2007 08 31 China Outward FDI Final

8/19/2019 2007 08 31 China Outward FDI Final

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Perspectives on China's Outward Foreign Direct Investment

Randall Morck

University of Alberta School of Businessand NBER

Tel: (780 !"#$%&8'randall)orc*+ualbertaca

Bernard Yeung

Stern School of Business

Ne, -or* UniversityTel: (#.# ""8$0!#%

byeun/+sternnyuedu

Minuan !hao

Ross School of BusinessUniversity of ichi/an

Tel: (7'! &!7$&"78)y1hao+u)ichedu

"ugust #$$%

2 The authors are /rateful for the hel3ful co))ents fro) 4illia) Allen5 To) 6u/el5 Alan Ru/)an5 uan/

un5 yles Shaver5 ordan Sie/el5 9han/i 4u and t,o anony)ous revie,ers

mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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I& Introduction

Barely thirty years a/o5 )ost ,ould consider 9hina a 3oor a/ricultural econo)y >n #008 9hina is hostin/

the ly)3ics to si/nal its e)er/ence as a )a@or econo)ic 3o,er This 3heno)enal develo3)ent

a33ro3riately dra,s international business scholars; attention ne es3ecially curious characteristic of

9hina;s develo3)ent 3ath is a recent sur/e in its out,ard forei/n direct invest)ent ( Successful and

not$so$successful forei/n acuisitions by co)3anies li*e aier5 enovo5 T9 and 9N9 (9hina

National ffshore il 9or3oration /rab headlines

uch discussion is of the 3heno)enon itself 4ith over a trillion dollars in forei/n reserves and

increasin/ econo)ic clout5 9hina can send fla/shi3 co)3anies abroad to acuire technolo/ies5 brands5

resources5 and better access to international )ar*ets >n so)e industries at least5 risin/ ca3acity and

intensifyin/ do)estic 3rice co)3etition are cuttin/ 3rofit )ar/ins5 and 9hinese )ana/ers see as a

,ay to u3/rade technolo/y and au/)ent earnin/s 4hile these are all le/iti)ate strate/ies under broad

ran/es of circu)stances5 ,e believe it is i)3ortant to identify s3ecific drivers of the current sur/e in

9hinese out,ard 5 and to evaluate its broader i)3lications ,ith econo)ic theories

>n the follo,in/5 ,e first s*etch the e)3irical characteristics of 9hina;s out,ard : its si1e5 tar/et

locations5 and )ost i)3ortant 3layers Then5 ,e offer alternative 3ers3ectives on the sub@ect )atter At the

econo)y level5 9hina;s hi/h savin/s rate5 the behavior of its do)inant state$controlled ban*s5 and the

endurin/ voice of the state in cor3orate /overnance )i/ht distort ca3ital allocation in ,ays that /enerate

out,ard in certain sectors 6lausible distortions arise fro) both the identity and li*ely )otives of the

*ey 3layers Ne?t5 ,e e?3lain ,hy 9hina;s out,ard ,ill 3robably /ro, substantially as different

3layers /ain 3ro)inence Civen this5 ,e ado3t a fir)$level 3ers3ective5 and consider three non$e?clusive

theoretical e?3lanations of 9hina;s out,ard sur/e >)3lications for cor3orate )ana/e)ent and 3ublic

3olicy are discussed in the conclusion

$ . $


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attracted invest)ent resources to stay ho)e instead of see*in/ o33ortunities overseas 9learly5 then5

9hina;s out,ard has substantial sco3e to /ro, in the lon/ run and it is be/innin/ to sho, a catchin/

u3 tendency

(a)le *& Comparison o Outward FDI across Countries

(US Billions "nnual FDI Flow Cumulative FDI

#00' #00! #00% #00' #00! #00%

Clobal total out,ard flo, &.## 7'0' G 85."&" "57'## G

China outward FDI

Total #" %% .#' ''# !!8 %7#

As F of /lobal total 0%F 08F .7F 0!F 0%F 0&F

Developed Countries

a3an G G '.0 G ''%% '70%


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South and East Asia and5 to a lesser e?tent5 Africa >n #00&5 the 7& ne,ly 3lanned out,ard 3ro@ects in

these t,o re/ions account for over &0F of the .#% total re3orted >n contrast5 only about a third is in

develo3ed countries

The stoc* of 9hina;s out,ard is even )ore /eo/ra3hically concentrated Accordin/ to the annual

statistics fro) the inistry of 9o))erce5 as of the end of #00%5 Asia5 atin A)erica and Africa account

for 7.F5 #0F and 'F of the stoc*5 res3ectively5 and the shares for North A)erican and Euro3e are

each belo, 'F

Table # se3arates 9hina;s out,ard volu)e by host countryIarea The to3 destinations are on/ Hon/

and 9aribbean ta? havens5 ,hich consistently account for about 70F of the flo, These countries 3rovide

confidentiality to forei/n investors5 and so are co))only used by )ultinational fir)s to store ,ealth

beyond the 3urvie, of ta? authorities (arris et al, .""' into these locations by 9hinese fir)s

