Foreign investment by multinationals from emerging countries: the case of China.

Author:Deng, Ping

China has become a leading foreign investor among all emerging countries, however, the existing literature seldom deals with this important topic. Based upon both macro and micro data, this paper attempts to fill this gap. In particular, the paper focuses on such critical issues on the topic: What are the motivations for Chinese multinationals to invest abroad? While investing abroad, how do they differ from others? And how do FDI theories explain the investment activities? The results of this study shed some light on the question of foreign investment by Chinese companies, thereby contributing to the existing literature on multinationals from emerging countries.


Since the 1980s there have been a stream of research dealing with foreign direct investment (FDI) by multinationals from emerging countries (e.g., Khan, 1986; Lecraw, 1993; Wells, 1983) and particularly by those from East Asia (e.g., Han and Brewer, 1987; Ting 1985; Zin, 1999). However, little work has been done on FDI by Chinese multinationals. This is an imperative issue that needs an immediate attention largely because of the growing importance of China as the leading foreign investor among all emerging countries. According to the World Bank (1997), in the mid-1990s China was the largest outward investor among emerging countries and the eighth largest supplier of outward investment among all countries. The most recent data further reinforce the fact that multinationals from China have been expanding abroad rapidly. For example, over the last ten years (1992-2001), Chinese multinationals had cumulatively invested more than $30 billion abroad and have FDI in virtually every country in the world (see Table 1). Another example is that the largest 12 Chinese multinationals now control over $30 billion in foreign assets across the whole spectrum of business activities, with over 20,000 foreign employees and 33 billion in foreign sales in 2001 (see Table 2).

In addition, in the very few studies on the topic (Wall, 1997; Zhan, 1995), researchers have focused on governmental policy issues rather than on business problems and strategies. Further, there is a paucity of analysis of the critical questions such as: What are the motivations for Chinese multinationals to invest overseas? While they invest abroad, how the Chinese multinationals differ from others? And how do FDI theories explain the determinants of Chinese foreign investment? This paper attempts to fill this gap by making a detailed analysis of both macro and micro data on FDI by multinationals based in China.

The study uses aggregate data published by the United Nations Conference on Trade and Development (UNCTAD) and firm-level data derived and synthesized from the Chinese Ministry of Foreign Trade and Economic Relations (MOFTEC) and other publicly available information (e.g., newspapers, magazines and company reports) since the 1980s. The aggregate data describe the overall patterns and destinations of FDI by Chinese multinationals, while the firm-level data provide numerous investment projects as examples for illustration and allow an examination of the actual investment activities abroad. The paper starts with analyzing the motivations for Chinese multinationals to invest abroad and concludes with some business implications derived from the issue.

Motivations to Invest abroad

According to the main stream of international business literature on the topic of multinationals from emerging countries, there are generally five motivations for multinationals to invest abroad; they seek resources, technology, markets, diversification, and strategic asset (e.g., Dunning, 1993; Khan, 1986; Wells, 1983). A careful analysis of the data and the investment by Chinese multinationals indicates the similar motivations. In the following, we will identify and discuss the prominent examples in each of the five investment motivations. It is, however, worth noting that although each case is placed in one category, the distinction is not always clear-cut as a Chinese multinational may be pursuing multiple objectives from one investment project at the same time. In addition, the motivations for FDI may also change as, for example, when a Chinese multinational becomes an experienced investor. Initially, some Chinese multinationals invest abroad to acquire natural resources or sustain the export markets; with increased international operations, however, they may use their activities as a means to improve their global market position by acquiring new sources of competitive advantage.

Resource-seeking FDI

Companies may establish foreign subsidiaries to exploit natural resources in order to acquire raw materials for their own industrial operations and secure a continual supply of the needed raw materials (Dunning, 1993; Root, 1994). Gaining security over access to raw materials is more often cited as the reason for Chinese firms to invest overseas. This is because that, although China is well endowed with natural resources, its per capita availability of natural resources is very low, particularly for such resources as iron ore, aluminum, copper, petroleum, timber, and fish (Nolan and Zhang, 2002). As there is a large and growing demand for these resources, Chinese investors establish foreign operations for the raw materials that are entirely or mainly exported to the home country. In addition, by exploiting abundant endowments of natural resources, energy, or other inputs in a foreign country they can obtain lower-cost supplies of components, parts, or finished goods.

