Historic and emergent trends in Chinese outward direct investment.
| Verfasser | Buckley, Peter J. |
| Posten | RESEARCH ARTICLE |
Abstract and Key Results
* Recent expansion of Chinese outward direct investment is analysed at two levels: at the aggregate level using Chinese Ministry of Commerce data and at the level of the individual FDI project using data compiled by the State Administration of Foreign Exchange.
* Project level analysis reveals wholly-owned projects are increasingly displacing joint ventures as the predominant mode of entry.
* Changes to the investment motivations are discernable in market-seeking FDI: with defensive and offensive FDI increasingly supplanting trade-related investment activity, and in strategic asset-seeking FDI: with improved access to foreign-owned technologies, brands, and distribution channels gaining importance.
Keywords: Chinese MNEs * Outward FDI * Foreign Market Entry-Investment Motivation
Introduction
A substantial body of literature has grown on the prominence of China as a recipient of foreign direct investment (FDI) and its consequences for national economic development and management practice (Branstetter/Lardy 2006). By contrast, much less attention has been paid to China's position as an FDI source. Given that China attracted an annual average FDI inflow of around US$29bn (or more than 7 percent of the world's total) in the 1990s, but contributed less than US$2.5bn (around 0.6 percent) to global outflows, this is perhaps not surprising (UNCTAD 2006). However, the sharp growth in Chinese outward direct investment (ODI) evident since 2002 (illustrated in Figure 1), combined with a number of recent high profile attempts by Chinese enterprises to acquire North American and European firms, have brought into relief China's rising status and potential as an investor nation. This potential is recognised in a recent UNCTAD survey of investment promotion agencies which predicts that China will become a 'top three' source country for FDI before the end of 2008 (UNCTAD 2005). It is also highlighted by the Director-General of UNIDO, Kandeh Yumkella, who suggests that annual flows of Chinese outbound investment are likely to reach US$60bn by 2010 (MOFCOM 2006). If growth rates in Chinese ODI continue and these predictions are realised, China's contribution to global FDI flows is likely to approximate current outflows of the leading industrialised countries.
In this exploratory study, we identify historic and emergent trends detectable in official aggregate data and individual FDI project level data on Chinese ODI for the period 1991 to 2005 with regard to investment destination, activity type, entry mode choice and investment motivation. Our aim is to assess whether or not Chinese ODI conforms to the general model of ODI and to the special case of emerging country ODI in general, and Asian countries in particular, with respect to the character and evolution of its recent ODI. To do this, we review in the next section some selected contributions to the literature on developing country ODI in order to establish a 'received wisdom' or base model against which we can contrast our empirical data from China. We also include some evidence from other Asian countries to control for cultural and regional interactions. (1) We go on to consider how the evolving institutional framework within which Chinese ODI is conducted and, especially, how adjustments to the administrative system and the engagement and disengagement of government at various times, notably following the launch of China's zou chu qu or 'go global' policy in 1999, have influenced the internationalisation decisions and motivations of Chinese firms. After providing further evidence for the rise of China as an FDI source country, we examine trends in respect of (i) aggregate Chinese ODI stocks and flows; (ii) the spatial distribution of Chinese ODI; (iii) the sectoral distribution, and (iv) the dominant entry mode employed. This is done by reviewing data on accumulated Chinese ODI by host economy as published by the Chinese Ministry of Commerce (MOFCOM) and by analysing previously unpublished data from China's State Administration of Foreign Exchange (SAFE), a government agency that administers, via the banking system, foreign exchange-related matters. (2) In the second part of the paper, we relate detected trends to emergent motivations advanced in the literature as driving the outward FDI activities of Chinese firms. We propose that Chinese ODI is indeed distinctive with respect to a standard model of developing country ODI, which itself is distinctive with respect to industrialised country ODI.