)i/ht also be desi/ned to hide ,ealth fro) ta? authorities5 other authorities5 or even 3ublic shareholders

$ ! $

=ata Source: ASI>CA


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ainland co)3anies )ay also invest in these countries5 3articularly in on/ Hon/5 because these

locations /ive the) convenient access to trade and financin/ o33ortunities#

oreover5 9hinese subsidiaries in these countries )i/ht serve as holdin/ co)3anies for invest)ents

else,hereJ or even bac* into 9hina


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Table ' ran*s the thirty lar/est co)3anies in 9hina by their out,ard in #00! and #00% Al)ost all are

either listed or controllin/ )a@or listed subsidiaries T,o observations follo, n #00%5 the to3 ten

SEs account for over 7%F of the total 3rofit of 9hina;s .&" national SEs !5 and '#F of the 3rofit

earned by the entire industrial sector (Table ! Ei/ht of the to3 ten ualify for inclusion in Table '

Na)ely5 the lar/est 3layers overla3 substantially ,ith the )ost 3rofitable SEs in 9hina

(a)le 20 2$ 3argest Companies Ranked ) Outward FDI

No -ear #00! -ear #00%

. 9hina obile 9hina National 6etroleu) 9or3

# 9hina National 6etroleu) 9or3 9hina National ffshore il 9or3

' 9hina National ffshore il 9or3 9hina obile

! 9hina Resources (oldin/ 9o td 9hina Resources (oldin/ 9o td

% 9S9 9S9

& 9>T>9 S>N6E9

7 S>N6E9 9>T>9

8 9hina Teleco) 9hina erchant Crou3

" Cuan/don/ and on/*on/ >nvest)ent oldin/ 9hina National 9ereal5 il and n 9hina5 there are SEs controlled by variouslevel of /overn)ents5 e/5 3rovincial and )unici3al

$ & $


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#! 9hina 4orld Best Crou3 Bei@in/ rient Electrics Crou3

#% T9 Crou3 9hina uanen/ Crou3

#& Cuan/don/ an/yun Crou3 9hina 6oly

#7 Shan/hai Bao Steel Shan/hai Bao Steel

#8 Bei@in/ ade Bird Crou3 9hina Shou Can/ Crou3

#" 9hina Nonferrous etal inin/ Crou3 9hina Nonferrous etal inin/ Crou3'0 9hina Road and Brid/e 9or3 9hina North >ndustrial Crou3

=ata source: 9hina Statistics Re3ort5 inistry of 9o))erce and 9hina Statistics Bureau

(a)le 40 (he (en Most Proita)le 5tate Owned 6nterprises in #$$7

Ran* 9o)3any na)e Net inco)e(￥.00

Cro,th over last year (F

. 9hina National 6etroleu) 9or3 .57%&. !&.

# 9hina obile 78#. #."

' S>N6E9 %%.8 #7&

! 9hina National ffshore il 9or3 '%7" %%#

% 9hina Teleco) ''8& '8

& Shen ua Crou3 9or3 ##.0 8%0

7 BaoSteel ##0% 0%

8 9S9 #00! &!#

" Alu)inu) 9or3 of 9hina td .%0# %.'

.0 State Crid 9or3oration of 9hina .!'" !!"

Total of the to3 .0 !57##% !00%

All .&" National SEs &5#7&% #7"

All #7.58'% SEs and non$state enter3rises above desi/nated si1e 2 .!580#%! ##&2

The desi/nated si1e is defined by the National Bureau of Statistics as enter3rises ,ith annual revenue over %)illion -uan fro) 3rinci3al businesses

=ata source: State$o,ned Assets Su3ervision and Ad)inistration 9o))ission of the State 9ouncil5 and 9hinaStatistic -earboo*

>n su)5 the data indicate that 9hina;s out,ard re)ains s)all relative to the econo)y;s si1e5 and

focuses on nearby develo3in/ countries and5 uite recently5 Africa


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III& Perspectives at the 6conom 3evel

This section e?a)ines three features of 9hina;s )acro environ)ent that are li*ely connected ,ith its

out,ard sur/e: a hi/h savin/s rate5 ,ea* cor3orate /overnance5 and distorted ca3ital allocation

Althou/h out,ard can let fir)s /ain i)3ortant econo)ies of scale and sco3e5 these three features

could cons3ire to induce e?cessive out,ard by the ,ron/ 3layers that ,or*s a/ainst 9hina;s lon/$

ter) econo)ic 3ros3erity

High savings

Savin/s 3ay for invest)ent5 and 9hina;s savin/s rate is 3ersistently and re)ar*ably hi/h


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Table % co)3ares 9hina;s savin/s rates to those of other countries 9learly5 9hina;s household5 enter3rise5

and /overn)ent savin/s e?ceed those of other countries by substantial )ar/ins&

(a)le 70 5avings Rates as Percent o 8DP

9ountry 9hina USA ndia

Total do)estic savin/s !.7 .!' #07 #%% '.0 #08 #8'

ousehold savin/s .&0 !8 .08 8# !% 80 ##0

Enter3rise savin/s #00 .0' "% ."! .!8 .0& !8

Covern)ent savin/s %7 $0" 0' $## ..7 ## .%

=ata source: Hui@s (#00&5 Table !

