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Managing Chinese
Outward Foreign Direct
Investment
From Entry Strategy to Sustainable
Development in Australia

Xueli Huang
Ying Zhu
Managing Chinese Outward Foreign Direct Investment
This page intentionally left blank
Managing Chinese
Outward Foreign Direct
Investment
From Entry Strategy to Sustainable
Development in Australia

Xueli Huang
RMIT University, Australia

Ying Zhu
The University of South Australia
© Xueli Huang and Ying Zhu 2016
Foreword © Ross Garnaut 2016
Softcover reprint of the hardcover 1st edition 2016 978-1-137-39458-3
All rights reserved. No reproduction, copy or transmission of this
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Any person who does any unauthorized act in relation to this publication
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work in accordance with the Copyright, Designs and Patents Act 1988.
First published 2016 by
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A catalogue record for this book is available from the British Library.
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Names: Huang, Xueli. | Zhu, Ying, 1961–
Title: Managing Chinese outward foreign direct investment : from entry
strategy to sustainable development in Australia / Xueli Huang, Ying Zhu.
Description: New York : Palgrave Macmillan, 2016. | Includes index.
Identifiers: LCCN 2015026342
Subjects: LCSH: Investments, Chinese—Australia. | Corporate
governance—China. | International business enterprises—
Management. | Diversity in the workplace—China. |
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LC record available at http://lccn.loc.gov/2015026342
Contents

List of Tables and Figures ix

Foreword xi

List of Abbreviations xiii

1 Introduction 1
Chinese OFDI in Australia 4
Bilateral trade and China–Australia Free Trade Agreement 5
Recent development of Chinese investment in Australia 6
The structure of this book 8

2 Strategic Entry Considerations and Their Impact on

Investment Performance in the Australian Mining
Industry 13
Introduction 13
Theoretical foundations 14
Mainstream FDI theory 14
Emerging FDI theories 15
Other FDI theories 17
Hypothesis development 18
The developmental stage of the target firms invested 20
Mode of market entry and financial performance 23
Methods 25
The database 25
Sample 26
Dependent variable 26
Independent variables 27
Control variables 28
Findings and discussion 28
Overall patterns of financial performance 28
Timing of market entry and financial performance 28
Stage of development invested and financial performance 30
Ownership percentage and financial performance 32
Mode of entry and financial performance 33
Discussion and conclusion 34

v
vi Contents

3 How Does Liability of Foreignness Impact the Behaviour

of Chinese MNCs? A Case Study of Sino Iron Project 44
Introduction 44
Reviewing literature on liability of foreignness 45
Research method 47
Case selection 47
Data collection 48
Case description 48
Findings and discussion 51
Poor preparation for entering the Australian
mining industry 51
Chinese standards in project design and costing 52
Difficulties and costs in managing major contractors 52
Additional costs in corporate management 55
Discriminatory government regulations and
administrative procedures 56
Discussion 57
Conclusion and implications 60

4 Managing Post-Transaction Integration by Chinese

MNCs 64
Introduction 64
Literature review 65
Strategic thinking and target identification in M&A 65
Post-acquisition integration 67
Research methods 74
Research design 74
Background information about Minmetals and MMG 76
Finding and discussion 77
Integration strategy and corporate control 77
Organisational integration 82
Cultural integration 84
Knowledge transfer and learning 84
MMG’s performance 86
Conclusion and implications 87

5 Corporate Governance in Chinese-Controlled

Subsidiaries 93
The institutional logics perspective and the logics
of corporate control 95
The institutional logics perspective 95
 Contents vii

Corporate control in China: The evolution of

institutional logics, social values and corporate
practices 96
Hypothesis development 101
Corporate governance practice and its adoption in
Chinese-controlled foreign subsidiaries 101
Moderating the relationship between institutional logics
and corporate control practices: Organisational
resources and size of foreign subsidiaries 106
Research methods 108
Findings and discussion 110
Board of director and chairperson appointments in
Chinese MNC subsidiaries 110
Appointment of MD/CEO and senior managers in
Chinese MNC subsidiaries 114
Conclusion and implication 117

6 Cross-Cultural Management and HRM 122

Introduction 122
Literature review on Chinese MNCs’ IHRM policies
and strategies 123
Methodology 131
The context 131
Methods adopted 132
Our case studies 133
Summary 137

7 Corporate Sustainable Development: How and Why

Chinese-Invested Firms Engage Community in the
Australian Mining Industry 140
Introduction 140
A conceptual framework of CSR performance 142
Research on community engagement 148
Community engagement practices by Chinese firms 149
Background information on the company studied 151
Research methods 152
Findings and discussion 153
Community engagement strategy and approach 153
Community engagement motivations 154
Conclusion 159
Limitations and directions for future research 160
viii Contents

8 Conclusion: Ongoing Challenges for Chinese OFDI and

MNCs Operating Abroad 166
Introduction 166
Ongoing challenges for Chinese OFDI and
MNCs operating abroad 167
Conclusion 169

Index 175
Tables and Figures

Tables

2.1 Typical major tasks involved in each stage of a mining

project development 21
2.2 Characteristics of Chinese investment in the Australian
mining industry 29
3.1 The timeline of the Sino Iron Project 49
4.1 Key issues and research disciplines adopted in each of the
stages of the M&A process 66
4.2 A chronological list of major events in Minmetals’
acquisition and post-acquisition development 80
4.3 The financial performance of MMG between 2009 and
2014 86
5.1 Institutional logics of bureaucrat/manager control and
corporate governance 102
5.2 Profile of the sample of Chinese subsidiaries and the
interviewees 109
5.3 Board of directors and the experience/qualifications of its
members at ten Chinese subsidiaries or JVs in Australia 111
5.4 Profile of CEOs and senior managers in Chinese
subsidiaries in Australia 115
7.1 The community engagement programmes and activities
undertaken by the JV 155
8.1 The existing problems and challenges for Chinese MNCs
and future improvements for policies and practices 170

Figures

1.1 China’s OFDI flow and M&A from 2004 to 2013 2

2.1 The relationship between entry time and the overall
profit of Chinese investments 30
2.2 The financial performance of Chinese investments at
different development stages of target firms 31
2.3 The relationship between ownership percentage and
financial performance of Chinese investment 32
4.1 Types of acquisition integration approaches 68

ix
x List of Tables and Figures

4.2 Organisation learning in acquisition: Sources,

mechanisms and performance 73
4.3 The effect of after-acquisition integration on acquisition
performance 74
4.4 Functional integration between Minmetals and MMG 83
5.1 The relationship of institutional players within the
context of corporate governance in China 100
5.2 The approach adopted by the Chinese government in
implementing corporate governance 101
5.3 Relationships between the logics of corporate control in
China, corporate practices in foreign subsidiaries,
organisational resources and the size and complexity of
foreign operations 108
7.1 The key drivers and moderators of CSR performance 147
Foreword

Chinese enterprises made their first investments in Australia less than

three decades ago. The CITIC Group’s investment in the Portland
aluminium smelter and the China Metallurgical Import and Export Cor-
poration’s investment in the Channar iron ore project were pioneers of
Chinese investment in the outside world as well as in Australia. The
Chinese government chose to dip its toe in the water of direct invest-
ment outside greater China in Australia with these two projects in the
resources sector, just as it had tested ideas and practice on technical
assistance from abroad and regional and global trade diplomacy through
interaction with Australia.
Chinese foreign direct investment abroad was tiny by global standards
until the twenty-first century. It is now a mainstay of expansion of inter-
national economic relations. By 2013, annual flows of direct investment
from China exceeded US$100 billion. Australia remains a major destina-
tion, accounting for more than from any other sovereign country other
than the United States. The resources sector remains of central impor-
tance, accounting for almost two-thirds of the total stock of Chinese
direct investment in Australia by 2013. This recent investment has been
characterised by much greater sectoral diversity.
Chinese outward foreign direct investment abroad is on the way to
becoming an even larger element of international economic coopera-
tion. Australia’s high complementarity with the Chinese economy, the
close bilateral economic ties between the two countries and the increas-
ing scale of the Chinese economy ensure that Chinese investment in
Australia will become more important to the development of the two
countries. A close study of China’s direct investment in Australia can
reveal important realities that are important not only for Chinese and
Australian development, but also in global terms.
In this book, Xueli Huang and Ying Zhu take a thorough look at the
experience of Chinese direct investment in Australia. Their conclusions
are instructive for future management of Chinese direct investment
abroad and for management of incoming investment by Australia and
other recipient countries.
The book is comprehensive in its scope. It is grounded on familiarity
with and sound application of the international literature on foreign
direct investment, and each chapter goes back to these foundations.

