Indiana businesses are welcoming investment from China

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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