China is experiencing rapid growth in its outward foreign direct investment (FDI), but many challenges lie ahead, says Karin Finkelston, mission director of the International Finance Corporation (IFC) in Beijing.

According to IFC, China's total outward FDI averaged more than US$3 billion over the past five years, a level comparable with Ireland and South Korea.

The new momentum is a result of a massive increase in South-South FDI.

FDI from developing countries is gaining importance with its total flow rising from US$16 billion in 1990 to nearly US$100 billion in 2000, before it settled down to about US$45 billion in 2002. It has remained at this level over the past two years.

Chinese companies have established operations in both developing and developed countries.

Statistics show that in 2002, the sales of Chinese companies operating overseas totalled US$77.2 billion.

In 2004, more than 2000 Chinese mainland companies were operating overseas. And outward FDI totaled US$3.6 billion (excluding computer giant Lenovo), with accumulated FDI reaching US$37 billion.

China has become a leading outward investor among developing countries, yet its level remains small compared to major global players, saidFinkelston.

Although China's relative production advantages in electronics, home appliances, and telecoms equipment are increasing globally, overseas Chinese investment concentrates on manufacturing, trade, trade services and construction, she adds.

Commenting on the investors, she says mainland shareholding companies and private companies are stepping up their investment, but large State-owned enterprises (SOEs) account for the bulk of investment.

Statistics show in 2003, about US$2.1 billion of outward FDI came from large Chinese companies under the State-owned Asset Supervision and Administration Commission of the State Council, accounting for 73.6 per cent of the year's total. The other 26.4 per cent -- or US$750 million -- was invested by companies at provincial level.

Beijing and the nation's coastal cities were the second major overseas investors after the large SOEs under the central government.

Chinese companies are facing tough challenges to make outward FDI, says Xing Houyan, a researcher at the Overseas Investment Research Centre under the Chinese Academy of International Trade and Economic Co-operation.

First of all, there is a misconception that only strong companies with advantages in this field can go out of the country. Actually companies with an average performance can also do so to improve their structure and diversify their operations, Xing said.

With a modern mindset, Chinese overseas investors should avoid blindness in their investment decisions, which at present is the biggest problem for Chinese mainland outward foreign direct investors, Xing adds.

Many mainland companies have no clear strategy for the operation and development of their overseas branches. Co-operation between mainland headquarters and overseas outlets is very poor. All these facts have hampered the globalization of these firms, according to the researcher.

Besides the lack of strategies, mainland outward investors also fall short in terms of accurate market information, Xing said.

This point was also echoed by Finkelston from the IFC. "Chinese companies have limited knowledge of investment strategies and they need systematic advice," she said.

Many mainland companies, especially private firms, do not have a deep comprehension of the laws and rules in overseas market. Nor do they understand the industry operation, which brings more risk to their investment, Xing added.

"These firms need to make full use of organizations such as legal agencies and consulting agencies to get information about the global market," Xing comments.

China's outward FDI should also be aimed at restructuring their resource and production elements.

According to a survey by the Chinese Academy of International Trade and Economic Co-operation, most Chinese overseas investors do not pay enough attention to the destination as they do to transferring extra productivity and lowering costs.

"This contradicts the traditional FDI concept and the basic rule of business operation under the market economy system," said Xing.

Moreover, Xing points out that the Chinese investors should develop a strong consciousness of intellectual property rights protection.

In the recent years, more than 100 famous Chinese brands have been registered by overseas competitors.

For example, Hisense, a famous mainland electronics brand, was registered in Europe last year by an overseas competitor.

Many firms will suffer if they fail to develop an awareness of intellectual property rights.

(China Business Weekly )