Rationale of internationalization of China's national oil companies: seeking natural resources, strategic assets or sectoral specialization?

The bulk of the existing literature emphasized that China's companies sought strategic assets (technology, brands and access to markets) through internationalization in order to overcome latecomers' comparative disadvantage, while some studies suggested that these firms went after natural resources to address China's rising oil imports. The third argument (which we coin the ‘sectoral strength’ hypothesis) suggested that the upstream firms in extractive business would seek natural resources, whereas downstream ones would seek strategic assets. In this study, we examine the rationale of main overseas investment deals (‘going out’) of China's two largest national oil companies during 2002–2010 which were also China's top two non-financial firms with the largest outward investment stocks during 2004–2010. We conclude that these deals can be best explained by the ‘sectoral specialisation’ hypothesis supplemented with a consideration for strategic assets.

China as the most promising source of FDI in the world for the period of 2013-2015, enabling China, instead of the US to claim this top spot (UNCTAD 2013, 21). China's stellar performance far outperformed the overall post-crisis decline or stagnation of OFDI of Russia, India and especially Brazil, the other members of the BRIC (UNCTAD 2013, 214 -216). Meanwhile, the number of Chinese multinational enterprises (MNEs) on the Fortune Global 500 list expanded from zero in 1990 to 61 firms in 2010 (Peng 2012).
However, compared to outward investments from other major economies, China's share in the OFDI stock (i.e. cumulative total) is still comparably small (see Figure 2). According to the World Investment Report (WIR) 2013, the world's FDI stock reached US $23.6 trillion by the end of 2012 (UNCTAD 2013). China's OFDI stock in 2012 amounted to US$476.1 billion and constituted only 2% of the world's total ( Figure 2).
Nevertheless, China's national oil companies (NOCs) are significant players in the world investment movement and world business. Leasing and business services, and banking were the two largest sources of Chinese OFDI stock in 2010, accounting for US $97.2 billion and US$55.3 billion, respectively (MOFCOM 2010). Mining including oil and gas and other commodities exploration and mining activities accounted for US$44.7 billion of investment stock (MOFCOM 2010). China's national oil companies (NOCs) 'have emerged as significant players in global mergers and acquisitions in upstream oil and natural gas' (namely, exploration and extraction of oil and gas). For example, Chinese companies invested US$18.2 billion on merger and acquisition (M&A) deals in 2009, accounting for 13% of the total US$144 billion of global oil and gas acquisitions, and for 61% of total US$30 billion of acquisitions by national oil companies (CNPC Research Institute of Economics and Technology 2010; quoted from Jiang and Sinton 2011).
The prominent role of China's NOCs in global investment in mining is due to several reasons. First of all, China's largest NOCs are among the world's top firms. In 2012, Sinopec and CNPC were ranked fifth and sixth, respectively, among the Fortune 500 Firms -the highest ranks among Chinese firms. Both Sinopec and CNPC (or PetroChina, the publicly-listed company and the most important branch of the latter) were the largest firms in China. Second, China has become the largest net oil importer since September 2013 (EIA 2014), largely thanks to the growing demand from the transport sector. Compared to coal of which China has rich deposits, oil consumption generates less pollution and causes less damage to the environment. However, China has a far smaller reserve as far as oil is concerned. In order to meet the rapidly growing oil consumption, China's oil and gas companies have been actively searching for resources abroad. China's demand for gas has increased drastically in the recent years and this trend seems to be continuing in the coming decade (O'hara and Lai 2011).

Research questions
This contribution aims to address the question 'What is the rationale for China's national oil companies (NOCs) to invest abroad?' against two contexts. The first is the speed at which Chinese firms have entered the world stage with respect to OFDI and the second is to add to the existing debates within the literature on the rationale for internationalization of firms from emerging economies and developing countries.
