2 Oct 2019
Report on the Sustainable Development of Chinese Private-Owned Enterprises along the Belt and Road
By United Nations Development Programme in China
All-China Federation of Industry and Commerce
Chinese Academy of International Trade and Economic Cooperation, Ministry of Commerce of the People’s Republic of China
Synergies between the Belt and Road Initiative and the 2030 Agenda
The 2030 Agenda for Sustainable Development, adopted by all 193 member states of the United Nations in 2015, is built on humanity’s recognition that economic, social and environmental sustainability are the indispensable and inseparable core components of development. The Belt and Road Initiative, launched by China in 2013, opens up a window of opportunity for enhanced sustainable development at the global, regional and national levels, through its embrace of mutual benefits and inclusive partnerships, and its aim to fuel the global economy and generate shared prosperity.
There are synergies between the 2030 Agenda and the Initiative that could contribute towards sustainable development and growth for all, if a conscious effort is made to build on these synergies. This can be achieved by aligning Belt and Road investments and projects with the development needs of host countries, while embedding sustainability measures throughout implementation. Opportunities brought by the Initiative in terms of infrastructure improvement, trade facilitation, financing and cross-border exchanges could further accelerate progress in the realisation of the Sustainable Development Goals (SDGs). In addition, both the 2030 Agenda and the Belt and Road Initiative recognise the importance of multi-sector participation and the role of the private sector, especially in implementation, financing, technology advancement and innovation.
Chinese POEs as an Emerging Force in the Belt & Road Initiative and the 2030 Agenda
Private-Owned Enterprises (POEs), accounting for 90% of the total number of companies in China, have played a significant role in driving China’s economic growth and social progress. With their emerging global presence especially along the Belt and Road, Chinese POEs also shoulder more responsibilities in promoting and implementing the global sustainable development agenda.
In terms of trade cooperation, the foreign trade volume of Chinese POEs accounted for 38.5% of China’s total foreign trade volume in 2017, while the total volume of imports and exports between POEs with countries along the Belt and Road amounted to more than US$600 billion. In terms of investment cooperation, by the end of 2017, 25.7% of the enterprises in China that made direct outward foreign investment were solely private-owned. In terms of sectors, POEs are highly diversified. In terms of investment modes, mergers and acquisitions initiated by Chinese POEs with companies along the Belt and Road are gradually increasing.
In order to support and incentivise Chinese POEs’ effective participation in the Belt and Road Initiative and the 2030 Agenda, several Chinese government departments have introduced a number of policy measures to strengthen the policy framework, to liberalise and facilitate investments and trade. Emphasis has also been put on improving overseas compliance as well as the social, environmental and corporate governance sustainability of Chinese enterprises.
Chinese POEs and Sustainable Development in Host Countries
1. Infrastructure Connectivity
Chinese enterprises, both state-owned enterprises (SOEs) and POEs, work on infrastructure construction and upgrading in host countries. Many large-scale POEs participate in infrastructure construction projects through public bidding. Other POEs also participate as contractors or service providers.
2. Industrial Cooperation
Chinese enterprises engaged in overseas manufacturing investment are mainly POEs. During the process of developing international production capacity, Chinese POEs often draw on the successful experience of China’s domestic development. At the same time, making effective use of local resources and responding to differentiated needs can help the host countries to solve fundamental and key problems that restrict economic development and industrial construction, and subsequently drive forward the development of local industrial chains.
3. Shared Platforms
The “Going Global” strategies of China’s POEs not only aim to promote exchange of development experience, but also to utilise platforms such as industrial zones and to develop local industrial chains for increased cooperation with the host country. By the end of 2017, Chinese POEs had invested and established over 70 overseas economic and trade cooperation zones (COCZs). Many COCZs not only provide a platform for Chinese enterprises to “Go Global”, but also to bring large-scale industrial chains and related capital, technology and experience to support the development of host countries.
4. Job Creation
In the course of “Going Global”, Chinese POEs have provided jobs for local people, which helps boost livelihoods, increases local workers’ technical skills, reduces costs and improves workforce localisation. Analysis of the survey results found that many Chinese POEs believe that their influence on job creation in the host country varied between regions along the Belt and Road. Positive impact on providing new jobs is perceived to be more prominent in Africa, South Asia and Southeast Asia; however, in Central and Eastern Europe and the Middle East, more attention has been paid to enhancing the quality of employment.
