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China's Outward Investment: Institutions, Constraints and Challenges

China’s outward investment policy has attracted attention not only for policy reasons, but also in academic debate on the role of institutions in foreign investment. Formal institutions in the form of government policy and regulations have been central to China’s outward investment. This paper bases itself on a detailed analysis of Chinese policy and regulatory documents, which provide evidence of the motivations, substance and outcomes of investment policy. The paper argues that the factors determining investment policy are complex and evolving, and that elements of the policy may not be coherent and can be conflicting. It also argues that unintended outcomes are frequent, and that enterprises, including state-owned enterprises, attempt to escape the constraints of government policy and regulation. Thus, the relationship between institutions in China and enterprise behaviour is complex, and is not simply one of restriction or promotion of outward investment.

Asia Paper  Volume 7  Issue 4  12 May 2013  ISSN 2034 5364 China’s Outward Investment Institutions, Constraints, and Challenges Abstract. China’s outward investment policy has attracted attention not only for policy reasons, but also in academic debate on the role of source-country institutions in foreign investment. Formal institutions in the form of government policy and regulations have been central to China’s outward investment. This paper bases itself on a detailed analysis of Chinese policy and regulatory documents, which provide evidence of the motivations, substance and outcomes of investment policy. The paper argues that the factors determining investment policy are complex and evolving, and that elements of the policy may not be coherent and can be conflicting. It also argues that unintended outcomes are frequent, and that enterprises, including state-owned enterprises, attempt to escape the constraints of government policy and regulation. Thus, the relationship between institutions in China and enterprise behaviour is complex, and is not simply one of restriction or promotion of outward investment. Keywords: China, outward direct investment, trade policy. Duncan Freeman The Asia Papers are the flagship publication series of the Brussels Institute of Contemporary China Studies. They aim at a wide audience of experts, students, journalists, and policy makers. All papers undergo a double peer review. They can be accessed via the institute’s website. Series editor: Jonathan Holslag. Brussels Institute of Contemporary China Studies Pleinlaan 5 1050 Brussels www.vub.ac.be/biccs China’s Outward Investment Institutions, Constraints, and Challenges1 Government regulation and policy have played a central role in China’s outward direct investment (ODI). While the traditional view of foreign investment has focused on the firm based in developed market economies, the increase in investment originating in emerging economies has shifted some of the focus toward source-country institutions. China has been a key element in scholarly discussion of the role of institutions in outward investment. Peng et al used China as part of the grounds for their argument for an institution-based view of international business strategy.1 While those writers couched much of their argument in terms of non-formal institutions such as guanxi, others have focused on the role of the state. Some scholars have focused on specific events and policies and have attempted to use statistical methods to demonstrate a relationship between institutions and ODI in China. Buckley et al in 2007 consider Chinese ODI between 1984 and 2001 and believe that domestic policy liberalization in 1992 led to an increase in investment.2 On the other hand Buckley et al in 2008 find that a liberalization of China’s foreign exchange regime in 1994 had a negative effect across most of their sample.3 Luo et al analyze investment policy between the 1980s and 2007, and argue that over this period there is correlation between government policy and China’s ODI, especially in the recent efforts at promotion of investment.4 It has become a commonplace that the promulgation of the “go-global” strategy by the Chinese government marked a significant change in policy on ODI, leading to an increase in flows.5 Titan finds that institutional factors are significant in determining the business strategies of state and non-state enterprises in ODI.6 Government policy creates institutional specific advantages that support ODI investment by SOEs, and discriminate against that by non-state enterprises, for which institutional escape is a factor in their ODI. Basing themselves on North,7 Dunning and Lundan argue that institutions must be included in the analysis of international business activities. 8 North states that institutions, by which he meant rules of the game as opposed organizations which are the players, may be both formal (constitutions, laws and regulations) and informal (norms of behaviour, conventions and self-imposed codes of conduct).9 This paper will only consider institutions in the formal sense of the role of government policy and regulation. The paper relies on an extensive analysis of Chinese central government policy and regulatory documents covering the period since the commencement of China’s “reform and opening” in the late 1970s. It examines the role of institutions by analyzing the substance of policy on ODI, the factors behind policymaking and its outcomes.10 The reasons why measures are adopted are revealed by the substance of policy and regulations, and by the fact that documents often explicitly set out why they are adopted.11 Furthermore, analysis of such documents also gives an indication, at least from the government perspective, of the effect of policy and regulations, and thus of institutions, on investment behaviour by enterprises. Underlying much of the discussion of the role of institutions in China’s ODI is an assumption that policy simply either restricts or promotes investment. The paper will argue Duncan Freeman is a senior research fellow at the Brussels Institute of Contemporary China Studies (BICCS). He can be reached at: dfreeman@vub.ac.be 2 Asia Paper 7, 4 that institutions have indeed been important in the development of China’s outward investment. However, this role is more complex than simply either restricting or promoting ODI with negative or positive outcomes for investment flows. The policy has itself been in a process of development and the factors in the formulation of China’s evolving ODI policy are complex and changing. Not only does policy affect investment, but actions of investors also affect policy. The paper will argue that there are several layers of factors that may lie behind the formulation of different elements of China’s ODI policy. Thus, different elements of policy on ODI may not be coherent, and some may actually be contradictory. Not all elements in the policy are intended simply to restrict or promote investment flows, but may have other purposes concerned with problems such as security and risk. Furthermore, as the evidence from the documents shows, unintended outcomes have been significant and enterprises have constantly attempted to evade the constraints of official policy and regulation. A considerable part of policymaking is taken up with dealing with these unintended outcomes. Chart 1. Outward Investment Flows from China 1982-2011 (US$ million) Source: UNCTAD12 The factors in the formulation of ODI policy in China comprise seven main groups. 1. Macro constraints/goals: This refers above all to foreign exchange. One of the fundamental factors determining China’s ODI policy has been the supply of foreign exchange. The foreign exchange regime is the broad framework within which ODI policy operates. 2. Strategic development goals: Throughout the period of “reform and opening” under discussion the Chinese government has continued to set broad economic and development goals. This has been the case with ODI which has goals that are intended to cohere with broader policy concerns. 3. Industry goals: Plans and goals are set for specific sectors of the economy and also in specific localities. These often include ODI. 4. External factors: External events outside China are a factor in policymaking on ODI. These events may not only be purely economic, but comprise all factors that broadly impact on the opportunities and especially risk related to ODI. 5. Consequences: China’s ODI increasingly entails consequences both for the investing enterprises and the locations where the investment takes place. There are also consequences for China more broadly, where for instance its reputation is damaged by the activities of Chinese enterprises. These consequences of Chinese investment are a factor in policymaking. 6. Integrity of control: Maintaining the integrity of the policy and regulatory system itself is a significant preoccupation of the China’s Outward Direct Investment 3 Chinese authorities. Since actions by enterprises that violate policy and regulations or that venture into policy and regulatory vacuums outside the boundaries of existing measures are frequent, enforcement and readjustment by the authorities in order to maintain control is a constant element in policymaking. 