To explore this question, we have conducted an analysis of the cases of foreign investment projects by Sinopec and CNPC over the last decade and tested the three following hypotheses derived from the literature on internationalization of firms -namely that: (1) China's companies seek strategic assets (technology, know-how, brands, and privileged access to markets) in order to overcome late comers' comparative disadvantage, (2) China's NOCs are primarily interested in natural resources to accommodate China's rising reliance on oil imports and (3) the upstream firms in the extractive business look for natural resources, whereas downstream firms are mainly interested in strategic assets and efficiency (which we coin the 'sectoral specialisation' hypothesis). We conclude that the 'sectoral specialisation' hypothesis supplemented by a heavy consideration for strategic assets best explain these international deals.

Literature on internationalization of business and the Chinese case
The existing literature offers useful insights as to the rationale of internationalization of business. Most of the mainstream international business theories are based on the experience of MNEs originating from developed economies. They propose that internal strength is an important prerequisite for a firm's internationalization. Dunning's eclectic model (1981) suggested that a firm would engage in international production when it possessed certain ownership-specific advantages that were not possessed by other firms. Only when a firm possessed such an advantage in ownership could it increase profits by exploiting its assets in overseas markets. The choice of host country location was believed to be determined by one or more of four types of motivations (Dunning 1998;Dunning and Lundan 2008, 67) -market-seeking, efficiency-seeking, resource-seeking and strategic asset-seeking. The aim of market seeking was to protect the existing markets or to exploit new markets (Dunning and Lundan 2008, p.70). Efficiency-seeking referred to the scenarios where firms seek to exploit differences in the costs of production between countries (UNCTAD 2007). Firms were regarded as seeking natural resources when they secured a continual supply of raw materials for companies' own industrial operations (Deng 2004). Strategic assets-seeking firms endeavoured to augment their comparative advantages or to overcome their comparative disadvantages by investing abroad in strategic assets such as research and development capacity, technology, brands and reputation or distribution and production networks (Deng 2012;Teece, Pisano, and Shuen 1997). These strategic assets were 'a set of complementary and specialized Resources and Capabilities which are scarce, durable, not easily traded, and difficult to imitate, may enable the firm to earn economic rents' (Amit and Schoemaker 1993, 37).
Much of the literature which considers China's international business focuses on whether conventional theories can explain the motivations behind China's OFDI (e.g. Child and Rodrigues 2005;Liu, Buck, and Shu 2005;Luo and Tung 2007;Buckley et al. 2007). Two major issues have been highlighted by recent studies. First, firms from emerging economies like China have weak ownership advantages (Deng 2009;Buckley et al. 2007;Alcácer and Chung 2007;Child and Rodrigues 2005). Second, these firms often leap-frog certain stages of internationalization process (Mathews 2006). From this perspective, Chinese companies go abroad not to exploit existing firm-specific advantages, but rather to explore and acquire strategic assets from developed market economies to overcome their latecomer disadvantages (Child and Rodrigues 2005;Luo and Tung 2007;Yiu, Lau, and Bruton 2007;March 1991). Indeed, some researchers (Nolan 2001) showed that the gap between top Chinese firms and their foreign counterparts was bigger than many had thought. For example, in 2012, PetroChina overtook Exxon as the world's biggest oil producer. However, in terms of total assets, profits and technological capacity, PetroChina is still behind the US giant (BBC News, 2012). Thus Chinese firms often resorted to a more aggressive approach to compensate for their competitive weakness and to gain sustainable competitive advantage (Cui and Jiang 2010;Rui and Yip 2008).
Several scholars (Ning 2009;Morck, Yeung, and Zhao 2008;Deng 2007;Buckley et al. 2007;Cai 1999) provide evidence for the argument that Chinese firms, especially multinational corporations (MNCs) and large state-owned firms (SOEs) are driven by their need to catch up through acquiring strategic assets such as technological know-how and managerial expertise. Some widely acknowledged institutional advantages for Chinese MNCs and large SOEs in the existing research include government support through diplomatic assistances, supplies of financial resources, access to state-supported scientific and technical research, benefits of state ownership (while not losing autonomy), and administrative regulations favouring outward investments.
