Soofi: China’s Foreign Direct Investments – Challenges of Due Diligence and Organizational Integration

Abstract:

This paper critically reviews Chinese companies’ foreign
direct investment practices of recent years. Using case studies involving
overseas Greenfield as well as merger and acquisition (M&A) of Chinese
enterprises, we aim to draw lessons from these experiences. However,
because of increasing importance of outbound acquisitions by Chinese
companies, this paper focuses on Chinese M&A activities. After
presenting the theoretical discussions of post-acquisition organizational
integration, this paper identifies factors that have contributed to less
than expected performances of Chinese foreign investments. Three
main factors are identified as the plausible causes of the less than
satisfactory outcomes: inadequate due diligence, not considering
political and country risks, and cultural differences. In all cases,
inexperience of Chinese enterprises in foreign direct investment, either
in Greenfield form or M&A, has attributed to the problems. Therefore,
summing the experiences of the Chinese enterprises that have foreign
direct investment is essential for those Chinese investors that intend to
invest overseas. Conduct of meaningful, in-depth due diligence before
serious negotiations for investment or acquisition, inclusion of risk
premium for political risk in cash flow analysis, and early post-merger
integration planning are essential for avoidances of bitter outcomes
many Chinese investors experienced overseas.

Available for download here.

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