The strengthening of security reviews in developed countries creates barriers-to-entry for foreign investors. The United States, Canada and Australia have all introduced laws to expand regulatory power over foreign investment through national security, financial security and environmental protection rules.
National security reviews are now the most important form of investment protectionism. They are generally characterised by unclear legal provisions, vague definitions and a lack of precise standards by which assessment for investment approval is made, so the host country can exercise great flexibility in law enforcement and treat foreign investment in a targeted manner.
Foreign governments aren’t solely to blame for the difficulties Chinese firms are facing however.
Many Chinese companies lack a clear strategy for their overseas investment. Some are eager to become bigger and stronger, and blindly set targets for their mergers and acquisitions (M&A) activity without adequate preparation or consideration for long-term corporate strategic goals. This leaves them unable to achieve expected post-merger integration effects since they don’t have a comprehensive strategy for the integration process.
Chinese companies’ due diligence teams are also often out of their depth. They are unable to effectively identify and assess risks since they have minimal international experience and an insufficient understanding of the overseas legal environment.
Organisational structures can make things worse. The decision-making power within some Chinese companies is highly concentrated in the headquarters, making it difficult for frontline teams to make necessary judgements and decisions in real time on the ground. Chinese buyers struggle to keep up with the speed that projects unfold in developed markets and have a hard time responding quickly when trading conditions change.
There is a lot to be done to improve this situation. Better economic diplomacy is an important start. Mutual trust that can facilitate ‘win-win’ relationships must be built. The diplomatic dialogue is only just beginning.
An important vector for this is China’s Belt and Road Initiative (BRI). The BRI has adapted to the demands of the international environment and has proposed a new concept for regional cooperation, bringing with it a new framework for foreign investment. But there is still a way to go in getting the frameworks for infrastructure investment right.
The international image of Chinese companies also needs a makeover. China’s Ministry of Foreign Affairs and Publicity Department have their work cut out for them. They need to engage on international platforms, with media and in conferences to make clearer the contribution made by Chinese enterprises through overseas investment.
The Chinese government also needs to accept the challenge of active participation in the formulation of international investment rules. Most effort in the past has been targeted at bilateral investment agreements. Instead, China should promote the establishment of organisations and multilateral investment pacts, such as the World Trade Organization and in complementary regional agreements. This approach will pay big dividends by providing uniform rules for multinationals to operate under.
There is much that individual firms should do too.
The core concerns of the host countries have to be taken into account — Chinese firms need to strive to achieve positive outcomes for all parties. Cooperating with local companies, meticulous compliance with local laws and being cautious when operating in sensitive industries are essential to successful investment abroad.
It’s also important that Chinese companies put more effort into succeeding in foreign business environments. Chinese companies need to understand the context and key points of foreign regulatory frameworks and security laws, and improve their corporate governance in accordance with international commercial best practice. Finding suitable local partners and investing in the cultivation of corporate talent can also help Chinese enterprises adapt to different rules and cultural environments more effectively. And for those competing in M&A markets, clear and coherent strategies and positions need to be put in place.
Chinese companies need to learn to play by the rules of the game in foreign corporate environments. For example, in the United States, lobbying Congress is a common and effective strategy, but it has often been ignored by Chinese companies. And the influence of public opinion on the American people and Congress should not be underestimated. Chinese companies should leverage different civil and social organisations to help forge a positive climate for investment.
There is a lot at stake. A successful Chinese outward investment strategy could help drive future global growth. But failure to address the current issues would not only be a huge waste, it could also fuel suspicion about China’s intentions and destabilise the already brittle global trade and investment policy environment.
Xie Ping is professor at the PBC School of Finance, Tsinghua University and is former executive vice president of China Investment Corporation.
The Chinese manage to take over foreign companies due to lax laws in the Western countries and the governments are not waking up to do something about it. In addition, if the Chinese want foreign partners, the partners have to play by the Chinese rules which means that the partners have no say in the operations of the partnership which the Chinese own the majority of the shares in the company which gives them the ultimate say in how the company will be run.
What’s good for the goose, is good for the gander too. The U.S. does not run the world or gets to call the shots, although it’s constantly selling arms to every country it can, and sanctioning those that don’t buy. Considering the present direction being taken, not to forget mentioning the endless wars being waged, which drain more dollars from the homeland maintenance, finger pointing instead of changing course, the time for a rude awakening to these actions, is drawing closer then ever. Considering the interest on the debt is over 1/2 $Trillion a year and growing, (almost the outlay of the DoD budget) which will be one $Trillion in just a few more years, thanks to the tax cuts, the race is on which one will cost – waste – more?
When American companies come in to take over companies, it is usually slashed, burn, sell off the assets and pocket the money. Partnerships don’t mean a thing anymore in America.