China's Direct Investment in India and Vietnam

China’s Direct Investment in

India and Vietnam

Jonas Babics

28th April 2009 - [email protected]

China’s outward foreign direct investment (OFDI) has gone through a period of very high growth

from 2000 to 2008. The country is globally recognised not only as an attractive host country for

FDI, but also as important source of OFDI. This growth started after the Chinese government

had introduced an official “go global” strategy. As a result, the question was raised among FDI

experts, if China’s OFDI are commercially motivated and can be explained through existing

theories or, if they are solely driven by the government in Beijing.

To identify the motivations behind China’s direct investment in India and Vietnam, I have

reviewed current literature and conducted a survey among FDI experts. The result is, that the

“go global” strategy had and still has a strong impact on Chinese enterprises’ decision to invest

abroad, though a lot of other reasons exist which motivate Chinese enterprises to invest in India

and Vietnam and which are commercial and profit-oriented. Comparing the two economies,

Vietnam seems more attractive for China’s OFDI. This may be explained by similar cultural and

historical backgrounds between China and Vietnam. China’s direct investment in India and

Vietnam are carried out through state owned and private owned enterprises.

Jonas Babics China’s Direct Investment in India and Vietnam Page 2

Table of Contents

Table of Contents........................................................................................................................ 2 Boxes, Figures, Tables ............................................................................................................... 3

Abbreviations .............................................................................................................................. 4 1. Introduction .......................................................................................................................... 5 1.1. Dezan Shira & Associates ........................................................................................ 6 1.2. Scope of the Report.................................................................................................. 7 2. Literature Review ................................................................................................................. 8 2.1. Definition of Foreign Direct Investment (FDI) ........................................................... 8 2.2. Measuring FDI and International Statistics............................................................. 10 2.3. Theories of Foreign Direct Investment ................................................................... 10 2.4. China’s Outward Foreign Direct Investment........................................................... 14 2.5. China, India and Vietnam ....................................................................................... 18 3. Methodology ....................................................................................................................... 20 4. Results ................................................................................................................................ 21 4.1. China’s FDI Statistics ............................................................................................. 22 4.2. Survey: China’s Direct Investment in India and Vietnam........................................ 24 5. Conclusion.......................................................................................................................... 30 6. Discussion .......................................................................................................................... 32 References................................................................................................................................. 34


Boxes

Box 2.1. Motivation of Chinese Investments in Vietnam....................................................... 20

Figures

Figure 2.1. China’s OFDI Flow: 1992-2006 .............................................................................. 15 Figure 4.1. China’s OFDI Flow: 2003-2007 .............................................................................. 22 Figure 4.2. China’s OFDI Stock: 2003-2007............................................................................. 23 Figure 4.3. General interest among Chinese companies for direct investment in India and

Vietnam .................................................................................................................. 24 Figure 4.4. Type of companies investing in India and Vietnam ................................................ 25 Figure 4.5. Motivations behind China’s direct investment in India............................................ 26 Figure 4.6. Motivations behind China’s direct investment in Vietnam ...................................... 27

Tables

Table 4.1. Reasons behind choosing India or Vietnam as preferred destination for China’s

direct investment .................................................................................................... 29


Abbreviations

BPM6 Balance of Payments and International Investment Position Manual, 6th edn.

BRIC Brazil, Russia, India, China

CLFG China Luoyang Floating Glass Corporation

FDI Foreign Direct Investment

IFDI Inward Foreign Direct Investment

IMF International Monetary Fund

LDC Less Developed Country

MNE Multinational Enterprise

MOFCOM Ministry of Commerce

OECD Organisation for Economic Co-operation and Development

OFDI Outward Foreign Direct Investment

SAFE State Administration of Foreign Exchange

SME Small and Medium Enterprise

SOE State Owned Enterprise

TNC Transnational Corporation

UNCTAD United Nations Conference on Trade and Development

USD United States Dollar


1. Introduction

China has attracted more and more attention not only as a destination for foreign direct

investment (FDI), but also as a growing source of outward FDI. By the end of 2007, the

accumulated stock of China’s outward FDI (OFDI) has reached the value of USD 117.91 billion.

According to the statistics from the Ministry of Commerce in Beijing, almost 7’000 Chinese

investment entities have established over 10’000 overseas enterprises in 173 economies

globally (MOFCOM, 2008). A significant part of China’s OFDI flows to developing countries with

Hong Kong, China as one of the major destinations. Furthermore, a great amount is invested in

China’s neighbouring economies. Lately, the international media has often mentioned two of

these neighbours - India and Vietnam - as new competitors of China, attracting also a lot of

foreign investment from developed countries. Since the two countries have opened their markets

to FDI, they have been seen as major alternative or addition in the global strategy of European

and American manufacturing or service enterprises. China’s direct investment in India and

Vietnam has also grown significantly in the last years. China may face competition from the two

emerging markets. On the same time, China sees them as an important destination for outward

FDI projects.

The current literature is mainly about foreign direct investment in China. However, in recent

years numerous reports and papers have been written about China’s outward FDI, where FDI

flow to Africa counts as a major topic for articles in newspapers and scientific journals. China’s

investments in Africa are controversial, as they flow almost exclusively into the natural resources

sector and are carried out by large state owned enterprises. China has often been criticised to

exploit the richness of African countries. China’s direct investment in developed economies has

also been examined by researchers, because governments of the host countries are not without

doubt, that the FDI projects may not have a negative impact on their home markets. Therefore,

the governments often intervene, where China’s OFDI get in contact with strategic important

sectors. Unlike Africa and developed economies, there are few research papers about China’s

OFDI in India and Vietnam. Dezan Shira & Associates, the firm where I worked during my

research, is specialized in FDI and has offices in China, but also in India and Vietnam.

Therefore, Chinese companies investing in India and Vietnam belong to their customers. These

are the reasons, why I chose the topic “China’s Direct Investment in India and Vietnam” for my

Licence Thesis.

Since India and Vietnam count as alternative for China as destinations for FDI from developed

countries, the conditions for direct investment must be similar. Although, India is often stated as

having a huge problem with underdeveloped infrastructure and Vietnam started to open its


economy later than China, the two countries attract more and more direct investment from

developed countries as well as from China itself. A reason for this is certainly the increasing

costs in China’s major cities like Shanghai, Beijing and Shenzhen. However, the potential for

cheap labour manufacturing in China’s central provinces is still immense. The typical reasons

(cheap labour, new market opportunities) why companies invest in countries like China, India or

Vietnam, still exist in China outside of the east coastal area. That led me to the question what

the motivations could be behind the direct investment of Chinese enterprises in India and

Vietnam.

My thesis is, that China’s direct investment in India and Vietnam are not commercially driven, but

are strategically motivated by the Chinese government and are carried out solely by state owned

enterprises (SOEs).

