Chinese Foreign Direct Investments –
Scopes, Forms and Motives

by: Carolina Sohn, Brigitte Stark, Michel Heck

INDEX

1. INTRODUCTION 1

2. DEFINITION: FOREIGN DIRECT INVESTMENT 2

3. SCOPE OF CHINESE FDIS 2

4. FORMS OF CHINESE FDIS  4

5. MOTIVES BEHIND CHINESE FDIS  5

6. GOVERNMENTAL ACTIONS 7

7. CHINESE FDIS IN GERMANY  9

8. PROBLEMS AND OBSTACLES  11

9. OUTLOOK 13

APPENDIX  III

BIBLIOGRAPHY VI

1. Introduction

Since the initiation of economic reforms in 1979, China has become one of the world’s fastest-growing economies. From 1979 to 2004 China’s real GDP grew at an average rate of 9.3 %¹ and many economists speculate that China could become the world’s largest economy at some point in the near future if the government continues and deepens its economic reforms. Moreover, trade continues to play a major role in China’s booming economy. In 2004, exports accounted for US$ 593 billion and imports for US$ 561 billion which makes China the third-largest trading economy worldwide.² China’s trade boom is largely due to the inflow of foreign direct investment (FDI).

Most people know that China is a magnet for FDI and that it attracts more than any other country. In 2003 mainland China surpassed the United States as the largest FDI recipient. One year later the FDI inflow reached US$ 61 billion³ resulting in a cumulative level of FDI of US$ 563 billion⁴ at the end of 2004. Looking at these figures and at the “China fever” of managers from all over the world it is not very astonishing that for the last five years at least the big story has been about China’s FDI inflows. But there is another story as well. It is hardly mentioned in the press but it is becoming more and more important: the increase of Chinese FDI outflows.

For this reason the essay on hand shows, based on a general definition of FDI, the scope of China’s FDI outflows through current data and categorizes the different forms of FDI. Furthermore, the motives of Chinese companies investing abroad as well as the governmental actions supporting the going global movement are analysed. Then Chinese FDIs are examined in great detail at the example of Germany. Finally, problems of the development are discussed and the essay concludes with an outlook about China’s future FDI outflows.

2. Definition: Foreign direct investment

Before exploring Chinese FDIs in greater detail it is necessary to define the term “foreign direct investment”. According to the International Monetary Fund a FDI is an “investment that reflects the objective of obtaining a lasting interest by a resident entity in one economy in an enterprise resident in another economy. The lasting interest implies the existence of a long-term relationship between the direct investor and the (foreign) enterprise and a significant degree of influence by the investor on the management of the enterprise.”⁵ The degree of influence is also called effective voice in the management and is suggested to be a threshold of 10 % of the equity ownership.⁶ However, this does not mean that the investor has absolute control, but it is this soughtafter element of influence and control that distinguishes direct from portfolio investment.

A FDI fulfilling the conditions mentioned above can be the acquisition of or the merger with a company, the creation of a Greenfield operation as well as the foundation of a subsidiary in a different country, but not the investment in foreign financial instruments.⁷ Finally, it is necessary to define which capital flows between the direct investor and the direct investment enterprise should be classified as FDI.⁸ In reference to UNCTAD this would be equity capital, the reinvestment of earnings and the provision of long-term and short-term intra-company loans, i.e. between parent and affiliate enterprises.

3. Scope of Chinese FDIs

It was in 1979 when the first outward investment was done by a Chinese company, namely the Beijing Friendship Commercial Service Co. which established a joint venture with a Japanese business in Tokyo. Since then China has emerged as an outward investor. According to the World Investment Report more than 7,000 Chinese enterprises have invested to date in 160 countries and regions.⁹ Over the past ten years China experienced a growth rate in FDI of 76.8 %¹⁰ which resulted in China’s FDI exceeding US$ 35 billion in 2003. According to UNCTAD, China therefore ranks on the fifth position after the United States, Germany, Great Britain and France. This fact shows that China has evolved from a country attracting large sums of FDI from developed countries to a major overseas investment power.¹¹ For many developing countries, China even takes position two after the United States. More than ten countries even list China as their major investor.¹²

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1 cf. Morrison, Wayne M. (2005): China’s Economic Conditions, http://www.fas.org/sgp/crs/row/IB98014.pdf, 24.10.2005.

2 cf. ibidem.

3 cf. UNCTAD (2005): World Investment Report 2005, http://unctad.org-wir05_fs_cn_en.pdf, 13.10.2005.

4 cf. Morrison, Wayne M. (2005), 24.10.2005.

5 Kant, Chander (1996): Foreign direct investment and capital flight, http://www.princeton.edu/~ies/IES_Studies/S80.pdf, 24.10.2005.

6 cf. UNCTAD (1997), Foreign Direct Investments, http://www.unctad.org/Templates/Page.asp?intItemID=3146&lang=1, 13.10.2005.

7 Hill, Charles W.L.: International Business, 5th edition.

8 cf. UNCTAD (1997), 13.10.2005.

9 cf. UNCTAD (2005), 13.10.2005.10 cf. Lan, Xinzhen (n.d.): Investing abroad, http://www.bjreview.com.cn/200432/Business- 200432(A).htm, 12.10.2005.

11 cf. Lan Xinzhen (2005): China’s enterprises encouraged to invest abroad, http://www.chinatoday.com.cn/English/e2004/e200411/p24.htm, 10.10.2005.

12 cf. ibidem.