xi
xii Foreword

It draws on a database that includes the major examples of Chinese

investment in Australia since the beginnings. The analysis of average
results from the data set reveals general tendencies, and well-chosen
case studies allow the authors to dig deeper to obtain qualitative insights
into particular issues. The case study of the Sino Iron Project becomes
a source of a long list of errors to avoid. However, the success of the
Minmetals’ acquisition of all but one of the mines of Oz Minerals in the
trough immediately following the Great Crash of 2008 illustrates what
can go right.
The book examines the reasons for investment, as well as the deter-
minants of success. The financial success rates are low, underlying the
importance of analysis of reasons for generally poor performance. It
turns out that one crucial determinant of success with resource invest-
ment is timing in the business cycle. Don’t invest at the peak of the
cycle. But how do you know where you are?
Chapters on integration of businesses acquired by Chinese firms, cor-
porate governance, cross-cultural relations within Chinese enterprises,
and sustainable development and community relations take us into
more subtle determinants of success. These parts of the book are of
interest to students of International Relations and cross-cultural rela-
tions beyond the business sector. The main lessons are cautionary. The
authors argue that Chinese business is on a long march to understand-
ing the international environments that are increasingly important to
its success.
Managing Chinese Outward Foreign Direct Investment: From Entry Strategy
to Sustainable Development in Australia is a commendable contribution to
understanding an increasingly important dimension of China’s relations
with Australia and the world. Future analysts of these issues will build
from sound foundations laid down in this book.

Ross Garnaut
Professor of Economics
The University of Melbourne, Australia
Abbreviations

ASX Australian Securities Exchange

CCC cross-cultural competence
CCE corporate community engagement
CCP Chinese Communist Party
CEO chief executive officer
CP CITIC Pacific
CPM CITIC Pacific Mining
CRM community relations manager
CSA country-specific advantage
CSP corporate social performance
CSR corporate social responsibility
CSRC China Securities Regulatory Commission
FDI foreign direct investment
FIRB Foreign Investment Review Board
FSA firm-specific advantage
GFC global financial crisis
HCN host-country national
HRM human resource management
IB international business
ICMM International Council on Mining and Metals
IPO initial public offering
JV joint venture
KPI key performance indicator
LOF liability of foreignness
M&A merger and acquisition
MCA Minerals Council of Australia
MCC Metallurgical Corporation of China
MMG Minerals and Metals Group
MNC multinational corporation
NDRC National Development and Reform Commission
NGO non-governmental organisation
OECD Organisation for Economic Co-operation and
Development
OFDI outward foreign direct investment
OLI ownership–location–internalisation
PCN parent-country national

xiii
xiv List of Abbreviations

POE privately owned enterprise

RBV resource-based view
ROI return on investment
SASAC State-owned Asset Supervision and Administration
Commission of China
SIP Sino Iron Project
SME small and medium-sized enterprise
SOE state-owned enterprise
TCE transaction cost economics
WOS wholly owned subsidiary
1
Introduction

Chinese outward foreign direct investment (OFDI) has rapidly increased

over the last two decades, from about US$1 billion in 1991 to
US$107.8 billion in 2013 (Ministry of Commerce, 2014). Consequently,
China has become an important source of global capital. Since 2008,
China has been among the top ten countries globally in terms of
OFDI (UNCTAD, 2014), ranked as tenth in 2008, fourth in 2009, third
in 2010, seventh in 2011 and third in 2012 and 2013. In 2013, Chinese
OFDI stock reached US$660.4 billion. However, it only accounted for
about 2 per cent of the global FDI stock (UNCTAD, 2013). The Chinese
government has indicated that its OFDI will be more than US$500 bil-
lion by the end of its 12th five-year plan (2011–2015). It is widely
expected that in the next decade Chinese OFDI will exceed 1 trillion
US dollars.
The major driving forces behind the rapid growth of Chinese OFDI at
the macro-level have been the rise of the Chinese economy and the
strong support from the Chinese government (Luo et al., 2010). Since
2011, the Chinese economy has become the world’s second largest econ-
omy, 32 years of rapid economic development after China implemented
its “open-door and economic reform” policy in 1979. Chinese govern-
ment has supported its domestic firms to expand overseas by providing
financial support and low-interest loans (Buckley et al., 2007), simplify-
ing its OFDI approval process and improving its OFDI-related systems
(Luo et al., 2010).
The rapid growth of Chinese OFDI over the last decade has been
accompanied by a change in the international investment environ-
ment. Governments in many host countries have revised or developed
new foreign investment policies (Economou & Sauvant, 2012), making
FDI more challenging. Moreover, many multiple or bilateral agreements

1
2 Managing Chinese Outward Foreign Direct Investment

have been established globally, often in favour of FDI from the countries
that are party to the agreements while discriminating FDI from other
countries. At the societal level, communities in host countries increas-
ingly expect and demand foreign multinational corporations (MNCs) to
be more socially and environmentally responsible for their operations
in host countries (Klein, 2014).
Many changes have also taken place in the domestic environment in
Chinese OFDI. With the new generation of Chinese leadership elected
in March 2013, and the slowdown of global economic recovery, the
Chinese government has refined its economic policies that stress the
importance of domestic consumption, innovation and change of indus-
try structure from labour-intensive to high value-added in developing
its national economy. Moreover, the Chinese government has put more
emphasis on the performance of Chinese OFDI, particularly that of
foreign subsidiaries of state-owned enterprises (SOEs).
This book focuses on the management of Chinese OFDI, particularly
foreign subsidiaries established through merger and acquisition (M&A)
at the organisational level. As shown in Figure 1.1, the amount of M&A,
similar to the trend of overall Chinese OFDI growth, has substantially
increased over the past ten years.

120
107.8
100

87.8
80
76.7
68.8
60 55.9 52.9
56.5

40 43.4
29.7
26.5 30.2 27.2
20 12.3 21.2
5.5 19.2
6.5 8.3 6.3
0 3
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

OFDI (US$ billion) M&A (US$ billion)

Figure 1.1 China’s OFDI flow and M&A from 2004 to 2013
Source: Ministry of Commerce (2014).
 Introduction 3

The rise of Chinese OFDI has resulted in the establishment of 25,400

foreign subsidiaries owned by more than 15,000 Chinese firms in 184
countries or regions by the end of 2013 (Ministry of Commerce, 2014).
The number of Chinese firms setting up their foreign subsidiaries has
been increased from less than 7,000 in 2007 to 15,300 in 2013, more
than doubling in six years (Ministry of Commerce, 2008, 2014). The
Chinese SOEs have been responsible for a majority of Chinese OFDI so
far, although their investment proportion was reduced from 81 per cent
in 2006 to 55.2 per cent in 2013 due to the increase of OFDI from
Chinese private firms (Ministry of Commerce, 2014).
How do Chinese MNCs manage their OFDI, particularly their for-
eign subsidiaries to achieve their investment objectives? This is a very
important question as the role played by Chinese OFDI has increasingly
become important to Chinese investors. OFDI is a complex, multidis-
ciplinary and dynamic process, and it covers a wide range of issues
in strategic management, finance and organisational behaviour. The
exponential growth of Chinese OFDI over the last decade has substan-
tially expanded the geographic scope of Chinese MNC’s operations,
enhanced their capability to manage international business and gained
many financial and non-financial benefits. Nevertheless, Chinese MNCs
have encountered many challenges in not only making their OFDI deci-
sions but also subsequently managing these OFDIs after the transactions
in order to ensure sustainable development. Anecdotal evidence has
shown that the financial performance of Chinese OFDI has not met
the expectation of Chinese investors, including the State-owned Asset
Supervision and Administration Commission of China (SASAC) which
owns the SOEs. As a result, the SASAC issued two interim regulations
in 2011 for tightening the management and supervision of the overseas
assets owned by Chinese SOEs. In particular, this move targeted centrally
controlled SOEs, aiming to improve the OFDI decision-making process
and subsequent corporate governance and management of the foreign
subsidiaries to enhance their financial performance.
Although much research has been devoted to Chinese OFDI over the
last decade, a recent literature review (Deng, 2012) found that “research
to date has been fragmented and piecemeal, and numerous theoret-
ical and empirical areas of the internationalisation of Chinese firms
(ICFs) remain significantly under investigated” (p. 423). OFDIs, particu-
larly those resulting in the establishment of foreign subsidiaries through
M&A, should be regarded as a process that involves pre-acquisition
preparation, acquisition, post-acquisition integration and subsequent
management. Each of these stages in the process can have substantial
4 Managing Chinese Outward Foreign Direct Investment

