Managing Chinese Outward Foreign Direct Investment

From Entry Strategy to Sustainable Development in Australia

Xueli Huang, Ying Zhu

• Publisher: Palgrave Macmillan
• Year: 2016
• Print ISBN:
  9781137394583
• eBook ISBN:
  9781137394606
• Topic: Business
• Subtopic: Business General
• Index: Business

China's outward foreign direct investment, for which Australia is one of the largest destinations, has rapidly increased and become an important source of global capital. Nevertheless, Chinese investors have encountered many challenges in making their investment decisions and managing their foreign direct investments for sustainable development and profitability. Managing Chinese Outward Foreign Direct Investment focuses on the management of Chinese outward foreign direct investment, particularly foreign subsidiaries established through merger and acquisition, at the organisational level. Considering investment as a process, the book addresses complex managerial issues from strategic entry decisions to corporate sustainable development. Particular emphases have been placed on the post-acquisition integration and management such as liability of foreignness mitigation, post-acquisition integration, corporate control and governance, human resources and cross-cultural management, and corporate social responsibility.

1

Introduction

Chinese outward foreign direct investment (OFDI) has rapidly increased over the last two decades, from about US$1 billion in 1991 to US$107.8 billion in 2013 (Ministry of Commerce, 2014). Consequently, China has become an important source of global capital. Since 2008, China has been among the top ten countries globally in terms of OFDI (UNCTAD, 2014), ranked as tenth in 2008, fourth in 2009, third in 2010, seventh in 2011 and third in 2012 and 2013. In 2013, Chinese OFDI stock reached US$660.4 billion. However, it only accounted for about 2 per cent of the global FDI stock (UNCTAD, 2013). The Chinese government has indicated that its OFDI will be more than US$500 billion by the end of its 12th five-year plan (2011–2015). It is widely expected that in the next decade Chinese OFDI will exceed 1 trillion US dollars.

The major driving forces behind the rapid growth of Chinese OFDI at the macro-level have been the rise of the Chinese economy and the strong support from the Chinese government (Luo et al., 2010). Since 2011, the Chinese economy has become the world’s second largest economy, 32 years of rapid economic development after China implemented its “open-door and economic reform” policy in 1979. Chinese government has supported its domestic firms to expand overseas by providing financial support and low-interest loans (Buckley et al., 2007), simplifying its OFDI approval process and improving its OFDI-related systems (Luo et al., 2010).

The rapid growth of Chinese OFDI over the last decade has been accompanied by a change in the international investment environment. Governments in many host countries have revised or developed new foreign investment policies (Economou & Sauvant, 2012), making FDI more challenging. Moreover, many multiple or bilateral agreements have been established globally, often in favour of FDI from the countries that are party to the agreements while discriminating FDI from other countries. At the societal level, communities in host countries increasingly expect and demand foreign multinational corporations (MNCs) to be more socially and environmentally responsible for their operations in host countries (Klein, 2014).

Many changes have also taken place in the domestic environment in Chinese OFDI. With the new generation of Chinese leadership elected in March 2013, and the slowdown of global economic recovery, the Chinese government has refined its economic policies that stress the importance of domestic consumption, innovation and change of industry structure from labour-intensive to high value-added in developing its national economy. Moreover, the Chinese government has put more emphasis on the performance of Chinese OFDI, particularly that of foreign subsidiaries of state-owned enterprises (SOEs).

This book focuses on the management of Chinese OFDI, particularly foreign subsidiaries established through merger and acquisition (M&A) at the organisational level. As shown in Figure 1.1, the amount of M&A, similar to the trend of overall Chinese OFDI growth, has substantially increased over the past ten years.

Figure 1.1 China’s OFDI flow and M&A from 2004 to 2013

Source: Ministry of Commerce (2014).

The rise of Chinese OFDI has resulted in the establishment of 25,400 foreign subsidiaries owned by more than 15,000 Chinese firms in 184 countries or regions by the end of 2013 (Ministry of Commerce, 2014). The number of Chinese firms setting up their foreign subsidiaries has been increased from less than 7,000 in 2007 to 15,300 in 2013, more than doubling in six years (Ministry of Commerce, 2008, 2014). The Chinese SOEs have been responsible for a majority of Chinese OFDI so far, although their investment proportion was reduced from 81 per cent in 2006 to 55.2 per cent in 2013 due to the increase of OFDI from Chinese private firms (Ministry of Commerce, 2014).