China’s OFDI have grown since 2000, following the launch of the “go global” strategy of the

government in Beijing. Enterprises were encouraged to invest overseas and to expand their

international market share (OECD 2008b). The thoughts behind my thesis are, that the market

opportunities in China are still great and not yet exhausted. Furthermore, that Chinese

companies have no advantage of producing in India or Vietnam and that they would be able to

deliver the two markets from their own country, due to the geographical nearness. In addition,

China has not always been in friendly relationship with India and Vietnam and it sees the two

countries now as competitors for FDI from Europe and the United States. It is not my conviction

that commercial reasons are responsible for China’s companies’ decisions to invest in India and

Vietnam.

1.1. Dezan Shira & Associates

During my research for my Licence Thesis I worked as an intern at Dezan Shira & Associates in

Shanghai. The firm provides legal, accounting and tax services for multinational companies,

which invest in China, Hong Kong, India and Vietnam and it has focus on the foreign direct

investment environment. Their clients are mainly European and North American enterprises.

Since Dezan Shira & Associates has established branches in India and Vietnam, the attention

lies also on Chinese companies investing in these two countries. Therefore, this report is

arranged in line with the interest of Dezan Shira & Associates. The aim of the firm is to find out

what kind of Chinese companies invest in India and Vietnam and what the motivations for their

international expansion are. As Dezan Shira & Associates has several offices in different regions

of China, there was a further request to find out, if there are differences in the motivations of

Chinese companies. The question raised was, if enterprises from North China have direct


investment in India and Vietnam at all or if this is limited to enterprises from South China, in

consequence of the geographical nearness.

1.2. Scope of the Report

The focus of this thesis lies on the motivations behind China’s outward FDI. It examines the

question why Chinese enterprises invest abroad and why they particularly invest in India and

Vietnam. The development of China’s total outward FDI is also very important, as it helps to

understand the current situation of Chinese firms and their international strategy.

The market entrance strategies of Chinese companies will not profoundly be identified. I

examined in my research, if there is a tendency towards joint ventures, greenfield investment or

acquisition of existing firms and if there are differences between investment projects in India or

in Vietnam. The companies and their unique way of entering the Indian or Vietnamese market

successfully or not, are not part of this report.

The impacts of China’s outward FDI on India and Vietnam will only be part of the discussion

chapter and will not be examined in details. It would be very interesting to do further research on

the difference between the behaviour of Chinese and western companies and the impacts in the

host countries. This would be an additional topic covering a separate research paper.

The recent influences of the financial crisis and the stimulus package of the Chinese government

are not taken into account. This will have specific consequences on the decisions and motivation

of Chinese firms and on the Chinese economy itself. However, the current impacts are not

entirely ascertainable. The stimulus plan from Beijing was announced during my research period

and the consequences cannot yet be academically examined.

As in all official FDI statistics, the numbers in this report consists of FDI from the People’s

Republic of China without Hong Kong, China, Macau, China and Taiwan Province of China.

Important to mention is that a significant part of China’s outward FDI flows to Hong Kong, China

and this can distort the overall picture of the development of China’s OFDI. It is possible that

some direct investment from Chinese firms in Hong Kong, China flow to India and Vietnam

afterwards and are not statistically registered as China’s OFDI flow to these two countries.

The aim of this report is to identify the motivations for China’s investment in India and Vietnam.

One might derive a conclusion about China’s investment in other South and South East Asian

countries, but this is not intended with this report.


2. Literature Review

The concept of foreign direct investment (FDI) is of interest for a lot of researchers. Since the

huge increase of FDI volume from the 1960s, economic literature has also been developed on

the theory of FDI. Beforehand, foreign direct investment was treated in the same way than

international capital flows and there did not exist a stand-alone theory of FDI (Jones and Wren,

2006). This chapter gives an overview of the most important theories of FDI, as well as of the

rather newer existence of outward foreign direct investment from developing countries.

China has been in the focus of managers and economists particularly for its impressing inflow of

FDI since the opening of the Chinese market. In recent years, China has also been regarded as

an important source of outward FDI. The second part of this chapter will describe the

development of China’s total outward FDI and the specific relationship between China and its

neighbouring countries India and Vietnam.

This literature review is limited to issues, which help to explain the motivations of Chinese

companies investing in India and Vietnam. I have chosen theories and literature, which can be

applied to interpret China’s direct investment in these two economies.

2.1. Definition of Foreign Direct Investment (FDI)

The United Nations Conference on Trade and Development, UNCTAD (2008:322) defines FDI

as „an investment involving a long-term relationship and reflecting a lasting interest and control

by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise

resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate

enterprise or foreign affiliate).“ This definition is consistent with the definitions that are contained

in the Balance of Payments and International Investment Position Manual, 6th edition (BPM6)

issued by the International Monetary Fund, IMF (2008) and in the Benchmark Definition of

Foreign Direct Investment, 4th edition issued by the Organisation for Economic Co-operation and

Development, OECD (2008a). The most important characteristic in this definition is the long-term

relationship as well as the lasting interest and control. The purpose of an individual or a legal

entity is to gain an effective voice upon the management of an enterprise operating outside of

the investor’s economy. While the investors could be individuals or legal entities, the investment

objects are usually enterprises (Kutschker and Schmid, 2006). The interpretation remains, how a

long-term relationship and the lasting interest and control can be measured. This question is not

answered by the definition and is also differently adopted by governments and statistic

institutions.


Direct investment is separated against portfolio investment, where the investor does not have a

lasting interest or wishes control, but has profit as his main purpose. However, how can you

distinguish between direct investment and portfolio investment? There is a threshold of equity

ownership or voting power, which identifies an investor as a direct investor. The OECD (2008a)

and the IMF (2008) both suggest a threshold of 10%. China’s FDI statistics apply the

recommendation from the OECD and measure foreign direct investment from an equity

ownership or voting power of 10% in an enterprise resident outside of the Chinese economy

(OECD 2008b).

Writing about foreign direct investment, different possibilities exist to express it. Two questions

could be asked to specify FDI: Which direction has the investment and which kind of

measurement is used. FDI can be divided into investment that flows from one economy into

other economies (outward FDI or OFDI) and investment that flows from different economies into

one specific economy (inward FDI or IFDI). Secondly, there has to be defined which kind of FDI

is measured. Statistics either measure the accumulated stock of direct investment (FDI stocks)

or the inflows and outflows of direct investment (FDI flows) within a defined period, mainly within

a calendar year (Kutschker and Schmid, 2006).

Transnational Corporations (TNC)

Enterprises that locate production or control assets of other entities in economies outside their

home economy are referred to as Transnational Corporations (UNCTAD, 2002) or Multinational

Enterprises (MNE). They can be seen as the vessel for FDI (Jones and Wren, 2006). The

accumulated value of output from TNCs contribute about 25% to the total global output, within

one third is generated outside their home economies (Moosa, 2002). There are different factors,

which influence the companies decision to either export their goods and services or to undertake

foreign direct investment in the target economy. Moosa (2002) suggests four of them:

profitability, opportunities for market growth, production cost levels, and economies of scale.

Regarding the results of this report, I would like to add another very important factor - especially

for TNCs from developing countries - which is government policy.


