Chinese Outward Foreign Direct Investment in the Southeast United States

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A major shift is underway in the direction of global foreign direct investment (FDI) flows. The generally accepted definition of FDI is when 10% or more of the voting securities in a company or its branch are held by an entity not a resident of or headquartered in the same country (Bureau of Economic Analysis cited in Morrison, 2011). This type of investment typically takes place between developed countries and from more developed into developing countries, with the U.S. both a major recipient and a major investor. An accelerating trend since the recession year of 2009, now officially encouraged by Chinese government policy, involves investment from that rapidly developing country into the developed world economies of the European Union (EU) and the United States (U.S.). The newness and nature of investment targets has triggered security and competitive concerns in certain U.S. industries, leading to a series of acquisition and partnership proposals being turned down. Potential investment recipients on the one hand welcome job creation prospects, but on the other hand suspect China’s motives and the consequences of involvement.

 

This research focuses on the economic geography of Chinese-linked businesses within three states that are successfully attracting investment to the southeastern United States: North Carolina, South Carolina and Georgia. In both 2011 and 2012, North Carolina and Georgia ranked sixth and seventh respectively in value of COFDI deals by U.S. states (Hanemann, 2012). One hypothesis holds that beyond the usual set of pecuniary incentives, COFDI reflects location specific embedded strengths, e.g., furniture related businesses in western and central North Carolina, high technology in the Research Triangle region, financial services in metropolitan Atlanta, and manufacturing in South Carolina. Yeung and Liu (2008) argue that differences in target investment locations depend on “local contingencies”: the particular bundle of advantages available to particular businesses in a certain place.

 

Another hypothesis is that COFDI investment paths additionally reflect knowledge gained from the first leg of business migration – the earlier offshoring of U.S. companies to China, and personal connections that provide trusted access to the knowledge of location attributes noted in the first hypothesis. While the upsurge in COFDI to the U.S. post-2008 demonstrates the effect of rising labor costs in China, continuing revaluations of the yuan, costs involved in shipping such as fuel and time, and IP leaks related to foreign manufacturing, the specific places of investment in specific industries remain under-examined and are addressed in this research (Economist, 2012; Hackett Group, 2012). Better understanding of investment location motivation could assist the marketing of places based on their economic geography attractions, rather than relying on the size of monetary incentives. This approach would increase the amount of OFDI based on intelligent targeted positioning rather than limit it based on funds available.

Chinese outbound foreign direct investment (COFDI) to the United States increased in response to the opportunities presented by the U.S.’s recession (Aeppel, 2009). The U.S. and Chinese economic slowdowns since 2009 gave U.S. companies affiliated with China a staying power by absorbing troubled U.S. companies (Loten 2011). Although the export-energized Chinese economy also slowed initially due to a drop in demand from economic downturn in developed world markets, large central government stimulus infusions provided the financial means for offshore investment. According to Chinese survey reports, COFDI offshoring moves comport with the classic FDI model: to increase global competitive capacity and U.S. market share, serve U.S. customers better, access brand and intellectual property (IP) assets, and avoid U.S. trade restrictions (Dunning, 1993; 1998; Ge and Ding, 2009; personal communications, 2013). The latter step resembles Japanese efforts in the 1980s when U.S. sensitivity toward a seemingly voracious “economic animal” consuming iconic U.S. businesses was high, particularly in the automobile industry and real estate acquisitions. Japan’s response was to encourage Japanese automobile firms to locate in the U.S. and employ Americans.

 

The amount of developed country COFDI in 2010 doubled that invested six years previously. In the U.S. alone COFDI set a new record in 2012, rising by 12% from the previous year to $6.5 billion, in contrast to large decreases in U.S. investments from countries experiencing their own economic downturns. The total amount of COFDI nevertheless represents only 1 percent of FDI in the U.S, but importantly led to a tripling of U.S. jobs since 2007 in Chinese linked companies (Caruso-Cabrera, 2013). Major prongs of China’s entry into the American economy lie in energy related investments in natural resources and sustainable technology, as well as manufacturing enterprises linked to Chinese domestic interests and high technology acquisitions in general. These types of industries reflect China’s judgment on future domestic and global market demand, which it is positioning its industries to meet.