7. Political: Even within the confines of narrow investment policy, political factors are a consideration.13 The following discussion analyses the evolution of ODI policy in China throughout the period of reform and opening from the late 1970s until early 2012. After the initiation of China’s reform and opening in the late 1970s the policy of the Chinese government on outward direct investment can be divided into roughly into four periods. In the initial period lasting about a decade from 1979 there was a strict control of ODI, but with almost no detailed policy and regulation in place. In this period the central authorities oversaw ODI, and foreign exchange controls on both the current and capital account were very strict.14 In 1989 the construction of an increasingly elaborate regulatory framework began, focusing especially on the use of foreign exchange for outward investment. This did not represent a “liberalization”, but rather the opposite. The intention was to ensure that tight control was maintained over outward investment, mainly through project and foreign exchange approval procedures. The policy direction began to change in 1999, with the first moves to loosen controls and actively encourage outward investment in the limited case of processing trade. The change in policy direction began in earnest with the adoption of the “go-global” strategy which was included in the 10th Five Year Plan for the first time in 2001. However, the substance of policy did not change abruptly. In the following years, policy was gradually changed by relaxing controls over ODI, particularly the use of foreign exchange and project approval, and even adopting measures to encourage such activities. As earning or conservation of foreign exchange was no longer an overriding priority, other developmental goals became important for ODI policy. This trend has continued until the present, but a new set of important factors has emerged as major concerns as the government sought to respond to the complexities entailed by rapidly increased ODI, including unsuccessful investments, fraud, security threats to facilities and personnel, environmental and social impacts of Chinese investments and financial and economic crises in destination countries. Investment Policy: The Early Years and the Primacy of Foreign Exchange Outward investment from the People’s Republic of China (PRC) commenced in the 1980s following the initiation of the policy of reform and opening adopted under the leadership of Deng Xiaoping in the late 1970s. The policy framework in which this investment took place was restrictive, but not elaborated in detail. In the early reform period the problem of foreign exchange was paramount for the Chinese government and the single most important factor in determining its view of both inward and outward investment. As Chart 2 shows, throughout the 1980s China’s total foreign exchange reserves never amounted to more than US$10 billion. The 1980s actually began with China having negative reserves, and a foreign exchange reserve crisis similarly occurred in the second half of the decade. It is noteworthy that the earliest foreign exchange control regulations of the reform period dating from 1980 issued by the State Council (SC) stated that one of the purposes behind their promulgation was increasing China’s foreign exchange earnings. In setting out a rigid system of foreign exchange control on both the current and capital accounts, while providing for economic activities such as trade and inward investment, they did not even contemplate the possibility of outward investment.15 The idea that Chinese enterprises should venture outside China was tentatively initiated at the very earliest stage of the reform process. In 1981 it was proposed that what were then the handful of corporations under the Ministry of Foreign Economic Relations and Trade (MOFERT) (a predecessor of the present Ministry of Commerce (MOFCOM)) should 4 Asia Paper 7, 4 operate “cooperative businesses” with partners outside the PRC “in order to expand exports, go out further to do business and increase foreign exchange earnings”.16 Compared to the efforts already underway to attract inward investment, this was a minor initiative and in the 1980s ODI was normally approved on a case-by-case basis at the highest level.17 During this period the amount of China’s outward investment was small (Chart 1). Most of it was directed to Hong Kong, although at the time there was mystery concerning the real amount of investment and the activities of many of the investors.18 Chart 2. China’s Foreign Exchange Reserves 1979-1994 (US$ billion). Source: SAFE The regulatory framework for outward investment only began to be elaborated in detail at the end of the 1980s. This process commenced in 1989 with the promulgation by the State Administration of Foreign Exchange (SAFE) of the Procedures for the Administration of Foreign Exchange for Outward Investment (Foreign Exchange Procedures).19 The Foreign Exchange Procedures, while setting out the procedures under which foreign exchange could be used for ODI, maintained tight restrictions on its use. This reflected the foreign exchange regime with strict controls on the capital account then still in force and which continued to underlie policy on ODI.20 Among other provisions, the Foreign Exchange Procedures required that all profits from outward investment be repatriated, and that the investing enterprises provide a guarantee equivalent to 5% of the foreign exchange amount remitted abroad for investment to ensure that repatriation of profits did occur. These provisions in themselves demonstrate not just the concern to maintain control over use of foreign exchange in ODI, but also the continued priority given to earning foreign exchange even for ODI. In subsequent years, the Chinese government issued several more regulations on outward investment. These marked the intention to establish a more detailed system of control over ODI than had existed hitherto. They continued to focus on control of foreign exchange, but also began to elaborate on the approval process for ODI and address the question of use of state-owned assets abroad. The regulations included the implementing rules for the Foreign Exchange Procedures in 1990,21 procedures for examination and approval of investment project proposals and feasibility reports in 1991,22 examination and approval of non-trade enterprises established outside China in 1992,23 registration of state-owned assets used in China’s Outward Direct Investment 5 outward investment in 1992,24 and regulations on the assessment of foreign exchange risk and verification of the source of foreign exchange for outward investment in 1993.25 The effect was to create a system of controls that sought to restrict and maintain state control over outward investment. If foreign exchange was the prime concern, it was not the only factor in policymaking even in this period. The consequences of China’s ODI were already a consideration. Although ODI was small, one of the main motivations for establishing tight controls over ODI was the problems associated with investments already undertaken. One policy document issued by the State Planning Commission (SPC) with the approval of the SC noted in 1991, “[t]here are some projects for which the anticipated results are not clear and enterprises have even made losses as a result of unfamiliarity with international markets and foreign laws and a lack of experience, not only causing economic damage to the state, but also causing negative political impacts”.26 As the document makes clear, the negative consequences of economic losses were compounded by political factors. The negative political consequences referred to here, although not made explicit, almost certainly refer to scandals in Hong Kong surrounding certain investments from the mainland.27 The document went on to assert that China did not meet the conditions for large-scale outward investment. Investment overseas, it said, must start from China’s needs, and focus on using foreign technology, resources and markets in order to supplement domestic weaknesses. Almost exactly the same broad development goals were to be cited more than a decade later when China did begin encouraging large-scale ODI, but in 1991 the document set strict requirements for ODI and detailed approval procedures for projects and the use of stateowned assets in investment. As the surge of ODI in 1992 and 1993 shown in Chart 1 demonstrates, the concerns of the SPC and SC and the stream of regulations which were issued in this period failed to bring about successful implementation of government policy, indeed quite the opposite occurred. In 1993 the SC issued another document which ordered a suspension of all acquisitions of companies abroad and once again called for strengthening of control over outward investment. The document stated there were problems: “[s]ome units violate state regulations on outward investment, foreign exchange, and administration of foreign debt, and do not make any application or report to any department in charge and transfer foreign exchange assets abroad or borrow abroad without authority. Among these some use the name of a company abroad to acquire foreign companies (backdoor listing), causing a large amount of foreign exchange to flow or be retained abroad improperly, making it possible that the state would lose control of foreign debt”.28 The document stated that according to incomplete statistics between August 1992 and July 1993, enterprises in China and entities outside the country with Chinese investment acquired 23 listed companies in Hong Kong, with a total investment of over HK$8 billion, but most of these investments had been undertaken without undergoing any formal reporting and approval procedures. Like the document issued by the SC and SPC two years previously, the 1993 circular reiterated there could be no major outward investment from China. The document addressed the crucial problems of foreign exchange and controlling unapproved activities by investors. The 1993 document said that although China’s economy had developed rapidly in recent years, the shortage of funds and foreign exchange could not be resolved in the short term, and thus did not meet the conditions for large-scale outward investment. It imposed the immediate suspension of purchases of shares in companies outside China by domestic Chinese enterprises or by entities with Chinese investment outside China. It also required a strengthening of administration and supervision of all state-owned assets outside China. Thus, at the earliest stages of China’s ODI, the failure of Chinese enterprises, even SOEs, to stay within the constraints of government policy became a central problem, and has remained so ever since. 