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China’s Direct Investment in

India and Vietnam

Jonas Babics

28th April 2009 - jonas.babics@gmail.com

China’s outward foreign direct investment (OFDI) has gone through a period of very high growth
from 2000 to 2008. The country is globally recognised not only as an attractive host country for
FDI, but also as important source of OFDI. This growth started after the Chinese government
had introduced an official “go global” strategy. As a result, the question was raised among FDI
experts, if China’s OFDI are commercially motivated and can be explained through existing
theories or, if they are solely driven by the government in Beijing.
To identify the motivations behind China’s direct investment in India and Vietnam, I have
reviewed current literature and conducted a survey among FDI experts. The result is, that the
“go global” strategy had and still has a strong impact on Chinese enterprises’ decision to invest
abroad, though a lot of other reasons exist which motivate Chinese enterprises to invest in India
and Vietnam and which are commercial and profit-oriented. Comparing the two economies,
Vietnam seems more attractive for China’s OFDI. This may be explained by similar cultural and
historical backgrounds between China and Vietnam. China’s direct investment in India and
Vietnam are carried out through state owned and private owned enterprises.
Table of Contents

Table of Contents ........................................................................................................................ 2


Boxes, Figures, Tables ............................................................................................................... 3
Abbreviations .............................................................................................................................. 4
1. Introduction .......................................................................................................................... 5
1.1. Dezan Shira & Associates ........................................................................................ 6
1.2. Scope of the Report.................................................................................................. 7
2. Literature Review ................................................................................................................. 8
2.1. Definition of Foreign Direct Investment (FDI) ........................................................... 8
2.2. Measuring FDI and International Statistics............................................................. 10
2.3. Theories of Foreign Direct Investment ................................................................... 10
2.4. China’s Outward Foreign Direct Investment........................................................... 14
2.5. China, India and Vietnam ....................................................................................... 18
3. Methodology ....................................................................................................................... 20
4. Results ................................................................................................................................ 21
4.1. China’s FDI Statistics ............................................................................................. 22
4.2. Survey: China’s Direct Investment in India and Vietnam........................................ 24
5. Conclusion.......................................................................................................................... 30
6. Discussion .......................................................................................................................... 32
References................................................................................................................................. 34

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Boxes

Box 2.1. Motivation of Chinese Investments in Vietnam....................................................... 20

Figures

Figure 2.1. China’s OFDI Flow: 1992-2006 .............................................................................. 15


Figure 4.1. China’s OFDI Flow: 2003-2007 .............................................................................. 22
Figure 4.2. China’s OFDI Stock: 2003-2007............................................................................. 23
Figure 4.3. General interest among Chinese companies for direct investment in India and
Vietnam .................................................................................................................. 24
Figure 4.4. Type of companies investing in India and Vietnam ................................................ 25
Figure 4.5. Motivations behind China’s direct investment in India............................................ 26
Figure 4.6. Motivations behind China’s direct investment in Vietnam ...................................... 27

Tables

Table 4.1. Reasons behind choosing India or Vietnam as preferred destination for China’s
direct investment .................................................................................................... 29

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Abbreviations

BPM6 Balance of Payments and International Investment Position Manual, 6th edn.
BRIC Brazil, Russia, India, China
CLFG China Luoyang Floating Glass Corporation
FDI Foreign Direct Investment
IFDI Inward Foreign Direct Investment
IMF International Monetary Fund
LDC Less Developed Country
MNE Multinational Enterprise
MOFCOM Ministry of Commerce
OECD Organisation for Economic Co-operation and Development
OFDI Outward Foreign Direct Investment
SAFE State Administration of Foreign Exchange
SME Small and Medium Enterprise
SOE State Owned Enterprise
TNC Transnational Corporation
UNCTAD United Nations Conference on Trade and Development
USD United States Dollar

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1. Introduction

China has attracted more and more attention not only as a destination for foreign direct
investment (FDI), but also as a growing source of outward FDI. By the end of 2007, the
accumulated stock of China’s outward FDI (OFDI) has reached the value of USD 117.91 billion.
According to the statistics from the Ministry of Commerce in Beijing, almost 7’000 Chinese
investment entities have established over 10’000 overseas enterprises in 173 economies
globally (MOFCOM, 2008). A significant part of China’s OFDI flows to developing countries with
Hong Kong, China as one of the major destinations. Furthermore, a great amount is invested in
China’s neighbouring economies. Lately, the international media has often mentioned two of
these neighbours - India and Vietnam - as new competitors of China, attracting also a lot of
foreign investment from developed countries. Since the two countries have opened their markets
to FDI, they have been seen as major alternative or addition in the global strategy of European
and American manufacturing or service enterprises. China’s direct investment in India and
Vietnam has also grown significantly in the last years. China may face competition from the two
emerging markets. On the same time, China sees them as an important destination for outward
FDI projects.
The current literature is mainly about foreign direct investment in China. However, in recent
years numerous reports and papers have been written about China’s outward FDI, where FDI
flow to Africa counts as a major topic for articles in newspapers and scientific journals. China’s
investments in Africa are controversial, as they flow almost exclusively into the natural resources
sector and are carried out by large state owned enterprises. China has often been criticised to
exploit the richness of African countries. China’s direct investment in developed economies has
also been examined by researchers, because governments of the host countries are not without
doubt, that the FDI projects may not have a negative impact on their home markets. Therefore,
the governments often intervene, where China’s OFDI get in contact with strategic important
sectors. Unlike Africa and developed economies, there are few research papers about China’s
OFDI in India and Vietnam. Dezan Shira & Associates, the firm where I worked during my
research, is specialized in FDI and has offices in China, but also in India and Vietnam.
Therefore, Chinese companies investing in India and Vietnam belong to their customers. These
are the reasons, why I chose the topic “China’s Direct Investment in India and Vietnam” for my
Licence Thesis.
Since India and Vietnam count as alternative for China as destinations for FDI from developed
countries, the conditions for direct investment must be similar. Although, India is often stated as
having a huge problem with underdeveloped infrastructure and Vietnam started to open its

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economy later than China, the two countries attract more and more direct investment from
developed countries as well as from China itself. A reason for this is certainly the increasing
costs in China’s major cities like Shanghai, Beijing and Shenzhen. However, the potential for
cheap labour manufacturing in China’s central provinces is still immense. The typical reasons
(cheap labour, new market opportunities) why companies invest in countries like China, India or
Vietnam, still exist in China outside of the east coastal area. That led me to the question what
the motivations could be behind the direct investment of Chinese enterprises in India and
Vietnam.
My thesis is, that China’s direct investment in India and Vietnam are not commercially driven, but
are strategically motivated by the Chinese government and are carried out solely by state owned
enterprises (SOEs).
China’s OFDI have grown since 2000, following the launch of the “go global” strategy of the
government in Beijing. Enterprises were encouraged to invest overseas and to expand their
international market share (OECD 2008b). The thoughts behind my thesis are, that the market
opportunities in China are still great and not yet exhausted. Furthermore, that Chinese
companies have no advantage of producing in India or Vietnam and that they would be able to
deliver the two markets from their own country, due to the geographical nearness. In addition,
China has not always been in friendly relationship with India and Vietnam and it sees the two
countries now as competitors for FDI from Europe and the United States. It is not my conviction
that commercial reasons are responsible for China’s companies’ decisions to invest in India and
Vietnam.

