Chinese firms going global must be prepared to meet more barriers and fiercer competition

Data from the State Administration of Foreign Exchange showed that China’s outbound direct investment amounted to $185.3 billion in 2023, and the importance of ODI is expected to grow.

China’s ODI started to be on track for steady growth in 2003 and peaked in 2016 at $196.1 billion. The typical feature of this round of ODI growth compared to previous ones is that more Chinese companies with great competitiveness are investing abroad, which is particularly evident in China’s investments in developed economies.

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Developed economies are an important investment destination for Chinese firms but that investment is never easy — Chinese companies face different difficulties at different stages.

In the early days, Chinese enterprises’ outbound investment was in sync with enhancing their competitiveness. Investment in developed economies helped strengthen the competitiveness of Chinese enterprises.

However, China’s investments in developed economies dropped between 2020 and 2022 after some developed economies prevented and restricted Chinese investments on “noneconomic motives”.

As China’s outbound investment entered a more mature stage,

Chinese enterprises with comparative advantages started to scale up their overseas investment.

Meanwhile, the likelihood of host countries enhancing investment barriers is also increasing. Let us take Chinese companies’ investments in Europe as an example.

First, the share of private enterprises has risen.

Chinese State-owned enterprises were the forerunners in the early days of outward investment. Recently there has been a rapid rise in the importance of private enterprises.

According to the Rhodium Group, investments by Chinese private companies in Europe totaled $7.69 billion in 2022, or 92.4 percent of China’s total European investment — up from $398 million, or 14.3 percent, in 2010.

The declining share of SOEs is related to the stage of Chinese investment and the discriminatory policies of developed countries.

In the early stage of Chinese companies’ outbound investment, SOEs accounted for a large share as investments were often focused on sectors where SOEs played a prominent role.

SOEs often face discriminatory treatment for their investments in developed economies, facing more rigorous regulations on their investments and projects, including rules on investment reviews, compliance, supply chains, and subsidies.

Second, the importance of greenfield investments has risen.

Traditionally, mergers and acquisitions (M&A) are the main means of Chinese investment in Europe.

According to the Rhodium Group, from 2010 to 2019, the total M&A value accounted for about 95 percent of the total Chinese investment in Europe, and greenfield investment often accounted for less than 5 percent of the total.

However, the situation has changed since 2020, with the share of greenfield investment rising sharply — jumping from 16.5 percent of the total Chinese investment in Europe in 2020 to 43 percent in 2022.

Third, the outbound investment value by industries where China has comparative advantages, such as the auto industry, has increased.

In 2022, China’s investment in Europe’s auto industry amounted to roughly $4.4 billion, and its investment in European auto companies and relative industry chains is very representative. Last July, Geely invested $910 million in Spain.

Chinese automakers have accumulated their advantages through economies of scale in the domestic market both in terms of space and time.

China’s huge market has been of great significance to the development of the auto industry’s advantages. The auto industry is a market-oriented one — large and affluent consumer markets are where major automakers are located.

This is why auto production was concentrated in North America, East Asia, and Europe before 2000. The size of the market is equally important for China’s auto industry, as the country’s growing per capita disposable income and expanding middle-income population provide support for auto consumption.

From the perspective of time, it has taken Chinese automakers a long time to build up advantages. Starting with the introduction of foreign capital to establish joint venture auto companies, China’s auto industry has gone through decades of development.

Chinese automakers and other industries with comparative advantages will likely encounter more barriers and face fiercer competition when investing in developed economies in the years to come.

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In the face of such a situation, first, Chinese enterprises should fully anticipate the challenges arising from overseas operations, understand the concerns of the host country, comply with the regulatory requirements of the host country, better localize their operations, and create true value for the host country.

Second, China can consider improving the mechanisms protecting Chinese companies overseas — through law, diplomacy, public opinion, politics, and other means. It should help them grow amid overseas competition to increase Chinese people’s wealth and back-feed and support the domestic economy.

Finally, China should advocate a more open and inclusive global investment environment, oppose investment protectionism, and urge host countries to provide a favorable institutional environment for Chinese enterprises, to inject momentum into international investment and sustained economic growth.

Pan Yuanyuan is an associate research fellow at the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. Huang Jiajing is an associate professor at the School of E-Commerce at Jiangxi College of Foreign Studies. The authors contributed this article to China Watch, a think tank powered by China Daily. 

The views do not necessarily reflect those of China Daily.