context: The PRC was the world's third-largest ODI (outward direct investor) in 2023. Amid geopolitical decoupling and falling foreign investment numbers, ODI is gaining importance for the PRC, as it is becoming an 'indirect' way to leverage foreign capital and technology. But Chinese ODI is also facing challenges, such as foreign protectionism, financing difficulties, adaptability issues, labour shortage and industrial competition.
A Yicai article unpacks ways for Chinese overseas firms to address overseas challenges and risks, including
- considering factors such as the investment environment, staff training, infrastructure and power supply
- Wang Qing 王庆 Freshfields Bruckhaus Deringer Global Transactions Group partner urges companies to take precautionary measures
- establish cooperation with strong partners who have good relations with the local government
- obtain more political, tax and investment protection commitments from local governments during bids for foreign investment
- Wang Qing 王庆 Freshfields Bruckhaus Deringer Global Transactions Group partner urges companies to take precautionary measures
- addressing political risks
- Wang suggests companies
- establish information collection and analysis mechanisms
- follow and anticipate macro-political and economic trends
- avoid over-concentration of investment in a single country
- consider account protection provided by bilateral investment protection agreements and other international treaties
- leverage 'stabilisation clauses' in legal documents
- utilise political risk insurance and including legal clauses to counter mandatory government levies
- Wang suggests companies
- addressing risks in developed markets
- setting up overseas headquarters in countries like Singapore or EU member states may not suffice to eliminate political risks, if the controlling stake is still in China
- for the manufacturing industry, Wang suggests firms set up factories in Mexico instead of the US
- this could theoretically circumvent high US tariffs and protection measures on Chinese goods and satisfy the rules of origin requirements under the US-Mexico-Canada Agreement
- against news about possible US restrictions on Chinese-invested Mexican firms, Wang suggests firms
- adopt a more flexible investment model
- firms can leverage greenfield investments in countries that are more friendly to Chinese investors, such as Hungary
- in countries with strict regulatory environments against Chinese investments, firms can work with local suppliers to achieve business goals via non-direct equity investment, such as technology licensing or signing operations and management agreements
- useful for Chinese battery suppliers, which can use these indirect methods to cooperate with local automotive suppliers
- adopt alternative models of cooperation or investment instead of setting up factories directly
- especially in EU member states, which are now considering anti-subsidy and anti-monopoly measures
- adopt a more flexible investment model
- Gong Yamin 贡亚敏 Rui Min Law Firm partner notes that it is paramount for Chinese firms to differentiate whether the local measures are targeting their 'Chinese firms identity' or the origin of their products
- it will be more difficult for Chinese firms to cover their corporate identity
- tweaking the shareholding structure or adopting joint ventures may not be enough to pass stringent scrutiny
- comparatively, there is more room for technical maneuvering to deal with the identity of the origin of products
- adjusting source locations for raw materials and the locations for production
- it will be more difficult for Chinese firms to cover their corporate identity