understanding investment by chinese soes in latin america_ juan pablo dominguez

8/20/2019 Understanding Investment by Chinese SOEs in Latin America_ Juan Pablo Dominguez

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Title

Understanding Investment by Chinese

SOEs in Latin AmericaA theoretical perspective on practical issues,

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论文作者：胡安 Juan Pablo Dominguez)

学号：DE2012600!

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Understanding Investment by Chinese

SOEs in Latin AmericaA theoretical perspective on practical issues,


2/61

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Abstract

The following research aims to evaluate the existent conceptual framework in the

decision making process for Chinese multinational enterprises (MNEs) investment inLatin America during the last decade !t is a multidisciplinar" approach to a #usiness

pro#lem that has political and economical ramifications The theoretical framework is

an integrated approach to !$ theor" #ased the %eneral Theor" of Multinational &irms'

which finds the motivation for foreign investment in unning eclectic paradigm' #ut

we complement it with organiational theor" aspects (Transaction Costs Economics'

*tategic Asset *eeking' and +esource ependence Theor") and tr" to understand its

relations with the num#er of cases for investment #" chinese companies ,e propose

a structural e-uation methodolog" #ecause in this particular t"pe of anal"sis

(varia#les with measurement errors' simultaneous causation and uno#served

explanator" varia#les) it has advantages over regression techni-ues

!n terms of academic relevance' there are three issues that are relevant when

stud"ing the #ehavior of Chinese outward direct investment (.!)/ 0 Chinese

investment in other countries responds different to western paradigms (motivations

and paths) This means that most likel"' traditional existing theories are not ade-uate

when explaining the phenomenon (Mathews 1223) 1 Chinese .! is ever more

relevant these da"s !n .cto#er 1204' the Ministr" of Commerce has reported a non5

financial investment of over 6* 74 #illion in the first ten months of the "ear 0 That8s

an increase of 039: "5o5" and places China as an important pla"er in the

international s"stem 9 Latin American countries is an important destination for

Chinese .! in recent "ears !t would #e important to understand the reasons #ehind

this

! aim to anal"e the #ehavior of Chinese MNEs in its invesment decisions !t is

important to take into consideration that the ;%o5%lo#al< estrateg" is a relativel" new

polic" and therefore its development is still not clear This is perhaps one of the

reasons wh" the #ehavior of Chinese MNE .! is not the full" understood at the

moments +esource seeking motives' market seeking and other theoreticalexplanations has #een given' #ut it seems the" are not appropriate to explain it The

idea that emerging markets multinational enterprises' such as those from China' have

an =asset augmentation8 approach to .!' involving strategic asset seeking #ehavior'

has gained considera#le traction within specific theories (eng 1201) Man" now

argue that MNEs from China do in fact =deviate from the predictions of existing

theories8 (Cui > ?iang' 1201' p 133) Chinese .!' in particular' has #een identified

as #eing strongl" driven #" aggressive ac-uisitions' predominantl" in developed

markets' in their pursuit of strategic assets (@edia' %affne" and Clampit 1201) ow

0 *ee/ http/BBeconomictimesindiatimescomBnewsBinternationalB#usinessBchinas5

odi5goes5up5to5745105#illion5this5"earBarticleshowB7D2197cmsprtpageF0


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is the case in developing economies

&igure 0 Continental istri#ution of Chinese .E *tock' 120

*ource/ ,orld +esource !nstitute' 1204

Additional to the former' ! #elieve that there is a second stage of the investment

decision making process and it is concentrated in fostering Chinese diplomac"' as

well as making use of chinese resources in other locations so as to maximie their use

as a slowing chinese econom" has reduced the amount of locall" needed capital+esearchers have identified new focus of research within the realm of Chinese .! to

#e concentrated in four non5traditional explanations/ the latecomer perspectiveG

Chinese state and government influencesG the d"namics of firms and institutionsG and

the lia#ilit" of foreignness8 (eng' 1209)

!n this fashion' the main purpose of this writing is to provide additional evidence

Chinese MNEs in Latin America into which #ehavior (market5seeking' resource5

seeking or strategic resource5seeking) ,ith this o#Hective in mind' ! argue that there

are several la"ers to #e considered previous to the investment decision and are more

related to concepts outside the traditional market or resource seeking #ehavior so

associated with the homos5economicus portra"ed in traditional economic research

&or this reason' ! pretend to use a multidisciplinar" approach with elements from

!nternational $usiness Theor"' !nternational +elations Theor" as well as

.rganiational Theor" &urthermore' it is defined in this document that the unit of

stud" #ecomes Chinese MNEs .! investors in the last decade in Latin America

Keywords


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China' Latin America' Multinational Enterprises' .utward irect !nvestment'

structural e-uation modeling' investment


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Table of Contents

A&ST'ACT(

)ey*ords (II

TA&LE O+ COTETS (III

C-A.TE' #/ IT'O0UCTIO #

Sino"Latinamerican conte1t ##

Economic and political Links 11

Literature 'evie* #%Cultural links 22

COCLUSIOS 22

C-A.TE' 2 C-IAS .OLITICAL (IE3 TO3A'0S LATI

A4E'ICA 2%

Chinas 5oreing policy and Latin America 2%

Strategic considerations 26

Current status and the Zouchuqu (Going-out) strategy 28inancing and in!estment 2"

COCLUSIO %

C-A.TE' % 6 A T-EO'ETICAL A..'OAC- TO C-IAS O0I

I LATI A4E'ICA %2

E1tant theories o5 5oreign direct investment %2

#arket seeking $%& '

Eciency seeking $%& '

*esource-seeking $%& '+Strategic asset-seeking $%& '+

The chinese case o5 O0I %$

,nalance in the access to Capital and distorted Capital #arkets '.

$/nership ad!antages o0 Chinese #Es '8

lnstitutional 0actors inuencing Chinese $%& '8

Current research areas !

A simple theory o5 Chinese O0I in Latin America !#

3ssumptions 24ypothesis5 '


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COCLUSIOS !!

C-A.TE' ! 4O0ELI7 C-IESE O0I TO LATI A4E'ICA !8

A model 5or Chinese O0I !8

'evie* o5 previous 9uantitative studies o5 Chinese O0I !:

4odel speci;cation and SE4 !:

#arket-seeking !ariales +

Eciency seeking !ariales +

*esource-seeking !ariales +1

Strategic asset-seeking !ariales +1

.'O.OSE0 4O0EL A0 -


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Chapter 1: IntroductionChina8s relevance in the world affairs is more and more evident !t has grown its .!

tremendousl" not onl" in num#ers #ut in value' furthermore it is now one of the most

important commercial partners of most of developing economies () A logical step to the

highl" successful development path of the oriental hegemon is to expand its sphere of influence via economic ties with more distant economies The stud" of Chinese .! is a

relativel" new su#Hect' simpl" #ecause onl" after its accession to the ,T.' China had

virtuall" no su#stantial .! to account for The -uestion comes then to/ what drives such

decision making process ,hich elements are to #e most pressing in the moment when

the people who run the process' go for an opportunit" in another econom"

The present pages are part of a stud" intended to decipher' at least partiall"' to the

theoretical constructs that might #e enticing to illustrate the current state of affairs of

Chinese .! 6nfortunatel"' given the #road spectrum that .! entails and the practical

difficulties of making a theor" a#out investment that can #ecome a theor" a#outever"thing' we are #ound to limit the scope of the stud" into more specific geographies

and time coordinates This restriction comes for the unluck" ina#ilit" of the author to

grasp the whole universe of events that ma" #e of worth stud"ing' #ut as most of "ou

should know' parsimon" is the ke"

The most pressing idea that the #ook aims to deliver to the reader is that the process

of investing' for large scale proHects #" Chinese *.Es' is undou#tedl" a matter more

concerned with the issues of international politics and relations than those of financial

varia#les and monetar" -uests That doesn8t not mean that there is a pure market gain

aspiration when the proHects are proposed that are considered #" the decision makers (or

polic" makers for that matter)' #ut the histor" of the state of affairs #etween the Chinese

side and its counterpart pla" a maHor role in moving the locomotor of investment from the

Chinese #anks arcs to the fields' roads' dams' ports and other important infrastructure

proHect that $eiHing is supporting in man" developing economies

!t is m" personal #elief that the stud" of Chinese investment a#road should #egin #"

understanding the mentalit" of Chinese rulers and how decisions are made within an

organiation that is characteried #" tradition' values and verticalit" That is wh" an"

modeling' theor" or h"pothesis that aims to test the conditionals of Chinese .! have tohave their genesis in a field outside of the simplicit" of maximiation of returns

!s in this fashion' that a rather well structure economic stud" of China has to include

at least a chapter on histor" of diplomatic relations as well as a short introduction to the

main areas that $eiHing is strategicall" considering for expanding its #usiness overseas


