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http://www.vcc.columbia.edu/content/fdi-perspectives<http://columbia.us6.list-manage1.com/track/click?u=ab15cc1d53&id=fa243306ff&e=dd153d6a25>
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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues by
the Vale Columbia Center on Sustainable International Investment
No. 121 May 12, 2014
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Shawn Lim ([log in to unmask])
*China needs to complement its “going-out” policy with a “going-in”
strategy*
by
Karl P. Sauvant and Victor Z. Chen*<#145f1b5841d69910_145f1ad4e3b50a23__edn1>
China’s rising outward foreign direct investment (OFDI) faces rising
skepticism abroad. This is partly the result of the leading role of
state-owned enterprises in her OFDI (and the fear that it serves
non-commercial purposes), the speed with which this investment has grown,
the negative image of the home country in some quarters, and the challenges
it poses to established competitors. Moreover, Chinese multinational
enterprises (MNEs) may not always keep in mind that host countries see FDI
as a tool to advance their own development and hence seek maximum benefits
from it.
To assuage skeptics, avoid backlash and, ultimately, build trust, China
needs to complement its relatively well-established “going-out” policy with
a purposeful “going-in” strategy that guides the investments of her firms
to ensure that FDI projects maximize contributions to host countries’
economic, environmental and social development, and take place within fair
governance mechanisms. This serves the interests of both host countries and
China.
*First*, a “going-in” strategy should *reinforce *China’s current
regulatory OFDI framework. It already addresses many host country issues,
including economic, environment, corruption, and labor concerns. However,
regulations are typically couched in general language and broad principles,
and do not require Chinese investors to comply with clearly defined
provisions. Out of over 20 environmental and social instruments on
OFDI,[1]<#145f1b5841d69910_145f1ad4e3b50a23__edn2>only a handful
foresees specific penalties. China should reinforce its
regulatory instruments by clearly specifying penalties for the violation of
any of these instruments.
*Second*, a “going-in” strategy should *expand* current efforts. The
government could learn from the OECD Guidelines for MNEs (or even adhere to
them) by, for example, requiring that Chinese MNEs meet disclosure
standards and human rights requirements.
Beyond that, China’s government could guide and assist her firms in *entering,
operating* *and prospering* in foreign markets. Many Chinese firms face
special scrutiny in some jurisdictions, particularly when
*entering*markets via mergers and acquisitions (M&As). In response,
large M&As must
be carefully prepared by taking into account the interests of affected
stakeholders. Understanding how to navigate the corridors of power in host
countries is important, as is coalition-building with local authorities,
potential suppliers, etc. Be it M&As or greenfield projects, in-depth
knowledge of a host country’s regulatory regime and business practices is
required. The government’s
“guidebooks”[2]<#145f1b5841d69910_145f1ad4e3b50a23__edn3>are helpful
here, but less experienced managers require special training.
To *operate and prosper* successfully in a host country, Chinese firms need
to overcome the liability of foreignness—and, in some countries, the
additional liability of being Chinese. They need to integrate tightly into
local communities, become insiders and build a positive brand. This
involves extra efforts in sourcing inputs from local firms (giving them a
stake in the success of Chinese investors), hiring and training local
employees, learning the local language (or at least English), respecting
local customs, becoming members of local organizations, and employing
corporate social responsibility (CSR) practices.
*Third*, the effectiveness of any “going-in” strategy requires that the
government better *monitor *and *enforce* its regulations and guidance,
especially for large-scale projects. A dedicated compliance unit in the
appropriate ministry could do this (assisted by China’s
embassies/consulates), including through on-the-ground inspections.
Enforcement could involve both incentives and penalties. On the incentive
side, compliance with economic, environmental and socially sustainable FDI
practices could become a prerequisite for the approval of OFDI projects
and, indeed, a requirement (as in the case of some countries) for obtaining
any of the advantages that the government makes available to outward
investors.[3] <#145f1b5841d69910_145f1ad4e3b50a23__edn4> Penalties could
include fines, exclusion from doing business with the government and
rescindment of the Certificate of Investment Overseas, as well as criminal
penalties for, say, corrupt practices overseas.
