Delegate, Subsidize and Control: The Political Economy of China’s Outward FDI

• In Event: Globalizing China: Drivers and Consequences of Authoritarian Power Projection

Abstract

In this book chapter, I explicate the domestic political economy driving China’s outward direct investment. I argue that the Chinese government relies on three chief mechanisms to direct and regulate outward FDI to accomplish the state’s objectives (e.g. energy security, technology acquisition): delegation, subsidization, and control. Delegation refers to the explicit charging of economic agents, namely state-owned enterprises (SOEs), with policy objectives to be fulfilled via overseas investment, subsidization refers to the provision of financial incentives to encourage investment in alignment with these objectives, and control refers to the exercise of bureaucratic and policy discretion to dampen investment activities when they are deemed to be in excess. These mechanisms apply differentially to different types of economic actors: while SOEs are delegated explicit policy objectives, amply subsidized, and resistant to the state’s attempt to control, private firms have no official claim to a policy role, are at a disadvantage in accessing financing, and are vulnerable to the government’s discretionary control. The combination of these three mechanisms, applied differentially to different actors, yields the following predictions for China’s outward FDI. First, the combination of delegation and subsidization generates moral hazard on the part of SOEs. That is, knowing they are too important to the government to be allowed to fail, SOEs leverage their policy roles to bet on risky investments to seek rents. Second, private actors, otherwise suppressed in their access to capital, respond vigorously to the government’s call to action to take advantage of subsidization and temporary lifting of control, leading quickly to over-investment. In sum, although China’s outward investment model is state-led, Chinese investors are not faithful agents of the state, not even the SOEs. China’s global economic spread can be massive, disruptive, and alarming, but it is hardly the masterplan of the state.

Author

• Weiyi Shi, University of California, San Diego