Author: Qiuyu Gaovan
In recent years, with the dramatic increase in Chinese Outward Foreign Direct Investment (OFDI), the topic on how political risk in host countries influences the locational choices of Chinese multinational enterprises (MNEs) has drawn the attention of many scholars. In this paper, I investigate the political risk distribution (PRD) of Chinese OFDI from 2006 to 2017 using a new measurement on political risk by a composite index (GaoYan 2019)— Political Risk Index (PRI). Meanwhile I use the firm-level CGIT data (https://www.aei.org/china-global-investment-tracker/) as the measurement of Chinese OFDI. I first analyse the general trend and then present the distribution of Chinese OFDI in low-, moderate- and high-risk countries.
According to Figures 1, 2 and 3, I observed that Chinese MNEs do not follow the incremental internationalization pathway suggested by traditional theories such as the Uppsala Model and life-cycle theory (Jiménez 2010 and Jiménez et al. 2014) but expand at a much faster pace. From 2006 to 2017, Chinese OFDI destinations nearly tripled, increasing from 28 in 2006 to 80 in 2015 and declining to 59 in 2017 (see Figure 1), while the annual number of Chinese large-scale FDI projects (those with a single investment of more than US$ 100 million, regardless of construction contractor direct investment) shot up from 49 in 2006 to 408 by 2016, only to fall to 157 in 2017 (see Figure 2). I also found that the annual outflows of Chinese OFDI increased six-fold, from US$ 40.23 billion in 2006 to US$ 261.1 Billion in 2016, and then dropped to US$ 132.24 billion in 2017 (see Figure 3). Regarding industrial distribution, according to Figure 4, I found that from 2006 to 2017, Chinese investment in energy, transport, real estate, raw materials, and metals exceeded 70% of its total investment. This finding reflects that Chinese OFDI is mainly concentrated in the field of natural resource development, energy, and infrastructure construction.
Figure 1. Political Risk Distribution of Chinese OFDI Destinations, 2006-2017.
Source: Calculate by the author.
Figure 2. Political Risk Distribution of Chinese OFDI Large-scale projects, 2006-2017.
Source: Calculate by the author.
Figure 3. Political Risk Distribution of Annual Chinese OFDI Outflows (Million USD), 2006-2017.
Source: Calculate by the author.
Figure 4: Political Risk Distribution of Chinese OFDI at sectorial level
Source: Calculate by the author.
The decade’s long expansion of Chinese MNEs can be divided into two different stages: the “Going Global” phase from 1999 to 2012 and the “Belt and Road” phase from 2013 onwards. The “Going Out Policy” phase (1998 to 2013) was marked by clear aims of pushing Chinese domestic enterprises into global business activities to acquire strategic resources and expand into foreign markets. At this stage, the Chinese government encouraged large-scale state-owned enterprises (SOEs) and powerful privately owned enterprises to acquire strategic resources, expand into foreign markets and invest in key “sensitive” industries defined by the 12th and 13th Five-Year Plans. The Chinese government steadfastly supported Chinese MNEs’ overseas activities through political backing, subsidies, preferential tax concessions, the reformation and relaxation of the regulatory process and the easing of foreign exchange controls.
When President Xi Jinping announced the Belt and Road initiative (BRI) in 2013, it was believed to be an updated version of the “Going Global Strategy”, with a clear aim of better integrating the Chinese economy with the economies of its neighbouring countries in Central Asia, Southeast Asia, and South Asia as well as those of Eastern Europe and the Baltics through infrastructure and production capacity cooperation. Through 2018, more than 86 sovereign states and international organizations have signed BRI cooperation agreements with China, and the majority of these countries have favoured the “Beijing consensus” and have been more likely to let “both formal and informal institutions develop under the role of the state“ (Lattemann et al. 2017).
