Survey on Chinese Enterprises’ Outbound Investment and Operation (I)

The year of 2011 marked the beginning of China’s 12th Five-Year Plan period， and also the 20th year of the country’s implementation of its “going global” strategy. In the past decade， Chinese enterprises’ outbound investment has witnessed the gradual transition from rapid growth to steady growth and from quantity based growth to qualitative based improvement. In 2011， against the backdrop of increasing turmoil in the global political and economic environment， the ongoing deepening of the European debt crisis， and an increasing complex international investment climate， Chinese enterprises’ outbound investment maintained a stable growth momentum. Domestic investors made non-financial outbound direct investment in 3391 overseas enterprises in 132 countries and regions around the world， and the cumulative direct investment amounted to US$60.07 billion， up 1.8% Y/Y. Going into 2012， domestic enterprises are actively more involved in overseas investment. In January and February， domestic investors made US$7.435 billion of non-financial outbound direct investment in 706 overseas in 97 countries and regions around the world， up 59.9% y/y.

Since the initiation of reforms and opening-up， especially after China’s accession to the WTO， for both “attracting inwards” and “going global”， Chinese enterprises have become closely related with economic globalization in terms of operations and development. The Chinese market has been playing an increasingly important role in the reorganization of global industrial and production networks. Under the pressures arising from the post-financial crisis， rapid domestic market development， and industrial transformation and up- grading， Chinese enterprises are enduring new challenges， and becoming more willing to consider new opportunities to enhance their prospects for survival and development. According to the questionnaire survey on Chinese enterprises’outbound investment situation and intention carried out by the China Council for the Promotion of International Trade (CCPIT) which was carried out consecutively from 2007 to 2012， in order to “go global”， Chinese enterprises in the initial start-up stage strive for the best investment modes， business philosophy， communication channels， and ability to adapt in various investment destinations around the world. Quit a few of them have established favorable cooperation and win-win situation with foreign companies， and also made some contribution to local economic development.

In combination with the survey of the cases involving participation from the member enterprises of local subcouncils of CCPIT， it is forecasted that over the next few years， Chinese enterprises will see great changes in outbound investment targets， strategy， environment， risk and management. There the 2011 CCPIT Questionnaire Survey of Chinese Enterprises’ Outbound Investment shifted its previous focus from expert-oriented enterprises to the actual operating conditions of those involved in “going global”.

The going-global trend and domestic development environment

1. Improving the scope for development is the major reason behind enterprises’going global trend

The respondents evaluated the “degree of restriction of domestic market environment and policy environment on enterprises development”. Among the factors for market environment， the top three restricting factors are surging domestic costs， the high degree of market competition and difficult access to talent. Most of the enterprises going global consider they are greatly restricted in eight out of the 11 indicators under the survey when it comes to domestic expansion. This somewhat reflects the suggestion that restrictions on domestic development and need for expanding the scope for future development constitute the major reasons behind why Chinese enterprises are going abroad.

See Figure 2.1

It is noteworthy that rising cost tops the list of factors restricting domestic expansion of enterprises. Apart from that， difficult access to talents， capital， technologies and raw materials are also among the major factors hampering their domestic development. In addition， Figure 2.2 shows the differences between private enterprises and stateowned enterprises in the evaluation of their development prospects at home. A comparison indicated that private enterprises find the domestic access to financing and raw materials much more difficult than state-owned enterprises.

See Figure 2.2

2. Drivers for the going global move by private enterprises

To better understand the domestic business environment of the surveyed enterprises going global， an investigation into the performance indicators related to the domestic business of surveyed enterprises over the past three years was made. Figure 2.3 shows that 57.5% of the respondents are satisfied with domestic sales， 49.3% satisfied with domestic market shares and 47% satisfied with profitability of domestic sales. In terms of growth rates， 53.3% of the respondents are satisfied with domestic sales growth， 50.2% satisfied with domestic market share growth and 44.5% satisfied with the profit growth rate of domestic sales.

