The world's largest economies should promote direct input in each others' businesses and help the global recovery

In recent years, China has emerged to be one of the largest investors in the world. Its ascent has been extremely rapid. As of 2010, China's outbound direct investment stood at $317.2 billion. This is still small in terms of the global total because China only started to invest abroad very recently.

The United States is an important destination of China's overseas investment.

A little-known fact is that US investment in China declined. The figure was $5.4 billion in 2002 but only $2.4 billion in 2011, while Chinese investment in the US will rise further. According to the recently released 2012 Annual Report by the US-China Economic and Security Review Commission, a number of huge acquisitions were proposed in 2012. These included Sinopec's $2.4 billion bid for big stakes in oil and gas developments by Devon Energy, Dalian Wanda's $2.6 billion bid for movie theater chain AMC, and a potential $1.8 billion bid by Chinese aerospace manufacturer Superior Aviation for Hawker Beechcraft.

There are important policy and political complications that will cloud China's rising investment in the US. One source of political complications is that unlike foreign direct investment in China, which mostly funds the establishment of new factories and production facilities, known as greenfield investment, most of the investment deals in the US take the form of acquiring existing assets rather than creating new assets.

Politicians often view asset acquisitions with greater suspicion than greenfield investment. Asset acquisitions contribute to economic growth on the margin by improving efficiency, but they do not add to a country's capital stock, at least not in the short term.

Some of these acquisition deals lead to restructuring that can result in workers being fired. Understandably, in the current economic environment, some people may be alarmed by such deals.

But Chinese investment in the US is not unique in this regard. Direct investment in the US are generally more acquisition oriented. What is unique about Chinese investment is the role of State-owned enterprises. According to one estimate, government-controlled companies accounted for 66 percent of Chinese direct investment in the US between 2003 and 2011. This is historically unprecedented.

It is for this reason that several proposed deals involving Chinese companies in the US have been controversial and why they were unsuccessful. There are two sets of concerns about the State ownership of Chinese investment in the US. One concern is economic, that State-owned enterprises have soft budget constraints and they can outcompete their commercial rivals because of subsidies. The other concern is political. State ownership prevails in a sector of an economy that is most political, for example, energy. On top of that, energy investment are always more controversial than manufacturing investment.

In a high-profile case in 2005, China National Offshore Oil Corporation withdrew its bid for Unocal Corp because of opposition from the media and a negative vote in the House of Representatives. In 2012, the US government also labeled two Chinese telecommunication companies, Huawei and ZTE, as potential threats to the national security of the US and restricted their operations in the US. Many Chinese officials and commentators often cite these cases as evidence that the US has a containment strategy against China.

This interpretation is highly questionable and ignores the special nature of the energy and telecommunication sectors. China itself has a myriad of restrictions on foreign investment in sectors that it deems as potentially related to national security.

Between 2005 and 2008, Carlyle Group, a private equity firm based in the US, attempted to take over Xugong Machinery, but the deal eventually collapsed. In 2009, Coca-Cola's proposal to take over China Huiyuan Juice Group was rejected. It would be a mistake to draw the conclusion from the outcomes of these cases that China has a containment strategy against the US.

Most developed economies treat investment by a government-owned entity differently from investment by a private company. In Canada, for example, such an investment triggers an automatic review, while in the US the issue tends to play out politically. It should be noted that just one year before CNOOC was rebuffed, in 2004, Lenovo succeeded in acquiring the manufacturing division of IBM. Almost no one raised national security or economic concerns about that deal. This is in part because Lenovo is widely accepted as more privately owned and electronic equipment manufacturing is such a competitive business that the nationality of ownership is immaterial to national security.

And investment reviews are not specific to China. Nor are negative review outcomes. In the 1980s, there were also national security concerns about Japanese acquisition activities in the US. In hindsight many of these concerns were misplaced and it is a mystery how Japan, a staunch ally of the US, should have sparked any national security concerns at all. But these concerns led to at least one negative review of a proposed Japanese acquisition. Fujitsu's attempt to acquire Fairchild Semiconductor in 1986 was very controversial, which led to the withdrawal of the bid.

It is inevitable that there will be further controversies involving Chinese investment in the US.

The US has to make the right tradeoffs between safeguarding legitimate national security concerns and recognizing the huge economic upside of Chinese investment in the US. According to research by Rhodium Group, a consulting company, Chinese companies in the US have sharply increased their employment from 10,000 five years ago to 27,000 now. There is a lot of room for Chinese companies to help the US economy grow if they are allowed more investment opportunities.

The US should also recognize the complexities of the Chinese corporate world. Yes, there are many State-owned firms in China but firms such as Huawei are genuinely private and they are doing their best to internationalize their own operations in conformity with accepted rules and norms of international commerce.

For China, it needs to come to terms with the fact that it has chosen a more statist model of economic development and that the international system is designed with an entirely different economic model in mind. Does it have a right to demand that the international system treats it differently from the rest of the world? Or should it take the easier path of denationalizing its own economy and its economic policy management? Doing so would not only help its economy but also make it much easier for Chinese companies to operate on the world stage.

The author is a professor of international management at MIT Sloan School of Management.