2.2. Measuring FDI and International Statistics

The IMF and the OECD try to standardise the worldwide measurement of foreign direct

investment. Despite these efforts, there is a lot of discrepancy in the collection of data from

statistical bodies from different governments worldwide. These issues range from the existence

of relevant data to the method of gathering the data and to the fluctuation of the exchange rates

against the USD. To be able to compare the FDI statistics from different countries, the results

are converted into USD, which can distort the data (Kutschker and Schmid, 2006).

In China, the inward and outward FDI statistics are issued by the Ministry of Commerce

(MOFCOM) and are used internationally. However, it is not possible to declare that China’s FDI

statistics are consistent with the OECD’s recommendations in the OECD Benchmark Definition

of FDI (OECD 2008b). The data from China’s Ministry of Commerce consists only of approved

investment projects from enterprises that pursued such permission from the MOFCOM. As

consequence, the data does not include unauthorized outflows and investment from companies,

which do not require MOFCOM approval. Therefore, it leads to an increasing discrepancy

between the approved investment amount and the actual monetary outflows that are measured

by the State Administration of Foreign Exchange (SAFE) (Cheng and Stough, 2007). China’s

FDI statistics also include the phenomenon commonly known as round-tripping. The main part of

China’s OFDI flows to offshore financial centres in Hong Kong, China, the British Virgin Islands

and the Cayman Islands and a significant percentage of these investments are likely to flow

back to China later as FDI inflows (OECD 2008b). Inward FDI in China from Hong Kong, China

that falls under round-tripping is estimated to be between 25% and 50% (UNCTAD, 2006).

In this paper I rely on the FDI statistics from the MOFCOM and the UNCTAD.

2.3. Theories of Foreign Direct Investment

Even though the characteristics of outward FDI from developing countries do not necessarily

correspond with the force behind direct investment from developed countries, the theories that

emerged after the increasing flow of FDI in the 1960s, can also be adopted to explain the

motivations behind China’s outward FDI. The following authors are often cited in various papers

about FDI and I referred to them to understand OFDI projects from Chinese enterprises. I will

give a short overview of their theories in the following paragraph and try to bring the theories in

an applicable perspective as well as decribe their limitations: Hymer’s (1960) international

operations of national firms; Vernon’s (1966) product life-cycle theory; Buckley and Casson’s

(1976) internalisation theory; Dunning’s (1977) eclectic theory and Lecraw’s (1977) direct

investment by firms from less developed countries.


Hymer’s Contribution

Before 1960, foreign direct investment was treated in the same way than portfolio investment

and were described by the standard neoclassical theories of capital movements (James and

Wren, 2006). Hymer (1960) pointed out the difference between these kinds of investment and

explained the key concept behind foreign direct investment. He distinguishes FDI from portfolio

investment in his theory on international operations of national firms, according the level of

control the investing company gets over the enterprise in the foreign country. Hymer describes

two reasons for FDI. One is that a company can eliminate competition with the acquisition of a

company in a foreign country and the other is to gain advantages over other companies

operating in different economies.

Product Life-Cycle Theory

Hymer’s (1960) contribution was completed by Vernon’s (1966) product life-cycle theory by

describing when and where the advantage of a transnational corporation would be exploited

(James and Wren, 2006). The decision to locate production in an economy outside the home

country has a more complicated process, than standard factor-cost or labour-cost analysis. The

theory consists of three main stages that a product undergoes in his life cycle. These stages are

product development process, maturing product and standardised product. The product life-

cycle theory states why, when and where FDI occurs.

Internalisation Theory

Buckley and Casson (1976) add to the existing FDI theories the factor of knowledge transition.

They state that a transnational corporation does not only produce goods or services but has also

activities such as marketing, training, research and development, management techniques and

involvement with financial markets. Intermediate products like knowledge, expertise or material

products connect these activities and if the market for these intermediate products does not exist

or is imperfect, a company will internalise these. This can happen across national boundaries

and hence FDI occurs (James and Wren, 2006).


The Eclectic Paradigm

The most cited and common theory is Dunnings’ (1977) eclectic theory. Dunning brings in his

eclectic approach Hymer’s ownership advantage with the internalisation of Buckley and Casson

together and adds a locational dimension to the theory (James and Wren, 2006). The eclectic

paradigm of FDI describes three factors, which have to be fulfilled that a company will direct

invest in a foreign country. That leads to the formula FDI = O + L + I, where O stands for

Ownership Advantage, L for Location Advantage and I for Internalisation Advantage. Ownership

advantage leads either to higher revenue and/or to lower costs and can be transferred easily

within a TNC (technology, brand name, size of the company) and gives the company an

advantage over the competitors in the host country. Location advantages are possessed by a

country and make the relocation of production more attractive than export. These are for

example transportation cost, government policy, labour cost, language and culture.

Internalisation occurs when a TNC internalises production. Reasons for internalisation could be

that a market does not exist, that the TNC wants to protect its goods or to avoid transaction

costs.

In his restatement and extension of his own eclectic paradigm, Dunning adds also an

explanation, where he distinguishes between FDI from developed and FDI from developing

countries (Dunning, 1988). He states that the early investment projects from companies from

developed countries normally sought natural resources or low cost labour, where there home

country was disadvantaged. Companies from developing countries however are currently

seeking to acquire technology.

Lecraw’s Contribution

Lecraw (1977) studied specifically the direct investment from TNCs from less developed

countries (LDCs). He found out that companies from LDCs do not substantially invest in

developed countries but almost exclusively in other LDCs. A reason could be that these markets

are similar to their own and that they have a lack of experience to carry out FDI projects in

developed countries, where higher technology and more capital is necessary. Lecraw (1977)

mentions also the impact of the government policy as factor for FDI. His example is India, where

the government encouraged companies to direct invest in other LDCs to follow the governments’

policy.


The theories try to explain why FDI occurs and what factors have to be fulfilled. Contributions

from Lecraw (1977) and Dunning (1988) also see a difference between FDI from developed and

FDI from developing countries. Most of the theories however do not consider that TNCs from

developing countries may follow other strategies and have other reasons for FDI than TNCs

from developed countries. A reason for this might be, that the increasing amount of developing

countries’ OFDI is a relatively new phenomenon. My major critique of the existing FDI theories is

that they do not include government policy from the home country as a reason for foreign direct

investment. In the case of China it would help to explain an important part of the development of

outward FDI. As we will see in the following paragraphs of this report, not only commercial

factors are responsible for the rise of China’s OFDI, but also strategical reasons from the

government in Beijing.

Dunning (et al., 1997) describes the difference between FDI from developing and FDI from

developed countries in his later works. The fact is highlighted, that TNCs from developing

countries focus their investment on neighbouring countries or economies that are in a similar or

even earlier developing stage than their own. One reason is, that the location advantages of the

host countries are similar to those of their home countries. As India and Vietnam are both

neighbouring countries of China, this contribution helps to explain why some enterprises may

choose India or Vietnam as first destination in their internationalisation strategy.

Another difference between FDI from developed and FDI from developing countries is the

advantages, companies use for their investment in other countries. Developed-country TNCs

utilize firm-specific advantages based on ownership of assets, like technologies, brands and

other intellectual property. Developing-country TNCs utilize more firm-specific advantages

derived from production process capabilities, networks and relationships, and organizational

structure (UNCTAD, 2006a).