Although there has been some doubt that the investment behaviour of Chinese firms has been significantly influenced by government policies, some researchers claim that Chinese OFDI was becoming more commercial and that internal corporate motives are now playing a more important role (Chen 2009;Houser 2008;Hong and Sun 2006).
Because the exploration of new markets is the most common type of strategy for companies from developing economies (UNCTAD 2007), several studies point to the rise of market-seeking Chinese firms (Buckley et al 2007, Taylor 2002. These studies have concluded that on the one hand, market-seeking motives were the logical consequence of China's export oriented policy, especially in the 1980s and 1990s (Zhan 1995), while on the other hand, growing competitive pressure from western MNEs in the Chinese domestic market and sliding profit margins gave incentive for Chinese companies to expand abroad, especially towards large markets (Deng 2004;Cai 1999).
With respect to natural resources, a number of existing studies have emphasized that China invests in resource-rich countries to secure a stable supply of raw materials to support China's high economic growth (Leung, Li, and Low 2011;Ellings and Friedberg 2006;Taylor 2002). Indeed, China's increased demand for oil and gas reflects not only the country's impressive economic performance, but also its lack of domestic reserves with China holding only 1% of oil and 1.5% of gas total world reserves (BP 2011). Some studies indicated that the resource-seeking OFDI of Chinese NOCs is directly associated with the government's policy of national energy security (Salidjanova 2011;Frynas and Paolo 2007). However, there are no conclusive findings on the significance of natural resources as a primary factor for Chinese NOCs to invest abroad. While Globerman and Shapiro (2009) conclude that securing resources is a relatively unimportant motive for Chinese OFDI, several researchers (e.g. Buckley et al. 2007;Kolstad and Wiig 2012) suggest that China's OFDI has concentrated on natural resources in countries with a weak institutional environment. In addition, Amighinia, Rabellottic, and Sanfilippob (2013) have suggested that state owned enterprises SOEs are not only more risk taking and attracted to natural resources, but are also driven by the strategic needs of their home country when investing abroad, while private enterprises are more risk averse and more motivated by tapping into the markets in their overseas investment. There is a growing body of literature, for example, a study by Lu et al. (2014) that emphasizes the role of institutions in the developed host countries that attracts China's OFDI. However, this argument seems to be less relevant for our study, as the previous study by Amighinia, Rabellottic, and Sanfilippob (2013) and our dataset suggest, China's large state energy firms have made a huge amount of investment in developing countries which lack good institutions.
Arguably, comparatively less has been written on efficiency-seeking motives in Chinese companies. According to the UNCTAD report (2007), efficiency-seeking outward investments were relatively unimportant for Chinese firms because of low costs in their domestic market. Several scholars proposed that factors such as increasing labour costs, infrastructure bottlenecks and power shortage might have resulted in the growing role of efficiency-seeking motives in China's OFDI in recent years (Ning and Sutherland 2012).
A number of studies have also emphasized the rapid expansion of outward investment from China into the world's tax havens (Ning and Sutherland 2012). The preferred tax havens for Chinese investors are Hong Kong, the Cayman Islands and the British Virgin Islands. By 2010, these destinations accounted for almost 76% of total Chinese OFDI stock (MOFCOM 2010). Although much of this investment was considered exclusively 'round-tripping' -assets recycled through tax havens for the purpose of obtaining preferential treatment as foreign capital (UNCTAD 2007;Luo and Tung 2007); a number of studies have also noted the importance of raising capital on foreign capital markets in such havens (Xiao 2004). In our dataset, we cannot find much information on investment of NOCs or acquisitions in these tax havens. We thus decide not to pursue this line of inquiry.

