China’s Evolving Role in a Global Economy

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treatment, and promoting FDI in accordance with domestic industrial objectives. These changes in policy priorities inevitably affected the pattern of FDI inflow in China.“ (Fung et al 2002, 5)

However, China has not remained a manufacturing giant for cheap consumer

products. As is already indicated above, China managed to upgrade its own industrial potential and extend its domestic capabilities, slowly moving up the value chain. Yet, as the traditional export markets for Chinese products undergo economic reshuffling and experienced continuous crisis since the year 2000, China was again forced to reconfigure its economic strategy.

5.2 China’s Evolving Role in a Global Economy

In the eyes of most observers, China remains the manufacturing giant, responsible for sucking up a large share of industrial jobs in developed countries. However, as of recently China has seen its development from global vacuum for investment put on reverse by the promotion of its domestic consumers market and by becoming a major investor to other countries itself.

The 12th Chinese five-year plan marks a decisive turning point in China’s economic development. The country increasingly aims to develop its own consumers market and set free the potential of its large population. Before the background of the severe Financial Crisis of 2008, the plan refocused attention away from increasingly problematic export destinations (US and EU) towards the domestic market. The new development path favors local consumption and key industries in services and particularly consumer products. (Xinhuanet 2011) As Guanyu Li and Jonathan Woetzel of McKinsey’s Shanghai office note: “China’s recently announced 12th five-year plan aims to transform the world’s second-largest economy from an investment-driven dynamo into a global powerhouse with a steadier and more stable trajectory.”

(Li/ Woetzel 2011)

In order to create such a national consumers market, the 12^th five-year plan aims to establish greater income parity and promotes inclusive growth to overcome the

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growing wealth gap. To this end, China has developed two strategies. The first is to move up the value chain in the eastern regions, including promotion of advanced sectors: biotechnology, new materials, new energy (nuclear as well as solar and wind), new IT, and high-end manufacturing (particularly aerospace and telecom). (Stanley/

Xu 2011, 2) Simultaneously, China speeds up its development of the poor western regions started in 2000 by setting incentives for companies to move further inland.⁷ This will create jobs for former working migrants, increase the domestic customer base to the hinterland and encourage domestic spending. (KPMG 2011, 2)

China also targets a higher quality growth, as questions of sustainability arise. While lifting millions out of poverty, China has paid a dear price by infringing on environmental standards and preservation. Development has come at the expense of resource depletion through extensive energy use and related pollution of air, water and land. Not only are current generations already suffering from exploitation of resources, but the cost to future generations is yet unknown. Therefore “(…) the low carbon sector, and other priority sectors identified in the plan, will benefit from increased investment and incentives.” (Stanley et al 2011, 4)

China is increasingly focused on its own domestic markets with a potential customer base above one billion people. Setting free its domestic potential would allow China to decrease its dependency on overseas markets in Europe and the US. But China also increasingly looks abroad for lucrative investment opportunities and starts to become an investor itself.

When the Chinese government initiated its Open Door Policy in 1979, it had virtually no FDI outflows. Its FDI emerged slowly between 1982 and 1991, but the annual sum did not exceed $1 billion at any point (Buckley/ Clegg/ Cross/ Voss, Zheng 2007).

This was due to government policies, which restricted both investment approval and foreign exchanges, and the weak competitiveness of Chinese firms. Outward investment policies were relaxed between 1991 and 1994, only to be tightened again until 1995, in order to cool the rate of domestic economic expansion. In 1998, the outflows declined again, because of the Asian Economic Crisis, which led to

7西部大开发, Xībù Dàkāifā.

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increased foreign exchange controls and an economic downturn in most neighboring countries. With the official introduction of an investment policy, Chinese FDI flows accelerated markedly. Since 2003, Chinese investments have accelerated even further, making China one of the fastest growing investors to the world (OECD, 2006).

Through its investments, China actively pursues its interests abroad. As a transitioning economy however, China has interests different from those of developed nations. Its status as an emerging economic powerhouse and the related need for resources, knowledge and technology associated with such an economic rise, shape its investment policy abroad.

5.3 Motivation behind Chinese Investments

Given China’s background as an emerging economy, we can identify three basic motivations with regards to investment flows from China. These interests are not mutually exclusive, but may apply in concurrence with one another:

The first is the efficiency motivation. China has accumulated the largest sum in foreign reserves worldwide and is keen to put them to use in investment opportunities.

(Buckley et al 2007) This aspect may be counted as one central push and pull factor, severely affecting incentives to move abroad and the investment decision as such.

(Dunning et al 2008) This view is further extended by Liu/ Buck/ Shu (2005), who link the national development path to the individual investment decision. From this point of view, each investment corresponds to- and is in line with national

development goals. OFDI would thus not only be a singular event, but heavily enmeshed with larger strategic implications. (Child/ Rodrigues n.d.)

Second is the learning- or catch-up motivation. Companies from southern countries do not generally enjoy an advantage with regards to technology or knowledge- this is what sets them apart from the preceding surges in FDI. (Goshal/Bartlett, 2000) Theorists therefore state that the basic interest must be that of a catching up strategy.

(Gammeltoft 2008) China promotes national champions, which enter the foreign market in order to improve their competitiveness and global reach (Berger et al 2008;

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Ramkishen, Kumar & Virgill 2006). As Matthews (2006) underlines, these companies have a clear strategic interest in investing abroad. In the case of China to developed country OFDI this must lie beyond the plain acquisition of resources of production and financial interests. (Deng 2004) Learning processes, especially when it comes to Chinese investment, may play a key role and could be the overriding factor for an investment decision. (Rui/Yip 2008; Milleli et al 2008) As Morck (2007) describes, Chinese companies increasingly need this intellectual capital in order to sustain against international competition on their home market too. Li (2009) adds that China is in need to acquire foreign technology abroad not only with regard to its position in the world market, but also in order to further the readjustment process of its growth mode towards sustainable development. (Chuang 2010)

The third is the market access motivation. Buckley et al (2007) find that the

acquisition of strategic intellectual capital initially played little role for Chinese OFDI.

Companies much rather pursued basic economic strategies, such as market share development. This may be especially true for a country like China. The Chinese economy is based on export oriented growth, thus pursuing market access and increasing market share in key markets like Europe may be one of the major

motivations behind Chinese OFDI to developed countries. (Zhan 1995/ Buckley et al 2007) Before this background the acquisition of local brands can be seen as a market access strategy, using the brand value as a strategic asset for gaining market share by selling own products through a well established brand. As Deng (2008) notes, the asset seeking conduct of Chinese companies is based on their need to acquire brands that allow them to access markets via strong and well-established networks.

Chinese global investments are said to mostly focus on resource-seeking, which is in line with the need for supplies to sustain continuing economic growth. As some of the Chinese investment destinations, for example the European Union, largely do not possess such strategic assets the investment in such areas does not comprise a noteworthy aspect. It may however be said, that resources could be interpreted in a broader sense encompassing technological assets and knowledge. Thus the acquisition of technology or knowledge based products could be interpreted as resource-seeking investment as well.

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According to findings from Gu (2009), most Chinese FDI is conducted by State-Owned Enterprises. Thus, for the case of China institutional frameworks impinge on an investment decision and are more than just background conditions. China actively promotes and supports its companies on their move abroad, while they are in turn required to further national development objectives through their investment projects.

In the past ten years, the Chinese government has put in place an investment promotion policy called “Go Global” and actively promotes Chinese companies in their move abroad. This policy however is only the preliminary end point to a wider development of an OFDI regime developed over time.