China and the EU in Context

Insights for Business and Investors

Kerry Brown

• Publisher: Palgrave Macmillan
• Year: 2014
• Print ISBN: 9781137352385
• eBook ISBN: 9781137351869
• Topic: Business
• Subtopic: Business General
• Index: Business

Brings together theresearch of world-class commentators on China from across Europe to explore the policy aspects of the China-EU relationship. Aimed at practitioners, this book shows how to relate to China practically and understand its complexities for business purposes, including investment, social unrest, and China's five-year program.

1 Chinese Overseas Direct Investment into the European Union

Jeremy Clegg and Hinrich Voss

Introduction

The purpose of this chapter is to review the factors that have driven and constrained mainland Chinese investments in the EU from 2000 to 2013, and to outline the policy recommendations that arise for the EU and its Member States wishing to increase their share of Chinese foreign direct investment (FDI). The geographical focus of investment for this chapter is the EU of 27 Member States (EU-27). The narrower boundaries of the EU of 15 Member States (EU-15) will be used when we refer to time periods before 2004 (i.e. the pre-Fifth-Enlargement members).

We focus on FDI by mainland Chinese firms, that is, where the ultimate parent company is Chinese. This can be determined by using mergers and acquisitions (M&A) data, but not with conventional FDI statistics. Thus portfolio investments, government bond purchases and direct investments from the Hong Kong Special Administrative Region (SAR), from the Macao SAR, from Taiwan or from any offshore tax haven are not considered here. Direct investments from Japan, South Korea and the US are included only for comparative reasons, to put Chinese investments in the EU into international perspective. A Chinese foreign direct investment in the EU is taken to mean investment owned by a Chinese-resident enterprise in an EU-resident enterprise, with the intention of establishing a lasting interest while exercising a significant degree of management influence. Such influence is inferred if the investor has 10 per cent or more of equity-based voting power (see UNCTAD 2009, p. 38; OECD 2008, para. 117). Chinese firms that invest overseas (including in Hong Kong, which is still regarded as autonomous from the People’s Republic of China (PRC) except in foreign policy and defence), thus owning productive assets in at least two countries, are classified as multinational enterprises (MNEs). This is regardless of their size or form of ownership. Forms of ownership addressed in this chapter cover state-owned and privately owned firms. Chinese listed firms can also fall into either of these categories. Sovereign wealth funds (SWFs), such as the China Investment Corporation (CIC) and the State Administration of Foreign Exchange (SAFE) Investment Fund, are government-owned investment vehicles, not state-owned enterprises. They are not solely, nor even predominantly, FDI-focused organisations. They are therefore treated as a separate form of investor. Monetary values are presented in Euros and US dollar.

Our analysis comprises a Chinese and a European perspective. The Chinese perspective is applied when we consider the investment pattern and motivation of Chinese state-owned and privately owned investors. Firms invest internationally in order to expand or to defend their overseas market (so-called market-seeking investment); to secure better access to raw materials such as oil and minerals (resource-seeking); to secure better access to technologies, brands, distribution channels (strategic asset-seeking); and/or to reduce overall production costs by utilising cheaper inputs, generally labour, or to achieve greater productivity (efficiency-seeking). Depending on the investment motive (and often several motives are present at a time), potential investors consider and evaluate host-country characteristics comparatively. Such characteristics encompass Chinese government attitudes and the Chinese institutional framework towards investing abroad. Indeed, one aspect that must not be overlooked in the Chinese context is the role of the government, which has been central in guiding the domestic economy to today’s economic success. The stance of central government policy has changed towards outward investment in recent years. Although cross-border investments were first permitted in the late 1970s, they were heavily restricted by the government. This slowly changed during the 1980s and 1990s as a regulatory framework was developed and state-owned enterprises incrementally gathered experience in operating in foreign markets. The most prominent initiative to signal that the government deemed Chinese companies sufficiently prepared was the ‘Go Global’ policy, formally decreed in 2000. We note in outline the relaxation of official Chinese policy, but we do not go into detail or predict the future. We give priority to what lies within the policy domain of the EU to win its share (and influence the quality) of China’s outward FDI rather than the aggregate quantity of its outward foreign direct investment (OFDI).

To complement the Chinese perspective, a European perspective is employed in order to analyse the attractiveness of Chinese investors and to evaluate the success of EU Member States in bringing them to Europe. Market, institutional and policy conditions are assessed for the way in which they support Chinese investments (through, for example, investment promotion agencies, specialised investment and trading hubs) but also hinder them (through restrictive work permits, visa regulations and so on).

