Chinese overseas investment

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Chinese overseas investment



Contents

Introduction

1. General description of FDI

2. Theoretical background

3. Rise of Chinese ODI since the early 2000-s

4. State policies related to outward investment

5. S&T infrastructure development

6. The share of investments in created assets in the total number of ODI

7. Chinese ODI from the perspective of the OLI paradigm

Conclusion

Abbreviations

Charts, graphs, histograms, diagrams

References

Sources



Introduction

This paper is devoted to the topic "Chinese ODI and the State: the OLI Paradigm Perspective" and is aimed to define the nature of the state-company interaction in the context of the Chinese outward investment. The main points are that the Chinese government may intensify economic development by pursuing two main kinds of policies, - shaping the direction of outward investment and establishing domestic S&T structure, - being a leader on the initial stage. Thus, the subject of the study is the Chinese ODI, while the object is the state-company interrelation from the perspective of the OLI paradigm, chosen as the basic theoretical approach.

Considering the fact that Chinese ODI is a new phenomenon in the global economy and its nature is still ambivalent, researches over the issue are not complete, especially in the area of the role of state in the ODI. But the very trend of rising ODI is very significant both for the Chinese and global economy, and the developments in this sphere may have strong influences on both domestic and foreign economies. Furthermore, new data over the issue is continuously emerging, showing volatile structure, rapid changes and new trends. That is why underlying reasons behind this trend should be more clear for academic, business and political communities and further elaborations and researches are critically in need.

There are following aims, posed in the given paper:

1. To define FDI as a phenomenon and major theoretical approaches to it, their advantages and disadvantages;

2. To define major features and trends in the overall pattern of Chinese ODI;

3. To define main features of the Chinese S&T structure;

4. To depict current place of created asset-seeking ODI and its possible future developments by defining its importance for the Chinese economy in general and current trends in particular;

5. Based on these findings to elaborate on the issue of the state-company interaction in boosting ODI as a major tool of rising national competitiveness.

According to the aims the structure of the paper is constructed. First, the general description of FDI and theories related to it are explicated. Second, the general structure, main trends, obstacles of Chinese ODI are described. Third, Chinese S&T policy and private companies' aspirations for new technologies are shown. Forth, created asset-seeking investment are depicted on two different levels, - large as well as small and medium enterprises, because the data is different for these two scales, - their dynamics, features and possible future developments. Fifth, the link between the state and companies is considered from the perspective of the OLI paradigm.

The basic research methodology used in the paper is qualitative research which is based on the data taken from various surveys, statistical databases and calculations, as well as on analyzing corresponding state policies. Through the assessment of the current developments in China's outward investment pattern, S&T and policies facilitating domestic companies' internationalization the major assumptions of the paper are proposed.

The historical framework of the research is as it follows - the starting point for the processes and trends, depicted in the given paper, is the outset of the 21th century, as the most of them have manifested exactly in this time being quite recent. That is why any previous dynamics are just slightly considered.

The literature on the theory if foreign investment is immense, as the first researches over the issue emerged in the 1920-s. In the course of time different approaches were emerging, interacting with one another and developing along with the development of the very phenomenon of foreign investment. To date there are several viable theoretical explanations, among which the OLI paradigm designed by Dunning J. was chosen as the most appropriate. His book "Multinational Enterprises and the Global Economy" reveals the final revision of his theorizing and is actively used throughout the paper along with a number of his other articles which shed light the given approach. Besides, special attention was paid to the miscellany called "Foreign Direct Investment and Governments: Catalyst for Economic Restructuring" edited by Dunning and Narula, where the concept of the investment development path is fully elucidated.

The literature over the issue of Chinese ODI is not rare and there are many researches dealing with it. But the problem is many of them are quite general in their nature, and only a few deal with concrete facets of Chinese ODI phenomenon from any theoretical perspective. The most important authors are Wang B. "Upgrading China's Economy through Outward Foreign Direct Investment", Wang B., Wang H. "Chinese Manufacturing Firms' Overseas Direct Investment: Patterns, Motivations and Challenges" and OECD surveys "Investment Policy Reviews - China", "Reviews of Innovation Policy - China", which provide with very important findings, data, assessments and interpretations. Besides, a research by Zhou N. et al. "Overview of Current Energy Efficiency Policies in China" was used to describe environmental policies in China, which seem to be crucial in the context of the overall technological development.

For statistics different sources were used: the Heritage Foundation data (where only the investments over 100 million USD level are considered), UNCTAD, MOFCOM, "China's Science and Technology Statistics" and a survey of SMEs "China Goes Global 2011", "China Goes Global 2013" which provide very unique and interesting data related to small and medium enterprises and therefore deserve special attention.