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Sino-Latinamerican context

Chinas presence in the region is #ecoming more and more apparent Latin America is pro#a#l" one of the last #astions of atttention for Chinese enterprises and "et the results

are more and more interesting !f one reviews the trade flows and investment figures'

most pro#a#l" some of the largest figures will have a good proportion of Chinese

presence ow to attract a more productive and win5win relationship with China is a

topic of interest not onl" to scholars or polic"5makers' #ut also to the population in

general This chapter introduces some of the most relevant topics in *ino5Latinamerican

relations so as to provide a context into which the whole dissertation will concentrate

Economic and political Links

Lets #egin #" talking a#out China8s ascendance as a world power China8s role in the

international arena as a glo#al power has #een propelled largel" #" the explosive growth

of China8s econom" over the last 94 "ear (Lin and ?ohnson 120) ,ith an econom"

second onl" to the 6*' China wields huge swing in the world econom" and #" extension

in its relations with over other nations As more countries turn to China for sources of

growth' markets for their products and investment' China has found itself in an

unprecedented position to move into unfamiliar terrains of international relations at a rate

and in scope unthinka#le until now even for the most savv" o#servers of the countr" (Lin

and ?ohnson 120)

&or nearl" a decade now' trade relations #etween China and Latin America have #een

#ooming &rom 1229 to 1209 alone #ilateral trade has increased #" over DI40 percent

(M.&C.M' China *tatistical Jear#ook 120 and 122) !n the period since the financial

crisis' countries such as $rail' Chile and most recentl" Keru have all seen China -uickl"

rise to #ecome their num#er5one trade partner $rail5China trade increased D percent

from 1202 to 1209 alone' while Mexico5China trade rose 93 percent over the same period

(ALA!' 1204)

&igure 1 Trade with China' 0774 5 1209 (6* $illions)


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72 72

712

7+6

78'

717'

71"

7+

768

71 727.

72.

7'+

71 727+

712718

ra9il #e:ico Chile 3rgentina

*ource/ National !nstitute of *tatistics (!NE)G Latin American Association of !ntegration (ALA!)G

Economic Commission for Latin America and the Cari##ean (ECLAC)

The expansion of economic ties has not #een limited to trade Chinese firms have

also recentl" dramaticall" stepped up their foreign direct investment in the region &or

example' within the last two "ears China has #ecome the top source of foreign direct

investment in first $rail and then Keru This #oom in trade and investment ties has #een

primaril" driven #" China8s rapidl" expanding demand for Latin American mineral'

agricultural and energ" resources At the same time' Chinese exports to Latin America of

manufactured goods ranging from modems to motorc"cles have also grown dramaticall"

&igure 9 Kroportion of trade with China over total trade' 0 120

Chile

ra9il

;eru

,ruguay

Colomia

3rgentina


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Jet the #oom in trade and investment ties #etween China and Latin America has not

had an e-ual impact throughout the Latin American region Exports to China have #een

largel" concentrated in a small num#er of raw materials (copper' iron ore' so" and oil)

from a core group of commodit"5rich *outh American countries (Argentina' $rail' Chile

and Keru) .ther countries throughout the region' with Mexico as a primar" example'

have a less complementar" and more competitive relationship with China8s export sector

Even in those countries like $rail' whose iron ore and so" #ean producers have

#enefited greatl" from China8s rapidl" expanding production of steel and pork' domestic

manufacturers have come under heav" pressure from Chinese competition

&igure Chinese Loan to Latin America and the Cari##ean' 122I51209 6* $illions

2.= 28= 2"= 21= 211= 212= 21'=

*ource/ National !nstitute of *tatistics (!NE)G Latin American Association of !ntegration (ALA!)G

Economic Commission for Latin America and the Cari##ean (ECLAC)

The following pages will provide a -uick view on what the literature has produced to

explain the relations #etween China and Latin America from an academic point of view

!t serves as an starting point for the main part of the paper to which we dedicate our

different h"pothesis and model estimation efforts in order to provide additional evidence

for the theoretical constructs that we #uild in the coming chapters

Literature e!iew

The growth in China8s economic' political' and cultural relations with Latin America

has #een widel" noted in the academic literature' popular press' and even in the halls of

the 6nited *tates Congress () *cholars in Latin America were particularl"


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concerned with the relationship Chinese economic fundamentals' namel" its need for

raw materials and new export markets' led to a rapid expansion of trade and scholars

argued whether this #urgeoning relationship was good or #ad for Latin America (Lora

122IG +osen 1229G $l-ue5Lido"' +odrOgue' and *antiso 1223G *ham#augh and

Murph" 1201) *imilarl"' press stories focusing on *ino5Latin American relations also

sk"rocketed Latin American Regional Report and the Latin American Monitor reported

Hust 1I stories in 1221 and 1229' while this num#er grew to I0 #" 1200 and 1201' and 31

from ?anuar" 1204 to ?anuar" 1203 (authors8 count) Committees in the 6nited *tates

*enate and ouse held multiple hearings relating to *ino5Latin American relations'

pa"ing particular attention to China8s expanded trade in the region and its focus on

securing access to raw materials' especiall" oil (?ohnson and ,asson 1200) ence' we

see that scholars' the popular press' and others are pa"ing close attention to *ino5Latin

American relations

,hile these relationships have drawn increased scrutin"' much of the extant

literature focuses these relationships from limited viewpoints The Chinese governmenthas largel" focused on expanding trade and investment opportunities in Latin America'

while downpla"ing conflict with the 6nited *tates (Ellis 1227G *tate Council of the

Keople8s +epu#lic of China 122D) The Latin American literature focuses on whether

China8s rise is good' #ad' or mixed for the region8s economies (%onale5Picente 1201G

Armon" 1201G ille#rand 1229G Mes-uita' Moreira 122I) *imilarl"' the American

literature focuses on whether China8s presence in the region is good or #ad for the 6nited

*tates and her national interests' not onl" her economic interests' #ut also her national

securit" (?ohnson1224G ?ohnson and ,asson 1200G Ka 1223) 6nfortunatel"' relativel"

little of this work has s"stematicall" examined how experts and individuals within China

view these relationships

.n the one hand' several studies of the !nteramerican evelopment $ank ($! 1224G

Lora 1224) note that the new economic relationship #etween China and Latin America

generated a group of winners countries' particularl" commodit" exporters in *outh

America' and losers' in particular Mexico and Central America !n addition' the" #elieved

that the effects of China in Latin America would #e lower' mainl" as a result of the

financial impact of China in the glo#al econom" and' therefore' indirect (Lora 1224)

This view has changed significantl" in 1202 (!$ 1202) and allowed a #roader'

proactive perspective towards China' continuing the original anal"sis of Mes-uita

Moreira (122) rightl" noted that the enormous challenges China meant for Latin

America' especiall" in the manufacturing sector

*everal studies linked to ECLAC (CEKAL 122G 1224 B #) anal"ed the relationship

of Central America and Mexico to China in general and focusing on value chains relevant

to these countries' such as "arn5textile5garment and electronics These documents

concluded that China was alread" an important region for trade and economic partner and

was massivel" displacing domestic production in domestic markets and other markets


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such as the 6*

*ince then a growing num#er of studies have pointed out that/ 0 The massive

integration of China into the world market and economic relations and direct trade with

Latin America are rapidl" changing economic and trade patterns in the region and its

potential Qde5escalationQ (upgrading)' ie its a#ilit" to integrate new segments of higher

technolog" and higher value5added *everal recent studies indicate that significant

demand for raw materials from China in the region' from copper ores' so"#eans and

energ"' have created a new group of companies QwinningQ

$" contrast' the manufacturing sector in the region which had achieved some degree

of scaling and development since the nineties' and in several countries such as $rail and

Mexico as a result of import su#stitution industrialiation (!*!) since 0732 he has lost

presence in terms of

%K' emplo"ment and trade (CesarOn and Moneta 1224' CorneHo 1224G %allagher

and Korecanski 122D B #' 1202G ?enkins' ussel Keters and Mes-uita Moreira 122DG

*argent and Matthews 122IG .ropea 122D) The positive effect of China on exports of raw materials from the region has also #een considered as critical in current times of

glo#al crisis ($ar#osa and %uimaraes 1202G ECLAC 1202 B a)

,hile it is important to recognie that much more empirical work is re-uired (ussel

Keters 1224Ba' 1202BaG %allagher and Korecanski 122DBaG Lall and ,eiss 1224G

*hafaeddin and Kiarro 122I)' initial results suggest that China has carried out a thorough

process of technological upgrading' unlike Latin America (ussel Keters 1227G .EC

1202) !n addition' we have anal"ed in detail the initial displacement and growing Latin

American sales to domestic markets and exports to the 6nited *tates or the European

