The Rise in Chinese Overseas Investment and What It Means for American Businesses

China’s outward foreign direct investment (OFDI) expanded significantly in the past decade, but the majority of the investment has gone to countries in the developing world. However, in recent years the focus of Chinese investors has started to shift to North America and Europe. Since 2009, Chinese direct investment in America and Europe has increased sharply, and developed economy-bound flows are poised to grow heavily through 2020, according to Rhodium Group estimates. Policymakers are still grappling with the proper policy response, but significant progress has been made in the United States over the past two years. The key impediments Chinese firms face when setting up US shops are inexperience and lack of capabilities rather than political shenanigans. For American businesses, the growth of Chinese investment does pose certain risks, most importantly new competition at home and abroad, but it also brings invaluable new opportunities such as divestment of assets, co-investment and new business opportunities in China. 

China’s Outward Investment Boom

China’s direct investment spree started in the mid-2000s. From an annual average of below $3 billion before 2005, OFDI flows grew to $20 billion in 2006, and more than $50 billion by 2008. In 2010, China’s annual OFDI reached $60 billion amid declining levels of global FDI, making China one of the world’s top 10 exporters of direct investment in the post-crisis years (see Fig. 1). By the end of 2011, China’s total global OFDI stock stood at $365 billion. However, this early investment boom was almost entirely concentrated on developing countries and a handful of resource-rich developed economies, such as Australia and Canada. Investments in most advanced economies were few and far between. That trend began to change in 2008 when investment flows to Europe and North America grew strongly.

China accounts for only a tiny share of total foreign direct investment in the United States, but the upward trend is clearly underway. A new assessment of FDI flows calculated by the Rhodium Group shows that Chinese firms are now operating in at least 37 of 50 states and have investments across a wide range of US industries. Chinese investment in the United States grew from less than $1 billion annually before 2008 to $2 billion in 2009 and $5 billion in 2010 (see Fig. 2). While fewer deals were made in the second half of 2011, dragging down the full year figure to $4.5 billion, investment picked up again in the first months of 2012. Several large scale acquisitions have already closed, for example Sinopec Shanghai Petrochemical Co.’s (Sinopec) $2.5 billion investment in five shale oil and gas fields owned by Oklahoma-based Devon Energy Corp. and the $2.6 billion acquisition of movie theater operator AMC Entertainment Holdings by China’s Dalian Wanda Group Co. Several big manufacturing deals are also in the pipeline for 2012, such as Golden Dragon Precise Copper Tube Group, Inc.’s $100 million copper tubing plant in Alabama, and a massive $5 billion solar project by ENN Mojave Energy Corp. in Nevada. If the ENN deal goes through, it would be equivalent to all Chinese investment in the United States in 2011.

The new momentum behind Chinese investment in developed economies is spurred by changing commercial realities that are forcing Chinese firms to look abroad. In the past, the attraction of growth at home overshadowed the lure of overseas opportunities, and outward FDI was limited to securing natural resources and building the infrastructure needed to boost cross-border trade. These motives are now receding, as a shift in the growth model is pushing Chinese firms to upgrade their technology, pursue higher levels of the value chain previously conceded to foreign firms, and augment managerial skills and staffing to remain globally competitive. Macroeconomic adjustments such as renminbi strengthening are adding to the pressure. Investments abroad are an ideal solution across the board, and developed economies offer the assets, regulatory environment, and workforce that Chinese multinationals are looking for. Given this shifting reality, investment flows destined for developed economies will continue to grow strongly in the years ahead, and developed economies can expect to receive a substantial share of the $1 to $2 trillion in direct investment that China will make around the world over the coming decade.

A More Sophisticated Policy Response

The unfolding Chinese investment boom has the potential to spur US economic growth, jobs, and innovation. Japanese investment in the United States is a good example. Japanese firms played a minor role in the US economy prior to the 1980s and were greeted with skepticism when they started making direct investments. Over the last three decades, they have contributed significantly to economic growth and prosperity in the United States. Today, Japanese firms employ more than 700,000 Americans with an annual payroll of $50 billion, account for more than $60 billion of US exports, and spend more than $5 billion every year on research and development activities. However, this success story is not guaranteed to repeat itself. Policymakers must take the right steps to ensure that inflows materialize and that the benefits are maximized.

Initially, politicians in Washington and elsewhere were caught off guard by rising Chinese investment interest in the United States. Hostile reactions to China National Offshore Oil Corp.’s (CNOOC) 2005 takeover offer for Union Oil Company of California (Unocal), a California-based oil company that later merged with Chevron Corp., left Chinese companies and officials with negative impressions of the US investment environment. US lawmakers were concerned that the deal could affect the availability of oil or endanger US national security. The shadow of the Unocal debacle still looms over the China-US investment relationship, but progress has been made over the past two years on both the federal and local levels. These efforts have helped to reassure Chinese investors that the United States is open for business.

Despite the downturn caused by the financial crisis, the Obama administration has stood firmly against calls to use national security reviews for foreign investment as a protectionist tool, and officials have repeatedly emphasized that the United States welcomes investment from China. The Committee on Foreign Investment in the United States (CFIUS), which screens investments for national security risks, has cleared the vast majority of Chinese proposals, among them acquisitions in sensitive sectors, such as power generation, shale gas development, and aviation. At the same time, policymakers in Washington are struggling with legitimate questions related to Chinese investment, such as how to treat investment in telecom networks and other critical infrastructure, and the potential impact of investment by China’s state-owned enterprises on competition and markets given the distorted nature of their cost structures back home.

Over the past two years, the Obama administration has also stepped up the federal government’s efforts to attract foreign investors to the United States. In 2011, the US government beefed up its federal investment promotion effort with a new initiative called “Select USA” to aid foreign investors. Many states have also started to ramp up their efforts to target Chinese investors specifically, opening offices and hosting road shows in China. This increased on-the-ground assistance will help Chinese investors overcome some of the difficulties they have experienced making the move to the United States.