1. General description of FDI

Foreign direct investment is a phenomenon inherent to the general process of globalization and its influence on the economic structures of different countries is becoming more and more prominent. That is why academic, business and political communities are paying more and more attention to these issues, seeing it as a tool to improve the understanding of the global economy, to increase profits or to further update national economy.

a. Definition of FDI and main actors

According to the OECD definition, FDI or "foreign direct investment reflects the objective of establishing a lasting interest by a resident enterprise in one economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an economy other than that of the direct investor". This kind of transaction means that the former obtains at least 10% of the voting power in the decision making of the latter and is also related to reinvested earnings and inter-company debt. This kind of investment is to be distinguished from the so-called portfolio investment, which are usually directed to buying up financial assets such as bonds, stocks, etc., and are usually less in the amount of the capital invested (under the threshold of 10% voting power) OECD Benchmark Definition of Foreign Direct Investment (fourth edition). - 2008. P. 48-49..

Evidently, the main agents are internationalizing companies, which are referred as MNEs (i.e. multinational enterprises) in the related literature. That is why most of the analytical papers concerned to the issues of foreign investment deal with these entities as the main objects of analysis. They are generally referred as "companies or other entities established in a more than one country and so linked that they may co-ordinate their operations in various ways" OECD Guidelines for Multinational Enterprises - 2008. P. 12.. John Dunning, a distinguished scholar in the field, gives a similar definition - "a coordinated system of value-added activities, the structure of which is determined by the hierarchical costs of production, the market costs of exchange and the interdependence of production and exchange relations"(Dunning, Lundan, 2008b, p. 120). The degree of subsidiaries' autonomy of the parent companies may vary from one such entity to another, but they are expected to co-operate and support one another.

b. Major types of FDI and "Knowledge Capital" model

Despite some disputes among concerned analysts See for example “Shenkar O., Luo Y. Foreign Direct Investment Theory and Application. SAGE Publications Inc., 2nd edition - 2007. P. 61-62”, where conglomerate FDI is pointed out as an additional type., there are two main types of FDI usually distinguished:

1) Horizontal FDI - MNE enters a foreign market to produce and sell the same goods as in the domestic market by establishing or buying up plants in the host country. Two factors are crucial for this kind of FDI to happen: presence of positive trade costs and firm-level scale economies, which stipulates the priority of local production over transportation from the home country. It's also noteworthy that this kind of FDI usually takes place among countries similar in size and factor endowment (Protsenko, 2003, p. 16-19);

2) Vertical FDI - MNE needs a foreign subsidiary to optimize the production chain by supplying certain intermediate goods, raw materials or to produce the final product and production stages are conducted one by one. The major motive underlying this type of FDI is that different parts of the final goods have various production costs among countries due to their comparative factor endowments. That is why it might be profitable to place certain stages of production in other countries. Like aforementioned type of FDI, it can also be considered as a certain trade-off between costs and benefits (Protsenko, 2003, p. 19-22).

The boundaries between these two types are rather obscure and in an attempt to incorporate them into holistic explanation the so-called "Knowledge Capital" model was proposed by Markusen (Markusen, 1996). As it can be seen from the figure below, the boundaries of horizontal and vertical FDI are not strict, but it is evident that the former dominates in countries with similar endowments, while the latter in countries with different ones. At the same time, there are areas in the figure where both types can occur together due to moderate differences in endowment which are knowledge-based, as it can be seen from the figure (unskilled vs. skilled labour).

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Figure 1. Vertical and Horizontal FDI in the KC-model

Source: Protsenko A. Vertical and Horizontal Foreign Direct Investments in Transition Countries. PhD thesis. Ludwig-Maximilians-Universitat, Munich - 2003. P. 24.

Nevertheless, the role of vertical investment in the model has been questioned by some analysts and the disaggregated level approach was proposed. For example, Gцrg H. and Geishecker I. noted, that in the previous empirical estimations of them in the given hypothesis the data on vertical FDI was misspecified (Carr, Markusen, Maskus, 1998), and hence there was in fact significant lacuna, which could be addressed by looking separately at different sectors. The authors show that by investigating apart service and manufacturing sectors helps to avoid this misspecification due to the tangibility of the final products - vertical investments conceptually are more appropriate for the latter (e.g. when a company moves certain parts of its production cycle to an unskilled labour abundant country, while its headquarters stay in the comparatively skilled abundant home country), while horizontal - for the former (Gцrg, Geishecker, 2005, p. 3-7).

c. Underlying motives and modes of implementing FDI

It is broadly acknowledged among scholars to point out four major types of MNE activities, as Dunning and Lundan show in their book "Multinational Enterprises and the Global Economy":

1) Natural resource seekers - these enterprises are inclined to internationalize in order to acquire specific resources which are absent, worse in terms of quality or more expensive on the domestic market. Three main types of resource seekers are distinguished: physical resource seekers, cheap and well-motivated unskilled or semi-skilled labour seekers and, finally, seekers of technological capability, management or marketing expertise and organizational skills.

