Abstract
The growth of outward investment from China has generated expressions of concern from policymakers in the United States regarding the economic and national security impacts of such investments. While inward foreign direct investment (FDI) has come to be viewed by most observers as generally imparting net economic benefits to the host economy, acquisitions of US companies by Chinese multinational companies (MNCs) have been criticized on several grounds. One is based on the mode of entry itself: some critics believe that entry by acquisition brings lower benefits than greenfield entry. A second and more prominent concern is that acquisitions of US companies by Chinese state-owned enterprises (SOEs) may be motivated by non-commercial objectives which, in turn, make those acquisitions of questionable value to the host economy. In this paper, we argue that Chinese FDI in the United States is more likely to take the form of acquisitions than greenfield investments for the foreseeable future. However, there is no strong case to be made that the host country economic benefits from Chinese FDI would be larger if entry took place primarily through greenfield investments. Furthermore, most of the alleged costs to the US economy from inward FDI from China are either unlikely to occur or are already anticipated by existing US laws and regulations, thus necessitating no additional, specific legislation.
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Notes
In 2006, the proposed sale of six major US ports to DB World, a state-owned company based in the United Arab Emirates, also precipitated a storm of controversy in the United States. The specific concern was that the sale would compromise port security in the United States. DB World subsequently sold its US operations to a North American company.
Concern is also being expressed in the United States and elsewhere about equity investments made in those countries by sovereign wealth funds headquartered in China and other emerging markets. See, for example, Davis (2007).
In an evaluation of preferred modes of FDI for Indian pharmaceutical companies, Prakash and Alakshendra (2006) conclude that acquisitions are typically more advantageous than greenfield investments. The attributes and motives of Indian companies may be similar to those of Chinese MNCs.
Direct improvements in efficiency should be distinguished from spillover (or indirect) efficiency benefits to non-acquired host country firms.
However, Huttunen (2007) finds for a sample of Finnish establishments that foreign acquisitions result in a decreased share of highly educated workers in the plant’s employment.
State ownership is present in most large Chinese-owned companies, though it may not involve majority ownership. Ownership can be held by national or local government. According to China’s Economic Census 2004, there were 192,000 firms with state ownership at the end of 2004 including SOEs, state-owned joint ventures and state-owned holding companies.
For a discussion of the unique governance problems facing SOEs, see The World Bank (2006).
Goergen (2007) and Young, Peng, Ahlstrom, Bruton, and Jiang (2008) point out that, for most of the world, conflicts of interest are not likely to emerge between management and shareholders but between the major shareholder and the minority shareholders; however, in many emerging market MNCs, major shareholders are either family members or the state, and family members or government bureaucrats are often senior managers.
This assertion has been disputed by some SOEs. For example, the CEO of the Abu Dhabi National Energy Company recently stated that the company, while formed by the government in 2005 to diversify the emirate’s portfolio globally, is “run like a private concern.” See Cattaneo (2007).
See The Wall Street Journal, 2008. Bain capital drops its bid for 3Com, March 21: B6.
For a discussion of the appearance versus the reality of compliance with OECD codes, see Peng (2004).
One thinks here of the recent bankruptcies of several large mortgage brokers in the United States that contributed to a reluctance to lend on the part of other financial institutions with attendant disruptions to the normal functioning of capital markets. For a more extensive discussion of this possibility, see Antkiewicz and Whalley (2007).
A comprehensive discussion of the Exon-Florio Amendment and FINSA is provided in Fagan (2007).
As Fagan (2007) notes, greenfield investments at the outset will not involve contracts or assets that are inherently central to national security. By contrast, an existing business may have contracts with the US government or access to sensitive or classified information.
At the same time, the rapid economic growth of China’s economy is encouraging economists and investment analysts to study Chinese companies more intensively, thereby mitigating some of the transparency problems associated with the activities of those companies (McMahon, 2007).
It was recently announced that the US and officials from Abu Dhabi and Singapore have agreed to basic principles that call for, among other things, strict disclosure and governance standards for sovereign wealth funds. The agreed-upon guidelines are aimed at complementing efforts under way at the International Monetary Fund and the OECD to write voluntary codes of “best practices” for sovereign wealth funds (Barkley, 2008). The guidelines developed for SWFs can conceptually be applied to SOEs, as well.
See US Treasury Department Office of Public Affairs, 2008. Joint US-China Fact Sheet, June 18. SED took place after a draft of this paper was written.
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The authors thank Mike Peng (Editor-in-Chief) for helpful comments on an earlier draft.
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Globerman, S., Shapiro, D. Economic and strategic considerations surrounding Chinese FDI in the United States. Asia Pac J Manag 26, 163–183 (2009). https://doi.org/10.1007/s10490-008-9112-5
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DOI: https://doi.org/10.1007/s10490-008-9112-5