China Law Blog

Joseph Battat of the World Bank's Foreign Investment Advisory Service did a presentation on China's Outward Investment (OFDI) at the 2006 Private Sector Development Forum and the World Bank's Private Sector Development Blog, (subtitled, "A Market Approach to Development Thinking" -- an excellent blog, by the way) did a post on that The presentation, entitled, "China's Outward Investment." 

The post links to Dr. Battat's written presentation materials, which, among other things, revealed the following: 

• Private Chinese companies make up more of China's outbound investment than its State Owned Entities (SOEs) by a 49% to 33% margin.  This goes along with our view that the dynamism in China's economy is coming from the private sector.

• 85% of Chinese companies that invest abroad cited "market seeking" as very important, while only 39% listed "resource seeking" as very important. 

• "Limitations on foreign exchange was the most often cited (58%) impediment to foreign investment.  Since China essentially lifted all such restrictions in March, 2006, this impediment is no more. 

• The biggest challenge (51%) was culture conflict.  Only 46% listed themselves as needing taxation auditing and accounting services.   I find this particularly interesting and I list these two statistics together because I am convinced it is cultural misunderstandings on the part of the Chinese companies to think they can invest abroad without any assistance from tax consultants.  I can speak from our own experiences in dealing with Chinese companies coming to the United States to invest.  We so far have had almost no success in getting Chinese companies to pay us minimal amounts to assist them in forming their companies here, reviewing their contracts, and hooking them up with international accountants.  However, we have had a lot of success in representing Chinese companies on work (usually referred to us by Chinese lawyers) involving cleaning up their malformed companies, working with accountants to remedy their tax problems, and working to try to resolve contractual conflicts that arose from poorly drafted contracts.  I see this as the equivalent of preferring to buy a new car engine every few years rather than paying to have the oil changed oil every 3,000 miles/5,000 kilometers. 

• 19.5% of Chinese investment has been in South & Southeast Asia and 19.9% in East Asia.  18.3% has been in Africa.  14.3% has been in North America and 11.6% in Western Europe. 

• The Chinese companies engaged in outbound investment overwhelmingly find the markets much better in Australia/New Zealand, Western Europe, East Asia, and North America than in China.  They overwhelmingly find the markets much worse in the Middle East and in Eastern Europe/Russia. 

• The Chinese companies that already invest overseas plan to greatly increase their investments in Southeast Asia (33% of them plan to invest there over the next five years, as opposed to the 19% there now) and decrease their investments in North America (8% plan to invest there in the next five years, as opposed to 14% there now).  Planned investments for the other regions are not expected to change much.  Because North America is considered to be a good market, I can only surmise that the Chinese companies are not finding the United States and Canada particularly hospitable or profitable for their businesses.

I urge anyone interested in learning more about China's outbound investments to read Dr. Battat's presentation materials.  The blog promises "a polished paper should be out soon] from Dr. Battat and we will be watching. 

Dr. Battat -- Your bio indicates you taught at the Kelley School of Business at Indiana University and I vaguely recall meeting you at an international law function back in 1984.  Is this possible?