China's Outward FDI Strategies

This assignment delves into the intricacies of China's outward foreign direct investment (OFDI) strategies. It examines various aspects, including China's motivations for engaging in OFDI, its preferred destinations, sectors of focus, and the diverse approaches employed by both central and local state-owned enterprises. The impact of OFDI on China's domestic innovation performance, economic growth, and global integration is also scrutinized. The analysis draws upon a range of academic sources to provide a comprehensive understanding of this dynamic phenomenon.

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Chinese business
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Introduction:
During the last two decades Chinese economy has faced remarkable growth and rapid
transformation in their economy. With the help of the Open Door policy by the Chinese central
government during the 1978, the Chinese economy has started to integrate itself with the global
economy (Huang et al. 2016). China started to participate in the international trade in greater
magnitude and within three decades it becomes the second largest country in economic terms in
the world. With the accession of Chinese economy in the world trade organisation (WTO) the
growth rate accelerated to a great extent (Hopewell 2015). With higher Ease of Doing Business
index, china gained huge amount of Foreign Direct Investment (FDI) from the western
economies that has aided the economy to become where it is now (Ahmad, Musheer and Singh
2017). However, during the last one decade, a special phenomenon has arisen in the case of
Chinese economy, where the outward Foreign Direct Investment (OFDI) of the country has
suppressed the Inward FDI of the Chinese economy. This has highlighted that china is moving
towards from a loan taker to loan giver through transforming itself into an investor (Chang et al.
2016). Despite the fact that OFDI of the Chinese economy has been rising subsequently over the
year, various Chinese organisations has fall short of their objectives. Thus, it is important to
discuss about the OFDI of the Chinese economy and trace out the factors that are affecting it.
This essay will provide a framework that will discuss the OFDI activities of the Chinese
economy and it will highlight various motivating factors of the same. Besides this, the essay will
highlight the Chinese OFDI growth path and try to forecast the future of Chinese economy which
is aiming to become a global investor.
Chinese OFDI growth path:

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Traditional perspective of the FDI from the developed nation argues that it is sourced by
the developed nations in order to exploit the cheap raw materials and labour in the developing
nations. However, when it comes to OFDI, then it differs fundamentally. Owing to the fact that
most of the outward FDI of the developing nations are disbursed to the developed countries with
a substantial portion to the developing economy it aids to identify strategic assets (Xiongfeng et
al 2016). Besides this, OFDI from the developing nations like china it aids to find out managerial
and technological skill instead offering them superior technology grown in the home nation.
When it comes to Chinese economy, then it has been observed that the country has fostered itself
as one of the fastest growing economy with an annual growth rate of 6.7% (Blanchard, Oliver
and Francesco 2016). According to the (Naughton and Barry 1996) with ever increasing amount
of international trade, the country has become one of the nations that has highest amount of
foreign exchange in its reserves. Besides this, statistically there has been substantial growth in
the GDP of the country during the last two decades, which has aided the nation to become where
it is now.
Moving forward, it can be seen that these key factors has aided the country to have higher
amount of the OFDI. From figure 1, it can be seen that Chinese economy has increased its OFDI
largely over the period 2000 to 2013. As one of the emerging nations, the country has increased
its OFDI from 2000 to 2013 by 44% ("MOFCOM Department of Outward Investment And
Economic Cooperation Comments On China’s Outward Investment Cooperation In January-
October 2017 -" 2018). According to the same source, Chinese OFDI has increased by 14.1%
from the previous year to the 102.9 USD; whereas the inward FDI increased to 119.6 billion
USD by 1.7%.

