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Why Chinese governments stimulate outward FDI - Essay Example

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According to the report by Randall Morck, Bernard Yeung and Minyuan Zhao (2007), the growth of outward investment (FDI), from developing and transition economies has greatly increased. China is one of the countries that are practicing the outward foreign investment. This means…
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Why Chinese governments stimulate outward FDI Why Chinese governments stimulate outward FDI? According to the report byRandall Morck, Bernard Yeung and Minyuan Zhao (2007), the growth of outward investment (FDI), from developing and transition economies has greatly increased. China is one of the countries that are practicing the outward foreign investment. This means that china is injecting funds into and enterprise that in a different country the text discusses on the main targets of the FDI and the interest of the chine managers. The Chinese managers see FDI as a way of upgrading technology and augment earnings (Morck, et al. 2007). With the outward FDI, china will grow sustainably as well as different players will gain prominence.
China has continued to stimulate outward FDI, with the lifting of restrictions on Chinese firm operations overseas on the new law on foreign exchange. For instance, there is no need to obtain exchange based on a risk assessment. This is expected to increase Chinas Outward FDI. As much as the countries may have difficulties in navigating towards the process, China may opt to go to the developing countries because of initiatives employed by these countries. Recently China is focusing on Africa, to increase the outward FDI since it is currently relatively small than the size of its economy (Ilhéu, 2010). There are other top host countries of great interest to china, which include Hong Kong and the Caribbean tax haven. That constantly account for about 70% of the flow. These counties are often used by multinational firms to store wealth as a result of their confidentiality to the foreign investors. Focusing on these countries by Chinese firm may also be one of the ways of hiding wealth from tax authorities, other authorities or the public shareholders (Morck, et al. 2007).
The following are the three features of Chinese macro environment that are likely to connect with the outward FDI surge. High saving rates, Weak corporate governance, distorted capital allocation. As much as outward FDI can let firms gain important economies of scale and scope, the above features could combine to induce excessive outward FDI by the wrong players that would be working with the Chinese long-term economic prospects (Morck, et al. 2007, p 10). Therefore, it is important to understand outward FDI to achieve prosperity.
Outward foreign direct investment by the Chinese firms was expected to reach a record of USD 120 billion in 2014. However, the recent liberalization of capital controls has also further complicated the task of recording such outflows accurately. Other data points suggest that the growth of China outward investment was much lower in 2014 than it was speculated in the official data suggested.
However, outward FDI in china has continued to grow from zero in seventies and eighties to USD 16 billion in 2006. Official data from the Chinas Ministry of Commerce (MOFCOM), shows that the outward FDI by the Chinese firm is on track and the projection of 2014 were USD 2014, as a result of reforms that significantly cut approval requirement for investors. However, the MOFCOM data largely ignore the reverse flow, which involve the overseas subsidiaries back to Chinese parent firms. It has greatly jumped over the last past two years as a result of free movement of money both ways and a tighter credit situation in China. In the coming years Chinas, outward FDI is expected to grow significantly not only in volume but also in a variety across industries and organizations. Proper understanding of outward FDI is a platform for the introduction of market reforms that improve on domestic investment and enhance growth.
References
Berning, S. and Holtbrügge, D. 2012. Chinese outward foreign direct investment—a challenge for traditional internationalization theories?. J Betriebswirtsch, 62(3-4), pp.169-224.
Collins, D. 2013. The BRIC states and outward foreign direct investment. Oxford: Oxford University Press
Ilhéu, F. 2010. Chinese Outward Foreign Direct Investment. International Journal of Asian Business and Information Management, 1(4), pp.43-56.
Morck, R., Yeung, B. and Zhao, M. 2007. Perspectives on Chinas Outward Foreign Direct Investment.pp. 3-29.
Robins, F. 2013. The uniqueness of Chinese outward foreign direct investment. Asian Bus Manage, 12(5), pp.525-537. Read More
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