Distribution of Chinese OFDI in Low- and Moderate-risk Countries
As seen from my figures, from 2006 to 2017, over 11 years, moderate-risk countries continue to be Chinese MNEs’ priority targeting investment economies, comprising 45% to 56% of annual investment destinations and hosting 37% to 53% of annual large-scale overseas projects. Regarding annual capital flows, the percentage of annual Chinese OFDI in moderate-risk countries fluctuates between 28% and 66%. Despite drastic changes, moderate-risk counties continued to absorb the majority (over 45%) of China’s annual OFDI flows between 2006 and 2015. Regarding sectorial distribution, I found that moderate-risk countries host more than half of China’s aggregate investment in the energy, transportation, metals, utilities, and chemical industries. The real estate sector is somewhat unique, with China’s total investment being evenly distributed between moderate- and low-risk countries. During the same period, low-risk countries accounted for 11% to 25% of Chinese MNEs’ annual investment destinations, hosted 18% to 42% of China’s annual overseas large-scale projects and absorbed 14% to 64% of China’s annual OFDI outflows. At the sector level, more than 56–65% of China’s total investment in agriculture, science and technology, and finance was located in low-risk countries; for industries such as tourism and entertainment, this number exceeds 70%.
The fact that the majority of Chinese OFDI is located in low- and moderate-risk countries proves that the level of political risk in host countries is not ignored by Chinese MNEs, thus verifying that traditional FDI theories can sufficiently explain the locational choices of Chinese MNEs. However, other reasons may also help explain this phenomenon. On the one hand, troubled transactions have taught Chinese MNEs to thoroughly evaluate the possible political risk in host countries and to take more cautious procedures and steps before making OFDI decisions. On the other hand, through effective government guidance, Chinese MNEs avoid making wrong decisions. The first type of guidance is “information guidance“. By providing Chinese enterprises with detailed, specific, and up-to-date information on the targeting host countries, the Chinese government helped reduce the PRD of Chinese OFDI. The second type of guidance is “policy guidance“. Through explicit policies, the Chinese government has helped improve the PRD of Chinese OFDI. The Chinese government has made use of the fact that Chinese OFDI is mostly carried out by SOEs and is therefore in a better position to implement its OFDI guidance.
Distribution of Chinese OFDI in High-risk Countries
From 2006 to 2017, high-risk countries comprised 15% to 31% of Chinese MNEs’ annual investment destinations and absorbed 7% to 32% of Chinese annual OFDI outflows. Additionally, approximately 15% to 30% of China’s annual overseas large-scale projects were located in high-risk countries. However, in the energy, transportation and utility industries, high-risk countries hosted approximately 30% of total Chinese investment.
According to traditional assumptions, high levels of political risk have been understood as a threat to MNEs; however, many studies have found that Chinese MNEs prefer to invest in high-risk countries. According to the results, the majority (over 90%) of large-scale projects in high-risk countries are undertaken by SOEs. This result can be explained by the institutional factors in China, especially the unique “state ownership advantage” brought by the unique “government–business” relationship between SOEs and the central government. This relationship has made SOEs less dependent on their own and even on other Chinese firms’ prior host country experience because under this “government–business” relationship (Quer, Claver and Rienda 2018), SOEs come under the direct supervision of the SASAC and the government provides them with political backing while SOEs are put in place to implement the government’s “Going Out” policy and Belt and Road initiative.
Second, the results also show that the OFDI undertaken by SOEs has achieved satisfactory performance (only 32% are classified as troubled transactions), proving that institutional factors are not the sole reasons for the reduced PRD of Chinese OFDI. As Holburn and Zelner (2010) show, because there are weaker institutional constraints on policymakers and greater redistributive pressures associated with political rent-seeking in China’s business environments, all companies, regardless of their ownership, have developed strong political capabilities through organizational learning and cognitive imprinting. Thus, they know how to operate in the challenging institutional environment—comprising a high level of direct state intervention, opaque corporate governance, unpredictable and burdensome regulations, cumbersome bureaucracy, and discontinuity in government policies—that characterizes the Chinese business environment. As a result, they are more capable of dealing with burdensome regulations and navigating opaque political constraints (Buckley et al. 2007). For many Chinese firms, their familiarity with the more difficult institutional conditions of developing countries and their expertise in managing such environments have helped them develop strong political capabilities, such as the negotiation of entry conditions, lobbying, litigation, campaign contributions, and coalition formation, leading to preferential conditions, reduced environmental uncertainty, reduced transaction costs and increased long-term sustainability for the firm, which reduce the deterrent effect of political risk on their foreign entry decisions. Sometimes, they even obtain a better competitive advantage over their Western competitors, as the latter are not used to the absence of a well-established infrastructure and a well-developed contracting and intellectual property rights regime in high-risk countries (Cueruo-Cazura and Genc 2008).
