While it is well known that FDI has been one of the important factors contributing to the Chinese economic miracle, it is perhaps less well known that China is now an important player in the overseas direct investment (ODI) global scene as well.

From 2003 to 2009, Chinese ODI flows grew at 55 per cent annually on average.

Chinese ODI in manufacturing is quite different from that in other sectors. The main investors are private firms rather than state-owned enterprises (SOEs). And the majority of investments in manufacturing have gone to industrialised economies. Chinese manufacturing firms’ ODI is dominantly motivated by seeking technology and other strategic assets — mainly brand names.

Chinese multinationals rarely have firm-specific ownership advantages — notably, core technology, organisational and management skills, and brand names. What they do have is a variety of home-country specific advantages, such as financial support from the government and comparative advantage in certain labour-intensive industries.

Compared with ODI by industrialised countries half a century ago, Chinese firms today face totally different circumstances, characterised by globalisation in general and China’s integration into the world economy in particular.

Globalisation has meant the integration of national economies into a single global economy. This results in intense competitive pressures at home, with firms no longer able to shelter behind protectionist barriers. Private firms are thus strongly motivated to go abroad to strategically acquire assets such as research and development (R&D) facilities, technologies, brands, distribution networks and managerial competencies. This type of ODI is identified as ‘asset augmentation’ in contrast to traditional ‘asset exploitation’.

The success of Chinese manufacturing firms’ ODI rests with their capacity to consolidate and operate the acquired strategic assets, and with their ability to set up win-win relationships with not only target firms but also the local community in the host country.

In addition to seeking technology, brands and distribution networks, Chinese manufacturing ODI firms also have numerous other motivations. A big one is ‘institutional escapism’: many Chinese firms go abroad to avoid competitive disadvantages incurred by operating exclusively in the domestic market, such as regional protectionism, limited access to capital, lack of developed intellectual property rights and an under-provision of training and education. Market seeking is also a key driving force in ODI, as is the quest for natural resources and increased efficiency.

Chinese manufacturing firms use four strategies when seeking technologies and brand names.

The first is to set up overseas R&D centres. Establishing R&D subsidiaries, especially in industrialised countries, is not only conducive to accessing foreign technological assets, but also captures the externalities created by host-country technology clusters and centres of innovation. A second, related, strategy is setting up joint ventures with incumbent firms.

The third strategy involves mergers with and acquisitions of overseas firms. This strategy has become a common approach, largely because it provides rapid access to proprietary technology, brand names and quick establishment of R&D capabilities. The most well-known example is Lenovo’s US$1.75 billion purchase of IBM’s PC business in 2005. After the acquisition, Lenovo became the third-largest PC producer in the world.

The fourth strategy is ‘clustered going abroad’. This strategy is gaining importance among Chinese private small and medium enterprises (SMEs). Chinese private SMEs are small scale with widespread distribution and flexible operations. The Chinese government has played a critical role in helping these small firms to cluster their investments abroad by setting up overseas industrial, scientific and technological parks.

Despite the dramatic growth of Chinese ODI, the overall performance of those investing firms to date is not all that promising, with recent research indicating that only 30 per cent of Chinese ODI firms make a profit.

Investing abroad involves huge risks for any firm, and especially for Chinese firms. In cases where the firm lacks ownership or firm-specific advantages, they will struggle even when only seeking asset augmentation unless they can apply some unique, sustainable, resources and capabilities.

These resources and capabilities are positively associated with a firm’s absorptive capacity, which refers to the firm’s ability to recognise the value of new, external information, to assimilate it, and to apply it to commercial ends.

The biggest challenges pertain to post-acquisition difficulties. These include: how to build up win-win relationships with foreign stakeholders; how to reconcile different cultures at the national and corporate level; how to organise globally dispersed complex activities; how to deal with foreign regulators, unions, employees and local communities; how to absorb the acquired technology; and how to operate acquired brand names.

Chinese manufacturing firms do not have sufficient ability and experience in handling the above problems. The differences in institutional backgrounds between China and the host country make Chinese firms more likely to have conflicts with foreign stakeholders, local regulators, employees and communities over managerial philosophies, corporate culture, incentive schemes, leadership styles and formalised managerial procedures.

China is currently aiming to transform its growth model toward a more sustainable, inclusive and environmentally friendly pattern. Investing abroad is a valuable channel for realising this transformation. It also provides the incentive for the deepening of SOE reforms and for improving the competitiveness of China’s domestic private firms. Based on the experience of Chinese economic development, the key principles of gradualism, decentralisation and market-driven engagement should ensure that Chinese ODI takes on the best ‘Chinese characteristics’, and leaves behind the rest.

Dr Huiyao Wang is the inaugural Director-General at the Centre for China and Globalisation, Beijing.

Bijun Wang is a doctoral candidate at the China Centre for Economic Research, Peking University, Beijing.

Their research was presented at China Update 2011. The annual China Update conference is hosted by the China Economy Program, in collaboration with the East Asia Forum, at the ANU in July.