The theories take only economic factors in account and disregard irrational factors like individual

preferences from boards of directors, which are sometimes very important, especially in the case

of small and medium enterprises (SME). The relationships, which executives from a company

have, may have a strong influence on their decision, whether to invest in a country or not. China

has a different historical background with its various neighbours and this leads to a different view

of the Chinese population towards these countries. Chinese enterprises my be influenced in their

decisions by these factors.


2.4. China’s Outward Foreign Direct Investment

China is commonly known as an attractive host country for FDI from economies from the entire

world. Recently, the country has also become an important source of outward FDI. Starting with

virtually no OFDI in 1979, the initial year of China’s open door policy, OFDI has now

accumulated to a stock of over USD 90 billion in 2006. China’s OFDI flow and stock rank now 4th

and 6th among OFDI from developing countries (OECD 2008c).

By the end of 2007, China’s OFDI stock reached the amount of USD 117.91 billion, with nearly

7’000 Chinese investment entities having established over 10’000 overseas enterprises in 173

economies globally (MOFCOM, 2008). However, the top five destinations for China’s OFDI

account for 85.5% of the total OFDI flow from China over the years 2003 to 2006 and 84.5% of

China’s total OFDI stock by the end of 2006. Hong Kong, China and popular tax havens or

offshore financial centres of the British Virgin Islands and the Cayman Islands account for 80%

of China’s OFDI flow over 2003-06. In addition to these economies, the following countries are

the most favoured destinations for China’s OFDI: Australia, Denmark, Korea, Macao, China,

Russia, Singapore, Sudan and the United States (OECD, 2008b). The amount of outward FDI

from China is significant and emerged earlier and in a greater degree than was expected,

regarding the theory of FDI or the past experience. An important reason could be the impact of

globalisation, especially the growing competition as well as increased opportunities (UNCTAD,

2006a). In the beginning, China’s OFDI flowed mainly to developed countries in North America

and Oceania, whereas the focus lies now more on developing countries. Since 2004, Africa has

appeared as an important recipient of China’s OFDI flow. By the end of 2006, 3.4% of China’s

total OFDI stock was found in Africa. China has grown to an important source of capital for

economic development in developing countries (OECD, 2008b).

Like in other developing countries, the active support from the government is to some extend

responsible for the fast development of OFDI from China. The public authorities realized that

higher competitiveness of their companies brings other benefits to the home economy and they

encourage their enterprises to invest abroad (UNCTAD, 2006b). As it is seen in the figure 2.1.,

most of the increase of China’s OFDI flow has taken place since 2000. This was the year, when

the Chinese government officially initiated the “go global” strategy to promote OFDI. The policy

contains relaxing controls on outward capital flows and simplified administrative requirements

and encouragement for Chinese companies to invest in other countries. The government’s policy

was and still is one of the most significant determinants for the development of China’s OFDI.

However, more and more OFDI projects of Chinese enterprises are recently driven by


commercial motivations (OECD, 2008c). The initiation of China’s “go global” strategy was very

important as a start for Chinese firms to invest abroad and made the outward investment climate

friendlier. Although, the first Chinese OFDI projects were only from large SOEs and

accomplished with pressure from the government, following projects were also implemented by

private enterprises with commercial reasons as motivation.

Figure 2.1. China’s OFDI Flow: 1992-2006 USD billions

Source: OECD (2008b)

China’s global OFDI volume has been dominated by large SOEs, mainly because the average

investment size of their projects is much larger than the ones from private companies. The ten

largest Chinese TNCs by OFDI stock are all state owned enterprises and more than half are

operating in the natural resources sector. Nevertheless, an increasing number of investment

projects have now been carried out by non-SOEs, which are mainly found in the manufacturing

sector (OECD, 2008b).

The Chinese government encourages all enterprises, state owned and private owned, to invest

overseas and expand their international market share. The “go global” strategy (走出去 - literally

„go out“) is an official policy and was initiated by the former Premier Zhu Rongji in his 2000


report to the National Congress on the work of the government (OECD, 2008b). For the

government, going global was the best option for the development of China’s TNCs (Ren, 2006).

In the current Five-Year Plan (2006-2010), the “go global” strategy is again part of the plan and

Premier Wen Jiabao emphasized, in a speech at the Tenth National People’s Congress, the

importance of the strategy. He mentioned that the implementation should be speeded up and the

investment be more efficiently co-ordinated and guided (OECD, 2008b).

There are several reasons why China experienced this turn in its OFDI policy. The country was

very successful with attracting FDI and promoting exports in previous decades. The government

continues the reform and liberalisation of the Chinese economy and tries now to strengthen their

own companies by motivating them to expand overseas. Furthermore, there are two

developments, which have influenced the policy shift. 1) China’s increasing exports have

frightened many host countries and have led to protectionist reactions. 2) The capital outflows

help China to achieve equilibrium in its international financial flows. This would mitigate the

pressure from other countries on China to revalue its currency, which has risen after China

accumulated large amounts of foreign exchange reserves (OECD 2008b).

The Chinese government promotes OFDI also by providing incentives. There are different tools

to support companies, which are however limited to companies on the priority list and these are

mainly large SOEs. These companies can benefit from access to below-market rate loans, direct

capital contribution, and subsidies associated with the official aid programmes (OECD, 2008b).

The MOFCOM and the Ministry of Foreign Affairs have released together the “Guidelines for

Investments in Overseas Countries’ Industries”, which includes recommendations of industry

sectors that are interesting for Chinese companies in 68 host countries. Tax is also a very

important tool for the government to promote OFDI. Chinese enterprises do not pay corporate

income tax in the first five years after beginning its overseas operations. Furthermore,

companies exporting equipment, raw materials and processed materials to their entities abroad

are able to get a refund of the value-added tax (OECD, 2008b).

The government in China plays a major role in the OFDI development and the increasing

number of OFDI projects is part of the broader process of economic reform and political activity.

To promote OFDI the government has also relaxed control on outward investment, which made

OFDI easier for all Chinese firms, not only companies on the priority list. Therefore, pure political

motivations have been more and more substituted by Chinese companies’ own commercial

motivations. The enterprises utilize the relaxed OFDI environment, but implement their own

strategy with profit as main objective. The recent enthusiasm for OFDI is based more on

economic rational reasons (OECD, 2008b).


Motivations for Chinese companies’ direct investment in developing countries

In the following paragraph, I will outline possible motivations for Chinese companies to invest in

other developing countries. These motivations can likely be transferred to China’s direct

investment in India and Vietnam. However, to specify the case of India and Vietnam, I have

conducted a separate survey, which is part of my research.

