Investing for strategic resources and its rationale: The case of outward FDI from Chinese companies

As more Chinese companies become engaged in foreign direct investment (FDI), particularly in industrial countries, a crucially important issue must be addressed: what is the motivation of Chinese outward FDI, and what is its rationale? Based on a detailed analysis of both primary and secondary data sources, this article argues that when investing in advanced economies, Chinese multinational corporations (MNCs) are motivated primarily by the quest for strategic resources and capabilities, and that the underlying rationale for such asset-seeking FDI is strategic needs. The examination of this premise will hopefully prompt business practitioners to think about this important issue in new and innovative ways, thereby identifying an appropriate policy and strategic response. D 2006 Kelley School of Business, Indiana University. All rights reserved. 1. Outward FDI from China: A closer look As a rapidly emerging economy with great global impact, China is attracting enormous attention for very good reasons. After more than two decades of unflagging expansion, China has become a leading economic power in the world. The country has been the second largest recipient of inward foreign direct investment since 1992 and the third largest trading nation in the world since 2004, and boasted a record trade surplus of $102 billion in 2005. At the same time, China’s outward FDI has grown rapidly; in fact, the country has the largest FDI outflow among emerging economies, with a cumulative investment exceeding $50 billion (www.mofcom. gov.cn; UNCTAD, 2005). Despite this fact, outward FDI from Chinese multinational corporations (MNCs) has received relatively little research attention (Child & Rodrigues, 2005), particularly from the asset-seeking perspective. As latecomers, in order to catch up with the incumbent global giants, Chinese firms face an urgent need to engage in asset-seeking FDI. Because the motivation for foreign investment largely underlies the very nature of MNCs and their behaviors, an explicit understanding of why Chinese firms invest abroad is critical (Caves, 1996). This issue has significant implications for business practices and is necessary to propose adequate policy responses. With motivations being of such critical importance, this article focuses on the asset-seeking motivation of Chinese outward FDI and the rationale behind it. In essence, this article contends that when Chinese MNCs invest abroad, particularly in industrial countries, they are moti0007-6813/$ see front matter D 2006 Kelley School of Business, Indiana University. All rights reserved. doi:10.1016/j.bushor.2006.07.001 E-mail address: [email protected] KEYWORDS