This article is a digest of their chapter, ‘Chinese Manufacturing Firms’ Overseas Direct Investment’, in Jane Golley and Ligang Song (eds), Rising China: Global Challenges and Opportunities (ANU E Press, 2011), available in pdf here. This book is the latest publication in the China Update Book Series, launched at the China Update conference every year.

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2. What will appreciation of the Chinese yuan do to China’s inward and outward direct investment?
3. Traps for Chinese investment overseas

Despite several years of solid growth in China’s domestic household consumption, as a share of GDP this sector has declined from around 55 per cent in the early 1980s to around 34 per cent in early 2011.

China’s 12th Five-Year Plan clearly indicates that increased domestic consumption is a major economic restructuring target, and key to achieving this goal will be reforms within the financial sector and policy on healthcare and the environment.

China’s financial system is beset by problems that curtail domestic household consumption. Beijing has consistently made poor lending decisions for its state-supported projects over the past decade, a fact which has inevitably propagated non-performing loans (NPL). Beijing has thus established a number of state-run asset-management companies and injected large amounts of foreign currency reserves into the ‘Big Four’ banks, to ensure recapitalisation. But it is Chinese households that are ultimately left to clean up the mess of NPLs, and this through a number of means.

First, by transferring huge amounts of resources to pay for expected losses on NPLs, bank regulators have captured a significant portion of Chinese income that could have funded consumption. Second, regulators have mandated a wide spread between deposit and lending rates. The policy aims at keeping both lending and deposit rates low; the first to slow the growth rate of NPLs and the second to ensure bank profitability. Consequently, Chinese savers are forced to accept brutally low returns on their savings, which also serves to constrain household consumption. Third, bank authorities force down the lending and deposit rates in order to address NPLs and to spur investment; and considerably low deposit rates effectively provide incentives to Chinese households to save more and consume less.

Considering Chinese investment is fully financed through domestic savings, household consumption will likely increase with banking-system reform and by relinquishing control on interest rates.

Underdeveloped consumer finance is another issue currently repressing household consumption. Increasing access to and use of consumer credit would stimulate consumption, and if China can expand the use of mortgage credit, educational financing and other consumer finance, a surge in consumption would be possible.

Equally, there can be great difficulty and expense in accessing China’s healthcare system, and while total healthcare spending in China has risen to about 5 per cent of GDP, the government’s share of expenditure has fallen. Poor-quality healthcare provision often drives rural inhabitants to seek better services in urban regions. But the high cost of healthcare in large cities has resulted in a rising number of people being priced out of treatment. Concerns about the affordability of healthcare and the potential for future illness, combined with the lack of any effective social protection scheme, mean Chinese households plan well ahead for future expenses.

But if China can achieve the twin aims of significantly increasing overall government expenditure on healthcare while also limiting related household spending, it could reduce financial strain on Chinese citizens, thus decreasing precautionary savings and increasing consumption.

The government has also introduced initiatives to tackle environmental problems caused by China’s rapid industrialisation and urbanisation — but pollution, drought and flooding remain serious concerns for their impact on public health.

In Chinese mega-cities, air pollution has caused non-communicable diseases (NCDs) such as lung cancer and asthma. Importantly, the explosive increase in the number of people with at least one NCD has led to a reduced ratio of healthy workers and implies more urban dwellers using costly hospital care for longer periods of time. And low-income inhabitants are often lacking in or have limited access to quality healthcare if they develop an NCD. Consequently, these sectors of the population tend to accumulate precautionary ‘excessive’ savings for future healthcare spending.

Increasing public concern means these environmental issues (and others) have gradually received more attention in Chinese society. And with environmental reform, Chinese citizens will lead healthier lives in the medium and long run. True, environmental reform might have some negative impacts on consumption growth in the near term; the introduction of an environmental tax could impose extra financial burden on consumers, and consumption growth would likely decrease by 0.38–1.39 per cent.

China’s best bet is to implement bold reforms to encourage a new wave of consumers. Otherwise, there are still significant costs, which are borne one way or another by the country’s households. Keeping this system would only make it more difficult for China to achieve a consumption-driven economy.

Yuhan Zhang is an International Fellow at Columbia University and former Researcher at the Carnegie Endowment for International Peace.

Lin Shi is a Research Assistant at Columbia University and Consultant at the World Bank.

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The time has come for India to realise its potential as a major destination for foreign direct investment (FDI).

Forbes puts India at 77th place — ahead of China at 90th place — in its 2010 list of the best countries for business. Equally, the UN Conference on Trade and Development report World Investment Prospects Survey 2010–2012, and the AT Kearney FDI Confidence Index 2010 rate India as the second most promising country for investment and business.

This is not surprising given that India has not only survived the global financial crisis, but also revived its growth rate, which has been close to 8 per cent in recent quarters. Yet India receives lower FDI than other emerging economies such as China and Brazil.

