Firms and the state in Chinese overseas investment

  • Fall 2019
Firms and the state in Chinese overseas investment
FALL 2019 : précis Student Feature
John Minnich
December 5, 2019

Long the world’s leading destination for foreign direct investment (FDI), China in the past decade has emerged as a key supplier of investment capital to the international system, as well. Indeed, Chinese outbound FDI flows grew from virtually nothing before 2005 to nearly $200 billion in 2016, making it the second largest overseas investor in terms of both annual flows and FDI stocks after the United States.1 Weaker economic growth at home and a trade war with the US caused Chinese outbound FDI to slow after 2017. Nonetheless, China will almost certainly remain one of the world’s top overseas investors for the foreseeable future.

In line with its astonishing growth, Chinese FDI has become increasingly contentious in many countries.2 Governments in wealthy industrial democracies now frequently investigate and sometimes outright block FDI from China into sectors like telecommunications and energy.3 Meanwhile, public perceptions that Chinese firms engage in unfair labor and lending practices or that Chinese investment exacerbates corruption and environmental degradation have provoked political backlash against China in some low- and middle-income countries.4 In particular, China’s Belt and Road Initiative (BRI), a potentially multi-trillion dollar effort to link China to the rest of Eurasia and beyond via basic infrastructure, has become something of a political lightning rod. In 2019, US Secretary of State Mike Pompeo lambasted the BRI as a form of “bribe-fueled debt-trap diplomacy” in service of China’s “imperial ambitions”.5 His views have been widely echoed in the mainstream media and policy community in the US and beyond.6 

Two questions underpin the debate over the consequences of Chinese FDI. First, what are the Chinese government’s intentions for the international system and for its own place within it? Second, to what extent does FDI from China reflect or serve these intentions? Put another way, do Chinese multinational enterprises, like their counterparts in the West or Japan and South Korea, base their investment decisions primarily on commercial interests, or do they invest abroad in order to advance Beijing’s political and strategic agenda, its “imperial ambitions”?

Firms and the State

It is beyond the scope of this essay to answer the question of China’s intentions. To begin to suggest that states have intentions requires that we make sometimes strong assumptions about the degree of state unity and coherence. In reality, even in countries like China where the foreign policy decision-making process is relatively centralized it is not always clear that the state is a unitary actor. And if, for argument’s sake, we assume that China’s government is a unitary actor, we must still confront the fact that intentions are, if not perfectly inscrutable, then complex and prone to change with shifts in the balance of power and other factors. 

Against this backdrop, scholars of Chinese FDI have tended to bracket the larger question of China’s intentions and instead focus on unbundling the relationship between Chinese multinationals and China’s state. Views of this relationship generally fall into one of two broad camps. 

In one camp, analysts point to the fact that most Chinese multinationals are centrally-administered state-owned enterprises, and that even private firms like Alibaba and Huawei are believed to have close ties to the country’s central leadership,7 as clear evidence that state-level political and strategic goals inform or even determine where Chinese businesses invest abroad. To bolster this inference, they point to evidence that Chinese firms’ overseas investment behavior differs systematically from that of Western multinationals, most of which are private and whose FDI decisions are generally seen as commercially, not politically, motivated.8 For example, whereas “traditional” overseas investors tend to prefer to invest in countries with strong political institutions and low levels of political risk, all else equal, Chinese multinationals appear to prefer the opposite: countries with weaker institutions and higher levels of political risk.9 If Chinese firms were primarily profit-driven commercial actors, the argument goes, then we should expect them to invest in much the same way as multinationals from other countries. That they do not is seen as indicative of the non-commercial–that is, political or strategic–motives behind Chinese FDI. 