9hinese do)estic savin/s flo, )ainly into state$controlled ban*s as de3osits The reasons for 9hinese

households; hi/h savin/s are ,ell *no,n: 9hinese save for education5 housin/5 3urchases of consu)er

durables5 and security (e/5 3ension and )edical e?3enses >ts household savin/s rate5 thou/h hi/h5 is

lo,er than >ndia;s The declinin/ trend in 9hina;s household savin/s rates in recent years li*ely reflects

several factors: (i /reater accu)ulated savin/s5 (ii an a/in/ 3o3ulation5 and (iii a /radual i)3rove)ent

in the consu)er credit )ar*et5 ,hich )iti/ates the need for household savin/s

9or3orate savin/s is retained earnin/s D the 3ortion of earnin/s not 3aid out to euity investors Table %

reveals that 9hina;s enter3rise savin/s rate is a)on/ the hi/hest in the ,orld5 and co)3arable to a3an;s

Ban* involve)ent in a3anese cor3orate /overnance is thou/ht to induce e?cessive earnin/s retentions by

fir)s there (orc* and Na*a)ura5 #000 >f enter3rises do not 3lo, their retained earnin/s into

econo)ically sound e?3ansions5 a hi/h enter3rise savin/s rate reflects an econo)ically undesirable

aversion to disburse earnin/s to shareholders (ensen5 ."8&

Standard cor3orate finance theory su//ests that co)3anies ou/ht to 3ay out to shareholders all earnin/s

e?ceedin/ the fir);s 3rofitable invest)ent needs >nfor)ation asy))etry )a*es K3rofitableL invest)ents

hard for shareholders to verify5 and ensen (."8& ar/ues that a co))on cor3orate /overnance 3roble)

& Note that the total savin/s rates in Tables ! and % are not fully co)3arable because they are fro) t,o differencesources

$ " $


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involves )ana/e)ent e?cessively retainin/ earnin/s and 3ourin/ the) into lo,$return 3ro@ects to build

cor3orate e)3ires a 6orta5 et al. (#000 sho, that sound le/al 3rotection for investors is associated ,ith

hi/her dividends5 but ,here le/al syste)s are less at the service of investors5 insiders tend to e?cessively

retain earnin/s for e)3ire$buildin/

builds 3articularly i)3ressive cor3orate e)3ires5 s3annin/ continents 4ea* cor3orate /overnance

underlyin/ 9hinese co)3anies; hi/h rates of earnin/s retention and fuelin/ their )ust be considered

a serious hy3othesis >t turns out that 9hinese SEs5 res3onsible for )ost 5 are 3articularly dividend$

averse Accordin/ to statistics fro) Shan/hai and Shen1hen stoc* e?chan/es5 over half of the listed SEs

3ay no dividends5 des3ite hi/h earnin/s


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6otential reasons for these lo, dividends beco)e a33arent if ,e loo* into the o,nershi3 structure of

listed co)3anies


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since the state ,ields sufficient votin/ 3o,er to a33oint the board of the ty3ical listed fir) Second5 listed

fir)s do not ty3ically 3ay dividends on non$tradable shares directly o,ned by the state5 even if they 3ay

dividends on other classes of tradable and non$tradable shares" Naturally5 vested interests ,ithin the state

or/ans see a hi/h dividend as undesirable because they have .00F of the control if the earnin/s are

retained but little to /ain once they are distributed

A seuence of le/al and re/ulatory refor)s has done little to alter this funda)ental 3o,er i)balance

State$a33ointed inde3endent directors often see the ,orld )uch as do state$a33ointed 9Es oreover5

every listed fir);s board has a 3arallel authority structure5 the fir);s 6arty 9o))ittee5 headed by its 6arty

Secretary Refor)s to the board leave this hidden D or not$so$hidden D real 3o,er structure untouched

The 6arty Secretary )ay or )ay not chair the board5 and 6arty 9o))ittee )e)bers )ay or )ay not

serve as directors 4here the t,o structures do not overla35 real 3o,er flo,s throu/h the 6arty channels5

leavin/ the board and for)al cor3orate to3 e?ecutives ,ith scant real authority >n the lar/e SEs5 the

