Compared with FDI in Australia from the US, UK, and Japan, China’s FDI is relatively small, only accounting for about 1.5 per cent of the total stock of FDI, and is concentrated in the resources sector, rather than spread over other major industries, as is the case with US, UK and Japanese firms.

China’s FDI in Australia seemed to slow down a little after the global financial crisis (GFC).  One reason was reduced demand for global capital by Australian firms, coupled with stimulatory monetary policy in other countries. Yet the Australian economy held up well in the crisis and the availability of capital within Chinese firms was a major factor that promoted their continuing investment in Australia during the GFC.

When cash is no longer king, Chinese firms will need to look deeper at what needs to be done to ensure the success of their FDI in Australia and elsewhere.

A crucial issue for Chinese firms is the improvement of corporate governance.  This is a major concern that the Australian government, the general public and business communities have about Chinese FDI in Australia, partly because most of China’s FDI has been made by Chinese state-owned enterprises (SOEs). In 2009, the Australian Senate Economics Committee launched an inquiry into Chinese FDI by SOEs. One of the key issues the committee examined was corporate governance in SOEs. In its re-vamped Foreign Investment Policy the Australian government has explicitly introduced corporate governance practices of foreign investors as an element in assessing how their proposed FDI impacts on Australia’s national interest, which is the most fundamental criterion in evaluating FDI applications. In the cases of Minmetal’s acquisition of the majority assets of OZ Minerals and Yan Coal’s takeover of Felix Recourses, the Australian government imposed several corporate governance requirements as conditions for approval of these investment applications.

Good corporate governance practices enhance the quality of corporate decision-making (including investment decisions), alleviate risks and align management with its organisational purpose, thus improving investment performance.

Putting in place a good corporate governance system is a big challenge for Chinese firms as corporate governance is a relatively new concept in China. For Chinese subsidiaries in Australia, this can be more difficult as they have to deal with the vast differences in corporate governance between China and Australia.

Corporate governance is an issue in Chinese firms. Conventionally, Chinese firms have been governed on a relationship basis. Chinese government, rather than the board of directors, is still heavily involved in the appointment of senior managers to SOEs. Many board members in Chinese firms are either inside directors, or related outsiders. The low degree of board independence is therefore a problem.

Most Chinese companies in Australia have CEOs appointed from the parent company, particularly in Chinese SOEs. By contrast, a Chinese private firm largely left intact the entire board and CEO of an Australian mining company, after acquiring a majority share.

This ‘create-it’ or ‘leave-it’ approach reflects the difficulties Chinese firms face in dealing with corporate governance in their subsidiaries or entities in which they have a greater than 50 per cent stake.

A market-based approach should be taken in appointing top management and the board of directors to Chinese subsidiaries and majority-owned entities to ensure that Chinese firms in Australia operate effectively and efficiently in the Australian context. It is widely acknowledged that poor corporate governance at BP was one of the major causes for its oil spills in the Gulf of Mexico last year.

As China becomes more powerful, politically and economically, and expands its business globally, more and more governments have Chinese investment on their radar. Australia is no exception. From an economic perspective, good corporate citizenship can earn Chinese firms a reputation of being responsible, long-term players, making China’s FDI more attractive to Australia.

The relationship between China and Australia has been very strong since 1972 when diplomatic ties were established. This does not mean there are no differences between the two countries, particularly in the areas of ideology and national security. Besides maintaining contacts at the highest political levels and dialogue on key issues of concern to both countries, enhancing Chinese corporate governance through experience in the Australian marketplace will help to alleviate tension in other areas and build an even stronger relationship between the two countries down the track.

Xueli Huang is Senior Lecturer of Strategic Management at RMIT University, and is co-author,  with Ian Austin at Edith Cowan University, of a new book entitled ‘Chinese Investment in Australia: Unique Insight from the Mining Industry‘, to be published by Palgrave-Macmillan July.