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Till 2013, most of the Chinese OFDI was aimed towards the Asian economies, however,
over the time china has reduced its investment to 50% in this region ("The Story Behind The
Shine | Michaelhill.Com" 2018). With higher amount of capital and monetary stock, the
economy has become potent enough to penetrate the European economies. Presently, European
countries have become the second largest recipient of the Chinese investment and it has given
the china an upper hand to diversify its investment further leading towards greater sustainability.
Figure 1: OFDI of emerging economies
Source: ("China’s Overseas Investments, Explained in 10 Graphics | World Resources Institute"
2018)
Figure 2 suggests that OFDI from Chinese economy is highly concentrated towards the
Asian economy. Almost 68% of its OFDI is directed towards the Asian economy and second
largest share of the outward FDI of Chinese economy is enjoyed by the Latin America
("MOFCOM Department Of Outward Investment And Economic Cooperation Comments On
China’S Outward Investment Cooperation In January-October 2017 -" 2018). Natural resource
seeking tendency of the Chinese economy has provided the economy a stimuli to have higher
level of OFDI, though the per capita resource availability is much lower. Thus to ensure constant

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flow of natural resource, Chinese economy has raised the outward FDI to the Asian nations that
are enriched with the resources (You, Kefei and Offiong 2015).
Figure 2: continental distribution of china’s OFDI
Source: ("China’s Overseas Investments, Explained in 10 Graphics | World Resources Institute"
2018)
Strong state control over the market and economy has helped the country to have higher
level of OFDI (Ash and Kueh 1996). Chinese multinational enterprises have boosted the OFDI
over the year to reach 184.3 billion USD. Presently the china invested in 5,410 enterprises in the
160 countries around the world and the overseas personnel dispatched count reached to 974,000
("China Becomes World's Second-Largest Source of Outward FDI: Report - Xinhua |
English.News.Cn" 2018). Considering this, it can be said that growth path of the Chinese OFDI
is highly agile and with constant governmental intervention makes it sustainable.

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Motivation for rise in Chinese OFDI:
Various factors have helped the Chinese economy to have higher level of OFDI, which
are as follow:
Government support and export promotion programs to raise the level of OFDI
Constant research and development has helped the economy to come up with superior
technologies compared to its rivals
Entrepreneurial desire and slow start doctrine in core competencies has helped the
economy to penetrate the international market properly with flow of outward investment
(Pradhan 2017)
Strategic asset and natural asset seeking interest of the Chinese economy is one of the
main reasons that acted as the stimuli to the Chinese OFDI
Strategies for increasing Chinese OFDI:
During 2004, china was the leading country that has highest amount of FDI, however,
over the next one decade it has transformed itself as the second largest FDI investor. There are
various strategies that helped the country to avail this position, which are as follows (Wang et al.
2018):
IJV route: International joint venture is one of the best ways to make strong foot print in
the foreign market. Chins utilized this strategy and makes strong partnership with the foreign
nations ranging from Asian countries to western countries (Wang et al. 2018).
Wholly owned subsidiaries: Using this strategy, Chinese enterprises during initial stage
gain international recognition with their products and services and then direct their investments
to the foreign market (Piperopoulos et al. 2018).

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Cross-border acquisition and mergers: Utilizing this simple framework of growing the
footprint in the international market, Chinese economy becomes the second largest investor.
With the huge amount of capital, china at initial stage purchases the foreign brands and using
their goodwill and rand name directs their investment in the foreign market (Li et al. 2018).
With these various strategies, Chinese economy enhanced their OFDI and now it has
become the second largest investor in the world.
Challenges for Chinese OFDI:
With 206.69 billion USD OFDI, china has become the second largest investor in the
world, however, there are certain amount of risks too ("China’s Overseas Investments, Explained
in 10 Graphics | World Resources Institute" 2018). Due to the difference in the managerial and
cultural practice in the different markets, it has become hard for the Chinese investment to find
their ideal target. Moreover, lack of personnel who have international management skills has
made the Chinese investment to influence the western economies (Appelbaum and Henderson
1992). According to the figure 3, it can be seen that most of the investment of china was
concentrated in the Asian economy during the 2004. Lack of diversity in the Chinese OFDI has
made it critical for the economy to provide stimuli. Thus, over the next one decade it has taken
various transformational steps in order to diversify the investment and by the year 2014, it has
effectively reduced investment in the Asian country and a rise in investment in the western
economy ("China Becomes World's Second-Largest Source Of Outward FDI: Report - Xinhua |
English.News.Cn" 2018).

