For years, the amount of outward investment from China had been small compared to investment into China. The main reasons for this are rooted in China’s history and politics. From 1949, when the Communist regime of the People’s Republic of China began, through 1979, there was virtually no outward FDI from China. This was partially due to political obstacles, as the regime was not recognized as the official government of China by many companies until the late 1960s or early 1970s. However, the main reason was that the government promoted a policy of economic self-sufficiency. It chose to “focus on internal development and did not want to rely on imports or take risks in foreign markets” (China Goes Global pg. 2).

After the 1979 reform program, the economy opened up gradually and Chinese firms were allowed to invest abroad under certain restrictions. However, the legacy of looking inward persisted throughout the 1980s and 1990s. Firms remained financially weak and outward FDI was not a government priority. There were few Chinese companies that had developed an international presence, brand, or reach. New big players in China were relatively weak, due to their lack of experience and exposure in international markets, or in market economies in general.

There are many reasons why firms invest abroad. The first is to overcome trade barriers. Governments often regulate international trade to raise revenue and pursue other economic policy objectives. Moving production into these countries circumvents these barriers. It also can reduce barriers caused naturally by transportation costs. The second reason is imperfect labor markets. Workers are not allowed to freely move across national boundaries to seek higher wages, causing massive wage differentials between countries. Firms often move to these countries to take advantage of underpriced labor.