impact on the OFDI’s financial performance. Extant research on Chinese

OFDI so far is not only fragmented, but also lopsided with regard to the
issues at the pre-acquisition stage, such as locational choices (Buckley
et al., 2007; Kang & Jiang, 2012; Kolstad & Wiig, 2012), role of Chinese
government (Gao et al., 2015; Luo et al., 2010; Voss et al., 2010), entry
mode consideration (Cui & Jiang, 2009; Rui & Yip, 2008), motivation
(Deng, 2009; Globerman & Shapiro, 2009) and ownership of Chinese
firms (Cui & Jiang, 2012; Hong & Sun, 2006; Huang & Chi, 2014). Scant
research has been devoted to the post-acquisition integration and its
subsequent management.
This book is specifically concerned with key issues in managing
foreign subsidiaries established by Chinese investors either through
Greenfield investment or acquisition in Australia. We have focused our
research on the managerial issues of Chinese OFDI since 2007 and have
interviewed more than 100 senior managers working in many Chinese
firms in Australia as part of several research projects in Chinese OFDI-
related areas. The book is built on the valuable insights we gained from
these research projects, and it addresses the managerial issues from
strategic investment decisions to corporate sustainable development.
Particular emphases have been placed on the post-acquisition integra-
tion and management, concentrating on major managerial issues such
as liability of foreignness (LOF) mitigation, post-acquisition integration,
corporate control and governance, human resources and cross-cultural
management and corporate social responsibility (CSR).
Before we explain the structure of this book, we would like to briefly
discuss Chinese OFDI in Australia, China’s bilateral trade with Australia
and the recent development of Chinese OFDI in Australia.

Chinese OFDI in Australia

Australia provides an excellent opportunity for studying the manage-

ment of Chinese OFDI, as it has been one of the largest destinations
for Chinese OFDI so far. Australia became the fifth largest destination
for Chinese OFDI by the end of 2013, only trailing behind Hong Kong,
the Virgin Islands, the Cayman Islands and the United States (Ministry
of Commerce, 2014). The Chinese OFDI stock in Australia had reached
US$17.45 billion, with nearly two-thirds (65.3 per cent) invested in the
extractive industry by 2013 (Ministry of Commerce, 2014). This number
has not considered investments made by Chinese MNCs through their
foreign subsidiaries, particularly those from Hong Kong, such as CITIC
Pacific, owned by CITIC Group, and Yangcoal, owed by Yang Kuang Co.
 Introduction 5

Both firms were listed in Hong Kong when they made their investments
in Australia. More than 80 per cent of Chinese OFDI in Australia was
made by Chinese SOEs (KPMG & China Studies Centre, 2014b).
Although Australia became the fifth largest destination for Chinese
OFDI by the end of 2013, Chinese OFDI stock in Australia accounted
for only 2.9 per cent of the Australia’s total FDI stock (Ministry of Com-
merce, 2014; UNCTAD, 2014). This is far less than the investments of the
United States (26 per cent), the United Kingdom (17 per cent), Japan
(6 per cent) and even Singapore (3 per cent) in Australia (Australian
Bureau of Statistics, 2015).

Bilateral trade and China–Australia Free Trade Agreement

The figure of Chinese OFDI in Australia is dwarfed by that of its bilateral
trade with Australia. China has been Australia’s largest trading partner
since 2011. In the Australian financial year of 2013–2014, Australian
exports to China reached A$107.5 billion and accounted for about one-
third (32.9 per cent) of its total export, while its imports from China
were A$52.1 billion, sharing 15.4 per cent of its total imports (Depart-
ment of Foreign Affairs and Trade, 2015b). While iron ore and coal were
ranked as the largest Australian exports to China (A$52.7 billion and
A$9.1 billion, respectively), telecommunication equipment and parts
and computers were the two largest imports by Australia from China
(Department of Foreign Affairs and Trade, 2015a).
Besides minerals exports to China, the exports of Australia’s agricul-
tural products, or “soft commodities”, such as wheat, red meat (e.g. beef
and lamb), seafood, wine and dairy products, have also substantially
increased over the last decade. For example, beef exports to China tre-
bled over the past five years and reached over 120,000 tons in 2014, but
this only accounted for 10 per cent of total Australian beef exports and
3 per cent of the total Chinese market share (Meat & Livestock Australia,
2015). The exports of Australian dairy products (liquid milk, milk pow-
der, cheese and butter) to China have nearly doubled since 2008 (Dairy
Australia, 2015).
China’s economic rise increases not only its demand for Australia’s
commodities and agricultural products, but also its service exports, par-
ticularly education and tourism, to China. Education is Australia’s third
largest export industry. China is Australia’s largest international stu-
dent market. By the end of March 2015, there were more than 115,000
Chinese students studying in Australia, accounting for 27.9 per cent of
the total number of international students in Australia (Department of
Education and Training, 2015).
6 Managing Chinese Outward Foreign Direct Investment

With regard to tourism, China was the second largest inbound tourist
market for Australia in 2013 with more than 700,000 arrivals (Tourism
Australia, 2014), increasing from less than 200,000 in 2003. Chinese
tourists contributed A$4.8 billion to Australia’s economy in 2013,
becoming a major source for the Australian tourism industry. In its
national strategic plan (“Tourism 2020”), Tourism Australia is expect-
ing that China will be a major contributor to its growth in the future
(Tourism Australia, 2011). The growth in bilateral trade between China
and Australia will further result in the increase of Chinese OFDI in
Australia.
With the signing of the China–Australia Free Trade Agreement on
17 November 2014 (Prime Minister of Australia, 2014), a wide range of
bilateral trade and investment opportunities will be accessible. On the
one hand, most import tariffs will be immediately or gradually elimi-
nated by the Chinese government, particularly for agricultural products
and processed food, such as dairy products, beef, live animal exports,
seafood, wine, honey and fruit juice (Department of Foreign Affairs and
Trade, 2015c). China will also open its market for Australia’s services
industry, such as financial, insurance, healthcare, legal, education, and
tourism and travel-related services. On the other hand, Australia will lift
its threshold for screening Chinese investment. Chinese private enti-
ties can invest up to A$1.094 billion without the need for approval
from the Australian government’s Foreign Investment Review Board
(FIRB). However, investment by Chinese SOEs in Australia still needs
approval from the FIRB, no matter how it is invested. Moreover, the
investment screen threshold is lower for sensitive sectors, such as media,
telecommunications and defence-related industries (Department of For-
eign Affairs and Trade, 2015c) and can be subject to change by the FIRB.
For example, the investment screen thresholds for foreign investors in
agricultural land and agribusinesses were reduced from A$252 million to
A$15 million and A$53 million, respectively, since 1 March 2015 (For-
eign Investment Review Board, 2015), partly due to negative sentiment
from the Australian public towards the acquisition of agricultural land
by foreigners.

Recent development of Chinese investment in Australia

Chinese investment in Australia has gradually diversified from the min-
ing industry since 2013, partly due to the slump in commodity prices.
For example, the commodity metal index and iron ore price declined
from A$202 and A$150 per ton in January 2013 to A$134 and A$57 in
March 2015, respectively (Index Mundi, 2015). Nevertheless, Chinese
firms continue investing in the Australian mining industry, although at
 Introduction 7

a slower pace. An example of such investment was Baosteel’s acquisition

of Aquila Resources in partnership with Aurizon, an Australian listed
company operating in railway and port transportation, in May 2014 for
A$1.4 billion.
Chinese investment in Australia’s infrastructure, real estate and
agribusiness has been growing over the past several years. China State
Grid acquired 19.9 per cent of the electricity supplier SP AusNet and
60 per cent of energy infrastructure company SPI Australia for A$3.7 bil-
lion in 2013 (KPMG & China Studies Centre, 2014b). China Merchants
Group secured its 98-year lease of Port of Newcastle for A$1.75 bil-
lion in a joint venture with a local company (50:50) in 2014 (Port of
Newcastle, 2015). Chinese firms have also started investing in agricul-
ture. Major Chinese investment projects in the Australian agriculture
industry include the acquisition of Tully Sugar mill by China’s Oil
and Food Company for A$136 million; Shangdong Ruyi’s acquisition
of a cotton farm, Cubbie Station, in Queensland in partnership with a
local wool company (80:20) for A$300 million; and Shanghai Zhongfu’s
leasing of Ord River for 50 years to develop 15,200 hectares of irri-
gated agricultural land in Western Australia. Chinese private investors,
including small and medium-sized enterprises (SMEs), have increas-
ingly become active in investing in Australia, particularly in real estate
and agriculture, such as vineyards, farmland or dairy production sites.
Nevertheless, Chinese investment in Australian agriculture is still very
small, just over A$1 billion and less than 2 per cent of their overall
investment in Australia by the end of 2013 (KPMG & China Studies
Centre, 2013). Given the vast opportunities in the improvement of
infrastructure and water systems in the Australian agricultural industry
in order to reduce supply chain costs and to increase its irrigated farm-
land (Australian Government, 2014), it is estimated that the Australian
agricultural industry needs A$600 billion of investment by 2050 for
improving farm productivity and increasing production (Port Jackson
Partners, 2012).
More recently, Chinese firms have also considered Australia as a plat-
form for raising capital through initial public offering (IPO). Given the
transparency and simplicity of the IPO procedure in Australia, it is
expected that more Chinese firms will come to Australia to raise money.
Nevertheless, the financial performance of these companies so far is gen-
erally unsatisfactory partly due to the problems in corporate governance
(Shanahan, 2014) and partly due to problems in their business model
and operations.
Australia is well positioned to attract FDI and has been heavily
relying on FDI for economic development since late 1900s (Caves
8 Managing Chinese Outward Foreign Direct Investment

