Upgrade outbound investment

Chinese investors need broader global perspective so it is oriented toward the high end of the global value chains

China's outbound direct investment has grown by leaps and bounds over the last decade or so, from $2.7 billion in 2002 to a record high of $87.8 billion in 2012, and it is estimated it will exceed $100 billion by the end of the 12th Five-Year Plan period (2011-15).

But despite having emerged as the world's third-largest outward investor, China is in urgent need of broadening its global perspective on outbound investment. In the initial stages of reform and opening-up, China's ODI was basically aimed at setting up small trading companies or offices to establish overseas contacts or provide supporting services for the country's export and import trade.

And after more than three decades of reform and opening-up, to a great extent, the country's outward investment is still oriented to foreign trade and domestic manufacturing, and of little significance for the integration of global resources. Statistics from the Chinese Ministry of Commerce show that about 65 percent of China's ODI in 2012 went to the leasing, commercial service and mining sectors, indicating an investment structure that is out of step with the circumstances in the post-financial crisis era.

The international investment climate has been undergoing profound changes since the onset of the global financial crisis. First and foremost, international investment has become an important means for developing countries to integrate into the global economy, participate in the division of labor within the global value chains and realize their industrial and technological upgrading.

If China continues to excessively orient its outward investment to the low-end manufacturing and export sectors, it will miss the opportunities to integrate global resources, especially advanced technologies, and be kept at the low end of global value chains. That is one of the reasons why China's outward investment requires a broad global perspective.

Also, in the context of the third industrial revolution, which features the development of Internet technologies and renewable energies, no country is capable of technological monopoly as the globalization of research and development is already underway. Production in this era will be decentralized in low volumes and customized with designs tailored for regional and even individual tastes. These will change the international division of labor, where, at present, developed countries dominate the research and development process while developing economies mostly undertake manufacturing.

Apart from R&D efforts, developed economies are likely to be more engaged in manufacturing, which will have a far-reaching influence on the global industrial layout. In the wake of the global financial crisis, many countries have loosened their grip on approving foreign investment and even proposed policy incentives to attract foreign investors, and many have enhanced economic stimulus efforts and boosted infrastructure investment. The Asian Development Bank and the Organization for Economic Cooperation and Development estimate that Asia alone will invest $8 trillion in infrastructure projects from 2010 to 2020.

The explosion in demand in emerging markets such as Asia, Africa and Latin America will present enormous opportunities for Chinese investment. Although the Doha round of talks within the framework of the World Trade Organization are still deadlocked, regional economic cooperation, especially in the Asia-Pacific region, has thrived. Washington is pressing ahead with negotiations on the Trans-Pacific Partnership and Transatlantic Trade and Investment Partnership, both of which boast rules that liberalize trade and investment among the parties concerned. With the rules-based global investment system undergoing profound changes, bilateral and multilateral investment agreements will cover more areas, including providing a high level of protection for investors and ensuring wider market access for foreign investors. These will further facilitate transnational direct investment.

Under the new circumstances, Chinese companies need to increase their inputs to optimize intangible resources such as talent, technology and management. Many Chinese companies in recent years have simply relocated their employees overseas and copied the management pattern at home in the host countries, but such investment with few localization efforts often fails to yield the expected returns. Moreover, the service sector, which includes high-end financial services, is at the high end of the global value chains and deserves greater input, so that China can better position itself in the international division of labor within the global value chains.

More need to be done to maintain China's market advantage in developing economies and meanwhile sharpen Chinese companies' competency in the developed markets. This is by no means an easy task given that competition in developed markets tends to be more intense.

Chinese investors need to grasp the chances derived from the growing demand of developed economies for foreign investment and acquire the technologies needed to enter the developed markets through mergers and acquisitions.

Great importance should be attached to corporate social responsibilities, as these have a direct bearing on a company's image and its overseas operations.

Equally important is support from the government, which is responsible for building a sound regional and even global economic and trade environment, facilitating the proposed establishment of free trade areas and balancing its position as a host and home country for international investment.

More efforts should be made to reform the outward investment system, streamline the administrative approval procedures and encourage State-owned and private sectors to invest abroad. Reform of the country's foreign exchange regime should be accelerated to encourage commercial banks to go global, too, so that they can better integrate into the process of financial globalization and meanwhile offer support to Chinese companies with global operations.

The Chinese version of this article first appeared in Study Times.