A Study on the External Environment of Chinese Investments in the United States

China’s outbound foreign direct investment (FDI) is entering a stage of rapid development. Outbound investment in 2010 was $68 billion, first among developing countries and fifth in the world. However investment has been concentrated in developing countries in Asia, Africa and Latin America. The share of investment in developed countries in Europe and North America has been relatively low. Up to the end of 2009, China’s accumulated FDI to developed countries totaled $18.17 billion, 7.4% of its total stock of outbound FDI. Of this, FDI stock in the United States was $3.34 billion, just 1.4% of China’s total outbound FDI stock. And, in great contrast to China and the United States’ status as one another’s second largest trading partners, China’s stock of FDI in the United States only represents 0.1% of the total stock of FDI to the United States. This is far below the share of FDI stock in the United States by Mexico, Saudi Arabia, South Korea, Brazil and India, and is merely equal to the levels of New Zealand and Austria. According to calculations by the Asia Society, by 2020 China’s outbound FDI will surpass $1 trillion USD, of which a good share will flow to developed countries like the United States.

Many in America view Chinese foreign investments with both hope and concern. On the one hand, Chinese investment plays a positive role in driving local economic growth and in creating job opportunities; many American state governments have established dedicated organizations in China responsible for attracting investment and business from China. According to materials from the Council of American States in China, by now more than half of all U.S. states have established representative offices in China to promote bilateral trade and Chinese investment in the states. On the other hand, differences in the political and cultural traditions of the United States, America remains anxious, worried about the threat to national security that would be posed by Chinese investments controlling some areas of the United States economy. The fact that in recent years Chinese investments in the United States have been repeatedly frustrated by political forces is closely related to this mindset among certain groups in the United States. For example, the attempt by China National Offshore Oil Company to acquire Unocal in 2005, the joint bid by Bain Capital and Huawei Technologies to acquire 3COM in 2007, China Northwest Nonferrous International Investment Company’s bid to acquire Firstgold in 2009, and the 2011 bid by Huawei to acquire the U.S. server technology company 3Leaf all ultimately fall apart on the grounds of national security concerns following interference from various circles in the United States.

Against this backdrop, research on the external environment facing Chinese companies investing in the United States is of critical importance. As we look into the environment for Chinese investment in the United States, we cannot only focus on the commercial risks of natural disasters, unexpected accidents, market changes, mismanagement and currency fluctuations. We must also look more deeply at the external environment facing Chinese investment and the related non-business risks such as political and operational risks. ‘Political risk’ refers to the passive risk posed by a lack of familiarity with laws governing investments by foreigners as well as the active risks posed by the influence of political forces in the review and supervision process. ‘Operational environment’ refers to risks of financial losses or litigation that may be posed after market entry by the substantial difference between the United States and China’s legal systems governing environmental protection, product responsibility, intellectual property, labor and employment and taxation.