Page 105 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.71, # 1, 2014, pp. 99-119

Misconception 4: Head office relocation follows

A common argument against Chinese FDI is that when local companies are purchased by

SOEs all decisions regarding local operations are moved overseas to the acquiring firm’s head

office. Critics argue that all key decision making is shifts along with the balance of power.

Evidence however suggests that the opposite is in fact true, with Chinese SOEs finding it in their

best interest to keep decision making activity as geographically close to the operations as

possible to maximize efficiency and profitability.

Misconception 5: Political considerations trump profitability

Critics often believe that Chinese SOEs act in a nationalistic manner to serve the interests

of the state, no matter what the cost. However this is often not the case. Chinese SOEs are

profitdriven to their core and operate in a manner that seeks to maximize their profit. The

organization and strategies of these SOEs more closely reflect that of their global rivals than that

of the state. This is especially prevalent in mining and oil companies. This profitmaximizing

approach can be further seen in the compensation structure where top management of such SOEs

are compensated on profitability rather than on execution of state policy.

Political Considerations

At first glance China and Canada present themselves as strong potential partners for FDI.

From a pragmatic perspective, the mandate for each country aligns with the goals and objectives

of the other. As discussed in our introduction, China is actively seeking opportunities for external

investment through their “going global” strategy while Canada is working to attract foreign

investors through the Invest in Canada Bureau. This is relevant to the Canadian resource sector

as forecasts indicate that capital investment in the oil sands is estimated to add up to $218 billion

over the next 25 years. Foreign investment will likely be required to achieve this goal.

105