[FIGURE 1 OMITTED]
Statistics on Chinese ODI are compiled by MOFCOM based on a summation of individual firm's direct investment amounts. (3) This aggregation masks the motives of the firms and reflects their choices of entry mode to foreign countries--direct investment is included, while licensing, technology transfer deals and other non-equity modes are excluded by definition. In this paper, we supplement these statistics with unique project level data from SAFE. Official statistics usually disaggregate the total by industry/sector and by destination country, but disaggregation by type of motive usually has to be conducted by analytical techniques such as regression analysis, which is an imperfect method working by inference. In addition, the time factor complicates the analysis (Buck et al. 2007). Firms often proceed by gradualism in foreign market entry, following a sequence of exporting, then non-equity modes such as licensing, then direct investment. A second type of sequential entry is from culturally and physically close countries to progressively more remote ones. These time series effects are only partially visible in cross section data. These limitations need to be borne in mind in our analysis.
Theoretical Explanations of Developing Country FDI
Firm and Industry Level Theory
Mainstream international business literature generally explains the strategy of the multinational enterprise (MNE) using the concepts of internalisation (Buckley/Casson 1976), transaction costs (Hennart 1988) and monopoly advantage (Hymer 1960). Together with location advantages, these concepts are synthesised by Dunning (2001) in his eclectic or OLI paradigm. This posits that the decision to internationalise production is predicated upon the interaction of ownership (O) advantages, location (L) advantages and the gains associated with hierarchical (I) over arm's length transacting. Since this theory was developed to explain MNEs from the industrialised countries, its ability to account for developing country FDI has been debated. One view is that an alternative framework to explain late-comer MNEs is needed (e.g., Mathews 2002, Moon/Roehl 2001). However, the majority view is that mainstream theory does work, but that special theories nested within the general theory are needed as well (Buckley et al. 2007, Lall 1983, Wells 1983, Khan 1986, Lecraw 1993, Zin 1999, UNCTAD 2006).
Special Explanations for Asian Developing Country Firms
Lecraw (1993) identifies two key issues that could contribute to a special theory on the internationalisation of developing country firms; namely, how do they compete internationally (that is, what is their source of competitive advantage) and where do they invest (that is, what drives their location decisions)? In this paper, we also recognise as pertinent issues concerning entry mode choice, the role of home country government and cultural distance between home and host countries.
First, developing country MNEs are said to hold particular ownership advantages over established MNEs, in addition to competitively priced labour (an advantage which normally diminishes as the home economy develops) and that these derive from their experiences and knowledge of operating at home. In other words, the capabilities that firms gain to cope with home country conditions (i.e., 'home country embeddedness') can be leveraged as competitive advantage in similar markets abroad. Erdener and Shapiro (2005), for example, assert that overseas Chinese firms are able to penetrate Asian markets unattractive to industrialised country firms because they are adept at operating successfully in environments characterised by uncertain economic development, opaque regulatory conditions and weak market-enhancing institutions. Similarly, Scott (2002) observes that the ability to exploit culturally-dependent relational assets in Asian countries through personal relationships is a significant source of competitive advantage for overseas Chinese firms (Yin/Bao 2006). Wells (1977) and Kumar and Kim (1984) demonstrate that developing country firms in general possess older technology which is best exploited in less developed country markets. Developing country firms may also be better able than industrialised country firms at customising particular technologies, products and processes appropriately for other developing country markets. This may be accomplished by downscaling production, by simplifying or substituting local inputs or by increasing the labour intensity of production (Shenkar/Luo 2004). Developing country firms may also be more flexible and adaptable than industrialised country firms because scale economies are forsaken (Wells 1983, Erdener/Shapiro 2005). Lau (2003) argues that this is evidenced by the investments of Hong Kong-based textiles firms in other developing countries. It follows that developing country firms are often found to be involved in manufacturing activity abroad, beginning with labour-intensive production and then graduating over time into more technology and marketing-intensive production, often based on imported technology (Lall 1983, Wells 1983, Lecraw 1993, Zin 1999). (4) In short, home country embeddedness may enable developing country firms to compete successfully with established MNEs in third markets, as well as with local firms, especially in other developing countries (Aggarwal/Agmon 1990).
Second, it follows from this...
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