2) Market seekers - such companies invest in a particular country or region to supply goods or services to markets in these or in adjacent countries. The main motive here is either to sustain or protect existing markets or to explore new ones. Inter alia, unlike other types, market-seeking MNEs are prone to give high level of autonomy to their foreign subsidiaries, which ensures that the latter might be much more responsive to the local needs and preferences of the customers.

3) Efficiency seekers - the main point of this type of investment is to rationalize the structure of established resource-based and market-seeking investment and to benefit from different factor endowments, formal and informal institutions, demand patterns, economic policies and market structures.

4) Strategic asset seekers - enterprises of this kind undertake FDI to obtain desired assets of foreign companies in order to promote their own strategic objectives, which usually are sustaining and improving competitiveness. Such activity is usually geared to acquire physical assets and/or human competences, so that these companies could prevail over their rivals. It may take the form of diversification of the activities which the company is engaged in or diversification of the environment the company is operating in (Dunning, Lundan, 2008b, p. 61-72).

In addition, other additional motives are noted by related analysts, such as escape investments (geared to avoid restrictive legislation or macro-organizational policies of home country), support investments (aimed to improve the activities of the rest of the enterprise) and passive investments (more specific to portfolio investment and are undertaken to earn profits or to gain capital appreciation) (Dunning, Lundan, 2008b, p. 72-74).

There are four major types of entry modes usually used in the related literature:

1) purchase/sale of existing equity in the form of mergers and acquisitions (M&A) -purchasing or selling of the existing equity;

2) greenfield investments - investments geared to establish a new foreign subsidiary from scratch;

3) extension of capital - additional new investments as an expansion of the established business;

4) financial restructuring - designed for debt repayments and loss reduction OECD Benchmark Definition of Foreign Direct Investment (fourth edition). - 2008. P. 87..

The first two entry modes are of the most relevance and according to the latest UNCTAD World Investment Report are of roughly the same level, though the dynamics of the others is larger UNCTAD - World Investment Report 2012. Global Value Chains: Investment and Trade for Development. P. 8..

d. Conclusion

On sum, there are different kinds of investments, which are geared to achieve various purposes, - from ensuring resource safety to enhancing technological capabilities, - that is the main point, why they are undertaken. Thus, the way of exploring global markets heavily depends on the precise purposes of companies - they may prefer to merge with other enterprises, acquire equities or build a completely new plant abroad and adjust the organization of investment according to it (be it vertical, horizontal or mixed).

2. Theoretical background

There are different theoretical approaches to explain FDI and till nowadays no consensus among the scientists has been achieved over the issue. Even more so, applied to the case of China numerous scholars acknowledge that the explanatory power of the existing theories is not sufficient, and that is why new developments are necessary. Nevertheless, some analysts are using various theoretical approaches, which can be used in at least partial explanation of the Chinese ODI phenomenon, while the bulk of papers is rather descriptive in its nature.

a. General theoretical framework of foreign investment activities

As John Dunning noted, concerned scholars are pursing the answers on differently posed questions, for example: "Why do firms own foreign production facilities?", "Why do firms locate their activities in one country rather than another?", "What specific attributes demarcate MNEs from uninational enterprises?"(Dunning, Lundan, 2008b, p. 78). The essence of various theories depends on the nature of the original question, and that is the reason why different theories can be found in the field of FDI.

Consequently, the very level of analysis may differ as well - political economists are trying to explain the general pattern of FDI in the world (e.g. by deriving it from the development of capitalism); scholars investigate macroeconomic perspective of MNE activity, where the country level of analysis plays the major role; analysts interested in the behavior of individual enterprises; researchers addressing the question of why certain companies are more capable to explore foreign markets than their counterparts and why they are willing to get control over value-added activities abroad (the leading theory here is that developed by John Dunning); and, finally, students concerned with the main factors determining decision-making process within distinct companies (Dunning, Lundan, 2008b, p. 77-79).

