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Indiana businesses are welcoming investment from China

January 22, 2010

A quarter century ago, its economy mired in a deep recession, Indiana looked to the Far East for financiers. The strategy paid off in a big way. Since then, the state has attracted more than 120 major Japanese direct foreign investments, including Subaru, Toyota and Honda auto plants.

Now, history is repeating itself—this time with China.

Indiana is in the earliest stages of developing a similar cooperative relationship with the emerging nation that many experts anticipate will be both partner and primary rival to the United States in the 21st century.

Conditions in the early ’80s and today are eerily similar.

“Back then, our concern was, where are new investments going to come from?” remembered Republican John Mutz, who served as Indiana’s lieutenant governor and top economic developer from 1981 to 1989. “The fact was, companies in the U.S. were just plain not investing, and in many cases were substantially short on cash.

“The Japanese had been building up large reservoirs of cash, and we knew they had a bunch of products, both consumer and auto, that they wanted to market in the U.S.”

Chinese foreign investment was virtually nonexistent a generation ago. Since then, the world’s most populated country has embraced capitalism in a big way. And it’s finally begun to look beyond its own borders.

By 2007, Chinese foreign investment had reached $25 billion, according to Washington, D.C.-based Peterson Institute for International Economics. That was just 1.1 percent of worldwide cross-border investments, while the United States that year accounted for 15.7 percent of the globe’s outbound investments.

However, it’s China’s acceleration that excites business leaders. Foreign investment by the Red Dragon doubled in 2008 to $50 billion.

“The history of outbound investment flows from China is short but spectacular,” Peterson fellow Daniel Rosen wrote in his June 2009 policy brief, “China’s Changing Outbound Foreign Direct Investment Profile: Drivers and Policy Implications.”

Lots of cultural differences must be overcome. For starters, there’s China’s sheer size. Scott Kennedy, director of the Indiana University Research Center for Chinese Politics and Business, pointed out that Chinese companies offer a wide range of motives and capabilities. Some are modern and highly efficient. Other enterprises are state-run, which can lead to all sorts of complications, from trade tariffs to lax pollution standards.

Both sorts are accustomed to operating in a far different business environment.

“Due diligence is so important with the Chinese, because they just come in so many flavors and shapes,” Kennedy said. “We’ve got a highly sophisticated business climate. There’s a lot of different gatekeepers they have to engage. In China, when you invest in a local factory, if you convince a Party secretary and a few functionaries, you’ll get all you need.”

But China is quickly surmounting all hurdles. Rosen wrote that Chinese companies are bidding for distressed firms, and the Chinese government is erasing regulatory red tape to ease investment.

Elsewhere in his brief, Rosen noted that officials in Beijing now talk publicly about making investments abroad as an alternative to holding U.S. government debt securities. The nation’s priorities are natural resources, such as oil and timber, but also new technologies: “Chinese [foreign investments] will increasingly target higher-value assets in advanced economies, as commercial competitiveness joins resource security as a first-order motivation.”

Pebbles, then an avalanche

Indiana has strengths that can capture some of China’s growing foreign investment appetite. In 2010, expect to begin seeing the first pebbles falling before the eventual avalanche.

“I actually know of three companies in Indiana that are in active negotiations with Chinese investors,” said frequent local angel investor Bob Compton. “They’re making strategic investments in the U.S. and Indiana, specifically in companies with high-end technology they want to understand and, frankly, develop on their own eventually in their own companies.”

A former venture capitalist who currently serves as chairman of Indianapolis-based Exact Target, Indiana’s fastest-growing software firm, Compton also regularly produces documentaries. He’s visited China multiple times for films about the nation’s educational system and its approach to entrepreneurship.

Compton said most of the deals he’s seen involving Chinese investors get little to no publicity, and usually aim to follow the same business model as the one they’re using to dominate solar panels. The technology was developed in the United States, particularly at the Massachusetts Institute of Technology, but China has obtained much of the production, and now holds 40 percent of the global market.

“Unlike venture capitalists that put tombstones [advertising their deals] into The Wall Street Journal, they aren’t looking for deal flow. They’re like snipers, looking for the technologies they want,” Compton said. “It often looks like really cheap money because there’s little to no equity involved. But that’s because they’re not looking to get a return on investment. They’re looking to access knowledge.”

Eyeing distribution networks

For all its economic progress, China remains an authoritarian nation.

The Chinese government must grant approval any time one of its people sends money outside its borders, noted Baker & Daniels partner Jacqueline Simmons, who leads the law firm’s international practice. Baker & Daniels has maintained a Beijing office the last 11 years.

Simmons is skeptical that Indiana’s economic dance with China will rehash the exact steps of a quarter century ago. It makes little sense for China to establish a lot of cheap manufacturing here, for example, since that’s what it already has in abundance at home.

Indiana’s opportunities, Simmons said, often will involve the logistics of distributing the products China wants to sell here. Whatever emerges, she said, it will certainly be the result of mutual investments in “face” time.

“China is very relationship-driven,” Simmons said. “If you are really interested in trying to find sources of investment in China, you’re going to have to spend some time in China to develop those relationships.”

That’s exactly where Indiana’s formal effort to engage China stands. Much as Mutz’s team did in the 1980s, today’s economic developers are attempting to cultivate still more Chinese interest in Indiana. In September, Gov. Mitch Daniels visited China for the first time. Ron Gifford, president of the Indy Partnership, which markets central Indiana, joined him on the trip.

Gifford also noticed a particular Chinese interest in Indiana’s strengths in life sciences, clean technology and alternative energy.

Gifford expects Daniels to visit China again in the fall. Gifford, himself, plans to visit several times, and so will local groups, like the economic developers who represent the city of Indianapolis.

“To the extent that Chinese businesses are going to invest in the States, we want to be in front of them, encouraging them to consider the Indianapolis area,” Gifford said. “To not reach out to China is to be extremely shortsighted, which means missing great opportunities.”

Gifford and his counterparts at the Indiana Economic Development Corp. and Indianapolis Economic Development Inc. are reaching out to everyone with a local Chinese connection for help.

Taiwanese native Albert Chen, for example, frequently joins local officials when they meet with Chinese business leaders. His Carmel-based telecommunications firm Telamon Corp. has six domestic offices and two in China.

Chen’s job in these situations is simple: Tell his own Hoosier success story, and explain why Indiana is a great place to do business. But his “heart and mind are here, not in China,” Chen said. So he always cautions his local friends to structure their Chinese deals carefully, especially when it comes to intellectual property.

“Those people are so smart,” Chen said. “Even I’m scared to do business with them.”•

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