1.1. Dezan Shira & Associates

During my research for my Licence Thesis I worked as an intern at Dezan Shira & Associates in
Shanghai. The firm provides legal, accounting and tax services for multinational companies,
which invest in China, Hong Kong, India and Vietnam and it has focus on the foreign direct
investment environment. Their clients are mainly European and North American enterprises.
Since Dezan Shira & Associates has established branches in India and Vietnam, the attention
lies also on Chinese companies investing in these two countries. Therefore, this report is
arranged in line with the interest of Dezan Shira & Associates. The aim of the firm is to find out
what kind of Chinese companies invest in India and Vietnam and what the motivations for their
international expansion are. As Dezan Shira & Associates has several offices in different regions
of China, there was a further request to find out, if there are differences in the motivations of
Chinese companies. The question raised was, if enterprises from North China have direct

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investment in India and Vietnam at all or if this is limited to enterprises from South China, in
consequence of the geographical nearness.

1.2. Scope of the Report

The focus of this thesis lies on the motivations behind China’s outward FDI. It examines the
question why Chinese enterprises invest abroad and why they particularly invest in India and
Vietnam. The development of China’s total outward FDI is also very important, as it helps to
understand the current situation of Chinese firms and their international strategy.
The market entrance strategies of Chinese companies will not profoundly be identified. I
examined in my research, if there is a tendency towards joint ventures, greenfield investment or
acquisition of existing firms and if there are differences between investment projects in India or
in Vietnam. The companies and their unique way of entering the Indian or Vietnamese market
successfully or not, are not part of this report.
The impacts of China’s outward FDI on India and Vietnam will only be part of the discussion
chapter and will not be examined in details. It would be very interesting to do further research on
the difference between the behaviour of Chinese and western companies and the impacts in the
host countries. This would be an additional topic covering a separate research paper.
The recent influences of the financial crisis and the stimulus package of the Chinese government
are not taken into account. This will have specific consequences on the decisions and motivation
of Chinese firms and on the Chinese economy itself. However, the current impacts are not
entirely ascertainable. The stimulus plan from Beijing was announced during my research period
and the consequences cannot yet be academically examined.
As in all official FDI statistics, the numbers in this report consists of FDI from the People’s
Republic of China without Hong Kong, China, Macau, China and Taiwan Province of China.
Important to mention is that a significant part of China’s outward FDI flows to Hong Kong, China
and this can distort the overall picture of the development of China’s OFDI. It is possible that
some direct investment from Chinese firms in Hong Kong, China flow to India and Vietnam
afterwards and are not statistically registered as China’s OFDI flow to these two countries.
The aim of this report is to identify the motivations for China’s investment in India and Vietnam.
One might derive a conclusion about China’s investment in other South and South East Asian
countries, but this is not intended with this report.

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2. Literature Review

The concept of foreign direct investment (FDI) is of interest for a lot of researchers. Since the
huge increase of FDI volume from the 1960s, economic literature has also been developed on
the theory of FDI. Beforehand, foreign direct investment was treated in the same way than
international capital flows and there did not exist a stand-alone theory of FDI (Jones and Wren,
2006). This chapter gives an overview of the most important theories of FDI, as well as of the
rather newer existence of outward foreign direct investment from developing countries.
China has been in the focus of managers and economists particularly for its impressing inflow of
FDI since the opening of the Chinese market. In recent years, China has also been regarded as
an important source of outward FDI. The second part of this chapter will describe the
development of China’s total outward FDI and the specific relationship between China and its
neighbouring countries India and Vietnam.
This literature review is limited to issues, which help to explain the motivations of Chinese
companies investing in India and Vietnam. I have chosen theories and literature, which can be
applied to interpret China’s direct investment in these two economies.

2.1. Definition of Foreign Direct Investment (FDI)

The United Nations Conference on Trade and Development, UNCTAD (2008:322) defines FDI
as „an investment involving a long-term relationship and reflecting a lasting interest and control
by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise
resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate
enterprise or foreign affiliate).“ This definition is consistent with the definitions that are contained
in the Balance of Payments and International Investment Position Manual, 6th edition (BPM6)
issued by the International Monetary Fund, IMF (2008) and in the Benchmark Definition of
Foreign Direct Investment, 4th edition issued by the Organisation for Economic Co-operation and
Development, OECD (2008a). The most important characteristic in this definition is the long-term
relationship as well as the lasting interest and control. The purpose of an individual or a legal
entity is to gain an effective voice upon the management of an enterprise operating outside of
the investor’s economy. While the investors could be individuals or legal entities, the investment
objects are usually enterprises (Kutschker and Schmid, 2006). The interpretation remains, how a
long-term relationship and the lasting interest and control can be measured. This question is not
answered by the definition and is also differently adopted by governments and statistic
institutions.

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Direct investment is separated against portfolio investment, where the investor does not have a
lasting interest or wishes control, but has profit as his main purpose. However, how can you
distinguish between direct investment and portfolio investment? There is a threshold of equity
ownership or voting power, which identifies an investor as a direct investor. The OECD (2008a)
and the IMF (2008) both suggest a threshold of 10%. China’s FDI statistics apply the
recommendation from the OECD and measure foreign direct investment from an equity
ownership or voting power of 10% in an enterprise resident outside of the Chinese economy
(OECD 2008b).

Writing about foreign direct investment, different possibilities exist to express it. Two questions
could be asked to specify FDI: Which direction has the investment and which kind of
measurement is used. FDI can be divided into investment that flows from one economy into
other economies (outward FDI or OFDI) and investment that flows from different economies into
one specific economy (inward FDI or IFDI). Secondly, there has to be defined which kind of FDI
is measured. Statistics either measure the accumulated stock of direct investment (FDI stocks)
or the inflows and outflows of direct investment (FDI flows) within a defined period, mainly within
a calendar year (Kutschker and Schmid, 2006).

Transnational Corporations (TNC)


Enterprises that locate production or control assets of other entities in economies outside their
home economy are referred to as Transnational Corporations (UNCTAD, 2002) or Multinational
Enterprises (MNE). They can be seen as the vessel for FDI (Jones and Wren, 2006). The
accumulated value of output from TNCs contribute about 25% to the total global output, within
one third is generated outside their home economies (Moosa, 2002). There are different factors,
which influence the companies decision to either export their goods and services or to undertake
foreign direct investment in the target economy. Moosa (2002) suggests four of them:
profitability, opportunities for market growth, production cost levels, and economies of scale.
Regarding the results of this report, I would like to add another very important factor - especially
for TNCs from developing countries - which is government policy.

