Investment good for both sides

In a high-profile case in 2005, China National Offshore Oil Corporation withdrew its bid for Unocal Corp because of opposition from the media and a negative vote in the House of Representatives. In 2012, the US government also labeled two Chinese telecommunication companies, Huawei and ZTE, as potential threats to the national security of the US and restricted their operations in the US. Many Chinese officials and commentators often cite these cases as evidence that the US has a containment strategy against China.

This interpretation is highly questionable and ignores the special nature of the energy and telecommunication sectors. China itself has a myriad of restrictions on foreign investment in sectors that it deems as potentially related to national security.

Between 2005 and 2008, Carlyle Group, a private equity firm based in the US, attempted to take over Xugong Machinery, but the deal eventually collapsed. In 2009, Coca-Cola's proposal to take over China Huiyuan Juice Group was rejected. It would be a mistake to draw the conclusion from the outcomes of these cases that China has a containment strategy against the US.

Most developed economies treat investment by a government-owned entity differently from investment by a private company. In Canada, for example, such an investment triggers an automatic review, while in the US the issue tends to play out politically. It should be noted that just one year before CNOOC was rebuffed, in 2004, Lenovo succeeded in acquiring the manufacturing division of IBM. Almost no one raised national security or economic concerns about that deal. This is in part because Lenovo is widely accepted as more privately owned and electronic equipment manufacturing is such a competitive business that the nationality of ownership is immaterial to national security.

And investment reviews are not specific to China. Nor are negative review outcomes. In the 1980s, there were also national security concerns about Japanese acquisition activities in the US. In hindsight many of these concerns were misplaced and it is a mystery how Japan, a staunch ally of the US, should have sparked any national security concerns at all. But these concerns led to at least one negative review of a proposed Japanese acquisition. Fujitsu's attempt to acquire Fairchild Semiconductor in 1986 was very controversial, which led to the withdrawal of the bid.

It is inevitable that there will be further controversies involving Chinese investment in the US.

The US has to make the right tradeoffs between safeguarding legitimate national security concerns and recognizing the huge economic upside of Chinese investment in the US. According to research by Rhodium Group, a consulting company, Chinese companies in the US have sharply increased their employment from 10,000 five years ago to 27,000 now. There is a lot of room for Chinese companies to help the US economy grow if they are allowed more investment opportunities.

The US should also recognize the complexities of the Chinese corporate world. Yes, there are many State-owned firms in China but firms such as Huawei are genuinely private and they are doing their best to internationalize their own operations in conformity with accepted rules and norms of international commerce.

For China, it needs to come to terms with the fact that it has chosen a more statist model of economic development and that the international system is designed with an entirely different economic model in mind. Does it have a right to demand that the international system treats it differently from the rest of the world? Or should it take the easier path of denationalizing its own economy and its economic policy management? Doing so would not only help its economy but also make it much easier for Chinese companies to operate on the world stage.

The author is a professor of international management at MIT Sloan School of Management.

(China Daily 12/20/2012 page8)