6nion' #" China .ther authors ($l-ue5Lido" et al' 1223G Lederman et al' 1227) point

out that the evidence for these negative effects on Latin American exports is poor' whilethe proximit" to the 6* market has #ecome one of the comparative advantages a#solute

most relevant vis5R5vis China (*argent and Matthews 122I) Karticularl" macroeconomic

and exchange rate policies are also powerful mechanisms for competition #etween Latin

America and China

*everal recent anal"es have noted that reduced levels of &! #etween China and

Latin America (although flows from China in the form of search for natural resources

have increased) reflect the still low levels of productive integration #etween the two (!$

1202G ecomtec 122DG ?enkins and ussel Keters 1227G @awai and Shai 1227)G until

1202' and as highlighted #" the !$ (1202/ 1)' that the *ino5Latinamerican relationship

;has remained predominantl" on a pillar/ tradeQ

The former explains in part wh" such economic relation is the focus of large part of

the existing literature As &igure 9 and &igure show' trade #etween the two regions

sk"rocketed during the 1222s' from onl" 13D0 #illion in 1229 to 130 #illion #" 1209

(M.&C.M' Jear#ook of National *tatistics) Much of this trade involved the export of


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primar" products from Latin America to China' and the export of manufactured goods

from China to Latin America China is $rail and Chile8s largest export market and

Argentina8s second largest (M!T 120) China imports increasing amounts of Peneuelan

oil' Chilean copper' Keruvian fishmeal' and Colom#ian and Costa +ican coffee (Ellis

1227) This led to high growth in commodities5#ased sectors throughout Latin America

(*antiso 1223) China has also sought to diversif" its export markets' selling greater

-uantities of manufactured products ranging from textiles to electronics (*ham#augh and

Murph" 1201)' sometimes at the expense of Latin American manufactures themselves

(%allagher' Moreno5$rid' and Korecanski 122DG ?enkins and de &reitas $ar#osa 1201G

Mes-uita Moreira 122I) The most concrete sign of China8s long5term plans are the &ree

Trade Agreements (&TAs) with Chile' Keru' and Costa +ica (*ham#augh and Murph"

1201) $" an" measure *ino5Latin American trade increased markedl" during the 1222s

,hile trade has #een the central focus' the literature also discusses Chinese

investment in the region (see Ta#le 0) Latin American leaders excitedl" anticipated atsunami of Chinese investment after state visits from Chinese leaders and investment did

increase Almost half of China8s &oreign irect !nvestment (&!) outflows in 1223 went

to Latin America (.EC 122D)' while China accounted for a#out 02 percent of total

foreign investment in Latin America #" 1202 (*ham#augh and Murph" 1201) %onale5

Picente8s (1201) case stud" of Chinese investment in Keruvian mining showed that

markets' rather than political factors determine Chinese investment strategies

Nevertheless' Chinese investments have #een a point of some contention $railian

leaders in particular have complained a#out the relative lack of investment' going so far

as to complain that $rail had #een ;deceived< #" Chinese promises (Economist 1224G

?ohnson and ,asson 1200) China has also #een criticied for ;phantom< investments'with Chinese companies hiding profits in Cari##ean tax havens rather than investing in

more productive economic sectors (e 122D) +egardless' the literature8s focus on the

d"namic economic relations #etween China and Latin America occup" center stage in the

extant literature

Ta#le 0 eepening Economic ties #etween China and Latin America' 6* million

Countr" or

+egion

.verall

trade with

China (120)

:

!ncrease

122I 51200

: of

ChinaUs

Total(122I)

: of

ChinaUs

Total(1200)

&!

from China

(1200)

As :

of All &!

fromChina

1200

Latin

America

&!o China(1200)

As : of

All &! to

China

Latin 1391II I7 2222 331D 00'794 0477 01'24 02ID

$rail D'190 7D 09I 190 013 4 9 223V

Mexico 99'9 019 23D 270 0 4

Argentina 0'I47 7 24 20 0D4 I

Peneuela 0D'132 100 217 27 D0 1

Chili 90'9D4 094 23I 2D3 09 0I


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Colom#ia D'199 04 204 211 99 220

Pirgin 3'12DV 7'I1VV

Caiman '793V 1'10VV

*ources/ Annual +eport on Latin America and the Cari##ean (120151209)' *ocial *ciences Academic

Kress (China)' 1209

V As : of $rail investment overseas

VV !nvestment from Chinese entities registered in the island(s)VVV!nvestment from companies registered in the island(s)

,hile *ino5Latin American economic ties have grown su#stantiall"' the relative

value of the region to China is still considera#l" small (M!T 120) Taken together' the

growth in economic ties com#ined with uneven knowledge of the region8s economies

will influence attitudes ,hile the literature8s primar" focus has #een *ino5Latin

American economic relations' much of this discussion takes place in the shadow of

changing political relations .ver 022 Latin American and Cari##ean heads of state have

visited China and multiple Chinese leaders have visited Latin America in recent "ears

(?ohnson and ,asson 1200G *ham#augh and Murph" 1201)' including Kresident u'

Kremier ,en' Kresident i and Kremier Li (see Ta#le 1) China was a#le to convince

Costa +ica to switch its diplomatic recognition from the +epu#lic of China to the

Keople8s +epu#lic (Ellis 1227) and other Central American and Cari##ean states were

likel" to follow' at least until Taiwan8s government and Chinese leaders tacitl" agreed to

ta#le this competition Man" Latin American leaders see China8s rise as an antidote to

6* domination' though China has #een ver" cautious on this front (Shimin and %regg'

120) China sought and gained o#server status in the .rganiation of American *tates

and the Latin American Karliament' as well as sponsoring exchanges #etween the CCK

and parties in Latin America (*ham#augh and Murph" 1201) The Chinese militar" has

-uietl" increased militar" sales and education exchanges (,atson 1202)' #ut has

maintained a relativel" small footprint in the region The Kacific5Alliance was signed into

effect in 1204' #ridging China not onl" with some Kacific states of Latin America' #ut

also additional economies


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Ta#le 1 Chinese *tate visits to Latin America ($" Countr")

"ountry #$o #$en %urpose &ccomplis$ed

Mexico

i ?in King >une 21'

?li0ting China-#e:ico ties to ahigher le!el=?

3greements to cooperate on commercialde0ense

Jang ?iechi (M&A) >uly@3ug21 China-#e:ico ;ermanent ational Commission

$elie none

%uatemala none

El *alvador none

onduras none

Nicaragua none

Costa +ica

i ?in King ?un509Qpromoting cooperation #etween the Asiangiant and the Central American countr"Q

22M loan from China to C+

Jang ?iechi (M&A) Aug502

Kanama none

Cu#a

i ?in King ?ul50To demonstrate ChinaUs strong willingness todeepen cooperation with Latin America ininfrastructure construction

i ?in King ?un500 ;increase friendship WandX deepencooperationQ 02 economic accords signed

Jang ?iechi (M&A) Aug502

Colom#ia Chen eming(MoC)

.ct501 Dth China5Colom#ia intergovernmentaleconomic and trade committee

*igned the China5Colom#ia Economic andTechnical Cooperation Agreement and letters of exchange' and a Memorandum of 6nderstandingon *trengthening Trade +emed" Cooperation


18/61

Li @e-iang Ma"504 !nvestment and trade deals

China signed more than I2 cooperation documentsin the areas of energ"' mining' infrastructureconstruction' nuclear plants and scientific andtechnological innovation' valued at more than 92 #illion dollars in Colom#ia' Keru' $rail and Chile

Peneuela i ?in King ?ul50A num#er of cooperation deals on infrastructureconstruction with Peneuela

Ecuador &an iaoHian

(L%.K)

*ep509 Kovert" reduction fact finding trip*igned M.6 to identif" cooperation mechanisms

on povert" eradication

KeruGuo o:iong(C#C


19/61

i ?in King ?un5007 cooperation agreements signed (agriculture' #anking' telecomm)

Li @e-iang Ma"504 !nvestment and trade deals

China signed more than I2 cooperation documentsin the areas of energ"' mining' infrastructureconstruction' nuclear plants and scientific andtechnological innovation' valued at more than 92 #illion dollars in Colom#ia' Keru' $rail and Chile

Argentina

i ?in King ?ul50A num#er of cooperation deals on infrastructure

construction with Argentina,en ?ia#ao ?un501 +ioY12

Jang ?iechi (M&A) *ep500

6rugua" ,en ?ia#ao ?un501 +ioY12Kledged to foster their trade ties and to step up #ilateral exchanges #etween the two nationsUlegislative #odies

Karagua" none

%u"ana none

*uriname none

&rench%uiana

none

*ource/ Shimin and %regg 120 with additional entries from author

$rail was the first stop on Chinese premier Li8s tour of Latin America' his first visit to the region since he assumed the

premiership in 1209 China has alread" announced 42 #illion in deals with *outh America' and this time the" focus largel" on

infrastructure proHects The contents of the tour gave indications of a shift awa" from procuring commodities to cooperation and

investment represents a new model for *ino5Latin American relations ()