As noted in the 2011 World Investment Report, India received $25 billion in 2010, against China’s US$105 billion and Brazil’s $48 billion. When FDI inflows to emerging countries revived after the global financial crisis, India lost out due to a lack of reforms and low investor confidence. The report also observes that India’s global ranking as a destination for FDI fell from 8 to 14. In addition, much of the $36 billion-worth of FDI in 2009 was directed to the real estate sector, with hardly any investment going into manufacturing or the services sector. To some extent, then, FDI continues to elude India. In fact, FDI to the South Asia region as a whole declined to $32 billion, reflecting a 31 per cent slide in inflows to India and a 14 per cent drop for Pakistan, the two largest recipients of FDI in the sub-continent. In India, the setback in attracting FDI was partly due to macroeconomic concerns, such as a high current account deficit and inflation, as well as delays in the approval of several large FDI projects.

China has reached the stage where signs of overheating loom large, and there is a concurrent increase in the overall cost of production in the economy — largely in regards to labour. India is thus well placed to attract FDI, particularly in manufacturing. FDI in manufacturing, as in China, will help productivity growth, improve export competitiveness and create employment opportunities for a huge semi-skilled labour force. Yet the government does not have a priority list of sectors where it wants FDI. Though India has formulated a manufacturing policy to facilitate the share of FDI to 15 per cent of GDP, policies toward land acquisition, environmental factors and infrastructure financing are yet to be made sufficiently clear and investor-friendly.

FDI reforms in India have been progressive and successful at the macro level. According to The Hindu’s Annual Survey of Industry 2011, a positive aspect of Indian FDI has been the increase in the share of export-oriented FDI, particularly in automobiles, auto components and products using embedded software. India has emerged as an auto hub due to investment from foreign multinationals such as Peugeot, Hyundai and Nissan. The decision by major global power equipment firms to set up production bases in India to cater to domestic demand proves that India is an attractive destination for FDI. The plus point is that the majority of FDI is domestic market-seeking and there is no export obligation for foreign investors. This is contrary to China’s FDI policy, where export obligation is mandatory for foreign investors.

Still, FDI inflows have remained low compared to other emerging markets. The important factors that impede these flows are lack of infrastructure, restrictive labour laws, absence of centre–state coordination, a dormant Special Economic Zone policy and a lack of institutional reform. Cost and time overruns due to contractual and institutional failures are also major obstacles, and are often caused by a lack of coordination among central and state government departments on land acquisition and environmental clearances.

It is time to implement policy reforms at both the macro and micro level to send a clear message that India is serious about attracting FDI. In this context, big ticket reforms like FDI in the retail, financial and insurance sectors, and labour laws, will help boost investors’ confidence in the Indian economy. These reforms are all the more important at present as there is capital flight out of the Indian economy because of anxiety over the European sovereign debt crisis. The combination of the crisis in Europe, the down-grading of the US economy, negative growth in Japan owing to the recent natural disasters, and the fact that China is overheating presents an opportunity for India to send the right signals to foreign investors by carrying out all pending reforms. India needs to make a statement that it is a safe haven for investors. It must take control of its macro fundamentals and carry out policy reforms in key areas. A strong political will in this direction is long overdue, and would give a much needed boost to the Indian economy.

Dr Geethanjali Nataraj is a Research Fellow at the National Council for Applied Economic Research, India.

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2. India-Japan CEPA: A strategic move
3. Can India and America up their investment game?

Structural impediments hindering US investment in India will grow if, as many economists suspect, India’s growth continues to slow from its restored post-crisis clip of 8–9 per cent a year to something more in the order of 7–7.5 per cent.

In that context, it is worth noting that Indian stocks recently completed their worst quarter since 2008. And of course food price inflation remains as stubborn as ever. My argument reflects in part a perspective from my new perch in Chicago rather than my old one in Washington, DC.

Nirupama Rao, India’s new ambassador to Washington, says that India is open for business, and the good news is that many in the US agree with her.

Bilateral trade has grown rapidly, more than doubling from 2004 to around US$60 billion in goods and services trade in 2009. The investment story is positive too. In 2008, US FDI in India was US$16.1 billion, a 10.8 per cent increase over 2007, while Indian FDI in the US totalled US$4.5 billion, a 60.4 per cent increase from 2007. As a US official in the Bush administration, I embraced these trends. Expanded trade and investment can both diversify and solidify a partnership to which both governments are deeply committed. That means bilateral initiatives to unlock an investment treaty, free up trade, grant visas, streamline the investment process and remove regulatory barriers. Such initiatives can matter greatly to the trajectory of trade.

But last month, I left Washington after 10 years and moved to the American heartland. Moving from Washington to Chicago, I am struck by how a change of scene can yield a change of context. Yes, macro policies matter. But living in a business city, not an ‘official’ one, you get a different perspective on just how much of an advantage India could derive from structural reforms. Chicago likes India a lot — and, by the way, the sentiment is mutual. An India business forum last month attracted the new mayor, Rahm Emanuel, along with commerce and industry minister Anand Sharma and a few dozen companies. But the Midwest is an agribusiness centre. And so there are limits to the scope and scale of how far investment can go in the absence of change to India’s supply-chain processes and infrastructure.

