Thailand Law Journal 2010 Spring Issue 1 Volume 13

China's Go-Out Strategy: Chinese Foreign Direct
Investment in Thailand

By Pittaya Suvakunta^*

The policy of "Four Modernizations", declared by Deng Xiaoping in 1978, aimed to open China to the outside world. The Chinese government not only has tried to attract foreign investment into China, but also has supported Chinese enterprises to make outward foreign direct investment (FDI) to seek experience overseas. From 1975 to 2002, the amount of Chinese investment in Thailand was the largest in ASEAN countries. Moreover, Chinese foreign investment in Thailand is determined by the so-called "Go-Out Strategy" involving the investment in foreign countries. Motives behind her investment in Thailand are to find market and resources there. These are China's significant mechanisms in expanding her investments. Thailand has great potential in geo-economic aspects as investment base facilitating the distribution of Chinese merchandise to ASEAN and world market.

1. Introduction

China's outward FDI go to both developing and developed countries. For this reason, traditional theories about the Multinational Corporations (MNCs) of both developed countries and developing ones can be used to explain China's strategic decision in stepping up outward FDI and to guide the government in formulating strategies and policies. The study of Chinese FDI covers the investment by Chinese enterprises outside the home country. Such investment involves a long-term relationship, and reflects a long term interest in and control of resident entity by a foreign one. it comprises three components: equity capital, reinvested earnings and intra company loans. Under a definition by the US Department of Commerce, FDI consists of ownership or control directly or indirectly, by one foreign person of 10 per cent or more of a foreign entity (Belli, 2000 and Frost, 2004, p. 2).

Most theories on FDI seek to answer three fundamental questions: why do firms invest aboard; what factors determine location of investment; and the means by which foreign firms compete in unfamiliar environments. Early engagements by economists and organizational theorists with these issues led to a number of hypotheses on this issue. Hymer's posits was that foreign investing firms possessed superior knowledge that enabled them to collect rents on knowledge assets (Hymer, 1976). Buckley and Casson argued that multinational enterprises replaced external markets with internal transactions and thus lowered transactions and thus lowered transaction costs (Buckley and Casson, 1976). Porter holds a view that success in attracting investment can be measured by demand analysis, supporting industries and firm strategy (Porter, 1990). Kojima's argument was the marginal expansion of industries (Kojima and Ozawa, 1984). And Dunning's argument was the eclectic paradigm provides an ownership, location and internalization (OLI) advantage-based framework to analyze why and where MNCs would invest abroad. Such investment could be resource seeking, market-seeking, or strategic asset-seeking (Dunning, 1993, 2000, p. 20). And four types of overseas investment activity, in which the strategies of intellectual property right exploitation and internaliza tion lead to, are to secure access to raw material, to secure market access, to secure access to proprietary technology, and to gain the benefits of international diversification (Wall, 1997, p. 14).

Dunning proposes that firms invest abroad when (1) they possessed a firm-specific advantage that enabled them to compete with local firm, (2) were able to internalize firm-specific advantage such as controlling production and distribution through foreign subsidiaries, and (3) believed that the host country demonstrated specific advantage, such as political stability, potential for market growth, trade barriers and costs (Dunning, 1981, 1993). And Wang identifies motivations with "Chinese characteristics" such as a political motive, as seen with Taiwan and Hong Kong (Wang, 2002, p. 203). Generally speaking the government permits outward FDI primarily within the context of its national identity.

Many ideas on the reason why firms invest abroad are applicable to China, out there are also some particular reasons to be considered particularly those relating to state involvement, and China's outward concerns for the national interest (Lerche and Said, 1995, p. 28). Why Chinese firms have made outward direct investment? There is no dispute that global FDI flows have increased dramatically in the last three decades. Prior to the start of economic reforms in 1978, the Chinese government opposed FDI inflows and instead premised its industrialization on self-reliance and economic independence. Deng Xiaoping's reforms, particularly the enactment of the Chinese-Foreign Joint Ventures Law of 1979, changed this policy almost overnight (Wu and Chen, 2001, pp. 1235 - 1254).