& Krause, 1984). By the end of 2013, Australia’s FDI stock reached
US$591 billion (UNCTAD, 2014), with the United States and the United
Kingdom accounting for nearly 50 per cent. There are several major
benefits for investing in Australia. For example, Australia is abundant
in mineral resources and is geographically close to China. It also has
a stable political system and a well-regulated and transparent business
environment, as well as a highly educated and skilled workforce. From
an industry perspective, the Australian mining industry is well advanced
globally in terms of technology and management (Huang & Austin,
2011). Its biotechnology and medical technology industries are also
leading the world. The Australian agricultural industry is renowned for
its safety, quality and cleanness. The Australian services sector is well
developed and a major contributor to its GDP.
As is the case in any other country, there are several challenges in
doing business in Australia (KPMG & China Studies Centre, 2014a).
These challenges include (1) costs of doing business in Australia,
(2) infrastructure bottleneck, (3) institutional integration, (4) nega-
tive media coverage and (5) entry and approval process. There are
also cultural and institutional differences between Australia and China
(Huang & Austin, 2011).

The structure of this book

Based on the investment trend of Chinese OFDI in Australia, we have

designed this book by focusing on the managerial issues of Chinese
OFDI. By adopting a process perspective, our research has targeted
key managerial issues from strategic entry considerations to corporate
sustainable development.
Chapter 2 examines how entry considerations impact the finan-
cial performance of Chinese OFDI in the Australian mining indus-
try. It focuses on three strategic entry factors: timing [before, during
and after the global financial crisis (GFC), during the GFC and after
the GFC], stage (exploration, development and production) of project
invested and percentage of ownership (minor vs. major) held by Chinese
investors. The chapter also describes the mainstream theory of FDI as
well as the emerging theories that focus on the explanation of the
behaviour of MNCs from transitional and developing countries. This
is one of the first empirical studies on the financial performance of
Chinese OFDI.
Chapter 3 investigates how the LOF of Chinese MNCs affects invest-
ment decisions and subsequent managerial behaviour. The Sino Iron
 Introduction 9

Project has been used as a case study. Sino Iron Project was invested
originally by CITIC Pacific, a Hong Kong listed company, and then by
CITIC Group, a large Chinese SOE, and it is the largest Chinese invest-
ment project (more than A$10 billion) in Australia so far. Coupled with
its Greenfield entry mode, the case provides an excellent opportunity to
identify, describe and analyse the LOFs encountered by Chinese MNCs
in Australia, what strategies are used to mitigate these LOFs and how
LOFs impact financial performance.
Chapter 4 concentrates on the post-acquisition integration. It first
develops a conceptual framework of post-acquisition integration based
on a literature review. Using a combination of secondary data
and in-depth interviews with senior managers, the chapter looks at
how post-acquisition integration was conducted by a Chinese SOE,
Minmetals, after it acquired a majority of the assets of OZ Miner-
als, an Australian-listed mining company, for A$1.4 billion in 2009.
We focus on several key issues in the post-acquisition integration,
including integration strategy, corporate control, functional integration,
cultural integration, and knowledge transfer and learning. The smooth
and successful post-acquisition integration of this case has offered many
managerial insights into the post-integration process by Chinese MNCs.
Chapter 5 describes the corporate control by Chinese MNCs over
their subsidiaries in Australia. We focus on the appointment of board of
directors and chief executive officers (CEOs) in the Chinese-controlled
and -listed companies in the Australian Securities Exchange (ASX).
We examine the CEOs and a number of Chinese insider directors
appointed, their educational background and professional experiences
and explore the reasons behind such appointments. This chapter also
presents a brief developmental history of corporate governance in China
and, using an institutional logics perspective, how such a historical
development, together with the influence of China’s institution and
culture, impacts corporate control by Chinese MNCs in their foreign
subsidiaries (Thornton et al., 2012).
Chapter 6 describes and discusses cross-cultural management and
human resource management of Chinese subsidiaries operating in
Australia. Using a case study method, the chapter focuses on identifying
problems, developing adequate policies and implementing them in a
culturally appropriate manner. Chinese firms in Australia confront new
challenges, particularly in the areas of a new labour market environ-
ment and relevant labour laws and regulations. It is crucial for them
to be familiar with such new institutional and economic environments
and, at the same time, be able to adopt and adapt new ways of doing
10 Managing Chinese Outward Foreign Direct Investment

business and managing their workforce. This chapter could be useful for
other companies to learn both positive and negative lessons, particu-
larly for companies from transition economies operating in developed
economies.
Chapter 7 explores CSR practices implemented by Chinese-controlled
entities in Australia. CSR has become an important issue for MNCs,
particularly for those operating in foreign countries. Specifically, the
chapter examines the community engagement by a Chinese-controlled
firm in the Australian mining industry. The chapter starts with a brief
review of literature on CSR and constructs a framework of factors influ-
encing CSR performance. It then describes the community engagement
strategy and approach implemented by the Chinese-controlled firm and
its motivations for undertaking such community engagement practices.
In conclusion, Chapter 8 highlights the research findings and dis-
cusses many ongoing challenges for Chinese OFDI and MNCs operating
abroad. In addition, it provides some implications for improving future
development in the hope that the relevant decision-makers and busi-
ness leaders both in China and abroad may learn from these lessons and
be more successful in future OFDI and MNC operations.

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2
Strategic Entry Considerations and
Their Impact on Investment
Performance in the Australian
Mining Industry

Introduction

Despite the rapid increase of OFDI from China and other develop-
ing countries and emerging economies, anecdotal evidence (Liu &
Waldemar, 2011) has shown that the financial performance of these
OFDIs varies substantially, and disturbingly, a large proportion of them
fail. Although research over the last three decades has been dedicated to
the theoretical and practical understanding of OFDI performance and
its influencing factors, an overwhelming proportion of this research has
focused on the OFDI from developed countries (Slangen & Hennart,
2008). Research on OFDI from developing countries to developed coun-
tries is growing and has so far concentrated on the role of institutions
(Meyer, 2004), the firm’s ownership (Cui & Jiang, 2012; Cui et al., 2011)
and investment motives (Deng, 2009; Rui & Yip, 2008).
This chapter aims to explore the financial performance of Chinese
OFDI and its influencing factors in the Australian mining industry.
Specifically, this chapter attempts to examine the financial performance
of major Chinese OFDI in the Australian mining industry, including
those listed on the Australian Securities Exchange (ASX), and analyses
how such performance is influenced by four entry factors: (1) market
entry timing, (2) developmental stages of the target companies, (3) own-
ership level held by Chinese investors and (4) mode of entry (greenfield
vs. acquisition). We employ multiple theoretical perspectives, such as
the institution perspective, the resource-based view (RBV), transaction
cost theory and agency theory, to explain why such entry behaviours
are observed in Chinese investors.

