward foreign direct investment by,
Chinese, 28–9
industry of, choice of, 31–2
institutional influence on, 28–9
location of, choice of, 30
mode of, choice of, 29–30
strategic choices of, 29–32
strategic choices of, 29–32
universalist approach to, 55
Multifiber Agreement, 305
multinational company (MNC), 54
MV, 364
Nam Kwong (Group) Company
Limited, 27
Nanjing Automobile, 188
Napoleon, 11
national absorptive capacity, 220
National Australia Bank, 95
National Bureau of Statistics of China
(NBS), 46–7
National Council, 87
National Development and Reform
Commission (NDRC), 87, 159, 161,
366
national identity, 28
national influence, 216
415
National Natural Science Foundation of
China, 120
National Planning Commission (NPC),
15, 16
see also State Development and Reform
Commission (SDRC)
NBS, see National Bureau of Statistics of
China (NBS)
NDRC, see National Development and
Reform Commission (NDRC)
neo-Marshallian cluster concept, 240
NEPAD, 320
net benefit test, 260
Nobel Group, The, 93
Nobel Oil Group, 93
Noranda, 257, 260, 262–3, 269
North America
in Canada, investment by Chinese
state-controlled entities in, 6
Chinese Investment Corporation
in, 88
foreign direct investment in,
Chinese, 6
NPC, see National Planning Commission
(NPC)
Oaktress Capital Management, 93
OECD, 75, 89, 234, 240, 257, 259, 314
OEM, see original equipment
manufacturer (OEM)
OFDI, see outward foreign direct
investment (OFDI)
offshore mergers and acquisitions
(OMA), 41
OICA, 378
OLI, see ownership, location,
internalization (OLI)
OLS, see ordinary least squares (OLS)
OMA, see offshore mergers and
acquisitions (OMA)
‘100 Day’ program, 222
‘open-door’ policy by Chinese
Government, 15, 97, 236
open state controlled funds and entity,
269
openness of economy, 45
operational changes, 367–8
ordinary least squares (OLS), 128
organizational absorptive capacity, 220
organizational changes, 367–8
416
Subject Index
organizational influence, 216
original equipment manufacturer
(OEM), 187
Orlando Business Journal, 341
Orlando International Airport, 338
Orlando Sentinel, 336, 341
outside director ratio, 128
outward foreign direct investment
(OFDI)
approval authority for, 16
boundaries of, 15–16
global statistics of, 11
growth rate for, 11
institutional framework for,
15, 16
via mergers and acquisitions, 11
see also Chinese outward foreign
direct investment
ownership, location, internalization
(OLI), 11, 39, 108, 315
Palgrave, 391
PBC, see People’s Bank of China (PBC)
Penn West Energy Canada, 93
pension reserve funds, 83
People for the Ethical Treatment of
Animals (PETA), 343
People’s Bank of China (PBC), 21, 85, 86,
87, 88
People’s Palace, 319
PETA, see People for the Ethical
Treatment of Animals (PETA)
Petro-China, 258, 260, 271, 272
Philips, 187
PMI, see post-merger integration (PMI)
Poland, 167
Politburo, 236
portfolio investments, 83
post-merger integration (PMI), 214
Potala Palace, 343, 344
Potash Co., 264, 272
potential absorptive capacity, 215
Powertrain Ltd., 385
Prato, 245–51
PRC Political Consultative Conference,
337
predictive causality, 73
private policy, 98–9
processing industries, 31
product knowledge, 219
Pronto Moda business model,
248
Proper Glory, 380
psychic distance, 108, 177
PT Bumi Resources Tbk, 93
PT Sanex, Indonesia’s, 360
‘pull’ factors, 50
Qianjiang Group (QJ), 358–9
international expansion of, 360–1
strengths of, 359–60
Qianjiang Motor Company
QJ, see Qianjiang Group (QJ)
‘quasi-government’ corporation, 345
RCA, 148
R&D, see research and development
(R&D)
realized absorptive capacity,
215, 227
‘reform and opening policy,’ 217
research and development (R&D), 184,
239
reserve investment corporations, 83
resource augmentation and control,
degree of, 116–17
resource-seeking foreign direct
investment, 315
return on investment, 3
return on sales, 128
reverse causation, 125–32
reverse spillovers, 179
Rio Tinto, 95
RMB, 44, 48–9, 85–6
Rolling Oaks Investment Properties LLP,
348
Royal Dutch Shell, 96
SADC, 320
SAFE, see State Administration of Foreign