Hypotheses: strategic assets, natural resources and sectoral strength
Given the contending views on business internationalization, we believe that a careful analysis of overseas investment projects by China's NOCs can help shed light on the relevance of these theories for China. To explore this issue, we analysed the main reasons for OFDI projects over the period 2000 -2010 which coincides with a period of increased activity by the NOCs.
As the literature suggests, there are four main reasons for internationalization of a business -seeking strategic assets, markets, efficiency and natural resources (Dunning 1998;Dunning and Lundan 2008, p. 67). By strategic assets, we mean technology, research and development capacity, good management practice, brand names and reputation, access to international markets or distribution and production networks. Strategic assets seeking in this study thus incorporates the assets-and market-seeking explanations. In particular, we focused on the explanations of strategic assets seeking versus natural resources seeking. We focus our analyses on these two explanations, though we still take note of other motivations such as efficiency. We do so for the following reasons.
As stated, the bulk of the literature on the internationalization of Chinese business converges towards the argument that the Chinese seek strategic assets and market access especially from developed market economies. It suggests that Chinese firms do so because they have a particularly strong desire to overcome their disadvantages of being latecomers, close a large gap with their foreign counterparts (Nolan 2001) and catch up with internationally leading firms (Child and Rodrigues 2005;Luo and Tung 2007;Yiu et al. 2007;March 1991).
In contrast, most of the studies generally hold that given China's low production costs the role of efficiency-seeking plays a minor role in the internationalization of Chinese business (UNCTAD 2007;Buckley et al. 2007). Despite changes in recent years, low production costs remained a key competitive edge in the 2000s, the period this study focuses on. Hence we develop the following strategic assets-seeking hypothesis -(1) In concluding international deals, China's national oil companies primarily seek strategic assets.
(2) The apparent alternative hypothesis is the natural resources seeking explanation. This hypothesis arises from major developments in recent years where over half of China's oil consumption has to be imported and where this share has also been increasing. Thus, it is imperative for China's oil firms to secure supplies of natural resources. This hypothesis is also drawn from numerous existing studies on China's overseas investment in resourcerich countries (Leung, Li, and Low 2011;Ellings and Friedberg 2006;Taylor 2002). This hypothesis is as follows -In concluding international deals, China's national oil companies primarily seek natural resources (in this case, oil and gas resources).
(3) According to the UNCTD report, there may be a potentially third alternative hypothesis in addition to strategic assets seeking and natural resources seeking hypotheses (UNCTD 2007, 99-126). This hypothesis suggests that China's NOCs may seek strategic assets or natural resources depending on where are they located in the chain of energy production and whether they are upstream or downstream. This hypothesis is as followsin their international deals, an upstream NOC will seek natural resources, whereas a downstream one would seek strategic assets. Obviously, for a firm whose business is mainly upstream (extraction and exploration of oil and gas), it makes economic sense for it to acquire mostly oil and gas resources in international deals. On the other hand, for a firm that is specialized in downstream business (i.e. refined oil products), it will naturally seek strategic assets such as technology including better refinery technology, brand names or market accesses because these assets will help it to produce and sell downstream products.
We coin the last hypothesis as the 'sectoral specialisation' hypothesis. By definition, a primarily upstream firm has strengths and an edge in competition in upstream business whereas a primarily downstream firm is relatively strong and possesses considerable skills in downstream business. Thus far, these three hypotheses have not been tested using the overseas projects of China's NOCs. Nor has the third hypothesis been carefully and empirically tested in the case of internationalization of China's firms.

