By Jacob Wolinsky. Originally published at ValueWalk.
Over the last 10 years, China has become a major player in foreign direct investment (FDI). According to China’s Ministry of Commerce, by the end of 2019 over 27,500 Chinese companies had invested in 188 countries around the world, and 44,000 companies had been started abroad. Asia, Europe and Latin America are the main destinations for these investments. The coronavirus pandemic has severely curtailed global trade and reduced FDI flows. Amidst this unprecedented global health crisis, what does the future hold for Chinese companies in the international economy? Ni Gao (full bio) below explains the importance of FDI for China.
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The Main Motivations Behind FDI
The primary motivation for Chinese companies to invest in FDI is the pursuit of new resources and new markets.
The quest for resources, markets and efficiency are the main motivations behind FDI. Western companies generally have monopolistic or other specific advantages that enable them to maintain their competitiveness on the international market.
Companies in emerging countries such as China do not necessarily have these types of advantages when they want to grow internationally. They use international growth as a means of accessing resources that would otherwise be inaccessible. With building competencies as their long-term objective, mergers and acquisitions (M&A) is the preferred means of entry for Chinese companies, since it enables them to:
- rapidly access the local market,
- expand their international market share,
- leverage a multitude of existing resources in the target company, such as their sales networks, patents, technologies or trademarks.
The pursuit of markets is another significant driver for Chinese companies. To better develop markets and meet consumer needs, Chinese companies have adopted a localised strategy, favouring local managers in countries with a different culture. In 2019, 60.5% of employees working for Chinese companies abroad were non-Chinese. This adaptation strategy is part of their success story.
Difficulties And Challenges Related To The Global Health Crisis
The model of the Chinese economy and its manufacturing industry are heavily export-based. The pandemic has disrupted global production chains and curtailed trade in goods and the movement of people. Affected by the slow global economic recovery, FDI is highly volatile and uncertainty has only intensified. This makes it all the more difficult for Chinese companies to operate in an unstable situation that has had negative impacts on the economies of host countries. Current conditions and the global economic environment are not conducive to the internationalisation of Chinese start-ups.
In the United States, Chinese FDI plummeted due to trade tensions. The pandemic has also affected investment flows between the world’s two largest economies. Government policies have had a strong impact on Chinese FDI. Most Chinese companies have reconsidered their investment plans, especially in the United States.
Several weeks ago, the US president announced a US ban on the application TikTok in the name of national security. To confront this change and continue to operate in the market, TikTok was forced to partner with two American companies (Oracle and Walmart). The matter is still pending, and the Committee on Foreign Investment can block the transaction at any time for reasons of national security.
Political hurdles have become a recurring and very common theme on their path to internationalisation in some host countries.
The Future For Chinese Companies: How To Confront Instability And Win Over New Markets?
Although COVID-19 has significantly impacted the entire global economy, it will not be the death knell of globalisation, for three reasons:
- Trade between countries and peoples, even if currently slowed down, will continue in one way or another,
- Increased digital connectivity facilitates the flow of ideas between companies,
- FDI will enjoy a new image.
For Chinese companies, building their technological competencies and international experience are key factors in tackling the instability and challenges posed by their growth. At the same time, a better understanding of host countries’ regulations and legislation may help them to expand their international operations.
At present, Chinese companies still play – and will continue to play – a major role in the global economy. This will require them to consider corporate social responsibility. A CSR approach can enable Chinese companies to achieve stronger governance, a better image and longer-term growth. With the health crisis, markets are demanding more communication and transparency from companies. For Chinese companies, building trust in order to win over new international markets will necessarily involve greater communication and transparency.
About Ni Gao:
Ni Gao, Assistant Professor in the Management Department at KEDGE Business School, holds a PhD in Management Sciences. Her research focuses on analysing emerging-country investment in Europe, primarily on internationalisation strategies, international management, and control of foreign subsidiaries.
About KEDGE Business School:
KEDGE Business School is a benchmark French business school with 4 campuses in France (Paris, Bordeaux, Marseille and Toulon), 3 overseas (2 in China, in Shanghai and Suzhou, and 1 in Africa in Dakar) and 3 partner campuses (Avignon, Bastia and Bayonne). The KEDGE community is made up of 14,800 students (23% of whom are international students), 192 full-time lecturers (45% of whom are international), 201 international academic partners and 70,000 graduates worldwide. KEDGE offers a portfolio of 36 training programmes in management and design for students and industry professionals. It also provides customised educational programmes for businesses at national and international levels. KEDGE Business School is AACSB, EQUIS and AMBA-accredited, and is a member of the Conférence des Grandes Ecoles. It is also recognised by the French government, with officially approved programmes, and is EESPIG-certified. KEDGE is ranked 34th by the Financial Times in the European Business School rankings and 41st globally for its Executive MBA.
kedge.edu - @kedgebs - LinkedIn/Kedge
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