Britain had its turn, then it was the US and Japan. China now waits in the wings

Over the next 10 years, big international Chinese companies are likely to transform the world of multinational competition.

China is moving toward a historical turning point. For three decades foreign investment has accumulated in the mainland, playing a vital role in rapid growth. Now investment flows from China are soaring as well.

Over the past decade Chinese investment abroad has increased dramatically, and in 2010 amounted to $68 billion (51 billion euros).

Over the next decade more than $1 trillion in foreign direct investment is projected to flow from China into the global economy.

This investment has the potential to spark modern growth in developing and emerging nations. It can also alleviate the adverse impact of the debt crises in advanced economies.

Until recently, most Chinese investment abroad was focused on developing countries and a clutch of resource-rich development economies.

In the future, much of this investment abroad will move toward developed countries and focus increasingly on advanced manufacturing, technology and science-based industries overall.

During the past century the world has seen several waves of multinationals.

The British ones were at the peak of their power in 1914, when they controlled half of the world's stock of outward foreign investment.

After World War II US multinationals were positioned to take advantage of post-war reconstruction, the transfer of new technologies, and harnessing management prowess. Their power peaked in the late 1960s, when they dominated half of the world's foreign direct investment.

Coming from a large and integrated economy, the rise of the US multinationals, from General Electric and Procter & Gamble to Intel, was often driven by internationalization, based on technological and managerial innovations.

After a decade or two of reconstruction, European multinationals resurfaced. Coming from a continent of diverse economies, their expansion was driven by responsive national strategies, from Unilever to Philips and Ericsson.

Starting in the mid-1960s, Japanese challengers began to capture increasing market share from cars to consumer electronics, across industries. They benefited from falling trade barriers, improved transport and communications, and increasingly homogeneous markets.

Coming from a unified island-nation, Japanese multinationals, from Matsushita and Toyota to Sony, excelled in global-scale efficiencies. The peak of their power occurred in 1990, when they controlled about a 10th of the stock of foreign investment worldwide.

Since the 1980s, globalization has contributed to the rise of large emerging economies. In the next decade the rise of multinational companies from emerging nations will be spearheaded by those of China.

Unlike multinationals from Europe, the US and Japan, aspiring Chinese multinational companies have to cope with competition that is increasingly global, capital intensive, and innovative.

At present many Chinese multinationals have relatively domestic origins, are not very capital intensive, and continue to build innovation capabilities. In a decade all that will have changed.

Coming from a massive home base, whose potential exceeds all current market economies, Chinese companies have unique strengths.

Unlike many of their counterparts, Chinese companies originate from a relatively global environment.

In China, economic growth has been boosted by foreign multinationals, which, through spillovers and learning, have given rise to Chinese partners, rivals, and innovators.

Today Chinese challengers represent a broad array of industries, including steel (Anshan Iron and Steel Group, Baosteel), construction industries (China State Construction Engineering, Sinohydro, Zoomlion), solar energy (Suntech Power, Chint Group, LDK Solar), cars (Geely, Chery, BYD), electrics (Shanghai Electric Group), coal (Yanzhou Coal Mining), IT and telecom (Huawei, ZTE, Lenovo), consumer electronics (Haier), shipping and ship building (China Shipping, China Shipbuilding Industry).

From Haier to Lenovo, the pioneering Chinese multinationals have had to struggle domestically and internationally. However, they often benefit from cost advantages that are beyond the reach of their current rivals.

Being familiar with severe pricing pressures in their home base, Chinese companies are well positioned to thrive where cost pressures are merciless.

More than 30 years ago Japanese investment in the US also began in an era characterized by friction over trade and currency. Nonetheless, as a percentage of total stock, Japanese investment in the US more than tripled from 6 percent in 1980 to 21 percent in 1990.

Despite some similarities with the Japanese experience, the story of Chinese capital abroad, especially in the US, will be different.

When Japanese firms arrived in the US they represented a relatively focused array of industries, especially in consumer electronics. Chinese firms operate in a wide array of industries, from low-tech to high-tech.

Over time Chinese multinationals will also play a more important role in foreign investment worldwide than the Japanese two decades ago.

Finally, Japan remains a vital ally to US interests in Asia, whereas China's strategic interests are more independent.

Consequently, Chinese firms will be under greater scrutiny in the US, especially at the federal level. However, increasing economic problems at the local level are likely to ease Chinese entry into the US marketplace.

Like the postwar European companies and the Japanese firms in the 1980s, Chinese firms, too, will need to integrate fully into US communities to defuse political opposition in Washington.

By overcoming barriers, bringing hope to the developing and developed nations alike, Chinese companies have the potential to bring more advanced technology, talent and capital to the mainland.

In turn, by investing capital and creating jobs abroad, Chinese multinationals have the potential to overcome obsolete prejudices, to win hearts and minds from the East to the West.

The author is research director of International Business at the India, China and America Institute, a think tank in the US, and visiting fellow at Shanghai Institutes for International Studies. The views do not necessarily reflect those of China Daily.

(China Daily 03/09/2012 page9)