Growing uncertainties in China’s domestic market, coupled with the government’s move to liberalise capital controls on foreign investments, has led Chinese firms to scale up their outward FDI, and the US has emerged as a prime destination, according to Mike Margolis, a partner at US-based law firm Blank Rome. China’s economic boom of the past two decades helped many Chinese businesses to grow, but the country’s recent slowdown has led companies, many of which are awash with capital, to seek growth outside of their domestic market. Supported by the government’s outbound investment initiative, which has progressively eased controls on outward investments from China, Mr Margolis said that the US, which is home to a thriving technology industry, has become as a hotspot for Chinese investments.

“The rate of growth of Chinese investment into the US is very high,” Mr Margolis said in an online statement. “There are great uncertainties and challenges in Chinese domestic conditions that create incentives for Chinese capital to move to more developed economies that are perceived as safer and more stable. For all its troubles, the US is first ranked among these.”

Advertisement

Indeed, the US has become an attractive location for Chinese firms, according to greenfield investment monitor fDi Markets, which shows that greenfield FDI from Chinese firms to the US increased from three projects worth $21m in 2003, to 47 projects worth $8bn. The country's technology industry has seen the most activity.

Silicon Valley, in northern California, has witnessed a significant influx of Chinese FDI in recent years. Home to some of the world’s largest technology corporations, California has emerged as the leading recipient of greenfield FDI from China. According to fDi Markets, 28 Chinese greenfield projects were recorded in the US software and IT sector between 2003 and 2014, California enjoyed the lion’s share of this, attracting 15 projects worth $423m.

Mr Margolis cautioned, however, that a common issue among several Chinese businesses was insufficient efforts to comply with state and federal regulations. While some Chinese firms fail to hire local lawyers in order to engage in ongoing consultations on issues, such as employment regulations, other firms outsource their litigation to lawyers based in their head offices in China. As a result, they become unable to enforce their private contracts in the US, in case a litigation issue arises.

“[For example] the new California-based subsidiary of a Chinese furniture manufacturer uses a simple sales contract, which states basic terms, such as price and time of delivery,” explained Mr Margolis. “The contract was drafted by a Chinese lawyer back at the parent company’s headquarters in Shenzhen, without US legal advice. Later, a customer in Florida refused to pay on a million-dollar order. Unfortunately, because [the Chinese furniture manufacturer’s] sales contract was not prepared by a US lawyer, it does not specify that that the lawsuit would be handled in California, nor that the customer would have to pay the legal fees in the lawsuit. The firm could have avoided these problems with a small preventative investment in US legal advice when preparing its contract, but – as is often true of Chinese companies – it just did not appreciate the value of doing so. These blind spots did not result from bad business ethics, but instead from a difference in business culture.”

Far from deterring Chinese FDI, however, Mr Margolis is confident that as economic recovery continues in the US, Chinese investment into the country will continue in the long term. “Chinese FDI into the US will be one of the great economic stories of the next decade,” he said.