An Assessment of Chinese Outward Foreign Direct Investments as an Innovation Strategy

Abstract: Chinese outward foreign direct investments (OFDI) have increased dramatically in the 2000s. Strategic asset seeking OFDI to developed economies have become a more prevalent characteristic of overseas investments by Chinese enterprises. This form of OFDI is being used as an instrument to access strategic assets such as knowledge and technology. The thesis attempts to assess the success of Chinese outgoing foreign direct investments as an innovation strategy. This is done by analyzing China’s preconditions for increasing its innovativeness through OFDI. The assessment is conducted through the development of an analytical framework that draws on the innovation system literature. This framework is structured around the concepts of absorption and diffusion and focuses on the Chinese innovation system’s capacity to absorb and diffuse knowledge and technologies acquired through OFDI. This analysis shows that China has good preconditions to absorb foreign technology and knowledge by having a developed technical human capital base. Furthermore, China’s ability to diffuse foreign knowledge and technology is facilitated by interactions between the business sector and public research institutions. However, a weak intellectual property rights regime, a poorly functioning judicial system and low levels of labor mobility impede China’s diffusive capacity. Furthermore, a general shortage of management skills hampers China’s absorptive capabilities. High costs associated with conducting OFDI are recognized to constitute a major stumbling block for using OFDI as an innovation strategy. The assessment further suggests that a revision of the active use of industrial policies, and a reformation of the federalist system could enhance OFDI as an innovation strategy.