5. Technology Cooperation
Technology transfer or spill-over from multinational corporations to local industries usually occurs in two ways: horizontally or vertically. In terms of horizontal transfer, investment and business cooperation by Chinese POEs increases the productivity of domestic firms, which occurs through three main channels: through the demonstration effect, through labour turnover and through the competition effect. Vertically, technology is transferred from Chinese POEs through buyer-supplier linkages towards upstream or downstream industries.
6. Social Welfare
The community relations and social responsibility projects of Chinese POEs can be divided into three categories; 1) projects that are initiated or supported by the economic and commercial counsellor’s office of the host country; 2) projects initiated by the chamber of commerce of the POEs and 3) projects independently initiated by enterprises. Most social responsibility projects initiated by POEs in Africa focus on benefiting surrounding communities near factories or construction sites, such as drilling wells, repairing schools, paving roads and providing drinking water. Some enterprises have also developed systematic corporate social responsibility strategies. In terms of supporting host countries to achieve the goals of the 2030 Agenda related to social sustainability, Chinese POEs note that they have focused more on internal decent and equal job opportunities and the maintenance and management of enterprises than on engagement with external stakeholders, an area where there is room for improvement.
7. Environmental Protection
The environmental sustainability of POEs is analysed from five key aspects in relation to the goals of the 2030 Agenda. The survey results show that POEs have focused more on energy consumption and waste disposal, with less being done in terms of minimising impacts on biodiversity, animal habitats and physical landscapes. In terms of environmental impact management, Environmental Impact Assessments are usually carried out in accordance with government requirements. In terms of investment and use of renewable energy, Chinese renewable energy POEs are expanding overseas and spreading related technologies worldwide. For some developing countries and least developed countries, Chinese technologies provide relatively clean energy solutions such as photovoltaic and wind energy.
For Chinese enterprises operating overseas, compliance requirements are threefold: first is compliance with the standards of the host country, second is compliance with the requirements of relevant domestic industries, and third is compliance with the requirements of upstream enterprises in the supply chain. Some manufacturing POEs are optimising supply chain management in order to obtain orders from internationally recognised brands and to meet the certification standards for upstream customers. Many POEs that have been engaged in overseas operations for a longer period realise that compliance can safeguard their own operations. The survey indicates that Chinese POEs consider “abiding by the laws and regulations of the host country”, “abiding by the UN Guiding Principles on Business and Human Rights” and “adopting responsible procurement-related policies” to be most important. However, “abiding by the relevant policies of anti-bribery and anti-unfair competition” was ranked lower.
Challenges Faced in POEs’ Overseas Operations
1. “Difficult Middle Ground”
When an enterprise’s global footprint becomes relatively large, there might be a “difficult middle ground” where incremental gains plateau but costs keep rising rapidly; therefore, companies find continued global expansion to be difficult. For “Going Global” Chinese POEs, this “middle ground” varies across industries, business models, markets and firms, but challenges are more severe in the middle and final stages of international expansion, especially for POEs with relatively weak corporate governance capabilities and limited experience in dealing with emerging risks. The study also finds that POEs’ overall risk perception is skewed towards economic, financial and commercial risks, compared to political, social, environmental and other sustainability issues.
2. Financing Difficulties
Most Chinese POEs operating in developing countries note that financing is complex. Chinese POEs, especially small and micro enterprises, lack collateral recognition from local banks and historical credit records in their host country, thus making it difficult to obtain efficient support from overseas financial services. Although China’s domestic financial institutions are gradually expanding overseas and more opportunities are open to Chinese POEs, financing support is still insufficient.
3. Legal and Regulatory Challenges
The major legal and regulatory challenges perceived by Chinese POEs include customs and trade restrictions, followed by lack of transparency and familiarity with market entry regulations, taxation, and contract disputes. Analysis shows that legal and regulation risks become less challenging for POEs as they operate longer overseas, familiarising themselves with the host country and global laws related to their business operations. Challenges also vary by geographical location. In more developed countries with mature regulation frameworks, the main difficulty for Chinese POEs is to have efficient mechanisms and structures in place to ensure compliance; in developing markets, however, the major obstacle lies in the enforcement of policies, laws and regulations.
4. Management Culture and Labour Relations
Language and communication barriers have a key influence on Chinese POEs’ overseas operations, posing challenges for management cultures. From the perspective of stakeholders, Chinese companies need to further improve their understanding of cultural diversity in different countries. In terms of labour relations, Chinese POEs tend to conform to local employment relations practices. However, challenges remain in understanding and complying with areas where there is a difference between Chinese and local labour law (such as discontinuity of employment contracts, setting up trade unions), as well as in the high turnover rate of both Chinese and local employees.
