Go Global 4.0

New Directions of China’s Investment Strategy

The extraordinary economic performance of China between the onset of the reform era in the early 1980s and the global financial crisis was mainly driven by export-led economic growth model, which was supported by high productivity of labour-intensive manufactures, low wages, and export-stimulating policies. In 1999, China carved out its “Go Global” strategy which bade farewell to the Mao-era mindset of self-reliance. It exhorted Chinese firms to take advantage of booming world trade to invest in global markets. Under the Xi–Li leadership, “Go Global” strategy has evolved to reflect domestic goals: moving from an investment- to an innovation-driven economy. Led by two high-profile initiatives—Belt and Road and Capacity Cooperation—Go Global strategy has changed China’s investment trends and patterns.

The Go Global strategy (or Go Out policy), which started in 1999, pushed and supported Chinese enterprises to become multinational companies.  The policy was officially launched in 2001 to coincide with China’s admission to the World Trade Organization (WTO), and Chinese private companies joined the policy in the same year. The Go Global strategy allowed the Chinese state to guide strategic companies – both state-owned enterprises (SOEs) and private businesses – to secure resources, knowledge, and access to offshore markets.

The policy reached its peak under the Wen Jiabao and Hu Jintao (Hu–Wen) administration (2002–2012). The principal investments under the policy pertained to securing access to energy and metal natural resources. Such investments accounted for 70% of total outfl ows from China between 2005 and 2014.

The other main beneficiaries of Chinese investment under the Go Global strategy were the automotive, technology, and shipping sectors, and Africa was the region that received the most of Chinese investment.

This early period of outward investment under the Hu–Wen administration is known as the ‘Go Global era 1.0’. A later period that saw Chinese SOEs secure access to overseas markets in key areas, such as oil and gas, is referred to as the ‘Go Global era 2.0’.

Under the Xi Jinping and Li Keqiang (Xi–Li) administration, Chinese investment moved towards a ‘Go Global era 3.0’, in which China directly invested in overseas markets, locating company assets and production abroad, and acquiring or merging foreign companies and infrastructure. Key to this period was the need to create an innovation-driven economy. Core to the ‘Go Global era 3.0’ was a strategic plan entitled ‘Made in China 2025’, whereby the government aimed to upgrade ten strategic industries, including robotics, aerospace, pharmaceuticals, car manufacturing, IT, and transportation. The logic behind ‘Made in China 2025’ was to overcome the middle-income trap by moving China’s manufacturing sector up the value chain. By forcing companies to invest and move part of their production overseas, the Chinese state hoped to drive innovation in these companies – a skill they would need in order to compete and survive in international markets.

Another key aspect of the ‘Go Global era 3.0’ is the implementation of the Belt and Road Initiative (BRI) and creation of its two related but independent investment vehicles, the Silk Road Fund and the Asian Infrastructure Investment Bank (AIIB). The scale of BRI investment is estimated to reach between $1 and $8trn.11 The BRI will involve at least 70 countries directly across Africa, Asia, Europe, Latin America, and the Caribbean. Another 60 countries, including South Korea, have signed BRI agreements despite not being directly affected.  The BRI will allow the Chinese state to directly support Chinese companies to gain a foothold in international markets. The BRI also creates Chinese-owned and -designed infrastructure networks, such as rail and telecommunications networks, allowing spill-over effects by offering Chinese private companies, which already contribute to such networks in China, a comparative advantage across these BRI networks. This will lead to the final era of the strategy, the ‘Go Global era 4.0’, which will see private Chinese enterprises as the main driver of overseas investment. This would enable the latter to raise private funds both inside China and on the international market. These companies would be less guided by the Chinese state and would be reactive to economic market drivers.

‘Go Global eras’ 3.0 and 4.0 under the Xi Jinping administration have created new directions of outward investment strategy for China, which allows China to push its economy further up the value chain. Thus, China hopes to increase the overall wealth of its workers, helping to create a more balanced consumption-driven economy.

New challenges, e.g. exhaustion of export-led economic growth model, resulting in slowing pace of economic growth, shift towards consumption-led growth, rapid growth of capital-intensive sectors, replacement of labour-intensive industries, as well as China’s strategic positioning as a ‘science and technology superpower’, predetermine recent trends in the country’s foreign investment strategy. Despite a 17% decline of outward direct investments (ODI) in 2018 (caused by policies discouraging capital outflows, the rising sanction tensions, and increased screening of inward investment in North America and Europe), China is still the world’s third-largest investor behind the US and Japan.

Following contemporary challenges and its strategic priorities, China’s outward investment policy has recently begun to demonstrate signs of significant change.

1. Changes in forms of investments

Chinese corporations shift from being minority stakeholders looking for profit to acquiring foreign companies, to increasing their share in various projects, participating in decision-making, and in using infrastructure facilities to meet their own strategic priorities.  In recent years, China’s corporations have become among the largest initiators of mega-deals in the form of mergers and acquisitions (the most recent cases are Italy’s Pirelli, Switzerland’s Syngenta, Spanish energy company Repsol’s offshore business, etc.).