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2.2. Measuring FDI and International Statistics

The IMF and the OECD try to standardise the worldwide measurement of foreign direct
investment. Despite these efforts, there is a lot of discrepancy in the collection of data from
statistical bodies from different governments worldwide. These issues range from the existence
of relevant data to the method of gathering the data and to the fluctuation of the exchange rates
against the USD. To be able to compare the FDI statistics from different countries, the results
are converted into USD, which can distort the data (Kutschker and Schmid, 2006).
In China, the inward and outward FDI statistics are issued by the Ministry of Commerce
(MOFCOM) and are used internationally. However, it is not possible to declare that China’s FDI
statistics are consistent with the OECD’s recommendations in the OECD Benchmark Definition
of FDI (OECD 2008b). The data from China’s Ministry of Commerce consists only of approved
investment projects from enterprises that pursued such permission from the MOFCOM. As
consequence, the data does not include unauthorized outflows and investment from companies,
which do not require MOFCOM approval. Therefore, it leads to an increasing discrepancy
between the approved investment amount and the actual monetary outflows that are measured
by the State Administration of Foreign Exchange (SAFE) (Cheng and Stough, 2007). China’s
FDI statistics also include the phenomenon commonly known as round-tripping. The main part of
China’s OFDI flows to offshore financial centres in Hong Kong, China, the British Virgin Islands
and the Cayman Islands and a significant percentage of these investments are likely to flow
back to China later as FDI inflows (OECD 2008b). Inward FDI in China from Hong Kong, China
that falls under round-tripping is estimated to be between 25% and 50% (UNCTAD, 2006).
In this paper I rely on the FDI statistics from the MOFCOM and the UNCTAD.

2.3. Theories of Foreign Direct Investment

Even though the characteristics of outward FDI from developing countries do not necessarily
correspond with the force behind direct investment from developed countries, the theories that
emerged after the increasing flow of FDI in the 1960s, can also be adopted to explain the
motivations behind China’s outward FDI. The following authors are often cited in various papers
about FDI and I referred to them to understand OFDI projects from Chinese enterprises. I will
give a short overview of their theories in the following paragraph and try to bring the theories in
an applicable perspective as well as decribe their limitations: Hymer’s (1960) international
operations of national firms; Vernon’s (1966) product life-cycle theory; Buckley and Casson’s
(1976) internalisation theory; Dunning’s (1977) eclectic theory and Lecraw’s (1977) direct
investment by firms from less developed countries.

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Hymer’s Contribution
Before 1960, foreign direct investment was treated in the same way than portfolio investment
and were described by the standard neoclassical theories of capital movements (James and
Wren, 2006). Hymer (1960) pointed out the difference between these kinds of investment and
explained the key concept behind foreign direct investment. He distinguishes FDI from portfolio
investment in his theory on international operations of national firms, according the level of
control the investing company gets over the enterprise in the foreign country. Hymer describes
two reasons for FDI. One is that a company can eliminate competition with the acquisition of a
company in a foreign country and the other is to gain advantages over other companies
operating in different economies.

Product Life-Cycle Theory


Hymer’s (1960) contribution was completed by Vernon’s (1966) product life-cycle theory by
describing when and where the advantage of a transnational corporation would be exploited
(James and Wren, 2006). The decision to locate production in an economy outside the home
country has a more complicated process, than standard factor-cost or labour-cost analysis. The
theory consists of three main stages that a product undergoes in his life cycle. These stages are
product development process, maturing product and standardised product. The product life-
cycle theory states why, when and where FDI occurs.

Internalisation Theory
Buckley and Casson (1976) add to the existing FDI theories the factor of knowledge transition.
They state that a transnational corporation does not only produce goods or services but has also
activities such as marketing, training, research and development, management techniques and
involvement with financial markets. Intermediate products like knowledge, expertise or material
products connect these activities and if the market for these intermediate products does not exist
or is imperfect, a company will internalise these. This can happen across national boundaries
and hence FDI occurs (James and Wren, 2006).

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The Eclectic Paradigm
The most cited and common theory is Dunnings’ (1977) eclectic theory. Dunning brings in his
eclectic approach Hymer’s ownership advantage with the internalisation of Buckley and Casson
together and adds a locational dimension to the theory (James and Wren, 2006). The eclectic
paradigm of FDI describes three factors, which have to be fulfilled that a company will direct
invest in a foreign country. That leads to the formula FDI = O + L + I, where O stands for
Ownership Advantage, L for Location Advantage and I for Internalisation Advantage. Ownership
advantage leads either to higher revenue and/or to lower costs and can be transferred easily
within a TNC (technology, brand name, size of the company) and gives the company an
advantage over the competitors in the host country. Location advantages are possessed by a
country and make the relocation of production more attractive than export. These are for
example transportation cost, government policy, labour cost, language and culture.
Internalisation occurs when a TNC internalises production. Reasons for internalisation could be
that a market does not exist, that the TNC wants to protect its goods or to avoid transaction
costs.
In his restatement and extension of his own eclectic paradigm, Dunning adds also an
explanation, where he distinguishes between FDI from developed and FDI from developing
countries (Dunning, 1988). He states that the early investment projects from companies from
developed countries normally sought natural resources or low cost labour, where there home
country was disadvantaged. Companies from developing countries however are currently
seeking to acquire technology.

Lecraw’s Contribution
Lecraw (1977) studied specifically the direct investment from TNCs from less developed
countries (LDCs). He found out that companies from LDCs do not substantially invest in
developed countries but almost exclusively in other LDCs. A reason could be that these markets
are similar to their own and that they have a lack of experience to carry out FDI projects in
developed countries, where higher technology and more capital is necessary. Lecraw (1977)
mentions also the impact of the government policy as factor for FDI. His example is India, where
the government encouraged companies to direct invest in other LDCs to follow the governments’
policy.

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The theories try to explain why FDI occurs and what factors have to be fulfilled. Contributions
from Lecraw (1977) and Dunning (1988) also see a difference between FDI from developed and
FDI from developing countries. Most of the theories however do not consider that TNCs from
developing countries may follow other strategies and have other reasons for FDI than TNCs
from developed countries. A reason for this might be, that the increasing amount of developing
countries’ OFDI is a relatively new phenomenon. My major critique of the existing FDI theories is
that they do not include government policy from the home country as a reason for foreign direct
investment. In the case of China it would help to explain an important part of the development of
outward FDI. As we will see in the following paragraphs of this report, not only commercial
factors are responsible for the rise of China’s OFDI, but also strategical reasons from the
government in Beijing.
Dunning (et al., 1997) describes the difference between FDI from developing and FDI from
developed countries in his later works. The fact is highlighted, that TNCs from developing
countries focus their investment on neighbouring countries or economies that are in a similar or
even earlier developing stage than their own. One reason is, that the location advantages of the
host countries are similar to those of their home countries. As India and Vietnam are both
neighbouring countries of China, this contribution helps to explain why some enterprises may
choose India or Vietnam as first destination in their internationalisation strategy.
Another difference between FDI from developed and FDI from developing countries is the
advantages, companies use for their investment in other countries. Developed-country TNCs
utilize firm-specific advantages based on ownership of assets, like technologies, brands and
other intellectual property. Developing-country TNCs utilize more firm-specific advantages
derived from production process capabilities, networks and relationships, and organizational
structure (UNCTAD, 2006a).
The theories take only economic factors in account and disregard irrational factors like individual
preferences from boards of directors, which are sometimes very important, especially in the case
of small and medium enterprises (SME). The relationships, which executives from a company
have, may have a strong influence on their decision, whether to invest in a country or not. China
has a different historical background with its various neighbours and this leads to a different view
of the Chinese population towards these countries. Chinese enterprises my be influenced in their
decisions by these factors.

