Outward FDI from China: Trends and Implications

Changqi Wu [email protected] 1

Outward FDI from China: Trends and Implications

Professor Changqi WuGuanghua School of Management

Peking University Beijing, China

The Global Institute RIC Conference

Emerging Super Trio: Global Economic ImplicationsNew Delhi, 20-21 November 2008


1 Globalization and China

China benefits enormously in the process of globalization in the last 30 years of economic reform.

China realizes its comparative advantage through international trade and direct investment.

China’s domestic market becomes less fragmented. Foreign invested enterprises strengthen the

competitiveness of China’s industries and more than half of the total export of China is so called process trade.

Intensive competition and spillovers from foreign invested enterprises create a group of Chinese companies that are competitive in international markets.


2. FDI in ChinaThe graph is an illustration of China´s FDI trend for the past 30 years. FDI rates

soared in the year 1993, showing a positive trend ever since.

3

Inward FDI in China


2. FDI in China

The first graph reveals that although there has been a huge increase in FDI in recent years, these are normally measured in contracted form.

Overall, there has been a positive trend in the number of projects, peaking in 1993.

4

Inward FDI in China


2. FDI in ChinaBy analysing FDI as a percentage of China´s GDP, there has been small increase, suddenly peaking in 1993. However, from then on the trend has been constantly decreasing.

This is rather interesting to note as a lot of sources pointed out to the increases in FDI in China in recent years. However, this portrays that the dependence of China´s economy on FDI has been exagerrated by the media.

5

Inward FDI in China


Outward FDI from China


Investment by CIC

China Investment Company is the 4th largest sovereign wealth funds with investment capital of $200 billion dollars.

It invested $3 billion in Blackstone Group at its IPO price of $29.61 in July, 2007.

The Chairman of the Board of CIC claims recently that its investment in Blackstone is a good one.


2. Motives for Chinese Firms Going Global?

Market seekers Resources seekers Intellectual property seekers Efficiency seekers Reducing transaction costs Institutional void fillers


Source: MOFCOM, 2008


3. A Tale of Two Companies

TCL in Europe

SMTCL and Schiess


TCL in Europe

TCL is one of the largest TV producers in China. In October 2002, it bought then bankrupted TV

operations of Schneider in Germany and resumed its 120 employees.

November 2003, TCL bought the TV operation of Thomson and formed joint venture in which it held 70%.

Both acquisitions are unsuccessful and do not meet the strategic objectives. TCL lost a lot of money in both acquisations.


Why TCL Failed Twice?

Insufficient understanding of operational environments

Rapid technological change Old brand name Cultural conflicts Most importantly, going global to buying

back


SMTCL

SMTCL (Shenyang Machine Tool Company Limited) is the largest (in units) machine tool manufacturing company in China.

Schiess is a company founded in1857 and enjoys a good reputation in machine tools industry.

After several restructurings since 1990, it declared bankruptcy on 1 August 2004.

SMTCL bought Schiess on 1 November 2004.


Horimaster 5 G.M.W. Burg

X- 13000 Y- 6000Z 3000C- 360°W- 2000B- 360°A- ±95° 90kW 9000Nm


Horimaster 5 mit Dreheinheit forHorimaster 5 mit Dreheinheit for （（ Alstom Alstom Belfort)Belfort)


Vertimaster VMG 1.30Vertimaster VMG 1.30PCA HalberstadtPCA Halberstadt


Old and New


Machine Tools (53,6 m.€)

Job Shop (2 Mill.€]

Services (7 m.€)

SMTCL Design (0,9 m.€)SMTCL Products

(2,5 m.€)

37%

31%

7% 7% 18%

Germany China Russia

USA ROW

Total Volume (66 m.€)

Machine Tools only

(53,9 m.€)

Overall Performance in 2007


SMTCL SCHIESS

SM mochine tools Mediam sized machine tools

Large machine

tools

Technological Cooperation

• Design

• Purchasing

• Manufacturing

• Assembling

A Win-Win Situation


Why Germany and Why Machine Tools

SMTCL-Schiess is one of series purchases made by Chinese machine tool companies in Europe.

China is in its mid-stage of industrialization process

These purchases are usually small and focuses on particular technology where there is a huge market in China.


4. New Generation of Chinese Companies

There are a group of new generation of Chinese enterprises that are emerging at the global stages.

Companies that can take advantages of comparative advantages of the country and develop into firm specific capabilities


The Case of BYD

Build Your Dream or Bring Your Dollars? A private firm incorporated in 1995. It turns out to be the largest producer of

rechargeable batteries for mobile phones. It ventures into the auto manufacturing

industry and become one of the leaders in the DM passage car business.


Economics of BYD

labor

capital

Q1

C1* Europe

C2 *C

China

A

K2

L2

K1

L1

B

C2 China


Build Your Dream

BYD enters into dual mode car market with strong battery technology.

It is one of the real electrical car that will enter into market in a matter of months.


Concluding Remarks

Outward FDI from China is rising rapidly in particularly with respect to its inward FDI, but is still insignificant in the global FDI.

Chinese companies in general do not have sufficient skills to management cross-border operations and are still at the learning stage of how to manage their rapid expanding operations in an increasingly globalized world.

A group of Chinese firms are becoming world leaders in certain industries when they manage to transform China’s comparative advantage into their competitive strengths.


Policy Implications

Chinese government should consider how to facilitate the companies with competitive edges to enter into global market.

The state-owned companies may have different incentives, so the government should be very careful in approving such kind of outward investment.

Outward FDI from China: Trends and Implications

Documents

inward fdi

outward fdi

fdi rates

cicchina investment

recent years

positive trend

chinas domestic market

total export of china