China’s Changing Outbound Foreign Direct Investment Profile: Drivers and Policy Implications

by Daniel H. Rosen, Peterson Institute for International Economics
and Thilo Hanemann, Rhodium Group

June 24, 2009

After decades of negligible outbound foreign direct investment (FDI), Chinese firms' outbound investment has reached significant levels in recent years, challenging international investment norms and affecting international relations. But China's outflows are poorly understood. Seen in context, China is a laggard in global investment, and the country faces numerous internal impediments to overcoming this disadvantaged position.

Daniel H. Rosen and Thilo Hanemann review the data behind China's growing outbound investment, consider the commercial and political forces driving this growth, and analyze both foreign and domestic obstacles for Chinese overseas investors. While extensive media coverage has provoked worries that Chinese firms are buying up the world, China remains a relatively minor global investor compared with OECD countries. China's net FDI position remains negative, with $5 of FDI assets under foreign ownership in China for every $1 of Chinese direct investment assets abroad. But China's efforts to rebalance its economic growth and make the shift toward higher value-added economic activity will increasingly force Chinese firms to invest abroad. Government policy has evolved in recent years to encourage and support China's firms to look abroad. Investment regimes in host countries are one obstacle to Chinese outbound FDI, but China's firms are even more impeded by home-made problems, including the parochial executive leadership and a dearth of key management skills needed to operate successfully overseas.

Rosen and Hanemann argue that the growing volume and changing nature of China's outbound investment have important implications for policymakers in host countries. Host country governments must clarify their policies and draw a clearer line between legitimate national security reviews and protectionist economic competitiveness impulses disguised as security concerns. The lack of data transparency contributes to the poor understanding of China's outbound investment, and these inadequacies must be corrected if China and investment incumbents are to work together optimally. In addition, given its disadvantaged FDI starting position China should be expected to pull considerable weight to preserve and promote an open international investment environment, including by maintaining openness at home. If China converges upward to OECD outbound investment levels rather than incumbent leaders trimming down to historic Chinese levels due to protectionism, then future flows coming from China can contribute positively to a range of international issues, from financial crisis recovery to mitigating climate change.

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