[MUSIC] In order to help us better understand China's recent surge in outbound FDI, I'm very happy to have two leading international scholars on this topic who are going to share their views with us. Barry Sautman is a political scientist and a lawyer and an expert on China and Africa. He's conducted extensive field research, interviewing firm managers and workers in a number of African countries. David Zweig is also a political scientist and is an expert on China's resource diplomacy and Chinese and international political economy. Both David and Barry are professors at HKUST. Maybe I can start by asking Barry, what do you think is behind this recent increase in FDI outward from China? >> One of the reasons that it’s been revealed through surveys taken of Chinese executives is that the competition in China is quite intense. And that means that the profit rates are very low in China compared to other parts of the world. Therefore, many Chinese companies are interested in moving at least part of their operations abroad to escape this intense competition and raise their rates of profit. Also, markets around the world are very appealing to Chinese companies now that they've had a very great deal of experience in doing what they do in China. They are now seeking out the larger markets of the world. Finally, there's the experience that they can provide to their personnel by going abroad and absorbing experiences such as learning new management techniques, technical transfer of information, and cultural interaction with other peoples. >> Maybe I can ask a follow up. Is part competition story that Chinese firms are trying to find cheaper labor in other countries because labor costs in China have been going up so fast? In some cases, that's true. It depends upon what the company is involved in. In some instances of course, if you're going to go and manufacture textiles, you wouldn't want to perhaps transfer part of you operations to a place like Cambodia or Ethiopia. On the other hand, there are places where they would want to set up shop where labor costs are necessarily much higher, but there's a huge market. For example, the United States. >> And maybe I can turn it over to David. Do you have anything to add to- >> Sure, a couple things. One would be what we call tariff-jumping, which is that idea that China wants to get its firms into other countries so that it doesn't have to pay the cost of moving those goods across the border. I think that's very important. Second would be energy consumption. So, China needs a lot of energy. It's become the factory of the world over the last 10, 15 years. Also I think there's a lot of surplus production in China. And so there's a big push to move steel and other resources out of China and export them to the world. >> A lot of the outward FDI from China has also been in the US and other developed countries. >> Right, Europe >> Many of those are mergers and acquisitions. Do you see any barriers looking forward in this type of activity? >> Sure, China is running into what I like to call pushback. There's a big push from, if you look at Canada, you look at Australia, you now recently look at Germany. There are foreign investment bureaus or boards in these countries that have the responsibility to evaluate the purchase. And any time any of those things come anywhere near some kind of technology that's related to defense, anything like that, very quickly the countries will refuse to allow that. And generally, there's a popular resistance to wholesale Chinese purchases of companies in these countries. >> Let me turn to the next question, which is about what is the involvement of the government and state enterprises in this outward FDI movement? Barry, do you know? >> Well, one of the things that the government does with regard to state-owned enterprises is it finances them heavily. And it's one of the things that differentiates state-owned enterprises from private enterprises. They have easier access to capital and a lot of capital. Another thing is that state-owned enterprises are different from private-owned enterprises in the sense that they generally are there for a longer term, precisely because they had the backing of the government. Whereas private enterprises, if things don't succeed well quickly, they may depart. >> David, what do you think about the importance of the government role in- >> Well, we've looked at some websites. I mean, you can see that the state is very active in encouraging the larger firms to go out. They have websites which state which product in which country, if you go out and try and purchase that, they will give you preferred financing. And we've seen this in the State Council, which is sort of the national government. And I've even seen websites like that at the provincial level, where Hunan province, for example, had a list of resources that they wanted for the province. And they were then encouraging their own state-owned enterprises owned by the province to go out and get those resources. >> So then, what's the main criteria for picking which types of products or activities are on that list? >> Well, my guess is that part of it's related to the Five-Year Plan. China has a reasonably planned economy, and so they know which are the key resources that they want to develop over the next five years. And then they can encourage those firms to go out and do that. >> Let me also ask, as an economist we're trying to understand, how does this outward FDI really benefit China's economy? Do you have any opinions about that question, Harry? >> It's not exactly clear that all of this outbound foreign direct investment on the part of China does benefit China's economy. Certainly part of it is profitable at this point, but a lot of it still isn't. And that's because the experience that China's had abroad is still very recent. And a lot of what Is bought by China are brownfield companies, that is, companies that have already been established. Perhaps they're not doing too well. They come out on