A good example is China Metallurgical Import and Export Corporation's $180 million investment in the Channar Mine in Australia, with an average annual output of 10 million tons of iron. During the 20 years of operation (19902010), the total mine output of 200 million tons of iron and ore is shipped back to China. Shanghai Baoshan Iron & Steel Corporation has also invested abroad to gain assured access to iron ore supplies. The company has invested in six JVs in Australia, Brazil and South Africa covering both iron-ore mining and steel marketing. Between 1990 and 1994 it shipped over 10 million tons of mineral back to China, saving an estimated $6 million in fees and charges. Another natural resource area where Chinese firms have been active in setting overseas subsidiaries is to ensure supplies of fish. As the leading investor in fishing, China Ocean Fishing Corporation over the 10 years from 1985 to 1995 established over 50 wholly owned subsidiaries (WOSs), joint ventures (JVs) and co-operative subsidiaries in almost 20 countries, including the US, Iran, Argentina, and West African countries (Liang, 1995). The company operates a fleet of more than 800 ships of various types and employs 15,000 sailors and land-based workers abroad. Its catch, of several hundred thousand tons per year, is all sent back to the rapidly growing Chinese market.

The resource-based FDI, notably in oil, minerals, and forestry, is usually in a large scale and actually involves a majority of Chinese foreign assets (see Table 2). Besides the above-mentioned examples, other prominent cases include: in November 1992, Capital Iron & Steel (Group) Corporation invested $332 million and bought Hierro-Hierro, an iron company of Beru; in July 1997, China National Petroleum Corporation (CNPC) invested $320 million and purchased 60% stake in Aktobemunaigaz, Kazakstan's second largest oil company; in June 1998, China Nonferrous Metal Inc. invested $150 million and jointly owned the Chambishi copper mine of Zambia; and in January 2002, China National Offshore Oil Corporations (CNOOC) invested $585 million and purchased the offshore Indonesia oil assets from Repsol YPF SA of Spain. Moreover, such large investments are most likely to be realized through acquisition. Through acquisition, the Chinese firms can quickly access new market opportunities, take over an existing company, and obtain local network of distribution and suppliers.

Finally, while Chinese investments in the resource sector are generally successful, there are some noticeable unsuccessful examples, including CNPC's investment in Kazakhstan. When it acquired a 60% stake in Aktobemunaigaz for $320 million, CNPC projected that the company would produce annually 7-8 million tons of oil, however, it turned out barely 2.5 million tons of oil a year. CNPC's other investments in Kazakhstan include a contractual oil JV of $5.5 billion and construction of a $3 billion, 4,000 km pipeline linking oilfields near the Caspian Sea to Xinjiang, and they are equally disappointing (Business China, 1999).

Technology-seeking FDI

Multinationals from emerging countries are most likely to invest in developed countries for sophisticated technology, learning, and compensating for their competitive disadvantages (Monkiewicz, 1986; Pananond and Zeithaml, 1998). This is no exception for Chinese multinationals, which are increasingly interested in acquiring advanced technology and manufacturing know-how in specific industries especially in the U.S. (Almanac, 2001).

One of the successful examples for access to proprietary technology is the investment made by the China Bicycles Corporation of Shenzhen. The company bought an American bicycle company in order to gain access to the technology for producing the high specification models in demand in the U.S. and Europe. It transferred the technology back to its Shenzhen plant which now has a highly successful export market. In this way not only the technology itself transferred but also is the ability to translate the technology into practical commercial use. Another example is that in 1988 the Capital Iron & Steel (Group) Corporation purchased 70% of the equity of the Masta Engineering and Design Inc. based in California of the U.S. for the purpose of obtaining access to the company's high technology design capability in steel rolling and casting equipment.

Some of Chinese investments in...

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