Data and methods
We assessed the relevance of the three hypotheses against the overseas investment projects that CNPC and the Sinopec embarked upon between 2002 and 2010. These two firms are selected as they are China's largest players in overseas energy deals. In fact, the Sinopec and CNPC were China's top two non-financial firms in 2010 in terms of OFDI stocks and foreign revenue (MOFCOM 2010). In addition, each of them dominates the upstream (CNPC) and downstream (Sinopec) oil and gas business in China. Therefore, their international deals can shed a good light on the validity of these three hypotheses. 1 The list of the international deals of the two NOCs initially came from an Information Paper on Overseas Investment by the International Energy Agency (IEA) in 2011 (Jiang and Sinton 2011). Tables 1 and 2 are a list of Chinese foreign oil and gas acquisition since 2002. The list included 11 deals by CNPC (Table 1) and 14 deals by Sinopec (Table 2). According to Jiang and Sinton 2011, the sources were as follows - (1)  However, details of these international investments were very brief and did not provide an in-depth analysis of the rationale of the two companies in concluding these deals. Thus in order to ascertain the primary reason for the deal, we collected information for each deal through Factiva, a database that compiles hundreds of news reports and sources. The relevant information we gathered on each deal includes the deal date, parties of the deal, the amount of investment by CNPC or Sinopec, the primary reason for CNPC or Sinopec to conclude the deal and a description of the project. In a few cases, the collected data either point to the final outcome of the deals such as their termination or suggest new deals that were not included in the Jiang and Sinton's (2011) paper. The data provide useful information and allowed us to determine what motivated the NOCs to seal a given deal. A summary of the main issues is for each of the deals concluded over the period is provided in Tables 1 and 2. We refer to our dataset as the Dataset on Overseas Investment of China's NOCs. Our findings are reported below.

Data analyses and findings -internationalization of China's CNPC and Sinopec
China's NOCs started their international operations as early as the early 1990s, long before the Chinese government's call for them to 'go out'. CNPC invested in Sudan, Peru and Kazakhstan and opened offices for trading and finance in London and New York (Jiang and Sinton 2011, 10). Since the 2000s, China's NOCs have intensified their international activities in the wake of China's entry into the World Trade Organisation (WTO) and in response to the government's call for 'going out'. As stated, our data base starts from 2002. For CNPC, its overseas investment occurred in two main peaks, 2005 and 2009 (Figure 3).
International investment by Sinopec followed a somewhat different trajectory with investments growing strongly from 2007 onwards (Figure 4). When comparing the relative magnitudes of investment of both giants, Sinopec clearly outweighed CNPC. During 2002-2010 Sinopec's total OFDI amounted to US$25.5 billion, compared to US$13.6 billion for CNPC. The annual average of OFDI for Sinopec reached US$2.8 billion, but only US$1.5 billion for CNPC ( Figure 4).
Next we analyse each of the cases of OFDI by CNPC and Sinopec and distil the relevant information in our database concerning the primary reasons for the NOCs to conclude a particular deal.
On the basis of the analysis, we classify each of these deals by CNPC and Sinopec by the primary reason (and in some cases, the secondary reason) into strategic assets-seeking, natural resources-seeking or efficiency-seeking. The results are presented in Tables 1 and 2. The summary information on these deals (such as the year, the amount of each deal and their location) by CNPC is presented in Table 3 and Figure 5. The same thing is done for Sinopec and the results are seen in Table 4 and Figure 6.
The pattern for overseas investment of CNPC is somewhat complex, but can be clearly understood at a closer look. There were seven assets-seeking investment projects, compared to five resources-seeking projects. However, the amount of investment has far greater importance than the number of projects. In this regard, resource-seeking investments clearly exceeded assets-seeking investment, being $7.7 billion for the former compared to $5.9 billion for the latter (Table 3). Out of the total investment of $13.6 billion by CNPC, 56.6% was natural resources-seeking ( Figure 5).  The purchase allowed Andes Petroleum and its co-owners Sinopec to boost production and market share as well as to export to Pacific Rim markets.

18
In June 2006, Sinopec won the bidding to buy a 96.9% share of the Udmurtneft oil field from TNK-BP. The company then reassigned 51% of the Udmurtneft shares to Rosneft. The deal was $3.5 billion. Primary reason: Assets-seeking (market); secondary reason: resources-seeking.