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2.4. China’s Outward Foreign Direct Investment

China is commonly known as an attractive host country for FDI from economies from the entire
world. Recently, the country has also become an important source of outward FDI. Starting with
virtually no OFDI in 1979, the initial year of China’s open door policy, OFDI has now
accumulated to a stock of over USD 90 billion in 2006. China’s OFDI flow and stock rank now 4th
and 6th among OFDI from developing countries (OECD 2008c).
By the end of 2007, China’s OFDI stock reached the amount of USD 117.91 billion, with nearly
7’000 Chinese investment entities having established over 10’000 overseas enterprises in 173
economies globally (MOFCOM, 2008). However, the top five destinations for China’s OFDI
account for 85.5% of the total OFDI flow from China over the years 2003 to 2006 and 84.5% of
China’s total OFDI stock by the end of 2006. Hong Kong, China and popular tax havens or
offshore financial centres of the British Virgin Islands and the Cayman Islands account for 80%
of China’s OFDI flow over 2003-06. In addition to these economies, the following countries are
the most favoured destinations for China’s OFDI: Australia, Denmark, Korea, Macao, China,
Russia, Singapore, Sudan and the United States (OECD, 2008b). The amount of outward FDI
from China is significant and emerged earlier and in a greater degree than was expected,
regarding the theory of FDI or the past experience. An important reason could be the impact of
globalisation, especially the growing competition as well as increased opportunities (UNCTAD,
2006a). In the beginning, China’s OFDI flowed mainly to developed countries in North America
and Oceania, whereas the focus lies now more on developing countries. Since 2004, Africa has
appeared as an important recipient of China’s OFDI flow. By the end of 2006, 3.4% of China’s
total OFDI stock was found in Africa. China has grown to an important source of capital for
economic development in developing countries (OECD, 2008b).

Like in other developing countries, the active support from the government is to some extend
responsible for the fast development of OFDI from China. The public authorities realized that
higher competitiveness of their companies brings other benefits to the home economy and they
encourage their enterprises to invest abroad (UNCTAD, 2006b). As it is seen in the figure 2.1.,
most of the increase of China’s OFDI flow has taken place since 2000. This was the year, when
the Chinese government officially initiated the “go global” strategy to promote OFDI. The policy
contains relaxing controls on outward capital flows and simplified administrative requirements
and encouragement for Chinese companies to invest in other countries. The government’s policy
was and still is one of the most significant determinants for the development of China’s OFDI.
However, more and more OFDI projects of Chinese enterprises are recently driven by

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commercial motivations (OECD, 2008c). The initiation of China’s “go global” strategy was very
important as a start for Chinese firms to invest abroad and made the outward investment climate
friendlier. Although, the first Chinese OFDI projects were only from large SOEs and
accomplished with pressure from the government, following projects were also implemented by
private enterprises with commercial reasons as motivation.

Figure 2.1. China’s OFDI Flow: 1992-2006


USD billions

Source: OECD (2008b)

China’s global OFDI volume has been dominated by large SOEs, mainly because the average
investment size of their projects is much larger than the ones from private companies. The ten
largest Chinese TNCs by OFDI stock are all state owned enterprises and more than half are
operating in the natural resources sector. Nevertheless, an increasing number of investment
projects have now been carried out by non-SOEs, which are mainly found in the manufacturing
sector (OECD, 2008b).
The Chinese government encourages all enterprises, state owned and private owned, to invest
overseas and expand their international market share. The “go global” strategy (走出去 - literally

„go out“) is an official policy and was initiated by the former Premier Zhu Rongji in his 2000

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report to the National Congress on the work of the government (OECD, 2008b). For the
government, going global was the best option for the development of China’s TNCs (Ren, 2006).
In the current Five-Year Plan (2006-2010), the “go global” strategy is again part of the plan and
Premier Wen Jiabao emphasized, in a speech at the Tenth National People’s Congress, the
importance of the strategy. He mentioned that the implementation should be speeded up and the
investment be more efficiently co-ordinated and guided (OECD, 2008b).
There are several reasons why China experienced this turn in its OFDI policy. The country was
very successful with attracting FDI and promoting exports in previous decades. The government
continues the reform and liberalisation of the Chinese economy and tries now to strengthen their
own companies by motivating them to expand overseas. Furthermore, there are two
developments, which have influenced the policy shift. 1) China’s increasing exports have
frightened many host countries and have led to protectionist reactions. 2) The capital outflows
help China to achieve equilibrium in its international financial flows. This would mitigate the
pressure from other countries on China to revalue its currency, which has risen after China
accumulated large amounts of foreign exchange reserves (OECD 2008b).
The Chinese government promotes OFDI also by providing incentives. There are different tools
to support companies, which are however limited to companies on the priority list and these are
mainly large SOEs. These companies can benefit from access to below-market rate loans, direct
capital contribution, and subsidies associated with the official aid programmes (OECD, 2008b).
The MOFCOM and the Ministry of Foreign Affairs have released together the “Guidelines for
Investments in Overseas Countries’ Industries”, which includes recommendations of industry
sectors that are interesting for Chinese companies in 68 host countries. Tax is also a very
important tool for the government to promote OFDI. Chinese enterprises do not pay corporate
income tax in the first five years after beginning its overseas operations. Furthermore,
companies exporting equipment, raw materials and processed materials to their entities abroad
are able to get a refund of the value-added tax (OECD, 2008b).
The government in China plays a major role in the OFDI development and the increasing
number of OFDI projects is part of the broader process of economic reform and political activity.
To promote OFDI the government has also relaxed control on outward investment, which made
OFDI easier for all Chinese firms, not only companies on the priority list. Therefore, pure political
motivations have been more and more substituted by Chinese companies’ own commercial
motivations. The enterprises utilize the relaxed OFDI environment, but implement their own
strategy with profit as main objective. The recent enthusiasm for OFDI is based more on
economic rational reasons (OECD, 2008b).

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Motivations for Chinese companies’ direct investment in developing countries
In the following paragraph, I will outline possible motivations for Chinese companies to invest in
other developing countries. These motivations can likely be transferred to China’s direct
investment in India and Vietnam. However, to specify the case of India and Vietnam, I have
conducted a separate survey, which is part of my research.
The OECD (2008b) outlines in his 2008 China Investment Policy Review major motivations that
drive OFDI projects in developing countries. 1) Projects seeking natural resources. This attracts
the main attention from the Chinese government and more than half of China’s largest TNC’s
operate in this sector. 2) Projects seeking product markets. Especially the household electrical
appliances, automobile production, textile industry and the agricultural industry account for a
large part of China’s joint ventures or wholly-owned factories in developing countries. The
support from the government is not as crucial in the manufacturing sector, but developing global
competitiveness and expanding markets are even though seen as key OFDI projects qualifying
for financial incentives. The outward investment from manufacturing companies are based on
survival strategies in an increasing competitive market and/or on their long-term business
development strategies. 3) Projects seeking efficiency. Especially in ASEAN countries, China’s
OFDI projects are carried out by low-tech and labour-intensive manufacturing companies. For
efficiency seeking, they either decide to locate their plants in China’s western inland provinces or
in foreign developing countries.
For the UNCTAD (2006a) costs are less of an issue explaining China’s OFDI, because of its
large reserve of skilled and unskilled labour. An important motivation driving Chinese companies
to invest abroad, is to bypass trade barriers and the competition from foreign TNCs in China’s
domestic economy.