The OECD (2008b) outlines in his 2008 China Investment Policy Review major motivations that

drive OFDI projects in developing countries. 1) Projects seeking natural resources. This attracts

the main attention from the Chinese government and more than half of China’s largest TNC’s

operate in this sector. 2) Projects seeking product markets. Especially the household electrical

appliances, automobile production, textile industry and the agricultural industry account for a

large part of China’s joint ventures or wholly-owned factories in developing countries. The

support from the government is not as crucial in the manufacturing sector, but developing global

competitiveness and expanding markets are even though seen as key OFDI projects qualifying

for financial incentives. The outward investment from manufacturing companies are based on

survival strategies in an increasing competitive market and/or on their long-term business

development strategies. 3) Projects seeking efficiency. Especially in ASEAN countries, China’s

OFDI projects are carried out by low-tech and labour-intensive manufacturing companies. For

efficiency seeking, they either decide to locate their plants in China’s western inland provinces or

in foreign developing countries.

For the UNCTAD (2006a) costs are less of an issue explaining China’s OFDI, because of its

large reserve of skilled and unskilled labour. An important motivation driving Chinese companies

to invest abroad, is to bypass trade barriers and the competition from foreign TNCs in China’s

domestic economy.

It is likely that China’s OFDI will further increase. In the foreseeable future, China will continue to

search for investment opportunities in developing and developed countries (OECD, 2008b). The

shift from a fixed exchange rate to an “exchange rate basket” management system leads

presumably to a gradual appreciation of the Chinese currency, the Yuan. This would make

overseas investment even more attractive for Chinese companies (Woo and Zhang, 2006). The

expected appreciation of the Yuan and rising labour costs may also push Chinese enterprises

out into the international market to maintain the cost competitiveness of their products (OECD,

2008b). Especially Vietnam will be a preferred destination for Chinese companies, as its

government follows a similar opening strategy for their economy as China. The opening

however, started later and the market is not yet as developed, which offers low-cost production

opportunities for Chinese manufacturing companies.


2.5. China, India and Vietnam

India and Vietnam are both China’s neighbouring countries. The relationship and historical

background is however rather different. In the following paragraph I will outline the most

important information to understand how geographical, historical and cultural facts may influence

the decision of firms to invest in these two countries. Recently, India and Vietnam were referred

as alternative or addition in the international strategy of direct investors from developed

countries. There exists even the opinion, that a competition has occurred between these three

countries to attract FDI. This may be relevant for the FDI flow from China to India and Vietnam.

Dezan Shira & Associates has offices in China, as well as in India and Vietnam. Since the

opening of the practices in India and Vietnam, Chinese companies have also belonged to their

customers. This report should help Dezan Shira & Associates to understand the possible

motivations from Chinese firms, which invest in India and Vietnam, to target them better.

India

China and India together account for more than one third of the world’s population. Along with

Brazil and Russia they belong to the so-called BRIC economies, which should, according to

Goldman Sachs, become a much larger force in the world economy over the next 50 years

(Wilson and Purushothaman, 2003). Nonetheless, the two countries often view each other with

an eye of suspicion. Although, they continue now to move closer to another and support each

other on international fronts, they still have fights over land and sea territory and started

competing for natural resources in Russia, Africa and Iran (China Briefing, 2008).

China is for India of high importance, as it is the largest trading partner. However, China has

also strong relationships with India’s rivals, which leads often to mistrust. The most important

recipients of China’s military support are India’s neighbouring countries, like Pakistan, Nepal, Sri

Lanka and Bangladesh (Kempf, 2002). Politically, the two countries try to strengthen the

relationships and both sides have maintained frequent high-level visits. They are convinced that

it is very important to cooperate and to trust each other (Zhang, 2008).

The two economies will be able to complement one another with India being strong in services

and information technology and China perceived to be strong in manufacturing and

infrastructure. That will also be a great opportunity for Chinese companies operating in the

infrastructure business.

As recipient of FDI inflows, India is often seen as a competitor to China. But China is still ranked

as preferred investment destination by most international companies. Direct Investment in India

still face barriers with continuing political resistance to privatisations, inflexible labour laws and


poor infrastructure (Economist Intelligence Unit, 2007). Another problem is the widespread

illiteracy in India. While 1% of China’s population aged 15-24 was illiterate, the percentage in

India was 24% in 2004 (Rowthorn, 2006).

Vietnam

“The Chinese government actively supports the building of China-Vietnam economic and trade

cooperation area and hopes that it would help encourage Chinese businesspeople to invest

more in Vietnam.” Wen Jiabao, Premier of the State Council of the People's Republic of China

(Ministry of Foreign Affairs, 2008)

China and Vietnam share an alternating history. In 1979, Chinese troops occupied the

Vietnamese boarder with a 29-day military campaign. The cause for this behaviour was

reasoned by China as answer to the alliance of Vietnam with the Soviet Union and its invasion of

Cambodia. The trade between China and Vietnam started only again in 1991, when the relations

between these countries began to defrost (China Briefing, 2008). In the early 1990s, bilateral

economic, trade and political ties have developed rabidly (Ren, 2006). Now China is one of

Vietnam’s most important trading partners. On the other hand Vietnam provides China with coal,

crude oil and natural rubber to still its insatiable hunger for natural resources.

Vietnam is the second largest market in Southeast Asia and experiences the same transition like

China from a centrally planned economy to a free market economy (Ren, 2006). China’s

strategy was to open the economy to investment while maintaining a tight hold on political

power. Vietnam’s leaders have watched the development of China’s market and intend to follow

the same strategy (Hookway, 2007). Vietnam opened its economy later than China and is

therefore at an earlier stage of development and is used as near shore production base for low-

cost supplies to the Chinese market (Oxford Economics, 2008). Industrial land is cheaper in

Vietnam than in China. Compared to China’s east coast regions, the wages are about one third

lower in Vietnam and it has a population of almost 90 millions, half of whom are under 30 years

old. The talent pool of Vietnam is deep and increasing (Hookway, 2007).

Culturally Vietnam is much closer to China than India. The communist revolution in both

countries has affected religion and traditional cultural values. The people today practice a

combination of Confucianism, Taoism and Buddhism to be guided how to live. Especially

Confucianism may influence economic behaviour and the political system, as it is a concept of

placing the good of the society above that of the individual (Jandt, 2004).


Box 2.1. Motivation of Chinese Investments in Vietnam

Ren Yi (2006) has interviewed two Chinese TNCs to find out their motivations for entering the

Vietnamese market. The companies are China Luoyang Floating Glass Corp. (CLFG) and China

TCL Holdings Co. Ltd. (TCL). For both of the companies, the large domestic market and

economic growth were major motivations to invest in Vietnam. They both had been exporting

products to Vietnam before they decided to invest there. However, setting up subsidiaries helped

them to reduce transaction costs and to get closer to the customers and their specific needs.

Vietnam was the prior investment destination in Southeast Asia for CLFG and TCL. “They

mentioned that they could easily understand workings of the Vietnamese government system,

local consumer behaviour, and did not experience difficulty in executing their market strategies”

(Ren, 2006:45). But Ren (2006) also pointed out that the role of the Chinese government and

the national policies are one of the most important motivations for Chinese TNC’s to invest in

Vietnam. Both, CLFG and TCL experienced strong push factors after the implementation of

China’s “go global” policy.