Government economists and bureaucrats increasingly believe that the sharp and sustained rise in India’s food price inflation since 2008 is a consequence of structural increases in income and consumption brought by rapid growth. Investment should rise to the extent that debate reopens in India about more liberal policies for FDI in all segments of the food supply chain. Examples include investment-friendly reforms to boost crop yields, heighten competition in the procurement of food from farmers, better develop the food processing industry, encourage investment in warehousing and cold storage chains, liberalise trade in agricultural products, and support the growth of modern retail. But several other issues, well known and much debated in India, matter to American business too.

First is growth. Will it be fast enough amid the current domestic slowdown to sustain the requisite levels of demand in India’s internal market? And second is demand. India’s economic expansion has been driven fundamentally by internal consumption. But will India’s internal market be big and affluent enough to make it a sufficiently attractive investment destination? The question is especially relevant because domestic demand trends are shifting elsewhere in Asia. Take China: Chinese planners are setting into place measures aimed at promoting internal migration and urbanisation, continuous income hikes and virtuous investment cycles to spur higher value-added manufacturing. The political barriers are high, but China is likely to achieve a consumption windfall.

In Southeast Asia, too, consumption is already robust in the big economies and growing among exporters and frontier markets. Manufacturers like Vietnam are pushing up from the bottom, leading others like Thailand to increasingly aim at higher value-added manufacturing that could spur consumption. In Indonesia, consumption already accounts for as much as 70 per cent of GDP. One question for India will be whether it lags in public goods provision, or on other reforms that could expand consumption in its domestic market.

Third is manufacturing. Will India win as Asia’s geography of manufacturing changes? India is well positioned to play a larger role in investors’ thinking about Asian supply chains. The national manufacturing policy could yield new manufacturing zones with industrial parks, warehousing and opportunities in special economic zones. An India with a 25 per cent share of manufacturing in GDP would be a vastly different investment proposition from one in which it lags at around 16 per cent. Nor does India need only to compete at the bottom of the value chain. It could aim to compete in machinery or auto parts through the adoption of new policies at the state level. But Indian manufacturing and labour reforms are lagging behind other investment destinations in Asia. And such policies could falter on land acquisition.

Fourth is infrastructure. Roads, rails, ports and airports steal headlines. But pricing reforms are especially relevant for the trajectory of US investment. Power tariffs in India are much higher than in China and reforms to tax infrastructure have stalled.

Fifth are sectoral issues. Traditions of political contestation bind Indians and Americans together. But from the standpoint of US investors, contestation has compromised the final version of at least some Indian reforms. Multi-brand retail is an example of a reform that ultimately may not lead to serious investment. The same is true of insurance and the nuclear industry.

Last is political risk. India is attractive to US investors because its democratic institutions enjoy a high degree of political legitimacy. But how will investors navigate players with whom they cannot easily negotiate — for instance, non-governmental organisations? Service delivery and administrative reforms set investment destinations apart.

Such steps appear very much in India’s self-interest, not as a ‘deliverable’ in an official relationship with Washington.

Evan A Feigenbaum is Adjunct Senior Fellow for East, Central and South Asia at the Council on Foreign Relations.

A version of this article was first published here at the Business Standard.

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2. China’s risky investment game
3. Is India in need of a new investment policy?

The global economy has another serious bout of the jitters around the deep problems in Europe and uncertain recovery in the United States.

The IMF meetings in Washington may have temporarily allayed the effects of the collapse in global confidence but there remain big challenges for the G20 in developing a response to the threat of the world’s slipping back into recession.

The manifestly inadequate response to the problems of some EU economies means that the prospect of a severe new financial shock is real, the future of the Euro is far from assured and confidence is fading, with many predicting up to a decade of weak growth or worse.

The self-imposed crises in the US and the EU have destroyed the capacity of industrial economies to contribute to global growth in the short term. China’s options are also problematic, with policy makers in Beijing increasingly worried about inflation China is will find it difficult to respond with an immediate, massive domestic stimulus, as it did in the 2008 paroxysm of the ongoing financial crisis.

Most economies need to undertake significant structural adjustment if there is to be rising productivity and sustainable long-term fiscal and external balance. But far too many governments have committed themselves, prematurely, to fiscal austerity at a time of deficient global demand, damaging prospects for sustained recovery in developed economies.

In the short-term, there will be enormous tensions as the relative economic weight of emerging economies grows apace. This is a defining moment for the G20, one that will either demonstrate or destroy its capacity to be an effective steering committee for the global economy.

The perverse reality is that, even at a time of deficient global demand, the savings of emerging economies, most of which are generated in Asia, are being intermediated chiefly in the financial markets of New York and London. These savings are then invested largely outside Asia with a significant part lent to governments of already heavily-indebted developed (usually western) economies to finance their fiscal deficits. This money can be put to better use.