13
14 Managing Chinese Outward Foreign Direct Investment

Theoretical foundations

Mainstream FDI theory

Why do firms make FDIs? This has been a fundamental question in the
study of FDI since the early 1960s. A seminal work can be traced back
to Hymer (1976) who based his analysis of MNC’s foreign operations
on Bain’s (1956) concept of oligopolistic advantages, including superior
technology, economies of scale, knowledge and distribution channels.
Firms must possess oligopolistic advantages to offset their disadvan-
tages caused by their unfamiliarity with foreign countries. This view is
broadly in line with the RBV (Barney, 1991) developed in the area of
strategic management, which emphasises the important role an organ-
isation’s internal resources [e.g. “strategic capability” (Johnson et al.,
2011 or “core competence” (Prahalad & Hamel, 1990)] play in surviv-
ing and competing successfully. Hymer (1976) elaborated that MNCs
can exploit these advantages by establishing foreign operations. Essen-
tially, Hymer’s (1976) explanation of FDI focused solely on internal, or
ownership, advantages that can be used to seek monopolistic rent for
MNCs (Rugman, 1986).
Building on Coase’s (1937) work on transaction costs, Buckley and
Casson (1976) offered an alternative explanation of FDI. They argued
that firms can reap the benefits of internalising missing and/or imperfect
external activities in their value chains, thus reducing their transaction
costs such as information, bargaining and enforcement costs. In contrast
to Hymer’s (1976) oligopolistic advantage, Buckley and Casson’s (1976)
internalisation theory is exogenous and focused on efficiency rent seek-
ing. While Hymer’s work is built on monopoly advantage, Buckley and
Casson’s argument is based on Coase’s (1937) transaction costs. These
two theories are similar to the concepts of “strategising” and “economis-
ing” (Williamson, 1991) used in the area of strategic management to
explain how “economic rent” can be generated by firms.
Dunning (1977) has concentrated on the valuable input offered
by different geographic locations (countries) in international produc-
tion, including endowments such as natural resources, kind of labour,
proximity to markets and technologies, and the legal and commer-
cial environment such as market structure, government legislation and
policies, to improve an organisation’s performance and/or enhance its
organisational capabilities. This is the locational advantage, which is
often available to all firms operating in that location.
The most widely used theory for explaining international busi-
ness activity and behaviour is probably Dunning’s eclectic theory
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expected to reach the eastern coast of Asia by crossing the Atlantic,
that part of Asia was so wholly unknown to Europeans, that its
discovery by means of a transatlantic voyage would have enabled
the discoverer to take possession of it as a new continent; and it was
hence quite proper for Columbus to speak of discovering a new
world when he was really intending to discover the eastern half of
what we now call the Old world.
It is all very well to have a good opinion of one’s self, but
Columbus really did put what seems to unprejudiced people a
tremendous price upon his services. Not only did he demand one
tenth of whatever profits might be derived from his discoveries, but
he insisted that he should be made an admiral, and viceroy over
every country that he might discover. One of the committee justly
remarked that the proposed arrangement was one by which
Columbus had everything to gain and nothing to lose, and that if he
made no discoveries whatever he would still be a Spanish admiral,
and would outrank scores of deserving officers who had spent their
lives in the service of their country. Columbus thereupon modified his
terms by consenting to take only an eighth of the profits, and to
furnish one eighth of the expenses.
It so happened that some member of the committee knew that
one eighth was more, instead of less, than one tenth. We need not
wonder, therefore, that the committee reported that the terms
proposed were inadmissible. De Talavera told the Queen that he had
met with a good deal of “cheek” in his time, but the cheek of
Columbus was positively monumental, and that nature designed him
not for an explorer but for a life-insurance agent.
The result was that the Queen decided to have no more to do
with the affair, and Columbus, in a tremendous rage, climbed upon
his mule and rode out of Santa Fé, remarking that he wouldn’t
discover a continent for the Spanish monarchs if continents were as
thick as blackberries. He furthermore declared that he would go
straight to France and make a contract with the French king, and that
the Spaniards would never cease to regret their short-sighted
economy.
 As the extremity of the Columbian mule vanished through the
city gate, Luis de St. Angel, treasurer of the Church funds of the
kingdom of Aragon, and the much-suffering Quintanella—who did
not believe that Columbus would really go to France, and were
convinced that the true way in which to be permanently rid of him
was to send him on his proposed expedition—hastened to the
palace, and told the monarchs that they were risking the loss of a
new continent because they were afraid to risk two ships and a
comparatively small sum of money, and because they hesitated to
give the title of Admiral to an explorer who, if he did not succeed,
would in all probability never return to Spain.
The Queen was much impressed by this straightforward
statement of facts, and admitted that she would like to employ
Columbus upon his own terms. The King, instead of saying,
“Certainly, my dear; do so, by all means!” began to speak of the
emptiness of the treasury and the necessity for economy. Of course
this made Isabella indignant, and she rose up and exclaimed, “I will
undertake the enterprise in behalf of Castile, and will raise the
money if I have to pawn my jewels.”
[Æt. 55–56; 1492]

Quintanella and St. Angel applauded this resolution, and the

latter offered to advance the necessary money without any security
whatever. Inasmuch as the money in St. Angel’s hands belonged to
Aragon, this was a remarkably neat way of saddling the whole
expense upon King Ferdinand’s private dominions; and there are few
ladies who will not concede that it served the King right.
A messenger was at once sent to recall Columbus, and that
astute person, grimly smiling at the success of his threat to go to
France, prevailed upon his mule to turn back and reënter Santa Fé.
He was immediately given an audience with the Queen, and a
contract was drawn up in which his utmost demands were
recognized. He was to have a tenth of everything, and to rank with
the High Admiral of Castile, while instead of his being required to
contribute an eighth of the cost of the expedition, it was simply
specified that he might make such a contribution if he should feel so
inclined. The contract was signed on the 17th of April, 1492, and
Columbus’s commission as Admiral and Viceroy was immediately
made out and given to him.
[Æt. 56; 1492]

From 1474 to 1492, or precisely eighteen years, Columbus had

been seeking for assistance to cross the Atlantic. During that entire
period he was without money, without any visible means of support,
and without powerful friends. Nevertheless, he finally obtained from
Ferdinand and Isabella a full compliance with demands that to nearly
every Spaniard seemed wildly preposterous. To what did he owe his
success? It seems very plain that it must have been due to his
unparalleled powers of conversation. We know that most of those
persons with whom he was on familiar terms when he first conceived
his scheme soon died, and the inference that they were talked to
death is irresistible. Beyond any doubt, these were only a few of his
victims. Columbus talked in Portugal until he was compelled to fly
the kingdom, and he talked in Spain until the two monarchs and a
few other clear-headed persons felt that if he could be got out of the
country by providing him with ships, money, and titles, it must be
done. We can readily understand why the news that he was actually
about to leave Spain, and to undertake a voyage in the course of
which it was universally believed he would be drowned, was
received by the Spaniards with unanimous delight. Women wept
tears of joy, and strong men went into secluded corners and stood
on their heads in wild hilarity. The day of their deliverance was at
hand, and the devastating career of the terrible talker was nearly at
an end.
 CHAPTER V.
HE IS COMMISSIONED, AND SETS SAIL.

[Æt. 56; 1492]

