Theoretical Explanation of Chinas Outward Direct Investment.docx

Theoretical Explanation of Chinas Outward Direct Investment.docx

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TheoreticalExplanationofChinasOutwardDirectInvestment

TheoreticalExplanationofChina’sOutwardDirectInvestment

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　　Abstract:

　　Traditionalforeigndirectinvestment（FDI）theoryonlyexaminescorporateinvestmentmotivationwhileneglectinggovernmentroles.China’soutwarddirectinvestment（ODI）isofbothcommercialandstrategicsignificancetoleveragedomesticandinternationalresourcesandmarkets.ODIisacorporatebehaviorbutalsoisameansofachievingnationalstrategiesandheighteningpoliticalandeconomicstatuses.AsasourceofODI,ChinashouldprovidestrongguidanceandbackingtocorporateODIforbothcommercialandnationalinterests.

　　KeyWords:

　　ForeignDirectInvestment（FDI）,nationalinterest,investmentsource,outwarddirectinvestment（ODI）

　　I.ChineseODI:

aNewPhenomenonforInternationalEconomics

　　VladimirLeninnotedin1914thattheemergenceofcapitalexportisanimportantwatershedofmonopolisticcapitalism,asopposedtotheeraoflaissez-fairecapitalismcharacterizedbycommodityexport.Theexportofcapitalisameansforgreatpowerstodominateworldmarkets.InhisbookImperialismIstheHighestStageofCapitalism1,Leninnotedthatinthemonopolystage,surpluscapitalbecomesmorepronounced,andbankcapitalandindustrialcapitalbecomeintegrated.Nomatterinthecaseofproductioncapital（directinvestmentforestablishingenterprises）orloancapital（capitalexportintheformofloanswiththeconditiontopurchasethecreditor'scommoditiesusingpartoftheloans）,“capitalexporthasbecomeameanstoencouragecommodityexport.”Somecreditorshaveusedcontractstocontroldebtor'sresourcesandsellcommoditiesathighpriceswhilepurchasingrawmaterialsatlowprices.BeforeWorldWarII,capitalexportwasprimarilyintheformofloancapital,andWesterneconomistsstudieditasaphenomenonofinternationalcurrencyflow.Internationaltradetheoryandexchangepremiumtheorybecamemainstreamtheoriesfortheexplanationofinternationalloancapital.ProposedbyGeorgeGoshenin1861,internationalloantheoryholdsthattheimportandexportofgoodsandservices,capitalexportandotherformsofinternationalbalanceofpaymentactivitiesbetweennationswillallgiverisetointernationalloans.Internationalloanswillchangeforeignexchangesupplyanddemand,andthuschangeforeignexchangerates.Inagivenperiodoftime,whenforeignincomeincreaseswhileforeignspendingdecreasesinacountry'sinternationalbalanceofpayments,foreigncreditswillexceedforeigndebts,whichmeanasurplusininternationalloans.Onthecontrary,ifforeigndebtsexceedforeigncredits,itsinternationalloanswillbeindeficit.Classicinternationalsecuritiesinvestmenttheoryholdsthattheveryexistenceofinternationalsecuritiesinvestmentisthedifferenceofexchangeratesbetweennations.Whenanation'sinterestrateislowerthananothernation's,financialcapitalwillflowfromthelowinterestratecountrytothehigherinterestratecountryuntilthegapisclosed.

　　AfterWorldWarII,capitalexportbecamedominatedbydirectinvestmentwhichprimarilyoccurredbetweendevelopedcountries.AccordingtotheinterpretationanddefinitionoftheUnitedNationsConferenceonTradeandDevelopment（UNCTAD）,fromacommercialperspective,thedifferencebetweendirectinvestmentandloancapital（indirectinvestment）isthatthelatteronlyaimsforcapitalreturns,whiletheformeraimsforbothcapitalreturnsandoperationrightsoroperationalcontrol.Thispromptedeconomiststoshifttheirresearchhorizon.Whymustforeignenterprisesacquireoperationalcontrolwheninvestinginahostcountry?

Withoutcolonialprivileges,whatstrengthsdoforeignenterpriseshavetocompetewithlocalfirmstoachievecapitalreturns?

Thesequestionstriggeredresponsesfromcontemporaryinternationaleconomistsonforeigndirectinvestment（FDI）theoryandmultinationalcompanies,aswellasastringoftheorieslikecorporatespecificadvantagetheory2,internalizationadvantagetheory3andinternationalproductioncompromisetheory4.TheseexplanationsandtheoriesformedthebasicframeworkforcontemporaryFDItheoryandareextensivelyreferencedinthetextbooksofWesterninternationaleconomics.

　　Withoutadoubt,thesetheoriesweredevelopedtoexplainthecross-borderinvestmentofcompaniesinthemostdevelopedcapitalistindustrializednationsinEuropeandNorthAmerica.Thescopeofanalysisprimarilyappliedtothemutualinvestmentsbetweendevelopednations.Sincethe1960s,however,largecompaniesinsomelate-startingcapitalistcountriesandemergingindustrializedeconomiessuchasJapan,SouthKoreaandSingaporestartedtoinvestabroad,includingtolessdevelopedeconomies.Thischangedthecompositionofmultinationalcompanies.ComparedtolargecompaniesinEuropeandNorthAmerica,theircross-borderinvestmentsarenotmarkedwithclearcorporatespecificadvantagesorinternalizationadvantages.Thequestionishowtoexplaintheirinvestmentbehaviorsgivensuchweaknesses?