The potential for profitable investment in economic infrastructure is enormous. The OECD has estimated global infrastructure requirements to 2030 to be in the order of US$50 trillion. Much of this demand is in Asia, also the primary source of these savings. China may be facing a temporary problem of over-heating, but its stock of capital relative to population and income is low. India and Indonesia offer vast scope for investment infrastructure. The US also needs to make large investments to rehabilitate or extend its economic infrastructure. More generally, global investment is a historically-low share of global output.

A concerted effort by all members of the G20 to make better use of global savings will allow them to work constructively to solve a shared policy problem, rather than blaming each other for too little growth and too many exports.

A G20 effort to deal with this policy issue can become a significant ongoing part of its international macroeconomic agenda: even a partial solution can begin to realise the potential for a sustainable and significant boost to global demand and production.

China and India are already investing more of their savings in infrastructure than in financing developing country debt. ASEAN governments have created an ASEAN Infrastructure Fund. From a modest base, the Fund can be leveraged to make a major contribution to removing domestic bottlenecks and accelerating integration towards an ASEAN Economic Community.

Many more opportunities await financing. Deeper and more liquid capital markets in emerging economies would certainly help. The International Bank for Reconstruction and Development (now known as the World Bank) was able to boost large-scale infrastructure investment after World War II at a time when international financial markets were far less well developed than they are now, suggesting that developing economies are in a good position to expand their infrastructure investment steeply.

The World Bank and regional development banks can all step up their roles. They can be sound borrowers of emerging economies’ savings; they can invest them in productive projects, including projects to improve connectivity among Asia’s economies. Commercial banks can also do more in credit-worthy emerging economies. The solvent economies of the world could create significant additional vehicles for infrastructure finance.

There will be some risks. One or two governments may act irresponsibly and make a mess of some investments. But most investments in infrastructure will prove to be viable. There is a lot of international experience on designing public–private partnerships and shaping policies to set prices and to contain project risks within acceptable limits. And the risk of some projects being less successful than expected is far less than the risks of prolonged recession.

The G20 can move quickly in this direction. Boosting infrastructure in low income countries is already one of the top priorities of its development agenda. G20 leaders have appointed a High-Level Panel on Infrastructure to advise on improving the institutional and enabling environment for investment in infrastructure, and innovative ideas for financing infrastructure projects with significant but delayed returns to investors.

The Panel’s present brief is to focus on badly needed infrastructure in some of the world’s most difficult investment environments, especially sub-Saharan Africa. That focus is too narrow. The issues of institutional capacity and innovative financing and risk management need attention everywhere. The Panel’s terms of reference need to be widened and G20 leaders need to challenge their officials, financial sector managers, and international financial institutions to use their expertise to find ways to intermediate more savings to finance commercially-viable investment in infrastructure where it’s needed.

With a bold development and global infrastructure investment agenda, the 2011 meeting of G20 leaders could restore confidence in recovery. This will require going beyond merely containing financial shocks emanating from Europe to leading the way on long-term investment-led global recovery.

Andrew Elek is a Research Associate at the Crawford School of Economics & Government, The Australian National University. 

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French mining company Eramet is increasing its investment in nickel mining in the eastern Indonesian region of Halmahera, North Maluku.

The project enjoys strong political support but faces criticism over the potential negative impacts it may have on local communities and on the environment. President Yudhoyono recently met with Patrick Buffet, Chairman and CEO of the Eramet Group. Buffet explained that Eramet will spend US$450 million for the project’s development, and will invest up to US$6 billion on the entire project.

Indonesia is rich in minerals. It is the world’s second-largest producer of tin and nickel and the fourth-largest copper producer. The mining industry accounted for 10.8 per cent of Indonesia’s GDP in 2009, with minerals and related products constituting one-fifth of the country’s total exports. But Indonesia’s heavy reliance on natural resources to boost its economic growth may mislead the interpretation of ‘true’ increases in its social welfare. GDP growth based on the exploitation of natural capital can disguise an unsustainable decline in resources. The government and companies who exploit natural resources often fail to reinvest the resource rents generated. When rents are not effectively invested and the natural resources are not replaced with human-made capital to form the basis for future development, growth is unsustainable.

A classic example of a struggle to manage the exploitation of natural resources is Freeport, which has operated the largest gold mine on earth in West Papua, Indonesia, since the 1960s. Despite various allegations that the company was involved in human rights violations and environmental degradation, it gained political support from the New Order government by paying a modest portion of its earnings in the form of taxes, dividends and royalties. The initial contract started in 1967, and was meant to end in 1997. But in 1991 Soeharto’s government renewed it and then extended it for another 30 years, and allowed Freeport to obtain two ten-year extensions. Freeport’s contract will now end in 2041.

Despite the progress of democracy and continuing criticism from opposition parties and environmentalists, there seems to be no significant change in the way the Indonesian government deals with foreign companies’ intervention into Indonesia’s resource sectors.