ON the 12th of May, 1492, Columbus left Santa Fé for Palos, the
seaport from which his expedition was to sail. He left his small-boy,
Diego, behind him, as page to Prince Juan, the heir of Castile and
Aragon. Diego was the son of his lawful wife, and it is pleasant to
find that, in spite of this fact, Columbus still remembered him. His
favorite son was of course Fernando, who, with his mother, Beatrix,
seems to have been sent away to board in the country during
Columbus’s absence at sea.
As soon as he arrived at Palos, Columbus called on his worthy
friend the Prior, and on the next day the two went to the church of St.
George, where the royal order directing the authorities of Palos to
supply Columbus with two armed ships, and calling upon everybody
to furnish the expedition with all necessary aid, was read aloud by a
notary-public. The authorities, as well as the other inhabitants of
Palos, were naturally only too glad to do everything in their power to
hasten the departure of Columbus; but it was found extremely
difficult to procure ships or sailors for the expedition. The merchants
very justly said that, much as they might desire to have Columbus
drowned, they did not care to furnish ships at their own expense for
an enterprise in the interest of all classes of the community. The
sailors declared that they were ready to ship for any voyage which
might be mentioned, but that it was a little too much to ask them to
go to sea with Columbus as their captain, since he would
undoubtedly use his authority to compel them to listen to a daily
lecture on “Other Continents than Ours,” thus rendering their
situation far worse than that of ordinary slaves.
 The King and Queen, learning of the failure of Columbus to
obtain ships and men, and fearing that he might return to court,
ordered the authorities of Palos to seize eligible vessels by force,
and to kidnap enough sailors to man them. This would probably have
provided Columbus with ships and men, had not the short-sighted
monarch appointed one Juan de Peñalosa to see that the order was
executed, and promised him two hundred maravedies a day until the
expedition should be ready. De Peñalosa was perhaps not the
intellectual equal of the average American office-holder, but he had
sense enough to appreciate his situation, and of course made up his
mind that it would take him all the rest of his natural life to see that
order carried out. Accordingly, he drew his pay with great vigor and
faithfulness, but could not find any ships which, in his opinion, were
fit to take part in the proposed expedition. The people soon
perceived the state of affairs, and despaired of ever witnessing the
departure of Columbus.
Doubtless De Peñalosa would have gone on for years failing to
find the necessary ships, had not two noble mariners resolved to
sacrifice themselves on the altar of their country. Martin Alonzo
Pinzon and Vincente Yanez Pinzon, his brother, were the two marine
patriots in question. They offered a ship and crew, and the
magistrates, emulating their patriotism, seized two other ships and
ordered them to be fitted for service.
These vessels were under one hundred tons’ burthen each, and
only one of them, the Santa Maria, was decked over. In model they
resembled the boats carved by small inland boys, and their rig would
have brought tears to the eyes of a modern sailor—provided, of
course, a way of bringing a modern sailor to Palos to inspect them
could have been devised. If we can put any faith in woodcuts, the
Santa Maria and her consorts were two-masted vessels carrying one
or two large square sails on each mast, and remotely resembling
dismasted brigs rigged with jury-masts by some passengers from
Indiana who had studied rigging and seamanship in Sunday-school
books. The pretence that those vessels could ever beat to windward
cannot be accepted for a moment. They must have been about as
fast and weatherly as a St. Lawrence “pin flat,” and in point of safety
and comfort they were even inferior to a Staten Island ferry-boat.
The Pinta was commanded by Martin Pinzon, and the Niña by
Vincente Pinzon. No less than four pilots were taken, though how
four pilots could have been equally divided among three ships
without subjecting at least one pilot to a subdivision that would have
seriously impaired his efficiency, can not readily be comprehended.
Indeed, no one has ever satisfactorily explained why Columbus
wanted pilots, when he intended to navigate utterly unknown seas. It
has been suggested that he had bound himself not to talk to an
intemperate extent to his officers or men, and that he laid in a supply
of private pilots purely for the purpose of talking to them. It is much
more probable that a law of compulsory pilotage existed at that time
in Spain,—for it was a dark and ignorant age,—and that, inasmuch
as Columbus would have had to pay the pilots whether he took them
with him or not, he thought he might as well accept their services.
Besides, he may have remembered that a vessel rarely runs
aground unless she is in charge of a pilot, and hence he may have
imagined that pilots possessed a peculiar skill in discovering
unexpected shores at unlooked-for moments, and might materially
help him in discovering a new continent by running the fleet aground
on its coast.
A royal notary was also sent with the expedition, so that if any
one should suddenly desire to swear or affirm, as the case might be,
it could be done legally. The three vessels carried ninety sailors, and
the entire expeditionary force consisted of one hundred and twenty
men.
The ship-carpenters and stevedores, doubtless at the instigation
of Peñalosa, made all the delay they possibly could, and at the last
moment a large number of sailors deserted. Other sailors were
procured, and finally everything was in readiness for the departure of
the fleet. On Friday the 3d of August, 1492, Columbus and his
officers and men confessed themselves and received the sacrament,
after which the expedition put to sea.
 In spite of the knowledge that Columbus was actually leaving
Spain with a very slight prospect of ever returning, the departure of
the ships cast a gloom over Palos. The people felt that to sacrifice
one hundred and nineteen lives, with three valuable vessels, was a
heavy price to pay, even for permanently ridding Spain of the
devastating talker. Still, we are not told that they permitted sentiment
to overpower their patriotism, and they were probably sustained by
the reflection that it was better that one hundred and nineteen other
people should be drowned, than that they themselves should be
talked to death.
It is universally agreed that it is impossible not to admire the
courage displayed by Columbus and his associates. The ships of the
expedition were small and unseaworthy. They were not supplied with
ice-houses, hot water, electric bells, saloons amidships where the
motion is least perceptible, smoking and bath rooms, or any of the
various other devices by which the safety of modern steamships is
secured. The crew knew that they were bound to an unknown port,
and that if their vessels managed to reach it there was no certainty
that they would find any rum. Columbus had employed eighteen
years in convincing himself that if he once set sail he would
ultimately arrive somewhere; but now that he was finally afloat, his
faith must have wavered somewhat. As he was an excellent sailor,
he could not but have felt uncomfortable when he remembered that
he had set sail on Friday. However, he professed to be in the very
best of spirits, and no one can deny that he was as brave as he was
tedious.
On the third day out, the Pinta unshipped her rudder, and soon
after began to leak badly. Her commander made shift partially to
repair the disaster to the rudder, but Columbus determined to put
into the Canaries, and charter another vessel in her place. He knew
that he was then not far from the Canaries, although the pilots, either
because their minds were already weakening under the strain of
their commander’s conversation, or because they were ready to
contradict him at every possible opportunity, insisted that the islands
were a long way off. Columbus was right, and on the 9th of August
they reached the Canaries, where we may suppose the pilots were
permitted to go ashore and obtain a little rest.
For three weeks Columbus waited in hopes of finding an
available ship, but he was disappointed. The Pinta was therefore
repaired to some extent, and the Niña was provided with a new set
of sails. A report here reached Columbus that three Portuguese
men-of-war were on their way to capture him—doubtless on the
charge of having compassed the death of several Portuguese
subjects with violent and prolonged conversation. He therefore set
sail at once, and as he passed the volcano, which was then in a
state of eruption, the crews were so much alarmed that they were on
the point of mutiny. Columbus, however, made them a speech on the
origin, nature, and probable object of volcanoes, which soon reduced
them to the most abject state of exhaustion.
Nothing was seen of the Portuguese men-of-war, and it has
been supposed that some practical joker alarmed the Admiral by
filling his mind with visions of hostile ships, when the only
Portuguese men-of-war in that part of the Atlantic were the harmless
little jelly-fish popularly known by that imposing title.
It was the 6th day of September when the expedition left the
Canaries, but owing to a prolonged calm it was not until the 9th that
the last of the islands was lost sight of. We can imagine what the
devoted pilots must have suffered during those three days in which
Columbus had nothing to do but talk; but they were hardy men, and
they survived it. They remarked to one another that they could die
but once; that care had once killed a vague and legendary cat; and
in various other ways tried to reconcile themselves to their fate.
The crew on losing sight of land became, so we are told, utterly
cast down, as they reflected upon the uncertainty of ever again
seeing a Christian grog-shop, or joining with fair ladies in the
cheerful fandango. Mr. Irving says that “rugged seamen shed tears,
and some broke into loud lamentation,” and that Columbus
thereupon made them a long speech in order to reconcile them to
their lot. The probability is that Mr. Irving reversed the order of these
two events. If Columbus made a long speech to his crew, as he very
likely did, there is no doubt that they shed tears, and lamented
loudly.
Lest the crew should be alarmed at the distance they were
rapidly putting between themselves and the spirituous liquors of
Spain, Columbus now adopted the plan of daily falsifying his
reckoning. Thus if the fleet had sailed one hundred miles in any
given twenty-four hours, he would announce that the distance sailed
was only sixty miles. Meanwhile he kept a private log-book, in which
he set down the true courses and distances sailed. This system may
have answered its purpose, but had the fleet been wrecked, and had
the false and the true log-books both fallen into the hands of the
underwriters, Columbus would not have recovered a dollar of
insurance, and would probably have been indicted for forgery with
attempt to lie. The lawyer for the insurance company would have put
in evidence the two entries for, let us say, the 10th of September; the
one reading, “Wind E.S.E., light and variable; course W. by N.;
distance by observation since noon yesterday, 61 miles;” and the
other, or true entry, reading, “Wind E.S.E.; course W. by N.; distance
by observation since noon yesterday, 117 miles. At seven bells in the
morning watch, furled main-top-gallant sails, and put a single reef in
all three topsails. This day ends with a strong easterly gale.” With
such evidence as this, he would easily have proved that Columbus
was a desperate villain, who had wrecked his vessels solely to
swindle the insurance companies. Thus we see that dishonesty will
vitiate the best policy, provided the underwriters can prove it.
It was perhaps this same desire to lead his crew into the belief
that the voyage would not be very long, which led Columbus to insert
in the sailing directions given to the two Pinzons an order to heave-to
every night as soon as they should have sailed seven hundred
leagues west of the Canaries. He explained that unless this
precaution were taken they would be liable to run foul of China in the
night, in case the latter should not happen to have lights properly
displayed. This was very thoughtful, but there is no reason to think
that it deceived the Pinzons. They knew perfectly well that Columbus
had not the least idea of the distance across the Atlantic, and they
probably made remarks to one another in regard to the difficulty of
catching old birds with chaff, which the Admiral would not have
enjoyed had he heard them.
Thus cheerfully cheating his sailors, and conversing with his
pilots, Columbus entered upon his voyage. A great many meritorious
emotions are ascribed to him by his biographers, and perhaps he felt
several of them. We have, however, no evidence on this point, and
the probability is that he would not have expressed any feeling but
confidence in his success to any person. He had long wanted to sail
in quest of new continents, and his wish was now gratified. He ought
to have been contented, and it is quite possible that he was.
 CHAPTER VI.
THE VOYAGE.

