How emerging market governments promote outward FDI: Experience from China

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Abstract

Large scale outward foreign direct investment (OFDI) by emerging market enterprises has become common in today's business world. Nested within the political economy perspective, this article elucidates why and how emerging market governments enthusiastically stimulate OFDI. Drawing upon our detailed analysis of the Chinese context, we developed the logic that OFDI promotion policies set by emerging market governments are economically imperative and institutionally complementary to offsetting competitive disadvantages of emerging market enterprises in global competition. This study presents the governmental institutions that impact Chinese OFDI, discusses evolutionary changes of OFDI policies, and describes current policies and measures that stimulate Chinese companies to expand into the global market. This article concludes with theoretical and managerial discussions wherein we call for convergence between two seemingly paradoxical views – institutional escapism and governmental promotion – presently used as an institutional logic explicating international expansion of emerging market enterprises.

Introduction

Outward foreign direct investment (OFDI) by emerging market enterprises (EMEs) has become increasingly noteworthy and prevalent in recent years. According to WIR (2008), OFDI from emerging and developing economies reached $304 billion in 2007, the highest level ever recorded, constituting a 36.51% increase from 2006. While a small number of source economies are responsible for a large share of such OFDI, companies from an increasing number of countries are undertaking OFDI to expand into the global market. For instance, in 2005, foreign sales and foreign employment of the top 100 transnational corporations from developing economies increased by 48% and 73% respectively. These enterprises also operate in a broader range of industries than the largest multinationals from developed countries, actively participating in a large number of cross-border mergers and acquisitions. This surge has come from the rapid pace of economic development and liberal market policies implemented by home governments, along with offshore availability of market opportunities, entrepreneurial desire to hit key international markets, and strategic intent to exploit competitive advantages in cost-effective massive manufacturing (Luo and Tung, 2007, Mathews, 2002, Rui and Yip, 2008).

This surge is also due, in part, to increasingly favorable measures adopted by home governments in emerging economies. Most emerging economy governments (such as, India, China, and Brazil) now encourage local enterprises to go global (WIR, 2008). Similarly, researchers agree that institutional factors in home countries play an important part in shaping international expansion behavior and the trajectory of emerging market enterprises. However, the regulatory pillar of the home country's institutional environment, particularly specific policies enacted by home country governments, has yet to be systematically examined in the literature, giving rise to an inadequate understanding of the roles of home governments in promoting OFDI and nurturing the growth of EMEs.

Using China as our descriptive and analytical setting, this study is designed to enhance our understanding of an emerging economy government's role in promoting OFDI for researchers, policymakers, and executives. This study enriches the political economy perspective, developing the logic that governmental promotion of OFDI is a legitimate political action needed to help compensate for EMEs’ competitive disadvantages and organizational deficiencies so that they can better compete against their much more experienced counterparts from advanced economies. This article also illuminates that an emerging economy's government, such as China, is a critical institution that should and can leverage institutional support (financial and non-financial) to EMEs in the process of global competition wherein these businesses suffer from late-mover disadvantages, shortfalls in distinctive capabilities, and liabilities of newness and foreignness. More importantly, how emerging economy governments spur the process of OFDI is vital because it determines the actual effectiveness of both policymaking and growth of EMEs. Finally, this article is written for international executives who need to know specific measures emerging economy governments currently adopt so that their businesses can take advantage of these measures or lobby their own governments to mimic what other country governments (like China's) do in creating a more conducive climate to launch offshore FDI.

As the world's leading emerging economy, in terms of market size and growth rate, China is an ideal country to illustrate why and how governments in emerging economies promote OFDI. China represents an appropriate lens through which we can examine the relationship between regulative institutions and OFDI. Over the past 30 years, China has evolved from a marginal player to an important source of OFDI among developing countries. Using China as the illustrative setting, we show why emerging market governments are important institutions in accentuating OFDI and stimulating the growth of EMEs, and how the Chinese government specifically promotes OFDI for the interest of national economic development as well as for the growth of individual Chinese firms.

Section snippets

The theoretic perspective

Political economists have long argued that the interaction between businesses and governments is a complex, dynamic, and interdependent process in which governments create the rules by which businesses must abide, while businesses make efforts to shape governmental policies (Boddewyn, 1988, Kofele-Kale, 1992, Moran, 1985). According to political economy theory, governments are the controllers, regulators, and adjudicators of business sectors. Government creates legislation to regulate the

Governmental institutions and processes

Although China's OFDI dates back to the 1980s, it accounted only for a small proportion of worldwide OFDI. Between 2002 and 2007, Chinese OFDI reached 118 billion dollars in various industries (15 billion in 2007 alone) (MOC, 2008). According to the recently released Statistical Bulletin of China's Outward Foreign Direct Investment (MOC, 2008), by December of 2007, nearly 7000 Chinese enterprises had engaged in OFDI in 173 countries, establishing over 10,000 overseas enterprises in both

Evolutionary change in governmental policies

Like many other regulations and policies in China, OFDI policies have changed in recent decades. The government perspective on OFDI experienced three stages: Phase 1 (1984–1990), Phase 2 (1991–2000), and Phase 3 (2001–present). Fig. 2 and Table 1 depict the evolution of all related policies on OFDI.

Current policies in promoting OFDI

We have delineated and discussed the evolution of China's OFDI policy regime, but only from a longitudinal perspective. In this section, we will articulate the characteristics of the extant OFDI policy regime. We believe that the motive of OFDI policies is to provide support for OFDI enterprises. Based on these policies’ purpose, they can be classified into two broad categories: simulative measures and monitoring policies (see Fig. 3).

Theoretical implications

The growth of OFDI from emerging economies has been facilitated by the liberalization of regulatory policies and supports from the governments. For instance, since the late 1990s, foreign exchange control limits on OFDI and restrictions on foreign dividend repatriation have been lifted in most emerging economies. Overall, there are two views of the institutional environment, prompting EMEs to expand globally: one involves more institutionally embedded constraints such as limited property rights

Conclusion

This study draws upon political economy theory to underpin our premise that emerging market governments can, and should, play an important role in promoting OFDI and helping EMEs redress the firms’ competitive disadvantages in global competition. A recent survey conducted by the Asia Pacific Foundation of Canada and the China Council for the Promotion of International Trade found China's “going global” strategy to be the second most important driving force behind Chinese OFDI today (WIR, 2006).

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    The authors appreciate Professor John Slocum and anonymous reviewers for their insightful suggestions. An earlier version of this paper was presented in the Five-Diamond International Conference on Thinking Outward: Global Players from Emerging Markets, April 28–29, 2008, Columbia University, New York.

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