Chinese FDI – for what purposes?

This is an interesting write up by FRBSF economists Titan Alon, Galina Hale and João Santos. The authors look for reasons for Chinese FDI. What is the purpose of Chinese FDI?

First some basics. What is the purpose of FDI?

Traditional economic theory identifies market-seeking, efficiency-seeking, and resource-seeking motives as the main reasons companies engage in foreign direct investment (Caves 2007).

Market-seeking investment is aimed at gaining access to foreign markets. Companies may find it less costly or easier to produce or assemble goods in or near target markets. Foreign car companies are seeking markets when they build assembly plants in the United States.

 Efficiency-seeking investment is designed to move production to countries where inputs, especially labor, are cheaper. U.S. shoe companies are seeking efficiency when they build factories in Asia in order to produce for U.S. markets.

Resource-seeking investment is aimed at gaining access to natural resources, particularly those that may be scarce in the country where the acquirer is located. Energy companies are seeking resources when they purchase oil fields overseas.

Researchers have recently noted other motives for foreign direct investment, such as strategic economic expansion, increased geopolitical influence in a target region, control of strategic assets, access to technology, and a desire to overcome domestic institutional barriers, such as capital controls and regulation (Dunning and Lundan 2008, Peng et al. 2008, Rui and Yip 2008, and Alon 2010).

In China’s case, all these motives are present.

Over our sample period, Hong Kong was the primary destination for China’s foreign direct investment, followed by the United States, Australia, Singapore, the United Kingdom, and Canada (Figure 2 shows the geographical composition). China targeted two main industry groups: natural resources, especially oil and gas, and the financial sector, especially banks and holding companies. Business services and manufactured capital goods followed (see Figure 3). Since the mid-1990s, China has increasingly diversified its reach. In 2008, it carried out investment deals in 39 countries, involving industries representing 41 two-digit SIC codes.

The deals are only expected to grow:

China invests abroad for many reasons, including to support an expanding industrial sector with a growing appetite for natural resources, capital inputs, and access to advanced technology and foreign markets. This pattern, combined with China’s burgeoning wealth, suggests that China’s outward foreign direct investment will expand and spread more widely across countries and industries. The majority of future deals are likely to take place in the financial and natural resource sectors, which, for China, are areas of comparative disadvantage. China’s investment in companies with cutting-edge technology is also ripe for growth since China’s domestic industrial composition is becoming more sophisticated.

State-owned companies dominate China’s outward investment, reflecting the government’s need to deploy the country’s vast foreign reserves. As China’s official foreign reserves grow, so too will its foreign investment, including equity investment in search of higher yield. China’s sovereign wealth funds, however, are unlikely to seek controlling stakes in foreign target companies because they don’t want to be subject to regulatory scrutiny overseas. Most such purchases are likely to take the form of portfolio investments rather than foreign direct investment. As of today, the $87 billion that China has directly invested in foreign companies is still a drop in the sea compared to the over $2 trillion in foreign reserves that the Chinese government holds.


One Response to “Chinese FDI – for what purposes?”

  1. Imran Arshad Says:

    If it was in details it could have been more better.thnx

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