Institutional Factors Matter: Perspectives on China's Outward Direct Investment

Abstract

In the past three decades, China has transformed itself from a central-planned, agricultural economy to the world’s manufacturing base and growth engine. Expanding at an average annual rate of more than 10 percent, the Chinese economy is now the second-largest in the world. Globalization is undoubtedly one of the most important drivers behind this extraordinary growth. Globalization is not a one-way process. As Chinese businesses grow and mature, they are increasingly turning to outward direct investment (ODI) to diversify their product portfolios, take advantage of cheaper labor in foreign countries, and claim reliable sources of raw materials. In recent years, several instances of Chinese outward direct investment received wide media attention. Among them were Lenovo Group’s purchase of IBM’s personal computer division in 2005 and Wanda Group’s acquisition of AMC Entertainment in 2012. However, acquisitions of assets by state-owned enterprises in natural resource-rich countries — especially African countries — have stirred the most concern. Still, despite the hype, Chinese outward direct investment remains small in relative size. In 2011, China’s ODI stock was 1.7 percent of the world’s total, or 5.2 percent of the nation’s GDP. When measured by direct investment, China is much less globalized than when measured by international trade. Is China’s relatively low outward direct investment level justified by economic fundamentals? What are the determinants of Chinese ODI? This paper uses country-level data to analyze the patterns of these investments.