[Æt. 56; 1492]

IN those days everybody supposed that the needle always

pointed due north. Great was the astonishment of Columbus when, a
few days after leaving the Canaries, he noticed what is now called
the variation of the compass. Instead of pointing to the north, the
needle began to point somewhat to the west of north; and the farther
the fleet sailed to the west, the greater became the needle’s variation
from the hitherto uniform direction of all respectable needles. Of
course Columbus at first supposed that his compass was out of
order, but he soon found that every compass in the fleet was
conducting itself in the same disreputable way. The pilots also
noticed the startling phenomenon, and said it was just what they had
expected. In seas so remote from the jurisdiction of Spain, who could
expect that the laws of Nature would be observed? They did not like
to grumble, but still they must say that it was simply impious to sail in
regions where even the compass could not tell the truth. But
Columbus was not the man to be put to confusion by remarks of this
kind. He calmly told the pilots that the compass was all right; it was
the North Star that was wrong, and he never had felt much
confidence in that star, anyway. Then inviting the pilots to come
down into his cabin and take a little—well, lunch, he explained to
them with such profound unintelligibility the astronomical habits and
customs of the North Star, that they actually believed his explanation
of the variation of the compass. There are those who hold that
Columbus really believed the North Star was leaving its proper
place; but the theory does gross injustice to the splendid mendacity
of the Admiral. The man who could coolly assert that if his compass
differed from the stars the latter were at fault, deserves the wonder
and admiration of even the most skilful editor of a campaign edition
of an American party organ.
The sailors would probably have grumbled a good deal about the
conduct of the compass had they noticed it; but it does not appear
that they had any suspicion that it had become untrustworthy.
Besides, the fleet was now fairly in the trade-wind, and very little
labor was required in the management of the vessels. The sailors,
having little to do, were in good spirits, and began to see signs of
land. A large meteor was seen to fall into the sea, and soon after a
great quantity of sea-weed was met, among which tunny-fish made
their home. The Admiral also caught a small crab. Crabs, tunny-fish,
sea-weed, and meteors must have been, in those days, exclusively
products of the land; otherwise, there was no reason why Columbus
and his men should have regarded them as proofs of the vicinity of
land. They did, however, meet with a bird of a variety—so the oldest
mariners asserted—that never sleeps except on a good substantial
roosting-place. This really did give them some reason to imagine that
land was not very far off; but as the result showed, the bird was
painfully untrustworthy.
Day after day the so-called signs of land were seen. A large
reward was offered to the first person who should see the sought-for
continent, and consequently everybody was constantly pretending
that a distant cloud or fog-bank was land, and then finding fault with
the Admiral because he would not change his course. One day a
pair of boobies—a bird singularly misnamed, in view of the fact that it
rarely flies out of sight of land—rested in the rigging. Another day
three birds of a kind—which, every one knows, were even better
than two pairs—came on board one of the ships in the morning, and
flew away again at night, and it was the universal opinion that they
sang altogether too sweetly for sea-birds; the voices of the gull, the
stormy petrel, and the albatross being notoriously far from musical.
After a time these signs ceased to give the crews any comfort.
As they forcibly observed, “What is the use of all your signs of land,
so long as you don’t fetch on your land?” They became convinced
that the sea was gradually becoming choked up with sea-weed, and
that the fact that the surface of the water remained unruffled,
although there was a steady breeze from the east, was proof that
something was seriously wrong. We now know that the expedition
was in the Sargasso Sea, a region of sea-weed and calms, and that
in point of fact Columbus was lucky in not being becalmed for a year
or two without any means of bringing his vessels to a more breezy
region. This, however, he did not know, and he explained the quiet of
the sea by asserting that the fleet was already in the lee of the
unseen land.
The men nevertheless continued to be discontented, and
declined any longer to believe that land was near. Even the sight of a
whale—which, as every one knows, is a land animal—failed to raise
their spirits, although Columbus told them that, now that he had seen
a whale, he knew they must be very near the shore. The sailors
would not listen to his argument, and openly insulted his whale. They
said he had brought them to a region where the wind either blew
steadily from the east or scarcely blew at all; in either case opposing
an insuperable obstacle to sailing back to Spain, for which reason,
with the charming consistency of sailors, they wanted to turn back
immediately and steer for Palos. Still, they did not break into open
mutiny, but confined themselves to discussing the propriety of
seizing the vessels, throwing Columbus overboard, and returning to
Spain, where they could account for the disappearance of the
Admiral by asserting that he had been pushed overboard by the cat,
or had been waylaid, robbed, and murdered by the James boys; or
by inventing some other equally plausible story. Happily, the wind
finally sprang up again, and the sailors, becoming more cheerful,
postponed their mutiny.
The typical biographer always begs us to take notice that
Columbus must have been a very great man, for the reason that he
prosecuted his great voyage in spite of the frequent mutinies of the
sailors; and as we shall hereafter see, Columbus was troubled by
mutinies during other voyages than his first one. At the present day,
however, the ability of a sea-captain would not be estimated by the
number of times his crew had mutinied. If Columbus was really an
able commander, how did it happen that he ever allowed a mutiny to
break out? Very likely his flag-ship was short of belaying-pins and
handspikes, but did not the Admiral wear a sword and carry pistols?
and was he not provided with fists and the power to use them?
Instead of going on deck at the first sign of mutinous conduct on the
part of any one of the crew, and striking terror and discipline into the
offender with the first available weapon, he seems to have waited
quietly in the cabin until the sailors had thrown off all authority, and
then to have gone on deck and induced them to resume work by
delivering a lecture on geography and the pleasures of exploration.
But we should remember that he was in command of Spanish
vessels, and that Spanish views of seamanship and discipline are
peculiar.
On the 25th of September, Martin Pinzon, whose vessel
happened to be within hailing distance of Columbus, suddenly
shouted that he saw land in the south-west, and wanted that reward.
The alleged land rapidly became clearly visible, and seemed to be a
very satisfactory piece of land, though it was too far off to show any
distinctively Japanese, Chinese, or East Indian features. Columbus
immediately called his men together, made a prayer, and ordered
them to sing a psalm. The fleet then steered toward the supposed
land, which soon proved to be an exasperating fog-bank, whereupon
the sailors unanimously agreed that Columbus had trifled with the
holiest feelings of their nature, and that they could not, with any self-
respect, much longer postpone the solemn duty of committing his
body to the deep.
About this time a brilliant idea occurred to the Pinzons. It was
that the true direction in which to look for land was the south-west,
and that Columbus ought to give orders to steer in that direction. As
they had no conceivable reason for this belief, and could advance no
argument whatever in support of it, they naturally adhered to it with
great persistency. Columbus declined to adopt their views—partly
because they were the independent views of the Pinzons, and, as is
well known, no subordinate officer has any right to independent
views, and partly because they were entirely worthless. The Pinzons
were therefore compelled to console themselves by remarking that
of course the Admiral meant well, but they were sadly afraid he was
a grossly incompetent discoverer. On the 7th of October the spirits of
the sailors were temporarily raised by a signal from the Niña, which
was a short distance in advance, announcing that land was positively
in sight. This also proved to be a mistake, and doubts began to be
entertained as to whether, in case land should be discovered, it
would wait for the fleet to come up with it, or would melt away into
invisibility.
Although Columbus would not change his course at the request
of the Pinzons, he now announced that he had seen several highly
respectable birds flying south-west, and that he had made up his
mind to follow them. This may have pleased the Pinzons, but it did
not satisfy the sailors. They came aft to the sacred precincts of the
quarter-deck, and informed Columbus that they were going home.
Unhappy men! The Admiral instantly began a speech of tremendous
length, in which he informed them that he should continue the
voyage until land should be reached, no matter how long it might
last. The more the men clamored, the more persistently Columbus
continued his speech, and the result was that they finally went back
to their quarters, exhausted and quite unable to carry out their
intention of throwing him overboard.
The very next morning a branch of a thorn-bush; a board which
had evidently been subjected to the influences of some sort of saw-
mill, and a stick which bore the marks of a jack-knife, floated by.
There could be no doubt now that land was near at last, and the
mutinous sailors became cheerful once more.
It was certainly rather odd that those branches, boards, and
sticks happened to come in sight just at the moment when they were
needed to revive the spirits of the men, and that during the entire
voyage, whenever a bird, a whale, a meteor, or other sign of land
was wanted, it always promptly appeared. Columbus expresses in
his journal the opinion that this was providential, and evidently
thought that, on the whole, it was a handsome recognition of his
transcendent merits. Concerning this we are not required to give any
decision.
The wind blew freshly from the east, and the fleet sailed rapidly
before it. In the evening Columbus fancied that he saw a light, which
he assumed to be a lantern in the hands of some one on land. He
called the attention of a sailor to it, who of course agreed with his
commander that the light was a shore light. At about two o’clock on
the following morning—the 12th of October—a sailor on board the
Pinta, named Rodrigo de Triana, positively saw land—this time
without any postponement.
Most of us have been taught to believe that the discovery of the
New World was signalized by the joyful cry of “Land ho! from the
Pinta.” A little reflection will show the gross impossibility that this
exclamation was ever made by anybody connected with the
expedition. In the first place, “Land ho! from the Pinta” is an English
sentence, and, so far as is known, neither Columbus nor any of his
officers or men knew a word of English. Then the expression would
have been meaningless. What was “Land ho! from the Pinta”? and
why should the sailors have referred to vague and unintelligible land
of that nature, when their thoughts were fixed on the land which lay
on the near horizon? Obviously this story is purely mythical, and
should no longer have a place in history.
As soon as it was certain that land was in sight, the fleet hove-to
and waited for daylight. The voyage was ended at last. Columbus
was about to set foot on transatlantic soil, and the sailors were full of
hope that the rum of the strange land would be cheap and palatable.
Perhaps the only unhappy man on board the fleet was Rodrigo de
Triana, who first saw the land but did not receive the promised
reward; Columbus appropriating it to himself, on the ground that,
having fancied he saw a hypothetical lantern early in the evening, he
was really the first to see land, and had honestly and fairly earned
the reward. Let us hope that he enjoyed it, and felt proud whenever
he thought of his noble achievement.
 CHAPTER VII.
THE DISCOVERY.

