Chapter 13

The above photograph shows the modern model of Zheng He’s ship compared to one of Columbus's ships.

13. Inward and Outward Direct Investments

13.1 Some basic concepts

13.2 Inflow of foreign direct investment

13.3 Outward direct investment

Keywords:

• foreign direct investment (FDI),

• outward direct investment (ODI),

• foreign invested enterprise (FIE),

• “going out” strategy,

• equity joint venture (EJV),

• cooperative joint venture (CJV),

• wholly foreign-owned enterprise (WFOE),

• merger and acquisition (M&A)

13.1 Some basic concepts

13.1.1 Equity joint venture

13.1.2 Cooperative joint venture

13.1.3 Wholly foreign owned enterprise

Category Total investment (TI)Minimum registered capital

1 Up to $3 million At least 70% of the TI

2From $3 million to $4.2 million

At least $2.1 million

3 $4.2 million to $10 million At least 50% of the TI

4 $10 million to $12.5 million At least $5 million

5 $12.5 million to $30 million At least 40% of the TI

6 $30 million to $36 million At least $12 million

7 More than $36 millionAt least 33.33% of the TI

Note: The foreign investment in the total project must be at least 25%. No minimum investment is set for the Chinese partner.

Table 13.1 Categories of total foreign investment and investment-capital ratios

13.2 Inflow of foreign direct investment

13.2.1 Sectoral distribution

13.2.2 Regional distribution

13.2.3 Contributions to the Chinese economy

Year Projects Utilized FDIYear Number Growth (%) (US$ billion) Growth (%)2001 26,140 17.0 46.9 15.12002 34,171 30.7 52.7 12.52003 41,081 20.2 53.5 1.42004 43,664 6.3 60.6 13.32005 44,001 0.8 60.3 -0.52006 41,485 -5.7 69.5 4.52007 37,871 -8.7 74.8 18.62008 27,514 -27.3 92.4 23.62009 23,435 -14.8 90.0 -2.62010 27,406 16.9 105.7 17.4Source: NBS (2011).

Table 13.1 Categories of total foreign investment and investment-capital ratios

Source: UNCTAD (2011).Notes: (1) Figures are measured in US Dollars at current prices and current exchange rates in millions. (2) The UNCTAD figures include only non-financial FDI.

Figure 13.1 Annual inward foreign direct investment flows to China, 1980-2010

Equity joint ventures 36%

Cooperative joint ventures

16%

Wholly foreign-owned

enterprises 47%

Others 1%

2000

Figure 13.2 The structural changes of the FDI in China (2000 and 2010)

Equity joint ventures

21%Cooperative

joint ventures1%

Wholly foreign-owned

enterprises77%

Foreign-invested shareholding

ventures1%

2010

Figure 13.2 (cont’d)

The FDI’s Contributions to the Chinese economy:

• Increase trade growth and participation in the international segmentation of production

• Build dynamic specialization • Increase export competitiveness • Become important source of capital • Create jobs, upgrade skills and raise wages of

employees • Raise factor productivity and increased

technology transfer • Upgrade China‘s industrial structure • Increase domestic competition • Increase industrial performance

13.3 Outward direct investment

13.3.1 Historical evolution

13.3.2 China’s “Going Out” strategy

13.3.3 Characteristics and directions

Historical evolution

• Stage I (1979-85)• Stage II (1986-91)• Stage III (1992-98)• Stage IV (1999-present)

China’s “Going Out” strategy:

• Avoid intensified competition in the domestic market

• Easy access to overseas sources of raw materials and energy

• Acquisition of technology, brands and know-how

• Avoid or overcome international barriers to trade

Source: UNCTAD (2011). Notes: (1) Figures are measured in US Dollars at current prices and current exchange rates in millions. (2) The UNCTAD figures include only non-financial FDI.

Figure 13.3 China’s outward foreign direct investment flows, 1980-2010

Source: MOFCOM (2010). Figure 13.4 Chinese outward direct investment (ODI) by region, stock

Source: MOFCOM (2010).Figure 13.5 China’s outward direct investment (ODI) in 2009 (stock) by sector

Destination Amount (million US$) Share (%)Hong Kong 164,498.94 66.94British Virgin Islands 15,060.69 6.13Cayman Islands 13,577.07 5.52Australia 5,863.10 2.39Singapore 4,857.32 1.98United States 3,338.42 1.36South Africa 2,306.86 0.94Luxembourg 2,484.38 1.01Russia 2,220.37 0.90Macau 1,837.23 0.75Canada 1,670.34 0.68Kazakhstan 1,516.21 0.62Pakistan 1,458.09 0.59Mongolia 1,241.66 0.51South Korea 1,217.80 0.50Germany 1,082.24 0.44UK 1,028.28 0.42Nigeria 1,025.96 0.42Myanmar 929.88 0.38Zambia 843.97 0.34Others 17,696.57 7.20World Total 245,755.38 100.00

Source: MOFCOM (2010).