the market, Chinese companies buy them. It takes quite a while before they become profitable, so it's It's still an open question as to how much all of this OFDI does benefit China. >> David, do you have any thoughts on that? >> Well, I'd agree with Barry that, to a certain extent, they're overpaying. As latecomers to the global economy, most of the resources are controlled by large multinational corporations. So they have to pay to get their way in there. So I think they need to do that, they feel they need to do that. But on the other hand, some people feel that they just don't need those resources, don't need to own the resources. You don't need to own the mine. You can buy the materials. So China just doesn't really trust the global economy. And so it really feels more secure when it owns those mines or owns those oil or gas fields than when it's just buying it on the global market, on the spot market. >> Let me now turn to the next question, which is how does this outbound FDI from China affect the economies in the receiving countries, especially in developing countries? Harry, you've been working a lot in Africa. Do you have a sense about how this FDI is making a difference? >> One of the ways that FDI makes a difference is employment. Actually, in Africa, there are now more than 100,000 Africans working for Chinese companies. And of course, if you look at the developing world as a whole, many, many more. That employment of course not only provides income, but also provides learning new skills and also learning of ways in which to interact with a different culture. In addition, I think Chinese investment is a bit different from investment from other parts of the world. Particularly from the developing countries in that it's more adapted to the situation of developing countries because China itself remains a developing country. >> So one other aspect of China's kind of reaching out is the One Belt, One Road initiative, which includes both infrastructure and development of trade and other ties with countries nearby China. David, what is your opinion about what the likely impact will be of One Belt, One Road? >> Well, I think the most important impact will be in infrastructure. If you look back at China's economy in the 1970s to 1980s, the first thing that they did was invest in harbors, roads, bridges, all kinds of projects like that. And if countries in the developing world want to get going, they certainly need that kind of investment. And I think China's been willing to be there and to promote that kind of development. One thing though that I think that's interesting though, is that I think the Latin American countries, a lot of countries in the world, are really very keen to get Chinese capital. It's the world, the West is not, US, Europe, they just don't have the kind of capitol that they had before. And so I remember I interviewed the the Argentinian Ambassador to China, and he just said $10 billion in investment, we're just thrilled to have it. We need it. Now, and as Barry has mentioned to me privately, that those countries need that kind of money to maintain their own stability. >> And what about, Barry, maybe you can answer, what about China? Is China going to benefit at all from One Belt, One Road? >> It's difficult to say, because One Belt, One Road is simply an idea at this point. If you look at the portion of Chinese investment that is in One Belt, One Road countries at present, it's only about 13% of the stock of OFDI from China in the world. Of course trade with those One Belt, One Road countries is at a much higher level, about $1 trillion US in trade in the last year with those countries. So I think we'll know better about how much China benefits from all of this in a year or two. And then we'll be able to make an appraisal whether One Belt, One Road will merely be a slogan or whether it'll be a real initiative. >> Albert, can I just add to that, which is, there's a big debate in China. Even though, Xi Jinping, it's become a kind of movement, right? Once a political movement. Once Xi Jinping said One Belt, One Road, everybody has to do it, everybody has to follow it. But there's a big debate in China already about whether or not it's a smart policy. And if you take a country like Pakistan and you pour $45 billion into Pakistan, is that, are you going to get any benefits from it? And a lot of that money is going into a place like Balochistan, which is one of the most dangerous places in the world. So, as Barry said, I think there's still time to, we're still going to have to see whether that really has a huge impact. >> And I'd also suggest that there are a lot of political motivations for One Belt, One Road spending that are not necessarily tied to economic [CROSSTALK]. >> And not just political motivations. I mean, if you're talking South China Sea, you're talking into the Indian Ocean, the Indians feel challenged or threatened by China's strategy of sort of moving out into the Indian Ocean which is part of OBOR. So it has a strategic implications which I think some of China's not best friends feel a little challenged by it. >> And I would add that one can't discount the cultural factor. That is to say that China had, at one point in its history, a huge connection with the very countries that have been picked out to be part of the One Belt, One Road initiative. And so this initiative is in part to recreate the idea among Chinese that China can have a significant place in the world as it had in the past. >> So I want to thank Barry Sautman and David Zweig for joining us to talk about China's outbound FDI. I think we've learned from this discussion that there are many different motivations for why we've seen so much outbound FDI from China. And although there are many potential benefits for both China and the recipient countries, there are also many factors which may limit the benefits of this investment. And we'll just have to wait and see in the coming years what it really means for China and the rest of the world.
