China's Outward Foreign Direct Investment: Salient Features, Drivers and Its Institutional Framework

Abstract

China has become the top emerging market outward investor, with continuing growth potential. This, in turn, has triggered growing interest in the salient features of this phenomenon, its drivers and the institutional framework in which it is embedded. China’s OFDI has indeed clear features: it predominantly comes from three major economic centers (the Yangtze River Delta, the Pearl River Delta, the Bohai Gulf). The Asian neighborhood (mostly Hong Kong) and the tertiary sector are the primary first hosts of the country’s OFDI, with developed countries and natural resources being the major ultimate destinations. State-owned enterprises (SOEs), particularly the central ones, are the dominant players, with mergers and acquisitions (M&As) becoming a fast rising mode of entry. To a large extent, these features are related to China’s unique institutional environment, where the government, through both regulation and support, plays a major role in OFDI activities, in response to the pressure of enterprises to liberalize the regulatory framework for OFDI and in order to further the country’s development strategy. China’s OFDI is driven primarily by the desire to support its exports, secure the supply of natural resources, acquire such strategic assets as technology and brands, service markets, and improve production cost efficiency, as well as some special factors. This takes place within an FDI regulatory framework that has moved from restrictive, to liberal, to encouraging. However, China’s OFDI faces various challenges related to the internationalization of the firms themselves, their reception in host countries and the manner in which the Government helps the outward FDI of its firms. China, the host countries to the OFDI of her firms and the international economy stand to gain from the rise of China’s OFDI, provided they take a dispassionate approach to the possible costs and benefits of this investment. This article provides an overview of these issues, with special attention to regulatory questions.