6arty Secretary a33oints the to3 e?ecutives and directors5 often si)3ly relayin/ orders fro) the

9o))unist 6arty of 9hina;s r/ani1ational =e3art)ent5 and e?ercises a leadin/ role in the co)3any

The ulti)ate function of the 6arty 9o))ittee and 6arty Secretary )ay chan/e as cor3orate /overnance

refor)s occur5 but this re)ains unresolved


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The full e?tent of State and 6arty influence over cor3orate )ana/e)ent is rendered obvious ,ith

e?a)3les of to3 e?ecutive turnover 6etro9hina5 a subsidiary of 9hina National 6etroleu) 9or3oration5

trades on both the Ne, -or* Stoc* E?chan/e (N-SE and the on/ Hon/ Stoc* E?chan/e (HSE >n

A3ril #00'5 r i -i1hon/5 then 9hair)en of the Board of 9N695 ,as a33ointed to the SASA9 and

re3laced by r 9hen Ton/hai5 a for)er State 6lannin/ 9o))ission official >n ctober #00'5 r 4ei

iuchen/5 then 9E5 9hair)an of the Board5 and 6arty Secretary of 9hina National ffshore il 9or3

(9N9 ,as a33ointed Covernor of ainan 6rovince >n Nove)ber #00!5 the to3 )ana/ers of the three

lar/est teleco))unication co)3anies in 9hina D 9hina obile5 9hina Teleco) and 9hina Unico) D

e?chan/ed 3ositions al)ost overni/ht ,ithout 3rior notice to 3ublic shareholders >n short5 e?ecutive

3ositions in listed fir)s are filled by State and 6arty bureaucrats and are seen as ste3s in the career of a

successful civil servant

The current cor3orate /overnance structure is unli*ely to re,ard )ana/ers ,ho honestly ad)it that

invest)ent o33ortunities are li)ited and advocate disbursin/ e?cess earnin/s to shareholders Un3aid

dividends are5 of course5 cor3orate savin/s..


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(B95 >ndustrial and 9o))ercial Ban* of 9hina (>9B95 9hina 9onstruction Ban* (99B5 and

A/ricultural Ban* of 9hina (AB9 D to/ether res3onsible for about three$uarters of all co))ercial loans

and @ust over half of total ban*in/ assets as of the end of #00% .' ousehold savin/s and idle cor3orate

funds both turn u3 as ban* de3osits5 and these are recycled as ban* loans ost of the loans /o to the state

sector5 often due to the 3referential 3olicies set by the local /overn)ent and the ban*s; lac* of

co)3etency in evaluatin/ ris*s (Tsai5 #00# Accordin/ to the Financial Statistics Yearbook (#00%

3ublished by the 6eo3le;s Ban* of 9hina5 SEs account for 7'F of the short$ter) ban* loans bet,een

#00. and #00! This )eans that even SEs that )erely hoard earnin/s as ban* de3osits5 ,ithout actually

initiatin/ forei/n acuisitions5 still hel3 fund the of other SEs

The E9=;s #00% Econo)ic Survey of 9hina sho,s the 3rivate sector to be the true en/ines of econo)ic

/ro,th5 accountin/ for %"#F of value added in the econo)y.! These /ro,in/ co)3anies face on/oin/

ca3ital constraints5 and )ust finance their /ro,th lar/ely ,ith infor)al financin/ (Allen et al 5 #00%

Ayya/ari et al. (#0075 Table 7 sho,s that fir)s that do obtain ban* loans subseuently 3ost elevated

sales5 but not 3roductivity /ro,th5 ,hile fir)s that rely on alternative channels of financin/ 3ost slo,er

sales /ro,th5 but stron/er 3roductivity /ro,th =ollar and 4ei (#007 also sho, that5 even after years of

refor)5 state$o,ned fir)s still have si/nificantly lo,er returns to ca3ital5 on avera/e5 than do)estic

3rivate or forei/n$o,ned fir)s This is consistent ,ith 9hina;s ban*in/ syste) channelin/ savin/s to

fir)s ,ith li)ited ca3abilities and 3rofitable invest)ent o33ortunities So)e of these funds )ay end u3

in 9hina;s hi/hly visible out,ard 5 but this )ay ,ell be the visible ti3 of a )uch lar/er ca3ital

)isallocation iceber/

>n su))ary5 9hina;s recent out,ard sur/e is li*ely a )anifestation of its inability to reinvest

efficiently its hi/h cor3orate and individual savin/s This distorted ca3ital flo, is 3ro3elled by the

.' Ste3hen Tho)as and 9hen i: Ban*in/ on Refor)5 in China Business Review5 a 3ublication of US$9hinaBusiness 9ouncil5 ay$une #00&

.! See the table in 9ha3ter #5 Economic Surve o! China, 6aris: E9=5 Se3te)ber .&5 #00% The survey defines