Source: Ren (2006)

3. Methodology

To find an answer to my research question and to support or to contradict my thesis, I have not

only reviewed current literature. Part of this report is also the analysis of a survey, I have

conducted during my internship at Dezan Shira & Associates. The focus group of this survey

was a pool of experts in foreign direct investment. It was sent to 132 individuals working either

for Dezan Shira & Associates, for consulates in China, India or Vietnam or for other economic

organisations. The survey consisted of an online questionnaire with eight questions specified for

each country and five general questions regarding China’s OFDI in India and Vietnam. I have

chosen the survey as methodology, since the focus group I was able to involve was big and the

experts were placed in different regions of China, India and Vietnam. With this methodology, it

was possible to reach them all and get a broad view of the motivations behind direct investment

from Chinese enterprises. It would have been possible to conduct in-depth interviews with a

smaller number of experts based in Shanghai. An additional idea of the survey, however, was to

find out differences of the investment attitude of firms from various regions of China. With an

online survey I was able reach a high number of experts, who came from different locations. The

questionnaire was very easy to fill in and used only about 10 to 15 minutes. Unfortunately, the

number of answers was not as high as expected. 20 individuals have filled in the online


questionnaire. The reasons for not filling in the answers, was often that they did not see

themselves capable enough to response to specific questions about India and Vietnam.

Nevertheless, I have analysed the answers and will be able to make a statement, if my thesis is

true and the motivations behind China’s OFDI in India and Vietnam are politically driven by the

Chinese government. As the members of the focus group were FDI experts and not executives

from Chinese companies, the result consists of opinions or experience and not actual

information from the investors itself.

To understand the development of China’s direct investment in India and Vietnam, I have

analysed the FDI statistics from 2003 to 2007 of the Ministry of Commerce in China. This

analysis is part of the first paragraph of the results chapter and helps to find out the importance

of each country from a Chinese perspective and to see, how the outward FDI from China

developed in these particular years. As the financial crisis affected the Chinese economy not

until the beginning of 2008, the impact cannot be observed in the analysis. The slowdown of

economic growth in China has also an influence on the outward FDI. However, this impact and

the influence of the stimulus package from the Chinese government can only be examined later.

If there is an effect on China’s direct investment in India and Vietnam, it will be only in a short-

term perspective and would most likely not change the long-term investment attitude of Chinese

enterprises.

4. Results

The review of current literature about China’s OFDI is contradictory to my thesis. I have found

out that political reasons are an important motivation behind OFDI from Chinese enterprises and

were responsible for the first wave of China’s outward FDI. However, this situation has changed

after the first years of Beijing’s “go global” strategy. Many firms now choose to invest abroad with

commercial intensions. The support or sometimes pressure from the Chinese government still

exists but is only part of the motivation behind China’s outward FDI. While strategic and political

reasons are still more important for FDI in Africa and mainly in the natural resource sector, OFDI

in India and Vietnam are more driven by commercial reasons.

With my own research I also try to find out the motivations behind China’s direct investment in

India and Vietnam and it will show, if the results of my survey confirm my conclusions of the

literature review or not.

In the first section of this chapter, I will analyse China’s FDI statistics from 2003 to 2007.

Regarding my topic, I have investigated China’s OFDI stock and flow to India and Vietnam.


4.1. China’s FDI Statistics

Figure 4.1. China’s OFDI Flow: 2003-2007 USD millions

Source: MOFCOM (2008)

China’s OFDI flow to Vietnam is much higher than to India and had also a higher growth rate in

the last years. The OFDI flow to Vietnam was USD 110.88 million compared to USD 22.02

million OFDI flow to India in 2007. The growth rate from 2006 to 2007 was 155% for Vietnam

and 292% for India. For both countries, the percentage of China’s total OFDI flow is very small:

Vietnam counts for 0.42% of China’s total OFDI flow and India for only 0.08% in 2007

(MOFCOM, 2008). Although, the importance of China’s OFDI flow to India and Vietnam is very

small compared to the overall FDI outflow from China, the growth rates are remarkable.

Furthermore, 80% of China’s OFDI over 2003-06 has flown to Hong Kong, China and popular

tax havens or offshore financial centres of the British Virgin Islands and the Cayman Islands.

This means, that 20% of total China’s OFDI flow was distributed to all the remaining economies.

Regarding this huge disparity, the comparison to previous years is more meaningful than the

comparison to the total FDI outflow to examine China’s OFDI flow to India and Vietnam.


Figure 4.2. China’s OFDI Stock: 2003-2007

USD millions

Source: MOFCOM (2008)

The OFDI stock shows a similar picture than the OFDI flow. Vietnam accounted for USD 396.99

million in 2007 compared to USD 120.14 million for India. Vietnam is therefore much more

attractive as destination for China’s OFDI than India. Again, the percentage of China’s total

OFDI stock is very small with 0.34% for Vietnam and 0.1% for India. The two countries account

for an OFDI stock, which is comparable to other Southeast Asian countries like Malaysia with

USD 274.63 million, Myanmar with USD 261.77 million and Thailand with USD 378.62 million in

2007.

China’s direct investment in India and Vietnam grow very fast. Although, the two countries do not

have an important position in the OFDI perspective of China, the accumulated amount of OFDI

stock in the last five years is significant. In the opposite direction, China is a very important

source of FDI for India and Vietnam and is for both countries a very important trading partner.

This shows an imbalance of power regarding the relationship between these countries.

In the statistics we see, that India and Vietnam get more and more an attractive destination for

OFDI from Chinese enterprises.


4.2. Survey: China’s Direct Investment in India and Vietnam

The most interesting question in the survey for this report is the question about the motivation

behind China’s direct investment in India and Vietnam. However, with addressing the experts I

took the opportunity to ask other questions that could be interesting to understand the

development of China’s OFDI. The survey consisted of the same questions for India and

Vietnam to be able to compare the two countries. On the one hand I wanted to be able to make

a general statement about China’s OFDI, on the other hand I was interested in the difference

between India and Vietnam. In the literature one may find a lot about OFDI from China in

general, however there exists no empirical research about specific countries in South and South

East Asia.

Figure 4.3. General interest among Chinese companies for direct investment in India or Vietnam

Source: Survey on China’s direct investment in India and Vietnam (Babics, 2009)

The figure shows the percentage of answers giving to the question, how the interest is among

Chinese companies for direct investment in India or Vietnam. The answers show that the interest

is stronger to invest in Vietnam than in India. Most experts answered that there is no special

interest for Chinese companies to invest in India. This corresponds with the MOFCOM statistics

of China’s OFDI 2003-2007, which shows that direct investment from Chinese companies in

Vietnam are much higher than in India. Although, India is a larger market and belongs to the

famous BRIC emerging economies, Chinese firms tend to have a higher interest for direct

investment in Vietnam.

For both countries, the general interest is not very high. This statement is also supported by the

fact that China’s OFDI flow and stock in India and Vietnam are very low compared to the total


OFDI flow and stock. India and Vietnam opened their economy for FDI relatively late and China

started only in 2000 with actively boosting OFDI.