The process of the theorizing on FDI has a comparatively long history starting in the 1920-s. Since then prominent contributions have been made by different scholars like Hymer, who touched the issues of market failure, ownership advantages (Hymer, 1976), Vernon who introduced the theory of product life-cycle (Vernon, 1966, p. 190-207), risk diversification hypothesis, macro-financial and exchange-rate theories, and the Uppsala model. Besides these rather specific explanations, there are three so-called general approaches - internalization theory, the OLI paradigm and a macroeconomic approach to the understanding of MNE activities (Dunning, Lundan, 2008b, p. 80-114). Berning and Holtbrьgge chose a representative sample of articles over the issue of the Chinese outward investment and counted the frequency of applying different theories, as it can be seen from the histogram below.

Figure 2: Frequency of Applying Different Theoretical Approaches to the Chinese ODI

Source: Berning S. C., Holtbrьgge D. Chinese Outward Foreign Direct Investment - a challenge for traditional Internationalization theories? - 2012.

b. The rationale of applying the OLI paradigm and other theoretical approaches

The OLI paradigm seems to be the most popular among different theories, it encompasses a huge variety of variables influencing internationalization phenomenon, as it is shown in the next section. And it is exactly because of the comprehensiveness and generalizability, ability to show the whole picture of factors influencing international investment that this approach was chosen to underlie the explanation of Chinese ODI by many specialists. Nevertheless, there is critique expressed by some analysts, the main point of which is that the OLI paradigm doesn't successfully explain how Chinese enterprises being latecomers on the global market are able to compete with their foreign peers (Mathews 2006; Luo, Tung 2007), or that some additional characteristics should be added (Yiu 2010). Further in the paper it will become evident how to address these points, while in this chapter deficiencies of other major theories are described. All in all, it is still the most popular approach and the share of explanatory power satisfaction is higher according to the figure above compared to the rival theories.

Uppsala school proposes incremental internationalization of developing country companies over time, where cultural and geographic distance plays an important role. Through the accumulation of the necessary experience and capacities in familiar environment such companies begin to invest in countries with lower cultural proximity, but better opportunities to make profits (Johanson, Vahlne, 1997). Still, it was criticized by a number of scholars, as for Chinese companies it seems impossible to differentiate certain stages of development, time sequence (Young et al., 1996), nor predicted distribution among host of Chinese ODI was found (Buckley et al., 2008).

Another popular approach was undertaken by Lu et. al. who proposed a rather different perspective trying to integrate and underscore the interrelatedness of the three different explanations conditioning ODI - industry-based view, institution-based view, resource-based view (Lu et al., 2010). In their explanations of the internationalization phenomenon industry-based view stresses the importance of the high industrial R&D intensity, institution-based view deals with institutional environment in which enterprises are operating (e.g. government policies, informal "rules of the game", etc.) and resource-based view concentrates on acquired ownership advantages of companies, as well as on effective acquisition and integration of particular knowledge from abroad (Lu, Liu, Wang, 2010, 224-230). But the problem with this argument is that the determinants of investing overseas are not sufficiently explained, as there are much more factors which influence on this, like the willingness to internalize acquired capabilities, or preferential access of some companies to the resources provided by the state.

Other approaches also have their limitations noted by many researchers. A macroeconomic one, proposed by Kojima (Kojima, 1982), stresses the importance of comparative advantages, but fails to explain market failures affecting investing process, or advantages related to common governance (Dunning, Lundan, 2008b, p. 108). Internalization approach (Vernon, 1966) stresses the propensity of companies to exploit their capabilities on intra-organizational level by establishing subsidiaries abroad, so that rivals couldn't acquire their competitive advantages. It used to be popular in international business studies before, but is criticized for example for the ignorance of comparative advantages of different countries and considered primarily in the context of the OLI paradigm (Dunning, Lundan, 2008b, p. 92).

On sum, it is obvious that various theories deal with the issue of foreign investment from different perspectives and each of them adds something to the general understanding of the phenomenon. But up to date the paradigm developed by John Dunning is probably the most recognized one due to its generalizability and comprehensiveness.

c. OLI paradigm

John Dunning noted that it is also impossible to develop an all-embracing theory to explain the phenomenon of foreign direct investment, and that is why a variety of perspectives and theories exists on different levels of analysis in the related literature. He rather proposes "super-theoretical" approach called the OLI paradigm, which is geared to explore FDI generally. The word paradigm here is referred as Kuhn defined it - `a disciplinary matrix', which can be considered as a thought pattern or "general framework for analyzing the relationship between phenomena from which it is possible to formulate a variety of competing or non-competing theories" (Dunning, Lundan, 2008b, p. 75-77).