Indonesia’s Chief Economic Minister Hatta Rajasa, after the meeting between the Eramet chief and President Yudhoyono, said that the project was part of the MP3EI Corridor 5 Development Plan. The Development Plan is designed to boost Indonesia’s GDP to approximately US$4.5 trillion by 2025. The government has identified six regions as economic corridors, with Papua and Maluku engaged in mining and fisheries. As part of the government’s ambitious Development Plan, Eramet’s nickel project clearly benefits from strong political support.

Under pressure to benefit local communities, Eramet will develop support facilities, including power and water treatment plants, and will use environmentally-friendly technology. Eramet has also managed to gain support from the World Bank by getting a US$207 million ‘aid’ guarantee to support the exploration and pre-construction phases. The World Bank’s support is condemned by environmentalists who argue that the project will destroy a large area of protected forest. Mine waste also threatens massive contamination of streams, rivers and the ocean in Weda Bay.

The opening of a new site will always provide job opportunities. But many of these positions will offer high salaries to skilled workers, so their requirements can only be met by graduates from the top universities in Indonesia, mainly from Java Island. There is little chance for local people to compete for these jobs. That the main occupations of local people are fishermen and farmers further implies that environmental degradation would adversely impact their income.

Conflicts between local people and the mining companies in Halmahera have been recorded multiple times, and the military is often required to secure the mining areas. On top of a series of inter-religious conflicts in Maluku, this nickel project will increase tension in the region, and leave a huge task for the government to ensure that the project benefits local communities. Whilst regulations to ensure sustainable and community-based development already exist, problems of law enforcement and the government’s political resolve remain.

Risti Permani is a Postdoctoral Research Fellow at the School of Economics at the University of Adelaide. 

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A recent publication in Nature Geoscience, announcing the detection of significant deposits of rare earth elements in the seabeds of the Eastern and Southern Pacific Ocean, has resulted in media outlets reporting the deposits are ‘readily extractable’, the BBC reporting the deposits could be as large as 100 billion tons.

Such optimism is unwarranted, and the veracity of these media reports cannot be established, at least from the actual July paper which in fact avoided such bold claims. A careful reading would show that the Japanese researchers were quite modest about their findings. The most promising result came from samples of Site 1222 which showed that the potential area could contain enough rare elements to ‘possibly’ meet the current global demand for these commodities. The figure of 100 billion tons was not mentioned in the published paper. And even though the seabed might contain rich deposits many significant obstacles to extraction remain.

When discussing the extraction of any commodity, the concepts of geographical and geopolitical distance need to be considered. In terms of geographical distance, these deposits are located in the seabed 4–5 kilometres below the sea. They are also located in international waters, hundreds of kilometres from land. And even though the seabed might contain these resources, it may not be economically viable to undertake any large-scale extraction, keeping these deposits tantalisingly out of reach.

But with the development of new equipment and technology, it might be possible in the near future to develop economically-viable methods to extract these resources from the seabed. Although in this case geopolitical distance may well prove to be a major obstacle. Situated in international waters, outside the exclusive economic zones (EEZ) of any countries, it would be difficult and very time-consuming, if at all possible, to come up with an equitable formula to divide up the extracted resources. Even though Japanese scientists discovered this potential mother lode of rare earths, this does not mean Japan is able to call dibs on them. To put the matter into perspective, recent Japanese efforts to extract minerals from the seabed in their EEZ have already drawn the ire of their Chinese counterparts, disputing Japanese claims of legal jurisdiction over the area.

Given the heightened global demand for rare earth elements, as well as the increasingly-unstable Chinese supply, many states are seeking access to alternative sources, and this recent discovery is going to draw attention. Any move to extract these resources are bound to draw protests from other interested actors and open up a new front in the competition for resources, thereby increasing international tension. It is also not uncommon for disputes over natural resources or EEZs to draw a very strong nationalistic response. For instance, in August 2007 Russia planted their flag on the Arctic seabed so as to cement its claim over the area. Expectedly, this provocative action was not well-received by the other claimant states, who naturally wanted to retain the freedom of being able to extract such resources in the future.

As it is, current evidence does not indicate that any concerted action would be taken by states to extract rare earth from the seabed. Apart from the issues of geographical and geopolitical distance, the interest in and prices of rare earths are high because supply is limited. Any major increase in supply will depress global interest as well as prices. Given that major consumers of rare earths such as Japan and South Korea have already embarked on ambitious projects to extract and refine rare earths in various countries prior to this recent discovery, it is highly unlikely that they want to see the rapid depreciation of their new investments by pushing for seabed extraction.

Lastly, the WTO has also recently released its ruling that China’s restrictions on the exports of certain forms of bauxite, coke, fluorspar, magnesium, manganese, silicon metal and zinc contravened the WTO’s Accession Protocol, which establishes a precedent for other states to challenge China’s restrictions on rare earths exports. A successful challenge would result in more Chinese exports, thereby removing any incentives to extract resources from the seabed, at least for now. Thus, for the time being, it seems that any dreams of extracting rare earths from the Pacific can be put to bed.

