Chinese Outbound Investment and Trust

As I have recently written (Chinese Technology Investment in the West and 

China Slowdown and Foreign Investment), there is a major emerging trend of Chinese outbound direct investment. Others clearly agree -- one example is a recent article in Forbes. During a recent trip to Hong Kong to work on a private equity deal, an investment manager at the fund with which I am working commented that many of their portfolio companies are actively looking for deals in Europe and the United States.

However, this trend is emerging somewhat more slowly than many (including me) have expected, with fewer deals completed. I am increasingly convinced that a major part of the reason is what I would call a lack of "trust" by Chinese investors in Western deals. I see three major strands to this problem:

• Language. Although many Chinese are learning to speak English (and other western languages), it is taking time for there to be a significant number who speak well, including because of the very large differences between Mandarin (which is dominant over other Chinese dialects for business) and western languages. And relatively few westerners speak Mandarin. It is difficult to trust deal counter-parties when one cannot communicate with them properly.
• Business Culture. There are major differences between Chinese and western business culture. For example, westerners (particularly Americans) tend to focus on explicit / written deal terms, while Chinese focus more on the overall relationship -- often showing a desire (distressing to westerners) to change an agreement when circumstances change. These cultural differences often produce misunderstanding and mistrust.
• Networks. Both western and Chinese dealmaking depend on network and connections, perhaps even more so in China with the central role of guanxi. But the overlap of Chinese and western networks is still fairly limited, including because of the two preceding barriers of language and business culture. For example, the fund manager in Hong Kong whom I mention above was helping a Chinese company look for targets in France, in a industry sector somewhat unfamiliar to him. The Chinese company apparently just did not know whom to trust in France. With a broader network, the company might have been able to pursue opportunities in France more directly.

The solutions to these three strands of the "trust" problem are different. Language is a problem of training, and the issue will reduce over time. The business culture problem will mostly be solved by Chinese investors learning to accept western business practices, just as western investors in China must learn to accept Chinese business practices -- although there is some room for meeting in the middle in both contexts. And networks will build over time -- like language ability, but through human connections rather than training -- and in the meantime there will be an important role for "connectors" with both Chinese and Western networks, like my fund manager friend in Hong Kong (and I hope myself!).

Maury Shenk, Lily Innovation Advisors