It is likely that China’s OFDI will further increase. In the foreseeable future, China will continue to
search for investment opportunities in developing and developed countries (OECD, 2008b). The
shift from a fixed exchange rate to an “exchange rate basket” management system leads
presumably to a gradual appreciation of the Chinese currency, the Yuan. This would make
overseas investment even more attractive for Chinese companies (Woo and Zhang, 2006). The
expected appreciation of the Yuan and rising labour costs may also push Chinese enterprises
out into the international market to maintain the cost competitiveness of their products (OECD,
2008b). Especially Vietnam will be a preferred destination for Chinese companies, as its
government follows a similar opening strategy for their economy as China. The opening
however, started later and the market is not yet as developed, which offers low-cost production
opportunities for Chinese manufacturing companies.

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2.5. China, India and Vietnam

India and Vietnam are both China’s neighbouring countries. The relationship and historical
background is however rather different. In the following paragraph I will outline the most
important information to understand how geographical, historical and cultural facts may influence
the decision of firms to invest in these two countries. Recently, India and Vietnam were referred
as alternative or addition in the international strategy of direct investors from developed
countries. There exists even the opinion, that a competition has occurred between these three
countries to attract FDI. This may be relevant for the FDI flow from China to India and Vietnam.
Dezan Shira & Associates has offices in China, as well as in India and Vietnam. Since the
opening of the practices in India and Vietnam, Chinese companies have also belonged to their
customers. This report should help Dezan Shira & Associates to understand the possible
motivations from Chinese firms, which invest in India and Vietnam, to target them better.

India

China and India together account for more than one third of the world’s population. Along with
Brazil and Russia they belong to the so-called BRIC economies, which should, according to
Goldman Sachs, become a much larger force in the world economy over the next 50 years
(Wilson and Purushothaman, 2003). Nonetheless, the two countries often view each other with
an eye of suspicion. Although, they continue now to move closer to another and support each
other on international fronts, they still have fights over land and sea territory and started
competing for natural resources in Russia, Africa and Iran (China Briefing, 2008).
China is for India of high importance, as it is the largest trading partner. However, China has
also strong relationships with India’s rivals, which leads often to mistrust. The most important
recipients of China’s military support are India’s neighbouring countries, like Pakistan, Nepal, Sri
Lanka and Bangladesh (Kempf, 2002). Politically, the two countries try to strengthen the
relationships and both sides have maintained frequent high-level visits. They are convinced that
it is very important to cooperate and to trust each other (Zhang, 2008).
The two economies will be able to complement one another with India being strong in services
and information technology and China perceived to be strong in manufacturing and
infrastructure. That will also be a great opportunity for Chinese companies operating in the
infrastructure business.
As recipient of FDI inflows, India is often seen as a competitor to China. But China is still ranked
as preferred investment destination by most international companies. Direct Investment in India
still face barriers with continuing political resistance to privatisations, inflexible labour laws and

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poor infrastructure (Economist Intelligence Unit, 2007). Another problem is the widespread
illiteracy in India. While 1% of China’s population aged 15-24 was illiterate, the percentage in
India was 24% in 2004 (Rowthorn, 2006).

Vietnam

“The Chinese government actively supports the building of China-Vietnam economic and trade
cooperation area and hopes that it would help encourage Chinese businesspeople to invest
more in Vietnam.” Wen Jiabao, Premier of the State Council of the People's Republic of China
(Ministry of Foreign Affairs, 2008)

China and Vietnam share an alternating history. In 1979, Chinese troops occupied the
Vietnamese boarder with a 29-day military campaign. The cause for this behaviour was
reasoned by China as answer to the alliance of Vietnam with the Soviet Union and its invasion of
Cambodia. The trade between China and Vietnam started only again in 1991, when the relations
between these countries began to defrost (China Briefing, 2008). In the early 1990s, bilateral
economic, trade and political ties have developed rabidly (Ren, 2006). Now China is one of
Vietnam’s most important trading partners. On the other hand Vietnam provides China with coal,
crude oil and natural rubber to still its insatiable hunger for natural resources.
Vietnam is the second largest market in Southeast Asia and experiences the same transition like
China from a centrally planned economy to a free market economy (Ren, 2006). China’s
strategy was to open the economy to investment while maintaining a tight hold on political
power. Vietnam’s leaders have watched the development of China’s market and intend to follow
the same strategy (Hookway, 2007). Vietnam opened its economy later than China and is
therefore at an earlier stage of development and is used as near shore production base for low-
cost supplies to the Chinese market (Oxford Economics, 2008). Industrial land is cheaper in
Vietnam than in China. Compared to China’s east coast regions, the wages are about one third
lower in Vietnam and it has a population of almost 90 millions, half of whom are under 30 years
old. The talent pool of Vietnam is deep and increasing (Hookway, 2007).
Culturally Vietnam is much closer to China than India. The communist revolution in both
countries has affected religion and traditional cultural values. The people today practice a
combination of Confucianism, Taoism and Buddhism to be guided how to live. Especially
Confucianism may influence economic behaviour and the political system, as it is a concept of
placing the good of the society above that of the individual (Jandt, 2004).

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Box 2.1. Motivation of Chinese Investments in Vietnam

Ren Yi (2006) has interviewed two Chinese TNCs to find out their motivations for entering the
Vietnamese market. The companies are China Luoyang Floating Glass Corp. (CLFG) and China
TCL Holdings Co. Ltd. (TCL). For both of the companies, the large domestic market and
economic growth were major motivations to invest in Vietnam. They both had been exporting
products to Vietnam before they decided to invest there. However, setting up subsidiaries helped
them to reduce transaction costs and to get closer to the customers and their specific needs.
Vietnam was the prior investment destination in Southeast Asia for CLFG and TCL. “They
mentioned that they could easily understand workings of the Vietnamese government system,
local consumer behaviour, and did not experience difficulty in executing their market strategies”
(Ren, 2006:45). But Ren (2006) also pointed out that the role of the Chinese government and
the national policies are one of the most important motivations for Chinese TNC’s to invest in
Vietnam. Both, CLFG and TCL experienced strong push factors after the implementation of
China’s “go global” policy.