3rivate enter3rises as those controlled by individuals or le/al 3ersons5 in contrast to the Kstate$controlledL andKcollectively controlledL

$ .! $


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/overnance structure of lar/e SEs and by inefficiencies in its ban*in/ sector Crandiose and 3atriotis)$

ins3irin/ initiatives5 li*e ta*eovers of forei/n co)3anies5 le/iti)i1e the continuation of the 3olitical

status "uo ver the lon/er ter)5 deflectin/ ca3ital a,ay fro) )ore efficient 3rivate sector ventures )ay

co)3ro)ise both continued econo)ic /ro,th and 3olitical stability

4e do not ar/ue that all out,ard fro) 9hina is un@ustified 4e @ust caution that the current

3ara)eters of /overnance and ban* lendin/ do su//est a hi/h li*elihood of ,asteful invest)ents

ean,hile5 3rivate co)3anies ,ith other,ise /reat overseas o33ortunities )ay be *e3t a,ay fro) the

door >t is ,orth 3ointin/ out that the ris*s of out,ard are not /oin/ unnoticed in 9hina The rationale

and efficiency of co)3anies /oin/ abroad have been freuently discussed in 9hinese ne,s3a3ers5

acade)ic @ournals5 and so)e hi/h$3rofile econo)ic foru)s.% any scholars5 3ractitioners and 3olicy

)a*ers have called for caution and 3atience5 e)3hasi1in/ that ,ould be a lon/ learnin/ 3rocess for

9hinese co)3anies ana/ers also try not to re3eat the e?3erience of their a3anese counter3arts in the

."80s5 and freuently see* the hel3 of e?ternal advisors ,ith their due dili/ence investi/ations ast5 but

not the least5 a lar/e nu)ber of cases truly reflects the stron/ 3erfor)ance of 9hinese fir)s 4e

devote the ne?t section to a )ore in$de3th analysis of these fir)s

I9& Perspectives at the Firm 3evel

Re/ardless of the above econo)y$level considerations5 )ay be econo)ically rational fro) an

individual fir)s; 3ers3ective To e?3lore this5 ,e therefore turn to the theory of the fir) and discuss

)icroecono)ic @ustifications of 9hina;s out,ard

Internalization: political wiles as an asset

uch by )ultinational fir)s is thou/ht to add value by raisin/ the returns to cor3orate invest)ent in

research and develo3)ent (R=5 brand creation5 and other ventures ,ith lar/e fi?ed costs and hi/h ris*s

.% nternational


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of )ar*et transactions (e/5 Buc*ley and 9asson ."7& (


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A )odified internali1ation 3ers3ective )i/ht therefore have )ore /eneral traction in e?3lainin/ the trend

in 9hina;s recent any of the Asian and African countries tar/eted by 9hinese have chronically

,ea* institutions uan/ et al. (#00! sho, that )ost ASEAN econo)ies have hi/h level of direct state

intervention5 insecure 3ro3erty ri/hts 3rotection5 and o3aue cor3orate /overnance These institutional

deficiencies i)3ede ca3ital )ar*et develo3)ent (a 6orta et al 5 .""7J .""85 and raise costs of ca3ital

for local fir)s (orc* et al 5 #00%

n contrast5 the Ke)er/in/ /iantsL fro)

develo3in/ countries have already survived financial and bureaucratic disadvanta/es in their ho)e

)ar*ets (Hhanna and 6ale3u5 #00& 9o)3ared to fir)s fro) hi/hly develo3ed countries5 9hinese fir)s

are )ore e?3erienced ,ith such institutional features5 and as a result are li*ely far )ore ca3able of

dealin/ ,ith burdenso)e re/ulations and navi/atin/ around the o3aue 3olitical constraints 6er*ins

(#00% sho,s that 3ast e?3erience in certain institutional environ)ents si/nificantly 3redicts survival

,hen a fir) invests in another such environ)ent Such ca3abilities beco)e an intan/ible asset that )i/ht

)a*e into li*e environ)ents far )ore 3rofitable for 9hinese co)3anies than for other forei/n fir)s

ur internali1ation theory thus 3osits that 9hinese SEs have develo3ed so3histicated )easures that hel3

the) o3erate des3ite ende)ic /overn)ent interference and related 3roble)s By e?3andin/ into

econo)ies ,ith si)ilar institutional environ)ents5 they can achieve lar/e returns on these 3ast

invest)ents >n #00%5 6etroHa1a*hstan5 a 9anadian o,ned concern ,ith o3erations 3ri)arily in

Ha1ahstan5 found itself unable to enforce its 3revious a/ree)ents ,ith a Ha1a*h /overn)ent bent on

e?3ro3riation The state$o,ned 9N69 a/ain ste33ed in and bou/ht out 6etroHa1a*hstan for !# billion