The OLI paradigm or the eclectic paradigm stands for the three main components of its essence: ownership, internalization and location advantages of internationalizing companies. In fact, it is based on the antecedent theories developed before John Dunning proposed his paradigm, and that is the reason why it is called eclectic. As Peter Buckley writes: "Mainstream international business literature generally explains the strategy of the multinational enterprise using the concepts of internalization Developed in Buckley P. J., Casson M. C. The Future of Multinational Enterprise. London, Macmillan. - 1976., transaction costs Developed in Hennart J. F. A Transaction Cost Theory of Equity Joint Ventures. Strategic Management Journal, 9, 4. - 1988. P. 361-374. and monopoly advantage Developed in Hymer S. H. The International Operations of National Firms: A Study of Direct Foreign Investment. Ph.D. dissertation. Cambridge: MIT press. - 1976.. Together with locational advantages, these concepts are synthesized by Dunning in his eclectic or OLI paradigm" (Buckley et al., 2008, p. 717-718).

Ownership advantages (referred as O advantages) imply that for enterprises which are willing to move abroad it is necessary to possess some kind of superiority (sometimes referred as competitive or monopolistic) over their foreign competitors specific to their nature and/or nationality of their ownership. Thus, the cost of internationalizing and moving abroad could be compensated by them. John Dunning identifies three major types of this kind of advantage:

1) exclusive privileged possession of monopoly power, scarce, unique and sustainable resources and capabilities or certain management competences - asset advantage (Oa);

2) existence of formal and informal institutions within MNE which govern value-added process of production - institutional assets (Oi);

3) ability to coordinate value-added activities under the conditions of multinationality and risk diversification - transaction cost-minimizing advantage (Ot) (Dunning, Lundan, 2008b, p. 99-100).

The second type is internalization advantages (referred as I advantages), which is stipulated by the preference of internationalizing enterprise to transfer its ownership-specific advantages abroad within its structure over selling or licensing foreign counterparts. It means that there are market failures, which urge companies to incorporate certain stages of production exclusively within it. John Dunning notes three major types of such failures:

1) originating from risk and uncertainty;

2) emerging from the excessive ability of firms to exploit the economies of large-scale production (only in an imperfect market situation);

3) occurring when the transaction induces externalities (e.g. costs or benefits) not conditioned in the original terms between parties (Dunning, 1988, p. 3-4).

Thus, internationalizing enterprises facing higher costs of cooperation with foreign companies have the propensity to organize the necessary transaction on the intra-organization level, rather than inter-organizational one, which yields additional benefits.

The third kind is called location advantages (referred as L advantages) and concerns the very location of production (i.e. particular country), where internationalizing companies see the potential benefits from enjoying certain immobile factor endowments, institutions or intermediate products of a foreign country or unique set of location-bound created assets, like S&T infrastructure, human capital and supporting institutional framework. Thus, they can explore new markets, acquire new set of various capabilities or get advantages from cheap local resources. Also, such companies may be encouraged by the government through certain policies (Dunning, 1988, p. 4-5).

It is worthy of noting that these variables are interrelated. Thus, a company wouldn't become a MNE if it were only ownership and location advantages - a uninational multi-activity firm would rather be the case, which is actively cooperating with its foreign counterparts. But the very cornerstone here is the notion of internalization, when such company faces what John Dunning calls "the presence of structural and cognitive market failure" (Dunning, Lundan, 2008, p. 95) and has to pursue the long-term strategy of intermediate products creation on the intra-organizational level. That is exactly the way of profit maximization of the ownership and location-specific advantages, when MNE itself, rather than market, can manage them much better. It makes sense in the contemporary world economy, where innovations (be it technological or managerial capabilities for example) are of extreme importance to outcompete rivals.

Moreover, the OLI paradigm is not static, as it may seem at the first glance, - there is a dynamic element in it as well. The ever-changing pattern of different countries can be explained by constantly augmenting ownership and location-specific advantages of enterprises compared to those of their foreign counterparts, as well as the extent to which the perception and willingness of internalization of such advantages prevails over simple cross-border market-organized activities. In addition to these endogenous variables, there are exogenous ones as well: population, raw material prices, exchange rates, national government policies, actions taken by international agencies, (Dunning, 1988, p. 98; Dunning, 2001, p. 178-179).

Being a general approach, this paradigm still has a high degree of explanatory power either on industry level (e.g. technological vs. primary sector industries) or country level (by looking at economic histories of countries); even individual firms may be analyzed by it. John Dunning regards it as a certain methodology and generic set of interrelated variables, which may serve is an envelope for different more specific theories and approaches (Dunning, 2000, p. 166).

d. Investment development path

The concept of the investment development path (IDP) was introduced in a number of papers, among which "The Investment Development Path" written by John Dunning and Rajneesh Narula is the most prominent one (Dunning, Narula, 1998, p. 1-41). It is suggested that countries go through five main stages of development, which are classified on the basis of their inward/outward investment propensity underlain by the OLI paradigm.