20/61

.ver the last several "ears' China has provided more loans to Latin America than the

,orld $ank and !nter5American evelopment $ank () Most of those loans have

#een for oil !t is estimated that #etween 1224 and 120' $eiHing granted loans 007222

million dollars throughout Latin America and is expected that this trend will increase in

the coming "ears This is confirmed #" the fact that in the coming "ears' China has

pledged to invest more than 42'222 million dollars in a series of maHor proHects

Morevore' i ?inping said in 1204 that China was preparing to invest in Latin

America 142'222 million dollars over the next 02 "ears !n earl" *eptem#er 1204' the

Central $ank of China announced the esta#lishment of a fund of 02'222 million for

#ilateral cooperation with Latin America in areas of high technolog"' energ"' mining and

infrastructure proHects These figures make it clear that China is displacing 6* in Latin

America ,hile in 120 Chinese investment in the region experienced an increase of

I0:' 6* lenders' on the other hand' the" suffered a decline of 12: since 1200

&inall"' it is important to sa" that China8s growing influence in Latin America ma"

induce some governments to #reak with Taiwan ()' thus intensif"ing the island8s

isolation Among the 14 states that maintain diplomatic relations with Taiwan' nearl" half

are in Latin America and the Cari##ean/ $elie' Costa +ica' %uatemala' aiti' onduras'

Nicaragua' Kanama' Karagua"' the ominican +epu#lic' *aint @itts and Nevis' *aint

Pincent and the %renadines' and *alvador

&or its first fift" "ears the Keople8s +epu#lic of China (K+C) took little interest in

Latin America The 6nited *tates exercised unrivalled political and economic power in

the region' and is still the dominant influence1 ,hile Cu#a esta#lished diplomaticrelations with China from 0732 onwards' most Latin American governments waited until

Kresident Nixon8s visit to $eiHing in &e#ruar" 07I1 #efore recognising the Keople8s

+epu#lic/ in 07I1 Argentina and Mexico recognised the K+C' followed #" $rail two

"ears later and' later still' $olivia in 07D4 This period of relative indifference was now at

an end Kresident u ?intao8s visits' towards the end of 122' to $rail' Argentina' Chile

and Cu#a and' a "ear later' to Mexico attested to $eiHing8s interest in the region9 ,hile

numerous studies have focused on China8s polic" towards Africa' its role in Latin

America is less fre-uentl" touched upon Jet' its growing presence there is of the greatest

economic and geostrategic significanceG and raises concerns and anxieties #oth in Latin

America and in the 6nited *tates' where $eiHing8s interference in the region has aroused

something less than enthusiasm !n media and political circles' periodic alarms have #een

sounded over the Chinese presence in America8s ;#ack "ard


21/61

"ultural links

,hile economic and political relations dominate coverage of *ino5Latin American

relations' some research also examines changing cultural links Ethnic Chinese

communities are found throughout Latin America' with approximatel" 0 percent of surve" respondents self5identif"ing as ;Asian< according to the Latino#arometer

(Latino#arometer Parious Jears) Not all who identif" as ;Asian< in these surve"s are

ethnic Chinese' "et ties #etween these China and iaspora communities have #een the

focus of CCTP #roadcasts (*ummer 1209) China has opened a num#er of ;Confucius

!nstitutes< in Latin America and Chinese tourism and student exchanges have grown

(*ham#augh and Murph" 1201) &urthermore' the growing popularit" of soccerBfoot#all

in China and the awarding of #oth the ,orld Cup (hosted this past summer) and

.l"mpics to $rail likel" increased Chinese interest in and knowledge of Latin America

!n short' we expect experts and interviewees with links to Latin America to have more

positive evaluations of the region' as well as a desire for continued deepening ties

ConclusionsMost of the literature has revolved around economic ties !nvestment is also part of

it

China8s influence in Latin America is growing alongside its economic links

There are positive cultural links #etween the regions and there is also a growing

political approachment in the region

ChinaUs presence in Latin America is growing at an unprecedented pace

Notwithstanding long tradition of the relationship' it seems to have #ecome much more

visi#le in recent "ears


22/61

Chapter 2 China’s political view towards Latin

America

!n China' #usiness and politics go hand in hand No maHor investment in Latin

America has #een achieved without the prior visit of high5ranking officials Thisdemonstrated for instance' #" the signing of the relevant agreements in Argentina during

the last presidenc" of Cristina @irchner and presinde i for the h"droelectric power

plants in *anta Cru called ?orge Cepernic " Nestor @irchner A 6*4I #illion proHect'

came as one of the most important diplomatic and economic links #etween the China and

Latin America in the nearest decade *ince then' several large5scale proHects have #een

announced #ut none of them have #een put into execution as the N@?C proHect

The aim of this chapter is to provide evidence that the anal"sis of investment #"

chinese companies in Latin America is an event that must consider political and

diplomatic ties #etween the two !n this fashion' we divide the chapter into 4 main parts

The first one talks a#out the guiding principles of chinese diplomac" and how the" relate

to Latin America The second one provides examples on how such diplomac" was a

prere-uisite for investment The following section presents some strategic concerns of

China in the region and finall" while the fourth section talks a#out current investments

and the =go5glo#al8 strateg" in the region &inall" we end the chapter with a set of

concluding remarks

"$inas 'orein( policy and Latin &merica

ChinaUs diplomac" over the past 32 "ears can #e divided into two periods with

07ID as the watershed (Shang 1202) !n the first 92 "ears (077 5 07ID)' the focus of

ChinaUs diplomatic tasks was to oppose the threat from #ig powers' consolidate national

independence' and safeguard sovereignt" and territorial integrit" owever' since its

opening up and reform in 07ID' China has re5oriented its diplomac" to create an external

environment conducive to its domestic economic development in the midst of the

changing international situation

Most recentl"' one stum#les into the notion of a Uharmonious worldU This concept

of diplomac" offers a principal guideline to the future direction of Chinese foreign #ehavior and polic" !ts concept is a strategic innovation to further facilitate the #ack#one

of ChinaUs foreign polic" principie' known as Q&ive Krincipies of Keaceful Co5existenceQ

!ts aim is twofold .ne is to further the precipitation of ChinaUs desire to preserve world

peace and sta#ilit" #" realiing harmon" in a world of diversit"' there#" serving the

foremost goal of current Chinese foreign polic" () Another aim is to materialie the

practice of such principies as mutual #enefit' e-ualit"' and non5interference of domestic


23/61

affairs !n sum' respect to diversit" in ideolog"' values' and s"stem is a prere-uisite to the

realiation of a harmonious world Nevertheless' China pursues a foreign polic" with its

own conviction and #elief in such principies regardless the status of a state ow others

perceive it does not seem to concern China as long as their relationship is deemed to #e

mutuall" #eneficial and practiced on e-ual #asis ()

espite the longevit" of the &ive Krincipies' on which the idea of creating a

harmonious world is founded' China has "et to win sufficient trust and confidence from

predominant actors like the 6* regarding its recent diplomatic excursion into developing

countries including Latin America Although China gets a wide approval of #eing a late

comer to international affairs' and therefore' it is an inevita#le due course for China to

#ecome more deepl" engaged in and integrated into the world s"stem' at the same time' it

raises a dire concern to maHor international actors Their concern is simpl" arisen #" the

sense of uncertaint" a#out where the rise of China will take it to' and the sense is deepl"

rooted in the theor" of power transition According to the theor"' it will #e inevita#le for a

state like China to challenge the primac" of the 6* in due time as a result of itsascendanc" to a great power status underpinned #" its accrued power from economic

success and enhanced political influence

The stud" of the motivations #ehind ChinaUs growing presence in Latin America

appears to #ear significance not onl" #ecause of its political and diplomatic conse-uences

#ut alos for its economic relevance A more in depth anal"sis of this issue re-uires

including Chinese domestic politics and foreign politics #ut unfortunatel" we onl"

provide a superficial account of the issue Most ofthe literature on the su#Hect is heavil"

approached from American or ,estem perspectives' focusing onl" on the phenomenal

aspect of Chinese engagement discourse with the region' which has naturall" led to a lack

of su#stantial anal"sis on Chinese polic" motivation' orientation' principies' strategies'and goals ()

uring the Cold ,ar period' issues conceming ChinaUs interest in Latin America

was #asicall" oriented towards its political and securit" outlook China and Latin

American states also shared a strong interest in pursuit of independent and autonomous

foreign polic" !n materialiing this' the" #oth activel" participated in Non5alliance

movement and the %roup II The" also strove hard in furthering their efforts towards the

idea of creating a new intemational political and economic order

Economic interest remained secondar" and marginal during this period .ne of

the most attri#uting factors was their economic conditions/ #oth were underdeveloped

and poor Third ,orld economies !n addition' #oth economies did not have much to offer

to each other in part #ecause of similarities in their industrial structure Moreover' the

a#sence of formal diplomatic recognition #etween China and Latin American states was

another salient impediment to the chance of developing economic relations in part

