Thu, Dec 09, 2010 - Page 9 News List

Revaluing China’s currency would boost its outward FDI

More direct investment by Chinese firms will force these companies both to compete on a level with other multinationals and to become good corporate citizens, which could help on the home front as well

By Karl Sauvant and Ken Davies

Because most of China’s outward FDI is from state-owned enterprises (SOEs), suspicions of non-commercial motivations are widespread. But there is no systematic evidence that China’s SOEs are driven by more than normal commercial considerations. At the same time, various private or semi-private entities have been investing abroad. As their operations are less visible, it is likely that their outward FDI, and therefore China’s total, is understated.

Fears of Chinese overseas investment, as of Japanese and South Korean investment in the 1980s and 1990s — and, before that, of the great post-war US multinationals, which the French writer Jean-Jacques Servan--Schreiber dubbed le defi americain in the 1960s — are misplaced. These investments were eventually accepted as making a contribution to their host countries. Similarly, the surge in China’s outward FDI is good for China and for host countries.

Chinese FDI, like all FDI, can provide host countries with a bundle of tangible and intangible assets needed for economic growth and development. While a significant part of China’s outward FDI initially takes the form of trade-supporting FDI, it can be expected to lead relatively quickly to some production being shifted out of China, including to the US and Europe, thereby possibly reducing exports from China. Moreover, FDI, like trade, is a key means to integrate China into the world economy and make it a responsible stakeholder.

Like their Japanese and South Korean counterparts, however, Chinese firms will have to learn how to operate in highly sophisticated developed-country markets, as well as in developing countries, where their investments in natural resources are expanding rapidly. They will also have to learn from the past mistakes of other multinationals. In particular, they need to establish a strong reputation as good corporate citizens, in addition to making a positive economic contribution to their host countries.

The Chinese government can play a crucial role by adopting a code of conduct for all Chinese enterprises investing abroad, in line with internationally accepted norms and taking into account the increasing importance of sustainable FDI. For their part, recipient countries should accept, rather than shun or discriminate against, China’s “new kids on the block.”

Karl Sauvant is founding executive director of the Vale Columbia Center on Sustainable International Investment, a joint center of Columbia Law School and The Earth Institute at Columbia University. Ken Davies is senior staff associate at the center.

Copyright: Project Syndicate

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