6etroHa1a*hstan;s investors e?ited ,ith so)e ca3ital intact and 9N69 ,as able to enforce contracts and

3ro3erty ri/hts ,here a 3rivate sector 9anadian fir) could not

$ .7 $


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Who is the oss! and why"

Another 3ers3ective )ay further reconcile standard e?3lanations of ,ith 9hinese fir)s; )ultinational

e?3ansion >n the auto)a*er e?a)3le above5 ,e i)a/ined a US auto)a*er ,ith uniue 3roductivity$

enhancin/ technolo/y ta*in/ over forei/n auto)a*ers and a33lyin/ its ne, technolo/y to their o3erations

as ,ell as its o,n This lets the innovative US auto)a*er not only a33ly its innovation on a /lobal scale5

but *ee3 *no,led/e of the innovation internal

>n recent years5 9hina has beco)e a /lobal )anufacturin/ hub >n )ost cases5 forei/n fir)s ,ith uniue

technolo/ical e?3ertise or valuable brand na)es direct into 9hina5 buildin/ or acuirin/ control of

)anufacturin/ facilities there But in a fe, hi/h$3rofile cases5 9hinese )anufacturin/ fir)s sou/ht to

acuire the fir)s in rich countries that 3rovide the) ,ith u3$to$date technolo/y >n this cate/ory 3erha3s

fall enovo;s acuisition of >B;s 69 )anufacturin/ unit and aier;s bid for ayta/ These cases stand

o33osite to our car)a*er )odel5 as if a lo,$tech 9hinese auto)a*er bou/ht the innovative US fir) and

its technolo/y5 and then undertoo* to a33ly the technolo/y on a /lobal scale

>n a ty3ical venture5 the fir) that develo3ed the intan/ible asset D the technolo/ical or advertisin/

heavy fir) D is the acuirer5 and retains control to 3rotect its 3ro3erty ri/hts over that asset Cross)an

and art (."80 ar/ue that control should reside ,ith the 3arty ,hose non$contractible effort is )ore

i)3ortant in creatin/ value for fir) >n the traditional settin/ ,ith the acuirer fro) a develo3ed

country5 this 3arty is the fir) that initially 3roduced the critical intan/ible asset A ne, technolo/y )ust

be u3dated continuously5 or ris*s ecli3se by advances else,here A brand na)e )ade valuable by a

re3utation for hi/h uality )ust be safe/uarded by continual ri/orous uality control


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9hina5 a forei/n fir) ,ith a technolo/ical ed/e or a brand na)e acuires 3hysical assets in 9hina that

hel3 it 3roduce for 9hinese or /lobal )ar*ets

o,ever5 this lo/ic need not a33ly in all cases >B sa, 69s beco)in/ co))oditi1ed5 ,ith ra3idly

eva3oratin/ 3rofit )ar/in 4hile technolo/y advances continue to affect *ey co)3onents5 actual 69

asse)bly beco)es routine5 ,hich )ade technolo/y )aintenance and u3/radin/ )ore contractible and

less critical The ter)s of co)3etition tilted to,ards 3roduction cost and uality control >n this settin/5

actions by the )ana/ers of the 9hinese asse)bly 3lants beca)e i)3ortant enou/h to @ustify enovo

ta*in/ control of >B;s 69 unit 9onceivably5 si)ilar lo/ic induced T9;s ta*eover of Tho)son;s TM

and =M= businesses in Euro3e and else,here

ore /enerally5 in )aturin/ industries5 intensifyin/ 3rice co)3etition in increasin/ly standardi1ed

3roducts renders )anufacturin/ uality )ore i)3ortant than cuttin/ ed/e R=5 and ri/orous cost control

)ore i)3ortant than brand na)e reco/nition >n such circu)stances5 a reversal of roles beco)es rational:

the 3roduction unit ta*es over the R= or brand$buildin/ unit because its non$contractible effort beco)es

)ore i)3ortant in creatin/ value

#rivate ene$its o$ control

Above5 ,e su//est that 9hina;s out,ard sur/e per se is not necessarily econo)ically ,asteful5 but its

)any and 3rofound institutional infir)ities5 es3ecially the cor3orate /overnance and ban*in/ syste)

deficits hi/hli/hted above5 are reasons for concern The civil servants )annin/ the 6arty 9o))ittees that

/overn 9hina;s SEs5 listed or not5 and the 6arty a33ointees /overnin/ 9hina;s state$run ban*s are

econo)ically rational 3eo3le ,ith ,ell$defined /oals5 ,hich they can be e?3ected to 3ursue These /oals

)ay not accord ,ith the lon/$ter) financial viability of the fir)s or ban*s they /overnJ and to understand

