Chinese private enterprises must back global moves with well-planned strategy for long-term returns

In North America and Europe, average people can feel China's influence in their daily life when they purchase goods imported from China. However they may never imagine that one day some of them could be working for Chinese in their own countries.

They had better be prepared. With the projection that Chinese investment in US companies could reach $2 trillion (1.5 trillion euros) in the coming decade, Bloomberg Businessweek magazine recently assembled a panel of experts to explain Sino-American cultural differences and Confucian principles that could get an uninformed American office worker into trouble. The magazine then published a report titled "How to Impress Your Chinese Boss".

How influential is China's foreign direct investment in the global economy? Let's look at the numbers. China's annual foreign direct investment reached $60 billion in 2010, which made it one of the world's top 10 investors. In 2011, China's total global FDI saw a growth of over 14 percent. By the end of this year, there were 18,000 Chinese firms in 177 countries with a total foreign direct investment of $365 billion and assets totaling $2 trillion. However, Chinese FDI also shows a unique pattern. State-owned firms account for more than 70 percent of the total, and most of the investments are in natural resource projects, largely in low-income countries.

There is some evidence that Chinese FDI has a great impact in these nations. Among them, Asia and sub-Saharan Africa are the major destinations for roughly 95 percent of the total Chinese FDI. Sub-Saharan nations accounted for 60-70 percent of these investments.

The Chinese private sector's impact in sub-Saharan nations is slowly gaining importance. A recent survey shows that among the 800 Chinese companies operating in Africa, nearly 85 percent are privately owned and mostly small and medium-sized enterprises. These private firms also play an important role in the local economy.

China's large State-owned companies generally focus on resources and construction projects, while private ones tend to concentrate on manufacturing and service industries. For construction projects, Chinese State-owned companies prefer to bring in their own workers and rely little on the local labor market.

In the manufacturing sector, on the other hand, once Chinese firms are committed to establishing local operations, they recruit the majority of their employees locally, especially for labor-intensive manufacturing. Chinese private firms usually begin their engagement with local economies by trading, and move on to investments.

Some economists believe that developing countries are stuck in a vicious circle of poverty. Chinese private investment helps breakthat cycle. Chinese FDI also adds capital to low-saving countries and thus increases productive capacity. Chinese private investment also helps increase productivity through increasing local labor skills, transferring technology, accelerating infrastructure renewal, diversifying local economy, strengthening competition and expanding exports.

Compared with their strong influence in low-income countries, Chinese firms' impact is still small in developed countries. Currently, China accounts for a very tiny share of total FDI in developed countries. If there is some influence from the Chinese private sector in developed countries, it may be limited to providing new competition to Western companies, forcing them to conduct R&D more intensively to maintain their lead. It may take years for Chinese private companies to have a real influence on developed countries.

Chinese private companies generally lack the capacity and experience for overseas investments in sophisticated markets. Many are used to manufacturing goods in a domestic competitive environment and to serving overseas markets only through exports.

The weak domestic regulatory environment leaves Chinese private companies highly unprepared to do business in the highly regulated markets. Many Chinese companies also rush into opportunities for going public in the overseas markets or for takeover attempts without careful planning or a clear strategy.

Most Chinese private companies are normally characterized by advantages in cost and flexibility but very rarely in terms of an advantage in technology.

It may be too early to gauge any measurable influence of Chinese private investment in developed countries. It is more realistic to believe that the influence is the other way around - by the developed countries' economic environment on Chinese private FDI.

China needs to develop an overall overseas investment strategy that should be consistent with its expected economic return on overseas investment, and its future role on the world stage. To increase China's global competitiveness, Chinese companies have to expand internationally, know world markets and adopt internationally recognized benchmarks for corporate performance. On the other hand, excessive investment abroad also should be avoided.

Since the 1980s, Japan has invested a lot in developed countries to re-create another Japan overseas. Japan currently has the biggest net foreign asset base in the world and has been receiving positive financial income from this.

Japan's GNP tends to be greater than its GDP. But recent studies show that the interest it earns from net foreign assets actuality is very small. Japan appears to be inefficient in its overseas investments. An excessive capital expansion abroad may not be a good strategy.

The author is an economics professor with University of Maryland University College. The views expressed are not necessarily those of China Daily.

Contact the writer at eugene.lee@faculty.umuc.edu

(China Daily 10/26/2012 page7)