Challenges for China's outward FDI

Since China adopted its "going out" policy in 2001, its outward foreign direct investment flows have grown rapidly, reaching $84 billion in 2012 (although the stock remains small). That year, China was the world's third-largest outward investor, after the United States and Japan.

This performance raises all sorts of issues, especially because State-holding enterprises control some three-quarters of the country's OFDI stock.

A short-term challenge for China's government is to consider what to do regarding the growing skepticism in some host countries about the country's OFDI. It is motivated partly by the usual difficulty of accommodating new competitors, concerns about national security and concerns about the impact of Chinese OFDI projects, even though this impact may not be that different from that of companies from other countries.

In some developing countries - especially where natural resources FDI dominates, as in Africa and Latin America - Chinese firms risk being seen as representing a new form of neo-colonialism in the context of a South-South center-periphery relationship.

Addressing these concerns requires China to formulate and enforce a "going in" strategy to complement its "going out" policy. Part of this strategy requires paying considerably more attention to the promotion of sustainable FDI, that is FDI that contributes as much as possible to the economic, social and environmental development of host countries and takes place in the context of fair governance including contracts in natural resources FDI.

One possibility would be for China to take the lead in establishing an independent facility to help the least developed countries negotiate large-scale contracts with firms from any country, including in natural resources.

A medium-term challenge is to see how China responds to the efforts by some developed countries to discipline, for example in the context of the Trans-Pacific Partnership negotiations, the support such as financial and fiscal incentives that governments give to their State-owned enterprises investing abroad. This issue is particularly important for China, given its elaborate set of home country measures that support Chinese firms going abroad.