Using“marginalindustrialrelocationtheory,”5JapanesescholarKiyoshiKojimaexplainedthe“flyinggeesepattern”formedintheprocessofindustrialrelocationinEastAsia,whichisactuallyadynamicextensionofcomparativeadvantagesandsharessimilarcharacteristicswithJohnH.Dunning'slocationtheory.TheseEasternandWesterntheoriesdominatedinternationaleconomicstextbooksforfortytofiftyyears.

　　Afterthe1980s,economicliberalizationsweptacrosstheworld.Economicglobalizationadvancedwithgreaterspeed,internationaldirectinvestmentsbecamemorecomplex,andtheoriginofmultinationalfirmsbecamemorevaried.Inparalleltocontinuedmutualinvestmentsbetweendevelopedcountries,thereemergedlargeinvestmentflowsfromtheNorthtotheSouth,betweentheSouthandtheSouth,andeveninverselyfromtheSouthtotheNorth.Inthefaceofthesenewdevelopments,mainstreamtheoriesininternationaleconomicstextbooksbecamepuzzled.Corporateinvestmentfromdevelopingeconomiestoricheconomies,inparticular,madeexistingtheoriesimpotent.Amongtheoriesondirectinvestmentofdevelopingcountries,thesmall-scaletechnologytheoryofWells（1983）isregardedasapioneeringresearchoutcomeonmultinationalcompaniesfromthedevelopingworld.Accordingtosmall-scaletechnologytheory,thecomparativeadvantageofcompaniesindevelopingcountriescomesfromlowcosts,whichreflectsthemarketcharacteristicsofhomecountries.Suchlow-costadvantagescomefromthefollowingsources:

possessionofsmall-scaleproductiontechnologiesforasmallmarket;nationalproductsthatarepopularabroad;alow-pricemarketingstrategy,etc.Giventhediverseandmulti-tieredworldmarket,evenforlessadvancedsmallfirms,theirlow-costadvantagestillpresentspowerfulcompetitiveness.Their“localcontentandspecialproducts”and“low-pricemarketingstrategy”makeitpossibleforthemtocompetewithmultinationalsfromdevelopedcountries.Accordingtosmall-scaletechnologytheory,evenenterprisesfromdevelopingcountrieswithsimpletechnology,alimitedbusinessscopeandasmallcapacitycanstilljoininternationalcompetitionthroughoutwarddirectinvestment（ODI）.

　　WithresearchonthecompetitivestrengthandinvestmentmotivesofIndianmultinationalcompanies,Lall（1983）developedhistechnologylocalizationtheoryonODIfromdevelopingcountries.Thistheoryholdsthatcorporatetechnologyformationindevelopingcountriescontainsinnovationactivitiesthatleadtospecificadvantages.Developingcountriesprovideadifferentenvironmentforcreatingtechnologyandknowledge.Theirtechnologiesareusuallylaborintensive,andtheirproductsareuniquetolocaldemandandthedemandofcountriesofequivalentincomelevels.Thatiswhydevelopingcountriesalsohavespecificadvantages.Technologylocalizationtheorystressesthatwhatdevelopingcountriesdoisnotsimplyduplicatetechnologiesfromdevelopedcountries;whattheydoistolearn,improveandinnovate.Itissuchinnovationthatbringsnewvitalityintointroducedtechnologies.Italsobringsnewcompetitiveadvantagestotheenterprisesandenablesthemtobecompetitiveinthelocalmarketandthemarketsofneighboringcountries.TheabovetwotheoriesexplainedODIfromdevelopingcountriesusingmicro-leveltheories,andexplainedwhatmakesitpossiblefordevelopingcountriestohavecomparativeadvantageswhiletakingpartininternationalproductionandbusinessactivities.

　　Inthelate1980s,ProfessorMichaelE.PorterofHarvardBusinessSchoolproposedtheideaofan“internationalproductionvaluechain”inhiscross-borderbusinesstheory.This,tosomeextent,madeupforthedefectsofexistinginternationaldirectinvestmenttheories.Usingtheconceptof“valuechain,”Porter（1986）describedtheprocessthroughwhichmultinationalsdeveloptheirstrategiesandcompetitiveness.Specifically,twostrategicvariablesarecrucial:

thefirstistheintegrationofcorporatebusinessactivitiesworldwide,i.e.whenorganizingbusinessactivitiesofvariouspartsofthevaluechain,multinationalcompaniesmustunderstandtheirworldwidelocations.Second,internalcoordination,i.e.whenconductingtheabove-mentionedbusinessactivities,multinationalcompaniesmustunderstandhowvariouslinksofthevaluechainarecoordinated.Porterholdsthatcompetitivenesscomesfromtwoaspects:

firstisthevalueactivitiesthemselves,whicharefundamental.Theotherisvaluechainlinkage,whichmeanstherelationshipbetweenhowaval