How do Chinese MNCs manage their OFDI, particularly their foreign subsidiaries to achieve their investment objectives? This is a very important question as the role played by Chinese OFDI has increasingly become important to Chinese investors. OFDI is a complex, multidisciplinary and dynamic process, and it covers a wide range of issues in strategic management, finance and organisational behaviour. The exponential growth of Chinese OFDI over the last decade has substantially expanded the geographic scope of Chinese MNC’s operations, enhanced their capability to manage international business and gained many financial and non-financial benefits. Nevertheless, Chinese MNCs have encountered many challenges in not only making their OFDI decisions but also subsequently managing these OFDIs after the transactions in order to ensure sustainable development. Anecdotal evidence has shown that the financial performance of Chinese OFDI has not met the expectation of Chinese investors, including the State-owned Asset Supervision and Administration Commission of China (SASAC) which owns the SOEs. As a result, the SASAC issued two interim regulations in 2011 for tightening the management and supervision of the overseas assets owned by Chinese SOEs. In particular, this move targeted centrally controlled SOEs, aiming to improve the OFDI decision-making process and subsequent corporate governance and management of the foreign subsidiaries to enhance their financial performance.

Although much research has been devoted to Chinese OFDI over the last decade, a recent literature review (Deng, 2012) found that “research to date has been fragmented and piecemeal, and numerous theoretical and empirical areas of the internationalisation of Chinese firms (ICFs) remain significantly under investigated” (p. 423). OFDIs, particularly those resulting in the establishment of foreign subsidiaries through M&A, should be regarded as a process that involves pre-acquisition preparation, acquisition, post-acquisition integration and subsequent management. Each of these stages in the process can have substantial impact on the OFDI’s financial performance. Extant research on Chinese OFDI so far is not only fragmented, but also lopsided with regard to the issues at the pre-acquisition stage, such as locational choices (Buckley et al., 2007; Kang & Jiang, 2012; Kolstad & Wiig, 2012), role of Chinese government (Gao et al., 2015; Luo et al., 2010; Voss et al., 2010), entry mode consideration (Cui & Jiang, 2009; Rui & Yip, 2008), motivation (Deng, 2009; Globerman & Shapiro, 2009) and ownership of Chinese firms (Cui & Jiang, 2012; Hong & Sun, 2006; Huang & Chi, 2014). Scant research has been devoted to the post-acquisition integration and its subsequent management.

This book is specifically concerned with key issues in managing foreign subsidiaries established by Chinese investors either through Greenfield investment or acquisition in Australia. We have focused our research on the managerial issues of Chinese OFDI since 2007 and have interviewed more than 100 senior managers working in many Chinese firms in Australia as part of several research projects in Chinese OFDI-related areas. The book is built on the valuable insights we gained from these research projects, and it addresses the managerial issues from strategic investment decisions to corporate sustainable development. Particular emphases have been placed on the post-acquisition integration and management, concentrating on major managerial issues such as liability of foreignness (LOF) mitigation, post-acquisition integration, corporate control and governance, human resources and cross-cultural management and corporate social responsibility (CSR).

Before we explain the structure of this book, we would like to briefly discuss Chinese OFDI in Australia, China’s bilateral trade with Australia and the recent development of Chinese OFDI in Australia.

Chinese OFDI in Australia

Australia provides an excellent opportunity for studying the management of Chinese OFDI, as it has been one of the largest destinations for Chinese OFDI so far. Australia became the fifth largest destination for Chinese OFDI by the end of 2013, only trailing behind Hong Kong, the Virgin Islands, the Cayman Islands and the United States (Ministry of Commerce, 2014). The Chinese OFDI stock in Australia had reached US$17.45 billion, with nearly two-thirds (65.3 per cent) invested in the extractive industry by 2013 (Ministry of Commerce, 2014). This number has not considered investments made by Chinese MNCs through their foreign subsidiaries, particularly those from Hong Kong, such as CITIC Pacific, owned by CITIC Group, and Yangcoal, owed by Yang Kuang Co. Both firms were listed in Hong Kong when they made their investments in Australia. More than 80 per cent of Chinese OFDI in Australia was made by Chinese SOEs (KPMG & China Studies Centre, 2014b).

Although Australia became the fifth largest destination for Chinese OFDI by the end of 2013, Chinese OFDI stock in Australia accounted for only 2.9 per cent of the Australia’s total FDI stock (Ministry of Commerce, 2014; UNCTAD, 2014). This is far less than the investments of the United States (26 per cent), the United Kingdom (17 per cent), Japan (6 per cent) and even Singapore (3 per cent) in Australia (Australian Bureau of Statistics, 2015).

Bilateral trade and China–Australia Free Trade Agreement

The figure of Chinese OFDI in Australia is dwarfed by that of its bilateral trade with Australia. China has been Australia’s largest trading partner since 2011. In the Australian financial year of 2013–2014, Australian exports to China reached A$107.5 billion and accounted for about one-third (32.9 per cent) of its total export, while its imports from China were A$52.1 billion, sharing 15.4 per cent of its total imports (Department of Foreign Affairs and Trade, 2015b). While iron ore and coal were ranked as the largest Australian exports to China (A$52.7 billion and A$9.1 billion, respectively), telecommunication equipment and parts and computers were the two largest imports by Australia from China (Department of Foreign Affairs and Trade, 2015a).

