On December 3, 2018, the Center for China and Globalization and the Development Research Institute of Southwestern University of Finance and Economics jointly released the 2018 Bluebook Report on Chinese Enterprise Globalization at CCG Beijing Headquarters, which is published by the Social Sciences Academic Press of the Chinese Academy of Social Sciences. This report was coauthored by CCG and the Development Research Institute of Southwestern University of Finance and Economics and edited by Dr. Wang Huiyao, CCG President and Dean of the Development Research Institute of Southwestern University of Finance and Economics, and Dr. Miao Lu, CCG’s Vice President and Secretary General.
The report summarizes the development and characteristics of global foreign investment and Chinese companies’ outbound investment from 2017 to 2018, and analyzes the reasons for the sharp decline in their outbound investment from the perspective of international politics, economy and investment environment, as well as proposes solution accordingly for their reference. In addition, the report discusses the issues including compliance with local regulations by Chinese companies in their overseas development, private enterprises' overseas investment in physical economy, and economic and trade cooperation along the “Belt and Road”, the nature of Chinese enterprises' overseas development, the dilemma that Chinese SMEs are facing abroad. Besides, the report invites professional lawyers to interpret the core clauses of cross-border M&A transactions, analyzes the impact of recent market access regulations in China, the US, and Europe on Chinese companies, and propose 10 suggestions to stabilize the Sino-US relations amid their trade conflict. Through the analysis and interpretation of eight cases studies about Chinese enterprise going abroad and an audit of China’s outbound investment activities from 2017 to 2018, the report provides more reference to guide Chinese companies’ overseas development.
The report shows that the global economy has entered into a stable recovery period in 2017, due to the factors such as improved financial environment and increased market demand. According to data from the International Monetary Fund (IMF), the world GDP growth rate in 2017 increased by 0.4 percentage points from 2016, the highest rate of global economic growth since 2011. Despite heightened trade barriers and enhanced de-globalization momentum, China’s economic development has a remarkable performance. In 2017, China's GDP reached 82.7 trillion yuan, exceeding 80 trillion yuan for the 1st time, an increase of 6.9% from 2016. Although Chinese companies have slowed the pace of investing abroad, their outbound investment have gradually returned to a rational level in terms of fields and modes.
In 2017, the global economy continued with its recovery, but global foreign investment went on to decline, and even at the highest level in nearly 15 years, exceeding the rate during the 2008-2009 financial crisis. Regionwise, the United States, Europe, and Asia are still the most favorable destinations for investors. Sectorwise, the investment is concentrated in the service industry. Regarding investment methods, both cross-border M&A and greenfield investment have declined. Although trade protectionism has been picking up globally, international investment policies remain in support of investment freedom and facilitation. In 2017, Chinese enterprises' outbound investment dropped for the first time, while strengthen regulations and supervision has guided Chinese companies to go global more rationally. Thanks to the initiatives such as “the Belt and Road”, they were able to invest in a broader range of areas and sectors. Currently, Europe, Asia and North America remain the top destinations for Chinese investors, although the investment in the United States has fallen sharply. M&A is still their major approach for overseas investment. However, their greenfield investment continues to decline. Among all the sectors, manufacturing continues to attract most of Chinese overseas investment, while information and communications, IT services and software industries are also gaining momentum.
Highlights of CCG’s 2018 Bluebook Report on Chinese Enterprise Globalization
1. Global foreign direct investment from 2017 to 2018:
In 2017, global economy continued with its recovery, but global FDI flow fell again. Unlike the slight decline in 2016, it dropped 23% yoy in 2017 to about $1.43 trillion. According to CCG analysis, the growing de-globalization trend worldwide is the main reason that caused the sharp decline. For example, US President Trump’s protectionism policies has increased uncertainties in global trade and economic cooperation. In Europe, the elections of major states such as Germany and France reflect the expansion of the right-wing forces in the region, which became a potential factor hindering the globalization process. In addition, the US and European countries have shown a strengthened investment protectionism tendency and formulated or revise laws to provide a legal basis for the government to review foreign M&A transactions.
In 2017, global investment inflows to developed economies shrank to only $712.4 billion, a decrease of $420.8 billion or 37% from 2016. Global investment in transition economies also fell sharply by 27% to $46.8 billion. In comparison, global investment in developing economies remained stable and rebounded slightly by $500 million to $670.7 billion. Asia surpassed Europe to become the No. 1 destination of global FDI, accounting for 36% of the total, followed by 26% in Europe, 21% in North America, 10% in Latin America and the Caribbean, 4% in Oceania and 3% in Africa. Compared to 2016, all the continents but Asia and Latin America and the Caribbean have received less foreign direct investment to different degrees. Europe, North America and Africa suffered from a sharp FDI decline by 39.8%, 39.4, and 21.5%, respectively. In 2017, the EU and Eurozone economy has begun to recovery, growing 2.4% from the previous year. The global investment in Asia has been growing steadily, with four out of the top 10 world’s most popular FDI destinations coming from this region.
