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Chinese enterprises need to devise overseas direct investment strategies that take into account the changing environment.
As the global economy becomes increasingly integrated, the interdependence of economies becomes more important.
Foreign direct investment, shepherded by multinational companies, has profoundly changed the international division of labour landscape.
The world economy is increasingly shifting from a world trade-dominated model to one that is fuelled by international direct investment.
Domestically the fast-growing economy has laid firm foundations for enterprises to seek opportunities abroad. Chinese companies are at the same time becoming stronger individually.
In 2004, 18 Chinese enterprises appeared on the world's 500 largest companies list.
Overseas expansion, therefore, is now a viable option for those powerful firms.
The fierce competition in the domestic market is another factor driving many enterprises to seek overseas investment opportunities.
This is especially true of the manufacturing industry.
In many product categories, China's manufacturing capacity is leading the world, with excessive supply of some commodities.
Clearly the domestic market is no longer big enough to accommodate such massive production capacity.
For enterprises in those industries, boosting foreign trade and seeking overseas direct investment is an efficient way to relieve mounting pressure in the domestic market.
International trade friction and trade barriers usually have a large effect on overseas investment.
China's foreign trade surged dramatically after its accession to the WTO, but there was also a contemporaneous spike in the number of disputes with trading partners.
China is the country most exposed to anti-dumping cases.
In 2004, 16 countries and regions lodged 57 cases of anti-dumping, anti-subsidy or other safeguard measures against China, involving US$1.26 billion in goods volume.
Many countries are racing to erect trade barriers to fend off Chinese imports.
Overseas direct investment, which can bypass barriers and reduce trade friction, is naturally favoured by investors and recipient countries alike.
Chinese enterprises' mergers with and acquisitions of European firms have been on the rise since the EU imposed trade barriers in recent years targeting Chinese products.
Overseas direct investment by Chinese companies is currently mainly concentrated in labour-intensive industries such as resource-drilling and manufacturing.
In 2004, Chinese enterprises' overseas direct investment in the mining industry was US$1.9 billion, accounting for 53 per cent of its total overseas investment in that year, while manufacturing accounting for 14 per cent, at US$490 million.
So far, developing countries have been the principal recipients of Chinese enterprises' overseas investment.
By the end of 2003, China's total overseas investment stood at US$33.2 billion, among which the Asia part accounts for 80 per cent, followed by Latin America with 14 per cent.
But enterprises' overseas investments have been plagued by a host of problems.
Because of relatively low industrial technology levels, many Chinese enterprises enjoy a small competitive edge in their overseas forays.
They lack expertise in overseas direct investment and operational experiences.
The textile industry is a sector in which China has traditionally held a comparative advantage in the international marketplace.
Chinese textile firms should have invested in countries or regions where the textile industry is underdeveloped, so they could make full use of their competitiveness.
The fact that State-owned enterprises are the major players in terms of overseas direct investment is also unfavourable.
At a time when there is no effective mechanism in place to supervise State assets, many such investment projects end up failing.
Until now China has not had a complete set of laws and policies concerning overseas direct investment.
The approval procedure is still too rigid and, in some cases, discriminates against private firms.
Enterprises should learn from multinational companies' experiences and adjust their overseas direct investment strategies accordingly.
Chinese companies, while continuing to invest heavily in developing countries, should also step up their investment drive in developed countries where they will be able to learn advanced technology as well as management expertise.
They should also refine the structure of their overseas investments.
Investment emphasis should be shifted from labour-intensive industrial projects to service sectors such as finance and logistics.
Localization is a basic rule for successful overseas business ventures, and is also true of Chinese companies which want a piece of the action in foreign countries.
They must learn how to operate their businesses under local conditions and strive to integrate their operations with the host country's economy.
Choosing a proper investment mode is also of vital importance for Chinese firms aspiring to go abroad.
In this regard, investment through mergers and acquisitions is strongly encouraged.
Setting up joint ventures as an initial step in foreign direct investment is a proven strategy for many multinational companies - a pattern that Chinese companies should also follow.
As multinational companies become more familiar with the local business environment they may choose to merge with or acquire local firms.
Drawing up effective overseas investment promotion policies is an effective way to help enterprises' investment strategies develop.
It is recommended that overseas investment promotion agencies, either government-run or private, be set up to provide consulting services to companies hoping to invest abroad.
The government should reform the current overseas investment approval system and encourage private firms to seek their fortune on foreign shores.
In addition, the government should extend credit and tax favours to encourage high-tech firms to initiate overseas investment programmes.
(China Daily August 1, 2005)
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