6 Asia Paper 7, 4 During the next few years, ODI continued to be far from a priority for China. Quite the opposite, policy focused on earning and conserving foreign exchange, and restricting outward investment, as indicated in a notice issued by the People’s Bank of China (PBOC) at the end of 1993 which reiterated that all foreign exchange profits from outward investment must be repatriated to China, and that all foreign exchange had to be sold to the Bank of China (BOC).29 This notice established a reformed foreign exchange system whereby it was possible for entities in China that did not earn foreign exchange to use renminbi to purchase foreign exchange on the basis of the provision of required documentation for certain prescribed activities on the current account such as importing. But outward investment was specifically excluded from the reformed system and still required to go through the foreign exchange examination and approval system previously in force, indicating that ODI on the capital account was considered to be an exceptional activity subject to greater restriction and oversight than those such as importing.30 In the following years further regulations were issued that added to the control of outward investment, for instance detailing the use of guarantees for outward investment to ensure the profit repatriation.31 More detailed control of ODI was elaborated through regulations setting out the financial systems to be used by enterprises in their investments.32 As SOEs dominated the small amount of ODI there was, control over their investment and assets abroad continued to be a key focus of policy makers’ concerns.33 In 1996 new general regulations were issued on foreign exchange control. Unlike the predecessors of 1980 which they replaced, the Provisions on the Administration of Foreign Exchange issued in 1996 did specifically recognize the possibility of outward investment, but the basic principles of strict control remained in force on the capital account.34 Their stated purpose was to strengthen foreign exchange control, and ensure balanced international payments as well as healthy economic development. Even at the end of the 1990s, ODI continued to be subservient to wider policy aims which were focused on conserving foreign exchange, and retaining control over investment35 on the capital account continued to be a policy priority at this time.36 The Go-global Strategy and Outward Investment Policy By the late 1990s the thinking of the Chinese government on ODI began to change. Signs of change appeared when the first policy document intended specifically to encourage outward investment was issued in 1999. This document sought to encourage Chinese enterprises to engage in processing and assembly operations outside China and was followed by a series of measures intended to give effect to this new departure.37 However, while it offered some support to activities within this specific sector, it was not part of a general policy to encourage ODI. Nor, even while seeking to encourage ODI in the processing sector, was it intended to contradict the prevailing policy concern for conserving foreign exchange. As the SC circular transmitting the document noted, the main purpose of this policy was to counteract the effects of the Asian financial crisis of 1997 and encourage exports from China.38 Still, the new policy showed a small shift in the priority previously given to restrictions over the use of foreign exchange in ODI. As part of the efforts to encourage processing and assembly outside China, foreign exchange controls did begin to be simplified and the requirement to provide a profit repatriation guarantee was removed in limited circumstances for this type of investment.39 The real policy change only began to emerge in the years after 2000 with the initiation of the “go-global” (zouchuqu) strategy. Although it had been used prior to this date, the goglobal slogan was first adopted in an official policy formulation in the Chinese Communist Party Central Committee (CCPCC) Opinion on the Formulation of the 10th National Economic and Social Development Five Year Plan (the Five Year Plan Opinion) issued in December 2000.40 This was the first formal call for the implementation of a go-global China’s Outward Direct Investment 7 policy, and set out in broad terms the economic development goals that ODI was intended to achieve. Article 12 of the Five Year Plan Opinion stated that one of the goals of the Five Year Plan should be to: Implement the “go-global” strategy, and strive to achieve new breakthroughs using domestic and foreign resources and markets. Encourage outward investment that can bring into play China’s comparative advantage, widen the areas, channels and methods of economic and technical cooperation, support the transnational operations of competitive enterprises to go abroad to develop processing trade and develop resources, and provide help in the areas of loans, insurance, etc. Grasp firmly the formulation and regulation of the system of supervision for domestic enterprises going abroad to invest, strengthen the administration of Chinese companies abroad and the coordination of investment services. This broad programme has since been included in both the 10th and subsequent Five Year Plans as well as in economic plans presented to the National People’s Congress, and has become a guiding principle of China’s external economic policy. The 10th Five Year Plan stated that the go-global strategy was to: Encourage outward investment that can give play to China’s comparative advantage, expand the scope, channels and means of international economic and technical cooperation. Continue to develop overseas contracting and labour service cooperation, encourage enterprises with competitive advantage to develop processing trade abroad, to drive exports of products, services and technology. Support enterprises in using foreign knowledge resources, and establishing research and development institutions and design centres abroad. Support strong enterprises in transnational operations, and the realization of internationalized development. Amplify the service system for outward investment in the areas such as finance, insurance, foreign exchange, taxation, human resources, law, information services and immigration control, so as to create the conditions for implementation of the “go-global” strategy. Perfect the corporate management structure and internal control system, and regulate the oversight of outward investment.41 In the view of these documents, ODI is one part of China’s wider development strategy, but despite the broad nature of the language used, they do not represent a complete break with the past. The ambitious sounding go-global slogan on closer examination appears quite limited in its aims. In both these policy outlines the sector-specific focus on expansion of processing trade remains a key goal of ODI. At the same time, driving exports of products, services and technology is mentioned as a central concern of the Five Year Plan, indicating that previous considerations regarding foreign exchange had not been fully abandoned. But they did add other elements. While the CCPCC Five Year Plan Opinion refers vaguely to investment to “develop resources”, the Five Year Plan is more specific in providing developmental goals for ODI of, “using foreign knowledge resources, and establishing research and development institutions and design centres abroad”. Notably, natural resources, which have subsequently become the focus of much attention, were not specifically mentioned as part of the strategy. At the same time, the Five Year Plan set out broad outlines for the type of support that ODI could expect, but also showed concern to ensure that control and oversight remained effective. The emergence of the go-global strategy eventually brought with it a major change in China’s policy on outward investment, yet this was not immediate. 8 Asia Paper 7, 4 The initial implementation of the policy outline included in the 10th Five Year Plan was tentative, and did not result in a rise in ODI, as Chart 1 shows. In the period immediately following its promulgation, the go-global slogan was invoked in policy documents, but for the most part these targeted specific industries such as electronic goods, software agriculture and coal,42 and only as part of initiatives for these sectors that generally focused mostly on domestic concerns. In this early period, one aim of the policy appeared to be to continue the previous focus on the processing industry investing outside China.43 Documents were issued seeking to encourage investment in processing in specific industries and regions such as textiles in Africa, Latin America and Asia or household electronics in Central and Eastern Europe.44 Chart 3: China’s Foreign Exchange Reserves 1995-2011 (US$ billion). Source: SAFE Policy barriers to outward investment were reduced cautiously in the years following the promulgation of the go-global policy. The policy on foreign exchange control was reformed in a series of steps. In 2001, there was an initial move to relax foreign exchange restrictions in limited cases of ODI.45 As the circular announcing this noted, the change in policy was directly related to China’s foreign exchange balances (In 2001 foreign exchange reserves were US$212 billion. Chart 3). China’s situation having changed, not all the limitations put in place in the 1990s were required. The requirement that enterprises investing abroad provide a guarantee to ensure profit repatriation was removed.46 In 2003 some investments were exempted from foreign exchange approval47 and experimental provisions on decentralizing foreign exchange approvals for ODI were announced.48 In the same year foreign exchange risk analysis for ODI was no longer required by SAFE.49 National quota limits on the total amount of foreign exchange to be used for outward investment were raised from US$3.3 billion to US$5 billion in 2005 and then later removed altogether.50 In 2005, the approval system for foreign exchange was further relaxed, so that now only an “opinion” was required from SAFE, and the authority to provide these opinions was decentralized to local SAFE bureaus.51 The procedures for domestic financial institutions providing guarantees for ODI were also simplified.52 Further relaxations of foreign exchange policy for ODI came into force in subsequent years.53 By 2009 foreign exchange control for ODI had essentially become a registration China’s Outward Direct Investment 9 process. Investors were even specifically permitted to retain profits abroad for reinvestment.54 China’s currency policy has changed so far that in 2011 experiments with the use of renminbi in ODI were permitted, reflecting the progressive internationalization of China’s currency.55 Outward investment projects were still required to go through a project approval process. Both MOFCOM56 and the National Development and Reform Commission (NDRC) are involved in this process, and in some cases the SC also, but like foreign exchange approval, the system became more decentralized than had previously been the case.57 New approval limits for ODI allowing for greater decentralization were set in 2004 as part of wider reforms of the investment approval process.58 Changes to the approval process continued with further decentralization in subsequent years. 