Consistent with so much about China’s thrust onto the global stage over the past decade, its outward foreign direct investment (OFDI) has grown far faster than OFDI from most other transitional economies.

Chinese OFDI is largely politically driven, aimed at achieving specific nationalistic objectives, such as securing natural resources, acquiring strategic assets in key technologies and service industries, and creating national champion companies. China’s approach to OFDI – which is often aggressive and brusque in nature – is increasingly colouring its relationship with recipient nations at all levels of development and income. 


Until 2000, OFDI from China – though still small – was negligible. That year, Premier Zhu Rongji officially announced that overseas investment would be one of the main objectives of the government’s 10th Five-Year Plan (2001-05), giving birth to a 'go global' strategy. Premier Wen Jiabao reinforced the importance of overseas investment in the 11th Five-Year Plan (2006-10). The government-led strategy has proven to be effective. In 2006, yearly OFDI flow was 19 times that of 2000, growing at an average rate of 116% per year, dwarfing the average world OFDI growth of 6% over the same period.[1][2]

Investment objectives

The acquisition of strategic natural resources through investment in the primary sector abroad is at the top of the government’s agenda. Such investment is designed to provide supply and price security for China’s manufacturing-based economy, whose ravenous appetite for oil, metals, construction materials and other key commodities makes their supply a national security imperative for the government. Not surprisingly, state-owned enterprises (SOEs) conduct OFDI in the primary sector, where investments are dominated by a few giant firms.

A second strategic objective is to spur investment that acquires sophisticated, proprietary technology, technical skills, industry best practices, and established brand names and distribution networks. Such investment often takes the form of M&A activity. Lenovo’s purchase of IBM’s computer unit and Huaneng Group’s acquisition of InterGen are representative examples.   

Finally, OFDI serves as a strategic objective at the macroeconomic level, relieving some of the imbalances that have been built up by economic policy that distorts the marketplace. Upward pressure on the yuan can be somewhat mitigated by encouraging greater capital outflows, and OFDI reduces the massive capital stock the government has accumulated. Furthermore, promoting OFDI allows for investment diversification, particularly away from US and other government bonds.

While private sector enterprises exposed to market forces are clearly playing a greater role, SOE’s have continued to dominate OFDI, with SOEs holding approximately 84% of OFDI stock, and accounting for approximately 84% of OFDI flows from 2004-06. Strategic OFDI also receives significant political backing. While private sector enterprises will gradually expand their share of OFDI, the government will maintain strict control of what it views as strategic industries. 

Developing relationships

An increased share of global investment is one consequence of China’s economic and political rise. Chinese OFDI has the potential to become a large portion of global crossborder investment, but China’s political power and political obstacles may inhibit that growth.

The blowback China has recently received from some African countries objecting to its one-size-fits-all approach to OFDI (leaving the host countries with a nice football stadium but no knowledge that will help them grow long-term) has prompted China to reconsider its approach. Some African countries are no longer simply rolling out the red carpet. In an increasing number of cases, natural resource export earnings must now be deposited into off-shore escrow accounts, with the value of the exports determined at the time of export, rather than in advance, for example. This is a far cry from how Chinese OFDI started in these countries, with the Chinese simply dictating the terms of engagement.

Developing countries accounted for 95% of Chinese OFDI stock by the end of 2006, with a significant percentage in countries with weak governance and rule of law. Many of these countries subsequently experienced the classic “resource curse” in which valuable reserves of minerals or fossil fuels enhanced corruption and conflict rather than promoting economic development. Chinese SOEs have typically stepped into this environment with the advantages of political backing and government subsidised and insured investment, and China has typically used significant sweeteners to win contracts.

To secure investment deals, the government offers infrastructure projects, politically important landmarks, soft loans and grant programmes as a package deal with a proposed natural resource investment. With government financing and political support, Chinese SOEs avoid a plethora of risks that often plague investments in resource-rich, economically poor countries. Political and reputational risks are usually mitigated and financing uncertainty is eliminated. Such risks hinder Western multinational enterprises (MNEs) that must respect the bottom line, which are of little concern to Chinese SOEs.

China’s relationship with other emerging markets is complex. Subsidised Chinese OFDI may crowd out less substantial or unsubsidised OFDI, or internal investment from other emerging market countries. At the same time, emerging markets view Chinese investment into their countries, particularly in infrastructure and industrial projects, as a valuable resource for economic development, especially since it comes with few strings attached and is plentiful at a time when FDI in general is stunted. China’s strategy has been to negotiate such investment through diplomatic channels, with investments taking the form of partnerships and quid pro quo loans as opposed to being exclusively under Chinese control; emerging markets have more negotiating power than heavily indebted poor countries, and the Chinese know it.

Developed dealings

Using such sweeteners as diplomacy, ideology and camaraderie tends not to work in developed countries, where China finds it is playing on a more even field. When placed in a competitive environment with a formidable opposite number, China tends to use a sledgehammer to get what it wants. 

Points of conflict with developed countries occur primarily in three areas. First, OFDI by Chinese SOEs is increasingly seen as unfairly competitive with private sector companies. By virtue of government ownership and backing, Chinese SOEs often operate investments in risky environments where Western multinationals prefer not to operate, and at reduced cost, thereby outmaneuvering Western firms. As Western multinationals generally operate based on market conditions, albeit with advantages from established reputations, technology and industry best practices, they and their home countries believe the playing field is no longer level. Indeed, China’s growing non-commercially motivated OFDI has the potential to distort global markets, leading to long-term loss of productivity and efficiency.

Second, Chinese official aid to unsavoury governments in order to lubricate OFDI contracts raises governance and humanitarian concerns and, therefore, hackles among developed country governments. China’s general willingness to befriend rogue or unsavory governments – funding projects in countries such as Sudan, Iran, Venezuela and Niger – creates tension with the developed world. Some of this tension may actually stem from the fact that the exercise of realpolitik by China puts it on top, and outmanoeuvres Western firms that have had their activities circumscribed in such countries due to sanctions, reputational or political risk. 

Finally, Chinese SOEs’ attempts to acquire ownership or assets of large developed country MNEs operating under market conditions have unnerved some developed country governments, which fear losing market access to strategic resources, as well as their technological and advanced practices edge.

If it weren’t for the West’s preoccupation with achieving a higher moral standard and adherence to international standards of acceptable behavior, China would not have been as successful as it has been in fostering OFDI in the developing and emerging world to the degree that it has.

China is in the process of beating the West at its own game – identifying what it sees as the West’s 'weakness' on the grand chess board and filling in the gaps left behind. If the West played the game the same way, China’s investment ambitions would be restricted mostly to the mainland. But the West is not going to change its stripes any more than China will be changing its own. In some respects, China is better at achieving capitalist nirvana than the countries that invented it.

China is quickly learning the benefits of establishing more equitable and mutually beneficial bilateral economic relationships. Soon enough it will master that game, too. Once that occurs, China will be able to truly demonstrate why this is the Chinese Century. Until then, the developing world will have to figure out a way to encourage China to leave something other than a football stadium behind.

Stephen Goldsmith is an analyst with International Country Risk Guide. Daniel Wagner is managing director of Country Risk Solutions, a political and economic risk consultancy based in Connecticut.


[1] Other statistical data is from the latest Organisation for Economic Co-operation and Development (OECD) Investment Policy Review of China, available at

[2] Note: Significant uncertainty underlies official Chinese OFDI statistics.