Such a strategy could be underpinned by two other initiatives to build
trust.
One, China’s government could require that a small percentage of parent
firms’ earnings be dedicated to foreign affiliates undertaking clearly
defined CSR activities in host countries (monitored by a board-level CSR
committee),[4] <#145f1b5841d69910_145f1ad4e3b50a23__edn5> creating the
financial and corporate governance basis for sustainable FDI.
Two, many of China’s OFDI projects are large and require extensive
contractual negotiations with host countries to define the projects’
economic, environmental and social dimensions. Typically, least-developing
countries’ governments do not have the capacity to negotiate such contracts
appropriately. China could take the lead in establishing a global
negotiations support facility that provides assistance to host countries in
these situations.[5] <#145f1b5841d69910_145f1ad4e3b50a23__edn6> China would
thereby not only contribute greatly to the development of countries hosting
large FDI projects, be it from Chinese or other MNEs, but also improve the
stability of the contracts concluded, which is in China’s interest.
A “going-in” strategy by China along these lines could become a model for
other home countries, whether they are developed or developing.
------------------------------
* <#145f1b5841d69910_145f1ad4e3b50a23__ednref1> Karl P. Sauvant (
[log in to unmask]) is Resident Senior Fellow at the Columbia Center on
Sustainable Investment (CCSI), a joint center of Columbia Law School and
the Earth Institute at Columbia University; Victor Z. Chen (
[log in to unmask]) is an Assistant Professor of International
Management at Belk College of Business, University of North Carolina at
Charlotte, and EMGP Global Coordinator and Editor at CCSI. The authors
would like to thank Yina Yang for her assistance, Kamal Hossain and Louis
Wells for their comments and Ilon Alon, Yadong Luo and Kenny K. Zhang for
their helpful peer reviews. *The views expressed by the authors of this
Perspective do not necessarily reflect the opinions of Columbia University
or its partners and supporters. Columbia FDI Perspectives** (ISSN
2158-3579) is a peer-reviewed series.*
[1] <#145f1b5841d69910_145f1ad4e3b50a23__ednref2> *See*
http://fec.mofcom.gov.cn/article/zcfg/zcfb/dwtz/201303/1741680_1.html<http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=759d88dfaa&e=dd153d6a25>
;
http://www.gov.cn/gzdt/2009-06/01/content_1329230.htm<http://columbia.us6.list-manage1.com/track/click?u=ab15cc1d53&id=bf6258eb24&e=dd153d6a25>;
http://www.caep.org.cn/book/中国对外投资中的环境保护政策.pdf<http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=90959dbffc&e=dd153d6a25>;
http://www.eximbank.gov.cn/tm/medialist/index_23_14365.html<http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=a044d6748c&e=dd153d6a25>;
http://www.eximbank.gov.cn/tm/medialist/index_23_14367.html<http://columbia.us6.list-manage1.com/track/click?u=ab15cc1d53&id=5ecf442a30&e=dd153d6a25>;
http://www.cbrc.gov.cn/EngdocView.do?docID=3CE646AB629B46B9B533B1D8D9FF8C4A<http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=661a494185&e=dd153d6a25>;
http://www.syntao.com/Uploads/file/Public-Consultation_Draft_Guideline_Chinese.pdf<http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=aea98b7dba&e=dd153d6a25>
.
[2] <#145f1b5841d69910_145f1ad4e3b50a23__ednref3> *See*
http://fec.mofcom.gov.cn/gbzn/gobiezhinan.shtml<http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=26427a964e&e=dd153d6a25>
.
[3] <#145f1b5841d69910_145f1ad4e3b50a23__ednref4> *See* Karl P. Sauvant and
Victor Zitian Chen, “China’s regulatory framework for outward foreign
direct investment,” *China Economic Journal,* 7(1) (February 2014), pp.
141-163.