59 The change in policy following the promulgation of the go-global strategy was not only administrative, nor simply a matter of removing restrictions, as the Chinese government became more actively involved in promoting and directing ODI. In 2004 MOFCOM began issuing catalogues of countries and sectors that it considered good prospects for investment, although these had no mandatory force and were for guidance only.60 These efforts to inform investors were reinforced by a newly established system of reporting on barriers to investment.61 It took some time for a wider policy of positive support to encourage and direct outward investment to emerge. In 2003 financial support for ODI was provided for, but this was limited to “major projects” and it took several years for a fully worked out policy of support to emerge.62 In 2005 the central government set a goal of completion of the regulatory system for ODI,63 but it was only in 2006 that a developed outline of policies to support ODI was issued. The Outward Investment Sector Direction Policy (Outward Investment Policy) issued by the NDRC, MOFCOM and several other government authorities set out the priority sectors for investment and the outlined the types of support the government would provide to them.64 The broad sectors in which outward investment is encouraged are those which: . can obtain resources or raw materials that are lacking within China and which the development of the national economy urgently requires . can stimulate the export of products, equipment or technology in which China has a comparative advantage and labour service exports, and . can raise China’s technological R&D capability, and which can make use of internationally advanced technology, advanced management experience and specialist human resources.65 Most significant in this context is the greater clarity compared to the original go-global outlines. Similar strategic goals had previously been set out in policy documents on ODI,66 but the Outward Investment Policy provides a more detailed elaboration of the targeted sectors, and envisages a much broader set of instruments with which to achieve the aims than discussed in previous documents. The Outward Investment Policy sets out those sectors in which outward investment is encouraged. Investment in the encouraged sectors receives active policy support, while those in permitted sectors may be undertaken, but do not receive policy support. The Outward Investment Policy states that support will be provided across a wide range of policy areas including, but not only, financial support. 67 Moves had already been made to offer financial support to ODI such as guarantees in order to solve problems of financing outward investment.68 Support from China Development Bank69 and Sinosure was provided for in 2005,70 but in this case it was directed at “major” investment projects rather than a general policy for all ODI. From 2006, the policy was generalized to those sectors that were deemed to be priority. One of the most important 10 Asia Paper 7, 4 means for providing policy support is through the Special Funds for Foreign Economic and Technical Cooperation which have operated since 2006.71 These funds are administered by the MOF and MOFCOM at central and local level and are used to support outward investment and other activities under the go-global strategy in specific sectors.72 The exact financial support available for outward investment changes periodically and a document is issued annually by the MOF and MOFCOM which sets out the precise scope of the support available. Thus Chinese policy had moved from suppression of ODI to active support. New Policy Challenges The extension of supports to ODI to achieve policy goals is not the only aspect of the increasing complexity of policy in this area. By 2005 China’s ODI was beginning to grow rapidly. As China’s outward investment has grown, it has increased the complexity of policy making. Once the gates to ODI were opened, investors and policymakers faced a series of new challenges, or old challenges on a larger scale. These challenges have become a significant factor in policy making. A broad range of external factors have increasingly impinged on China’s ODI. The consequences following from the investment activities of Chinese enterprises have risen up the agenda. As ODI has increased, the perennial question of maintaining control and oversight over enterprises has continued to exercise policymakers. This has particularly been the case for SOEs, despite the increasing diversity of enterprises engaging in ODI. One of the new external factors to arise as a consequence of increased ODI is security. In 2005, the issue of security was addressed in an opinion issued by the SC, MFA and the State-owned Assets Supervision and Administration Commission (SASAC). This document sets out a broad range of measures to protect the security of enterprises and individuals working outside China. It called for the creation of a “complete security concept and development concept”, the strengthening of education on and management of security, and the establishment of internal security precautions and emergency procedures by enterprises. In this document assessment of security threats focused largely on external problems, such as the economic and political situation, ethnic and religious conflict, social stability and terrorism in the investment location. Yet, even if Chinese ODI was still relatively small, it also recognized that security threats were not only the result of causes external to enterprises, and that their own actions were a factor in their creation. The opinion called on Chinese enterprises to consider the interests of local citizens and groups, including those of employees, and to avoid commercial disputes and conflicts with local interests.73 At the same time MOFCOM also addressed the issue at the approval stage. In 2005, the question of security was included in the approval procedures for ODI which required that the security situation in the destination country be taken into account in investment approval.74 The host country factors to be taken into consideration included that there should have been no major nationalization or expropriation of foreign investors, that there should be no terrorism, the assets and lives of investing enterprises and persons should be protected, the financial and foreign exchange policies are stable and repatriation of profits has legal protection, that there is no interference in operations of enterprises from political parties or radical groups and the social order is good, and that the location of the investment is not subject to sovereignty disputes. These regulations are one of the rare cases where political factors are specifically recognized in ODI policy. Among the political and economic factors to be taken into account in approvals are whether or not the destination country has established diplomatic relations with the PRC, practices trade discrimination against PRC or has any special restriction on entry of PRC citizens.75 Investment in countries with which China has no diplomatic relations is not banned, but requires special approval, as does investment in “specially designated” countries and regions listed by MOFCOM, MFA and other departments.76 China’s Outward Direct Investment 11 Concern for security continued as investment increased. One document issued by several authorities in 2010 noted, “In recent years, following the rapid development and continual broadening of the scope of foreign investment and cooperation, the international situation faced by China’s ‘going global’ is increasingly difficult and complicated: traditional security threats and non-traditional security threats are intertwined, international terrorist activities are increasingly rampant, and the security of our enterprises and institutions with Chinese investment and personnel are under serious threat.”77 The accompanying regulations dealt specifically with security problems such as war, coups d’état, terrorism and kidnapping, and natural disasters. Yet the regulations recognized that ensuring security was also a question of preventing the consequences of actions by individuals and enterprises from China, and stated that enterprises must issue rules for all personnel sent abroad requiring that they abide by local laws and respect local customs. Enterprises were also required to carry out their social responsibilities, protect the environment, improve local employment, and actively participate in work for the public interest “in order to create a good external environment for the development of foreign investment and cooperation”.78 The sometimes broad definition of security threats is indicative of concern over wider problems of investment risk faced by Chinese enterprises and their performance. Soon after the go-global policy was promulgated, steps were taken to ensure that control was maintained over the risk entailed in increased ODI. Annual inspections of outward investment enterprises were instituted in 2002.79 Measures were taken to monitor the performance of investments80 especially in the case of financial enterprises.81 As ODI grew, so did the problem of risk. The question was recognized in 2005, when a circular on the prevention of risk for major projects was issued by the NDRC and Sinosure.82 In addition to security, the procedures issued by MOFCOM in 2005 stipulated the risk factors in the destination country to be taken into account when approving outward investment projects. Thus, there should be political and social stability, ie there should be no war or social instability; the economic situation should be normal, ie there should be no economic crisis; foreign exchange and the tax system should be stable; the legal system