Foreign Direct Investment from China: Sense and Sensibility

Inspired by psychological studies on human judgment, this article represents the first attempt to provide a systematic account of how various heuristics and cognitive biases can influence public perception as well as regulatory response to foreign direct investment. In particular, it catalogues the main social and cognitive mechanisms through which various well-organized interest groups can exploit public fear of foreign direct investment from China. By closely studying two cases — the U.S. Congress’ hostile response to CNOOC’s attempted acquisition of Unocal and the European Commission’s increased antitrust scrutiny of Chinese state-owned enterprises’ acquisitions in Europe — this article shows how fear of Chinese investment can lead to counterproductive regulatory response. Contrary to the popular perception that Chinese state-owned enterprises are mere puppets of the government, the article draws attention to the pervasive but neglected agency problems that have powered the surge of Chinese outward investment. It calls for more effortful thinking by western policymakers and cautions against extreme precautionary measures for investment from China. At the same time, however, it questions the wisdom of overseas investment by Chinese state-owned enterprises. Empire building incentives, exacerbated by weak corporate governance structures and the lack of financial disclosure, make it highly likely that state assets are squandered in overseas acquisitions.