At the first stage the L advantages of the country are low - unskilled labour force, undeveloped infrastructure and institutions, low demand level on the local market (the only exception could be the possession of natural resources), which may inhibit foreign companies from investing in such country. Under such conditions they would prefer undertaking import/export operations and cooperative non-equity arrangements with the indigenous firms.

The O advantages of the local companies cannot be compared with those of their foreign rivals, as the general technological infrastructure is rather backward - hence the probability of outward investment is also very low. Only state-owned enterprises are likely to be more or less active on the global stage, or those strongly backed by the government.

The role of the state is predicted to be crucial, as it is the only creator of the necessary institutions and public goods, including those related to improving educational level of population and overall technological infrastructure. Moreover, it may engage in different policies promoting certain development goals like import protection, domestic content policies, export subsidies, etc.

At the second stage inward investments based on O advantages start to increase, which may be caused by widening domestic market for example, as well as investments based on the L advantages, if there is ample unskilled labour force and the necessary infrastructure for production. Inward investment by foreign companies will prevail in its aggregate amount over the outward investment, though they are likely to have the trend of convergence in the course of time.

On the other hand, O advantages of domestic companies may be improved compared to the previous stage by learning from foreign peers and corresponding government policies. Their investments are likely to be directed primarily to adjacent developing countries based on the market-seeking and trade-related motives, or to developed countries based on the strategic assets seeking motive. It is predicted that I advantages of domestic enterprises and L advantages of the country will increase on this stage.

The state has the central role, being able to respond to this trend by establishing certain institutions, supply capacities, designing proper macroeconomic and organizational policies as well as by encouraging technological and organizational improvement of domestic enterprises.

At the third stage the overall economic maturity and the industrial structure of the country are likely to become more similar to a developed one, as the switch from investment- to innovation-driven growth begins to happen. The proportion between inward and outward investment is likely to further converge.

Domestic companies are predicted to acquire more O advantages and successfully compete with their foreign rivals domestically. Moreover, they may internationalize and utilize their technological and organizational capabilities in other countries, which are on the lower stage of development in the form of market-seeking investment and those geared to establish export platforms, as some of the domestic L advantages will have disappeared (e.g. cheap labor force, some types of resources). Moreover, the increasing trend of the emergence of domestic companies' investments in developed countries may take place as well, based on the market-seeking and all the more so on the strategic assets seeking motives to further update their own O advantages.

On the other hand, it becomes harder for foreign companies to outcompete their local counterparts, as well as to utilize cheap local labour force, which may induce them to augment their management, technological, marketing capabilities, introduce more innovations and undertake more technology intensive production in order to stay competitive. It will be especially important in the light of the increased consumption capacity of the local population and the improved L advantages of the country. Furthermore, such changes are likely to happen on the intra-organizational level of these companies through internalization, so that their rivals won't be able to mimic them.

The role of the state on this stage is rather auxiliary as domestic companies are more and more able to sustain their O advantages on their own. Hence, the state should sustain and further develop efficient resource allocation, technological infrastructure and human resources by enhancing the overall educational level and knowledge dissemination. It is also predicted to address the problem of market imperfections caused by decreasing natural assets through encouraging domestic enterprises to invest in those sectors, where their O advantages are the strongest, while L advantages of the given country are the weakest. At the same times, foreign companies investments are also stimulated by the state to invest in the sectors, where local O advantages are the weakest, while comparative L advantages are the strongest.

The fourth stage is called "post-industrial" or knowledge economy as there will occur even more spending on technological development and R&D designed to sustain existing and create new products and production methods. The share of services in the aggregate production is likely to increase, especially in innovatory sectors.

The number of outward investment continues to rise and its rate is likely to exceed or to be equal at least to inward investment. Moreover, based on further improved O advantages domestic companies are likely to successfully compete with foreign rivals both on domestic and foreign markets at least in some sectors. It will be also important for them to boost competitiveness by internalizing foreign operations as well as by moving certain operations to other countries, where the overall costs will be lower. The nature of L advantages will also have changed being almost completely composed of created assets.

Inward investors are likely to come from countries of the same stage and to be aimed for efficiency and assets seeking investments, though enterprises from countries of the lower stages may also engage in market seeking, trade-related and asset seeking investment.

The role of the state will continue to be auxiliary and geared to continue its supervisory and regulatory functions, to reduce market imperfection, sustain further institutional, technological upgrading and maintain competition. Thus, more government support is likely to be headed to infant industries and designed to reduce transaction costs and facilitate markets to operate efficiently.

