Leeds University Business School Funded by the Jean Monnet Programme, Key Activity 1, for a project on “European Integration and Chinese Foreign Direct

Leeds University Business School

Funded by the Jean Monnet Programme, Key Activity 1, for a project on “European Integration and Chinese Foreign Direct Investment in the EU” with conference co-funding from The Sino-British Fellowship Trust

Professor L. Jeremy Clegg & Dr Hinrich Voss

Chinese Foreign Direct Investment into the European Union


Understanding Chinese FDI

Chinese FDI stocks and flows

Chinese M&As

Investment motives

The Chinese government factor

The potential impacts of Chinese OFDI

Economic downside

Economic upside

Looking Ahead

Agenda

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Understanding Chinese FDI


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Chinese global OFDI stock in Billion US Dol-lars

Chinese global OFDI stock as % of world to-tal

Chinese global OFDI stock

UNCTAD (2012)

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Leeds University Business School UNCTAD (2012)

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Chinese OFDI flow (Billion USD)

Chinese OFDI flow as % of world total

Chinese global OFDI flow

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Resource giantsResource giants

Oil and gasOil and gas- CNPC- Sinopec- CNOOCMining and metalMining and metal- Chinalco- Minmetals- SinosteelEnergyEnergy- China Power - Huaneng Group- State Grid

Service dominatorsService dominators

TransportTransport- COSCO- China Shipping- Air ChinaTelecomTelecom- China Unicom- China Mobile- China TelecomConstructionConstruction- CSCEC- CCCC- SINOHYDRO

Manufacturing starsManufacturing stars

- Huawei- COFCO - Lenovo- Geely- China North Ind.- China Shipbuilding- ZTE- ChemChina…

ConglomeratesConglomerates

- China Resources- China Merchants- CITIC Group- China Poly Group- Beijing Enterprises - GDH LTD. …

Top 50Top 50 InvestorsInvestors

Liang (2012)

Who is behind the Chinese OFDI?

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Chinese OFDI stock in Europe (Billion EUR)

Chinese OFDI stock in Europe as % of total

Chinese OFDI stock in Europe

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Chinese OFDI flow into Europe (Billion EUR)

Chinese OFDI flow into Europe as % of total

Chinese OFDI flow into Europe

%

Eurostat (2012)

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Chinese OFDI flows into Europe

Clegg & Voss (2012)

USD mn

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M&As by Chinese firms are typically horizontal - to transform product portfolios from local to global brands, in industries such as: manufacturing machinery; consumer electronics, and household appliances

Chinese OFDI, compared with other OFDI, is more risk-tolerant: acquiring financially distressed firms and entering countries that appear politically risky

A high percentage of Chinese OFDI flow is entering the business service sector, to facilitate Chinese exports. Other important sectors includes natural resources, and wholesale

Chinese acquirers are more likely than others to leave the management intact, suggesting that they are not restructuring companies for profits

Elia (2012); Knoerich (2012); Xing (2012)

Characteristics of Chinese M&As

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Motive Percentage

Accessing oversea markets 68.42

Building global brands 63.16Obtaining international managerial talents and experience

47.37

Increasing sales 26.32Adapting to the trend of the world economy

26.32

Obtaining raw materials and natural resources

21.05

Obtaining new technologies 15.79

Accelerating capital operation 10.53

Diversify risks 5.26

Reducing costs 5.26

Motives of overseas investment ranked by interviewed companies

Liang (2012)

Motives of Chinese OFDI: Results from a survey

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Motive Projects % of FDI Projects

Companies % of Companies

Market Growth Potential 81 37.0 55 37.9Proximity to markets or customers

72 32.9 53 36.5

Regulations or business climate 55 25.1 41 28.3Skilled workforce availability 32 14.6 27 18.6Infrastructure and logistics 26 11.9 23 15.9IPA or Govt support 21 9.6 17 11.7Industry Cluster / Critical Mass 15 6.8 15 10.3Natural Resources 14 6.4 11 7.6Lower Costs 10 4.6 9 6.2Attractiveness / Quality of Life 9 4.1 9 6.2Other Motive 31 14.2 27 18.6

De Beule (2012)

Motives of Chinese OFDI: Another perspective

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Individual and family (entrepreneurial firms)

Cost focus

Transfer of their business model from the home country

Market seeking motivation (trading activities)

‘less knowledge-intensive service and manufacturing sectors, CEEC

Corporate firms

Differentiation focus

Transfer assets from the host country

Asset seeking motivation (technology, brand and network)

Perform well in terms of job creation and assets augmenting

Western Europe and in knowledge intensive sectors

Zhang & Van Den Bulcke (2012)

Nature of Chinese investors

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• There are signs of fear towards “Chinese encroachment”: Europeans fear an eastward shift in economic power

• Public discourse and politicians in the UK and USA voice security concerns over the “fledgling capability” China could potentially use against them if activities in telecommunications and energy were allowed

• Why is Chinese OFDI perceived as different from existing dominant home countries such as Japan and USA?