Home-Grown Problems Remain Key Impediments

The most significant hurdles for Chinese firms looking to expand their footprint in the United States are not US policy or politics, but a lack of capability and experience with overseas investment in sophisticated markets. In the past, most Chinese firms were focused on establishing themselves in the competitive domestic market or serving overseas markets through exports. This inward orientation has left firms ill-prepared for the challenge of going abroad. And the service sectors — who are near the beginning of the learning curve, well behind the early frontrunners like China’s large oil firms that have been operating in overseas markets for more than a decade.

The track record of Chinese investments in North America and Europe illustrates these weaknesses. Many firms have rushed into opportunistic takeover attempts without careful planning or a clear strategy. One particular problem is that Chinese firms have to actively manage political risks on two fronts, but often lack the capacity to do so. In addition to navigating through national security screenings and politicization in host countries, Chinese corporations also have to deal with domestic politics in China. Despite gradual liberalization of China’s capital controls in past years, firms still need to go through a burdensome and time-consuming approval process for overseas investments. This often involves numerous regulators and bureaucrats with different preferences and attitudes, delaying deals and diminishing the Chinese firm’s chances in competitive bids. Sometimes Chinese regulators and industrial policy planners also strong-arm firms into abandoning deals, as when China’s Sichuan Tengzhong Heavy Industrial Machinery Co. was forced to relinquish an attempted takeover of US auto brand Hummer in 2010. The purchase of Hummer was not seen as in line with important industrial policy goals, such as consolidation of the fragmented auto sector and the promotion of higher fuel efficiency cars.

Other home-grown factors add to the difficulties. The bias of the domestic financial system towards state-owned firms and investments in tangible assets is even more pronounced when it comes to overseas financing, especially smaller firms from China’s private sector that struggle to raise financing for overseas projects. More importantly, the weak domestic regulatory environment leaves China’s firms unprepared to do business in highly regulated markets. This can simply be a drag for operating in the United States, but in some cases it also makes Chinese investors more vulnerable to outside attacks by competitors or interest groups. Domestic reforms addressing these weaknesses, such as strengthening corporate governance rules, are urgently needed to accelerate the learning curve of Chinese businesses.

Implications for American Businesses

The era of rising Chinese investment will be both sweet and sour for American businesses. In many industries, the emergence of these new Asian multinationals will transform the competitive landscape. Rising overseas Chinese presence will mean new competitors for US firms. The acquisition of foreign brands and technology will make Chinese firms stronger in their home markets, which is in some cases currently dominated by foreign firms, such as autos or luxury goods. OFDI will also help Chinese manufacturers enter markets they have yet to breach. In addition to moving them up the technology ladder, OFDI will help China’s pioneers establish local after-sales operations, which was the key for frontrunners including Huawei Technologies Co., Ltd., Sany Heavy Industry Co., Ltd., and Haier Group Co. to sell high-tech products in foreign markets.

Finally, the emergence of Chinese multinationals will enhance competition for scarce global assets, most importantly human talent. Unlike the multiethnic and diverse workforces typical of Western multinationals, Chinese companies mostly employ young Han Chinese with very little experience in running global operations. China’s new multinationals will have to adjust their structures and workforce to be successful in markets abroad, which means a massive demand for talented staff. Several industries are already experiencing a burgeoning hiring spree by new entrants, for example Huawei’s local recruiting efforts in the United States and Europe. This is good news for local job markets, but may not be such good news for other multinationals keen on retaining their most valuable staff.

On the other hand, a Chinese investment boom will offer plenty of opportunities for well-positioned US firms. In a post-crisis, slow-growth world with significantly lower levels of global FDI, Chinese buyers are a bright spot for divesting assets. Chinese firms are interested in acquiring assets that US firms want to discard when moving up the value chain themselves, such as when International Business Machines Corp. (IBM) sold its PC division to China-based Lenovo Group Ltd. in 2004. The move of Chinese firms into new markets will also offer plenty of opportunities for co-investments and partnerships. China’s firms are in a weak position when it comes to running overseas operations for all the reasons discussed above, and just like American multinationals entering China in years past, they will need allies to establish a presence in advanced market economies in the period ahead.

One dividend from China’s move abroad will be the benefit of their having to learn to play our game. For decades, Chinese businesses have operated on a purely domestic field and have therefore remained more or less shielded from foreign regulations and courts. Dumping duties were one of the few legal instruments Chinese firms had to fear. Going abroad changes this situation fundamentally. Chinese firms operating in the United States and Europe will have to comply with local laws and regulations, and they are subject to US courts and litigation, giving their competitors a greater arsenal of legal options in the case of improper behavior. Exposure to foreign regulators should also create a positive feedback loop back into China, pushing the government to realize that its own legal system is diminishing the chances for these firms to successfully compete overseas. Over the long term, China’s new multinationals might even ramp up lobbying efforts with their own government for a level playing field at home, once they are able to compete in a rules-based and sophisticated market economy and see this as competitive advantage vis-à-vis less globalized domestic competitors.

Finally, growing Chinese investment in developed economies will open up new opportunities in the Chinese market. China still maintains significant controls on capital inflows, and many sectors of the economy remain closed to foreign investment, especially in services. The Chinese government emphasizes that it will continue to open these sectors to private and foreign investment, but in a gradual manner. The growing interest in outward investment in developed economies provides Beijing with an excellent reason to accelerate the pace of opening at home, to forestall the unfavorable comparisons of reciprocal treatment which will inevitably arise. This could well lead to new liberalization in China, offering wider opportunities for foreign multinationals in industries currently off-limits to them.


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