See Figure 2.3

According to a comparison of the degree of satisfaction with domestic business development between private enterprises and state-owned enterprises illustrated in Figure 2.4， private enterprises show less satisfaction than stateowned enterprises in six aspects， namely domestic sales， domestic sales growth， domestic market share， domestic market share growth， domestic profitability and profit growth rate of domestic sales.

See Figure 2.4

In a conclusion， first， the enterprises going global generally feel good about domestic business development， but nearly half of the enterprises are not so satisfied with various indicators of domestic business. This serves as a major force that drives them to go global. Secondly， private enterprises are obviously less satisfied with domestic business when compared with state-owned enterprises， showing that private enterprises face more severe restrictions and competition in the domestic market. It can be said that the going global move by private enterprises to some extent are motivated by the pressure of development at home.

Purposes of going global

1. Chinese enterprises engage in overseas investment to expand market expansion rather than acquire resources

Enterprises conduct outward direct investment to optimize the allocation of resources worldwide and expand markets both at home and abroad. Chinese enterprises with potential in overseas investment mainly include three types: i) State-owned energy and resources enterprises， which the aim to stabilize domestic resource supply and benefit from rising prices of raw materials by mobilizing upstream resources; ii) High-tech enterprises， mainly including those in communications and IT industries， which hope to participate in global competition and gain technological resources; iii) Enterprises with comparative advantages， mainly including textiles， clothes and home appliances enterprises， which desire to penetrate international markets and circumvent trade restrictions. Investment motives of the said three types of enterprises can be further broken down into two types: overseas market-seeking and resourceseeking motives.

According to responses to survey questions measuring the importance of various functions offered by overseas branches of outward-investing enterprises， the most important functions served by these branches are aimed at creating new market opportunities， in- cluding manufacturing and promoting products for parent companies (66.1%)， providing after-sales services to parent companies (57.6%)， improving the reputation of parents in host countries(54.2%)， obtaining internationally famous brands (45.2%) and avoiding barriers in major destinations of export(40%). Functions reflecting the motive to obtain overseas resources， such as obtaining parts or raw materials for parent companies (38.1%)， manufacturing products of parent companies based on local cost advantages (35.8%)， conducting RD activities using local technological advantages (34.3%)， and investing in the domestic market as for- eign capital (20.9%)， are less important. From figure 2.5 we can see that all the functions that reflect market-seeking opportunities rank ahead of those that reflect the motive to obtain overseas resources. Survey data show that the importance of seeking market opportunities is greater than the importance of obtaining overseas resources for surveyed Chinese enterprises going global. This also shows that the Chinese enterprises carry out overseas investment with the aim to expand markets rather than contend for resources.

See Figure 2.5

2. Importance of internationalized operations to private enterprises

Based on the comparison of stateowned enterprises and private enterprises in terms of relative importance of various functions undertaken by their overseas branches， we see that all the functions， except the function of obtaining parts or raw materials， are more important to private enterprises than to state-owned enterprises. This indicated that for private enterprises， the importance of either seeking for market opportunities or obtaining overseas resources is greater than that for stateowned enterprises. This also signifies that the success of internationalization is more important to the development of private enterprises.

3. Differences in purposes of investment in European American countries and in Africa.

According to a comparison between overseas branches established in European and American countries and those in African countries in terms of the importance of various functions， overseas branched in European and American countries mainly aim to produce and promote products for parent companies， provide after-sales services to parent companies， improve the local reputation of parent companies and explore other market opportunities. Reflecting strategic-asset seeking motives， overseas branched in European and American countries mainly intend to conduct RD activities using local technological advantages and invest in the domestic market as foreign capital. By contrast， overseas branches in Africa mainly hope to circumvent trade barriers in major destinations of export and manufacture products for parent companies by exploiting the cost advantages of local areas.

Figure 2.1 Evaluation of the enterprises going global regarding their domestic development prospects

Figure 2.2 Evaluation of state-owned enterprises and private enterprises regarding domestic development prospects

Figure 2.3 Proportions of the enterprises going global that are satisfied with domestic business over the past three years

Figure 2.4 Proportions of state-owned and private enterprises going global which are satisfied with their domestic business over the past three years

Figure 2.5 Proportion of overseas branches of enterprises going global by importance of functions