Chinese Outward FDI Globally and the Role of the EU

The importance and magnitude of Chinese direct investments to, and within, the EU cannot be assessed properly without first being contextualised. We therefore begin by presenting an analysis of Chinese direct investment globally. This is done in two parts: (1) its distribution in terms of absolute values and growth figures, from which we infer the importance of the EU to Chinese investors, and (2) the industrial distribution of Chinese investments globally.

Structure of Chinese Global Outward FDI Distribution

In 2011, Chinese firms made investments of €53 billion (US$70 billion) overseas (NBS, MOFCOM and SAFE, 2012). Early investments from China were directed towards the industrialised countries Australia, Canada and the USA. But this has changed since the mid-1990s, and today the majority of Chinese investments are directed to emerging and developing countries. A major pull factor for Chinese investments globally is the level of natural resource endowment of host countries, in particular oil (Kolstad and Wiig, 2012; Duanmu, 2012).

The EU saw an increase in Chinese inward investment from €0.3 billion (US$0.4 billion) to €5.8 billion (US$7.6 billion) between 2003 and 2011 (NBS, MOFCOM and SAFE, 2012). This was an annual growth rate of Chinese outward FDI stock to the EU-27 of 59.4 per cent, much above the 42.7 per cent growth rate of the global Chinese FDI stock. In 2006–9, the progress of Chinese investment in the EU became decoupled from the global trend. Chinese investments there were rising faster than the global average until the Anglo-American financial and economic crisis. Then the downward pressure on investment worldwide translated into a far steeper decline of Chinese FDI in the EU (and North America). In particular, a majority of Chinese SMEs expressed the intention to reduce their overseas investments, and a desire to seek more advantageous host economies (CCPIT, 2009). The crisis also heralded changes in the motivation for investment by Chinese firms. The strategic intent of Chinese investors in the EU market shifted almost entirely away from the resource-rich regions, as Chinese enterprises became opportunistic acquirers of firms, and parts of firms, in response to the shrinkage of EU corporations’ equity value during the crisis. Overall, however, movements of Chinese FDI into the EU over the period average out; and the share of Chinese investment secured by the EU has returned to around 2.5 per cent in 2009 (the same level prior to the crisis). Since then, the share has then increased to 5 per cent of China’s outward FDI stock.

Distribution of OFDI by Sector

In 2003 China reported, for the first time, OFDI statistics that were in line with OECD and IMF definitions (Cheung and Qian, 2009; NBS, MOFCOM and SAFE, 2010). This resulted in a revaluation downwards of mining and manufacturing investments while investments in business services and finance were revealed as more substantial than previously appreciated. These two service sectors are important in supporting the internationalisation of home-country enterprise: firms from these service sectors either follow their major domestic clients or prepare the path on to which their domestic clients step. The underlying increase in share of these sectors can be regarded as part of the continuous intensification in the internationalisation process of Chinese firms.

Bilateral trade, in the form of exports and imports to and from the host country, are important determinants of the geographical pattern of Chinese OFDI (Buckley, Clegg, Cross et al., 2007; Kolstad and Wiig, 2012). The published Chinese statistics do not enable us to see the simultaneous industry-by-country distribution of Chinese OFDI. Cuervo-Cazurra (2007) observed that emerging-market firms tend to locate sales, marketing and R&D-related activities in host countries where they can exploit their home-country advantages and that they locate manufacturing activities in hosts when the cross-border transfer of end products is difficult or when host country advantages of location can be exploited. It follows from this that Chinese investments in the more advanced economies of the EU-15 should be characterised by smaller-scale, knowledge-exploring, high-value manufacturing and goods-trading investments. The Fifth-Enlargement Member States, which joined the EU in 2004 and 2007, are more likely to receive predominantly standardised manufacturing or assembly-related FDI. The small share of Chinese FDI destined for the European Union raises a number of questions that we intend to address in the following sections. In particular, are Europeans making a sufficient effort to attract Chinese investments or are the wrong Chinese investors being courted? Are there artificial or natural barriers to Chinese investments? Before we can answer these questions, it is important to understand better what is happening in the EU.