Source: Ren (2006)

3. Methodology

To find an answer to my research question and to support or to contradict my thesis, I have not
only reviewed current literature. Part of this report is also the analysis of a survey, I have
conducted during my internship at Dezan Shira & Associates. The focus group of this survey
was a pool of experts in foreign direct investment. It was sent to 132 individuals working either
for Dezan Shira & Associates, for consulates in China, India or Vietnam or for other economic
organisations. The survey consisted of an online questionnaire with eight questions specified for
each country and five general questions regarding China’s OFDI in India and Vietnam. I have
chosen the survey as methodology, since the focus group I was able to involve was big and the
experts were placed in different regions of China, India and Vietnam. With this methodology, it
was possible to reach them all and get a broad view of the motivations behind direct investment
from Chinese enterprises. It would have been possible to conduct in-depth interviews with a
smaller number of experts based in Shanghai. An additional idea of the survey, however, was to
find out differences of the investment attitude of firms from various regions of China. With an
online survey I was able reach a high number of experts, who came from different locations. The
questionnaire was very easy to fill in and used only about 10 to 15 minutes. Unfortunately, the
number of answers was not as high as expected. 20 individuals have filled in the online

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questionnaire. The reasons for not filling in the answers, was often that they did not see
themselves capable enough to response to specific questions about India and Vietnam.
Nevertheless, I have analysed the answers and will be able to make a statement, if my thesis is
true and the motivations behind China’s OFDI in India and Vietnam are politically driven by the
Chinese government. As the members of the focus group were FDI experts and not executives
from Chinese companies, the result consists of opinions or experience and not actual
information from the investors itself.

To understand the development of China’s direct investment in India and Vietnam, I have
analysed the FDI statistics from 2003 to 2007 of the Ministry of Commerce in China. This
analysis is part of the first paragraph of the results chapter and helps to find out the importance
of each country from a Chinese perspective and to see, how the outward FDI from China
developed in these particular years. As the financial crisis affected the Chinese economy not
until the beginning of 2008, the impact cannot be observed in the analysis. The slowdown of
economic growth in China has also an influence on the outward FDI. However, this impact and
the influence of the stimulus package from the Chinese government can only be examined later.
If there is an effect on China’s direct investment in India and Vietnam, it will be only in a short-
term perspective and would most likely not change the long-term investment attitude of Chinese
enterprises.

4. Results

The review of current literature about China’s OFDI is contradictory to my thesis. I have found
out that political reasons are an important motivation behind OFDI from Chinese enterprises and
were responsible for the first wave of China’s outward FDI. However, this situation has changed
after the first years of Beijing’s “go global” strategy. Many firms now choose to invest abroad with
commercial intensions. The support or sometimes pressure from the Chinese government still
exists but is only part of the motivation behind China’s outward FDI. While strategic and political
reasons are still more important for FDI in Africa and mainly in the natural resource sector, OFDI
in India and Vietnam are more driven by commercial reasons.
With my own research I also try to find out the motivations behind China’s direct investment in
India and Vietnam and it will show, if the results of my survey confirm my conclusions of the
literature review or not.
In the first section of this chapter, I will analyse China’s FDI statistics from 2003 to 2007.
Regarding my topic, I have investigated China’s OFDI stock and flow to India and Vietnam.

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4.1. China’s FDI Statistics

Figure 4.1. China’s OFDI Flow: 2003-2007


USD millions

Source: MOFCOM (2008)

China’s OFDI flow to Vietnam is much higher than to India and had also a higher growth rate in
the last years. The OFDI flow to Vietnam was USD 110.88 million compared to USD 22.02
million OFDI flow to India in 2007. The growth rate from 2006 to 2007 was 155% for Vietnam
and 292% for India. For both countries, the percentage of China’s total OFDI flow is very small:
Vietnam counts for 0.42% of China’s total OFDI flow and India for only 0.08% in 2007
(MOFCOM, 2008). Although, the importance of China’s OFDI flow to India and Vietnam is very
small compared to the overall FDI outflow from China, the growth rates are remarkable.
Furthermore, 80% of China’s OFDI over 2003-06 has flown to Hong Kong, China and popular
tax havens or offshore financial centres of the British Virgin Islands and the Cayman Islands.
This means, that 20% of total China’s OFDI flow was distributed to all the remaining economies.
Regarding this huge disparity, the comparison to previous years is more meaningful than the
comparison to the total FDI outflow to examine China’s OFDI flow to India and Vietnam.

Jonas Babics China’s Direct Investment in India and Vietnam Page 22


Figure 4.2. China’s OFDI Stock: 2003-2007
USD millions

Source: MOFCOM (2008)

The OFDI stock shows a similar picture than the OFDI flow. Vietnam accounted for USD 396.99
million in 2007 compared to USD 120.14 million for India. Vietnam is therefore much more
attractive as destination for China’s OFDI than India. Again, the percentage of China’s total
OFDI stock is very small with 0.34% for Vietnam and 0.1% for India. The two countries account
for an OFDI stock, which is comparable to other Southeast Asian countries like Malaysia with
USD 274.63 million, Myanmar with USD 261.77 million and Thailand with USD 378.62 million in
2007.

China’s direct investment in India and Vietnam grow very fast. Although, the two countries do not
have an important position in the OFDI perspective of China, the accumulated amount of OFDI
stock in the last five years is significant. In the opposite direction, China is a very important
source of FDI for India and Vietnam and is for both countries a very important trading partner.
This shows an imbalance of power regarding the relationship between these countries.
In the statistics we see, that India and Vietnam get more and more an attractive destination for
OFDI from Chinese enterprises.

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4.2. Survey: China’s Direct Investment in India and Vietnam

The most interesting question in the survey for this report is the question about the motivation
behind China’s direct investment in India and Vietnam. However, with addressing the experts I
took the opportunity to ask other questions that could be interesting to understand the
development of China’s OFDI. The survey consisted of the same questions for India and
Vietnam to be able to compare the two countries. On the one hand I wanted to be able to make
a general statement about China’s OFDI, on the other hand I was interested in the difference
between India and Vietnam. In the literature one may find a lot about OFDI from China in
general, however there exists no empirical research about specific countries in South and South
East Asia.

Figure 4.3. General interest among Chinese companies for direct investment in
India or Vietnam

Source: Survey on China’s direct investment in India and Vietnam (Babics, 2009)

The figure shows the percentage of answers giving to the question, how the interest is among
Chinese companies for direct investment in India or Vietnam. The answers show that the interest
is stronger to invest in Vietnam than in India. Most experts answered that there is no special
interest for Chinese companies to invest in India. This corresponds with the MOFCOM statistics
of China’s OFDI 2003-2007, which shows that direct investment from Chinese companies in
Vietnam are much higher than in India. Although, India is a larger market and belongs to the
famous BRIC emerging economies, Chinese firms tend to have a higher interest for direct
investment in Vietnam.
For both countries, the general interest is not very high. This statement is also supported by the
fact that China’s OFDI flow and stock in India and Vietnam are very low compared to the total

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OFDI flow and stock. India and Vietnam opened their economy for FDI relatively late and China
started only in 2000 with actively boosting OFDI.
Furthermore, India and Vietnam have similar environments and especially Vietnam is used as
near shore production base for low-cost supplies to the Chinese market (Oxford Economics,
2008). Higher labour costs are a new phenomenon in China and therefore Vietnam is not yet as
attractive for Chinese enterprises, as for western manufacturing companies. If production costs
increase further in China, India and Vietnam will get more interesting as host countries for
China’s OFDI.