The first wave of foreign investment swept away old ideas about the evils of the multinationals, and by the 1980s the government began actively encouraging not only inward FDI but also outward direct investment by enterprises as well. Chinese firms, mostly state-owned enterprises, have gradually expanded their business presence overseas (Wang and Chan, 2003, pp. 273 - 301).

As a result, an average annual foreign direct investment outflow of China had grown from US$ 0.4 billion in the 1980s to US$ 2.3 billion in the 1990s. By the end of 2003, China's accumulated investment stock was estimated at US$ 37 billion. The Chinese authorities have so far approved some 7,000 outward investment projects of non-financial firms covering a whole range of businesses including trade, transportation, resources exploration, tourism, and manufacturing in 160 countries (UNCTAD, 2003).

Although China's overseas investment started in the 1980s after the market reform, the significant investment take-off happened in the 1990s when the Chinese authorities began giving support to Chinese enterprises expanding investment overseas. As China's fast-growing economy has drawn in more foreign investment capital and huge foreign reserves, the Chinese government can afford to allow more outward investment flows. Also, the 10th National Development Plan (2001 - 2005) says clearly that it would increase China's overseas investment in order to boost international competitiveness of Chinese firms (Kasikora Research Center, 2004).

While UNCTAD estimated that China's accumulated investment stock grew into US$ 35 billion at the end of 2002, China's official statistics of approved investment overseas only shows the figure of US$ 9.34 billion at the end of 2002. Experts believe that the Chinese statistics underestimate the actual amount of FDI stock as it excludes reinvested earnings from exports or loans raised in foreign capital markets, intra-company loans and non-financial and private sector transactions. Many Chinese
conglomerates also use international financial centers such as Hong Kong as the bases from which investment was made. The Exim Bank of China had provided billions of dollars of loans and guarantees for Chinese companies overseas and serves as a major instrument that facilitates Chinese overseas investments.

With full government support and fast business expansion both at home and abroad, an increasing number of Chinese firms have emerged as some of the largest MNCs from developing countries. Chinese enterprises listed among the top 50 largest MNCs from developing countries grew from 7 firms in 1994 to 12 firms in 2001 and 15 firms in 2004. These huge Chinese conglomerates include State Grid. Sinopec, China National Petroleum, China Life Insurance, China Mobile Communications, Industrial & Commercial Bank of China, China Telecommunications, Sinochem, China Construction Bank, Bank of China, Shanghai Baosteel Group, Hutchison Whampoa, Agricultural Bank of China, COFCO and Shanghai Automotive (Fortune Magazine 2004, pp. Fl - F12).

Chinese investments are scattered over many countries, around 60 percent of total Chinese investment was destined to Asia, followed by North America, Africa and Latin America. Top investment destinations are Hong Kong, the US, Canada, Australia, Thailand, Russia, Peru, and Mexico. Most investments in developed countries are in services. Although most Chinese investments in Western countries are in services and information and communications technology (ICT), their investments in developing economies are concentrated in resource exploitation and light industries such as textile, shoes, bicycle, motorcycles, electronics and electrical appliances.

The motives of Chinese investment oversea: The United Nations has identified five primary types of FDI from developing economies, which provide us with a framework to analyze Chinese investment overseas. According to the UN, the motives for developing economies investment overseas, such as China's, can be classified as: market-seeking, export-oriented, resource-seeking, technology-seeking and efficiency seeking (United Nations, 1993, Wu and Sia, 2002).

* PhD. Candidate in Integrated Sciences, College of Interdisciplinary Studies,Thammasat University, Thailand. The author thanks Associate Professor Dr. Chulacheeb Chinwanno, Dr. Juajan Wongpolganan, Dr. Surasak Chithanakij, Mr. Sitthiphon Kruarttikan and the anonymous readers for their helpful comments of the earlier drafts. Also he would like to extend his gratitude to the Thailand Research Fund through the Royal Golden Jubilee Ph.D. Program for funding this research