Going Global Starts at Home
Bilateral investment was a big agenda item last week when Chinese Vice President and presumed President-to-be Xi Jinping visited the U.S. Yet while most attention went to a deal with DreamsWorks studio that will allow greater access to China for foreign film companies, investment flows in the other direction—from China to the U.S.—remain a contentious issue. And in this respect, China’s fate is more in its own hands than people realize.
China currently accounts for less than 1% of the $2.3 trillion of foreign direct investment in the United States. Inflows from China are poised to increase in coming years, but it’s not clear yet whether this will happen at a pace commensurate with the amount of capital Chinese companies have available to export and their commercial motives for doing so. In light of a few controversies and politicized deals, Chinese officials regularly blame political resistance in the U.S. for the low level of Chinese investment. But blaming those earlier ructions misses a key point. China itself needs to do a better job encouraging outbound investment to, and preparing its firms for doing business in, mature market economies.
One problem is that potential Chinese investors regularly misjudge the political landscape in the U.S. A few high-profile controversies obscure the number of investments that go without a hitch. Since 2009 Chinese investors have spent more than $12 billion on factories and other direct investment projects, and are now present in 38 states. Only a small number of investments are subject to national security review, and despite heated rhetoric, most Chinese investments have been approved, among them deals in oil and gas extraction, power generation and aviation.
Chinese officials should remind businesses that investments in the U.S. succeed if the companies properly manage the process. As it is, officials themselves are too likely to focus only on the failures.
That change in attitude needs to be accompanied by a wholesale change in the nitty-gritty process for outward investment. Chinese companies still face capital controls and a lengthy and burdensome process for overseas ventures. The approval process for outbound investment involves numerous government entities with different interests and preferences, including the Ministry of Commerce, the National Development and Reform Commission, the State Administration of Foreign Exchange and industry-specific regulators.
Chinese investors often get tangled up in bureaucratic turf wars, which puts them at a great disadvantage in competitive bidding processes for assets in developed economies. And often enough deals fail because domestic regulators veto them in the name of domestic industrial policy, such as in the case of Tengzhong’s proposed acquisition of U.S. auto brand Hummer in 2010 or Bank of China’s stake in French private bank Rothschild in 2009. Global success will require loosening the industrial-policy grip on firms and giving them greater scope to experiment abroad.
Further domestic policy reforms also would help greater outbound investment. Stricter corporate governance rules and convergence with global business norms would make it much easier for firms to expand to developed economies. Not only would this kind of corporate transparency allay lingering political concerns about such investment in recipient markets, but it would also equip Chinese companies to better compete with well-run foreign companies.
Distinct features of China’s legal system also are big impediments for its firms to operate across borders and comply with regulations abroad. A glaring example is the state secret law which prohibits auditors from giving out certain financial information to overseas regulators. By accelerating domestic reforms in relevant areas and making its institutions more compatible with mature economies, China can lay the foundation for the future global success of its multinationals.
Beijing also needs to consider the kind of firm doing the overseas investing. State-owned enterprises have traditionally dominated overseas investment, but private firms will play a more important role in flows to developed economies – they already account for more than 70% of all Chinese foreign-direct-investment deals in the U.S. But these firms are greatly disadvantaged in China’s current system. For both domestic and overseas investment, state-owned enterprises enjoy greater political support, better access to capital and faster approval of investments.
Finally, the time is ripe for China to play a more active role in keeping the global investment environment open. As the U.S. and other developed economies receive greater investment from China, pressure for reciprocal treatment will increase. China must be prepared to further open up its own economy and level the playing field for foreign firms. China’s new national security screening framework, which includes “economic security” and “social stability” as reasons to reject foreign investment into China, is a step into the wrong direction.
Chinese outbound investment will be as beneficial for China’s own economy as it will be for the recipients of that capital—going global is how Chinese companies will learn how to compete with foreign companies, and many of those lessons will be applicable at home in China, too. Beijing can’t afford to give up on the U.S. as an investment destination, and it can’t afford not to implement the domestic reforms that would bolster that investment.
© Wall Street Journal