The joint venture allowed Sinopec to access international markets including Russian oil and natural gas production and feed its domestic oil supply.

19
In August 2006, Sinopec International and India's Oil and Natural Gas Corp. Ltd. bought Texas-based Omimex Resources Inc.'s Colombian oil assets for $0.8 billion (jointly). Primary reason: Assets-seeking (market).
The joint venture spread the risk of doing business in countries with modest potential growth and unstable business environments. It also enabled Sinopec to expand in the region. (Continued) The situation for Sinopec is different, and in fact, the opposite. During 2002-2010, there were 13 investment projects primarily aimed at valuable assets, while two projects were seeking natural resources. In terms of the amount of investment, the pattern was even clearer with $25.1 billion of investment primarily devoted to pursuit of valuable assets, dwarfing the meagre $0.4 billion investment primarily aiming at natural resources.

Discussion
The next issue we will investigate is the validity of the three hypotheses. One quick approach is to examine the primary reason for investment by combining that of CNPC with that of Sinopec. Out of $39 billion total investment by CNPC and Sinopec, 79.3% was aimed primarily at assets seeking compared to 20.7% natural resources seeking (Table 5). In September 2008, Sinopec paid Calgarybased Tanganyika Oil Co $1.9 billion for the latter's natural gas and oil assets in Syria. Primary reason: Assets-seeking (technology and market); Secondary Reason: efficiencyseeking.
Energy market analysts noted Tanganyika's enhanced oil recovery technology. This technology would increase production at Sinopec's mature legacy fields. The deal would increase Sinopec refineries' supply of heavier crude oil from overseas to expand its supply sources and bring down costs. 22 In June 2009, Sinopec purchased Addax Petroleum Corp., a Swiss oil explorer, for $7.24 billion. Primary reason: Assets-seeking (market and diversified assets); secondary reason: resources-seeking and efficiency seeking.
Addax has interesting and enticing assets in Africa. The purchase allowed Sinopec to create a stronger presence in West Africa. It would also increase the company's foreign production.

23
In April 2010, Sinopec (SIPC) bought a 9.03% share of Syncrude, a Canadian oil sands company, from U.S.-based ConocoPhillips for $4.675 billion. Primary reason: Assets-seeking (market and technology).
The purchase allowed Sinopec to continue to move into the Canadian oil sands region. Sinopec wanted to make a profit from the purchase rather than shipping the crude oil to China. The company could benefit from the technical knowledge of other partners. 24 In October 2010, Sinopec bought a 40% share of the Spanish oil company Repsol's Brazilian subsidiary for $7.1 billion. Primary reason: Assets-seeking (market and managerial knowhow); secondary reason: resources-seeking.
The purchase allowed Sinopec to improve China's energy security, strengthen its energy sector position in Latin America, develop stronger operations and improve its portfolio of offshore oil and natural gas assets. The company also gained operating experience in Brazil. 25 In December 2010, Sinopec bought 18% of the Gendalo-Gehemdeep water natural gas project in Indonesia owned by Chevron for $680 million. Primary reason: Assets-seeking (technology, market and managerial knowhow).
The purchase permitted Sinopec to improve the company's technical deepwater drilling skills along with its management and production of complex projects. An estimated 25% of the project's natural gas would be sold in Indonesia's domestic market.
Source: Dataset on Overseas Investment of China's NOCs.