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Figure 3: Geographical distribution of China’s OFDI during 2004 and 2013
Source: ("China’s Overseas Investments, Explained in 10 Graphics | World Resources Institute"
2018)
Chinese OFDI is maturing itself over the time and it is now the second largest investor.
However, it needs to understand the post entry process in order to integrate itself with the various
economies (Buckley et al. 2018).
Future forecast of Chinese OFDI:
China has ever increasing amount of the OFDI and according to the trend, the country’s
outward FDI is rising at 17.9% annual rate. Considering the different industry, it has been
observed that the OFDI of the country is rising in the case of commercial service industry by
32.4%, manufacturing industry by 17.0%, retail and wholesale industry by 12.3% and
information transmission by 9.9% annually ("MOFCOM Department Of Outward Investment
And Economic Cooperation Comments On China’s Outward Investment Cooperation In
January-October 2017 -" 2018). Besides this, the country has signed deals of investment

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summing approximately 155.47 billion USD and the additional 12.37 billion USD as the
contractual project investment in 4,951 enterprises ("China’s Overseas Investments, Explained In
10 Graphics | World Resources Institute" 2018). According to the same source, China-Pakistan
economic corridor project signed by both the developing nations is an ambitious project of 13.3
billion USD that has boosted the total OFDI of the Chinese economy to 206.69 billion USD for
the year 2018.
Figure 4: present and future forecast of Chinese OFDI
Source: ("China to Become One of World’s Biggest Overseas Investors By 2020" 2018)
According to the figure 5, it can be seen that the future forecast shows that by the end of
the year the economy has disbursed 5 trillion USD as OFDI since 2004 to 2012. And the
projection highlights that it will rise to 18 trillion by the year 2020 if the trend remains same,
making it the largest investor in the world ("China To Become One Of World’s Biggest Overseas
Investors By 2020" 2018). Presently, it is acknowledged as the second largest investor in the
world and with its ambitious projects it can certainly become the largest investor in the world (Li
et al. 2016). However, there are various recommendations that the country to need to follow in
order to keep the flow continued, which is discussed below.
Recommendations for the Chinese economy to become a world investor:

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Chinese OFDI is growing at a large scale over the year and recently with ambitious
project with various economies, multinational enterprises, the economy is expected to high
demand of their investment too. However, there are various factors that need to be checked to
maintain the trend. Recommendations for keeping the Chinese OFDI are as follows:
China needs to diversify its OFDI in order to make it elastic
The country need to invest more on the high yielding assets in order to enhance the scope
of higher return
Though there is rise in FDI outflow, the Chinese economy need to invest more in the
neighbouring nation, which will not only reduce the scope of retaliation of Chinese
activities in the area, besides this it will provide diversity in the Chinese OFDI portfolio
Chinese economy mainly invest in the commercial projects, however it need to invest
more in the infrastructural development projects
Conclusion:
This essay has analyzed the OFDI performance of the Chinese economy and it tried to
find out the factors that are affecting the outward flow of the FDI for the Chinese economy.
Besides this, it has tried to forecast the future of Chinese OFDI and found that there is high
potential in front of the Chinese economy to become a world investor. Above analysis has found
that there is sharp rise in the OFDI of the Chinese economy and if the trend continues, then the
Chinese economy will be the largest investor in the world by 2020. The analysis has found that
most of the OFDI of the Chinese economy is disbursed to the Asian countries that possess risk in
the case of demand side shock. Besides this, Chinese economy needs to diversify its OFDI and
invest more in the high yielding assets. The report has also found that conventional motivations
like government support, global competition, idiosyncratic motivations helps the country to have

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higher level of OFDI. In addition to this, Chinese multinational enterprise’s strategic asset
seeking encouragement has helped the nation to become one of the largest investor in the world.
To conclude, it can be said that, given proposition in the question is true and if the trend
continues then, the country can certainly reflect itself in the role of global investor.

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