Figure 4.4. Type of companies investing in India and Vietnam

Source: Survey on China’s direct investment in India and Vietnam (Babics, 2009)

Regarding India and Vietnam, nearly half of the experts answered that both state and private
companies invest in these countries. This shows that the prejudice of China’s OFDI is not true,
which states that in China only SOEs are able to invest abroad. For Vietnam more experts
answered that only or mainly private owned companies carry out direct investment projects. This
underlines the fact that Vietnam is a more attractive market for Chinese companies and
therefore the percentage of private owned companies is higher. Private owned companies do
not follow the state strategy in the same amount than state owned companies and therefore, the
probability that the reasons for FDI are commercially motivated is higher.
The analysis of this question disproves the second part of my thesis, where I have made the
statement, that China’s OFDI are carried out solely by SOEs. This is even more true for
Vietnam, where the proportion of private owned companies seems higher.

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Analysing the first two questions together leads me to the perception, that the more attractive a
market is for FDI, the more increases the percentage of private owned companies. This might be
true in general, but especially for China the correlation is observable. Where a market is not
attractive regarding usual commercial reasons, SOEs may even though carry out FDI projects
with political strategical purposes. When the market gets more attractive from a business
perspective, also private owned companies follow and invest in this economy.

The most interesting part of the survey was to find out the motivations behind China’s direct
investment in India and Vietnam. The experts could choose motivations from a range of
possibilities. As the possible motivations where either commercial or political, I am now able to
make the statement if the direct investment in India and Vietnam are commercially driven, or
more influenced by strategical reasons from the Chinese government. Each possible motivation
was rated with an intensity, which gives an average importance of the motivation in the analysis
of the answers. Added together, it shows the reasons why Chinese companies start expanding
their business in India and Vietnam.

Figure 4.5. Motivations behind China’s direct investment in India

Note: The motivations are rated with an intensity of importance for Chinese companies choosing to invest in India,
where 0 means low intensity and 4 means high intensity

Source: Survey on China’s direct investment in India and Vietnam (Babics, 2009)

Jonas Babics China’s Direct Investment in India and Vietnam Page 26


The most important motivations fall under the category of commercial reasons. The “go global”
strategy of the government still plays an important role ranked 3rd on the list of motivations,
however, number one is new “market opportunities”. Chinese companies know the potential of
the Indian economy and therefore invest in its market to profit from a huge number of
consumers. “Low cost sourcing” is another important motivation. This would be mainly in the
manufacturing industry as this was rated as number three of the industries having investment in
India, after Information Technology and Construction.
The difference between the motivation with the lowest average intensity (low demand in China -
2.06) and the motivation with the highest average intensity (new market opportunities 3.78) is
not big. Furthermore, all motivations mentioned in the survey have a average intensity above 2.
This means firstly, that a variety of reasons are behind FDI from Chinese enterprises and that
China’s direct investment in India is not dominated by one or few motivations.
Although, political reasons are still important for China’s direct investment in India, my thesis
cannot be supported by the analysis of the survey. The two most important motivations are
typically commercial.

Figure 4.6. Motivations behind China’s direct investment in Vietnam

Note: The motivations are rated with an intensity of importance for Chinese companies choosing to invest in India.
Where 0 means low intensity and 4 means high intensity

Source: Survey on China’s direct investment in India and Vietnam (Babics, 2009)

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Like for India, the motivations with the highest intensity are “new market opportunities” followed
by “low-cost sourcing”. Number three in Vietnam is “access to natural resources”, which is
reasoned by the huge amount of coal, crude oil and natural rubber exported from Vietnam to
China. China secures its access by investing in Vietnam. This reason can be seen as politically
driven, as the access to natural resources belongs to an important part of the international
strategy of the Chinese government. However, the two most important motivations are
commercial. Compared to India, the difference of the intensity between the motivations show a
higher variety.
The motivations for OFDI in Vietnam are also typical motivations for the manufacturing industry.
The question, which industries have direct investment in Vietnam showed the same result with
manufacturing leading the list before Textile - which is also to a huge part manufacturing -,
construction and mining / natural resources. Again, the same result comes from the question,
what kind of companies are mainly established in Vietnam, where manufacturing company was
chosen to 73.3% and services as well as trading companies to 13.3% each. Compared to India,
the manufacturing sector in Vietnam has a much higher proportion of OFDI from Chinese
enterprises. For India, trading companies were chosen to 42.1%, manufacturing companies to
31.6% and services companies to 26.3%.
Also for Vietnam my thesis cannot be supported. The main reasons for China’s direct investment
in Vietnam are commercially motivated and not politically. The influence from the Chinese
government is still there. The political motivations from Chinese government reached an average
intensity of 2.29. However, it does not count to the most important reasons behind China’s OFDI.

Regarding the question which country is preferred for China’s direct investment, the two
countries were chosen almost equally. 46.7% of the experts answered India and 53.3%
answered Vietnam. Asking the reasons behind the selected answer, the two countries show a
different picture. As shown in Table 4.1., half of the experts have chosen India because of better
business prospects and half have chosen Vietnam mainly because of geographical or cultural
reasons. Multiple answers were possible for this question.

Jonas Babics China’s Direct Investment in India and Vietnam Page 28


Table 4.1. Reasons behind choosing India or Vietnam as preferred destination
for China’s direct investment

Reasons India Vietnam

Geographical 2 4
Cultural 6
Better business prospects 6 2
Friendlier investment climate 2
Support form local government 3

Source: Survey on China’s direct investment in India and Vietnam (Babics, 2009)

Vietnam provides also easier access and is more attractive for small and medium enterprises.
47.4% of the experts answered, that the firms with direct investment in India are big companies,
while 50% of the experts answered that firms with direct investment in India are either SME or
big companies. 93.8% of the experts answered that firms with direct investment in Vietnam are
SMEs or big companies and SMEs.
The entrance strategy of Chinese enterprises investing in India or Vietnam is also different. Joint
ventures seem to be the most chosen entrance strategy in Vietnam with 53.3% and acquisition
of an existing firm the least chosen entrance strategy with 13.3%. An acquisition is capital
intensive and more possible for bigger companies. Joint venture is an attractive opportunity for
smaller companies, as the risk is lower, as well as the costs for market research. For India,
greenfield investment, acquisition of an existing firm and joint venture account for one third each
as entrance strategy of Chinese companies.

The results of my survey are consistent with the results from the literature review and are
supported by the analysis of China’s OFDI statistics. My thesis, that China’s direct investment in
India and Vietnam are not commercially driven but are strategically motivated by the Chinese
government and are carried out solely by SOEs, is not true. Political reasons for direct
investment in India and Vietnam are still strong but do not dominate OFDI anymore. The main
reasons behind direct investment in India and Vietnam are commercially driven.
Small and medium enterprises have also a high percentage of OFDI. Therefore, not only SOEs
are responsible for direct investment in India and Vietnam.