#ecause most ofthe states had diplomatic relationships with Taiwan () LatOn

America during the Cold ,ar period was heavil" influenced #" the 6* as it intervened


24/61

ver" much into domestic politics of Latin American states in the name of UMonroe

doctrineU

,ith the end of the Cold ,ar' coupled with the rapid processing of glo#aliation

and deepening integration of world econom"' China and Latin America would find

renewed political and economic interests in each other () ChinaUs interests in its

relations with developing countries are multifaceted There is a variet" of issues

conceming Chinese national interest Most of all' developing countries em#od" the

fundamental foreign polic" outlook and values of Chinese foreign polic" China remains

a part of Third ,orld' and it is unthinka#le to exclude itself from Third ,orld (?u#an"

and Koon 1223/ ) !ts polic" and polic" goals' therefore' naturall" fall in the same line

with those of most of developing countries ()

Chinese polic" on Latin America and developing countries shares the same polic"

goals in enhancing solidarit" and cooperation' according to ChinaUs Kolic" Kaper on Latin

America and the Cari##ean pu#lished on Novem#er 4' 122D Although China in recent

"ears has #een restraining from making explicit of its desire for a multipolar world'however' it is well represented in its polic" towards Latin American' and well respected

and accepted #" Latin America states (elamer' Malena' and Kom 122/ I7) The" #oth

value the importance of *outh5North dialogue and *outh5*outh cooperation as a means to

settle the economic disparit" #etween the rich and poor

*econdl"' ChinaUs interest in issues is awakened #" the economic opportunities in

developing countries and LatOn America in particular ChinaUs international trade has

expanded at a rapid pace Trade has #een the driving engine of its miraculous economic

development %iven its ever5expanding intemational trade in terms of #oth sheer volume

and market share' Chinese expansion into LatOn America was naturall" destined %iven

the reciprocal nature of intemational trade' LatOn AmericaUs economic engagement withChina also #egan to grow' largel" for growing Chinese interest in Latin AmericaUs

economic merits/ markets' natural resources' and raw materials China values LatOn

American market not onl" for its potential #ut also for the progress it has made in the

regionaliation process Moreover' their industrial and economic structure is viewed as to

#e mutuall" reinforcing and #enefiting (Lu 122I/ 3159)

Thirdl"' Latin America' for instance' is a world5class supplier of natural resources

including energ" resources and raw materials (?iang 1223/ 0) China relies heavil" on

imports for copper' iron ore' and food grains !ts import dependence for energ" resources

is ever growing larger Energ" ties with Latin America have the dual #enefits of an

alternative source of suppl" as well as a #argaining power over other suppliers China has

long pursued to diversif" its import source of energ"' expanding from +ussia to Central

Asia to Africa This diversification polic" has helped China gain leverage over suppliers'

there#" enhancing its #argaining power ,ith respect to Latin AmericaUs potential as an

export market' China has #een proactive in pioneering Latin American markets !ts efforts

have paid off large dividends owever modest the trade share is' Latin America rapidl"

rose to #ecome ChinaUs fifth largest export market


25/61

Lastl" #ut not least' Latin America remains an itsmus test of Chinese diplomatic

competition against Taiwan !t is a region with a num#er of states that maintain

diplomatic relationship with Taiwan .f the thirt"5three regional states' twelve recognie

Taiwan as a sovereign state' a diplomatic challenge to Uone China polic"U in the e"es of

$eiHing(avis 122I/ 12)

Strate(ic considerations

ChinaUs approach to LatOn America is carried out strategicall" #ecause it is

political As indicated a#ove' China priorities political relations a#ove an"thing else

() A sound political relationship is a precondition to the relationships in other

sectors Economic relationship' for instance' is premised upon friendl" polOtica) relations

() Cultural exchange can #e facilitated #" sta#le political relationsG ChinaUs Usoft

powerU will otherwise #e viewed as vigilant

ence' ever since Chinese leadership #egan to emphasie the value of relationship

with Latin America in the late 0772s' it was the" themselves who took the initiative to

pursue political relationship with regional states () uring this pursuit' Chinese

approaches were revealed' and from this' Chinese strategies can #e inferred () At

the outset of development of the relationship' Chinese top leaders called for summit

meetings with Latin American counterparts (see Ta#le 1) ,hile the" toured regional

states' the" would #asicall" discuss and negotiate their interests at the #ilateral level6pon the foundation of political relationship' China furthers its relations in other areas A

salient strateg" applied in the economic realm is 'zouchuqu (going out)U strateg"

Chinese leaders sustained their summit diplomac" with Latin America !n 1220'

then president ?iang Simin made his last official trip of his tenure (077951221) to four

regional states After succeeding ?iang in 1229' the fourth generation leader u ?intao did

not hesitate to follow his predecessor in visiting the region (six states' to #e specific) in

Novem#er ofthe following "ear uUs visit was considered historie #ecause it paved wa"

to enhanced strategic understanding #etween China and Latin America' improved trust

and confidence' and conse-uentl" led to mutual understanding on the importance of exchange to a new level

.ne of the most prominent achievement u retrieved from his visit was the

winning of $eiHingUs coveted designation of market econom" status from some of the

largest economies in the region' namel" Argentina' $rail' Keru' and Chile !n retum'

from 0773 to 1222' D presidents' 9 govemor5generals' and 9 prime ministers from Latin

America visited China !n its active pursuit of interests in Latin America' ChinaUs strateg"


26/61

of #ilateral approach was further emphasied China has thus far succeeded with this

approach #" successfull" capitaliing on the concept of partnership in promoting its

relations with the Latin American states

Argentina moved up the ladder of partnership at a much faster pace !t was first'

for instance' recognied as a Qcooperative partnerQ as ?une of 122 uring uUs state

visit in Novem#er 122' it was UpromotedU to #e a Qstrategic partnerQ The fast changing

character of the #ilateral relationship' according to sorne anal"ses' is attri#uted to the

result of ArgentinaUs conve" of a greater willingness for political colla#oration with China

(omingue/ 19) Peneuela was endowed with Qfriendl" cooperative relationsQ upon

former president ?iangUs visit in April 1220 !t would take onl" a month after the

#estowment ofthis la#el that China upgraded the #ilateral relationship to Qstrategic

partnerQ during Peneuelan president ChaveUs visit to $eiHing

Economic ties #ased on improved political relationship have #een manifested in

the rapid increase of trade volume and investment ChinaUs trade with the region in 07I4'for instance' stood at mere 122 million After thirt" "ears in 1223' the total trade volume

exceeded I2 #illion ,hat is noteworth" is that a great portion of this was achieved

#etween 1222 and 1223 when the #ilateral trade increased #" over 422 percent (e 122I/

D1)

ow the improved political ties had a spillover effects in other aspects of the

#ilateral relationship #etween China and Latin America is summaried in the following

#ilateral cases ,ith $rail' unlike other cases' the political impact on the economic

realm in particular has #een much more visi#le *ince $rail received strategic

partnership in 0779 when the then president Cardoso #ecame the first $railian president

to visit China' the #ilateral relationship #urgeoned upon a solid political foundation (,u1224/ 09) !n 1221' China surpassed ?apan as $rail Us largest trade partner in Asia !n

122' as the #ilateral trade exceeded 01 #illion' and #" -uintupling from 1222 and 122'

China #ecame $railUs fourth most important trade partner $rail supplies 92 percent of

ChinaUs total so"#ean imports and03 percent of total imports of iron ore concentrates

(omingue/ 1I) Chile has #een the most visited LatOn American nations #" Chinese top

leaders *ince former president JangUs visit in 0772' former president ?iang visited twice

in 0779 and 077I' and president u in 122 +eciprocall"' ever" Chilean president

visited $eiHing since 077250771' 0774' and 122l Kinochet as militar" commander5in5

chief also visited China in 0779 and 077I Moreover' Michelle $achelete' the newl"

elected president in 120' has also declared for continuit" in his nationUs polic" to China

Mexico was one ofthe earliest LatOn American states that recognied China in

07I1' onl" second to Cu#a *ince the normaliation of relations in 07I1' the relationship

experienced a great magnitude of fluctuation *trange enough' it enHo"ed its peak during

the Cold ,ar era' and it is somewhat contrar" to the post5Cold ,ar period' full of

controversial relation to intemational affairs The dark side of the relationship #egan to