Table 13.3 Top destinations for China’s ODI in 2009 (stock)

Country

Reservesbn bb (oil )/ tcm (gas)

Project name Project typeDate signed

Company Investment

Saudi Arabia

264 / 7.2 Section B (gas)Exploration & production

2004 Sinopec<US$5.2 bn

Iran 138 / 27.8

Block 3 (oil)Exploration & production

2005 CNPC

Masjed-I-Suleiman (oil) Acquisition 2004 CNPC US$150m

South Pars (gas) Development 2009 CNPC US$5 bn

Yadavaran (oil)Exploration & production

2007 Sinopec US$2 bn

Zarareh-KashanExploration & production

2001 Sinopec US$160 m

North Pars (gas)Exploration & production

2006 CNPC US$16 bn

Arak (oil) Refinery upgrade 2006 Sinopec

Iraq 115 / 3.2

Al-Ahdab (oil) Development 1997/2008 CNPCSouth Rumalia (oil) Development 2009 CNPC US$190m

Addax assets (oil)Exploration & production, refinery

2009 Sinopec

Kuwait 101 / 1.8 Development 2009 Sinopec US$350 m

Table 13.4 Summary of selected exploration, production and refining investment by Chinese NOCs in the Middle East, 2001-2010

Notes: CNPC= China National Petroleum Corporation; NOC= national oil companies; Sinopec= China Petrochemical Corporation Group.Sources: Andrew-Speed (2009, p. 19) and Scissors (2011).

UAE 98 / 6.1 Uraq&Zora (gas) Acquisition 2003 Sinochem

Oman 5.6 / 0.7

Blocks 36&38Exploration & production

2004 Sinopec

Blocks 17&40 Acquisition 2003 Sinochem

Blocks 5 (oil)Exploration & production

CNPC

Yemen 2.8 / 0.5Block S2 2001 CNPCBlock 69&71 2005 Sinopec

Syria 2.5 / 0.3

Qubibe (oil) Development 2004 CNPC

Al Furat Prod Co (oil) Acquisition 2005 CNPC US$570m

Al Zour (oil) Refinery 2008 CNPC US$2bn

Block 10 (oil) Acquisition 2008 Sinochem

Acquisition 2010 CNPC US$1,500m

CountryReserves

oil (bn bb)/gas (tcm)

Project name Project typeDate signed

Company Investment

Table 13.4 (cont’d)

Chapter conclusion:

Foreign investment has played an increasing role in the Chinese economy. What is more important, the foreign enterprises have promoted the importation of advanced technology, equipment, and management and, above all, competition mechanisms from the advanced economies. Although China’s outward direct investment (ODI) is still smaller than its massive inward FDI, China’s overseas companies have been gaining momentum in moving international capital, investing across a broad spectrum of sectors ranging from natural resources to manufacturing to telecommunications and many others. As China’s economy continues to grow, China faces shortages in many raw materials (particularly oil, iron ore, aluminum, and uranium), and it must therefore build trade linkages with resource-rich countries (such as Australia, Russia, Brazil and the Middle East countries) to secure supplies.

Suggested readingAlden, Chris and Christopher R. Hughes (2009). “Harmony and Discord

in China's Africa Strategy: Some Implications for Foreign Policy,” The China Quarterly, Volume 199, pp. 563 - 584.

Awokuse, Titus O., Hong Yin (2010). “Intellectual property rights protection and the surge in FDI in China,” Journal of Comparative Economics, Volume 38, Issue 2, pp. 217-224.

Bräutigam, Deborah A. and Tang Xiaoyang (2009). “China's Engagement in African Agriculture: ‘Down to the Countryside’,” The China Quarterly, Volume 199, pp. 686 - 706.

Chen, Shaofeng (2011). “Has China's Foreign Energy Quest Enhanced Its Energy Security?” The China Quarterly, Volume 207, pp. 600 - 625.

Haglund, Dan (2009). “In It for the Long Term? Governance and Learning among Chinese Investors in Zambia's Copper Sector,” The China Quarterly, Volume 199, pp. 627 – 646.

Hong, Eunsuk and Laixiang Sun (2006). “Dynamics of Internationalization and Outward Investment: Chinese Corporations' Strategies,” The China Quarterly, Volume 187, pp. 610 - 634.

Suggested readingHuang, Y. (2001). “Why More is Actually Less: New Interpretations of

China's Labor-Intensive FDI”, William Davidson Institute (WDI) Working Papers No. 375.

Jiang, Wenran (2009). “Fuelling the Dragon: China's Rise and Its Energy and Resources Extraction in Africa,” The China Quarterly, Volume 199, pp. 585 - 609.

Kim, Joon-Kyung, Yangseon Kim and Chung H. Lee (2006). “Trade, Investment and Economic Interdependence between South Korea and China,” Asian Economic Journal, Volume 20, Issue 4, pp. 379–392.

Qin, Julia Ya (2007). “Trade, Investment and Beyond: The Impact of WTO Accession on China's Legal System,” The China Quarterly, Volume 191, pp. 720 - 741.

Sun, Sizhong (2010). “Heterogeneity of FDI Export Spillovers and Its Policy Implications: The Experience of China,” Asian Economic Journal, Volume 24, Issue 4, pp. 289–303.

Williamson, Peter J., and Anand P. Raman (2011). “How China Reset Its Global Acquisition Agenda,” Harvard Business Review, Apr 1.

Xing, Y. (2006). “Why is China so attractive for FDI? The role of exchange rates,” China Economic Review, Volume 17, Issue 2, pp. 198-209.