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5. Conclusion

The very fast increase of China’s OFDI started in 2000 from a very low figure. Since then, the
growth of OFDI flow has been very high and China already ranks 4th among OFDI flow from
developing countries (OECD 2008c). The start of this rise is in line with the introduction of the
“go global” strategy from the Chinese government. They began to encourage Chinese
enterprises to invest abroad and expand their international market share. China is more and
more recognized globally as important source of OFDI and not solely as an attractive host
country for FDI from developed and developing countries. The OECD published a review about
China’s investment policy, where OFDI represents the main topic (OECD (2008b) OECD
Investment Policy Reviews: China 2008). However, 80% of China’s OFDI flow to Hong Kong,
China or to popular tax havens and offshore financial centres of the British Virgin Islands and the
Cayman Islands. This may distort China’s FDI statistics, as it is assumed that a part of these
direct investment flow back to China as so called round-tripping.
The question, which often arises and which was also my research question for this thesis, is, if
China’s OFDI are commercially motivated or only occur through pressure from the Chinese
government under their “go global” strategy. In addition, if state owned enterprises are
responsible for most of the outward investment projects or if there is also a significant part from
private owned companies. The literature review and the results from my survey - conducted
among FDI experts from the service firm Dezan Shira & Associates and from chambers of
commerce in China, India and Vietnam - brought the same conclusion. The “go global” strategy
might have had a strong impact on the decision of the companies’ start to internationalize. After
this initiation, the firms have undertaken their direct investment due to profit-oriented reasons
and they do not differ from FDI from developed countries’ companies. They are also consistent
with the current FDI theories that explain advantages for internationalized enterprises and why
they invest abroad. These findings may be not true for investment projects in the natural
resources sector, especially the ones carried out in resource rich economies in Africa. In these
cases, strategic considerations may have outvoted commercial reasons and had a greater
impact on OFDI motivations. For China’s direct investment in India and Vietnam, commercial
motivations outbalance strategic motivations. Political reasons still play a role in companies’
decisions to invest in its neighbouring countries. The impact however, is not as important
anymore. Chinese OFDI projects in India and Vietnam are carried out through state owned and
private owned enterprises. The value of OFDI projects from state enterprises may be higher, as
these companies operate mainly in capital-intensive industries (e.g. natural resources,

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infrastructure). Nonetheless, the number of small and medium private companies, that also
invest in India and Vietnam, is increasing.
Comparing India and Vietnam, the FDI statistics and the survey results show, that Vietnam tends
to be more attractive as host country for OFDI from China’s enterprises. Vietnam also attracts
more direct investment from SMEs, although India is a bigger economy and has better business
prospects. Vietnam is culturally related to China and the two countries share a similar history.
For theses reasons, Chinese companies may choose Vietnam as the first country in their
internationalization strategy. However, both countries account for only a very small part of
China’s total OFDI. Although, China is the most important trading and investment partner for
India as well as for Vietnam, the two economies do not have the same significance for China.
What does that mean for Dezan Shira & Associates, the company where I have done my
internship and which is interested in the results of my research? Before the firm opened their
offices in India and Vietnam, Chinese companies did not belong to their target customers. For
the branches in India and Vietnam it is interesting what motivations Chinese companies have,
which invest in these two economies. In both countries, Chinese investors are important, as
China’s FDI is responsible for a significant part of inward FDI flows to India and Vietnam. Again,
Dezan Shira & Associates may draw more attention on Chinese enterprises with direct
investment in Vietnam than in India, as the FDI volume is much higher. Furthermore, the
percentage of private owned as well as small and medium enterprises is higher in Vietnam.
State owned companies are not in the same interest for a service firm like Dezan Shira &
Associates, as they often have their own bodies to carry out these services. Dezan Shira &
Associates may focus on the manufacturing industry in both countries and specifically on textile
in Vietnam and information technology in India. As OFDI flows from China are expected to
increase further in the following years, Chinese enterprises should be regarded as key
customers for legal, tax and accounting services in India and Vietnam. Additionally, Dezan Shira
& Associates already has well educated Chinese employees, who are familiar with the culture
and requirements of Chinese companies. This is an advantage compared to service firms from
India and Vietnam itself. It would have been very interesting for Dezan Shira & Associates to find
out, if there are differences among Chinese investors from different regions in China. However,
the respondents of my survey seldomly filled in the personal questions including their location,
which would have made it possible for me to find out differences in the answers from experts
from Beijing in the north or from Guangzhou in the south.

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In general the results show that China’s OFDI are not only politically driven and this may
contribute to the discussion about whether host countries should have special attention on FDI
from Chinese enterprises or not. As China’s OFDI seem more commercially motivated, they can
be treated the same than FDI from developed countries. Host countries from developed and
from developing regions do not have to be afraid of China’s direct investment and should try to
benefit from the advantages.

6. Discussion
The results of my whole research are not new. Although, there do not exist many papers about
China’s direct investment in India and Vietnam, China’s OFDI are examined and discussed by
various researchers. The result that China’s OFDI are more and more commercially motivated
can be read in other papers. However, I did not find any empirical research that underlined this
fact. From this point of view my survey would have been a useful contribution to the discussion
about China’s OFDI. But the survey has his limitations. Firstly, the focus group were FDI experts
from a consulting company and from chambers of commerce. I was not able to ask executives
from Chinese companies directly. To ask them their motivations for direct investment in India
and Vietnam would have been more meaningful. Secondly, the response rate was very low and
it is not possible to make an academical statement with 20 answers. Due to the fact that the
results from my survey do not differ from the results of my literature review, I can nevertheless
answer my research question. In general, the answers were of high quality, in some cases
however the questions were wrongly interpreted. The question, if the government fund does
investment in India and Vietnam also requested some examples. The examples I got were FDI
projects from state owned enterprises. I wanted to know, if the Chinese government fund also
started to invest abroad like Arabian government funds do, as well as the one from Singapore
and, if these investment even cross the threshold of 10% to count as direct investment.
The results of my research are also too general to be of real worth for Dezan Shira &
Associates. Although, I found out the importance of Chinese investors in India and Vietnam and
tried to distinguish industry sectors, on which the company should have special attention, the
recommendations are not specific enough. For further research, it would be interesting to have a
closer look on the companies that invest in India and Vietnam and to find out, if they have an
advantage over domestic enterprises in the host countries and over Chinese firms without
international engagement.
Another interesting topic is the impacts of China’s OFDI on the host countries. Especially in India
the population is sceptical about Chinese investment projects. Facts that the Indian market was

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overflowed by cheap toys from Chinese manufacturers that did not meet security requirements
of western countries, until India blocked the import of Chinese toys, do not help to reduce the
scepticism. Nevertheless, my conviction is, that host countries can profit from China’s OFDI, as
long as they are commercially motivated. The verification of this statement or thesis could be a
useful argument in the dispute about China’s direct investment in Africa and would be an
interesting topic to cover in a following research paper.
I also would like to take the chance to criticise my thesis itself. It is affected by a prejudice that
the Chinese companies and Chinese people are all steered by the government and do not have
their own needs and requirements. The results of my research and my personal experience in
China show a different picture. Beijing still has more control over the country and the population
than in most other countries. Nevertheless, in these boundaries, people and companies use their
freedom and make their decisions on an individual, economic and rational basis.

Jonas Babics China’s Direct Investment in India and Vietnam Page 33


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