Ming Hwa Ting, PhD., teaches at the University of Adelaide. He was most recently interviewed by ABC National Radio on the reasons behind China’s unexpected relaxation of its rare earth exports in H2-2011. The interview and transcript is available here.

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The feasibility of India giving credit worth billions to other nations was unthinkable a decade ago, but thanks to a resurgent economy, India has recently moved from being a recipient to a benefactor.

This differs from the earlier ‘protectionist’ approach. Encouraged by a confident government, but also seeing opportunities on its own, the Indian private sector is getting involved in foreign investment and pushing the government to engage with Africa more consistently and to expand its network. Like investors from other emerging economies, India sees Africa as an important supplier and customer to drive growth. As India generates and absorbs hi-tech, it is ready to transfer intermediate technology more suited to developing economies, and invest, even though returns are not going to be large or fast.

Last month, India took significant steps to engage economically with the whole African continent of 53 nations. Re-working plans rolled out in New Delhi in 2008, the Second India-Africa Summit in Addis Ababa was a landmark development. Indian Prime Minister Manmohan Singh pledged US$5 billion over three years in development support, US$700 million for 80 new institutions and training programmes and US$300 million for an Ethiopia-Djibouti railway line.

The Summit declaration announced that ‘Africa is determined to partner in India’s economic resurgence as India is committed to be a close partner in Africa’s renaissance’. The African Union also came out in support of India’s claim for a permanent seat in the United Nations Security Council.

Prime Minister Singh also unveiled a gift package for Tanzania, which included US$191 million in credits and grants for development projects and a 300-bed hospital to be set up by the India-based Apollo Hospitals.

India’s state-run oil firms have already invested in countries including Nigeria and Kenya. Coal and diamond firms have invested across Africa. New embassies in Niger and Malawi have been opened to assist firms with securing uranium for India’s fast growing nuclear power industry.

India is keen to leverage its global expertise in the information technology, agriculture and human resource sectors in African countries, many of which face similar developmental hurdles to those India is grappling with.

Last August, India launched the second phase of the African e-network project. The stated aim of the project is to connect all members of the African Union via a satellite and fibre optic network. The project is equipped to support e-governance, e-commerce, infotainment, resource mapping, meteorological and other services, as well as providing VVIP connectivity among heads of states of the African countries through a highly secure closed satellite network.

Over 1,700 African students have already registered with Indian universities for tele-education courses. Regular tele-medical consultations have started between African doctors and Indian specialists through this network. Nearly 700 tele-lectures have been delivered by Indian doctors.

India is also keen to trumpet its cultural links with African countries, citing a shared history of imperialism and trade routes established centuries ago. The two million Indian diaspora in Africa engage in teaching, business and have contributed to the industrialisation of many nations.

Various comparisons with China, who moved in well after India, but has forged way ahead, are inevitable. India was relegated to the sidelines when China arrived in Africa seeking resources and energy, and offering financial riches New Delhi could not match.

China boasts foreign exchange reserves of more than US$3 trillion, 10 times India’s US$307 billion, and has aggressively used state owned development banks to invest heavily in oil, gas and other resource industries across the continent.

Total trade between India and African countries stood at US$46 billion last year, still less than half of China’s US$108 billion in 2008, but a huge increase on US$3 billion in 2000-1. India hopes to boost this to US$70 billion by 2015.

After losing a series of bids for oil rights and infrastructure projects to China, India has embarked on a new approach to Africa that blends trade and investment with development economics.

‘India’s approach is reciprocal, expecting access to resources in exchange for developing technology and training Africa’s human resources. That’s how India is different from other foreign powers,’ says Suresh Kumar, head of Delhi University’s African Studies Department. India’s thrust rides on its private sector. With China, it is state-to-state, even if the investors are private companies.

Former Indian foreign secretary Muchkund Dubey dismisses the India-China rivalry talk as ‘negative’. A degree of competition yes, but he says there is enough space for both to operate in Africa.

Mahendra Ved is a New Delhi-based writer and columnist.

1. China’s and India’s growing investment and trade with Africa
2. IBSA vs BRICS: China and India courting Africa
3. China and Africa: friends with benefits

Chinese outward foreign direct investment (FDI) has surged since 2003.

In 2010, China’s FDI reached US$57.9 billion, nearly 20 times 2003 levels, and accounted for over 5 per cent of global FDI. Since 2007, Australia has become one of the world’s largest destinations for Chinese FDI.

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.

1. Chinese FDI and corporate governance
2. Corporate governance reform in Korea
3. FDI and corporate governance in Japan

With China’s hunger for resources, its mining ventures into the Pacific continue to expand. With the discovery of vast tracts of copper deposits in New Britain, there are likely to be new investments in PNG undertaken by Chinese state-owned enterprises, quite possibly in partnership with Australian mineral exploration companies.

