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Outward investment rises as countries eye many benefits
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In 2008 global FDI fell by around 20 percent, while outward FDI from China nearly doubled.

This disparity is likely to continue in 2009 and 2010 as China invests even more overseas. Certain key drivers of China's outward FDI explain this acceleration.

One of the most reported motivations in the international media and in some academic writing is China's need to secure natural resources to fuel rapid growth, though this is not the most significant area of China's outward investment, which is service industry.

While most of China's exports are from foreign-owned enterprises, large domestic firms also export large volumes and need services like shipping and insurance.

China's major enterprises are also acquiring global brands (like Lenovo's acquisition of IBM's personal computer business or the SAIC and Nanjing purchase of MG Rover).

Large state-owned enterprises (SOEs) losing their monopoly position at home are diversifying internationally.

And some enterprises - despite China's ample labor supply - seek to move their labor-intensive operations to cheaper overseas locations like Vietnam and Africa.

The relative strengths of these motivations are reflected in the sectoral and geographical distribution of China's accumulated FDI.

The latest figures published by China's Ministry of Commerce (MOFCOM) in February 2009 show outward FDI cumulated to end-2007 as US$118 billion.

Services prevail

The tertiary sector predominated, with over 70 percent of the total.

Manufacturing remained modest at 8 percent, and construction even lower at 1.4 percent; so, with other items, the secondary sector contributed around 16 percent of outward FDI.

The remaining 14 percent is accounted for by mining, quarrying and oil production (13 percent) and agriculture, forestry and fisheries (1 percent).

The predominance of services is the result of China's export boom and the extension of China's financial services overseas to utilize the wealth of the Chinese diaspora, learn advanced techniques and diversify earnings sources.

Media reports focus on China's investments in Africa, but the continent that continues to absorb most of China's capital exports is Asia, which accounted for about 67 percent of cumulated Chinese outward FDI to end-2007, with Latin America receiving 21 percent, Europe 4 percent, Africa 4 percent, North America 3 percent and Oceania 2 percent.

Guangdong Province - the largest recipient of FDI in China - provided 20 percent of total outward FDI in 2008. The second largest source was Zhejiang, with 8 percent of outward FDI, Shandong following in third place with 8 percent.

This distribution results from several factors: proximity to major seaports and thus overseas markets, strong links to a global diaspora originating from coastal areas, and positive spill-over and demonstration effects of inward FDI in or near the three major coastal economic centers of the Pearl River Delta, the Yangtze Delta and the Bohai Gulf.

Fiscal stimulus

How is the crisis affecting China's outward FDI? As an open economy, China can not escape the effects of the global financial crisis of 2008.

The government is countering the downturn with a fiscal stimulus that will limit GDP deceleration, and credit has actually expanded

With US$1.9 trillion in foreign-exchange reserves, a current-account surplus forecast by the OECD to rise to 11.7 percent of GDP in 2009 and no credit crunch, China can afford large investments overseas. China's outward FDI accounts for not much more than 1 percent of the global total, far below the country's share of world trade.

However, this total is rising fast and the country will eventually become a major source of global FDI. Potential recipient countries are beginning to recognize this as they start to offer inducements to attract Chinese multinational enterprises.

(The author is head of Global Relations in the OECD's Investment Division. The views are his own. The article is adapted with permission from the Vale Columbia Center on Sustainable International Investment - www.vcc.columbia.edu.)

(Shanghai Daily June 8, 2009)

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