Chinese Investment: After the Fanfare

If there is one truism about politicians anywhere, it is that they will attempt to squeeze as much political capital as possible when an investment in their jurisdiction creates real jobs for real constituents. In the United States, for example, mergers and acquisitions by Chinese firms have been incredibly controversial yet governors, mayors, and a host of federal legislators still welcome greenfield investments from China that result in new plants, more jobs, and the creation of economic value in their communities. That is why Midwestern governors competed to win a big new investment from Foxconn and the Wisconsin government offered the company an array of special incentives. It is also why so many American cities are now competing to attract Amazon’s second headquarters. Elected officials have strong political incentives to close these deals and woo Chinese and other foreign companies because greenfield investments that lead to new jobs and more local growth can burnish a resume and help to win elections.

Once these deals are closed, we see a familiar pattern: first come the ribbon-cutting and ground-breaking ceremonies, replete with smiling local officials and investors, then come the press releases in which governors, mayors, and other local worthies claim credit for big gains to their states and localities. But once the fanfare stops and the photo-ops have ended, the story continues, sometimes with very mixed results indeed.

Unfortunately, the public, having watched the fanfare on the news, rarely gets a glimpse into what happens next to these investments. And this is no less the case with Chinese investment. In fact, much of what we know about direct investment in the United States, and Chinese investment in particular, is based on public announcements only.

So it’s worth digging down with post-hoc assessments on a case-by-case basis. Sometimes, you find that Chinese investments haven’t exactly panned out as originally intended.

Take, for example, Tranlin Inc., a technologically advanced Chinese paper maker that in June 2014 announced a $2 billion investment to build a plant and create 2,000 jobs in Chesterfield County, Virginia. At the time, the project was the largest greenfield investment by a private Chinese company in the United States, stirring up considerable excitement in the national media and all sorts of claims from local officials.

But despite breaking ground in 2015, the project has made little headway, and in May 2017, the company officially announced that it was delaying construction, citing as the reason that the company intended to incorporate the latest technology it had developed in its Chinese factory into its to-be-built U.S. plant.

This explanation, however, is probably unsatisfactory and not very reassuring to those in Virginia who touted the deal. As part of its bid to secure the Chinese paper mill’s investment, the state gave Tranlin $5 million worth of incentives up front, which the company used to buy land for its factory. Yet a look at the site via Google Earth reveals that this land currently remains virtually untouched, which raises the question of whether the Chinese company will now fulfill its promise to pay the money back by October 24, 2017 since it had not met its initial commitments to the state (see Figure 1).

Figure 1. Tranlin’s Virginia Plant Location Sits Emptyimage001 1 e1505253468959 - Chinese Investment: After the Fanfare

Source: Google.

In other cases, Virginia has been even less lucky with investors literally disappearing into thin air. Here is an example: In mid-2014, another Chinese firm, Lindenburg Industry, announced its plan to invest $113 million to build a chemical factory in Appomattox, 100 miles west of the Tranlin site. Lindenburg received $1.4 million in state funding, accounting for two-thirds of what it paid for a production facility. But then, nothing happened and, unfortunately, for months, state officials tried yet failed to get a hold of company representatives. In effect, the Chinese company “ghosted” the state of Virginia until finally, in 2016, Lindenburg executives revealed that the investment wouldn’t be going ahead—and they wouldn’t be returning the money either.

Perhaps more careful vetting would have discovered warning signs that something wasn’t quite right about Lindenburg. For one, pictures on the Chinese company website had seemingly been lifted from another firm. Second, Lindenburg’s parent had said that it owned a property in North Carolina, which turned out not to be the case. Third, the firm financed the initial phase of the investment with a 10-day, short-term loan that it borrowed on the same day it closed the deal with the state.

Problems surrounding local authorities’ efforts to attract investment are far from exclusive to Chinese investors, however. Returning to the case of Virginia, for example, between 2002 and 2011 the state handed out $718 million worth of incentives to 3,400 investment projects, both domestic and foreign. The vast majority of the investments did, in fact, yield tangible benefits to the state and local economies, but a third of them nonetheless failed to create as many jobs as promised, according to a state review commission (see Figure 2).

Figure 2. Most But Not All Investors Keep Their Original Promises
Source: Joint Legislative Audit and Review Commission of Virginia.

Virginia is now in the process of trying to recover taxpayers’ money in the Lindenburg case but faces an “uphill battle,” as one local official has put it. The lesson? Foreign investment is good for jobs and growth, but in case after case, there is no substitute for deliberative due diligence of any investment, Chinese or otherwise. When the fanfare stops, the deal continues.