Exporting National Champions: China's Outward Foreign Direct Investment Finance in Comparative Perspective

• Published date: 01 November 2014
• Date: 01 November 2014
• Author: Amos Irwin,Kevin P. Gallagher
• DOI: http://doi.org/10.1111/cwe.12089

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China & World Economy / 1–21, Vol. 22, No. 6, 2014

©2014 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Exporting National Champions: China’s Outward

Foreign Direct Investment Finance

in Comparative Perspective

Kevin P. Gallagher, Amos Irwin*

Abstract

We examine the extent to which Chinese development banks have financed the globalization

of China’s “national champion” firms: specifically, through outward foreign direct investment

(OFDI). We create a database of Chinese finance for OFDI and compare our results to the

existing literature and available data on Japan, Korea and other Asian nations. We estimate

the total value of China’s OFDI finance from 2002 to 2012 at US$140bn. As a percentage

of total OFDI, China’s lending is roughly three times higher than Japan ’s, the previous

global leader in OFDI finance. We identify two major reasons for China’s high (31 percent)

ratio of OFDI lending to total OFDI. First, China has a greater incentive to give OFDI

loans than Japan or Korea ever did because its borrowers are state-owned so it can more

easily channel funds to targeted areas. Second, China has a greater capacity to give OFDI

loans because it has significantly higher savings and foreign exchange reserves than Japan

and Korea.

Key words: China, developmental states, outward direct investment

JEL codes: E220, F210, F230

I. Introduction

Numerous studies compare the policies behind China’s rise to those of its Asian

predecessors. In the present paper, we focus on the less researched area of outward foreign

direct investment (OFDI) promotion by state development banks. Starting in the 1950s,

Korean and Japanese policy banks gave billions of dollars in loans to “national champion”

*Kevin P. Gallagher, Co-director, Global Economic Governance Initiative, Boston University ’s Pardee

School of Global Studies, Boston, USA. Email: kpg@bu.edu; Amos Irwin, Researcher, Global Economic

Governance Initiative, Boston University’s Pardee School of Global Studies, Boston, USA. Email:

aeirwin@gmail.com.

2Kevin P. Gallagher, Amos Irwin / 1–21, Vol. 22, No. 6, 2014

©2014 Institute of World Economics and Politics, Chinese Academy of Social Sciences

companies to encourage overseas investment. In 2003 Japan was seen as the “undisputed

leader” of OFDI lending (Solís, 2003b). Today, Chinese state-owned banks are lending

billions to state-owned companies to invest abroad as part of the government ’s “Go Global”

policy. This paper compares China’s OFDI lending to that of Japan and Korea today and

during their “developmental” periods.

We also consider and compare the rationale behind the Chinese finance for OFDI.

Scholars have suggested that in the case of Japan, the loans were designed to acquire

primary resources, to gain access to advanced technology, enter foreign markets and

outsource declining industries (see e.g. Solis, 2004). We contend that China encourages

OFDI mainly for the three former motives and to diversify its foreign reserve holdings.

In the 60 years since Japan’s initial modern “take off,” Korea and now China have used

similar tools to achieve record economic growth. Scholars have documented the policies of

these “Asian Tigers” and discussed the lessons their example sets for other developing

countries (Wade, 1990; World Bank, 1993; Krugman, 1994; Stiglitz, 1996; Amsden, 2001).

The state-led industrialization strategies of Japan and Korea bear the strongest similarities

to China’s strategy today (Perkins, 1994).

Scholars have documented how the Asian Tigers used the state to coordinate a

structural shift toward industrialization. Indeed, such a strategy has been deemed a

“developmental state.” They show that Japan, Korea and others gradually liberalized trade,

investment and, finally, capital markets after using state policy to achieve a certain level of

industrialization and per capita income (Johnson, 1982; Wade, 1990; Amsden and Wang,

1992; Amsden, 2007). Alongside industrial policy and gradual liberalization, the Asian Tigers

gave strong state financial support to “national champion” companies to groom them for

international competition. Because infant Asian industries could not compete with developed

world companies, the governments of Japan, Korea and others launched two-pronged

strategies of protection and promotion. They protected domestic exporters in capital-

intensive industries through import tariffs, foreign exchange controls and limits on foreign

investment (Johnson, 1982). The governments also purchased technology licenses to learn

from more advanced economies (Komiya et al., 1988). In exchange for the loans, they

required and incentivized borrowers to export to force them to become competitive (Amsden,

1989; Lawrence and Weinstein, 1999). Scholars disagree on the extent to which the Asian

Tigers’ active efforts to support national champions contributed to the success of these

industries but it is clear that such policy played some role (Galenson, 1979; Amsden, 1989;

Wade, 1990; Lawrence and Weinstein, 1999; Ozawa, 1999).

Perhaps the most undisputed feature of state promotion was subsidized credit. Indeed,