9hina;s out,ard better5 a dee3er understandin/ of those /oals )i/ht be useful

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6rivate benefits of control are benefits en@oyed by a do)inant controllin/ o,ner above and beyond

dividends and other cash flo, ri/hts5 ,hich also accrue to 3ublic shareholders uch evidence sho,s that

controllin/ shareholders in )any countries 3reserve their control ,ith5 e/5 su3er$votin/ shares5 even

thou/h these structures are e)3irically lin*ed to de3ressed valuations >nsiders also loc* in their control

,ith sta//ered boards5 3yra)idin/5 and various other entrench)ent devices that e)3irically 3rove value$

destroyin/ These actions su//est that cor3orate insiders5 includin/ controllin/ shareholders5 derive

3rivate benefits lar/e enou/h to co)3ensate the controllin/ shareholder for the de3ressed value of her

shares 4hile there are )ulti3le ,ays to co)bine the 9hinese and forei/n fir)s; ca3abilities5 e?ecutives

,ho value 3rivate benefits of control sufficiently hi/h )ay choose acuisitions over other 3ossibilities5

such as lon/$ter) contracts or technolo/y licenses5 and are ,illin/ to 3ay for this ,ith a de3ressed share

valuation

These 3rivate benefits )ay be 3ecuniary5 such as ,ealth accu)ulated throu/h self$dealin/ or insider

tradin/ The flo,in/ fro) 9hinese SEs into 9aribbean ta? havens5 ,here it essentially disa33ears

fro) si/ht5 )i/ht ulti)ately beco)e a 3ecuniary 3rivate benefit of control for the SEs; insiders But the

3rivate benefits of control also include non$3ecuniary /ains5 such as status5 3o,er5 and res3ect

9onceivably5 9hina;s out,ard is a )anifestation of e?ecutives 3ursuin/ such intan/ible benefits

>ndeed5 there are 3lausible reasons for e?3ectin/ such insiders to value control hi/hly indeed n 3art5 this )ay be an understandable res3onse to @udicial inefficiency and )ar*et

failures in 9hina5 ,here free )ar*et institutions re)ain a ,or*$in$3ro/ress Assu)in/ si)ilar 3roble)s in

,orld )ar*ets5 9hinese e?ecutives )i/ht overvalue direct control over e/ natural resources This

)indset )ay 3ersist until a ne, /eneration of 9hinese e?ecutives5 ,ith )ore confidence in )ar*ets5 ta*es

over

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4ea* cor3orate /overnance li*ely further reinforces the i)3ortance of KcontrolL to )any 9hinese

e?ecutives E?3erience 3roves5 in 9hina at least5 that investin/ in fir)s one does not control 3uts one at

the )ercy of their controllin/ shareholders 4ea* cor3orate /overnance creates a @un/le$li*e ethic of

Kcontrol or be controlledL D investors ,ho do not ,ield control find the)selves at the )ercy of ,hoever

does5 and cannot e?3ect to be treated tenderly Not trustin/ institutions outside 9hina either5 they )ay

3erceive out,ard as necessary to control their dealin/s abroad >n countries ,ith ,ell develo3ed

institutions5 contracts and le/al ri/hts )ay be chea3er5 and hence )ore efficient ,ays to or/ani1e their

dealin/s5 but 9hinese e?ecutives )ay have to learn this fro) e?3erience

ts flo, and stoc* are tiny relative

to its C=65 even co)3ared to those of other develo3in/ countries oreover5 9hina;s out,ard is

)ostly acuisitions in nei/hborin/ Asian countries and resource$rich 3arts of Africa As 9hina develo3s

ra3idly5 the sco3e and scale of 9hinese out,ard )erits on$/oin/ analysis by international business

scholars5 for it is a )anifestation of the econo)ic5 or/ani1ational and )ana/erial transfor)ation in the

country5 and of its relation ,ith the rest of the ,orld This 3a3er develo3s 3ers3ectives ,e ho3e can

facilitate a better understandin/ of the dee3er causes and conseuences of 9hina;s out,ard


24/29

are lar/e SEs ,ith lucrative state$enforced )ono3olies in natural resources or infrastructure sectors

=ue to their 3eculiar o,nershi3 and incentive structures5 lar/e SEs tend to hoard retained earnin/s5

rather than distribute dividends to shareholders 9hina;s ban*$do)inated ca3ital allocation also li*ely

channels savin/s dis3ro3ortionately to these SEs ence5 the insiders5 es3ecially their 6arty Secretaries

and 6arty 9o))ittee )e)bers5 )ay use these retained earnin/s to fund invest)ents that advance their

careers as bureaucrats5 li*e Kfla/shi3L 3ro@ects overseas5 rather than invest)ents ,ith hi/h econo)ic

returns

>n s3ite of the causes for concern5 standard econo)ic rationales for ta*e on une?3ected ne, for)s in

9hina5 and )ay @ustify so)e5 3erha3s even )uch5 of 9hina;s out,ard Three rationales are of note