Besides minerals exports to China, the exports of Australia’s agricultural products, or “soft commodities”, such as wheat, red meat (e.g. beef and lamb), seafood, wine and dairy products, have also substantially increased over the last decade. For example, beef exports to China trebled over the past five years and reached over 120,000 tons in 2014, but this only accounted for 10 per cent of total Australian beef exports and 3 per cent of the total Chinese market share (Meat & Livestock Australia, 2015). The exports of Australian dairy products (liquid milk, milk powder, cheese and butter) to China have nearly doubled since 2008 (Dairy Australia, 2015).

China’s economic rise increases not only its demand for Australia’s commodities and agricultural products, but also its service exports, particularly education and tourism, to China. Education is Australia’s third largest export industry. China is Australia’s largest international student market. By the end of March 2015, there were more than 115,000 Chinese students studying in Australia, accounting for 27.9 per cent of the total number of international students in Australia (Department of Education and Training, 2015).

With regard to tourism, China was the second largest inbound tourist market for Australia in 2013 with more than 700,000 arrivals (Tourism Australia, 2014), increasing from less than 200,000 in 2003. Chinese tourists contributed A$4.8 billion to Australia’s economy in 2013, becoming a major source for the Australian tourism industry. In its national strategic plan (“Tourism 2020”), Tourism Australia is expecting that China will be a major contributor to its growth in the future (Tourism Australia, 2011). The growth in bilateral trade between China and Australia will further result in the increase of Chinese OFDI in Australia.

With the signing of the China–Australia Free Trade Agreement on 17 November 2014 (Prime Minister of Australia, 2014), a wide range of bilateral trade and investment opportunities will be accessible. On the one hand, most import tariffs will be immediately or gradually eliminated by the Chinese government, particularly for agricultural products and processed food, such as dairy products, beef, live animal exports, seafood, wine, honey and fruit juice (Department of Foreign Affairs and Trade, 2015c). China will also open its market for Australia’s services industry, such as financial, insurance, healthcare, legal, education, and tourism and travel-related services. On the other hand, Australia will lift its threshold for screening Chinese investment. Chinese private entities can invest up to A$1.094 billion without the need for approval from the Australian government’s Foreign Investment Review Board (FIRB). However, investment by Chinese SOEs in Australia still needs approval from the FIRB, no matter how it is invested. Moreover, the investment screen threshold is lower for sensitive sectors, such as media, telecommunications and defence-related industries (Department of Foreign Affairs and Trade, 2015c) and can be subject to change by the FIRB. For example, the investment screen thresholds for foreign investors in agricultural land and agribusinesses were reduced from A$252 million to A$15 million and A$53 million, respectively, since 1 March 2015 (Foreign Investment Review Board, 2015), partly due to negative sentiment from the Australian public towards the acquisition of agricultural land by foreigners.

Recent development of Chinese investment in Australia

Chinese investment in Australia has gradually diversified from the mining industry since 2013, partly due to the slump in commodity prices. For example, the commodity metal index and iron ore price declined from A$202 and A$150 per ton in January 2013 to A$134 and A$57 in March 2015, respectively (Index Mundi, 2015). Nevertheless, Chinese firms continue investing in the Australian mining industry, although at a slower pace. An example of such investment was Baosteel’s acquisition of Aquila Resources in partnership with Aurizon, an Australian listed company operating in railway and port transportation, in May 2014 for A$1.4 billion.

Chinese investment in Australia’s infrastructure, real estate and agribusiness has been growing over the past several years. China State Grid acquired 19.9 per cent of the electricity supplier SP AusNet and 60 per cent of energy infrastructure company SPI Australia for A$3.7 billion in 2013 (KPMG & China Studies Centre, 2014b). China Merchants Group secured its 98-year lease of Port of Newcastle for A$1.75 billion in a joint venture with a local company (50:50) in 2014 (Port of Newcastle, 2015). Chinese firms have also started investing in agriculture. Major Chinese investment projects in the Australian agriculture industry include the acquisition of Tully Sugar mill by China’s Oil and Food Company for A$136 million; Shangdong Ruyi’s acquisition of a cotton farm, Cubbie Station, in Queensland in partnership with a local wool company (80:20) for A$300 million; and Shanghai Zhongfu’s leasing of Ord River for 50 years to develop 15,200 hectares of irrigated agricultural land in Western Australia. Chinese private investors, including small and medium-sized enterprises (SMEs), have increasingly become active in investing in Australia, particularly in real estate and agriculture, such as vineyards,...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• List of Tables and Figures
• Foreword
• List of Abbreviations
• 1. Introduction
• 2. Strategic Entry Considerations and Their Impact on Investment Performance in the Australian Mining Industry
• 3. How Does Liability of Foreignness Impact the Behaviour of Chinese MNCs? A Case Study of Sino Iron Project
• 4. Managing Post-Transaction Integration by Chinese MNCs
• 5. Corporate Governance in Chinese-Controlled Subsidiaries
• 6. Cross-Cultural Management and HRM
• 7. Corporate Sustainable Development: How and Why Chinese-Invested Firms Engage Community in the Australian Mining Industry
• 8. Conclusion: Ongoing Challenges for Chinese OFDI and MNCs Operating Abroad
• Index