Asia Supplement The Rise of the Chinese Multinationals Dan Steinbock N EARLY June, hoping to ease These overseas Chinese have developed Igrowing trade tensions with the an informal “bamboo network” that tran- European Union, China agreed to place scends national boundaries and extends voluntary limits on the growth of its tex- throughout the region, where entrepre- tile and apparel exports to Europe. The neurs, business executives, traders and decision came hours before the EU was financiers of Chinese descent are major set to impose its own trade restrictions players in local economies.1 Today, the on China. A few days later, deep misgiv- array of complementary business rela- ings about China’s rising economic and tionships comprises more than fifty mil- political clout fueled a fierce debate over lion ethnic Chinese, who control many of a major Chinese oil company’s bid to buy Asia’s largest public companies and who U.S. producer Unocal. Topping Chev- have contributed to the rise of China’s ron’s original offer of $16.8 billion, the new multinationals. $18.5 billion bid from the government- When, a century ago, the first wave of controlled China National Offshore Oil globalization swept across the developed Corporation (CNOOC) came under fire economies of western Europe and North from U.S. lawmakers. These two inci- America, East Asia enjoyed a boom of dents highlight the new economic reality: its own. Chinese capitalists launched op- China is no longer just a destination for erations outside China while investing in foreign direct investment (FDI)—it is the their home country. home for Asia’s new multinationals. After 1949 the People’s Republic of China opted for a command economy in- Bamboo Networks to SEZs 1Murray Weidenbaum and Samuel Hughes, The INCE THE 1500s, southern Bamboo Network: How Expatriate Chinese En- SChina has been a springboard for trepreneurs are Creating a New Economic Super- emigrants to Vietnam, Thailand, Indo- power in Asia (New York: Simon & Schuster, nesia and elsewhere in Southeast Asia. 1996). 2 The National Interest––Fall 2005 spired by the Soviet model. Despite rapid was a Beijing restaurant in Tokyo, a joint growth, productivity was dismal. The civil venture of a Chinese and a Japanese com- war and the communist rule that followed pany. Despite significant expansion in led to massive capital outflows to neigh- overseas investment, by 1985 only 143 boring Hong Kong, Taiwan and Southeast Chinese enterprises had made the jump, Asia. Chinese “emigrant entrepreneurs” investing $170 million in 45 countries played a critical role in the industrializa- (less than 3 percent of China’s total inflow tion of Hong Kong, contributing to the of FDI). These businesses were mostly in significance of the city as a global textiles low-tech services, such as Chinese res- and garment hub.2 With the Cold War, taurants, located in the major cities or capital outflows from China were replaced Chinatowns of countries like the United by two-way flows between Hong Kong States, Japan and Thailand. Investment in and Southeast Asia. Postwar globalization other service sectors, such as construction arrived in mainland China only after the and shipping, was located primarily in failures of the initial national moderniza- Hong Kong and Macao. tion efforts (the Great Leap Forward in the 1950s and the Cultural Revolution in High-Tech Zones and Natural Resources the late 1960s), which contributed to fam- ine, devastation and dissension. itH THE initiation of in- In January 1975 Deng Xiaoping and Wdustrial modernization in the Zhou Enlai drafted the “Four Modern- coastal provinces, Chinese reformers also izations”, calling for modernization in began to pay increasing attention to the agriculture, industry, science and technol- modernization of science and technology, ogy, and national defense. The transition the third priority of the modernization from import substitution to export orien- program. The development of high-tech tation led to China’s “reform and open- industries was seen as vital for boosting ing.” Following the successful reforms of FDI inflows and attracting foreign mul- the agricultural sector, Deng moved on tinationals. If the idea for the SEZs came to the next stage of China’s moderniza- mainly from other East Asian export pro- tion, industrial reform, in 1984. The gov- cessing zones and free trade zones, the ernment established Special Economic model for the high-tech zones originated Zones (SEZs) close to Hong Kong and in Silicon Valley. then opened the coastal provinces and China’s high-tech development pro- major cities to overseas capital. The re- gram was initiated in 1986, when the formers saw the bamboo network of the State Council called together more than overseas Chinese in the south as an asset 120 senior Chinese scientists to draft through which the SEZs could be inte- China’s strategic high-technology plan. grated with Hong Kong, Macao and Tai- To implement the plan, the