Op-Ed Commentary: Chris Devonshire-Ellis
With governments around the world seeking to redress massive trade imbalances with China, a lot has been done to try and attract Chinese outbound investment overseas. The figures, at first glance, look impressive – China has become the world’s third largest overseas investor, behind the United States and Japan. The numbers, too, are huge – US$87.8 billion in 2012. Not surprisingly, a lot of international trade delegations have been visiting China, knocking on doors and hopeful that the Chinese will see attraction in investing in their respective countries. It is, however, a flawed strategy.
The problem with Chinese overseas investment is that much of it is State controlled and that means there are political considerations. Such investments tend to be strategic, rather than purely commercial. Often large, Chinese outbound investments are completely tied in with the needs of the Chinese State – and that typically restricts the type of investments being made to big ticket deals, often with added sweeteners, and usually solely the preserve of the recipient nations own SOE’s or its giant corporates.
Developing a city-based strategy then to generally attempt to try and attract Chinese outbound investment to cities such as Cincinnati, Melbourne or Manchester, simply isn’t going to work. You need to have a political angle to sell, and that is hard. Just because the Chinese have the world’s largest financial reserves doesn’t mean they are particularly open to spending much of it, and certainly not in unfamiliar, foreign territory.
RELATED: China’s Outbound Investment
But now appearing on the horizon is a potential new source of outbound investment from Asia – India. There are profound differences between how the Indians and the Chinese view finance, and to a large extent, commerce. In China, the entire realm is politicized and controlled by the State. The age of “Chinese entrepreneurs” is largely myth – the new billionaires in China are both highly connected to the Government, and secondly, restricted in their wealth and commercial strengths to purely their own home country – China. There are very few Chinese billionaires or entrepreneurs who have adapted to become Multinationals. An example of this can be seen by examining the companies listed on the Shanghai Stock Exchange. 90 percent of them are either wholly, or partially owned by the State. Government and political involvement in commerce remains extraordinarily high.
India, by contrast, has been developing a new generation of entrepreneurs, with the government largely stepping aside and staying out of commerce. In contrast to Shanghai, the Bombay Stock Exchange manages a bourse where 90 percent of its companies are owned and controlled by entrepreneurs – and not the Government. This has in turn lead to the development of a true class of Indian Multinationals – Tata, Infosys, Reliance and many others, in complete contrast to China’s SOE’s. It is these Indian MNC’s that are now flexing their muscles and participating in outbound foreign investment – and in search of true commercial opportunities rather than State driven strategy. India, in fact, invested a fraction under US$30 billion overseas last year – all of that being driven by commercial considerations.
On paper, it appears that Chinese outbound investment is substantially more than India’s. Yet it is the quality of those investment dollars that count, in addition to the underlying entrepreneurial goals that are driving them. You’ll never have much success persuading a Chinese SOE to invest in a manufacturing plant in the United States or Europe, unless there is a sound, State driven need for them to do so. But if you can demonstrate to Indian investors a solid business plan, money making opportunities and how it can project their business further into the global arena, you are far more likely to generate a positive response. China may have the larger amount of overseas bound investment dollars. But it is India that has the entrepreneurs who are interested in making a return on that investment.
Chris Devonshire-Ellis is the Founding Partner of Dezan Shira & Associates – a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy and the United States.
For further details or to contact the firm, please email asia@dezshira.com, visit www.dezshira.com, or download our brochure.
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