27/61

!oom large in 0779 when the Mexican government imposed 0222 anti5dumping measures

on Chinese goods (omingue/ 9D) Conflicts in trade relations eventuall" developed

over into political ones .ut of fears of Chinese growing competition' Mexico would take

the economic issues into political arena to challenge China issues such as human rights

issue' Ti#etan issue' and others alike Nonetheless' Mexico as one of the leading

economies in LatOn America #ears significant strategic meanings to ChinaUs national

interests lt is recognied as a strategic partner to China in 122 The notion of

partnership was not' however' appreciated #" the &ox administration when it declared

China as a competitor and not partner during Pice5president Seng inghongUs visit in

1224

$eiHing and Caracas signed numerous contracts to develop Peneuelan oil fields

Apart from energ" resources' the cooperation #etween the two nations is -uite active in

technolog" transfer area !n 1224' Peneuela signed a deal with China to #uild and launch

a satellite in 122D uring his visit to China in ecem#er 122' Peneuelan president

Chave o#served that the investment and trade agreements signed could generate 9 #illion in 1224

!n development in other areas' a Hoint venture compan" #etween Ecuador and

China agreed on the ac-uisition of EnCana CorporationUs oil and pipeline asset in 1224

for 01 #illion $olivia invited China to develop its gas reserves !n the Cari##ean'

China is enticing' for instance' ominica with 001 mi!lion investment at the expense of

cutting off ties with Taiwan (Noriega 122I/ 9)

$rail' Cu#a' Argentina' and Chile in 122 were selected as QChinese group

travelersU destination'Q or also known as QApproved estination *tatus (A*)Q Cu#a wasthe first Latin American nation to #e granted of such a status in 1229 Mexico and Keru

Hoined them in 1224 +egarding the Cari##ean' China listed Antigua and $ar#uda'

$ar#ados' the $ahamas' %renada' %u"ana' *t Lucia' ominica' *uriname' Trinidad and

To#ago' and ?amaica as tourist destinations Nonetheless' the" are "et to witness

su#stantial num#ers of Chinese tourists' and hence' the status seems to remain rather

s"m#olic This designation is politicall" significant and economicall" meaningful

#ecause it serves as a diplomatic tool for $eiHing and selected nations can hope to realie

millions of dollars in revenue per "ear (re"er 1223/ 71)

"urrent status and t$e Zouchuqu )*oin(-out+ strate(y

Zouchuqu strateg" has in recent "ears #een an impetus #ehind ChinaUs improved

relations with developing countries and Latin America in particular () lt offers

Hustification and legal grounds to its efforts for a greater economic engagement through


28/61

investment with those states whose relationship is much improved as a conse-uence of

summit meetings and #ilateral efforts () The goals of the strateg" are multifaceted

,hile it emphasies the need to pursue this strateg" to secure the resources to help its

econom" to sustain continuous growth' it also envisions its econom"Us place in the world'

especiall" in developing countries &urthermore' it values the market opportunities in

these states !t also encourages Chinese firms to go a#road to achieve these o#Hectives

Moreover' it underscores Chinese governmentUs support to such endeavor #" Chinese

enterprises At the same time' it also highlights the need for Chinese #usinesses to

advance into the developed world through aforementioned multilateral efforts

!n sum' the strateg" can #e viewed from two different perspectives &rom the

perspective of ChinaUs advancement into developing countries' the purpose is o#viousl"

to pioneer new markets' to secure natural and strategic resources' and to help the

economic development of developing countries in the end () ,ith regards to the

developed nations' the strateg" is designed to overcome the o#stacles and #arriers thathinder ChinaUs pursuit of high technolog" and related information and skills through

direct engagement of Chinese firms in these nations !n practice' this strateg" in

developed economies has translated into the M>A fields were technolog" and know5how

are the main o#Hective of chinese investors so as to -uickl" reduce the gap #etween

mainland and foreign competitors

Thus far' ChinaUs zouchuqu strateg" has #een most active and visi#le in Latin

America As of 1209' ChinaUs outward direct investment stock in Latin America totaled

6*D3 #illion Most of the investment is in financial assets directed to The Ca"man

!slands' followed #" the Pirgin lslands The next four largest host countries are Mexico'Keru' $rail' and Peneuela

,inancin( and in!estment

The flow of financing from China to Latin America dou#led in 1204 to 17'222

million dollars' Peneuela' $rail and Ecuador as principal recipients' and shift towards

infrastructure proHects

espite the glo#al economic slowdown and the #leak outlook for 1203' with asecond consecutive "ear of negative growth in Latin America' funding from China to

Latin America was 17'222 million in 1204 compared to 07'222 million in 120

The" come' as has #een previousl"' #" two government institutions/ China

evelopment $ank and Export5!mport $ank Again' as has #een the case in recent "ears'

ChinaUs investment in Latin America exceeded Hoint loans provided #" the ,orld $ank


29/61

(,$)' the !nter5American evelopment $ank (!$) and the evelopment $ank of Latin

America (CA& ) said @evin %allagher' a professor at $oston 6niversit" and coordinator

of the report at the press conference presentation

The data show China Qto strengthen its investments in Latin America at a time when

other institutions are reducing theQ as the ,orld $ank' which lowered its lending to the

region #" D: to D'222 million last "ear' and the !$ it made a 0: to 00'422 million

$" countr"' the trend a decade ago' when it #egan to #e compiled this data#ase in

1224' Peneuela' $rail and Ecuador remained ahead !n 120 $rail received 02'342

million dollars' followed #" Peneuela with 02'222 million dollars' and Ecuador I'222

million

!n the case of $rail' most of the funding went to the state oil compan" Ketro#ras for

petroleum developmentG as in Peneuela' the state oil compan" KP*A' earned 4'222

million Ecuador' meanwhile' received most of the funding for transport proHects' health

and education

Then stood $olivia' which approved funding of D42 million' all dedicated toimproving the road network' including its share of the proposed #io5oceanic corridor

linking $rail' $olivia and Chile &or its part' Costa +ica earned 22 million' its first

agreement with China and will #e used to finance the highwa" #etween the capital *an

?ose and LimonG and $ar#ados' 0I2 million for the reha#ilitation of ,"ndham Tourist

Complex

China has announced three new platforms funding' totaling 94'222 million dollars' so

it is expected that Qthese flows grow further in the futureQ The China5LAC !nvestment

&und for !ndustrial Cooperation with 02'222 millionG *pecial Loan Krogram for

!nfrastructure KroHects China5LAC' with 12'222 millionG 4'222 additional to the alread"

esta#lished &und China5LAC cooperation *ince 1224' funding for China to LatinAmerica amounted to 014'222 million

"."L/S.

Chinese advancement in #oth diplomac" and economic realms in Latin America

has #een a recent phenomenon Although the #ilateral relationship #etween China and

Latin America #egan in the earl" 07I2s' however' the development of the relationship has

remained in most of time ver" much id le lt has not advanced as much as #oth partiesdesired due to historical reasons (eg ChinaUs Cultural +evolution) and political reasons

(eg 6* intluence) (Shang 122I/ 1) *oon after ChinaUs engagement #ecame visi#le first

with fre-uent visits #" the head of the state and later #" high ranking officials' heated

de#ates naturall" arose in the American polic"making communit" and academia in order

to find the Chinese true intention #ehind all these maneuvers

*trategic and go5glo#al


30/61

&inance


31/61

Chapter 3 – A theoretical approach to China’s !I in

Latin America

The previous chapters presented a rough sketch of academic literature review

alongside with a context into which economic' political and cultural phenomena wasdescri#ed revolving Chinese5Latinamerican relations in the past decades This chapter

pretends to center its focus in providing a more specific academic view on such relation

with the o#Hective to provide material for future model estimation The different concepts

and constructs displa"ed #elow are the continuation of several works from several

researchers with the added value of putting it into the Latin American context

!n this sense we divide this chapter into main sections The first section will

provide a -uick review of extant investment theories The second section is pro#a#l"

more interesting #ecause it shows wh" such theories have failed to explain the Chinese

experience of outward direct investment and the current research areas in the field The

third section will provide some of the current field of stud" in Chinese .! literature

The fourth section provides a short theor" that we #elieve might provide some

ellucidating conditions into which .! in Latin America would #e #etter explained

&inall" we end the chapter with a set of concluding remarks

Extant t$eories o' 'orei(n direct in!estment

The stud" of wh" firms put reources into different production activites in different

locations is as old as the stud" of #usiness itself !nternational #usiness activit" can #e

traced #ack to the ancient world and further along the road' several multinational

corporations (MNEs) can also #e identified in Europue in the middle ages and in the

#eginning of the modern era (unning' 0779)

Modern international #usiness acitivt" #ecame more apparent onl" after the

industrial revolution !t is when' after realiing the power of factor specialiation' which

entrepeneurs were a#le to learn tat efficienc" is o#tained through organiing the relevant

factors according to their advantages That is to sa" that modern MNEs' in particular'

have their roots in the massive international movement of factors that took place in the

nineteenth centur" (unning' 0779a/ p77) +esource5seeking was the most commonmotivation of &! in this period' even if #" 0D42 man" firms had alread" crossed the

