Global Business 4th Edition by Mike Peng

Exercise 32

The Myth Behind China's Outward Foreign Direct Investment 1
Mike w. Peng (University of Texas at Dallas)
The Western media is full of sensational (but often unsubstantiated) reporting on the allegedly huge scale and scope of China's outward foreign direct investment (OFDI). This evidence-based case suggests that as the world's second-largest economy, China is punching below its weight when it comes to OFDI. How should the United States view such FDI from China In two words: pragmatic nationalism.
As China's economic power grows, it has increased its outward foreign direct investment (OFDI). Western media reporting on China's OFDI has been sensational. For example, popular magazines have had a field day running eye-catching cover stories, such as "China Goes Shopping" (Bussiness Week, July 27, 2009), "China Buys the World" (Fortune, October 26, 2009), and "Buying Up the World" (Economist, November 11, 2009). David Lampton, a leading China scholar in the United States, has summarized this literature as the "China on steroids" Literature. This often-unsubstantiated reporting has permeated Western policy discourse, resulting in- as an extreme but provocative expression- a theme of "China threat."
If these sensational headlines are to be believed, three lasting impressions emerge: (1) China is one of the world's largest overseas direct investors. (2) Among emerging economics, it is the largest. (3) China's OFDI extends all over the world. Unfortunately, these impressions cannot be substantiated by hard evidence. The allegedly huge scale and scope of China's OFDI (which can escalate into a "threat") thus become a myth that takes on a life of its own. What exactly are the scale and scope of China's OFDI How strong is it in the United States Does it warrant the disproportionate media and political attention How should the United States view such FDI from China This case sheds some evidence-based light on this myth behind China's OFDI. (Given our focus on China's foreign direct investment, its foreign portfolio investment such as purchasing US Treasury bills is outside the scope of this article)
Hard Data on a Weak Case
A look at the hard evidence points out how weak the case is to believe that China's OFDI is monetarily large, geographically expansive, and politically dangerous. First, take the notion that China is an OFDI powerhouse. According to the United Nations' World Investment Report 2012 , in 2011, China was merely the ninth largest generator of OFDI flows ($65 billion)- well behind the United States, Japan, Britain, France, Hong Kong, Belgium, Switzerland, and Russian= (in that order). World Investment Report 2014 reported that in 2013 (the most recent year for which data were available), China rose to become the third-largest generator of OFDI flows- but as $101 billion (7% of world total) such OFDI flows were still substantially smaller than those from the United States ($338 billion, 24% of the world total) and Japan ($136 billion, 10% of world total). As of 2011, China's OFDI stock (the cumulative OFDI made in all years) ($366 billion) was only 1.7% of the world total ($21 trillion) and 8% of the US OFDI stock ($4.5 trillion). By 2013, China's OFDI stock reached $614 billion (2.3% of world total-$26 trillion) and 10% of the US OFDI stock (24% of world total-$6.5 trillion). In other words, if Chinese companies could buy up the world with that relatively tiny sum, then US companies would have already done that 12 times (in 2011) or ten times(in 2013).
Second, there is also a widespread perception that China must be the largest foreign investor among emerging economics. Again, that is not entirely accurate, according to UN data. Using OFDI stock as a measure, China only became the largest foreign investor among emerging economics very recently- since 2011, after China's OFDI stock caught up with Russia's.In 2013, while China's stock of OFDI, at 2.3% of the worldwide total, was six times India's (0.4%) and more than twice Brazil's (1.1%), it was only slightly ahead of Russia's OFDI stock (2%).
Finally, despite media sensations about Chinese multinationals "buying up the world," Chinese OFDI is not global. This is because Chinese companies have not invested all over the world. Instead, their OFDI is geographically concentrated. Hong Kong commands 67% of China's OFDI stock, while the rest of Asia has received 9%. Significant round tripping of Chinese capital, via Hong Kong, has taken place in order to iake advantage of Chinese regulations in favor of "foreign" capital. Of the 12% of China's OFDI stock that Chinese companies have invested in Latin America and the Caribbean, tax havens such as the British Virgin Islands and the Cayman Islands have absorbed 11%. As Beijing's control of Hong Kong intensifies, it is likely that the British Virgin Islands and the Cayman Islands as tax havens increasingly assume the role that Hong Kong has traditionally played- to facilitate significant capital round tripping. By contrast, China's OFDI in Europe (4% of its OFDI stock), North America (2%), and Oceania (3%) is relatively small, while Africa accounts for just 4% of China's OFDI stock.
