|
|
|
|
|
ITM Master 1. Sem. |
|
China's Outbound FDI - Why? |
|
- Natural Resources Outbound investment in natural resources will remain a very important component of China’s OFDI in the future, although it is likely to fall in relative terms. Chinese resource firms have a huge interest in extraction investments abroad due to limited domestic deposits of most resources except for coal. Capital constraints and consolidation in the mining industry globally provide Chinese firms with an opportunity to take major stakes in established firms with good reputations and extensive experience in countries such as Australia and Canada, instead of in high-risk projects in unstable countries. New resource priorities are also emerging, for instance, in low-carbon energy, including natural gas, and in overseas farmland to offset the limited arable land in China. - Heavy Industry Heavy industrial capacity has expanded massively in China, bringing an abundance of industrial goods but many problems as well. Heavy industrial manufacturing requires extensive financing but creates few jobs, causes environmental damage, and aggravates energy-security concerns. Rebalancing growth entails shifting capital from these sectors to more labor-intensive light manufacturing and services, where China’s comparative advantage lies. China will need to rely on imports for a larger share of its heavy industrial needs than in recent years. In addition to the traditional logic of trade specialization, this greater reliance on imports will be prompted by China’s need to minimize its energy footprint and to cut its carbon emissions from production. China’s heavy industrial production in the current decade has entailed the energy-intensive, long-distance transportation of both raw materials (such as iron ore) and energy resources to China for initial processing. The combination of rising transportation energy costs and future carbon emissions reduction policies will incentivize restructuring the production chain so that initial processing occurs nearer to resource extraction, thus reducing carbon emissions. “Made in China” will be replaced by “made by China—abroad,” as Chinese firms have already begun to build smelters, refineries, and other heavy industrial facilities abroad, a process Beijing has encouraged. Domestic Chinese investment in energy-intensive heavy industrial activities grew by an average of 30 percent per year over the past five years. This growth is likely to continue, but a significant share of future investment will take place abroad.
- Manufacturing Outbound investment by China’s mid-market manufacturers is poised to take off. The gains from increasing the scale of production have played out, external consumer demand growth is flat, and lower-wage countries are increasingly taking market share at the low end. To survive the current crisis, China’s manufacturers must capture a larger share of the value chain. For a typical product manufactured in China, less than 20 percent of the final profit margin is captured by the Chinese manufacturer; the rest is enjoyed downstream in distribution, marketing, retail, and customer relations or upstream in product design, quality control, sourcing, branding, and research and development. These margins are obviously higher in foreign markets where consumers have a per capita income of $40,000 per year than in China with $3,000 per capita. In addition, China’s manufacturers will pursue greater profit by improving the sophistication of their operations, which similarly points abroad. The hard-to replicate elements of economic value-added activity are intellectual property, intangible brand value, and human resources with global operating talent. All three factors are abundant in the OECD countries but relatively scarce in China. Both of these imperatives—upgrading the sophistication of Chinese manufacturing and competing for the most lucrative portions of the value chain—create powerful incentives for China’s firms to go abroad. New outbound investment will target distribution networks, retail, management, high-tech and other professional human resources, and foreign brands (such as the recently announced purchase of Hummer by Tengzhong). This implies that the geographical distribution of China’s OFDI will shift toward the OECD countries. A few pioneers have already begun this process, including Lenovo, Haier, Sany, and Huawei; many others are sure to follow.
- Services China’s services sector OFDI is expanding beyond trade-facilitation, a trend that will only be reinforced as rebalancing puts greater economic emphasis on this sector. In services that are already well developed in China, firms will take their comparative advantages abroad. The construction sector is a good example: Chinese firms have become serious players in the global market for large infrastructure projects, winning prestigious bids such as the new Medina-Mecca railway line in Saudi Arabia. Overseas revenue in this sector grew from $11 billion in 2002 to $57 billion in 2008. In most of the higher valueadded services, domestic Chinese development is just beginning to take off—in healthcare, finance, information technology, and insurance—and China’s firms will not go abroad for market share so much as to build their upstream capabilities through improved human resources, enhanced process and product knowledge, and cobranding.
|
|
|
|
Contact:
Prof. Dr. Wolfgang Georg Arlt FRGS |
|