Chinese enterprises lack experience of doing business overseas, often provoking unnecessary antipathy as they mishandle local communities and sensitivities; laws and regulations; intellectual rights; product quality control and CSR responsibilities

Brown (2012); Davis (2012)

Concerns over Chinese OFDI

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There is an alleged primacy attached to the goal of facilitating the next stage of China's economic development through the instrument of OFDI

China's MNEs remain deeply embedded in China's cadre-capitalism, both in terms of policy treatment and personnel movement.

Three agencies govern and regulate Chinese OFDI NDRC sets the overall direction of economic reform MOFCOM gathers and publishes data on OFDI SASAC, the “parent” of SOEs, has control over targets

In 2009, SOEs accounted for USD 38.2bn (68%) of total OFDI, with major SOEs including: Sinopec, CIC, Chinalco

Chinese OFDI behaviour, in some ways, challenges certain established theories in international business

Brennan & Rios-Morales (2012); De Beule (2012)

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Government influence on China’s OFDI

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O u tw ard F D I

S u p p o rt th ein tern a tio n a lisa tion

o f F irm s

• In fo rm a tio n a b o u t in v es tm en t o p p o rtu n ities

• M a rk e t resea rc h• Tra in in g p ro g ra m m es• L o w -c o s t c a p ita l

In w ard F D I

C rea tin g a co m p etitiveE n viro n m en t

• M a c ro ec o n o m ic p o lic ies• In d u stria l s tra teg ies

F D IO bjectives

• N a tu ra l re so urc e -se e k in g• L o c a l m a rk e t-se e k in g• E ffic ie nc y -se e k in g• Te c hno lo g ic a l

a s se ts -se e k ing

F o sterin g In terg o v ern m en ta lC o o p era tio n

• B ila te ra l T rad e A g reem e nts• R eg io na l T rad e A g reem ents• Investm ent A g reem e nts• Tax A g reem e nts

Setting L o ng -term eco no m ic develo pm ent g o a ls

E co no m ic , P o litica l, C u ltura l co nsidera tio ns

M ea ns•P ro m o tio na l F ram ew o rk•B u ild ing link s be tw eenF D I and the lo ca l ind u str y

•M o ving u p to the va lu e cha in

Brennan & Rios- M orales 2007

PUSH

PULL

Government influence on China’s OFDI

Brennan & Rios-Morales (2012)

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The potential impacts of Chinese OFDI


The issue of performance is necessary to assess any impact

• Marked differences in employment, assets per employee, labour productivity, and profits, between Chinese firms in Europe

• 78% of entrepreneurial firms registered profits vs. 56% of subsidiaries

• 60% of large operations are profitable vs. 67 % of medium and 77% of small

• Operating revenue: Euros 800,000 for subsidiaries vs. Euros 61,000 of small

• Labour costs per employee: Euros 59,000 vs. Euros 600 for small entrepreneurial firms

Zhang (2012)

How has Chinese OFDI in Europe performed so far?

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Chinese firms are currently unlikely to transfer new cutting edge technology, meanwhile OFDI increases the productivity of Chinese MNCs, and allowing them to catch up quicker

acquiring state-of-the-art technology gaining managerial and commercial experience as an MNE

According to a BBC poll, a majority of Germans, Italians, French, Americans, and Canadians view China's rise negatively

Denzer (2012); Economist (2011); Xing (2012)

Economic downsides: stronger Chinese competitors

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With low domestic saving rates and a sluggish lending market, European countries will become increasingly dependent on IFDI to spur growth

Concerns are voiced over the relative size/bargaining power China has over smaller economies – like New Zealand → Chinese firms could easily monopolize key domestic markets.

The perception that Chinese OFDI in NZ is coordinated and supported by the government makes the locals feel bullied

Chinese sovereign wealth funds (SWFs) are very large, and are especially interested in buying equity in European utilities

Enderwick (2012)

Economic downsides: Over-dependence

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European affiliates might benefit from Chinese home-country inputs: strong state support, cheap labour costs, and abundant natural resources

Chinese OFDI generates market access for European production, not otherwise so possible, creating a demand for German engineers and French brands, to export to China

German SMEs must enter emerging markets to survive, Chinese OFDI creates instant access and support

German SMEs are willing to be acquired because China is the largest consumer of machine goods

German firms can re-enter previously abandoned middle and low tier consumer segment

Elia (2012); Knoerich (2012)

Economic upsides: Access to the Chinese market

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A lot of small and medium European firms do not have access to adequate capital for necessary investments to maintain their edge

examples of Chinese SOE automotive giants investing heavily in central and eastern Europe

Financial repression in the past left lots of excess capital, private or public, in China, evidenced by the amount of treasury bills held

If investments are in line with the macroeconomic policy, Chinese firms might find it easier to shift their excess capital abroad. Recent need to diversify from American dollar also made Chinese capital more interested in Euro assets.