should be complete; and the legal system should encourage and protect foreign investment.83 The concern over risk for ODI continued, reaching the very highest level of China’s leadership. In 2006 improvement of the ODI risk control system was named as one of the priorities for work by the State Council84 and in 2007 Hu Jintao, China’s President and Secretary General of the Chinese Communist Party, at a Politburo study session called for improvement of risk management for outward investment.85 In 2008 a new office was established under the National Audit Bureau to audit enterprises established by investment outside China.86 And in 2010 MOFOM established an official system of ODI risk warnings covering political, economic, policy and natural risks to investors.87 The regulations provide for a system of public risk warnings which are provided on the website of MOFCOM. There are also non-public internal risk warnings. The investment activities of SOEs have continued to be a key concern of the authorities. Despite reforms and the greatly increased diversity of enterprises engaged in ODI, the SOEs, particularly those under the jurisdiction of the central government, continue to be the key actors. At the central level SOEs in China have been subject to the control of SASAC since 2004. Following a series of scandals involving SOEs as they expanded their foreign activities, SASAC called for tighter supervision of their operations in 2005.88 Still, activities of SOEs continued to be problem, especially their increasing use of tax havens such as the British Virgin Islands.89 However, SASAC had little real control over the ODI activities of SOEs. Outward investment by SOEs was required to be reported to SASAC, but this body had limited power of supervision over ODI projects. In fact, SASAC issued regulations in 2006 on supervision of investment by SOEs which specifically excluded outward investment.90 12 Asia Paper 7, 4 Concern that ODI by SOEs posed significant problems continued.91 In 2007 SASAC responded with a new set of regulations intended to control SOE investment, including this time ODI.92 As the document noted, “problems have appeared in the investment activities of some enterprises: some enterprise blindly continue to invest in the situation where their debt ratio is high, exceeding what the enterprise has the capacity to bear, some enterprises violate regulations to use bank lending funds to invest in shares and real estate, some enterprises carry out investment in non-core business, outward investment, supplementary projects outside the plan, and investment in high risk areas, and do not report to SASAC in accordance with regulations.” Thus, SOEs were required to report all major investment to SASAC, including ODI, and strengthen measures to control risk. Yet, despite its role as asset holder and overseer of state owned assets, SASAC has not been forceful in its role with regard to outward investment. Indeed Li Rongrong, the head of SASAC, at the time expressed a rather hands-off view of its role in outward investment.93 In 2011, SASAC issued new regulations on supervision of assets outside China of central SOEs. One of the main concerns was loss of state assets, and the regulations set out detailed provisions on the transfer of state assets abroad, and their control.94 Certain practices permitted by the government appear designed to store up later problems for control over SOE activities. In the early days of outward investment it was common for state-owned assets outside China to be registered in the name of individuals.95 One of the justifications for this policy was to “protect” state-owned assets, but, as has been reported in the Chinese media, this often resulted in the embezzlement of state assets by the individuals in whose name they had been registered. The practice continued to be officially recognized by the Chinese authorities as necessary96 and was formally discontinued only in 2010.97 In order to ensure the successful performance of central SOEs, SASAC has responsibility for guiding them to prevent investment risk. But more recent regulations reveal continuing problems with ODI by SOEs. Regulations issued in 2012 by the SC state that the role of SASAC is also to improve cooperation and avoid “unhealthy competition” between SOEs.98 The question of competition between SOEs has become the focus of attention in the Chinese media, which points to frequent cases of them engaging in bidding wars for the same project, and as a result overpaying and in the end losing money. Another indication of concerns over activities of SOEs that evade the constraints of policy is that the regulations ban them from ODI outside their core business areas. Despite their favoured status, the relationship between the constraints set by the government and the ODI activities of SOEs is far from simple, and has evolved over time. This typifies the role of institutions in China’s ODI. While in some respects there has been a withdrawal of constraints in areas such as foreign exchange and project approval, this does not mean that institutions have no role. Their role has evolved in response to the increase in China’s ODI and new challenges that it faces. Conclusions Flows of investment from China are a function of many factors, but institutions in the form of government policy and regulations are central to its development. The relationship between institutions and the outcomes is far from simple and is not merely a matter of either “restricting” or “promoting” outward investment. As documents cited in this paper demonstrate, there has indeed been a shift from restriction to promotion, and this has been related to an increase in ODI. Underlying this has been the central concern for foreign exchange in China’s policymaking in this area. Once policymakers believed that China no longer faced a shortage of foreign exchange, policy on ODI began to change toward “liberalization”. Support and promotion became a central part of policy on ODI. Such a China’s Outward Direct Investment 13 policy is intended to achieve China’s broad development and also specific industry policy goals, by providing support to Chinese enterprises in areas such as finance, but also in other ways such as information and analysis concerning destination countries. However, the effort to direct investment to specific targets, or to constrain the behaviour of enterprises to comply with policy requirements, is problematic. The difficulty of policy control can already be seen in 1990s, when strict regulatory regime initially failed to curb investment before control was reasserted in 1993. Early attempts to encourage ODI in processing industry in late 1990s also failed to have any appreciable effect. Policy change after the go-global strategy was promulgated did eventually bring about an increase in ODI, although whether the policy goals have been successfully achieved is far from clear. What is clear even from the government’s own view is that many of the outcomes have not been desired. Neither permitting or encouraging a desired outcome nor banning or discouraging one that is not desired guarantee the intended result was achieved. Given the propensity of Chinese enterprises to evade or ignore government regulations and policy, the gap between the desired and actual outcome may be large. Drawing simple causal relationships between government policy and behavior of Chinese enterprises is fraught with difficulty, not least because the enterprises frequently act in direct contravention of policies and regulatory constraints. This is often the case even with SOEs, the category of enterprises in theory most directly subject to government control or that benefit most from government support. One of the consequences of this is that a key motivation for policymaking on ODI in China has been to maintain the integrity of the regulatory system itself in the face of almost constant efforts by enterprises to act outside the limits it lays down. Rather than there being a unidirectional causality from policy to enterprise behavior, the opposite is often the case, as the policymakers are forced to react to the behavior of enterprises. The increasing focus of Chinese policymaking on problems that follow from the increase in ODI, such as security, and more broadly risk, indicate a set of concerns that goes beyond a narrow view of investment promotion. Rather than withdrawing from the investment process, the Chinese state continues to engage in areas that in most developed economies would be considered beyond its role. North argues that one of the basic purposes of institutions is to reduce uncertainty.99 But Chinese policymaking suggests that while its intention may be to support ODI, and to reduce uncertainty and risk for Chinese enterprises, frequently the opposite is achieved. Policies intended to promote investment such as financial support may be found to actually increase uncertainty and risk. North argues that the role of institutions is rooted in transaction costs, and a key element in the cost of a transaction is information.100 The reach of formal institutions in ODI from China goes beyond that which is usually considered to be the normal role governments. The Chinese government, like many, provides services such as information to enterprises on market and investment conditions in destination countries, but goes further, and not just by providing financial support, but also for instance setting out regulatory requirements on steps that enterprises must take in order to reduce risk, incorporating risk into the approval process for ODI projects, and implementing outright bans on certain types of activities that it considers as entailing risk. Thus, the state seeks to play an active role in the flow of information and the assessment of risk that goes beyond that found in most developed market economies. That the state plays such a role in China is hardly surprising given its past and even present role in directing the Chinese economy. However, many of the policies adopted in this case have followed the development of ODI rather than preceding it. The state, faced with the consequences flowing from increased ODI, attempts to provide a substitute for the apparent failings of Chinese enterprises to adapt to risk that in developed economies would be left largely up to the firm itself. While the system of control 14 Asia Paper 7, 4 over ODI has been considerably liberalized, this does not mean that the state has withdrawn, but that its role has changed. Notes and references: 1 Peng, M. W., Wang, D. Y. L., & Jiang, Y. (2008). An Institution-based View of International Business Strategy: A Focus on Emerging Economies. Journal of International Business Studies, 39(5), 920-936. 