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Chinese investments facing COVID-19: what is the future of Chinese companies in the international economy?

International Business

publication date 19 / 01 / 2021

Over the last 10 years, China has become an important player in foreign direct investment (FDI).

According to China's trade department, more than 27,500 Chinese companies had invested in 188 countries around the world by the end of 2019 and 44,000 companies have been created abroad. Asia, Europe and Latin America are the main destinations for these investments. The coronavirus pandemic has put a real damper on global trade and reduced FDI flows.

With this unprecedented global health crisis, what is the future of Chinese companies in the international economy?

The main motivations for FDI for Chinese companies: the search for additional resources and new markets

The number of FDIs increased considerably after the Second World War, as did the analyses aimed at better understanding them. These analyses have revealed that their main motivations are the search for resources, markets and efficiency. Western companies often benefit from monopolies or specific advantages that enable them to maintain their competitiveness on the international market. Firms in emerging countries such as China do not necessarily have these types of advantages when they want to expand internationally. They use international expansion as a means of accessing resources that would otherwise be inaccessible.

Skills upgrading is their long-term goal and M&A is the preferred mode of entry for Chinese companies:

  • Rapid access to the local market,
  • to expand their international market share,
  • to use a multitude of existing resources in the target company such as their sales networks, patents, technologies or trademarks.

Market research is also an important motivation for Chinese companies. To better develop markets and meet consumer needs, Chinese companies have adopted a strategy of proximity, favouring local managers in countries with a different culture. In 2019, Chinese companies had 60.5% non-Chinese employees abroad. This adaptation strategy is part of their success story.

Difficulties and challenges in relation to the global health crisis

The model of the Chinese economy and its manufacturing sector are heavily export-based. The pandemic has disrupted global production chains and reduced trade in goods and the movement of people. Affected by the slow global economic recovery, FDI is highly volatile and uncertainties have increased. This makes it all the more difficult for Chinese companies to operate in an unstable situation that has had negative impacts on the economies of host countries.

Current conditions and the global economic environment are not conducive to the internationalisation of Chinese start-ups. In the United States, Chinese FDI has fallen to very low levels due to trade tensions. The pandemic is also weighing on investment flows between the world's two largest economies. Government policies have had a strong impact on Chinese FDI. Most Chinese companies have reconsidered their investment intentions, particularly in the United States. The political obstacle has become a recurrent and very present element on their internationalisation path in some host countries.

The future for Chinese companies: how to cope with instability and conquer new markets?

If the Covid-19 has important impacts on the whole world economy, it will however not kill globalisation for 3 reasons :

  • Exchanges between countries and populations, even if slowed down at the moment, will continue in one way or another,
  • Increased digital connectivity facilitates the flow of ideas between companies,
  • FDI will have a new image.

For Chinese companies, the improvement of their technological skills and international experience are major assets to meet the challenges posed during their development and to face the instability of the markets.

At the same time, a better understanding of host country regulations and legislation can also help them to advance their international operations. At present, Chinese companies are and will remain a major player in the global economy. This will require them to take corporate social responsibility into consideration. This CSR approach can enable Chinese companies to have better governance, a better image and a development towards the longer term. With the health crisis, the markets demand more communication and transparency from companies.

For Chinese companies, building trust in order to conquer new international markets will necessarily involve more communication and transparency.

 

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