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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
Karl P. Sauvant and Victor Z. Chen*

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] 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] 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] 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] 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] 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.
* 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.
[3] 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] A variation of what India’s Companies Act 2013 mandates. See
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 (” A copy should kindly be sent to the Vale Columbia Center at [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
  • 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
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
(212) 854-0689
Fax: (212) 854-7946

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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.
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