2 Buckley, P. J., Clegg, L. J., Cross, A. R., Liu, X., Voss, H., & Zheng, P. (2007). The Determinants of Chinese Outward Foreign Direct Investment. Ibid., 38(4), 499-518. 3 Buckley, P. J., Clegg, L. J., Cross, A. R., Voss, H., Rhodes, M., & Zheng, P. (2008). Explaining China's Outward FDI: An Institutional Perspective. In K. P. Sauvant (Ed.), The Rise of Transnational Corporations From Emerging Markets: Threat or Opportunity? (pp. 107-157). Cheltenam: Edward Elgar. 4 Luo, Y., Xue, Q., & Han, B. (2010). How Emerging Market Governments Promote Outward FDI: Experience from China. Journal of World Business, 45(1), 68-79. 5 Buckley, P. J., Cross, A. R., Tan, H., Xin, L., & Voss, H. (2008). Historic and Emergent Trends in Chinese Outward Direct Investment. Management International Review, 48(6), 715-748. 6 Titan, A. (2010). Institutional Analysis and the Determinants of Chinese FDI. Multinational Business Review, 18(3), 1-24. 7 North, D. C. (1981). Structure and Change in Economic History. New York, London: W W Norton & Co, North, D. C. (1990). Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University Press, ibid. 8 Dunning, J. H., & Lundan, S. M. (2008). Institutions and the OLI paradigm of the multinational enterprise. Asia Pacific Journal of Management, 25(4), 573-593. 9 North, D. C. (1990). Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University Press. 10 Local governments in China frequently make policy on ODI, which in theory should fall within the parameters laid down by central government policy, but in fact they often pursue their own goals and interests. Local government is outside the scope of this paper. 11 There is the possibility that “internal” (neibu) policy documents exist on ODI, however in the absence of access to such documents, no attempt is made to include them in the discussion. It is also possible that some policy factors, for instance the political, are not dealt with in the formal investment policy documents discussed here. Furthermore, while this paper focuses on ODI policy, it is possible that investment is affected by other factors even within the formal institution sphere that determine the overall business environment. 12 Investment flow statistics provided by UNCTAD correspond closely to those provided by China’s Ministry of Commerce (MOFCOM). 13 This paper only considers political factors as they are discussed in the context of ODI policy. The idea that Chinese investment may have a political agenda is widespread and frequently alluded to in Western media, but evidence for this would have to be found elsewhere. 14 By contrast, the policy and regulation on inward investment began to be elaborated in detail from the earliest days of reform and opening. 15 Waihui guanli zanxing tiaoli, [Provisional Provisions on the Administration of Foreign Exchange], SC, December 18, 1980. Among the purposes of the Provisions cited in Article 1, the second is to “increase the nation’s foreign exchange earnings”. The Provisions require that, unless where otherwise provided by law, all foreign exchange income of Chinese or foreign institutions or individuals must be sold to the Bank of China. All China’s Outward Direct Investment 15 circulation and use of foreign exchange in China was prohibited. Foreign exchange income and payments of all entities in China were to be administered under the plan. 16 Guanyu zai guowai kaishe heying qiye de zanxing guiding, [Provisional Regulations on Establishment of Cooperative Enterprises Outside China], MOFERT, November 3, 1981. To put this into context it should be remembered that at this time there were only a handful of foreign trade corporations that existed under the central control of MOFERT. 17 Guanyu zai guowi he gang ao diqu juban feimaoyixing hezi jingying qiye shenpi quanxian he yuanzi de tongzhi, [Circular on Jurisdiction and Principles for Examination and Approval of the Operation of Joint Venture Non-Trade Enterprises Outside China and in the Hong Kong and Macau Regions], MOFERT, 1984, Guanyu zai guowai kaishe feimaoyixing hezi jingying qiye de shenpi chengxu he guanli banfa, [Procedures for Administration and Examination and Approval Process (Trial) of the Establishment of Non-Trade Cooperative Investment Enterprises Outside China], MOFERT, February 1, 1985. 18 Sun Y-w. (1996). Chinese Outward Investment in Hong Kong: Trends, Prospects and Policy Implications, OECD Development Centre, Working Paper. 19 Jingwai touzi waihui guanli banfa, [Procedures for the Administration of Foreign Exchange for Outward Investment], SAFE, March 3, 1989 20 Unlike the earlier Provisional Provisions on the Administration of Foreign Exchange, the Foreign Exchange Procedures did not refer to the need to increase foreign exchange earnings, but to balancing international payments (Article 1). They also refer to encouraging economic and technological cooperation, and strengthening control of foreign exchange for ODI as reasons for their enactment. 21 Jingwai touzi waihui guanli banfa xize, [Detailed Rules for the Procedures for the Administration of Foreign Exchange for Outward Investment], SAFE, June 26, 1990. 22 Guanyu bianzhi, shenpi jingwai touzi xiangmu de xiangmu jianyi shu he kexingxing yanjiu baogao guiding, [Regulations on the Writing, Examination and Approval of Outward Investment Project Proposals and Feasibility Study Reports], State Planning Commission (SPC), August 17, 1991. 23 Duiwai jingji maoyibu guanyu zai jingwai juban feimaoyixing qiye de shenpi he guanli guiding (shixing gao), [Regulations (Trial) on the Examination, Approval and Administration of Non-Trade Enterprises Operating Outside China], MOFERT, March 23, 1992. 24 Jingwai guoyou zichan chanquan dengji guanli zanxing banfa, [Provisional Procedures for the Administration of the Registration of State-owned Assets Outside China], State State-owned Assets Administration Bureau, June 25, 1992, 25 Jingwai touzi waihui fengxian ji waihui zijin laiyuan shencha de shenpi guifan, [Regulations on the Examination and Approval of the Verification of Outward Investment Foreign Exchange Risk and Sources of Foreign Exchange Funds], SAFE, September 20, 1993. 26 Pizhuan guojia jiwei guanyu jiaqiang haiwai touzi xiangmu guanli yijian de tongzhi, [Circular on the Approval and Transmission of the State Planning Commission Opinion on Strengthening the Administration of Overseas Investment Projects], SC, March 5, 1991. 27 An account of some of the more egregious in the 1980s can be found in Rafferty, K. (1989). City on the Rocks: Hong Kong’s Uncertain Future, Viking, London. 28 Guanyu zanting shougou jingwai qiye he jinyibu jiaqiang jingwai touzi guanli de tongzhi, [Circular on the Suspension of the Acquisition of Enterprises Outside China and Further Strengthening of the Administration of Outward Investment], SC, September 3, 1993. The Circular was reinforced by Guanyu guanche luoshi <<Guowuyuan guanyu zanting shougou jingwai qiye he jinyibu jiaqiang jingwai touzi guanli de tongzhi>> jinji tongzhi, [Urgent Circular on the Implementation of the <<State Council Circular on the Suspension of the Acquisition of Enterprises Outside China and Further Strengthening of the Administration of Outward Investment>>], Ministry of Finance (MOF), November 23, 1993. Buckley, P. 16 Asia Paper 7, 4 J., L. J. Clegg, et al. (2007) and Luo, Y., Q. Xue, et al. (2010) following them ascribe the increase in ODI in 1992 to a policy “liberalization” resulting from Deng Xiaoping’s famous “southern tour” in February of that year. In fact, as the documents cited here show, there was no policy liberalization for ODI, although enterprises and even local authorities may certainly have used the opportunity afforded by the sudden impetus to reform and economic expansion Deng provided to engage in activities that were outside the permitted boundaries. 29 Guanyu jinyibu gaige waihui guanli tizhi de gonggao, [Notice on Further Reform of the Foreign Exchange Administration System], PBOC, December 28, 1993. Reiterated in Jiehui, shouhui ji fuhui guanli zanxing guiding, [Provisional Regulations on the Administration of the Settlement, Purchase and Payment of Foreign Exchange], PBOC, March 26, 1994, and Guanyu <<Jingwai touzi guanli banfa>> de buchong tongzhi, [Supplementary Circular on <<Procedures for the Administration of Foreign Exchange for Outward Investment>>], SAFE, September 14, 1995. 30 Guanyu jinyibu gaige waihui guanli tizhi de gonggao, [Notice on Further Reform of the Foreign Exchange Administration System], PBOC, December 28, 1993. Buckley, P. J., L. J. Clegg, et al. (2008) and Luo, Y., Q. Xue, et al. (2010) following them mistakenly believe that this reform represented a liberalization of the foreign exchange system for ODI. Buckley, P. J., L. J. Clegg, et al. (2008) in their statistical analysis find the “surprising” result that ODI is negatively associated with this “liberalization” and hypothesize that it may be evidence of an idiosyncratic approach to international business by Chinese Transnational Corporations. The answer to the problem is that there was no liberalization for ODI. Outward lending and aid from China were similarly specifically excluded from the reformed system. They also suggest that one interpretation of the reduction in Chinese ODI after 1994 is that foreign exchange liberalization provided Chinese firms with greater access to hard currencies from domestic sources, and this reduced the need to invest abroad, and that further research on the point is required. As seen above, in 1993 the central government reasserted control over illegal ODI, which explains the subsequent decline. 31 Guanyu <<Jingwai touzi waihui guanli banfa>> de buchong tongzhi, [Supplementary Circular on <<Procedures for the Administration of Foreign Exchange for Outward Investment>>], SAFE September 14, 1995. 32 Jingwai touzi caiwu guanli zanxing banfa, [Provisional Procedures on the Financial Administration of Outward Investment], MOF, June 6, 1996. 