Outbound investment strategy needs to be revamped
Updated: 2013-01-07 13:17
By Zhang Huanbo (China Daily)
Approval process is complicated, inefficient
Since the global financial crisis broke out in 2008, China's outbound direct investment has grown rapidly. The country now has the fifth-largest volume of outbound capital flow.
From January to November last year Chinese domestic investors pumped direct investment worth $62.53 billion (48 billion euros) into 3,596 foreign companies in 130 countries and regions. The amount invested grew 25 percent over the course of a year.
Compared with developed economies, China's outbound direct investment is still relatively low, and there is great scope to develop. Till 2010 the country's outbound direct investment was only 6.5 percent of that of the US, 18.8 percent of UK's, 20.8 percent of France's and 22.3 percent of Germany's.
Chinese outbound investment covers a wide range, mainly focusing on industries such as manufacturing, wholesale and retail, rental and commercial services, construction and mining. That makeup is unlikely to change greatly this year.
Manufacturing will still be the main force of investment. China's manufacturing industry is faced with limitations caused by resources, markets and environment. Acquiring foreign companies to gain new technology and high-tech products, and to link up with well-known brands to have greater market share, is a practical way of nurturing new competitiveness in these industries. Acquisitions are a practical way for Chinese manufacturers to go global.
The energy resources industry will continue to be the choice of many outbound Chinese companies. Since China joined the World Trade Organization, most Chinese companies' overseas investment and acquisition has been in energy and natural resources industries. That is a result of China's rapid economic development, which needs a stable raw material supply. The expansion of Chinese resources companies internationally has also brought employment opportunities to the target markets.
Chinese energy companies need to do extensive research on target markets before they act, getting to know the local investment environment, laws and regulations. In some derdeveloping countries, political risks need to be considered, too.
This year retail companies will pick up pace in going overseas. Consumer goods markets and catering chains are two of the main categories of Chinese retail companies' that could expand overseas. After establishing themselves, such companies will do business in both wholesale and retail.
The big opportunities for Chinese retail companies are in developing countries, where commercial business remains relatively undeveloped and where demand outstrips supply.
The Ministry of Commerce, in its guidelines on promoting the development of retail industry over the 12th Five-Year Plan (2011-15), said it will support the development of overseas commercial facilities to promote retail companies expanding overseas.
In doing so, consumer goods and services exports will be stimulated, and Chinese brands will be able to build their brand images.
Of course, Chinese retail companies will need to choose the most suitable overseas markets to enter. The government should support big retail companies to set up retail terminals and logistics centers in overseas markets so they can build up an integrated overseas sales network. Small and medium-sized companies may choose to stick together to form retail groups, drawing on the advantages that such an approach brings.
As for service industries, breakthroughs are on the cards this year. There is huge demand in the international services industry because of the large gap between developed and developing countries in people's income and purchasing power.
Compared with manufacturing, the threshold for service industries in entering a foreign market is much lower, and with less government intervention. In addition, both the level of investment and the risks involved are low.
The competitiveness of the services industry and its products lies in low prices and specialties, which are exactly what Chinese companies are good at. That means that as a business proposition, going international is highly realistic for Chinese service industries.
The experience of developed countries suggests that if service industries go into overseas markets before other industries, they can provide information and financial services to many other industries - the key to success of any overseas investment.
Industries such as finance, real estate, transport and telecommunications should redouble their outbound investment efforts. It is especially urgent for associations, think tanks and consulting organizations to go global first so they can provide information services for companies from other industries.
As globalization continues apace, capital, resources and technology are being distributed on a huge scale, meaning China's economic development will be increasingly reliant on the global environment and its resources.
There is great investment potential in Africa and South America. Countries there are mostly developing ones, but with great potential. Natural resources and labor are abundant, too, providing great investment opportunities.
The development potential of Africa provides particular scope for investment for Chinese companies. A long history of cooperation between China and Africa together with government policies provide good incentive for Chinese companies to invest in the continent.
Africa is rich in mining resources, and large quantities of land, forestry and water resources are yet to be developed. Land prices are relatively low, and labor is abundant. Tourism resources are there to be explored, and infrastructure needs to be built on a wide scale.
On top of all of that, the Sino-African dialogue has provided immense opportunities on both sides.
In South America, resources and energy investment potential is also large. Most of these countries are developing rapidly and have stable governments. Natural resources including oil, natural gas, minerals and woods are in abundant supply, yet the economies are still relatively undeveloped.
In addition, Africa and South America have great investment opportunities in industries such as electricity generation and infrastructure, transport, telecommunications, ports, resources and mining.
Meanwhile, ASEAN countries are becoming increasingly important for Chinese investors. As emerging economies, the ASEAN countries are enjoying a higher economic status worldwide.
Finance, mining, electricity, gas, manufacturing, construction, wholesale and retail, rental and commercial services, transport, logistics and postal services are all industries in ASEAN countries that are worth investing in.
Developed countries in Europe and North American are the ideal markets in which advanced technology can be absorbed. Chinese companies can take themselves into such developed markets through holding stakes. They can then nurture their companies with advanced management and company cultures, absorb technology and arm themselves with innovative know-how.
In recent years China has made great efforts in supporting companies that want to go overseas. Most of these efforts are paying off, with an increasing number of domestic companies making their presence felt abroad.
However, Chinese companies still face some problems while trying to expand overseas.
For example, China's approval process of outbound investment projects is unnecessarily complicated and inefficient. And Chinese companies mostly go it alone in overseas markets. The lack of support systems for Chinese companies overseas has made it more difficult for them to survive in a foreign environment. On the other hand, think tanks and industry associations, which ought to have been going global before companies, have failed to do so.
With an increasing number of companies going out, it is essential that the overall outbound investment strategy is changed. The government, companies and intermediary organizations should live up to their responsibilities, and a coordinated, well-structured, transparent and efficient outbound investment framework should be established.
The author is a researcher with the China Center for International Economic Exchanges. The views do not necessarily reflect those of China Daily.