Struggling European firms are looking for a Chinese white knight

Economist (2011); Amighini (2012)

Economic upsides: Access to Chinese capital

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One of the major concerns over Chinese investment is the erosion of the technological and organizational edge of European firms

However, as the developed market is saturated, firms increasingly must compete on a price basis in the developing world

Which makes it important that innovations can adapt to these developing markets

Anecdotal evidence by one of the business panelists (in the IT business) suggested that they are, in fact, implementing projects that are developed in China so knowledge transfer is actually coming from China.

Levesley (2012)

Economic upsides: Technological transfer

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Wales traditionally lags behind the rest of the UK in terms of economic prosperity; education level and social development. Its past reliance on manufacturing exacerbates the problem

However, its proximity to southern England and the latter's talent pool, institutions and infrastructure would make it an ideal investment destination for Chinese manufacturing firms looking to globalize

Chinese OFDI in Wales, though large in head count (25.7% of the total number of emerging market investments), lacks volume (5.3% of total) and job-creation (1.8% of total)

Cook (2012)

Economic realities: The Welsh Experience

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Looking Ahead


Chinese investors see the EU as an internally segmented market, and so the IPAs of member states will have to remain very active. Therefore, member states must

Understand the difficulties and costs faced by Chinese firms when entering the EU: the potential political backslash; difficulty in identifying suitable targets, legal and CSR issues, etc.

In order to maximize the benefits, we must work to encourage more greenfield projects that could offer the best potential synergies between the strengths and needs of both China and Europe, by asking:

Which section of your country's economy could benefit from Chinese OFDI the most? And how would you attract them?

Economic futures: Making the most out of OFDI

Brown (2012); Davis (2012)

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Difficulties to identify the ultimate destination of Chinese OFDI because more than 75 per cent goes through tax havens such as Hong Kong, Cayman Islands, and the British Virgin Islands. “Round-tripping” - a substantial amount of those funds are reinvested back to China in pursuit of preferential treatments masked as IFDI

A more strategic approach: Developing individually tailored policy recommendations for

individual member states. Academics could help IPAs to identify sectors and European firms that would be attractive targets for the most beneficial kind of Chinese OFDI

Similar to the “target list” tabulated by MOFCOM

Where can more research be done?

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Xing (2012)


Summary and Conclusions

The depressed EU economy needs

(1)Capital via inward investment(2)Market access to China

acquisition of EU firms and integration into the Chinese supply chain may enable access, but it places Chinese – not EU – firms in the leadership role

Post-Lisbon Treaty, with EU competence for external investment, an EU policy overhaul is needed - individual member-state bilateral investment treaties (BITs) focused on market access in China, not on Chinese FDI in the EU

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Summary and Conclusions

Given that the EU does not discriminate in official policy towards investment from outside the EU (non invoking of REIO exception) the EU can mainly offer comprehensive investment protection across the EU in a China-EU bilateral investment agreement:• Chinese fear non-transparent national barriers and security concerns in the

EU• Chinese government feels that its firms are often poorly informed, and lack

FDI capability (need chambers of commerce, investment facilitation and training)

• The strength of Chinese desire is a main bargaining chip for the EU

The EU has external investment competence but now needs better FDI statistics – to gauge impact – not just on quantity but on quality (operational data)

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- Thank You -


Further reading

Clegg & Voss. 2012. Chinese Overseas Direct Investment in the European Union. London: ECRAN.

Available here:

http://www.euecran.eu/publications-db

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References

Papers presented at the Jean Monnet Conference European Integration and Chinese Foreign Direct Investment in the EU, 12 April 2012, University of Leeds:

Amighini, A. 2012. The Chinese automobile industry in Europe.

Brennan, L. and Rios-Morales, R . 2012. The Emergence of Chinese Investment in Europe.

Brown, K. 2012. Reactions in the EU to Chinese FDI.

Cook, M. 2012. How to Research Chinese Outward Investment ?

Davis, K. 2012. The Sustainability of Chinese FDI in the EU.

Denzer, A. 2012. Home Country effects of Chinese OFDI

Elia, S. 2012. Multinational firms from Emerging to Developed Countries.

Enderwick, P. 2012. Chinese Investments in Oceania.

Knoerich, J. 2012. Chinese FDI in the EU and Germany.

Levesley, D. 2012. Business Panel Discussion.

Liang, G.Y. 2012. What can we learn about the impact of political factors on Chinese Outward FDI.

Xing, Y.Q. 2012. China's OFDI.

Zhang, H.Y. & van den Bulcke, D. 2012. The Performance of Chinese-owned firms.

Other references

Clegg, L.J. and Voss, H. 2012. Chinese Overseas Direct Investment in the European Union. London: Europe China Research and Advice Network.

Economist. 2011.

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Documents

Leeds University Business School Funded by the Jean Monnet Programme, Key Activity 1, for a project on “European Integration and Chinese Foreign Direct