 

One of the areas for study in relation to the nature, purpose and trajectory of Chinese OFDI is the role of governments in aiding these enterprises. China’s strongly centralized and interventionist political economy modifies the traditional capitalist profit motive as it assists Chinese companies to enter a foreign economy (Blanchard, 2011). A question remains as to what extent this penetration occurs by way of mergers and acquisitions in the traditional manner or by way of a “reverse” strategy whereby a Chinese company blends into a similar U.S. firm basically in order to acquire that company’s position on the stock exchange, through joint ventures (JV) of various types, or via new “greenfield” ventures (Lubman, 2011). In addition to providing a regional study of COFDI in the southeastern U.S., this research explores the practices of several large companies that maintain a presence in both the southeastern U.S. and Germany (Lenovo and Sany), that have branches in multiple southeastern states (Cosco Container Lines), and large firms that locate in separate southeastern locations (Huawei, Lenovo and Haier). The latter strategy allocates a plum COFDI in each adjacent state similar to the Japanese “Auto Alley” vehicle firms. Clustering allowed them to share the results of state incentives competition in a region with similar attractive features, later pulling in suppliers and enhancing cluster benefits for their host and surrounding areas including in other contiguous states as in the case of Greater Charlotte (Nie, et al, 2012).

 

All predicted motivations can be allotted to the following categories: 1) asset acquisition: natural resources, market share, stock market listing via M&A name; 2) cost efficiencies: reduced shipping costs and time, shifts in relative currency and wage spreads; 3) learning behaviors: management and production practices increasing global competitiveness, including R&D, which enable moving up the value chain; and 4) development stage: providing services needed by a market based on manufactured goods, lobbying for acceptance. Relevant theory must combine the structural considerations of factors 1-3 appropriate to development stage (4), bringing political considerations to bear in an Evolutionary Political Economics approach.

 

Issues with COFDI flow from the distinctiveness of the Chinese political-economic model of an interventionist State. Although Chinese investments in U.S. businesses have been relatively modest, the U.S. economic downtown presented both opportunities for inexpensive acquisitions and a significantly decreased gap in the relative cost of doing business in both countries, leading to a sharply increased growth in COFDI. Encouragement by the Chinese government for domestic companies to go abroad provided political permission to pursue economic activity outside a country with a sharply rising labor cost in the face of business competition for their services in domestically concentrated places. The other alternative cost reduction was to move operations into the Chinese interior, trading wage issues for infrastructure ones but catering to an increasing Chinese low-end mark

 

Creation and comparison of a tri-state COFDI dataset permits examination of similarities and differences, substantiating claims that locational attributes matter. COFDI type and concentration matched the host areas: Metropolitan Atlanta’s regional strength throughout the Southeast as a broad-based economy with a significant services component; North Carolina COFDI company clustering was very heavy in the furniture industry; South Carolina’s share tilted to manufacturing. The role of Beijing can be measured in part by the relative strength of SOE vs. private capital COFDI investment, which is trending downward over time but still almost double that of private firms. Companies and state recruiters also cited the social environment of a place, such as its international attributes and openness. Chinese sending areas reflected the same considerations, explaining the heavy concentration of east coast metropolitan regions.

 

Absent significant changes in current economic and policy trends, FDI from China is likely to increase significantly. The growth in China’s U.S. investments reflects efforts by governments on both sides of the Pacific. On an aggregate basis the economic benefits of Chinese investments have been relatively modest compared to investments from other OECD countries and are accompanied by policy challenges on the national scale. For local states the benefits seem to be clearly positive in jobs created and deals concluded, pumping funds into areas that were already centers of similar economic activity and sustaining regional economic strength. Continuing research is needed to monitor developments over time as both China and the U.S. experience economic adjustments and global interactions with long term consequences for building a strategically important relationship.