Domestic enterprises should start on a small scale to reduce opposition and obstacles from local cooperative partners

In the context of China's accelerated efforts to push forward its "go global" strategy, domestic enterprises have conducted an increasing number of overseas business and investment activities, but also encountered ever-growing investment risks.

China's enterprises rarely experienced such risks during the initial period of the country's reform and opening-up, during which it mainly exported products and labor while introducing foreign investment. China's economy has entered a new stage after three decades of booming development and its ever-deepening economic links with the outside world are no longer confined to the exporting of products and labor and the importing of foreign capital alone. Aside from the export of products and labor, China's efforts to integrate itself in the global economy will usher in increased outward investment activities, as part of its growing economic interdependence with the world.

The opening of a less-developed country to the outside world usually starts with exports of its products and labor. However, this scenario will face growing difficulties as the country's economic development enters a higher level, especially for an emerging country like China that enjoys comparative advantages in some factors of production. The lower labor costs and insufficient attention it has paid to environmental protection over the past decades have helped China's products acquire a sharper price advantage over trading partners, which has resulted in its ever-yawning trade surplus.

However, China's widening export volume and trade surplus have also fueled increased frictions with its trading partners and prompted them to create trade barriers targeted at Chinese products. International experience indicates that after a country becomes a trading power, it usually encounters strong trade barriers from its trading partners. Because of this, the country has to bypass these protective barriers to maintain and deepen mutual economic links.

Transferring part of the manufacturing activities that were originally located within its own territory to trading partners, an effort to replace the previous product-dominated trade with direct investment, thus becomes an effective way for the country to evade possible tariffs, non-tariff and technological barriers its trading partners set to reduce its exports to them. The experiences of other countries also indicate that direct outward investment is the best way for a country to shy away from trade barriers set by imports-sensitive trading partners.

In the early period of its reform and opening-up initiative, China also looked at inbound overseas investment in a cautious way and put in place numerous restrictions targeting foreign capital. For foreign investors, such restrictions meant a kind of investment risk, even a big one, especially at a time when the campaign of "nationalizing" foreign investment was common in the country. Some Latin American countries also adopted a similar practice.

When it comes to its own enterprises that are poised to conduct overseas investment activities, China should look at the overseas risks they might encounter in a calm and objective manner rather than from a Cold War perspective. We should not regard any foreign efforts to obstruct overseas investment or acquisitions by China's enterprises as a "plot".

Instead of an obsession with negative elements, China should realize some new and positive trends in international economic development. It was China's claim in the past that, on the grounds that they were all spearheaded and institutionalized by Western powers, the existing international economic and financial systems only represent the interests and values of developed countries. With such a perception, China claimed that these established institutions failed to benefit developing countries and thus advocated their abolition to better protect the interests of developing nations. China has now changed its position, believing its participation in established international economic and financial systems and its efforts to promote their better governance will serve its own interests. Compared with China, the United States, however, is more motivated to push for sweeping reforms of the existing international economic and financial orders that it believes serve Beijing better.

Many Chinese people interpret the country's "go global" strategy as an attempt to acquire a bigger control over foreign resources and other industries of strategic significance. Such an interpretation will only create trouble for domestic enterprises' overseas investment moves. Imagine what we would feel if foreign enterprises were thought to be doing this in China. China's enterprises will inevitably encounter obstructions from their host countries if their investment moves are believed to be in this direction.

The success of Japan and Germany in their overseas investment activities should be an example for China. Instead of focusing on so-called industries of strategic significance alone, overseas investments by Tokyo and Berlin have been in a broad range of fields. For example, Japan's investment in Australia is distributed among many of the latter's enterprises, but all are less than a 12 percent investment in the entire venture, a share-holding proportion that is believed to pose no threat to local ownership and thus causes no alarm among local partners. This investment tactic helped Japan's investors succeed in their pursuit of investment cooperation with Australian partners.

In their bid to unfold increased overseas economic activities, China's enterprises should learn from their Japanese counterparts. Instead of pursuing large investments in overseas projects, which might cause their local partners to lose shareholding power, domestic enterprises should begin with some smaller-scale overseas investment projects in order to reduce the opposition and obstruction of local cooperative partners.

The author is vice-president of the Chinese Academy of Social Sciences. This is an excerpt of a speech he made at a forum on the risk management of outbound investments held at the academy last month.

(China Daily 01/16/2013 page8)