Recently, Spencer Lake, the Global Head of Capital Financing at
HSBC, reported that China is positioned to overtake the United States
in outward foreign direct investment (FDI) in
the coming few years. The most widely-used rule of thumb for FDI is a 10%
(or greater) investment in voting shares in a foreign-owned
company, and thus, it includes foreign mergers and acquisitions.
The significance of this statistic is that it can be used as an
indicator of economic development. It comes as no surprise that the
United States has been a leader in outward FDI over the past few
decades – ranking first in this statistic in almost every
year over this span. Currently, at approximately $337 billion, US outward FDI
comprises nearly a quarter of the entire world's outward
FDI; by comparison, China's 2014 outward FDI is only $116
billion. With respect to outward FDI, a key difference between the
two nations, however, can be seen in their recent growth rates.
Over the past five years, China's outward FDI has been booming
at an average annual rate of 15% (Spencer Lake cites a growth rate
of 19%, which appears to be an over-estimate). Compared to the
US's growth rate over the same period (approximately 3%), China
is quickly making up ground. If their respective growth rates are
maintained, China would surpass the US as the world leader in
outward FDI by 2024.
The first response to this proposition is that a 15% growth rate
is unsustainable over a 10 year period. The explanation that Lake
provides for this prediction, however, is persuasive. He argues
that this trend has been the result of a deliberate, targeted
effort on the part of the Chinese government: Firstly, China is currently sitting on approximately USD
$3.7 trillion in foreign exchange reserves. Secondly, other
foreign currencies are undergoing comparative depreciation. As a
consequence, China is economically well-positioned to implement an
outward FDI strategy. Through some recent deregulation in foreign
investment, privately-owned enterprises (POEs) are
further incentivized to ramp up investments abroad.
One of the observations that might support this hypothesis is
the increase in both the number and total value of foreign M&A
deals by POEs. From 2013 to 2014, the number increased 23% to 145
whereas the total value of the deals increased 29% to $14.7
billion. Indeed, Lake projects a continued strong foreign
M&A presence from China for the foreseeable future. On the
other hand, from 2012 to 2013, the number of Chinese foreign
M&A deals by POEs decreased by 6% and total value decreased by
43%. As a result, it may be premature to conclude that the recent
increases are a result of the Chinese government's strategy and
that the outward FDI projections will ultimately be realized so
The author would like to thank Peter Georgas, summer
student, for his assistance in preparing this legal
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The Government of India ("GOI") has allowed for 100% Foreign Direct Investment ("FDI") in the education sector under the automatic route.
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