State Science wan, as well as the rest of the world. Still, and Technology (S & T) Commission de- overall annual FDI averaged only around signed the Torch Program, which aimed $1 billion. at the commercialization, industrialization Chinese FDI abroad started even more and internationalization of “high and new modestly. In 1979 a chosen few compa- technology.” One of the program’s key nies began to invest overseas, typically components was to establish Science and on the basis of existing overseas trade Technology Industrial Parks and innova- linkages. A third of overseas operations were located in Hong Kong and Macao, 2Siu-Lin Wong, Emigrant Entrepreneurs: Shanghai another third in the United States, Japan Industrialists in Hong Kong (Hong Kong: Ox- and Thailand. The first multinational ford University, 1988). Asia Supplement 3 tion centers. Meanwhile, the program investors, capital inflows accelerated also became responsible for the “high and dramatically. Initially, this FDI phase led new technology industrial development to the geographical expansion of Chi- zones” (HNTIDZs) focusing on a dozen nese firms from Hong Kong, Taiwan and strategic industries, including microelec- Southeast Asia. Now China also showed tronics, aerospace, biotechnology and, up on the radar screens of U.S. corpora- more recently, information technology. tions. After Deng’s southern tour, U.S. Concurrently, the government took steps investment flows to China grew more to improve the investment environment, than fivefold to $556 million in 1993. which triggered another phase of FDI, Over the latter half of the decade, U.S. with annual inflows exceeding $3 billion. capital flows to China averaged $1.1 bil- These measures were mirrored by lion annually. the Chinese government’s bolder steps Through foreign multinationals—the toward outward investment. In the latter so-called foreign-invested enterprises half of the 1980s, 620 new Chinese busi- (FIEs)—FDI played a critical role not just nesses invested more than $860 million in China’s economic reforms and opening, in over ninety countries. Instead of res- but in the rise of Chinese multination- taurants, natural resource development als. Until the late 1980s only 2 percent of projects, along with assembly and trans- the foreign multinationals in China were port, dominated Chinese overseas invest- regarded as technologically advanced, ments. Large, state-owned enterprises, and enterprises using advanced technol- including trust, steel and chemical giants, ogy made up just 5 percent of total FDI joined in. Of the newly established over- in China. After the mid-1990s the FIEs seas firms, 50 percent were in Asia and 18 replaced the small- and medium-sized en- percent were in Africa. However, it was terprises of the overseas Chinese as major the developed countries that attracted investors. Capital inflows soared from $11 the attention of Chinese investors, with billion in 1992 to $50 billion in 1999. Australia targeted as the single most im- Located in the United States, western portant host country for natural resource Europe and Japan, the FIEs are global development projects. But though the giants, owned by institutional investors, growth rate of Chinese FDI was almost engaged in worldwide operations and ex- 50 percent greater than the growth rate celling in high-tech industries. Account- of multinationals worldwide, Chinese FDI ing for only 10 percent of total national accounted for only 0.1 percent of the industrial assets in 2000, they provided global total. more than 27 percent of the gross in- The tumultuous early years of reform dustrial output value, 24 percent of the contributed to inflationary pressures, total value added and 29 percent of the unrest and, ultimately, the Tiananmen total industrial profits. At the end of the events. The momentum was recaptured growth years in 2001, more than 400 of only in 1992. Following his tour of the the world’s top 500 manufacturing com- southern coastal provinces, Deng was panies had invested in China. The FIEs now calling for “faster, better, deeper” accounted for an estimated one fifth of economic growth. the GDP growth. In particular, the rapid export growth of China resulted from Enter the Global Giants the dramatic expansion of FIE exports as a percentage of national total exports— S THE Chinese government from less than 16 percent in the early Aintroduced market-oriented re- 1990s to more than 50 percent in the forms to again attract U.S. and other early 2000s. 4 The National Interest––Fall 2005 For more than two decades, China and communication technology (ICT). In- has been the most attractive FDI host deed, China’s trade in ICT goods (imports among all developing countries. China’s and exports) more than doubled from just accession to the World Trade Organiza- over 12 percent of total trade in 1996 to tion and selection to host the 2008 Olym- more than 27 percent in 2003. More than pics has accelerated investment initiatives.