5. Community and Stakeholder Engagement
The management of stakeholder relationships is another challenge faced by Chinese POEs. Interviews with stakeholders show that local governments that have worked with Chinese companies in general have a positive attitude towards Chinese investors. They complimented Chinese contributions to the infrastructure development and industrial upgrading in their countries, although some officials did raise concerns on issues such as the quality of construction work and environmental impact management. NGOs and civil society organisations (CSO) and the media in host countries both had mixed views about Chinese investments. While acknowledging the contributions Chinese companies have made to economic and infrastructure development of their countries, they also highlighted a number of concerns. For example, some stated that POEs lack information transparency and sound reporting mechanisms need to be improved. Although some local stakeholders would like to assist Chinese POEs in responding to domestic concerns, communication barriers sometimes weaken such support.
6. Environmental Risks
Environmental and Social Impact Assessments (ESIA), widely accepted by stakeholders, are a common practice used by investment projects to evaluate environmental and social risks. Research findings identify two underlying causes of weak risk management of some outbound Chinese POEs: 1) the opportunistic perception of risks that sees risk management as a cost rather than a cost-reduction factor; and 2) insufficient support from both regulatory authorities and professional agencies in guiding and advising companies adopting appropriate risk reduction measures.
7. Overseas Cooperation Networks Chinese POEs need to broaden their partnership networks and strengthen engagement with key stakeholders such as government entities, overseas business associations, international organisations, media, academic institutions and NGOs/CSOs. However, challenges encountered by stakeholders themselves may limit the opportunities for collaboration. For example, although Chinese chambers of commerce could potentially provide effective assistance to POEs’ overseas operations, they are experiencing problems such as a lack of competent full-time staff and funding. Chinese “Going Global” CSOs can potentially help Chinese enterprises abroad to build bridges with local communities and other stakeholders, but their capacity and degree of internationalisation are still at an early stage.
Recommendations for Chinese Policy Makers, Chinese “Going Global” POEs and Other Stakeholders
1. Chinese Government Entities
Improve overseas financial services for POEs. Measures can be taken to speed up currency internationalisation, improve transaction security and legitimacy, encourage innovative financial models, and to reduce information asymmetry between the domestic and overseas financial industries.
Enhance policy guidance to POEs on sustainable development overseas, including but not limited to, actionable frameworks and tools to assess, monitor and measure the sustainability performance of Chinese POEs, and provide targeted and incentivised guidance for POEs’ overseas practices.
Enhance support from the embassies and economic counsellors’ offices, in particular: 1) organise training programmes and sharing of best practices on topics related to overseas business sustainability; 2) host open business and policy dialogues between China and the host country; 3) develop knowledge products together with academic institutions in the host country to provide information on the country’s development context.
Strengthen training for POEs to “Go Global” to improve the capacity of POEs to go abroad. Under the framework of the joint inter-ministerial meeting for “Going Global”, a joint capacity development coordination mechanism could be established with clear responsibilities and work plans, and special funds could be set up.
2. Chinese “Going Global” POEs
Acquire technical support from professional agencies. For example, professional lawyers, accounting firms and public relations companies can provide support to enhance compliance and risk management; partners working on sustainable development may help POEs to better engage with local communities.
Cultivate international talents. This includes encouraging Chinese employees to go abroad and develop their internationalised capacity as well as inviting overseas employees to be trained in China which allows them to take over greater responsibilities when going back to the overseas branches, and ultimately to resolve challenges in cross-culture management.
Strengthen cooperation between POEs and SOEs in order to make full use of their respective advantages in areas such as efficiency in decision-making and resource allocation.
Improve corporate governance structures by adapting domestic and international frameworks and interventions, learning from other multinationals’ best practices, and developing a corporate governance framework that is in line with their business context.
3. International Organisations
International organisations can utilise their convening power, global presence and networks, as well as knowledge and expertise on development to further guide Chinese POEs towards responsible and sustainable conduct, to support them in identifying potential social, environmental and economic risks as well as in formulating mitigation measures, to enhance policy coordination, and to facilitate dialogue and cooperation between multiple stakeholders.
4. Host Country Governments
Host governments can play a pro-active role in bridging national SDG efforts, Belt and Road projects and private sector business activities. Country-level coordination mechanisms could be set up to match interested partners with national SDG priorities, anchor private investments to fit into local development contexts, and to complement existing cooperation and coordination platforms to seek opportunities for joint design, co-financing and implement projects under the framework of the SDGs and the Belt and Road Initiative.
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