Thus, taken together, it appears that the asset-seeking hypothesis has the most mileage in explaining the investment patterns of China's biggest NOCs with both going after valuable and strategic assets in their OFDI such as technologies, brands and, importantly, access to foreign markets. For example, in May 2009, PetroChina, the main branch of CNPC, agreed to pay US$1 billion for a 45.5% stake in the Singapore Petroleum Company (SPC) increasing its stake to 70.1% in July the same year. This was the first major move by CNPC into an international downstream business and allowed it to gain a strategic foothold in Asia's largest oil trading centre. The SPC investment not only allowed CNPC to build on its existing position in Singapore and gain access to refining capacity and other infrastructure, but also provided CNPC an opportunity to exploit new options in supplying its distribution network in southern China, where it had no major refining capacity at that time. Significantly, it also allowed CNPC to use SPC as a vehicle for other international deals, thereby diluting the political risks. In another massive deal which took place about the same time, Sinopec International Petroleum Exploration and Production (SIPC), a branch of Sinopec, bought Swiss oil explorer Addax Petroleum Corp for $7.24 billion, making it China's biggest overseas acquisition up to that time.  Addax had a number of attractive assets in the Gulf of Guinea, with promising acreage offshore Nigeria, Gabon and Cameroon. Through this deal, Sinopec hoped to build a stronger presence and operations in West Africa and Iraq, accelerating its international growth strategy. It also tried to increase the company's overseas production and increase the proportion of crude it refined from its own assets. The deal also enabled Sinopec to diversify its foreign assets holdings away from 'financial' assets such as foreign government securities into more 'real' assets such as energy and natural resource companies. Thus, the primary reason for the deal was seeking strategic assets, followed by seeking natural resources. However, this quick assessment of the first two hypotheses is rough. Our analysis can be refined through a close examination of the third hypothesis (the 'sectoral specialisation'  Table 2 for information on the deal in Ecuador.

56.60%
asset-seeking resource-seeking hypothesis). To do this, we need to know whether CNPC and Sinopec operate mainly in upstream or downstream sectors. It is generally believed that CNPC traditionally specializes in the extraction of oil and gas, while Sinopec focuses more on downstream business such as the distribution and sale of oil and gas products. Energy production and processing data from the two NOCs suggest that this remains true (Table 6). In 2010, CNPC produced far more crude oil than Sinopec at home (105.41 million metric tonnes or mmt for CNPC versus 42.56 mmt for Sinopec). However, Sinopec outstripped CNPC in terms of processing crude oil (213 mmt versus 160 mmt) and in producing refined domestic oil product (140 mmt versus 102   (Table 6 and its sources). According to the third (or the 'sectoral specialisation') hypothesis, we should expect Sinopec to invest more overseas in strategic assets which relate primarily to its downstream business and expect CNPC to invest more in natural resources which are associated more closely with its upstream business. From what we have seen (Tables 3 -6 and Figures 5 -6), this is indeed the case. CNPC, which is primarily an upstream energy firm, focused mainly on natural resources seeking projects in investing abroad. In contrast, Sinopec, a predominantly downstream energy firm, invested overwhelmingly in strategic assets in undertaking international projects. Therefore, the 'sectoral specialisation' hypothesis is supported by the evidence.
Nevertheless, there is a subtly heavy consideration for strategic assets for both firms in investing abroad. Take CNPC for an example, as Figure 7 illustrates and as explained above, in general, CNPC is driven by a consideration for natural resources in its international deals. However, the significance of natural resources to its OFDI portfolio had been in decline since peaking in 2005 and rebounded modestly during 2006-2010. In contrast, the significance of strategic assets to its OFDI had been increasing since 2003 and surpassed that of natural resources during 2006 -2009. It thus appears that even though CNPC is primarily interested in natural resources when investing abroad, the significance of strategic assets had loomed large in the backdrop and had increased since 2002 (except for a downturn in 2010). Therefore, the patterns of overseas investment by Sinopec and CNPC can be best explained by the 'sectoral specialisation' hypothesis which is supplemented by an argument for strategic assets.