33 Jingwai guoyou zichan chanquan dengji guanli zanxing banfa shishi xize, [Detailed Implementing Rules for the Provisional Procedures for the Administration of Registration of State-Owned Assets Outside China], State State-Owned Assets Administration Bureau, September 11, 1996, Jingwai guoyou zichan guanli zanxing banfa [Provisional Procedures for the Administration of State-Owned Assets Outside China], MOF, Ministry of Foreign Affairs (MFA), SAFE, Customs General Administration, September 27, 1999. 34 Waihui guanli tiaoli, [Provisions on the Administration of Foreign Exchange], January 29, 1996. The Provisions replaced the 1980 Provisional Provisions. Jiehui, shouhui ji fuhui guanli guiding, [Regulations on the Administration of Settlement, Purchase and Payment of Foreign Exchange], PBOC, June 20, 1996. 35 Guanyu jiaqiang ziben xiangmu waihui guanli ruogan wenti de tongzhi, [Circular on Certain Problems Concerning the Strengthening the Administration of Foreign Exchange on the Capital Account], SAFE, September 15, 1998. The Circular referred to problems concerning the capital account, and among other measures SAFE imposed a suspension of examinations of foreign exchange risk for ODI. Such examinations were a necessary step for ODI approval. 36 Guanyu wanshan ziben xiangmu waihui guanli youguan wenti de tongzhi, [Circular on Problems Concerning the Improvement of Administration of Foreign Exchange on the Capital Account], SAFE, January 7, 1999. 37 Guanyu guli qiye fazhan jingwai dailiao jiagong zhuangpei yewu yijian, [Opinion on the Encouragement of Enterprises in the Development of Foreign Processing and Assembly of China’s Outward Direct Investment 17 Materials], Ministry of Foreign Trade and Economic Cooperation (MOFTEC), State Economic and Trade Commission, MOF, February 1, 1999, Guli qiye liyong yuanwai youhui daikuan he yuanwai hezi hezuo xiangmu jijin kaizhan jingwai dai liao jiagong zhuangpei yewu yijian de tongzhi, [Circular on the Opinion on the Encouragement of Enterprises Using Foreign Aid Preferential Loans and Foreign Aid Joint Venture Cooperation Funds to Develop Processing and Assembly Business Outside China], MOFTEC, March 22, 1999, Guanyu jingwai dai liao jiagong zhuangpei xiangmu shenbao chengxu ji youguan shixiang de tongzhi, [Circular on Procedures for Reporting Processing and Assembly Projects Outside China and Related Matters], MOFTEC, State Economic and Trade Commission, May 4, 1999, Guanyu jingwai dai liao jiagong zhuangpei yewu youguan chukou tui shui wenti de tongzhi, [Circular on Problems Concerning Export Tax Rebates Related to Processing and Assembly Projects Outside China], State Administration of Taxation (SAT), MOFTEC, May 5, 1999, Jingwai jiagong maoyi qiye zhouzhuan waihui daikuan tie xi guanli banfa, [Procedures for the Administration of Interest on Foreign Exchange Working Capital Loans for Processing Trade Enterprises Outside China], MOF, MOFTEC, May 19, 1999, Guanyu zhichi jingwai jiagong maoyi yewu de xindai zhidao yijian, [Guidance Opinion on Credit to Support Processing Trade Business Outside China], PBOC, MOFTEC, June 30, 1999. 38 Zhuanfa waijingmaobu, guojia jingmaowei, caizhengbu guanyu guli qiye kaizhan jingwai dai liao jiagong zhuangpei yewu yijian de tongzhi, [Circular on the Transmission of the Ministry of Foreign Economic Relations and Trade, State Economic and Trade Commission, Ministry of Finance Opinion on the Encouragement of Enterprises in the Development of Foreign Processing and Assembly of Materials], SC Office, February 14, 1999. 39 Guanyu jianhua jingwai dai liao jiagong zhuangpei yewu waihui guanli de tongzhi, [Circular on the Simplification of Foreign Exchange Administration of Processing and Assembly Business Outside China], MOFTEC, SAFE, April 20, 1999, Guojia waihui guanli ju guanyu bufen xiangmu mian jiao jingwai touzi hui hui lirun baozhengjin de tongzhi, [Circular on Exemption of Certain Projects from the Outward Investment Foreign Exchange Profit Repatriation Guarantee Fund], SAFE, September 7, 1999. 40 Zhonggong zhongyang guanyu zhiding guomin jingji he shehui fazhan dishiwu nian jihua de jianyi, [CCPCC Opinion on the Formulation of the 10th Five Year National Economic and Social Development Plan], passed by the 5th Plenary Meeting of the 15th Session of the CCPCC on 11 December 2000. 41 Zhonghua renmin gonghe guo guomin jingji he shehui fazhan di shi ge wunian jihua gangyao, [Outline of 10th Five Year Economic and Social Development Plan], Chapter 17, Section 4, 15 March 2001. 42 Guanyu zuo hao 2001 nian nongye he nongcun gongzuo de yijian, [Opinion on Correctly Implementing Agricultural and Rural Work in 2001], Chinese Communist Part Centre, SC, January 11, 2001, Guanyu “shiwu” qijian jinyibu cujin jidian chanpin chukou de yijian, [Opinion on the Further Encouragement of Exports of Electronic Products in the “Tenth Five Year Plan” Period], October 3, 2001, Zhenxing ruanjian chanye xingdong gangyao (2002 nian zhi 2005 nian), [Outline Action Plan for Revitalization of the Software Industry (2002-2005)], State Council Office for Informationization Work, July 24, 2002, Guanyu cujin meitan gongye jiankang fazhan de ruogan yijian, [Opinion Concerning Encouragement of the Healthy Development of the Coal Industry], SC, July 6, 2005. 43 Guojia guli kaizhan jingwai jiagong maoyi chanpin mulu, [Product Catalogue for State Encouragement of the Development of Processing Trade Outside China], State Economic and Trade Commission, MOFTEC, December 12, 2002, Guanyu jianhua jingwai jiagongmaoyi xiangmu shenpi chengxu he xiafang quanxian youguan wenti de tongzhi, [Circular on Problems Concerning the Simplification of Procedures and Decentralization of Jurisdiction for Examination and Approval of Processing Trade Projects Outside China], MOFCOM, SAFE, June 26, 2003. 18 Asia Paper 7, 4 44 Zai dongnan feizhou diqu kaizhan fangzhi fuzhuang jiagongmaoyilei touzi guobie zhidao mulu, [Country Guidance Catalogue for the Development of Textile and Apparel Processing Trade Type Investment in the East and South African Region], MOFCOM, October 23, 2003, Zai lamei diqu kaizhan fangzhi fuzhuang jiagong maoyilei touzi guobie zhidao mulu, [Country Guidance Catalogue for the Development of Textile and Apparel Processing Trade Type Investment in the Latin America Region], MOFCOM, April 16, 2004, Zai yazhou diqu kaizhan fangzhi fuzhuang jiagongmaoyi lei touzi guobie zhidao mulu, [Country Guidance Catalogue for the Development of Textile and Apparel Processing Trade Type Investment in the Asia Region], MOFCOM, May 19, 2004, Zai zhongdong ou diqu kaizhan jiayong dianqi jiagongmaoyi lei touzi guobie zhidao mulu, [Country Guidance Catalogue for the Development of Household Electrical Appliance Processing Trade Type Investment in the Central and Eastern European Region], MOFCOM, December 10, 2003. 45 Guanyu tiaozheng zibenxiang xia bufen gou hui guanli cuoshi de tongzhi, [Circular on Adjustment of Certain Administrative Measures for Foreign Exchange Purchase Under the Capital Account], PBOC, SAFE, October 24, 2001. 46 Guanyu qingli jingwai touzi hui hui lirun baozhengjin youguan wenti de tongzhi, [Circular on Problems Concerning the Clearing of Outward Investment Foreign Profit Repatriation Guarantee Funds], SAFE, November 12, 2002. Reiterated in Guojia waihui guanliju gonggao, [Notice from State Administration of Foreign Exchange], SAFE April 15, 2003. 47 Guanyu jianhua jingwai touzi waihui zijin laiyuan shencha youguan wenti de tongzhi, [Circular on Problems Related to the Simplification of the Verification of the Source of Foreign Exchange Funds for Outward Investment], SAFE, March 19, 2003. 48 Guanyu kuoda jingwai touzi shenpi quanxian gaige shi dian de pifu, [Reply on Reform Trial Locations for Widening the Jurisdiction for Examination and Approval of Outward Investment], MOFCOM, April 28, 2003, Guanyu jinyibu shenhua jingwai touzi waihui guanli gaige youguan wenti de tongzhi, [Circular on Problems Concerning Further Deepening of Reform of Outward Investment Foreign Exchange Administration], SAFE, October 15, 2003. 49 Guojia waihui guanliju gonggao, [Notice from State Administration of Foreign Exchange], SAFE April 15, 2003. 50 Guanyu kuoda jingwai touzi waihui guanli gaige shidian youguan wenti de tongzhi, [Notice on Problems Concerning Trial Locations Widening Reform of Foreign Exchange Administration for Outward Investment], SAFE, May 19, 2005. 51 Guanyu kuoda jingwai touzi waihui guanli gaige shidian youguan wenti de tongzhi, [Circular on Problems Concerning Trial Locations for Widening Reform of Foreign Exchange Administration for Outward Investment], SAFE, May 19, 2005, Guanyu tiaozheng bufen jingwai touzi waihui guanli zhengce de tongzhi, [Circular on the Adjustment of Certain Policies Concerning the Administration of Foreign Exchange for Outward Investment], SAFE, June 6, 2006. 52 Guanyu tiaozheng jingnei yinhang wei jingwai touzi qiye tigong rongzixing duiwai danbao guanli fangshi de tongzhi, [Circular on Adjustment of the Means of Administration of the Provision of Financial Guarantees by Domestic Banks to Enterprises Investing Outside China], SAFE, August 16, 2005. 53 Guanyu tiaozheng bufen jingwai touzi waihui guanli zhengce de tongzhi, [Circular on the Adjustment of Some Foreign Exchange Administration Policies on Outward Investment], SAFE, July 1, 2006. 54 Jingnei jigou jingwai zhijie touzi waihui guanli guiding, [Regulations on Foreign Exchange Administration of Outward Investment by Domestic Entities], SAFE, July 13, 2009. China’s Outward Direct Investment 19 55 Jingwai zhijie touzi renminbi jiesuan shidian guanli banfa, [Procedures for the Administration of Trial Location for Clearing of Renminbi for Outward Direct Investment], PBOC, January 6. 2011. 56 Guanyu jingwai touzi kaiban qiye hezhun shixiang de guiding, [Regulations on Matters Concerning the Verification and Approval of the Establishment and Operation of Enterprises by Outward Investment], MOFCOM, October 1, 2004. 57 Jingwai touzi xiangmu hezhun zanxing guanli banfa, [Provisional Procedures for the Administration of the Examination of Outward Investment Projects], NDRC, 9 October 2004. 58 Guanyu touzi tizhi gaige de jueding, [Decision on Reform of the Investment System]. SC, July 16 2004. 