2. Changes in sectoral destinations

Income-stimulating policies (monetary easing and fiscal expansion) and rapid growth in incomes and wages deprive China from its traditional comparative advantages. As a result, the country is no longer interested in investing primarily in commodities but rather in manufacturing and high-tech industries. Moreover, the recent years have seen substantial increase in ODI to service sectors and participation in large infrastructure projects. In 2018, amid rising concerns about China’s investment expansion in recipient countries, investments in transport, infrastructure, and real estate declined. At the same time, such sectors as financial services, health and biotech, consumer products and services, and automotive saw the biggest increases. China is expanding investments into relatively more hi-tech projects, including alternative energy, biotechnologies, etc. The number of acquisitions of hi-tech companies and manufacturing companies is also on the rise. State-supported investments in sensitive technologies and critical infrastructure have risen significantly.

3. Changes in motivation

Resource-seeking and efficiency-seeking motives of outward investments give place to strategic asset-seeking purposes. When making investment decisions, Chinese companies are driven by the motive to get access to technology, strategic facilities, knowledge, or competences that are not inside the firm, as well as to expand the network of business contacts and improve business reputation. Market-seeking motivation seems to be a second-important type, its contentment has been changing.

As a percentage of state-owned or state-supported enterprises is high, their outward investment policy is driven to a relatively lesser extent by profit-maximizing factors but rather by strategic economic and political ones. Instead of being motivated by the will of avoiding transportation and trade costs (or by tariff jumping motives), China tends to consider foreign markets more as destination for its labour force, because of rising social tensions inside the country.13 Moreover, it is becoming important to have physical presence on the market to prevent competitors from its occupation.

Go Global and Technological Transformation

Reducing technological gap with the developed world and transforming innovations into a driver of economic growth is China’s third strategic priority.  On the one hand, its achieving is associated with the country’s outward investment strategy (enhanced direct investments into high-tech industries and enterprises abroad). On the other hand, it is encouraged by domestic policies.  The country’s strategy of technological development bases on several documents: The National Outline for Medium- and Long-term Science and Technology Development Programme (2006–2020); Five-year Science and Technology Development Plan; ‘Internet+’ strategy and the ‘Made in China 2025’ roadmap. The main instruments contributing to technological transformation are:

• the authorities’ heavy investments in technologies;
• rising governmental expenditures on research and development at the level of higher education system and research institutes;
• stimulation of innovation development through free trade zones; and
• intensive development of a wide net of international bilateral and multilateral agreements on science and technology.

China’s successful innovation-stimulating policy resulted in substantial changes in directions and sectoral structure of technological flows.

1. China used to be blamed for cloning US technologies and business models (‘Copy-to-China’ strategy). In recent years, the trend has reversed. Some experts stress an evolution from ‘Copy-to-China’ to ‘Copy-from-China’, when Western companies are ‘looking to China for aspiration, especially in Internet-related areas. Thus, China transforms gradually from a recipient of foreign technological ideas into a driver of technological innovations.
2. ‘Chinese industries are not only getting closer to the technological frontier in conventional areas such as electronics, machinery, automobiles, high-speed railways and aviation, but also driving technological innovations in emerging areas’.
3. Chinese enterprises tend to be rather successful in ‘creation of new combinations of component technologies’.16 As China for decades used to be a global ‘assembly manufactory’ and the core element of global value-added chains, different research and development (R&D) activities base inside the country, providing opportunities for new technological combinations.
4. China is moving from medium-level technological track to a high-tech one. The country has already reached maturity in machinery and electronics, as well as infrastructure construction and logistic chains. At the same time, it starts encouraging high-tech sector development, such as smart and clean energy systems, new energy vehicles, automation and robotics, advanced medical equipment, biotechnologies, etc.

The sectoral priorities are closely connected with contemporary trends on the advanced markets, as well as potential challenges and risks to China’s long-term sustainable development. The three main fields of innovation development can be outlined:

• Agricultural technologies – as the problems of ensuring food security become more acute. Positive population growth and rapid middleclass growth increase demand for agricultural products. At the same time, relatively lower productivity of agricultural workforce, together with rapid urbanization and gradual degradation of agricultural land, lower agricultural supply.
• Energy – mainly new and renewable sources of energy (solar, wind, biomass, and nuclear fusion)17, advanced nuclear energy. China remains one of the largest energy consumers amid the increasing scarcity of traditional energy sources. The contemporary policy aims at establishing a clean, low-carbon, safe, and efficient modern energy system for sustainable growth, and achieving the goal of non-fossil energy accounting for 15% of primary energy consumption by 2020 is officially declared in the 13^th Five-Year Plan.
• Cyberspace – including next generation information and telecommunication technologies, big data and supercomputers, robotics, and e-commerce, which have both economic and political motives. Besides the expected sufficient returns due to excessive demand on these types of technologies and services both on domestic and external markets, they become a strategic instrument for strengthening China’s positions in the system of international relations. The ‘international status’ notion has been gradually changing, now it is determined not just by military or economic power but by countries’ ‘power of opinion’, their positioning in information and digital space.