[4] <#145f1b5841d69910_145f1ad4e3b50a23__ednref5> A variation of what
India’s Companies Act 2013 mandates. *See*
http://indiacode.nic.in/acts-in-pdf/182013.pdf<http://columbia.us6.list-manage1.com/track/click?u=ab15cc1d53&id=5287f96f3e&e=dd153d6a25>
.
[5] <#145f1b5841d69910_145f1ad4e3b50a23__ednref6> For a concept paper, see
Humboldt-Viadrina School of Governance, “Establishing a negotiations
support facility,” available at
http://www.humboldt-viadrina.org/eng/research/current-research-areas/negotiation-support-initiative/<http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=0c6c23ed39&e=dd153d6a25>
.
*The material in this Perspective may be reprinted if accompanied by
the following acknowledgment: “Karl P. Sauvant and Victor Z. Chen, ‘China
needs to complement its “going-out” policy with a “going-in” strategy,’
Columbia FDI Perspectives, No. 121, May 12, 2014. Reprinted with permission
from the Vale Columbia Center on Sustainable International Investment
(www.vcc.columbia.edu <http://www.vcc.columbia.edu>).” A copy should kindly
be sent to the Vale Columbia Center at [log in to unmask]
<[log in to unmask]>.*
For further information, including information regarding submission to the
*Perspectives*, please contact: Vale Columbia Center on Sustainable
International Investment, Shawn Lim, [log in to unmask] or
[log in to unmask]
The Vale Columbia Center on Sustainable International Investment (VCC), a
joint center of Columbia Law School and the Earth Institute at Columbia
University, is a leading applied research center and forum dedicated to the
study, practice and discussion of sustainable international investment. Our
mission is to develop and disseminate practical approaches and solutions,
as well as to analyze topical policy-oriented issues, in order to maximize
the impact of international investment for sustainable development. The
Center undertakes its mission through interdisciplinary research, advisory
projects, multi-stakeholder dialogue, educational programs, and the
development of resources and tools. For more information, visit us at
www.vcc.columbia.edu<http://columbia.us6.list-manage1.com/track/click?u=ab15cc1d53&id=31b2635a02&e=dd153d6a25>
.
*Most recent Columbia FDI
Perspectives*<http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=91be278c3b&e=dd153d6a25>
- No. 120, Jeremy Caddel and Nathan M. Jensen, “Which host country
government actors are most involved in disputes with foreign investors?”
April 28, 2014.
- No. 119, Rainer Geiger, “The Transatlantic Trade and Investment
Partnership: A critical perspective,” April 14, 2014.
- No. 118, Peter Nunnenkamp, Wan-Hsin Liu and Frank Bickenbach,
“Regional concentration of FDI involves trade-offs in post-reform India,”
March 31, 2014.
- No. 117, Rudolf Adlung, “Multilateral investment disciplines: Don’t
forget the GATS!” March 17, 2014.
- No. 116, Gary Hufbauer and Sherry Stephenson, “The case for a
framework agreement on investment,” March 3, 2014.
*All previous FDI Perspectives are available at *
*http://www.vcc.columbia.edu/content/fdi-perspectives*<http://columbia.us6.list-manage2.com/track/click?u=ab15cc1d53&id=97f6750b33&e=dd153d6a25>
*.*
Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Vale Columbia Center on Sustainable International Investment
Columbia Law School - Earth Institute
Columbia University
435 West 116th Street, Rm. JGH 645
New York, NY 10027
Ph: (212) 854-0689
Fax: (212) 854-7946
Please visit our website -
http://www.vcc.columbia.edu<http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=48842ba4c2&e=dd153d6a25>
For Karl P. Sauvant and Federico Ortino, *Improving the International
Investment Law and Policy Regime: Options for the Future*, and Karl P.
Sauvant and Victor Zitian Chen, "China's regulatory framework for outward
foreign direct investment,"*China Economic Journal*, vol. 7 (2014), pp.
141-163, see the Center's website.
*Copyright © 2014 Vale Columbia Center on Sustainable
International Investment (VCC), All rights reserved.*
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