Furthermore, India and Vietnam have similar environments and especially Vietnam is used as

near shore production base for low-cost supplies to the Chinese market (Oxford Economics,

2008). Higher labour costs are a new phenomenon in China and therefore Vietnam is not yet as

attractive for Chinese enterprises, as for western manufacturing companies. If production costs

increase further in China, India and Vietnam will get more interesting as host countries for

China’s OFDI.

Figure 4.4. Type of companies investing in India and Vietnam


Regarding India and Vietnam, nearly half of the experts answered that both state and private

companies invest in these countries. This shows that the prejudice of China’s OFDI is not true,

which states that in China only SOEs are able to invest abroad. For Vietnam more experts

answered that only or mainly private owned companies carry out direct investment projects. This

underlines the fact that Vietnam is a more attractive market for Chinese companies and

therefore the percentage of private owned companies is higher. Private owned companies do

not follow the state strategy in the same amount than state owned companies and therefore, the

probability that the reasons for FDI are commercially motivated is higher.

The analysis of this question disproves the second part of my thesis, where I have made the

statement, that China’s OFDI are carried out solely by SOEs. This is even more true for

Vietnam, where the proportion of private owned companies seems higher.


Analysing the first two questions together leads me to the perception, that the more attractive a

market is for FDI, the more increases the percentage of private owned companies. This might be

true in general, but especially for China the correlation is observable. Where a market is not

attractive regarding usual commercial reasons, SOEs may even though carry out FDI projects

with political strategical purposes. When the market gets more attractive from a business

perspective, also private owned companies follow and invest in this economy.

The most interesting part of the survey was to find out the motivations behind China’s direct

investment in India and Vietnam. The experts could choose motivations from a range of

possibilities. As the possible motivations where either commercial or political, I am now able to

make the statement if the direct investment in India and Vietnam are commercially driven, or

more influenced by strategical reasons from the Chinese government. Each possible motivation

was rated with an intensity, which gives an average importance of the motivation in the analysis

of the answers. Added together, it shows the reasons why Chinese companies start expanding

their business in India and Vietnam.

Figure 4.5. Motivations behind China’s direct investment in India

Note: The motivations are rated with an intensity of importance for Chinese companies choosing to invest in India, where 0 means low intensity and 4 means high intensity



The most important motivations fall under the category of commercial reasons. The “go global”

strategy of the government still plays an important role ranked 3rd on the list of motivations,

however, number one is new “market opportunities”. Chinese companies know the potential of

the Indian economy and therefore invest in its market to profit from a huge number of

consumers. “Low cost sourcing” is another important motivation. This would be mainly in the

manufacturing industry as this was rated as number three of the industries having investment in

India, after Information Technology and Construction.

The difference between the motivation with the lowest average intensity (low demand in China -

2.06) and the motivation with the highest average intensity (new market opportunities 3.78) is

not big. Furthermore, all motivations mentioned in the survey have a average intensity above 2.

This means firstly, that a variety of reasons are behind FDI from Chinese enterprises and that

China’s direct investment in India is not dominated by one or few motivations.

Although, political reasons are still important for China’s direct investment in India, my thesis

cannot be supported by the analysis of the survey. The two most important motivations are

typically commercial.

Figure 4.6. Motivations behind China’s direct investment in Vietnam

Note: The motivations are rated with an intensity of importance for Chinese companies choosing to invest in India. Where 0 means low intensity and 4 means high intensity



Like for India, the motivations with the highest intensity are “new market opportunities” followed

by “low-cost sourcing”. Number three in Vietnam is “access to natural resources”, which is

reasoned by the huge amount of coal, crude oil and natural rubber exported from Vietnam to

China. China secures its access by investing in Vietnam. This reason can be seen as politically

driven, as the access to natural resources belongs to an important part of the international

strategy of the Chinese government. However, the two most important motivations are

commercial. Compared to India, the difference of the intensity between the motivations show a

higher variety.

The motivations for OFDI in Vietnam are also typical motivations for the manufacturing industry.

The question, which industries have direct investment in Vietnam showed the same result with

manufacturing leading the list before Textile - which is also to a huge part manufacturing -,

construction and mining / natural resources. Again, the same result comes from the question,

what kind of companies are mainly established in Vietnam, where manufacturing company was

chosen to 73.3% and services as well as trading companies to 13.3% each. Compared to India,

the manufacturing sector in Vietnam has a much higher proportion of OFDI from Chinese

enterprises. For India, trading companies were chosen to 42.1%, manufacturing companies to

31.6% and services companies to 26.3%.

Also for Vietnam my thesis cannot be supported. The main reasons for China’s direct investment

in Vietnam are commercially motivated and not politically. The influence from the Chinese

government is still there. The political motivations from Chinese government reached an average

intensity of 2.29. However, it does not count to the most important reasons behind China’s OFDI.

Regarding the question which country is preferred for China’s direct investment, the two

countries were chosen almost equally. 46.7% of the experts answered India and 53.3%

answered Vietnam. Asking the reasons behind the selected answer, the two countries show a

different picture. As shown in Table 4.1., half of the experts have chosen India because of better

business prospects and half have chosen Vietnam mainly because of geographical or cultural

reasons. Multiple answers were possible for this question.


Table 4.1. Reasons behind choosing India or Vietnam as preferred destination for China’s direct investment

Reasons India Vietnam

Geographical 2 4Cultural 6Better business prospects 6 2Friendlier investment climate 2Support form local government 3


Vietnam provides also easier access and is more attractive for small and medium enterprises.

47.4% of the experts answered, that the firms with direct investment in India are big companies,

while 50% of the experts answered that firms with direct investment in India are either SME or

big companies. 93.8% of the experts answered that firms with direct investment in Vietnam are

SMEs or big companies and SMEs.

The entrance strategy of Chinese enterprises investing in India or Vietnam is also different. Joint

ventures seem to be the most chosen entrance strategy in Vietnam with 53.3% and acquisition

of an existing firm the least chosen entrance strategy with 13.3%. An acquisition is capital

intensive and more possible for bigger companies. Joint venture is an attractive opportunity for

smaller companies, as the risk is lower, as well as the costs for market research. For India,

greenfield investment, acquisition of an existing firm and joint venture account for one third each

as entrance strategy of Chinese companies.

The results of my survey are consistent with the results from the literature review and are

supported by the analysis of China’s OFDI statistics. My thesis, that China’s direct investment in

India and Vietnam are not commercially driven but are strategically motivated by the Chinese

government and are carried out solely by SOEs, is not true. Political reasons for direct

investment in India and Vietnam are still strong but do not dominate OFDI anymore. The main

reasons behind direct investment in India and Vietnam are commercially driven.

Small and medium enterprises have also a high percentage of OFDI. Therefore, not only SOEs

are responsible for direct investment in India and Vietnam.


