Chinese Foreign Direct Investments - Scopes, Forms and Motives

Essay, 2005

21 Pages, Grade: 1,3



1. Introduction

2. Definition: Foreign direct investment

3. Scope of Chinese FDIs

4. Forms of Chinese FDIs

5. Motives behind Chinese FDIs

6. Governmental Actions

7. Chinese FDIs in Germany

8. Problems and Obstacles

9. Outlook



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 billion[3] resulting in a cumulative level of FDI of US$ 563 billion[4] 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 sought-after 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]

As a result of this massive growth 12 Chinese firms are now ranking among the 50 largest TNCs in the world in terms of foreign assets. Six even had foreign assets of above US$ 2 billion.[13]

Given the country’s rapid economic development and the governmental interest in investing abroad which will be explained in detail later on Chinese FDI can be expected to rise further.

The Chinese FDIs mainly flow into industrial, agricultural and tertiary industries[14] concentrated on the service sector, processing industry, agricultural products and resource development.[15]

The destinations of Chinese FDI outflow are spread around the world. Still about 60 % of all FDIs flow into other Asian countries like Thailand, Cambodia or Singapore. On the second position ranks North America, but China also invests in Africa, Latin America and Europe.[16]

The lion’s share of Chinese outward FDIs flows into Hong Kong, China. The reason for this fact can be seen in the opportunity to use Hong Kong as a springboard to spread investment somewhere else,[17] although Hong Kong is geo-culturally quite similar to China what makes the step into foreign markets easier. Together with the United States as second largest receiver of Chinese FDI Hong Kong accounts for almost
50 % of the accumulated outward investment value.[18] Despite this concentration, Chinese FDIs reach more and more destinations.

In spite of these impressing numbers China’s overseas investments make up only
0.15 % of the world’s total FDI. Also the ratio of absorbed foreign investment and investment in other countries is with 1:0.09 quite low. This low number results from the huge amount of FDI that still flows into the Chinese economy. As comparison: developed countries normally have a ratio of around 1:1.14. This indicates that China is still at the primary stage of overseas investment.[19]

4. Forms of Chinese FDIs

As Chinese FDIs are continuously rising each year it is interesting to have a closer look at the different forms the Chinese investors use within their going-abroad strategy. They can be classified in four different types so far.

The first category is the so-called Greenfield investment.[20] This term indicates fully owned subsidiaries or joint ventures that Chinese investors built up with their own money or money provided by Chinese investors or creditors.[21] Usually these investments are transacted within the electronic industry, light industry and textile industry. The company Haier that has established a fully owned subsidiary in the United States constitutes an example for this.[22]

The second category of Chinese FDI is mergers and acquisitions. Mergers and acquisitions rely on different strategic motives. The main issues are the safeguarding of resources, the development of new markets and the stabilisation of order books and reduction of marketing costs. An example for the first is the Chinese oil company China National Offshore Oil Corp that realized mergers and acquisitions with 68 oil companies in 18 countries around the world[23]. The automotive supplier Wanxiang Group bought his American subcontractor UAI which ordered brakes from Wanxiang for US$ 25 million every year. This is a good example for M&As with the aim of cost reduction and stabilisation of order books. Finally, the acquisition of foreign technologies is another motive for mergers and acquisitions. So the Chinese D’Long-Group bought the aircraft manufacturer FairchildDornier after its bankruptcy in 2003.[24]

The third category of Chinese FDI is investment in research and development. An example for that is the company Huawei Technologies which opened 32 branches outside China and owns a big number of patents in several developing countries.[25]

The last category is the strategic cooperation with international companies, for instance the union of TCL and Thomson. With this union TCL got the rights to market the brands and use the network of sales and the production facilities of Thomson.[26]

It can be concluded from these forms of FDI that Chinese FDI outflows are manifold and arise from different reasons. Also the Chinese use almost all known categories of FDI which certifies the Chinese investors a growing experience in investment activities abroad


[1] cf. Morrison, Wayne M. (2005): China’s Economic Conditions,, 24.10.2005.

[2] cf. ibidem.

[3] cf. UNCTAD (2005): World Investment Report 2005,, 13.10.2005.

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

[5] Kant, Chander (1996): Foreign direct investment and capital flight,, 24.10.2005.

[6] cf. UNCTAD (1997), Foreign Direct Investments,, 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,, 12.10.2005.

[11] cf. Lan Xinzhen (2005): China’s enterprises encouraged to invest abroad,, 10.10.2005.

[12] cf. ibidem.

[13] cf. UNCTAD (2003): China: an emerging FDI outward investor,, 11.10.2005.

[14] cf. Lan, Xinzhen (n.d.), 12.10.2005.

[15] cf. Yan Zhu (2005): Chinese Foreign Investment Abroad and Global Business Strategy,, 09.10.2005.

[16] See Appendix: “China’s FDI outflow by region 1979-2002 cumulative“.

[17] cf. UNCTAD (2003), 08.10.2005.

[18] cf. Appendix: “China’s FDI outflows, top 30 destinations, 1979-2002 cumulative“.

[19] cf. Yan Zhu (2005), 09.10.2005.

[20] „Investitionen auf der grünen Wiese“ aus Deutsche Botschaft Peking (2004): Die andere Richtung: China als Auslandsinvestor,, 18.10.2005.

[21] cf. ibidem.

[22] cf. ibidem.

[23] cf. (2005): China National Offshore Oil Company,, 25.10.2005.

[24] cf. (2004): Erfolg der Chinesen in Deutschland steht noch aus,, 25.10.2005.

[25] cf Deutsche Botschaft Peking, 18.10.2005.

[26] cf. ibidem.

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Chinese Foreign Direct Investments - Scopes, Forms and Motives
Munich Business School University of Applied Sciences
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Carolina Sohn (Author)Brigitte Stark (Author)Michel Heck (Author), 2005, Chinese Foreign Direct Investments - Scopes, Forms and Motives, Munich, GRIN Verlag,


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