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Outward FDI from China: Trends and Implications

Outward FDI from China: Trends and Implications. The Global Institute RIC Conference Emerging Super Trio: Global Economic Implications New Delhi, 20-21 November 2008. Professor Changqi Wu Guanghua School of Management Peking University Beijing, China. 1 Globalization and China.

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Outward FDI from China: Trends and Implications

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  1. Outward FDI from China: Trends and Implications The Global Institute RIC Conference Emerging Super Trio: Global Economic Implications New Delhi, 20-21 November 2008 Professor Changqi Wu Guanghua School of Management Peking University Beijing, China topdog@pku.edu.cn

  2. 1 Globalization and China • China benefits enormously in the process of globalization in the last 30 years of economic reform. • China realizes its comparative advantage through international trade and direct investment. • China’s domestic market becomes less fragmented. • Foreign invested enterprises strengthen the competitiveness of China’s industries and more than half of the total export of China is so called process trade. • Intensive competition and spillovers from foreign invested enterprises create a group of Chinese companies that are competitive in international markets. topdog@pku.edu.cn

  3. Inward FDI in China 2. FDI in China The graph is an illustration of China´s FDI trend for the past 30 years. FDI rates soared in the year 1993, showing a positive trend ever since. topdog@pku.edu.cn 3

  4. Inward FDI in China The first graph reveals that although there has been a huge increase in FDI in recent years, these are normally measured in contracted form. Overall, there has been a positive trend in the number of projects, peaking in 1993. 2. FDI in China topdog@pku.edu.cn 4

  5. Inward FDI in China By analysing FDI as a percentage of China´s GDP, there has been small increase, suddenly peaking in 1993. However, from then on the trend has been constantly decreasing. This is rather interesting to note as a lot of sources pointed out to the increases in FDI in China in recent years. However, this portrays that the dependence of China´s economy on FDI has been exagerrated by the media. 2. FDI in China topdog@pku.edu.cn 5

  6. Outward FDI from China topdog@pku.edu.cn

  7. Investment by CIC • China Investment Company is the 4th largest sovereign wealth funds with investment capital of $200 billion dollars. • It invested $3 billion in Blackstone Group at its IPO price of $29.61 in July, 2007. • The Chairman of the Board of CIC claims recently that its investment in Blackstone is a good one. topdog@pku.edu.cn

  8. Motives for Chinese Firms Going Global? • Market seekers • Resources seekers • Intellectual property seekers • Efficiency seekers • Reducing transaction costs • Institutional void fillers topdog@pku.edu.cn

  9. Source: MOFCOM, 2008 topdog@pku.edu.cn

  10. 3. A Tale of Two Companies • TCL in Europe • SMTCL and Schiess topdog@pku.edu.cn

  11. TCL in Europe • TCL is one of the largest TV producers in China. • In October 2002, it bought then bankrupted TV operations of Schneider in Germany and resumed its 120 employees. • November 2003, TCL bought the TV operation of Thomson and formed joint venture in which it held 70%. • Both acquisitions are unsuccessful and do not meet the strategic objectives. TCL lost a lot of money in both acquisations. topdog@pku.edu.cn

  12. Why TCL Failed Twice? • Insufficient understanding of operational environments • Rapid technological change • Old brand name • Cultural conflicts • Most importantly, going global to buying back topdog@pku.edu.cn

  13. SMTCL • SMTCL (Shenyang Machine Tool Company Limited) is the largest (in units) machine tool manufacturing company in China. • Schiess is a company founded in1857 and enjoys a good reputation in machine tools industry. • After several restructurings since 1990, it declared bankruptcy on 1 August 2004. • SMTCL bought Schiess on 1 November 2004. topdog@pku.edu.cn

  14. Horimaster 5 G.M.W. Burg X- 13000 Y- 6000 Z 3000 C- 360° W- 2000 B- 360° A- ±95° 90kW 9000Nm topdog@pku.edu.cn

  15. Horimaster 5 mit Dreheinheit for（Alstom Belfort) topdog@pku.edu.cn

  16. Vertimaster VMG 1.30 PCA Halberstadt topdog@pku.edu.cn

  17. Old and New topdog@pku.edu.cn

  18. Overall Performance in 2007 SMTCL Design (0,9 m.€) SMTCL Products (2,5 m.€) Services (7 m.€) Job Shop (2 Mill.€] Machine Tools (53,6 m.€) Machine Tools only (53,9 m.€) Total Volume (66 m.€) topdog@pku.edu.cn

  19. A Win-Win Situation SMTCL SCHIESS SM mochine tools Mediam sized machine tools Large machine tools • Technological Cooperation • Design • Purchasing • Manufacturing • Assembling topdog@pku.edu.cn

  20. Why Germany and Why Machine Tools • SMTCL-Schiess is one of series purchases made by Chinese machine tool companies in Europe. • China is in its mid-stage of industrialization process • These purchases are usually small and focuses on particular technology where there is a huge market in China. topdog@pku.edu.cn

  21. 4. New Generation of Chinese Companies • There are a group of new generation of Chinese enterprises that are emerging at the global stages. • Companies that can take advantages of comparative advantages of the country and develop into firm specific capabilities topdog@pku.edu.cn

  22. The Case of BYD Build Your Dream or Bring Your Dollars? A private firm incorporated in 1995. It turns out to be the largest producer of rechargeable batteries for mobile phones. It ventures into the auto manufacturing industry and become one of the leaders in the DM passage car business. topdog@pku.edu.cn

  23. Economics of BYD capital C1* Europe A K1 C2 China B Q1 K2 C2 *CChina labor L1 L2 topdog@pku.edu.cn

  24. Build Your Dream • BYD enters into dual mode car market with strong battery technology. • It is one of the real electrical car that will enter into market in a matter of months. topdog@pku.edu.cn

  25. Concluding Remarks • Outward FDI from China is rising rapidly in particularly with respect to its inward FDI, but is still insignificant in the global FDI. • Chinese companies in general do not have sufficient skills to management cross-border operations and are still at the learning stage of how to manage their rapid expanding operations in an increasingly globalized world. • A group of Chinese firms are becoming world leaders in certain industries when they manage to transform China’s comparative advantage into their competitive strengths. topdog@pku.edu.cn

  26. Policy Implications • Chinese government should consider how to facilitate the companies with competitive edges to enter into global market. • The state-owned companies may have different incentives, so the government should be very careful in approving such kind of outward investment. topdog@pku.edu.cn

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