[Æt. 56; 1492]

WHEN the day dawned, an island was seen to be close at hand,

and the desire to go ashore was so keen that in all probability little
attention was paid to breakfast. The officers put on all their best
clothes, and Columbus and the two Pinzons, each bearing flags with
appropriate devices, entered the boats and were rowed ashore.
What were considered appropriate devices to be borne on banners
such as were used on the occasion of the landing of Columbus, we
do not know, the historians having forgotten to describe the banners
with minuteness. Perhaps “Heaven bless our Admiral” and “Cuba
Libre” were the so-called appropriate devices.
The natives, assuming that Columbus and his companions had a
brass band with them, which would begin to play when the boats
should reach the shore, precipitately fled, and concealed
themselves. As soon as he landed, Columbus threw himself on his
knees, kissed the earth, and recited a prayer. He then took
possession of the island in due form, and announced that it was
called San Salvador; though how he had thus early discovered its
name we are not told. Everybody was then made to take an oath of
allegiance to Columbus as Viceroy, in the presence of the notary
whom he had so thoughtfully brought with him.
Business being thus properly attended to, the sailors were
allowed to amuse themselves by tasting the strange fruits which they
saw before them, and by searching earnestly but without success for
a wine-shop.
 The natives gradually took courage and approached the
strangers, whom they decided to be emigrants from heaven.
Columbus smiled sweetly on them, and gave them beads, pocket-
knives, pin-cushions, back numbers of the Illustrated London News,
and other presents such as are popularly believed to soothe the
savage breast. As, however, they did not seem to appreciate the
Admiral’s speeches, and as the sailors could find no rum, the order
was given to return to the ships. The natives thereupon launched
their canoes and paddled out to the vessels to return the visit of the
Spaniards. They brought with them specimens of a novel substance
now known as cotton, and a few small gold ornaments, which
created much enthusiasm among the sailors. The Admiral promptly
proclaimed that gold, being a royal monopoly, he only had the right
to buy it, and that, in view of the immense importance which he
foresaw that cotton would assume in dressmaking and other
industries, he should conduct the cotton speculations of that
expedition himself. As the natives, when the conversation turned
upon gold, mentioned that, though there was no gold in San
Salvador, the islands farther south were full of it, Columbus only
waited to lay in wood and water, improving the time by a boat
expedition along the coast, and then set sail in search of fresh
discoveries.
During the next few days a number of small islands were
discovered, all of which were flowing with copper-colored natives
and wild fruit, but they did not appear to produce gold. The natives
were in all cases amiable and full of respect for the supposed
heavenly visitors, but they stoutly denied that they had any gold.
Indeed, had they been questioned about chills and fever, instead of
gold, they could not have been more unanimous in asserting that
their particular island was entirely free from it, but that it abounded in
the next island farther south.
All these islands belonged to the Bahama group, but Columbus
assumed that they were in the neighborhood of Japan, and that the
mainland of Asia must be within a few days’ sail. As soon therefore
as the sameness of constantly discovering new islands began to pall
upon him, he set sail for Cuba, where, as the natives told him, there
was a king whose commonest articles of furniture were made of
gold. He thought it would be well to visit this deserving monarch, and
buy a few secondhand tables and bedsteads from him, and then to
sail straight to Asia; and so accomplish the real purpose of his
voyage.
It is a pity that we are not told whether the natives talked
Spanish, or whether Columbus spoke the copper-colored language.
When so many discussions on the subject of gold were had, it is
evident that somebody must have made rapid progress in learning
one language or the other, and from what we know of the Admiral’s
conversational powers, it is quite probable that he mastered the San
Salvadorian grammar and spelling-book, and was able to read, write,
and speak the language within the first twenty-four hours after
landing.
On the 28th of October Columbus reached Cuba, having picked
up a host of small islands on the way. He was delighted with its
appearance, and decided that, instead of being an island, it must be
the mainland. For days he coasted along the shore, frequently
landing and examining the deserted huts from which the inhabitants
had fled on his approach. Judging from the entries made by
Columbus in his journal, there was never such another island since
the world began; but he is compelled to admit that the natives were
not sociable. In fact, he never exchanged words with them until the
interpreter whom he had brought from San Salvador threw himself
overboard and swam ashore. The natives, regarding him as less
ferocious and dangerous than a boat, permitted him to land, and
listened to his account of the Spaniards. They were even induced to
launch their canoes and visit the ships, where they were received by
Columbus, who assured them that he had no connection with the
Emperor of China—a statement which must have struck them as
somewhat irrelevant and uncalled for.
The place where this interview was held is now known as
Savanna la Mar. The harbor being a safe one, Columbus decided to
remain and repair his ships, and to send an embassy by land to
Pekin, which he was confident could not be more than two days’
journey into the interior. Two Spaniards and the San Salvadorian
native were selected as ambassadors, and supplied with a letter and
presents for the Chinese Emperor, and Columbus with much
liberality gave them six days in which to go to Pekin and return.
After they had departed, the ships were careened and caulked,
and other little jobs were invented to keep the men out of mischief.
As to gold, the natives told the old story. There was none of it in their
neighborhood, but there was an island farther south where it was as
common and cheap as dirt. Seeing how the description pleased the
Admiral, they kindly threw in a tribe of natives with one eye in their
forehead, and a quantity of select cannibals, and thus increased his
desire to visit so remarkable an island.
In six days the ambassadors returned. They had found neither
Pekin nor the Chinese Emperor—nothing, in fact, except a small
village, a naked chief, and a community of placid savages who had
no gold and were entirely devoid of interest. They brought back with
them a few cold potatoes, a vegetable hitherto unknown to
Europeans, and they casually mentioned that they had seen natives
in the act of smoking rolls of dark-colored leaves, but they attached
no importance to the discovery, and regarded it as a curious
evidence of pagan degradation. Little did they know that the dark-
colored leaves were tobacco, and that the natives were smoking
Partagas, Villar-y-Villar, Intimidads, and other priceless brands of the
Vuelt Abajo. The sailors were cursing the worthlessness of a new
continent which produced neither rum, wine, nor beer, and yet it was
the native land of tobacco! Thus does poor fallen human nature fix
its gaze on unattainable rum and Chinese Emperors, and so
overlook the cigars that are within its reach.