The world outside Hong Kong accounts for just about one-third of China's stock of OFDI. Doing a little math, we can see that Chinese companies have invested a mere 0.046% of the worldwide stock of OFDI in North America (that is: 2.3% of worldwide total x 2% invested in North America). In dollar terms, that is about US$12.3 billion as of 2013. Note this is the stock of China's OFDI in the United States-meaning the accumulation of all such investments over the years (not merely the flows of one year). In comparison, the revenue of the smallest US company on the Fortune Global 500, Raytheon (ranked 500th in 2014 based on revenues in 2013), was US$23 billion in just one year. Among firms from all countries that hold FDI stock in the United States (with a total stock of US$2.3 trillion), multinationals from China hold approximately 0.1%- a trivial amount compared to firms from Britain (20%), Japan (12%), and Germany (12%). According to an influential Asia Society study, when it comes to FDI in the United States, "the world's second-largest economy still plays in the same league as New Zealand and Austria."5 A study by the US-China Economic and Security Review Commission reported that until 2009, inward FDI from China had been so tiny that it was recorded in officialUS statistics as a rounding error. The upshot China's OFDI, while emerging and increasing, is insignificant in the United States and certainly does not deserve the disproportionate media hoopla and political attention.
Pragmatic Nationalism
To put things in perspective, the United States has little reason to feel threatened by a statistical rounding error. That said, the world's largest economy needs to pay attention to what the world's second-largest economy is doing. Given that the rise o f the Chinese economy and the emergence of China's OFDI only started recently, one thing for sure is that China's OFDI will grow and its share in the United States will become higher in the future.
How should the United States view FDI from China The pros and cons, of FDI have been debated for decades around the world. In the United States, the most recent debate prior to the arrival of Chinese FDI took place in the 1980s and the 1990s when Japanese multinationals emerged as a force to be reckoned with. What emerged out of these debates has always been pragmatic nationalism- viewing FDI as having both pros and cons and only approving FDI when its benefits outweigh costs. Pragmatic nationalism guided US policy regarding Japan's FDI into the United States, despite some harsh concerns expressed by certain politicians and media outlets at that time. Today, Japanese multinationals, via FDI, employ approximately 700,000 Americans. Not a single American politician or media outlet bothers to worry about the "Japan threat" any more.
Despite the geopolitical rivalry between the United States and China and the uneasy feeling among some Americans that a majority of China's OFDI is undertaken by state-owned enterprises (SOEs), there is no reason to abandon the policy of pragmatic nationalism. Especially considering the tiny scale and scope of China's FDI in the United States, the costs for overhauling the overall regulatory framework governing FDI simply outweigh the benefits. Other than legitimate scrutiny that is sector-specific (such as telecommunications) and issue-specific (such as national security reviews undertaken by the Committee on Foreign Investments in the United States [CFIUS]), a blanket negative, unfriendly, and even hostile attitude toward China's FDI m general will be counter-productive and even self-destructive. In short, the right attitude toward China's FDI should be: "Yes, unless".
Today, China's FDI in the United States supports approximately 20,000 American jobs. While not large, this number is a tangible contribution to the US economy and a clear vote of confidence. This number can grow much higher, as China may generate US$1 trillion OFDI to invest around the world by 2020. How much of this OFDI will come to the United States and how many new jobs will be created will depend on the investment decisions made by each and every Chinese multinational. In my executive training and consulting engagements, I have been repeatedly confronted by Chinese executives who are eager to invest in the United States but who are frustrated by negative treatments of Chinese firms in the hands of American politicians and the media (think of CNOOC in 2005 and Huawei in 2012). "Is the United States really hostile to us one executive raised a pointed question to me. He then continued: "My company wants to invest abroad. Between America and Africa, where should I go In Africa, the governments are nice and the terms are friendly. But, in America, politicians make me worry and the media is scary." While I always share with my clients that the United States is really open to China's FDI and that the majority of China's OFDI deals (never mind CNOOC's and Huawei's) routinely go through, I have a sense that my arguments are not very persuasive, given the negative US political and media sentiments that are widely reported in China.
