What you need to know
When analyzing future Chinese investment, we need to recognize these inter-dependencies and the possible synergies and conflicts between them.
Since Lenovo’s acquisition of IBM personal computers in 2004, China has emerged as the second-largest outward foreign direct investment (FDI) country in the world. In the last two years, Chinese firms undertook a number of merger & acquisition (M&A) megadeals, including Haier’s US$5.4 billion acquisition of GE home appliances unit, Wanda’s US$7.2 billion acquisitions in the U.S. entertainment industries, and China’s National Chemical Corporation’s US$43 billion offer to buy Syngenta, a Swiss seeds and pesticide company. With China’s economy entering an important transition phase, Chinese firms are proactively pursuing overseas acquisitions in advanced economies as a primary way to build their high-end capabilities and upgrade their global value chains. The rapid growth of Chinese investment, particularly acquisitions of Western firms, highlights a relatively new and increasingly important channel to learn about one another, providing policymakers, scholars, and business practitioners with enormous implications.
Despite widespread criticisms of Chinese overseas investment such as state backing and resulting unfair competition in global takeovers, the number and size of Chinese investment and particularly international acquisitions has been rising year by year. As with other advanced countries hosting FDI from China, the United States has both security and economic concerns inflaming protectionist sentiment. After initial reluctance, however, governors, mayors, and other local officials have intensified efforts to promote Chinese FDI. This is because the benefits from Chinese presence are showing up enormously and in a variety of ways.
For many of the target companies, Chinese acquirers are appealing in several respects. For example, many target firms solicit the assistance of their Chinese acquirers to gain better access to the huge Chinese market. Even if GDP growth slows to 5.5 percent, below the official target of 6.5 percent, by 2020 Chinese consumption will have grown by US$2.3 trillion, which would be comparable to adding a consumer market 1.3 times larger than that of today’s Germany or Great Britain. Therefore, in most sectors, a presence in the Chinese market is now indispensable for success and survival, but managing this market without local support and networks can be difficult, if not possible.
Similarly, a Chinese firm can help the target firm to establish its own production in China or can support efforts at reducing costs in procurement and other areas. In turn, target firms are often willing to pass on some sort of know-how and technology to acquiring firms and offer to engage with them in joint R&D efforts. This may be a significant step toward fulfilling the goal of many Chinese acquiring firms to catch up and obtain strategic assets, allowing them to enter higher-end segments. In addition, target firms often value the injection of capital from Chinese acquirers, either because they face financial distress or they need to further expand their businesses. Chinese firms are attractive bidders because they are often rich in cash, from profits made in the lucrative Chinese market, or as a result of state support. The attractiveness of these deals to target firms is often enhanced further by the maintenance of a strong separation between them and the acquiring firms.
Chinese investors also see the value in getting closer to their customers, as evidenced by companies like Fuyao Glass, the largest auto glass manufacturer in the world, building facilities in Ohio and Illinois, to serve the U.S. domestic market. Furthermore, new investment and acquisitions illustrate the important role that FDI can play in facilitating export of goods and services to China. For example, a new US$1.85 billion greenfield facility by Yuhuang Chemical in Louisiana produces methanol for the Chinese market and exports the majority of the methanol produced to China. Finally, massive investment from China can stimulate local economies and generate jobs for many advanced economies. For example, Chinese FDI already supports more than 100,000 direct U.S. jobs today, up from fewer than 20,000 five years ago. More importantly, U.S.-China bilateral FDI is nowhere near saturation. Chinese companies have just started to operate overseas and will invest hundreds of billions of dollars in the coming decades to adjust their business models to cope with new economic realities of a growing China.
Despite numerous benefits, Chinese investors face growing challenges. While the regulatory and political environment is an important consideration, the major challenge is that the context of China varies substantially from those of developed countries. In essence, governments and government-related entities are not only setting the foreign investment rules in China, but they are active players in the economy. Moreover, network-based behaviors of Chinese firms are common, partially due to the less efficient markets, but arguably also due to Chinese history, culture, and social traditions. For Chinese firms, the question is how they can use their domestic networks when venturing in advanced economies. In addition, Chinese investors face challenges in managing multiple embeddedness across heterogeneous contexts normally at two levels. At the firm level, Chinese investors must organize their networks to exploit effectively both the differences and similarities of their multiple host locations, whereas at the subsidiary level, they must balance “internal” embeddedness within the firm network context, with their “external” embeddedness in the host locations. This dual embedding means that Chinese subsidiaries are subject to institutional pressures arising, respectively, from its home context (China) through its parent firm and from the local context in advanced economies. This multiple contextual embeddedness is particularly evident when Chinese firms acquire Western firms.
Equally important, the interaction of Chinese investors with their various local contexts depends not only on the extent to which these contexts are interrelated, but also overlain by temporal and spatial dimensions of context. A spatial dimension to Chinese investment concerns the geographical locus of Chinese firms in terms of their global, regional and location distribution. The spatial dimension also includes the mobility of Chinese investors to different geographic areas with different regulations, laws, and social norms, thus affecting their ability to internationalize far beyond a single country.
In short, when analyzing future Chinese investment, we need to recognize these inter-dependencies and the possible synergies and conflicts between them. Recognizing these inter-dependencies of contextual differences between China and advanced economies also suggests that a policy to foster a particular aspect of FDI by Chinese firms requires a specific mix of policy instruments for a particular combination of contexts.
This article was originally published in CPI Analysis. The News Lens has been authorized to republish this article.
TNL Editor: Edward White