To date, China’s flagship project in the Pacific islands has been the Ramu nickel and cobalt mine, a US$1.4 billion investment in PNG’s Madang province managed by the China Metallurgical Corporation (MCC), in partnership with Brisbane-based Highlands Pacific.

The project has found itself stalled in the courts since March 2010, and it awaits final approval to proceed with plans to dispose of tailings in Astrolabe Bay. In 2009, the Basamuk refinery site saw a riot between PNG and Chinese workers, triggered by lax safety procedures and communication barriers. Controversies over the migration status of Chinese workers, health, safety and labor issues have been ongoing, spawning a strident and popular blog that now covers all mines in PNG.

Australian and international companies have acquired a reputation for damaging the environment and local communities. This was seen most spectacularly in Bougainville and Ok Tedi, and more recently in revelations of human rights abuses at Barrick’s Porgera mine; but nothing of comparable scale has transpired in Madang.

China’s involvement in Ramu may mean its development will differ from other mines. But there is danger in treating ‘Chinese’ enterprises as monolithic propositions and neglecting the variations found in different communities in the Pacific, as well as denying the significant role of local agency in interactions with powerful international actors. Much of what has unfolded in Madang is specific to both the structure and corporate culture of MCC, factors peculiar to the local communities at the Kurumbukare mine site and the Basamuk refinery site, and the weakness of provincial and local government in Madang.

The background of MCC and its Engineering and Non-Ferrous Institute (ENFI) contractors in infrastructure has been a strength and weakness. It has allowed much of the hardware (including a 134-kilometre pipeline to carry the ore slurry) to be built ahead of schedule, but emphasis on meeting construction deadlines has led to disputes with local communities that have been left unresolved long after the responsible ENFI contractors have returned to China.

As with all mining projects in PNG, Ramu has found itself caught up in complex local landowner disputes, most of which arise whenever a mining company shows up, regardless of its nationality. The levels of expectation that have built up around this project (the exploration lease was issued five decades ago), the haste of construction, and the PNG state’s lack of institutional capacity to resolve disputes regarding who is entitled to receive landowner benefits have exacerbated these disputes.

One notable characteristic of the Ramu project is the propensity of both the Chinese and PNG governments to view it as a ‘state-to-state’ matter, leaving provincial and local governments and landowners sidelined. At first, this approach appeared to be to the benefit of MCC, delivering a 10-year tax holiday, a zero rating on value added tax during the construction phase, and a framework agreement which passed much of the sovereign risk to PNG.

Ramu Nickel’s preference for dealing with the PNG central government arose partly from MCC’s identity as the offspring of the Ministry of Metallurgy, and partly from the lamentable state of political leadership in Madang, which during the negotiation phase entailed a succession of flawed governors who went straight from the provincial government to the lockup. The 2008 PNG National Economic Fiscal Committee Report found Madang to be in the bottom three of PNG’s 18 provinces in terms of service delivery.

But having to rely on PNG’s Somare government has ultimately disadvantaged MCC, the PNG central government having failed to deliver on many projects in the Memorandum of Agreement, and shifting the blame for changes to the Environment Act to MCC — even though government agents primarily drove these changes.

Still, MCC management’s reluctance to engage with local government, civil society and landowner groups led to the court action that has delayed construction for a year; mistakes which future Chinese investors may learn from. While MCC is often described as a ‘giant’, future Chinese investors may bring more in the way of state largesse; in September 2009, the chairman of MCC, Shen Heting, memorably described the level of state support for MCC’s overseas ventures as ‘one hair of nine buffaloes.’

Other elements of Chinese exceptionalism that future projects will face are extensive use of Chinese labour, low wages paid to local staff, and communication problems between the two workforces. A tendency to keep wage costs tight extends to Chinese employees, who only receive 20 per cent loading, and two months of holidays per year — far less than comparable mining companies.

This is an extension of how these companies operate domestically, rather than a strategy devised for PNG. In China, wages share of GDP is below 40 per cent, having dropped more than ten percent between 2000 and 2007 (ILO figures put the wage share at 63.7 percent in the US and 56.7 percent in Australia). Pacific nations will face pressure from Chinese companies to make their labor regimes more flexible, as Julia Gillard discovered when Shen Heting called on her to scrap the English language test for migrants to Australia.

To make the best of future investments, Chinese or otherwise, PNG actors could heed the advice of John Momis — PNG’s former ambassador to China and now President of the Autonomous Region of Bougainville — and push for joint ventures. This will allow for real input from local partners and provide funding for the local state to deliver services, rather than expecting mining companies to become the state.

Dr Graeme Smith is a Postdoctoral Research Fellow at the China Research Centre, University of Technology Sydney, and a Visiting Fellow at the State, Society & Governance in Melanesia Centre at the College of Asia and the Pacific, Australian National University.

1. North Korea’s mining prospects
2. Indian mining ban will cripple economy
3. Chinese investment in Mongolia: An uneasy courtship between Goliath and David