Theoretical Explanation of Chinas Outward Direct Investment.docx

1、Theoretical Explanation of Chinas Outward Direct InvestmentTheoretical Explanation of Chinas Outward Direct Investment Abstract: Traditional foreign direct investment (FDI) theory only examines corporate investment motivation while neglecting government roles. Chinas outward direct investment (ODI)

2、is of both commercial and strategic significance to leverage domestic and international resources and markets. ODI is a corporate behavior but also is a means of achieving national strategies and heightening political and economic statuses. As a source of ODI, China should provide strong guidance an

3、d backing to corporate ODI for both commercial and national interests. Key Words: Foreign Direct Investment (FDI), national interest, investment source, outward direct investment (ODI) I. Chinese ODI: a New Phenomenon for International Economics Vladimir Lenin noted in 1914 that the emergence of cap

4、ital export is an important watershed of monopolistic capitalism, as opposed to the era of laissez-faire capitalism characterized by commodity export. The export of capital is a means for great powers to dominate world markets. In his book Imperialism Is the Highest Stage of Capitalism1, Lenin noted

5、 that in the monopoly stage, surplus capital becomes more pronounced, and bank capital and industrial capital become integrated. No matter in the case of production capital (direct investment for establishing enterprises) or loan capital (capital export in the form of loans with the condition to pur

6、chase the creditors commodities using part of the loans), “capital export has become a means to encourage commodity export.” Some creditors have used contracts to control debtors resources and sell commodities at high prices while purchasing raw materials at low prices. Before World War II, capital

7、export was primarily in the form of loan capital, and Western economists studied it as a phenomenon of international currency flow. International trade theory and exchange premium theory became mainstream theories for the explanation of international loan capital. Proposed by George Goshen in 1861,

8、international loan theory holds that the import and export of goods and services, capital export and other forms of international balance of payment activities between nations will all give rise to international loans. International loans will change foreign exchange supply and demand, and thus chan

9、ge foreign exchange rates. In a given period of time, when foreign income increases while foreign spending decreases in a countrys international balance of payments, foreign credits will exceed foreign debts, which mean a surplus in international loans. On the contrary, if foreign debts exceed forei

10、gn credits, its international loans will be in deficit. Classic international securities investment theory holds that the very existence of international securities investment is the difference of exchange rates between nations. When a nations interest rate is lower than another nations, financial c

11、apital will flow from the low interest rate country to the higher interest rate country until the gap is closed. After World War II, capital export became dominated by direct investment which primarily occurred between developed countries. According to the interpretation and definition of the United

12、 Nations Conference on Trade and Development (UNCTAD), from a commercial perspective, the difference between direct investment and loan capital (indirect investment) is that the latter only aims for capital returns, while the former aims for both capital returns and operation rights or operational c

13、ontrol. This prompted economists to shift their research horizon. Why must foreign enterprises acquire operational control when investing in a host country? Without colonial privileges, what strengths do foreign enterprises have to compete with local firms to achieve capital returns? These questions

14、 triggered responses from contemporary international economists on foreign direct investment (FDI) theory and multinational companies, as well as a string of theories like corporate specific advantage theory2, internalization advantage theory3 and international production compromise theory4. These e

15、xplanations and theories formed the basic framework for contemporary FDI theory and are extensively referenced in the textbooks of Western international economics. Without a doubt, these theories were developed to explain the cross-border investment of companies in the most developed capitalist indu

16、strialized nations in Europe and North America. The scope of analysis primarily applied to the mutual investments between developed nations. Since the 1960s, however, large companies in some late-starting capitalist countries and emerging industrialized economies such as Japan, South Korea and Singa

17、pore started to invest abroad, including to less developed economies. This changed the composition of multinational companies. Compared to large companies in Europe and North America, their cross-border investments are not marked with clear corporate specific advantages or internalization advantages

18、. The question is how to explain their investment behaviors given such weaknesses? Using “marginal industrial relocation theory,” 5 Japanese scholar Kiyoshi Kojima explained the “flying geese pattern” formed in the process of industrial relocation in East Asia, which is actually a dynamic extension

19、of comparative advantages and shares similar characteristics with John H. Dunnings location theory. These Eastern and Western theories dominated international economics textbooks for forty to fifty years. After the 1980s, economic liberalization swept across the world. Economic globalization advance

20、d with greater speed, international direct investments became more complex, and the origin of multinational firms became more varied. In parallel to continued mutual investments between developed countries, there emerged large investment flows from the North to the South, between the South and the S

21、outh, and even inversely from the South to the North. In the face of these new developments, mainstream theories in international economics textbooks became puzzled. Corporate investment from developing economies to rich economies, in particular, made existing theories impotent. Among theories on di

22、rect investment of developing countries, the small-scale technology theory of Wells (1983) is regarded as a pioneering research outcome on multinational companies from the developing world. According to small-scale technology theory, the comparative advantage of companies in developing countries com

23、es from low costs, which reflects the market characteristics of home countries. Such low-cost advantages come from the following sources: possession of small-scale production technologies for a small market; national products that are popular abroad; a low-price marketing strategy, etc. Given the di

24、verse and multi-tiered world market, even for less advanced small firms, their low-cost advantage still presents powerful competitiveness. Their “local content and special products” and “low-price marketing strategy” make it possible for them to compete with multinationals from developed countries.

25、According to small-scale technology theory, even enterprises from developing countries with simple technology, a limited business scope and a small capacity can still join international competition through outward direct investment (ODI). With research on the competitive strength and investment moti

26、ves of Indian multinational companies, Lall (1983) developed his technology localization theory on ODI from developing countries. This theory holds that corporate technology formation in developing countries contains innovation activities that lead to specific advantages. Developing countries provid

27、e a different environment for creating technology and knowledge. Their technologies are usually labor intensive, and their products are unique to local demand and the demand of countries of equivalent income levels. That is why developing countries also have specific advantages. Technology localizat

28、ion theory stresses that what developing countries do is not simply duplicate technologies from developed countries; what they do is to learn, improve and innovate. It is such innovation that brings new vitality into introduced technologies. It also brings new competitive advantages to the enterpris

29、es and enables them to be competitive in the local market and the markets of neighboring countries. The above two theories explained ODI from developing countries using micro-level theories, and explained what makes it possible for developing countries to have comparative advantages while taking par

30、t in international production and business activities. In the late 1980s, Professor Michael E. Porter of Harvard Business School proposed the idea of an “international production value chain” in his cross-border business theory. This, to some extent, made up for the defects of existing international

31、 direct investment theories. Using the concept of “value chain,” Porter (1986) described the process through which multinationals develop their strategies and competitiveness. Specifically, two strategic variables are crucial: the first is the integration of corporate business activities worldwide,

32、i.e. when organizing business activities of various parts of the value chain, multinational companies must understand their worldwide locations. Second, internal coordination, i.e. when conducting the above-mentioned business activities, multinational companies must understand how various links of the value chain are coordinated. Porter holds that competitiveness comes from two aspects: first is the value activities themselves, which are fundamental. The other is value chain linkage, which means the relationship between how a val