5. Conclusion

The very fast increase of China’s OFDI started in 2000 from a very low figure. Since then, the

growth of OFDI flow has been very high and China already ranks 4th among OFDI flow from

developing countries (OECD 2008c). The start of this rise is in line with the introduction of the

“go global” strategy from the Chinese government. They began to encourage Chinese

enterprises to invest abroad and expand their international market share. China is more and

more recognized globally as important source of OFDI and not solely as an attractive host

country for FDI from developed and developing countries. The OECD published a review about

China’s investment policy, where OFDI represents the main topic (OECD (2008b) OECD

Investment Policy Reviews: China 2008). However, 80% of China’s OFDI flow to Hong Kong,

China or to popular tax havens and offshore financial centres of the British Virgin Islands and the

Cayman Islands. This may distort China’s FDI statistics, as it is assumed that a part of these

direct investment flow back to China as so called round-tripping.

The question, which often arises and which was also my research question for this thesis, is, if

China’s OFDI are commercially motivated or only occur through pressure from the Chinese

government under their “go global” strategy. In addition, if state owned enterprises are

responsible for most of the outward investment projects or if there is also a significant part from

private owned companies. The literature review and the results from my survey - conducted

among FDI experts from the service firm Dezan Shira & Associates and from chambers of

commerce in China, India and Vietnam - brought the same conclusion. The “go global” strategy

might have had a strong impact on the decision of the companies’ start to internationalize. After

this initiation, the firms have undertaken their direct investment due to profit-oriented reasons

and they do not differ from FDI from developed countries’ companies. They are also consistent

with the current FDI theories that explain advantages for internationalized enterprises and why

they invest abroad. These findings may be not true for investment projects in the natural

resources sector, especially the ones carried out in resource rich economies in Africa. In these

cases, strategic considerations may have outvoted commercial reasons and had a greater

impact on OFDI motivations. For China’s direct investment in India and Vietnam, commercial

motivations outbalance strategic motivations. Political reasons still play a role in companies’

decisions to invest in its neighbouring countries. The impact however, is not as important

anymore. Chinese OFDI projects in India and Vietnam are carried out through state owned and

private owned enterprises. The value of OFDI projects from state enterprises may be higher, as

these companies operate mainly in capital-intensive industries (e.g. natural resources,


infrastructure). Nonetheless, the number of small and medium private companies, that also

invest in India and Vietnam, is increasing.

Comparing India and Vietnam, the FDI statistics and the survey results show, that Vietnam tends

to be more attractive as host country for OFDI from China’s enterprises. Vietnam also attracts

more direct investment from SMEs, although India is a bigger economy and has better business

prospects. Vietnam is culturally related to China and the two countries share a similar history.

For theses reasons, Chinese companies may choose Vietnam as the first country in their

internationalization strategy. However, both countries account for only a very small part of

China’s total OFDI. Although, China is the most important trading and investment partner for

India as well as for Vietnam, the two economies do not have the same significance for China.

What does that mean for Dezan Shira & Associates, the company where I have done my

internship and which is interested in the results of my research? Before the firm opened their

offices in India and Vietnam, Chinese companies did not belong to their target customers. For

the branches in India and Vietnam it is interesting what motivations Chinese companies have,

which invest in these two economies. In both countries, Chinese investors are important, as

China’s FDI is responsible for a significant part of inward FDI flows to India and Vietnam. Again,

Dezan Shira & Associates may draw more attention on Chinese enterprises with direct

investment in Vietnam than in India, as the FDI volume is much higher. Furthermore, the

percentage of private owned as well as small and medium enterprises is higher in Vietnam.

State owned companies are not in the same interest for a service firm like Dezan Shira &

Associates, as they often have their own bodies to carry out these services. Dezan Shira &

Associates may focus on the manufacturing industry in both countries and specifically on textile

in Vietnam and information technology in India. As OFDI flows from China are expected to

increase further in the following years, Chinese enterprises should be regarded as key

customers for legal, tax and accounting services in India and Vietnam. Additionally, Dezan Shira

& Associates already has well educated Chinese employees, who are familiar with the culture

and requirements of Chinese companies. This is an advantage compared to service firms from

India and Vietnam itself. It would have been very interesting for Dezan Shira & Associates to find

out, if there are differences among Chinese investors from different regions in China. However,

the respondents of my survey seldomly filled in the personal questions including their location,

which would have made it possible for me to find out differences in the answers from experts

from Beijing in the north or from Guangzhou in the south.


In general the results show that China’s OFDI are not only politically driven and this may

contribute to the discussion about whether host countries should have special attention on FDI

from Chinese enterprises or not. As China’s OFDI seem more commercially motivated, they can

be treated the same than FDI from developed countries. Host countries from developed and

from developing regions do not have to be afraid of China’s direct investment and should try to

benefit from the advantages.

6. Discussion

The results of my whole research are not new. Although, there do not exist many papers about

China’s direct investment in India and Vietnam, China’s OFDI are examined and discussed by

various researchers. The result that China’s OFDI are more and more commercially motivated

can be read in other papers. However, I did not find any empirical research that underlined this

fact. From this point of view my survey would have been a useful contribution to the discussion

about China’s OFDI. But the survey has his limitations. Firstly, the focus group were FDI experts

from a consulting company and from chambers of commerce. I was not able to ask executives

from Chinese companies directly. To ask them their motivations for direct investment in India

and Vietnam would have been more meaningful. Secondly, the response rate was very low and

it is not possible to make an academical statement with 20 answers. Due to the fact that the

results from my survey do not differ from the results of my literature review, I can nevertheless

answer my research question. In general, the answers were of high quality, in some cases

however the questions were wrongly interpreted. The question, if the government fund does

investment in India and Vietnam also requested some examples. The examples I got were FDI

projects from state owned enterprises. I wanted to know, if the Chinese government fund also

started to invest abroad like Arabian government funds do, as well as the one from Singapore

and, if these investment even cross the threshold of 10% to count as direct investment.

The results of my research are also too general to be of real worth for Dezan Shira &

Associates. Although, I found out the importance of Chinese investors in India and Vietnam and

tried to distinguish industry sectors, on which the company should have special attention, the

recommendations are not specific enough. For further research, it would be interesting to have a

closer look on the companies that invest in India and Vietnam and to find out, if they have an

advantage over domestic enterprises in the host countries and over Chinese firms without

international engagement.

Another interesting topic is the impacts of China’s OFDI on the host countries. Especially in India

the population is sceptical about Chinese investment projects. Facts that the Indian market was


overflowed by cheap toys from Chinese manufacturers that did not meet security requirements

of western countries, until India blocked the import of Chinese toys, do not help to reduce the

scepticism. Nevertheless, my conviction is, that host countries can profit from China’s OFDI, as

long as they are commercially motivated. The verification of this statement or thesis could be a

useful argument in the dispute about China’s direct investment in Africa and would be an

interesting topic to cover in a following research paper.

I also would like to take the chance to criticise my thesis itself. It is affected by a prejudice that

the Chinese companies and Chinese people are all steered by the government and do not have

their own needs and requirements. The results of my research and my personal experience in

China show a different picture. Beijing still has more control over the country and the population

than in most other countries. Nevertheless, in these boundaries, people and companies use their

freedom and make their decisions on an individual, economic and rational basis.


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China's Direct Investment in India and Vietnam

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