Exchange (SAFE)
SAFE Investment Company, 96
St. Petersburg Times, 344
sales activities, in commercial network,
369–70
Samsung, 143
Sanex Qianjiang Motor International,
360
Santiago Principles, 101
Subject Index
Sany Group (Sany), 110–13, 117
efficiency-seeking by, 112
overseas investment by, 111
in Germany, motives for, 111–12
overview of, 110–11
resource augmentation and control by,
112–13
strategic asset-seeking by, 112
Sany Heavy Industry Co., Ltd. (Sany
Heavy), 111
SASAC, see State-owned Assets
Supervision and Administration
Commission (SASAC)
savings funds, 83
SCFE, see state controlled funds and
entity (SCFE)
Scharwz Criterion, 62
Schneider Corp., 149
School of Oriental and African Studies,
University of London, UK, 193
SDC Platinum, 221
SDRC, see State Development and
Reform Commission (SDRC)
SE, see standard error (SE) shock
Sea World, 330, 347
SEQ, see simultaneous equation (SEQ)
model; structural equation (SEQ)
model
‘setting up enterprises overseas’
concept, 15
Severn Trent, 96
SEZ, see Special Economic Zones (SEZ)
Shanghai Automotive Industry
Corporation, 27, 377
Shanghai Baosteel Group Corporation
Shanghai Institutions of Higher
Learning, 151
Shanghai LTI Automobile Components
Company Limited, 115
Shanghai Overseas United Investment
Co., Ltd.
Shanghai Stock Exchange, 111,
127, 217
shareholder value, 316
Shenhua Group Corporation, 27
Shenzhen Investment Holdings Co.,
Ltd., 27
Shenzhen Stock Exchange, 127,
217, 359
Shougang Corporation, 27
417
Shum Yip Holdings Company
Limited, 26
Sichuan Tengzhong Heavy Industrial
Machinery Co Ltd. (Tengzhong), 107
simultaneous equation (SEQ) model, 58
Sino-African Business Conference, 304
Sinohem Corporation, 25
Sinohydro Co., Ltd., 27
Sinopec, 49, 236
SinoSteel Corporation, 25
SINOTRANS Changjiang National
Shipping (Group) Corporation, 25
‘sleeping dragon’, see China
small-to-medium-sized Chinese
enterprise (SME), 234–52
cluster theory, 240
ethnic enclave, 240–1
industrial districts, 239–40
Prato, 245–51
scoping study on, 241–2
SME, see small-to-medium-sized Chinese
enterprise (SME)
Social Security Fund, 87
SOE, see state-owned enterprises (SOE)
SOE ZTE, 317
Songbird Estates, 93
Sony, 143
South Africa’s Standard Bank, 309
South Gobi Energy Resources, 93
South-South foreign direct investment,
177–8
sovereign wealth fund (SWF), 2–3,
81–101, 100, 258
Chinese, 85–96, 88, 98, 99, 101
characteristics of, 86–7
government policy behind, 97–8
investment strategies of, 87–96
issues concerning, 99–101
private policy behind, 98–9
purpose of, 85–6
defined, 82, 259
features of, 82–4
global trends in, 84
strategic objectives of, 101
transparency of, 100
types of, 82–3
Special Economic Zones (SEZ), 171
Splendid China Day, 336, 344
Ssangyong Motors, 115
stabilization funds, 83
418
Subject Index
Stadium of the Martyrs, 319
standard error (SE) shock, 69
State Administration of Foreign
Exchange (SAFE), 15, 22, 42, 47, 49,
81, 86–9
China Investment Corporation,
competition with, 81
investment strategy of, 98
Transparency Index of, 100
state controlled funds and entity (SCFE),
257, 264
in China, 258–60
closed, 269
open, 269
predictions of, 270–1
restricted access to, 269–70
State Council, 15, 16, 87
State Development and Reform
Commission (SDRC), 15, 16, 22
State Economic and Trade Commission,
97
State Grid Corporation of China
state of China, institutional perspective
on role of, 1
State-owned Assets Supervision and
Administration Commission
(SASAC), 22, 50
state-owned enterprises (SOE), 11, 22,
49, 217
state shareholding, 128
strategic investors, 83
Statistical Bulletins of Chinese Outward
Foreign Direct Investment, 180
strategic assets, 116, 140
applying, 141–2
intangible resources and, 4
integrating, 140–1
knowledge and, 4
understanding, 140
strategic industries, 50
structural equation (SEQ) model, 58
Sub-Saharan Africa, Chinese foreign
direct investment flows to, 300–22
distinctiveness of, 311–17
resources, 311–13
trade reversal, 311–13
dynamics of, 300–3
eclectic theory of