So far, Africa has indeed absorbed much more of China's OFDI than the United States-the ratio is about 2:1. While there are many economic reasons attracting Chinese multinationals to invest in Africa (think of natural resources), we do not know on the margin how many of them choose to go to Africa because the United States loses out in their investment decision. In other words, we need to be aware that the United States competes with Africa-and with the rest of the world, for that matter- for precious OFDI dollars and for new job creation. After all, Chinese firms are not obligated to invest in the United States. When US unemployment is high, jobs are hard to come by, and J governments are eager to lure Chinese FDI into their jurisdictions certain US politicians and media outlets' attitude to turn away investors from the second-largest economy in the world due to their alleged "threat" does not make much sense. A case ean be made that they are economically and socially irresponsible by destroying US jobs that could have been created by such FDI.
The Myth and the Truth
If not debunked and refuted, myths have a tendency to take on a life of their own. The more myths are reported the more likely they become self-fulfilling prophecies. The myth behind China's OFDI is one of the cruciail but rarely investigated myths of our time. The truth is; as the world's second-largest economy and the largest exporter, China is punching below its weight due to its relatively modest sum and limited scope of OFDI. Every in Chinese citizen only Possesses approximately US$460 in OFDI stock. In Comparison, every American citizen enjoys US$13,500 and the global average is US$2,900 Further a lot of China's OFDI goes back to China due to capital round tripping.
China's OFDI is destined to grow- in 2015, its OFDI is likely to exceed its inward FDI flow for the first time. Overall, a sensible approach is not to view Chinas expanding OFDI as a fire-breathing "dragon" on the verge of taking over the world-Chinese multinationals are far from being capable of doing that (even if they wanted to). To be sure, host country governments, firms, the media, as well as the public need to be serious in dealing this new phenomenon on the global scene. Therefore, a useful metaphor is to view China's OFDI as a fast and strong "racehorse" unleashed by the forces of globalization in the 21st century.
1) This research was supported by the Jindal Chair at the Jindal School of Management, University of Texas at Dallas. All views and errors are those of the author. © Mike W. Peng. Reprinted with permission.
2) D.M. Lampton, 2010, Power constrained: Sources of mutual strategic suspicion in U.S - China relations (p. 7), NBR Analysis, June, seatttle; National Bureau of Asian Research.
3) US Congress, 2012, Invesrigative Report on the US National Security issues Posed by Chinese Telecomunications Companies Huawei and ZTE, October 8, Washington, DC: US House of Representatives, 112 th Congress.
4) M.W. Pere, 2011, The social responsibility of international business scholars: The case of China AIB Insights, 11 (4): 8-10; M.W. Pang, S. L. Sun D. Blevins, 2011, The social responsibility of international business scholars, Multinational Business Review , 19(2); 106-119; M. W. peng and Z. Xiao, 2011, Busting the China Inc. myth, Harvard Business Review , June: blogs.hbr.org.
5) D. Rosen T. Hanemann, 2011, An American Open Door Maximizing the Benefits of Chinese Foreign Direct Investment (p. 27), New York Asia Society.
6) A Szamosszegi, 2012, An Analysis of Chinese Investments in the US Economy (p. 1 and p. 80), Washington, DC US-China Economic and Security Review Commission.
7) M. W. Peng, 2012, Why China's investments aren't a threat, Harvard Business Review , Febuary 13, blogs.hbr.org.
8) S. Globerman, 2015, Host governments should not treat state owned enterprises different than other foreign investors, Columbia FDI Perspectives , January, No.138.
9) S. Globerman D. Shapiro, 2009, Economic and strategic considerations surrounding Chinese FDI in the United States, Asia Pacific Journal of Management , 26: 163-183.
10) R. A. IKapp, 2013, The impending tide of Chinese investment in the United States, NBR Analysis Brief, February, Seattle: National Bureau of Asian Research.
11) M. W. Pang, 2012, The global strategy of emerging multinationals from China, Global Strategy Journal, 2: 97-107.
12) I was involved in the US-China Investment Week that was kicked off in Dallas on September 21, 2012. To welcome a delegation of 50 investors from China, three governors from Texas, Florida, and Wisconsin came, and former President George W. Bush gave a key note at the banquet.
13) M. W. Peng R. C. Parente, 2012. Institution based weaknesses behind emerging multinational, Revista de Administrate de Empresas. 52: 360-364.
14) Economist, 2015. The World in 2016 Ip. 94), London: The Economist Group.
Using data from the most recent year, what is the flow of china FDI Into your country What is the stock of China's in your country Relative to other countries whose multinationals undertake FDI in your country what is China's ranking-in both flow and stock relative to other countries