Investment

Rewards for overseas investments outweigh the problems and hurdles

By Luo Zhongwei (China Daily)
Updated: 2010-08-20 16:28

As China earns a more important role in the global market partly due to the financial crisis, Chinese enterprises have been given more opportunities to globalize.

In reality, having risen to a major force in cross-border mergers and acquisitions (M&A) and international Greenfield investments, Chinese enterprises have become the focus at home and abroad.

Compared with domestic investment, investment in foreign companies is more complicated and risky. Cross-border M&A, in particular, requires more mature conditions and operating skills.

Though Chinese overseas investment is booming, there are already signs it facing protectionism. For instance, institutional barriers to entry, which is highly targeted, are increasing.

In industries concerning national security, media and public opinion in some countries, Chinese investment is either blocked or limited.

Chinese enterprises are apparently confronted with more and more discrimination. They have to go through harsh antitrust inquiry and national security investigation when investing in sensitive industries.

In the US, many political forces have always been wary about China's rapid rise. Many US enterprises are hostile to Chinese investment due to the fear the expansion of Chinese enterprises could threaten their interests.

Protectionism, in forms of policy barriers, political interference, protest of trades, is the crux of many failed cases in recent years.

A bid by China Aluminum Corporation, or Chinalco, to take over Australia's mining giant Rio Tinto went nowhere as a result of political interference.

Recently, Huawei, one of China's leading telecom solutions providers, failed again to buy part of an American company's assets, days after its first frustrated effort at another American company.

Chinese investors also suffer in countries such as Cambodia and Zimbabwe. Moreover, Chinese enterprises are confronted by more and more business litigation in the US. Many of them, not experienced enough, are on the ropes.

Although protectionism is likely to be increasingly serious, attempts at overseas investments should not be given up.

It is inevitable for Chinese enterprises to compete for resources in the global market.

They should be more determined and confident. In the short term, overseas investment is an effective way for Chinese enterprises to grow.

The financial crisis gives them an opportunity to step into the overseas investment market.

In the long run, there's no doubt a number of Chinese enterprises will make their presence felt in the global market, sooner or later.

Therefore, rules governing in overseas investments and cross-border M&A are a must. Overseas resources, potential markets, overseas market share are not the only reasons that make overseas investment necessary. Skills of overseas investing and industry restructuring, advanced technologies and managerial skills and abilities to integrate resources are even more important reasons.

Chinese enterprises are expected to ascend from the low end to high end of the value chain. Nothing else but practice can bring about skills and experience. Even with the knowledge of rules and regulations in host countries, and laws of the market, a good understanding of potential opportunities and risks can facilitate the process. But the cost is inevitable. No pain, no gain.

On the other hand, the government should help enterprises when necessary to obtain an advantage. There are three ways.

First, the government should be open to overseas investments in China and reiterate its denunciation of protectionism according to World Trade Organization rules in order to create a favorable political and public opinion environment for the enterprises.

Second, different strategies should be used to cope with investments in different industries. State-owned emprises should firmly insist on acquiring and buying resources and products in industries concerned with the crucial development of China's national economy after scientific decision-making and scrutiny, provided the government shoulders certain risk and responsibility.

Overseas investment in these industries should also be the target of the country's huge foreign exchange reserve. For other profit-driven investments, common enterprises should be the driving force. They are free to decide whether or not to jump into the pool according to their capability, capital, anti-risk capability and corporate strategy.

Even if some investments are not in the national interests, the government can only adjust them by national laws and regulations, rather than directly intervene in them.

Finally, saying that private enterprises should play the main role in common overseas investments do not mean the government should drop out.

To provide enterprises with convenience to M&A and advice on avoiding and manipulating risks is one advantage of the Chinese system.

The government can take at least the following measures: to establish and improve the system targeted at overseas investments, including information service, technical support and training, to strengthen financial support to enterprises engaged in overseas investments and to encourage the development of intermediaries committed to overseas investments.

The author is a researcher at the Chinese Academy of Social Sciences.

For China Daily