By increasing its foreign investment linkages with other countries, China has integrated rapidly with the world economy. It is found that through continuing international economic policy reform, effective government guidance and the continuing development of political capabilities within Chinese MNEs, Chinese OFDI has witnessed a substantial increase in the last ten years, while the political risk of Chinese OFDI has declined rapidly.
To summarize, the following conclusions can be drawn: first, by applying this PRI, I found that between 2006 and 2017, low-risk and moderate-risk countries remain Chinese companies’ predominant investment destinations; however, the majority of Chinese OFDI is undertaken by Chinese SOEs. Second, I observed that until 2017, the value of China’s overseas investment and construction combined was approaching US$ 1.6325 trillion. During the same period, Chinese MNEs invested in a total of 2276 large-scale projects worldwide. Of these, 677 large-scale projects were located in low-risk countries, another 1066 took place in moderate-risk countries, and 533 occurred in high-risk countries. In terms of aggregate investment, low-risk countries were found to host 33% of the total stock of Chinese OFDI, while moderate-risk countries accounted for 45%, and the remaining 22% of Chinese OFDI was in high-risk countries. The majority of Chinese OFDI is therefore directed towards moderate- and low-risk countries. Third, during the same period, low-risk and moderate-risk countries account for more than 70% of total Chinese OFDI in 12 different industries. Only in industries such as energy, transportation, and utilities did high-risk countries host approximately 30% of total Chinese OFDI. Among the remaining nine industries, high-risk countries attracted only a small proportion of China’s total OFDI.
My conclusion proves that the importance of the political risk level in host countries has never been neglected by Chinese MNEs when making investment decisions because troubled transactions have taught them to take more cautious procedures and steps in their OFDI; at the same time, governmental efforts, such as effective guidance, consultation and real-time investment information, have prevented Chinese enterprises from investing in troubled projects and high-risk-level countries. Most importantly, the political capacities developed by Chinese MNEs in the Chinese business environment have helped them overcome many difficulties in their internationalization.
- Buckley, P., Clegg, L., Cross, A., Liu, X., Voss, H. and Zheng, P. (2007). The determinants of Chinese outward foreign direct investment. Journal of International Business Studies, 38(4), pp.499-518.
- Cuervo-Cazurra, A. and Genc, M. (2008). Transforming disadvantages into advantages: developing-country MNEs in the least developed countries. Journal of International Business Studies, 39(6), pp.957-979.
- Holburn, G. and Zelner, B. (2010). Political capabilities, policy risk, and international investment strategy: evidence from the global electric power generation industry. Strategic Management Journal, 31(12), pp.1290-1315.
- Jiménez, A. (2010). Does political risk affect the scope of the expansion abroad? Evidence from Spanish MNEs. International Business Review, 19(6), pp.619-633.
- Jiménez, A., Luis-Rico, I. and Benito-Osorio, D. (2014). The influence of political risk on the scope of internationalization of regulated companies: Insights from a Spanish sample. Journal of World Business, 49(3), pp.301-311.
- Lattemann, C., Alon, I., Spigarelli, F. and Marinova, S. (2017). Dynamic Embeddedness in Chinese Firm Internationalization. Thunderbird International Business Review, 59(4), pp.547-559.
- Quer, D., Claver, E. and Rienda, L. (2018). The influence of political risk, inertia and imitative behavior on the location choice of Chinese multinational enterprises. International Journal of Emerging Markets, 13(3), pp.518-535.
- Цюйюй Гаоянь, “Распределение политических рисков при вложении прямых иностранных инвестиций Китаем (эмпирическое исследование на основе данных за 2006–2017”, Гуманитарные науки. Вестник Финансового университета., 2019 No.4