Atlantic' in #oth directions' in what can #e defined as market5seeking investment

(unning' 0779a/ p022G ?ones' 0773/ p4)

espite the presence of &!' most foreign investment in the nineteenth centur" 5 and

indeed until the late 072s Z was portfolio capital As a result' international #usiness

activit" was largel" ignored in economic theor" until the late 0742s () After the end


32/61

of colonialism and the spread of capitalism' onl" then did the international movement of

capital was considera#le enough to catch the attention of academics A possi#le reason for

such late #loom is that the phenomenon did not have a maHor perceived economic impact

.n the other hand (and pro#a#l" more importantl")' the neo5classical theor"' #ased upon

perfect markets and the international immo#ilit" of factors' did not easil" incorporate

multinational activit" ()

The growth of &! (and of the MNEs themselves) that followed ,orld ,ar !!

emphasised the inade-uac" of the neo5classical theor" to explain the phenomenon and the

need for a whole new approach Economic theories passing from +icardo8s classic model

of comparative advantage' passing through the eckscher5.hlin model' failed to explain

the growth of &! during the post5war era The volume of international investment not

onl" grew su#stantiall"' it started to reduce its concentration in primar" goods' and to #e

increasingl" directed towards the production of knowledge5#ased products in other

developed countries ($uckle" and Casson' 07I3/ p93) &urthermore' important changes

in the organisation of international #usiness were taking place' in particular' thedevelopment of horiontal MNEs and the new ?apanese vertical foreign investments

(unning' 07I7/ pp1I251G 0779a' pp0135I)

!t was not onl" after Pernon8s seminal piece of the product c"cle theor" that research

on the determinants of foreign production #ecame extensive () Two schools of

thought emerged as the contesting approaches for providing a consistent explanation of

the reasons wh" firms choose to own production and trading facilities a#road/ the

=+eading *chool8 with the ;internalisation theor"< headed #" $uckle"' Casson' +ugman

and ennartG and the ;eclectic paradigm< maximied #" unning Additional to these

efforts' scholars at the 6niversit" of 6ppsala (?ohanson' ,iedersheim5Kaul' Pahlne)

started investigating the internationalisation process of individual firms' widening thescope of the new discipline ()

!s in this fashion' and #earing that the scope of this paper isn8t a deep discussion of

the histor" of &! theor" development' we skip most of the work to #ring up some of the

most relevant constructs/

The internatilisation approach which has #een most most associted with $uckle" and

Casson (07I3) and it represents a different perspercitve from the traditional ;market<

view of the interaction of the agents that compose an econom"' regardless if its an

international economic s"stem or a simpler isolated one This view provides a new set of

tools that give the universe of &! stud" a compeling starting point into which one can

derive certain principles that could #e useful in order to explain or understand the

complexities around it &ollowing their work' a ver" #asic generaliation could #e the

starting point/ (0) firms internalise missing or imperfect external markets until the costs

of further internalisation outweigh the #enefitsG and (1) firms choose locations for their


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constituent activities that minimise the overall costs of their operations (K ? $uckle"' ?

Clegg' et al 122I) !n other words' the classical principles of economic theor" are #eing

applied in the sense of rationaliation and resource allocation efficienc" Neoclassical

schools of thought are immediatel" represented in this traditional wa" of thinking and

model especification follows the same path as economics would do

A #asic tenant of such view is that the expansion #" the internalisation of markets

means that firms use &! to replace imperfect external markets in intermediate products

and knowledge (as exemplified #" exporting and licensing) and appropriate the profits

from so doing !n the case of emerging econom" MNEs' there are likel" to #e particular

imperfections in home countr" capital markets that ma" re-uire special applications of

the theor"' and this' as we shall see' is true of China (K ? $uckle"' L ? Clegg' et al

122I)

Now' it was with unning that a separation from the pseudo5orthodox economic

perspective of the theories of &! that a shift in theore" came a#out unningUs eclectic paradigm came to the rescue and suggested three primar" motivations (unning' 07II'

0779)/ foreign5market5seeking &!G efficienc" (cost reduction)5seeking &! and

resource5seeking &! (including a su#set that is known as strategic5asset5seeking &!)

arket seekin(

As noted #" 6NCTA' ;market5seeking .! is #" far the most common t"pe of

strateg" for developing5countr" TNCs in their process of internationaliation< (6NCTA,!+ 1223) *everal recent studies point to the rise of strategic asset5seeking motives

driving Chinese .! particularl" towards large developed markets (@edia' %affne" and

Clampit 1201) !n their stud" covering Chinese .! from 07D to 1220' $uckle" and al

discovered that market seeking was a ke" motive for Chinese .! in the period under

stud" (K ? $uckle"' L ? Clegg' et al 122I) owever' over this period' Chinese firms

have moved awa" from undertaking mainl" market5seeking strategies in near#" foreign

markets towards the securing of raw material even in riskiers markets (K ? $uckle"' ?

Clegg' et al 122I)

E''iciency seekin(

;Efficienc"5seeking .! is an important motive' #ut its prevalence varies

considera#l" among developing5countr" TNCs' especiall" in terms of their countr" or

region of origin and industr" (%ugler and $oie 122D) Most of the companies for which


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efficienc"5seeking .! is important are Asian and in three main industries' electrical and

electronic products' garments and !T services< (6NCTA ,!+' 1223) owever' in

some sectors where competitive pressure is ver" high' other cost5reducing factors'

including national and international policies' seem to have induced efficienc"5seeking

investment #" emerging countries firms including Chinese companies &or example'

companies from China have invested in African countries such as Lesotho' Malawi'

*enegal and *wailand to #enefit inter alia from special treatment (dut"5free) accorded

#" some developed countries to product exports from these African countries (6NCTA

,!+' 1223)

esource-seekin(

China tremendous economic development re-uires a stead" suppl" of natural

resources' including ferrous and non5ferrous metals' precious metals' minerals and oil and

gas Chinese companies have thus developed enormous activities in resource5seeking

.! in natural resources are not driven #" regional proximit"' #ut simpl" #" the

availa#ilit" of assets (%ugler and $oie 122D) The active ac-uisition of natural resources

stands out amongst Chinese investments a#road' and destinations for Chinese outward

.! are resource5rich countries around the glo#e' such as African and Central Asian

countries' along with Australia' +ussia and Canada (K ? $uckle"' L ? Clegg' et al

122I) The common rationale to set up su#sidiaries a#road is to ensure a sta#le suppl" of

resources for the own operations in production and construction (%ugler and $oie 122D)

Strate(ic asset-seekin(

According to the glo#al surve" carried out #" 6NCTA' Chinese companies

investing a#road regard strategic asset5seeking as the second most important motivation

after market5seeking Among Chinese MNEs' 40 per cent regard created5asset5seeking as

an important motive for their .!' compared to D4 per cent for market5seeking' 97 per

cent for efficienc"5seeking and 2 per cent for resource5seeking .! (6NCTA ,!+'

1223)%enerall"' strategic asset5seeking is often aiming at the ac-uisition of information

and knowledge on how to operate internationall" owever' with growing experience of

Chinese firms in this' their goal has rather turned to concrete intangi#le assets' such as

advanced proprietar" technolog" and immo#ile strategic assets' #oth through greenfield

investments and ac-uisitions (Anderson5!!! 120) The ac-uisition of foreign

technologies and #rands is often regarded as a short cut to esta#lish a compan" as an


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internationall" known' -ualit" producer with a portfolio of latest technologies and

services' and an efficient distri#ution channel Ac-uisition will function as a fast route to

such #enefits' and in addition' will also den" them to competitors (Anderson5!!! 120)

The previous section gave a -uick look at the theoretical development of &! in the

last I2 "ears The initial postulation #egan as an offspring of economic theor" tradition'

which emerged onl" after capital gains in the post5war era' were large enough that the

traditional economic theor" failed to account for it Academics #egan to ponder the

necessit" of providing new wa"s of explaining &! and came up with different options

*ome of the most studied motivatiosn #ehind the increasing flow and stock of Chinese

.! include/ ac-uiring strategic resourcesBassets' adopting advanced technologies'

attracting glo#al talents' avoiding trade protections and high tariffs ($arne"' 0770G eng'

122IG $oisot and Me"er' 122DG +ui and Jip' 122DG eng' 1201)The internalisation approach' #ased upon Coase8s perspective of the firm' has

provided a roadmap that produced research and theories that seems to fit in some cases

6nfortunatel"' that doesn8t seem to #e the case when one is stud"ing developing

economies' and in particualr China8 .! The following paragraphs gives several

arguments into which a different perspective should #e considered in this case

$e c$inese case o'

The process of China8s reintegration with the glo#al world econom" #egan with the