In the other camp, some scholars argue that state control over firm-level investment behavior is often tenuous even for the most closely-held state-owned enterprises. In this view, divergent preference schedules, information asymmetries, and other challenges to monitoring and enforcement render the principal-agent relationship between China’s government and Chinese firms much more problematic than first meets the eye.10 This is not to deny that the state can sometimes shape broad incentive structures for Chinese multinationals. Indeed, the Belt and Road Initiative, like Beijing’s earlier “Going Out” program of the mid-2000s, exemplifies how China’s state uses policy initiatives to channel outbound investment towards certain parts of the world and certain industries, for example energy and basic infrastructure. Nonetheless, scholars in this camp emphasize that the conditions under which China’s government directly and strongly influences firm-level behavior are fairly restrictive. According to this view, apart from a small number of government-directed “prestige projects,” when it comes to overseas investment Chinese firms are “at best imperfect agents” of the state.11 

The stakes of the debate

Understanding the relationship between Chinese firms and China’s government matters for both theory and policy. On the theory front, if Chinese firms do act as agents of the state in their overseas investment behavior, then scholars of international political economy must reconsider the scope conditions of dominant theories of the political determinants of FDI, virtually all of which proceed from the assumption that firms are independent of their host governments.12 After all, if state control leads Chinese firms to invest in ways that differ from “traditional” multinationals, and if Chinese FDI (not to mention FDI from other non-Western non-democracies) is likely to grow in the future, then it follows that aggregate patterns of FDI flows may shift in the years ahead, with important distributional consequences for recipient countries. 

By the same token, if Chinese firms do not generally act as agents of the Chinese state, then we need new explanations for why their investment behavior nonetheless diverges from past precedent and expectations derived from existing theories. For example, it may be that commercial interests largely explain why Chinese multinationals invest where they do, but that Chinese firms face risks and uncertainties in countries with strong political institutions (including many democracies) that their Western or Japanese or South Korean counterparts do not. These risks, which may be a function of differences in institutional environments13 or even a response to fears of mounting political backlash against China in certain kinds of countries, may explain observed differences in Chinese versus non-Chinese FDI behavior. 

On the policy front, how decisionmakers in the US and beyond perceive the relationship between firms and the state in China will likely powerfully influence how they respond to Chinese FDI. The more Chinese multinationals are seen as agents of the state, the more prone host governments will be to view Chinese investment as a potential threat to national security. At the extreme, this “securitization” of Chinese FDI could lead recipient countries like the United States not only to more closely scrutinize incoming investments from China, but to actively work to contain Chinese firms’ activities in third party countries.14 At the very least, the belief that Beijing’s strategic ambitions drive Chinese firms’ behavior overseas exacerbates fears that China harbors broadly revisionist aspirations and is thus a threat to the US-dominated liberal world order. 

1 Source: UNCTAD, FDI/MNE Database (2019). Retrieved from 

2 Small, Andrew. “The Backlash to Belt and Road,” Foreign Affairs, February 16, 2018

3 Rappeport, Alan, “U.S. Outlines Plans to Scrutinize Chinese and Other Foreign Investments,” The New York Times, September 17, 2019,

4 Balding, Christopher, “Why Democracies Are Turning Against the Belt and Road,” Foreign Affairs, October 24, 2018.

5 Blanchard, Ben, “China says ‘Fed Up’ with hearing U.S. complaints on Belt and Road,” Reuters, May 9, 2019,

6 Kliman, Daniel and Abigail Grace, “Power Play: Addressing China’s Belt and Road Strategy,” Center for a New American Security,

7 Maizland, Lindsay and Andrew Chatzky, “Huawei: China’s Controversial Tech Giant,” Council on Foreign Relations, June 12, 2019,

8 Ramasamy, Bala, Matthew Yeung and Sylvie Laforet. 2012. “China’s Outward Foreign Direct Investment: Location Choice and Firm Ownership,” Journal of World Business, 47(1):17–25.

9 Kolstad, Ivar and Arne Wiig. 2012. “What Determines Chinese Outward FDI?” Journal of World Business, 47(1):26–34.

10 Norris, William J. 2016. Chinese Economic Statecraft: Commercial Actors, Grand Strategy, and State Control. Ithaca: Cornell University Press.

11Shi, Weiyi. 2015. The Political Economy of China’s Outward Direct Investments. Doctoral Dissertation, University of California at San Diego. 

12Jensen, Nathan M. (2003). “Democratic governance and multinational corporations: Political regimes and inflows of foreign direct investment,” International Organization, 57 (3), 587.

13 Xu, Dean and Oded Shenkar (2002). “Institutional distance and the multinational enterprise,” The Academy of Management Review, 27 (4), 608-618.

14 Connan, Caroline, Gregory Viscusi and Angelina Rascouet, “Macron’s Answer to Trump’s Threat: France Won’t Block Huawei,” Bloomberg, May 16, 2019