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Risk Warning and Prevention of China’s Outbound Direct Investment

Author: ZhaoWei
Tutor: WangShaoZuo
School: Dongbei University of Finance
Course: International Trade
Keywords: ODI(outbound direct investment) risk warning risk prevention
CLC: F832.6
Type: Master's thesis
Year: 2012
Downloads: 221
Quote: 0
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Abstract


The global financial crisis and economic recession has had a profound impact on China’s foreign trade and domestic economy, however, the financial tsunami and the sluggish international economy also has provided Chinese enterprises a rare opportunity of making foreign direct investments. According to statistics, China’s foreign direct investment reached68.81billion U.S. dollars in2010achieving a rapid growth of21.7%on the basis of its historical peak in2009, and for the first time the annual flow outnumbered Japan ($56.26billion), United Kingdom ($11.02billion) and other traditional countries of foreign investment, ranking5th in the world. The average annual growth rate of China’s foreign direct investment was49.9%from2002to2010,. Chinese enterprises invest in foreign companies located in178countries and regions, involving trade, resource exploitation, manufacturing of industrial and agricultural production, engineering, contracting, transportation, finance, insurance, tourism, food service industry and other industries. China has not only become a country attracting the world’s foreign most direct investments, but also the one making the fastest output of investments into the world among developing countries, Chinese enterprises is becoming an influential force on overseas investments.At the same time, we also see that the Chinese enterprises’ global stratagem pace has not been easy. The outbreak of the2011Libyan war made the Chinese enterprises suffer serious losses. And with the rise of the Chinese economy in recent years, the "China threat theory" has been moved on the table by some countries and politicians, making each of Chinese large-scale overseas investments especially ones made by state-owned enterprises touch the sensitive political nerve of the host country and other countries, which makes Chinese overseas investments face greater political risk. According to World Bank’s estimate, China’s foreign direct investing business takes the shape of the "three1/3", i.e.1/3of the enterprises are making profit,1/3operating flat, and1/3suffering losses, a large number of enterprises make losses in the overseas investments. The current impact of the financial crisis has not yet dispersed, the global economic downturn makes foreign direct investment face increasing risks from business cycles, exchange rates, interest rates and inflation. In addition, the risks from management and the social culture of the host country make up the main risks that China’s foreign investments are facing.In the background of economic internationalization,no country can stay out of the international market,so China has made whole use of the two resources and two markets, which has been regarded as the most basic requirements.Therefore, the Chinese government puts forward the policy of adhering to the strategy of "going out".With implementing the "going out" strategy,we can use foreign resources, make up the deficiency of the domestic resources, make full use of foreign capital,learn from advanced foreign technology and management experience,improve the production ability,the management level and the competitiveness of enterprises,and the strategy will help to implement the strategy of market diversification.However, China most relied on trade to participate in international market. This way leads to high dependence on trade and burying hidden trouble for sustained growth of economic.In addition, the domestic situation of China is "double surplus" of domestic reserves and foreign exchange reserves,so that direct foreign investment is also an effective way to make better use of China’s massive foreign exchange reserves.We can draw a conclusion that China will still encourage and support direct foreign investment of China’s enterprise in recent years from now and the scale of direct foreign investment of China will also continue to rise.However, with the expansion of the scale of China’s foreign direct investment, the risks will be unavoidably correspondingly increasing, and every enterprise "going out" must face the problem on how to prevent the risks. The purpose of this paper is to help China’s foreign direct investment to establish the risk warning system and risk prevention mechanisms. The first part of this paper is to introduce the research background and the significance, the research methodology and the framework, the study of innovation and weaknesses of this paper. The second part is the Literature Review., which is the theoretical basis of this study. The third part is about Chinese ODI status and risks analysis, analysis of the status quo of China’s foreign direct investments and the risks faced within the framework of the classic international investment theory, at the same time these risks are summarized and classified into three major categories:macro-, meso-and microscopic. The fourth part of this paper is about China’s ODI risk warning, including the identification and assessment of the risks. In the risk identification, this paper draws on the Miler’s multi-dimensional evaluation of risks method (PEU model) and the Brouthers’ refined evaluation method (PEU2model) of risks, combines them with the risk characteristics of Chinese ODI, adds three refinement dimensions, and designs the Chinese ODI risk measurement system and rating system; in the risk assessment, for the characteristics that most of the risk indicators can only be qualitatively rather than quantitatively analyzed, this paper chooses to use Fuzzy comprehensive evaluation model, which can calculate the appropriate level of risks. The fifth part is about Chinese ODI risk prevention, according to Chinese ODI status and risks, these part supplies recommendations on risk prevention policy, strategies which involve operable concrete measures. The last part is a summary of the full text.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Exchange rate,foreign financial relations
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