The fifth stage is considered to be reached by advanced industrial nations by the end of the 20th century (e.g. the USA, Japan, Sweden) and is characterized both by constant increases in inward and outward investments. The specific feature of this stage is that created assets component of the L advantages of such countries are converging and becoming more transferrable. Thus, no single country will have absolute L advantages in created assets and companies will have to develop their abilities to acquire assets and to manage their capabilities more effectively under the conditions of multinationality.

MNE of these countries are likely to utilize and benefit more from economies of scale and scope, engage more in cross-border alliances, mergers and acquisitions, and that is why alliance capitalism occurs on this stage, when enterprises are more inclined to cooperate with one another. As John Dunning notes, in the age of the globalization, companies have to face the new challenges of increasing dynamic competitiveness by concentrating on critical competences, undertaking asset-seeking alliances or conducting market-seeking alliances to be more cost-effective (Dunning, 1995). This trend is not controversial to internalization, as it may seem at the first glance, but rather an additional component to the competitive strategies of companies. In addition, domestic companies, which previously have not internationalized are beginning to catch up with their multinational peers at higher rates by imitating O advantages of the latter. Hence, the share of small and medium enterprises in foreign investment will be increasing on this stage. It is caused by the necessity to explore new dynamic markets, as those in developed countries are stagnating in their growth. In addition, the link between large national enterprises and the state will become loose and the former will act more autonomously in their decision making.

The fluctuating equilibrium is likely to be dynamically settled down between inward (market-seeking and knowledge-seeking investments from countries of the lower stage and optimization investments from developed countries) and outward investment (directed to less developed countries primarily to utilize their resources and to developed countries in the form of strategic assets seeking investments), which is a function of comparative O advantages, relative innovatory and organizational strengths of the countries of this stage.

The role of state is to sustain and further develop technological infrastructure and human resources as well as to make better use of them. It should be based on the national location-bound endowments, natural assets, the characteristics of the local markets and the macro-organizational strategies of the government. Moreover, the state should also be the main initiator of exploring new trajectories of economic growth based on country's comparative advantages, as it was the case for Japan, as well as of active cooperating with enterprises to adjust the economic structure.

The overall empirical value of the investment development path model has been shown by some scholars (Dunning, Narula, 1998; Liu et al., 2005), but it should be noted, that the concept described above is not static, but rather dynamic and may vary among different countries, as many other variables may influence this process of investment development (e.g. particular economic structure, development strategies, organizational policies, global trends and crises, etc.). Hence, there will be individual features for each country, which are very subtle and hard to be measured. Nevertheless, it is obvious that the role played by MNEs in economic upgrading is crucial - they are the real engines of economic growth fueled by the state Ozawa explained this point in great details in his seminal article “Foreign Direct Investment and Economic Growth” (Ozawa, 1992).. There are three general point noted by John Dunning and Rajneesh Narula and agreed by many other scholars which determine the successfulness of a country moving along the stages, where the general trend is the shift from the resource-driven economy to knowledge-drive one:

1) the type of FDI undertaken;

2) the structure of the indigenous resources and capabilities of the countries concerned;

3) the macroeconomic and organizational policies pursued by governments (Dunning, Narula, 1998, p. 12-13).

e. Possible future development of MNEs in the context of globalizing economy

As Dunning and Lundan noted, that the current stage of the global economy evolution from mid-1980-s up to date is marked by rapid pace of scientific and technological improvement, a range of dramatic advances in IT and organizational methods, influential political and economic changes on the global scale, which MNEs and governments have to address (Dunning, Lundan, 2008, p. 736-737).

There are two major kinds of technological advances in relation to FDI. First type is upgrading the efficiency of production, which is not only labor-saving, but also resource and capital economizing, as well as much more flexible than before. Also, more specialization takes place, as production cycle becomes more sophisticated and it becomes more reasonable to cooperate with other entities, rather than do everything within the scope of a single enterprise. The second type is related to the lowering transaction costs (e.g. transportation, communication), which lead to the transformation in existing business models and emerging of new ones.

The industrial structure of the most developed countries is converging over the past 40 years, and the share of the service sector is constantly increasing in it. Created assets are of the most significance for countries and enterprises due to technological improvements, while cheap labor cost for example becomes less important. At the same time, most of developing countries are diverging even further from the former, though their share of the world FDI stock of recipient countries is more dynamic.

The logic of the investment development path leads to the upcoming era of the change from the hierarchical capitalism to the alliance capitalism (Dunning, 1995), when more and more companies will prefer vertical organization of production (i.e. less diversified) and concentrating more on their own comparative advantages. Instead of fully internalizing their capabilities it becomes more appropriate (especially for companies from the most developed countries) to arrange alliances with other entities, M&A to reduce transaction costs of over-diversified activities, acquire even more O advantages through exchange, benefit from technological clusters and industrial networks (where many different firms are participating). Thus, the ability to successfully operate with different assets becomes more important than the type of assets any company has. At the same time, there emerge more companies geared to function exactly within the global network, rather than gradually developing from the national level.

