China Inc., International: how Chinese companies have discretely internationalized their operations.

• Author: Wu, Friedrich

Recent high-profile international acquisitions and take-over bids by Chinese companies have dramatically shifted media attention from spotlighting China as a "giant sucking vacuum cleaner" for global inward foreign direct investment to characterizing the country as a cash-rich "predator" embarking on a global buying binge. Despite the latest public frenzy stirred up by Chinese companies' accelerated cross-border merger-and-acquisition forays, a large number of these enterprises have actually been discreetly internationalizing their operations for some years without attracting a lot of media limelight.

Since the early 1990s, the Beijing government has been formulating and executing the "Go-Out" strategy as a complementary component of the "Open-Door" policy promulgated more than a decade ago. Between 1991 and 1997, the State Council had assembled a "national team" of 120 state-owned industry-groups--from "strategic sectors" such as power generation, mining, automobiles, electronics, iron and steel, machinery, chemicals, construction, transport, aerospace, and pharmaceuticals--that could spearhead the internationalization of Chinese enterprises. To build the "national team," these enterprise groups were given high levels of protection, generous state financial support, as well as special rights in management autonomy, profit retention, and investment decisions. By 1997, in a reference to the government's drive to nurture globally competitive firms, President Jiang Zemin asserted during the 15th Chinese Communist Party Congress that "the state-owned sector must be in a dominant position in major industries ... we shall effectuate a strategic reorganization of state-owned enterprises by managing large enterprises well.... China will establish highly competitive large enterprise-groups with ... transnational operations."

With official encouragement, Chinese outward foreign direct investment flows surged to an average of nearly US$3.0 billion per year during 2001-04, compared to US$2.3 billion during 1991-2000. By the end of 2004, according to the United Nations Conference on Trade and Development, accumulated outward foreign direct investment stock by Chinese companies reached US$38.8 billion, which was almost on par with South Korea's US$39.3 billion, a country whose chaebols had a longer track record of internationalization. To facilitate Chinese firms' ability to invest abroad, the Beijing government had signed bilateral investment treaties with 103 countries and double taxation treaties with 68 countries by early 2003.

Today, Chinese enterprises are present in almost every corner of the earth. According to China's Ministry of Commerce, there were 7,470 Chinese foreign affiliates spreading across 168 countries or economies at the end of 2003. In value terms, besides Hong Kong which owing to its unique "'gateway" position claimed a significant 40 percent share at the end of 2003, Chinese outward-bound capital seemed to favor developed economies such as North America, the European Union, and Australia/New Zealand, which together accounted for 23 percent of China's outward foreign direct investment stock, with the...