The Pattern and Magnitude of China’s Outward FDI in Asia Shaoming Cheng Roger Stough ICRIER Project on Intra-Asian FDI Flows New Delhi, India April 25-26, 2007

Outline Why China’s outward FDI? Theories on outward FDI from developing countries History and development of China’s outward FDI Data sources and qualifications Characteristics and geographic distribution Pulling and pushing factors Conclusions

Research Background China is known as: –Tremendous amount of FDI inflows –Top FDI destination in the world –Global manufacturing hub But, China has not been recognized as an important FDI exporting country –By 2004, $15B cumulative outward FDI in 150 countries –In 2005 alone, $11B outward FDI

Theories Lecraw (1977): labor-intensive tech Wells (1983): different sources for OLI advantages Lall (1983) and Tolentino (1993): cultural similarity Dunning (1981, 1986): investment development path Asset-seeking FDI: Cantwell, 1989; Dunning, 1998; Porter, 1990, 1998; Wesson, 1993

History and Development Political opposition and emergence of China’s outward FDI –Ideological bias –Small scale of FDI Political acceptance and early boom –Part of “economic reform” Political enthusiasm and rapid expansion –“going abroad” strategy

Data Sources State Administration of Foreign Exchange (SAFE) –“Balance of payments” financial data –Aggregated Ministry of Commence (MOFCOM) –Approved overseas investment –Disaggregated by country and industry Focus on MOFCOM data

Data Qualifications Approval is required or not Approval vs. execution (when, how much…) Initial approval vs. reinvested earnings Non-trade FDI only Imposed FDI patterns through the approval process Unauthorized and illegal capital outflows HK and Macau as “foreign” destinations

Characteristics Rapid growth, particularly after the “going abroad” strategy in 2001 Lack of correlation between China’s FDI outflows and GDP growth Lack of correlation between China’s FDI outflows and FDI inflows

FDI and GDP

FDI Outflows and Inflows

Geographic Distribution

Geographic Distribution (Cont.)

Geographic Distribution in Asia

Average Project Scale

Average Project Scale in Asia

Pulling Factors Resource-acquiring FDI –Natural resources and energy –ASEAN countries Market-expanding and efficiency-improving FDI –Intertwined and complemented –Avoid trade barriers –ASEAN countries Asset-seeking FDI –Local innovation capabilities –Korea

Pushing Factors Increasing domestic competition, excess production capacity and sliding profit margins Abundant foreign exchange reserves Huge and still rising demands for natural resources Chinese governments’ determination and associated “going abroad” policy and financial support

Conclusions Tremendous growth Concentration in Asia Increasing role of Korea and Southeast Asian countries Strong pulling and pushing factors Continued outward FDI growth China emerges as a large FDI sourcing country