25/29

conflicts in South A)erica Shan/hai Auto)otive >ndustrial 9or3oration (SA>9 has si)ilar e?3eriences

in South Horea after acuirin/ Ssan/-on/ otor in #00!

n the years to co)e5 ,e e?3ect

si/nificant /ro,th in 9hina;s out,ard 5 not only in volu)e5 but also in variety across industries and

or/ani1ational for)s ore i)3ortantly5 ,e e?3ect that the /lobali1ation e?3erience ,ill transfor) )any

9hinese co)3anies5 es3ecially those enterin/ develo3ed countries and co)3etin/ in hi/her$end 3roduct

)ar*ets >t has lon/ been ar/ued in international business studies that fir)s )ay /ro, in their

international e?3eriences (9asson .""% o, ,ill 9hinese fir)s establish a /lobal identity5 desi/n

fle?ible o3erations across countries5 and i)3rove cor3orate /overnance at both the headuarters and

/lobal net,or* levels o, ,ill cor3orate /overnance i)3rove in 9hinese fir)s as they co)3ete in

/lobal )ar*ets5 and as 9hinese do)estic institutions develo3 4hat sort of )odern )ana/e)ent syste)

is co)3atible ,ith the 3ath that 9hina has follo,ed These issues have 3rofound conseuences for

9hina;s lon/$ter) econo)ic and institutional develo3)ent5 and for our dee3er understandin/ of

international business

Studyin/ these 3heno)ena in their infancy also 3rovides sco3e for lon/itudinal research The dyna)ic

evolution of fir)s and institutions not only offers a rich e)3irical settin/ for various research uestions5

but also lets researchers avoid e#$post observation biases


26/29

3olitical and social as3ects into consideration Civen the visible hands of the 9hinese State and the 6arty

in the econo)y5 any )icro$level analysis ,ill not be co)3lete ,ithout a )acro level bac*/round

E?citin/ ne, insi/hts are li*ely to be /leaned fro) this rich conte?t

$ #! $


27/29

Reerences

Allen5 nte/ration5L %ournal o! (olitical Econom5 "!(!: &".$7."

arris5 =avid C (.""' KThe >)3act of US Ta? a, Revision on ultinational 9or3orationsO 9a3ital

ocation and >nco)e$Shiftin/ =ecisions5L %ournal o! )ccounting Research5 '.: ...$.!0

uan/5 -asen/5 Randall orc* and Bernard -eun/ (#00! KASEAN 9ountries5 E?ternal Threat5 nternal >nstitutional 4ea*nesses5L Business an* (olitics5 &(.

ensen5 ichael 9 (."8& KThe A/ency 9osts of


28/29

Hhanna5 Tarun and Hrishna C 6ale3u (#00& E)er/in/ Ciants: Buildin/ 4orld$9lass 9o)3anies in

=evelo3in/ 9ountries +arvar* Business Review5 8!(.0

Hui@s5 ouis (#00& Ko, 4ill 9hinaOs Savin/$>nvest)ent Balance EvolveL 4orld Ban* 6olicy

Research 4or*in/ 6a3er No '"%8

a 6orta5 Rafael5 nternali1ation: An Event Study Test5L %ournal o!

nternational Economics5 Mol ''5 (Au/ust5 3 !.$%&

orc*5 Randall and Bernard -eun/ (."". K4hy >nvestors Malue ultinationality5L %ournal o! Business5

&!(#: .&%$87

orc*5 Randall5 Bernard -eun/ and inyuan Qhao (#00% K9hina;s uc*y 9or3orate Covernance5L

(eking -niversit Business Forum5 Se3te)ber

Ru/)an5 Alan (.""& &he &heor o! 'ultinational Enterprises. 9heltenha): El/ar

Ru/)an5 Alan and Alain Merbe*e (.""# A Note on the Transnational Solution and the Transaction

9ost Theory of ultinational Strate/ic ana/e)ent ournal o! nternational Business Stu*ies5

#'(!: 7&.$77#

$ #& $

http://ideas.repec.org/a/ucp/jnlbus/v64y1991i2p165-87.htmlhttp://ideas.repec.org/s/ucp/jnlbus.htmlhttp://ideas.repec.org/s/ucp/jnlbus.htmlhttp://ideas.repec.org/s/ucp/jnlbus.htmlhttp://ideas.repec.org/a/ucp/jnlbus/v64y1991i2p165-87.htmlhttp://ideas.repec.org/s/ucp/jnlbus.html


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6er*ins5 Susan (#00% K=oes 6rior E?3erience Really 6ay nvest)ents5 >nstitutional

Environ)ents and nstitutional 9onstraints5L %ournal o! nternational Business Stu*ies5 '8(!: %7"D%"!

Documents

2007 08 31 China Outward FDI Final