The US FDI has grown significantly in 2017, up 22% year-on-year to reach $342.3 billion. Japan jumped from the 4th largest source of FDI in 2016 to the 2nd in the world, reaching $160.4 billion. This is the 4th consecutive year that Japan’s foreign investment has been on increase. In mainland China, there has been a major decline of outbound investment in 2017, falling from $196.1 billion in 2016 to $124.6 billion. In terms of the investment destinations, investment that flew to the US has decreased 40% last year, although it is still ranked the No.1 destination with a total of $275.4 billion FDI. However, due to the US rigorous rules to review foreign investment and other factors that created uncertainties, the global investment that flowed to the country in the first half year in 2018 has fell by 73% to $46 billion, making the US drop from the No. 1 FDI destination to the 3rd place. Under a series of investment facilitation and investment promotion measures, China's attractiveness to foreign investment has been increasing. In the first half of 2018, China surpassed the United States and became the world's largest foreign investment destination.
In 2017, the primary industry led by agriculture only received 1% of the total FDI, down 3% from 2016. Due to the a large number of cross-border M&A cases in the chemical raw materials, chemical product manufacturing, food and tobacco industries, manufacturing industries accounted for 43% , 3% more than 2016. The service industry, on the other hand, is still the most attractive sector for FDI, accounting for 56% of the total investment. According to CCG analysis, many major economies have introduced policies to boost industrial development and high-tech innovation in recent years, such as Germany's "Industry 4.0", China's "Made in China 2025", the United States' "manufacturing backflow" and Japan's "new robot strategy", to increase the global competitiveness of their products. It has driven the FDI flow to global manufacturing industries.
In 2017, the value of global cross-border M&A cases have decreased by 22% year-on-year, while the number of M&A deals increased slightly by 5% to 6,967. Among all, the deals in the primary industry experienced a sharp decline by 123%. The value of greenfield investment also dropped 14%. It is worth noting that in the greenfield investment in the manufacturing industry grew 14%, while it decreased in both primary industry and service industry by 61% and 25%, respectively.
In 2017, a total of 126 policies have been issued in 65 countries around the world about trade, and 73.8% of them are intended to liberate and facilitate trade, 6% higher than 2016. The number of policies to restrict foreign investment has slightly declined, accounting for 14% of the total. Asian emerging economies, in particular, are making unprecedented efforts to expand the fields for FDI. According to CCG analysis, the general trend is that many countries have attached more importance to attracting FDI, and it has become a consensus to provide a more enabling environment for foreign investors. However, there are still some countries that are taking cautious approach to receive FDI in 2017. It is noteworthy that the countries with restrict policies are mostly developed economies. They have strengthened their review of foreign M&A deals, especially those that involve strategic assets and high-tech companies. Given the fact that most China’s outbound investment have flew to the developed economies in Europe and North America last year, Chinese enterprises will be greatly affected by the restricted review policies in those countries. Therefore, they are suggested to be more prepared to handle the difficult situation with a more professional M&A team.
2. China’s outbound Investment from 2017 to 2018
Chinese enterprises’ outbound investment fell for the first time in 2017, but strengthened policy supervision guided their investment abroad more rational.
According to data from the Ministry of Commerce, China’s outbound investment have declined for the first time in 2017 to $158.29 billion. CCG believes that one of the reasons for the decrease was the stricter policy supervision rolled out in the past two years to guide Chinese companies going global. Policy changes have a significant impact on their outbound investment.
In 2017, China’s outbound investment was concentrated in Europe, Asia and North America, accounting for 39%, 23% and 23% of the total, respectively. Countrywise, the investment in the United States has dropped significantly both in terms of amount of value last year due to the Trump trade policies and other factors that created uncertainties. Chinese companies invested only 67 projects in the country, with a total $201.33 billion in value, a year-on-year decrease of 57% and 76% from 2016.
According to CCG statistics, cross-border M&A still dominated China’s outbound investment in 2017. However, the number of M&A cases started decreasing, ending the time of the increase both in the amount and value between 2013 and 2016. According to CCG analysis, in 2017, the tightened policy and supervision has effectively curbed irrational outbound investment, especially in the sectors like real estate, hotels, entertainment. On the other hand, the barriers set by foreign governments in cross-border M&A cases also discouraged Chinese companies’ outbound investment.
Regarding greenfield investment, both the number and value of the cases in 2017 have dropped to the lowest level in four years after three-year continuous decline. CCG believes that greenfield investment is beneficial to the social development, productivity and job creation in the hosting countries. However, greenfield investment involves a large amount of preparation work and a long term before the return on investment starts, as well as the high requirement on the capital and experience in localized operation. Therefore, it is still less favorable compared to M&A investment. However, CCG predicts that as the “Belt and Road” initiative will lead to the expansion of greenfield investment by Chinese enterprises in the countries along the route in the next five years.
Sectorwise, manufacturing accounted for 40% of China’s total outbound investment in 2017, 4% higher than the previous year. The investment in information & communications, IT services and software industry has grown for the 4th consecutive year in 2017, accounting for 15% of the total, 4% higher than the previous year. CCG believes this sector will gain more momentum with the increased M&A activities of Chinese Internet giants such as Alibaba.com and Tencent Holdings.