Implications for theory and practice
This study has a number of implications for the conventional perception of the motivations of China's NOCs and for theories on internationalization business. The conventional view would regard natural resources-seeking as a key factor that motivates China's NOCs to invest abroad. The findings of this study suggest that this is not the case and that strategic assets-seeking has played a more important role. Much of the literature on internationalization business would suggest that China's NOCs endeavour to overcome the latecomers' disadvantages by obtaining better technologies, more established brands and accesses to international markets. Indeed, assets-seeking has apparently been a significant factor that drives international investment of major firms from the emerging markets like China. However, in doing so, firms will also play to their own advantages and invest in areas where they have already had significant strengths in a specific sector and apparently aim to reduce risks in investing away from their home countries. Firms apparently still play to their strength in given sectors (as seen from their dominant business in upstream versus downstream sectors) and may aim to reduce risks in new international projects as well. While giving a very serious consideration of strategic assets, upstream firms will pay more attention to natural resources whereas downstream firms may focus predominantly on strategic assets. In the case of China's two major NOCs, one that is specialized in downstream business has chosen to invest more in downstream projects that are clearly associated with strategic assets, and the other, that has a traditional strength in upstream business, has preferred to invest primarily in upstream business, which is closely related to natural resources. Based on these findings, we see merits in exercising caution when attempting any generalized arguments about a single motivation in internationalization of firms from developing countries. There is also merit in considering calculated multiple motivations reflecting firms' strength in a given major sector and the needs to overcome their latecomer disadvantages through acquiring strategic assets. The findings of this study can help to shed light on the dynamics and the logic of growing and massive investment of these Chinese corporate giants around the world, and probably investment of firms from other emerging markets as well.

Conclusions
In recent decades, China has emerged as an increasingly important player in global investment outflows. Its NOCs in particular are among the most active investors in the global extractive business. Meanwhile, as stated in the aforementioned review of literature, there have been discussions and debates among scholars on internationalization of business in general and that in China in particular.
In this study, we set out to test three hypotheses regarding the OFDI of China's NOCs -the natural resources seeking hypothesis, the strategic resources seeking hypothesis, and the 'sectorial specialisation' hypothesis. We examine the overseas investment deals by the two largest Chinese NOCs, namely, CNPC and Sinopec during 2002 -2010 and try to find the primary reason for each of these deals. Overall, we find that in investing outside China, CNPC was more interested in natural resources whereas Sinopec was overwhelmingly focusing on securing strategic assets. If we take into account the total investment from both NOCs, the majority of the investment poured into assetsseeking projects.
On the face value or in terms of the breakdown of total investment by the two NOCs, the assets-seeking hypothesis seems to be supported. This is so as nearly 80% of the investment was primarily for obtaining strategic assets, such as technology, brand and access to foreign markets. However, at a closer look at the investment rationale of individual NOC and their position in upstream and downstream business, it is clear that the 'sectoral strength' hypothesis stands out the best in our test using the collected data analysis. It emerges from our analysis that CNPC, a main upstream company, was more interested in getting natural resources in its overseas investment. On the other hand, Sinopec, an oil and gas company specialized more in downstream business than upstream, single-mindedly sought strategic assets in its investment projects abroad. Each NOC apparently wanted to augment their economic advantage and existing sectoral strengths. They might also want to invest in areas where they knew the best to avoid unnecessary risks. Therefore, the 'sectoral specialisation' hypothesis best explains the OFDI of CNPC and Sinopec and the assets-seeking hypothesis receives some support simply because the Sinopec's assets-seeking investment overwhelmed CNPC's resources-seeking-dominant investment outflows.
Our study has important implications for the global energy business world with the findings indicating that China's NOCs have actively embarked upon investments abroad by prudently tapping on their existing strength in the specific downstream or upstream sectors while increasingly focusing on strategic assets such as technology and market accesses. Backed by huge foreign reserves and the largest energy market in the world, this shrewd investment strategy may well enable China's NOCs, latecomers from an emerging market, to play a quick catch-up game against the existing prominent Western energy conglomerates in the global energy business. In the coming decades China's NOCs may become strong rivals in certain sectors and regions, thereby intensifying corporate competition in the world energy business.