;.pen oor< policies in 07I7s uite soon' in the middle of the 07D2s' clear and concrete

political motivations for the opening were stated (%ugler and $oie 122D) As Shan notes'

the important aims were to secure a sta#le suppl" of resources that cannot #e sourced in

China' to contri#ute to foreign exchange earnings and generating export opportunities'

and channeling advanced technolog" and e-uipment to China (Shan 0774) As a ke"5

stone' in 0777' the ;go5glo#al< initiative (ou chu -u) was esta#lished' aiming at

promoting the international competitiveness of Chinese firms

!n its search for newer markets' China would #e then prone to have a Market5*eeking

motivation of &! for traditional trade supporting reasons' ie to access distri#utionnetworks' to facilitate the exports of domestic producers' and to enhance exports from the

host countr" to other large and rapidl" growing markets () +egarding to efficienc"5

seeking &!' such will occur when outward investors seek lower5cost locations for

operations' in particular in the search for lowercost la#our %iven ChinaUs comparativel"

low la#our cost levels this motivation is unlikel"' and is not explicitl" considered here

+esource5seeking &! from emerging economies occurs to ac-uire or secure the suppl"


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of raw materials and energ" sources in short suppl" at home This ma" well involve

Chinese .! in relativel" high5income countries that have significant energ" reserves

and raw material deposits (eg' Australia and Canada) !t ma" also involve the search for

specific assets such as +> capacit" and output' design facilities and #rand names that

are em#edded in advanced countr" firms and which can usuall" #e accessed onl" #"

takeover of these firms or su#divisions of them (unning' 1220)

The -uestion then arises as to whether &! from emerging economies and'

specificall"' from China re-uires a special theor" nested within the general theor" a#ove

$uckel" et al have proposed three main conidtions that appear when a specific case of

stud" does not fit into the general theories of &!/ capital market imperfections' the

special ownership advantages of Chinese MNEs and institutional factors ()

/n4alance in t$e access to "apital and distorted "apital

arkets

!n China for instance' given the large sums of capital that were availa#le after

decades of unprecedented growth' the market for capital showed a semipermanent

dise-uili#rium that gave incentives for companies and people to exploit overseas !n this

sense' market imperfections ma" #e transformed into ownership advantages #" emerging

econom" firms ($uckle"' 122a) !n other words' firms' as in the case of large chinese

investors in the infraestructure secto in Latin America' have found eas"5cheap capital

made availa#le #" the China evelopment $ank and the Export5!mport $ank' to developactivities at #elow standard capital rates This t"pe of situation is what $uckle" refers to a

market imperfection that incetivises Chinese .!

&urthermore' one can argue that *tate5sponsored soft #udget constraints make

ac-uisition #" Chinese enterprises a UnormalU mode of entering and penetrating a host

econom" (,arner et al., 122) The Usiea#le venture capitalU afforded to *.E is

exemplified #" the *tate CouncilUs provision to the China !nternational Trust and

!nvestment Corporation (C!T!C) when it was instructed to explore overseas investment

opportunities in priorit" resource sectors (Shang' 1229) ifferent authors have given

several other examples &or instance' The *tate Council also directed the transfer of the

China !nvestment and Trust Corporation for &oreign Economic Cooperation and Trade(&.T!C' previousl" the financia[ arm of M.&TEC) to the *inochem %roup' effectivel"

giving it an Uinternal #ankU (Shang' 1229)' while the $eiHing steel producer' *hougang

%roup' was granted the right to start and own a #ank' virtuall" guaranteeing the lifting of

a hard #udget constraint (*teinfeld' 077D) The ac-uisition of !$MUs personal computer

#usiness #" Lenovo (concluded in 1224) was generall" regarded to have #een

underwritten #" the Chinese government' who at the time held a stake of * I: in the


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compan" (Business Week, 122) &rom this discussion' it appears possi#le that capital

market imperfections ma" account for the ease with which #oth natural5resource5seeking

&! (t"picall" in energ" and raw materials sectors) and strategic5asset5seeking &! might

have #een undertaken #" Chinese MNEs during the period of stud"

wners$ip ad!anta(es o' "$inese .Es

There is an argument that emerging econom" MNEs have developed ownership

advantages that allow them to operate certain t"pes of activit" in foreign countries more

effectivel" than local firms and industrialised countr" MNEs !t is a concept related to

cultural affinit" provided #" local diaspora !t provides certain #enefits such as familiarit"

with the local conditions' easier access to resources and their control ,here these

conditions are relativel" long5lasting then the" provide the case for semi5permanent

Uownership advantagesU of emerging econom" MNEs 5 the third element of unningUs

eclectic theor" after internalisation and location factors (unning' 0779) !f these

conditions are met' then market information a#out the most suita#le and profita#le

investment opportunities can circulate with ease' and fruitful commercial relationships

can #e esta#lished that facilitate market entr" and development !nvestment and

commercial risk can #e reduced as a conse-uence (Lecraw' 07IIG Shan' 0774)

lnstitutional 'actors in'luencin( "$inese

The institutional fa#ric of an emerging econom" can determine the a#ilit" and will of

domestic firms to invest a#road A straightforward' consistent and li#eral polic" towards

outward &! will encourage it' while a discretionar" and fre-uentl" adHusted polic" ma"

do the opposite There is an emerging #od" of theoretical work that concerns the

institution5#ased view of strateg"' or institutional theor" for short (North' 0772G Keng'

1221G Me"er and Ngu"en' 1224G ,right et al., 1224) This has the potential to help

explain distinctiveness in the #ehaviour of outward5investing Chinese firms (K ?

$uckle"' ? Clegg' et al 122I) The #asic thrust of this contri#ution is that firmsU strateg"

is shaped #" the home institutional environment (more collo-uiall" Uthe rules of thegameU)' which is formall" and informall" enforced #" government and its agents (*cott'

1221) and which #ears upon the norms and cognitions that influence investment'

including foreign investment' #ehaviour

%iven the extent of state control of the Chinese econom" (*cott' 1221)' the

institutional environment is likel" to have had far5reaching and profound effects on the

internationalisation decision of Chinese firms (K ? $uckle"' ? Clegg' et al 122I) The


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The Lia#ilit" of &oreignnessG The +ole of %overnment and *tate and The "namics of

&irms and !nstitutions At a -uick glance we can see that the role of the government and

instutions in the .! decision takes a maHor role' impl"ing that several techni-ues from

&oreign Kolic" anal"sis ma" #e suita#le for the stud" of Chinese .! The description of

such perspective or areas of research falls outside the scope of this paper' #ut we make

use of some of the principles outlined #" them in the next section when talking a#out the

model and which varia#les are necessar" for anal"sing the main factors #ehind Chinese

.! in Latin America

Moreover' !t is widel" accepted that the support of the governments is a main driver

of the Chinese .! () *cholars argue that .! promotion policies are economicall"

imperative and institutionall" complementar" to mitigate the latecomer weakness and

lia#ilit"5of5foreignness of the Chinese MNCs in glo#al competition *ome argue that the

rapid growth of the .! is the outcome of the Chinese ;going5out< strateg" to serve its

national development priorities (*ong' Jang' > Shang' 1200)' no dou#t fuelled #"

China s huge foreign currenc" reserve' as much as 94 trillion at the end of 1201‟

(Cheung > ian' 1227)

&inall"' when considering a different level of ana"sis' al#eit the interactions #etween

firms and institutions when stud"ing their effect on investment strategies' management

scholars advance #oth institutional and resource5#ased arguments with respect to strategic

options #ased on resource' institution' and transaction cost considerations (Luo > +ui'

1227) &or example' formal institutional constrains such as weak intellectual propert"

rights (!K+) and inefficient legal frameworks discouraging Chinese firms investing in

+> and innovations in China As such some Chinese firms use .&! as an alternative

to ac-uire strategic resources including advanced technologies (eng' 1227) !n addition

some Chinese firms chose to go a#road and invest overseas #ecause the fragmentation of the Chinese econom" imposed high costs to do #usiness across local #oundaries ($oisot

> Me"er' 122D) *imilarl"' international expansion ma" indicate that more Chinese

MNCs ma" escape domestic limitations and competitive disadvantages through .!

Although current research helps shed considera#le lights on how Chinese investors

respond to various institutional constraints' research is lacking on the interactions

#etween firms and institutions as the" Hointl" influence Chinese .! ()

& simple t$eory o' "$inese in Latin &merica

All throughout the chapter we have shown some of the most known academic

postulates that have #een written with the intention to understand the motivations #ehind

Chinese .! in Latin America *till there is no consensus a#out which are the main

elements that interact in the decision making process of .! in China when investing in

Latin America That is to sa" that China8s .! #ehavior has somewhat fallen outside the


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general norms of what the traditional theor" sa"s a#out the main impulse #ehind its

investment decisions

The

understanding investment by chinese soes in latin america_ juan pablo dominguez

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