CCG also points out that manufacturing is still a key industry for Chinese companies’ outbound overseas. Through M&A investment, they can acquire advanced technology and management experience, transform and upgrade the entire industry, and optimize the allocation of the domestic industrial structure. At the same time, through the M&A activities in IT, computer services and software industries, Chinese companies have acquired R&D, operation, management and technical talent in line with international standard as well as established markets to continuously increase their say in high-tech industries. However, they are advised to take cautious measures when conducting M&A in these fields, with the national security review and anti-monopoly review in the developed countries.
In the first half of 2002~2018, in terms of scale, most investment by Chinese companies in the Belt and Road countries are between $100 million to $1 billion, accounting for 48.7% of the total, following by the investment between $10 million and $100 million and the investment between $1 billion and $10 billion, accounting for 25% and 15.6%, respectively. The cases of the investment below $100,000 and above $10 billion is very limited. Sectorwise, most of the investment in the Belt and Road countries flew to manufacturing and information/communications/IT services/software industry, accounting for 33% and 34%, respectively, followed by mining, transportation, and financial industries, all accounting for 7%. The rest of the shares scattered in the industries like real estate, construction, culture & sport, electricity, and gas and water supply.
According to CCG analysis, after five years since its release, the “Belt and Road” initiative has entered the stage of comprehensive cooperation. China's state-owned enterprises, as the main force in outbound investment, have driven the cooperation and development in the industries like infrastructure, energy, and aviation the countries along the route. At the same time, because of the PPP projects promoted by the Chinese government, many private companies have been able to participate in the upstream and downstream of industrial chains built along the “Belt and Road”, and more companies in manufacturing and IT industries introduced to the markets in the region. Overseas industrial parks have become an effective path and platform for the construction of the “Belt and Road” projects.
3. Five major challenges and solutions accordingly for Chinese enterprise globalization in 2017~2018
Many Chinese companies have been punished abroad because they were not familiar with the laws and regulations of the hosting countries or had no a complete compliance system to avoid legal risks. CCG recommends the Chinese enterprises to raise their awareness and attention to compliance from the top leadership, to improve their compliance system and to appoint chief compliance officer to coordinate on the relevant affairs. The government is advised to strengthen legislation for the compliance of Chinese companies and establish a specific commission to review their practice. In addition, think tanks can provide advice and suggestions to help Chinese companies abroad in this regard.
Chinese companies are still lagged behind developed countries in terms of their branding influence. According to CCG analysis, this is because Chinese companies are still caught in traditional business thinking, and their brand reputation, promotion, and management needs to be improved. To solve these problems, Chinese enterprises should enhance their product quality and improve R&D with both the essence of Chinese traditional culture and lesson learned from the best practice in overseas management and consumption culture. The government should improve policies and regulations to create a favorable environment and create more opportunities for Chinese brands to go abroad. Media, on the other hand, should also help Chinese companies build their brands abroad.
Chinese enterprises have played a vital role in the “Belt and Road” initiative. However, as they became more involved in the “Belt and Road” projects, they started encountering various difficulties, including political risks, cultural barriers, differences in legal systems, and environmental and labor issues. CCG believes that those problems were caused by the frequent regime changes in countries along the route, investment barriers created by cultural conflicts, and environmental issues that hinder the further development of their overseas investment. CCG suggests the companies to learn more about how to use political insurance tools and improve their compliance with local regulations on business operation. The government is advised to help enterprises to participate in overseas investment negotiations, break down the obstacles for the sake of common interests, and invite developed countries to join the “Belt and Road” projects. Meanwhile, financial institutions are pushed to provide them with more assistance.
The ongoing Sino-US trade friction is a heavy blow to Chinese and American companies. According to CCG analysis, the reasons for such as a predicament include American bipartisan politics, the US political game in the name of protecting "national security", and the lack of social responsibilities for some Chinese enterprises in the United States. To improve the situation, CCG suggests that Chinese companies should adapt themselves to American social culture and fulfill their social responsibilities to gain more support. At the same time, they should explore more investment opportunities in the emerging countries in Asia, Africa and Latin America. The government should provide them with more policy support to go abroad and maintain multilateral and free trading mechanisms. Financial institutions such as banks should also increase capital support for Chinese companies. General public should restore confidence in the home-grown companies. Think tanks should actively promote “Track II Diplomacy” to help create a favorable environment for Chinese companies abroad.
At present, the level of internationalization of Chinese companies that contract construction projects abroad is still relatively low, far behind developed countries. Chinese companies are still in a primitive stage in the business of overseas project contracting and therefore facing many challenges. CCG believes that Chinese companies needs to improve the capacity of running PPP projects overseas and to handle the challenge from the lack of PPP-related regulations and policies in the hosting countries. As a solution, CCG suggests that Chinese companies change their mentality when participating in PPP projects and select the best timing and method to launch the cooperation. The government can promote PPP cooperation in the countries that have closer relations with China and provide information platform to help Chinese companies go abroad and coordinate on their overseas contracting projects.From ，2019-06-24