The role of the state in this process is of extreme significance, as it can be seen from the paragraphs above, and its position as the initiator on the early stages of the investment development path and as the facilitator on the later ones should be concentrated on providing the location-bound resources, institutional infrastructure and capabilities crucial for establishing and further employment of the O advantages of both foreign and domestic enterprises. This may lead to virtuous cycle of upgrading economic development, unlike vicious one which may happen, if there is no proper combination of competitive advantages of companies and the country. On the other hand, it should be also engaged into the international cooperation to institutionalize the relations between companies of the international level.

f. Conclusion

It is not anecdotal that the OLI paradigm is the most popular one, and among various theoretical approaches to explain the phenomenon of FDI it was chosen exactly due to its inclusiveness. Though changes in the global economy pose some challenges to it, this approach still remains quite flexible being able to incorporate additional components into its structure (e.g. internalization in the era of the alliance capitalism). Moreover, this "though pattern" underlies the concept of the investment development path providing new insights in the economic upgrading from the perspective of foreign investment. It turns out that for countries to get out of the vicious circle of technological backwardness it is extremely crucial to conduct certain policies to facilitate internationalization of domestic companies through related policies and institutional framework. In fact, states have to find the "sweet spot" by undertaking a gradual approach towards opening its economy to the world, and keep in mind that being too fast or too small may be fatal.

3. Rise of Chinese ODI since the early 2000-s

a. Aggregate figures on the Chinese ODI dynamics

The recent figures on the ODI evolution of Chinese companies are astonishing, like many other things related to economic development in this country. In fact, even before the turn of centuries there was certain outflow of Chinese capital in the form of investment (e.g. Cheng and Ma, 2007), but it was comparatively insignificant. Only since the 21 century Chinese companies have become especially active on the global scale and the wave of investments made by Chinese companies seems to become bigger and bigger having steady pace. The patterns of the ODI flow and stock growth since 2002 are represented on the figures below It should be noted that there are some discrepancies in data between various statistics, and that is why several major sources are taken into account..



Figure 3: ODI Flow (values are given in billion dollars)

Source: The Heritage Foundation - China's Steady Global Investment: American Choices. Derek Scissors; UNCTAD - Foreign Direct Investment Statistics; MOFCOM - Foreign Investment Statistics

Figure 4: ODI Stock (values are given in billion dollars)

Source: UNCTAD - Foreign Direct Investment Statistics

It is clear from the graph that despite some fluctuations the general trend of ODI development is upward and the process itself is quite rapid. Since the figures have been skyrocketing in the recent years, much attention has been paid to this process, and negative as well as positive opinions have been expressed. But it seems too early to make any firm conclusion about the general impact of Chinese ODI, because this process is still on its initial phase, and, as a consequence, there is no enough empirical evidence to derive sound conclusions. This problem of the lack of empirical evidences is even exacerbated by obscure financial operations of some Chinese companies and the fact that large amount of Chinese capital goes through so-called tax havens like Hong Kong, Cayman Islands and Virgin Islands, which makes it harder to track final destinations of Chinese investment. For example in 2007 this flow was 13.7, 2.6, and 1.9 billion dollars respectively China Data: Chinese Companies Invest Abroad. The data there are taken from PRC Ministry of Commerce, National Bureau of Statistics and State Administration of Foreign Exchange statistics..

b. Aggregate figures on the Chinese ODI distribution by sector

The distribution of the Chinese ODI between different sectors may be shown by the pie chart below.

Figure 5: General Distribution of ODI by Sector

Source: The Heritage Foundation, China Global Investment Tracker Interactive Map - it very important to keep in mind that these data doesn't include investments less than 100 million, which makes it biased to some extent.

It is well-known that energy resources are extremely important for China, as it doesn't have much of them on its own territory. From this point of view, one of the most important regions for China is Africa, where this motive is currently prevalent, though other motives, like market-seeking, are also present there (Cheung, et al., 2010). Another region is Australia, which alone is one of the main recipients of Chinese resource-seeking investments (Hurst, et al., 2012). But most of such countries are comparatively poor and SOEs are the main actors in this type of outward investment.

On the other hand, other sectors are also important and should be taken into account, as it is shown on the figure. For example, investments in such sectors as transportation, finance, wholesale or retail, geared to support China's import and export activities OECD Investment Policy Reviews: China. - 2008. P. 75., are also prominent. Private-owned enterprises play the most prominent role here, and such investments are direct mostly to developed countries.

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