Going green urged in overseas investment

Chinese companies are encouraged to pay greater attention to green and sustainable operations in going global

As China actively boosts outbound investment, enterprises are urged to build a new competitive edge by utilizing green operational standards and bringing more benefits to host regions, elements considered crucial for sustainable development in the long run.

"Chinese enterprises will follow a spiral growth trend during the drive of going abroad to tap international markets and the journey certainly won't be smooth sailing. Overseas investment started to grow in 2004, and surged after the 2008 financial crisis," Peng Yali, director and head of research of KPMG Global China Practice, told China Daily in an interview.

"Our study suggests that China's outward direct investment in the near future is likely to face a period of adjustment, owing to risk control and green operations and so on. The pace may slow down after fast growth in the past decade. The slowdown and the fluctuations in some years could be a good time for enterprises to reflect on their strategies for further improvement while the overall trend of China's ODI (outward direct investment) will maintain growth," Peng added.

Non-financial outward direct investment experienced fast expansion over the past decade. In 2012, China ranked third among all economies in terms of ODI flows. The country's non-financial ODI registered $77.73 billion last year, up 13.3 percent from a year earlier and compared with $2.7 billion in 2002, according to the 2012 Statistical Bulletin of China's Outward Foreign Direct Investment.

In the first nine months of this year, China's non-financial ODI increased 17.4 percent from a year earlier to $61.64 billion, according to the Ministry of Commerce.

China is deepening its comprehensive reforms and opening itself up to the world. In the next five years, the country's overseas investment is expected to reach $500 billion.

China's ODI covered all sectors but centered on seven - leasing and business services, finance, mining, wholesale and retail, manufacturing, logistics and construction. They accounted for 92.4 percent of the China's total ODI by the end of 2012. Meanwhile, Asia and Latin America received 81.3 percent of the country's total ODI stock at the end of last year, according to the bulletin.

"The major destinations for China's ODI are now shifting from Asian regions to Europe and North America as Chinese enterprises are increasingly interested in infrastructure investment and the acquisition of advanced technology in high-end manufacturing as well as brands. Meanwhile, agribusiness and food processing will be a highlight in China's future ODI," said Peng.

He added: "China will see a group of multinational corporations emerging from manufacturing sectors and private businesses as the country heads for the high end in some manufacturing industries."

Mounting challenges

The increase of outbound direct investment is a natural process for Chinese enterprises while the acquisition of brands, resources and technology as well as market expansion are the major motives, Peng said.

Sean Gilbert, director of climate change and sustainability at global consultancy KPMG LLP said China has been receiving the benefits of overseas investment, including the driving force transmitted into domestic reforms and the emergence of a group of multinational corporations.

Gilbert said that during the process of going abroad to tap international markets, Chinese enterprises face challenges from both the external environment and internal management.

"Misunderstandings or insufficient knowledge about local cultures can lead to labor disputes for enterprises. Similarly, Chinese enterprises need to be aware of the concerns of local governments, communities, as well as NGOs (non-governmental organizations) even as they work to maintain good partnerships with host governments. As a foreign investor, you will be more welcome if you are bringing leading practices rather than simply complying with the minimum. Therefore, they should also aim for standards in business operations that are higher than local standards, including in the area of 'soft' laws or best practices," Gilbert said.

A recent survey by KPMG and China Council for the Promotion of International Trade said that as Chinese enterprises speed up the pace of going global, they are facing mounting challenges from corporate social responsibilities, especially in environmental protection, owing to insufficient awareness and experience.

"In addition to financial performance, Chinese enterprises are also greatly challenged over integration into local cultures, setting up a positive image and getting accepted by local customers, communities, NGOs and governmental bodies in host countries," said the report.

Peng added that the emerging Chinese multinational corporations demonstrated distinct characteristics.

"Most of them are State-owned enterprises. They are big. More of their names are on the world's top 500 list, but they are less developed in brand and innovation and few names can be found on the list of world's most admired companies. In addition, they don't have sufficient knowledge and experience in overseas investment," Peng said.

In the recent survey Transparency in Corporate Reporting, Chinese companies ranked the lowest in public reporting practices in emerging markets, while Indian companies fared the best.

The 33 Chinese multinational corporations averaged a score of two out of 10 points in Berlin-based Transparency International's survey, which measured three categories: reporting on anti-corruption programs, organizational transparency, and country-by-country reporting of revenue, expenses and tax payments.

"The results show that companies from China lag behind in every dimension," Transparency International said in the report. "Considering their growing influence in markets around the world, this poor performance is of concern."

Huawei Technologies Co, the second-largest telecom equipment provider in the world, failed two attempts in 2007 and 2008 to acquire 3COM, a US network equipment manufacturer, because of alleged concerns about threats to US national security.

In 2010, Huawei's bids for 2Wire and the mobile network branch of Motorola also failed to obtain approval from the US government. In 2011, the company backed away from attempting to purchase 3Leaf, a US server producer.

Green operation

In the future, cost and quality alone will be unable to support the development of enterprises, while green products, environment engineering and technology will be the new force in shaping the competitive landscape of enterprises, said the report.

"In overseas operations, Chinese enterprises will face a more competitive market while their competitors have gained rich experience in green technology and operations. Chinese companies should especially emphasize green operational management and technology innovation and increase investment, which will not only build a new competitive edge but also enhance the country's image as a responsible investor in the world," said the report.

"Chinese enterprises should, before undertaking overseas investment, set down envisaged and strategic objectives for overseas green operations and make them an essential part of the company's strategy. Meanwhile, more efforts should be devoted to executing green operational strategies with improved internal organization and standards," it added.

Companies are also urged to maintain communication with all parties from the very beginning of projects and introduce the company objectively to build trust, according to the report.