China is an important overseas direct investor. But this is a recent development: before 2004, the size of Chinese overseas direct investment (ODI) was trivial. From 2004, ODI grew significantly, alongside a dramatic expansion of China’s current account surplus. Total ODI increased from US$2.85 billion in 2003 to US$56.53 billion in 2009, registering an average growth rate of 55 per cent a year. During the same period, its share in global ODI flow also rose from 0.45 to 5.1 per cent.
In 2009, China was not only the largest developing country investor but also the fifth largest investor in the world, following the US, France, Japan and Germany.
The Chinese case challenges the perception that ODI is dominated by developed countries. It is also exceptional in that while China enjoys comparative advantages in certain manufacturing industries, evidenced by its export competitiveness, these are not the areas where Chinese ODI is concentrated. According to official statistics, most Chinese ODI is in the service industry, including commercial services, finance, retail and wholesale.
China’s prominent ODI role could simply be due to its size: China is now big in economic terms — even a relatively low propensity to invest overseas adds up significantly. It might also be a consequence of financial repression at home: such policies reduce the cost of capital and make abundant capital available to the state-owned enterprises (SOEs). Finally, China may desire advanced technology, brand names, management skills and a stable supply of raw materials in order to strengthen its domestic production. Certainly, it could be all of the above as none of them are mutually exclusive.
The industry distribution of Chinese ODI differs markedly from that of other countries. The primary sector (including resources) accounted for 18.7 per cent of China’s total ODI flow between 2006 and 2008. In comparison, those of the developed and developing economies were only 7.84 and 8.38 per cent, respectively. These large differences were mainly contributed by investments in mining, quarrying and the petroleum industry — the latter contributing 97 per cent of Chinese ODI in the primary sector. This may reflect strategic use of Chinese ODI to secure a long-term resource supply.
More surprising was the distribution of Chinese ODI between the manufacturing and service industries.
The manufacturing sector accounted for an extremely low share, only 4.7 per cent of the total — this is despite China’s image as a global manufacturing centre. To put this in perspective, the same share for developed countries averaged 24.1 per cent, and for other developing economies it was 15 per cent. The proportion of Chinese ODI directed to the service sector is astonishing. Services account for 76.57 per cent of Chinese ODI. This is compared to 60.01 for developed countries and 69.8 per cent for developing economies.
It is evident that Chinese ODI neither follows its revealed comparative advantage nor concentrates on the industries with higher development.
The more comparative advantages held by OECD countries, and the better the service sector, the more Chinese ODI appears to flow in. This suggests that Chinese firms, in the service sector, want to gain their experiences and technologies in OECD countries. In contrast, for non-OECD economies, the stronger the comparative advantages, and better the service sector is, the less Chinese ODI flows in. It seems that Chinese firms are content with competing in non-OECD countries.
There are, therefore, clear differences between the ODI of China and other developed economies. For the Chinese, high profits are not the obvious driving motivation. Market size, labour costs and the legal environment generally do not matter. The international competitiveness of advanced economies and the resource endowment of developing economies are more important.
The chief objective of Chinese ODI is to strengthen the competitiveness and sustainability of domestic production. Acquiring advanced technology, securing commodity supply or even facilitating exports are all ways of doing this.
The Chinese ODI model may be transitional. As the Chinese economy develops further, its ODI behaviour may likely converge with that of developed countries. If wages keep rising rapidly, China may eventually move its textile, toys and travel goods factories to other low cost countries. That investment would be more consistent with the market or low cost-seeking motivations in traditional FDI theory. Again, if further liberalisation of the financial industry triggers costs of capital to rise and the state sector to decline, the importance of the China model may also decline.
Still, analysis of the China model could increase understanding of the ODI behaviour of other developing countries. But, qualifying this, there is much we still don’t really know about Chinese ODI because of the lack of comprehensive firm-level data and problems in the aggregate data. So the current evidence is still very preliminary.
Bijun Wang is a PhD Scholar at Peking University and a Visiting Scholar at the Crawford School of Economics and Government, Australian National University. Yiping Huang is Professor of Economics at the China Center for Economic Research, Peking University, and an Adjunct Professor at the Crawford School of Economics and Government, Australian National University.
Source: www.eastasiaforum.org
