Chinese Investment Is Far From Scary

A “mix of policy liberalization and changing commercial realities in the Chinese marketplace” have led to a boom in Chinese foreign direct investment (FDI) in the US, but these investments are complicated by mistrust, national security concerns and widespread fears that Chinese firms have unfair advantages.

A new report suggests Chinese FDI in U.S. high tech may not be as scary as popular opinion there would have us believe.

The sum total of China’s OFDI in high tech is but a tiny fraction of US$9.1 of the more than half trillion China has invested abroad, say Thilo Hanemann and Daniel Rosen in High Tech: The Next Wave of Chinese Investment in America, a report for the Asia Society.

Between 2010 and 2012, China was one of the largest exporters of FDI in the world, investing more than US$50 billion per year, up from US$3 billion in 2004. China started investing seriously in North America in the 1990s focusing on trade facilitation. It moved to natural resources in the mid-2000s and to high-tech started around 2010. (Prior to that, the only deal of any significance in this space was Lenovo’s acquisition of IBM’s personal computing unit in 2005.)

But high tech investments have created a number of fears in the U.S.

The first is that Chinese firms may have non-market advantages that “could threaten the healthy functioning of competitive markets in the long-term”. Hanemann and Rosen point out that the impact to date has been mostly positive with “firms such as Haier, Lenovo, Tencent and Alibaba… increasing choices and lowering prices for consumer.”.

The second concern is that Chinese firms want to move innovative activities to China and hurt U.S. competitiveness. The authors say they have found no signs of any policy goals or doctrines to that end. Contrary to public opinion but Chinese firms have created 25,000 jobs in the US and are contributing to research and development.

A third concern revolves around national security given China’s size and its links to pariah (in the West) regimes like North Korea. Stronger screenings by the Committee on Foreign Investment in the United States (CFIUS) could be one solution

But it is not enough for the U.S. to identify and address domestic concerns. China should also work to remove impediments to investing.

A place to start is to acknowledge the “anxieties” of foreign trade partners. A “down payment” on reform could help deal with many of the fears of China’s partners. The program of reforms outlined in the Third Plenum of the Communist Party in November 2013 is a start. A stronger private sector should also help with acceptance of Chinese investment. Finally, say the authors, China could and should step up as a global leader.

As China’s economy transforms and more of its innovative companies take to the global stage, more of them are likely to invest overseas, particularly in the U.S. which remains the largest market in the world in many industries.

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