Chinese Outward FDI in the EU

The distribution of Chinese investment across the EU is an important indication of the ability of Chinese firms to invest and of their motivation for investment. However, there are limits to the extent to which we can determine competitiveness by using aggregate data. Chinese affiliates may simply be handling goods produced in China, in which case these firms’ competitiveness must inevitably owe more to the locational (comparative) advantage of China as a production base than to abilities specific to them. Chinese direct investments in the economically developed countries indicate a motivation to acquire technologies and brands as well as a degree of capability and competitiveness intrinsic to the firms concerned. On the other hand, investments in the Fifth-Enlargement countries of the EU point towards low-cost production strategies that target only the European market without upgrading the abilities of the investing Chinese firms.

The distribution of investments is also instructive for assessing the potential impact of Chinese FDI. For those of the Fifth-Enlargement countries that otherwise receive little FDI, Chinese investment can offer a valuable contribution to industrialising their economy.

Structure of Intra-EU Distribution

Chinese investment in the EU has always been concentrated in a small number of countries. France, Germany and the United Kingdom have together attracted on average 51 per cent of annual Chinese investment from 2003 to 2011 (NBS, MOFCOM and SAFE, 2012). We shall look at the distribution of Chinese outward investment in the European Union countries using three alternative measures, in order to build a picture of the true commitment of Chinese firms to the European market.

Figure 1.1, using data from Eurostat (Eurostat, 2011a) and from the NBS, MOFCOM and SAFE statistical bulletin (2011), shows clearly that the distribution of Chinese OFDI is highly concentrated within the European Union. The top four investment locations account for 39.2 per cent of all Chinese investment there, according to Eurostat data. The ranking of the major host countries differs between the Eurostat data and the MOFCOM data, but we can see that the dominance by major host countries remains. And although there are significant conflicts between the two data sources, they do agree that the UK and Germany are major host countries to inward Chinese FDI.

The major disagreement between the two data sources concerns Denmark and France. They complete the leading four host countries, according to the Eurostat data; but Luxembourg and the Netherlands replace them in the top four, according to the MOFCOM data. This can be explained by known deficiencies in the data. Eurostat data are not reported for Luxembourg, and that immediately distorts the basis for comparison. This underlines the value of using MOFCOM data to identify where Chinese investments are directed. At the same time, Luxembourg is known to be an investment gateway into the EU, and so the recording of Chinese FDI entering Luxembourg is not necessarily that of where the investment remains. Data collected by the United Nations Conference on Trade and Development (UNCTAD) also supports this interpretation that Luxembourg is, in many cases, not the ultimate destination of investment (UNCTAD, 2011). We should also note that investment into Luxembourg is characteristically ‘lumpy’: it tends to be built up by the accumulation of a relatively few large-value investments.

Greater confidence in the data is yielded by a comparison of the two sources, as the absolute difference in the valuations for individual countries (for which both data sources are reported) is not excessive; and there is no evidence of significant systematic under- or overvaluation. Generally, the Eurostat data estimate Chinese FDI in the EU to be a little higher than the Chinese data (for example in 2009, €5.7 billion (in dollar terms, US$8 billion) as compared with €4.5 billion (US$6.3 billion)). Such differences in valuation are not unusual. It is deficiencies in reporting at Member State level that are the most problematic; in particular, the absence of Eurostat data for Luxembourg distorts the picture. For certain states, we see that FDI positions may be negative, or might diminish rapidly. Although this might seem to suggest that FDI is zero, it actually signifies that affiliates are in credit with parent enterprises, and it may have much to do with financial repositioning internal to MNEs after the financial and economic crisis.

A combined analysis of both data sources suggests a clustering in the distribution of investments. First, there are the top two hosts, the UK and Germany, then the ‘super-cluster’ of Denmark, France and the Netherlands. After these countries, China invests in Austria, Italy, Poland and the like. A large number of Member States have received very little Chinese investment or record negative FDI positions, according to Eurostat. The remarka...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of Figures and Tables
• Notes on Contributors
• List of Abbreviations
• Acknowledgements
• Introduction: The EU and China, a Relationship in Context
• 1 Chinese Overseas Direct Investment into the European Union
• 2 Chinese Investment in the Greater Europe Zone
• 3 Rebalancing towards a Sustainable Future: China’s Twelfth Five-Year Programme
• 4 China’s Rulers: The Fifth Generation Take Power (2012–13)
• 5 Social Unrest in China
• 6 Untapped Trilateralism: Common Economic and Security Interests of the European Union, the United States and China
• 7 China’s Food Security: Is it a National, Regional or Global Issue?
• 8 Migration from China to the EU: The Challenge within Europe
• Index