59 Guanyu wanshan jingwai touzi xiangmu guanli youguan wenti de tongzhi, [Circular on Problems Concerning Improvement of the Administration of Outward Investment Projects], NDRC, June 8, 2009, Guanyu zuohao jingwai touzi xiangmu xiafang hezhun quanxian gongzuo de tongzhi, [Circular on Correctly Carrying Out Work Concerning the Delegation of Jurisdiction for Checking and Approval of Outward Investment Projects], NDRC, February 14, 2011. 60 Duiwai touzi guobie chanye daoxiang mulu (yi), [Country Guidance Catalogue for Outward Investment (1)], MOFCOM, July 8, 2004, Duiwai touzi guobie chanye daoxiang mulu (er), [Country Guidance Catalogue for Outward Investment (2)], MOFCOM, MFA, October 2005, Duiwai touzi guobie chanye daoxiang mulu (san), [Country Guidance Catalogue for Outward Investment (3)], MOFCOM, MFA, NDRC, January 31, 2007. 61 Guobie touzi jingying zhangai baogao zhidu, [Country Reporting System on Investment Barriers], MOFCOM, November 11, 2004. 62 Guanyu dui guojia guli de jingwai touzi zhongdian xiangmu jiyu xindai zhichi youguan wenti tongzhi, [Circular on Problems Related to Giving Credit Support to Major Outward Investment Projects Encouraged by the State], NDRC, Exim Bank, May 9, 2003. Revised by Fagaiwaizi [2004] 2345 hao, October 27, 2004. 63 Guanyu 2005 nian shenhua jingji tizhi gaige de yijian, [Opinion on Deepening Reform of the Economic System in 2005], SC, April 4, 2005. Specifically called for promulgation of Provisions for Administration of Outward Investment which were not promulgated in that year. Procedures for Administration of Outward Investment were only promulgated in 2009. 64 Jingwai touzi chanye zhidao zhengce, [Outward Investment Sector Direction Policy], NDRC, MOFCOM, MFA, MOF, General Administration of Customs, SAT, SAFE, 5 July 2006. 65 Outward Investment Policy, Article 6. 66 Goals for ODI using very similar language had previously been set out in Guanyu dui guojia guli de jingwai touzi zhongdian xiangmu jiyu xindai zhichi youguan wenti tongzhi, [Circular on Problems Related to Giving Credit Support Major Outward Investment Projects Encouraged by the State], NDRC, Exim Bank, May 9, 2003 and in Guanyu jianli jingwai touzi zhongdian xiangmu fengxian baozhang jizhi youguan wenti de tongzhi, [Circular on Problems Related to the Establishment of a Risk Protection System for Major Outward Investment Projects], NDRC, China Export and Credit Insurance Corporation (Sinosure), January 25, 2005 and also in Guanyu jinyibu jiaqiang dui jingwai touzi zhongdian xiangmu rongzi zhichi youguan wenti de tongzhi, [Circular on Problems Related to Further Strengthening of Funding Support for Major Outward Investment Projects], NDRC, China Development Bank, September 25, 2005. 67 Outward Investment Policy, Article 8. 68 Guanyu tiaozheng jingnei yinhang wei jingwai touzi qiye tigong rongzixing duiwai danbao guanli fangshi de tongzhi, [Circular on Adjustment of the Means of Administration of the Provision of Financial Guarantees by Domestic Banks to Enterprises Investing Outside China], SAFE, August 16, 2005 20 Asia Paper 7, 4 69 In Guanyu jinyibu jiaqiang dui jingwai touzi zhongdian xiangmu rong zi zhichi youguan wenti de tongzhi, [Circular on Problems Related to Further Strengthening of Funding Support for Major Outward Investment Projects], NDRC, China Development Bank, September 25, 2005. 70 Guanyu jinyibu jiada dui jingwai zhongdian xiangmu jinrong baoxian zhichi lidu youguan wenti de tongzhi, [Circular on Problems Concerning Increasing the Level of Finance and Insurance Support for Major Projects Outside China], China Development Bank, Sinosure, January 18 2006 71 Duiwai jingji hezuo zhuan xiang zijin guanli zanxing banfa, [Provisional Procedures for the Administration of Special Funds for Foreign Economic Cooperation], MOF, MOFCOM, December 9, 2005. 72 Guowai kuangchan ziyuan fengxian kancha zhuanxiang zijin guanli zanxing banfa, [Provisional Procedures for the Administration of Special Funds for Venture Prospecting for Mining Resources Outside China], MOF, October 31, 2005, Guanyu duiwai jingji jishu hezuo zhuanxiang zijin zhichi zhengce youguan wenti de tongzhi, [Circular on Problems Related to Policy Support for Special Funds for Foreign Economic and Technical Cooperation], MOF, MOFCOM, 8 May 2006. 73 Guanyu jiaqiang jingwai zhong zi qiye jigou yu renyuan anquan baohu gongzuo de yijian, [Opinion on Strengthening Security Work for Entities and Personnel of Enterprises Investing Outside China], MOFCOM, MFA, SASAC, September 28, 2005. 74 Jingwai touzi kaiban qiye hezhun xize, [Detailed Rules on the Checking and Approval of Establishment and Operation of Enterprises Investing Outside China], MOFCOM, October 17, 2005. 75 Jingwai touzi kaiban qiye hezhun xize, [Detailed Rules on the Checking and Approval of Establishment and Operation of Enterprises Investing Outside China], MOFCOM, October 17, 2005. 76 Jingwai touzi guanli banfa, [Procedures for the Administration of Outward Investment], MOFCOM, March 16, 2009. 77 Yin fa <<Jingwai zhong zi qiye jigou he renyuan anquan guanli guiding>> de tongzhi, [Circular on the Printing and Distribution of the <<Regulations for the Administration of the Security of Entities and Personnel of Enterprises with Chinese Investment Outside China>>], MOFCOM, MFA, NDRC, Ministry of Public Security, SASAC, State Administration of Work Safety, All China Federation of Industry and Commerce, August 13, 2010. 78 Jingwai zhong zi qiye jigou he renyuan anquan guanli guiding, [Regulations for the Administration of the Security of Entities and Personnel of Enterprises with Chinese Investment Outside China], MOFCOM, MFA, NDRC, Ministry of Public Security, SASAC, State Administration of Work Safety, All China Federation of Industry and Commerce, August 13, 2010. 79 Jingwai touzi lianhe nian jian zanxing banfa, [Provisional Procedures for the Joint Annual Inspection of Outward Investment], MOFTEC, SAFE, October 27, 2002. 80 Jingwai touzi zonghe jixiao pingjia banfa (shixing), [Procedures (Trial) for the Evaluation of the Overall Results of Outward Investment], MOFTEC, January 1, 2003. 81 Guanyu jinrong jigou dui jingwai zichan fuzhai ji sunyi shenbao youguan shixiang de tongzhi, [Circular on Matters Concerning the Reporting of Balance Sheets and Profit and Loss Accounts Outside China of Financial Institutions], SAFE, December 13, 2005 82 Guanyu jianli jingwai touzi zhongdian xiangmu fengxian baozhang jizhi youguan wenti de tongzhi, [Circular on Problems Concerning the Establishment of a Risk Prevention System for Major Outward Investment Projects], NDRC, Sinosure, January 25, 2005. 83 Jingwai touzi kaiban qiye hezhun xize, [Detailed Rules on the Checking and Approval of Establishment and Operation of Enterprises Investing Outside China], MOFCOM, October 17, 2005. 84 2006 nian gongzuo yaodian, [Key Points for Work in 2006], SC, March 19, 2006. China’s Outward Direct Investment 21 85 Hu Jintao: wanxi jingwai touzi fengxian guanli tigao liyong waizi zhiliang, [Hu Jintao: Improve the Risk Management of Outward Investment and Raise the Quality of Use of Foreign Investment], Xinhuanet, 30 September 2007. 86 Shenjishu zhuyao zhize neishe jigou he renyuan bianzhi guiding, [Regulations on Internal Organization and Personnel Disposition for the Main Responsibilities of the State Audit Bureau], SC, August 11, 2008. 87 Duiwai touzi hezuo jingwai anquan fengxian yujing he xinxi tongbao zhidu, [Foreign Security Risk Warning and Information Reporting System for Outward Investment and Cooperation], MOFCOM, August 26, 2010. 88 Guoziwei: jinkuai wanshan dui jingwai zhong zi qiye de jianguan yiji jiankong, [SASAC: Urgently Improve Supervision and Control of Chinese Invested Enterprises Outside China], Xinhua, May 30, 2005. 89 Guanyu zuo hao zhongyang qiye 2005 niandu caiwu juesuan he 2006 niandu caiwu jianguan gongzuo de tongzhi, [Circular on Properly Carrying Out Work on 2005 Financial Accounting and 2006 Financial Supervision of Central State-owned Enterprises] SASAC, December 2, 2005. 90 Zhongyang qiye touzi jiandu guanli zanxing banfa, [Provisional Procedures for the Administration of Supervision of Investment by Central State-owned Enterprises], SASAC, June 28, 2006. 91 Guoziwei 07 nian guihua: jiang zhiding yangqi jingwai touzi jianguan zhidu, [SASAC 07 Plan: Formulate Supervision System for Central State-owned Enterprise Outward Investment], Xinhua, March 8, 2007 92 Guanyu jinyibu guifan zhongyang qiye touzi guanli de tongzhi, [Circular on Further Regulation of the Administration of Investment by Central State-owned Enterprises], SASAC, June 27, 2007. 93 Li Rongrong: qiye haiwai hezuo yiding yao shuangying xiangmu zizhu jueding, [Li Rongrong: Enterprises Cooperating Overseas Must Be Win-win, Projects Must Be Decided Independently], China.org, August 10, 2008. 94 Zhongyang qiye jingwai guoyou zichan jiandu guanli zanxing banfa, [Provisional Procedures for the Administration of Supervision of State-owned Assets Outside China of Central State-owned Enterprises], SASAC, June 14, 2011, Zhongyang qiye jingwai guoyou chanquan guanli zanxing banfa, [Provisional Procedures for the Administration of Stateowned Assets Outside China of Central State-owned Enterprises], SASAC, June 14, 2011. 95 Guowuyuan bangongting zhuanfa caizhengbu, guojia guoyou zichan guanli ju guanyu zhu gang ao jigou yi geren mingyi banli chanquan zhuce dengji shouxu deng wenti de yijian tongzhi, [Circular on the Transmission of the Ministry of Finance, State State-owned Assets Administration Bureau Opinion on Problems Such as the Registration Procedures for Carrying Out Asset Registration in the Name of Individuals by Entities Resident in Hong Kong and Macau], SC Office, November 16, 1989. 96 Jingwai touzi caiwu guanli zanxing banfa, [Provisional Procedures on the Financial Administration of Outward Investment], MOF, June 6, 1996. 97 Guanyu guifan guoyouqiye jingwai touzi zhong geren daichi gufen youguan wenti de tongzhi, [Circular on Regulation of Problems Concerning Individuals Holding Shares in Outward Investments by State-owned Enterprises], MOF, March 26, 2010. 98 Zhongyang qiye jingwai touzi jiandu guanli zanxing banfa, [Provisional Procedures on the Administration of Supervision of Outward Investment by Central State-owned Enterprises], SC, March 18, 2012. 99 North, D. C. (1990). Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University Press. 100 Ibid. 22 Asia Paper 7, 4