Chinese Investment in Europe: A Concern for FDI

This article discusses the recent trend of Chinese investment in Europe and its implications. The article highlights the reasons behind this trend, such as less politicized foreign direct investment and the desire for Chinese cash to finance infrastructure or bail-out debt-ridden firms. The article also discusses the challenges and opportunities this trend presents for European companies and policymakers.

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For years, China has been identified as a destination for FDI (foreign direct investment) as
multinational companies flocked there in order to establish export platforms and take undue
advantage of its enhancing market structure. The increment in China’s direct investment in
Europe is a major concern in this scenario. Based on the recent report by a law firm named as
‘Baker and McKenzie’ and Rhodium Group (consultancy), the net stock of Chinese
investment in European countries has increased almost ten-fold from the US $6 billion in the
year 2010 to US$ 55 billion in the year 2014. Besides, in the year 2015 alone, the OFDI on
the part of China in Europe enhanced by forty-four percent through deals like Italian tire
manufacturer Pirelli’s takeover by ChemChina valuing the US $7.7 billion. The total flow of
US$ 23 billion surpassed China’s investment in the United States that was US$ 17 billion in
that same year (Brookings, 2017). Moreover, based on the analysts, the present year could
witness an enhanced increment if ChemChina’s proposed takeover of swiss agro-technology
valuing US$46 billion firms (Syngenta) is granted approval by the regulators (Davies &
Crawford, 2012).
(Seaman et. al, 2017)
The major reasons why investors of China have favored Europe in the past few years are first,
that the issue of foreign direct investment on the part of China is less politicized in European
countries. However, a handful of high-profile investments through China in the US have been
restricted for political issues, and the process of a national security review of Committee on
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Foreign Investment in the US poses a hurdle for fewer types of acquisitions done by Chinese
SOE’s (state owned enterprises) (Rossi & Burghart, 2009). In relation to Europe, it lacks an
equivalent procedure and this describes why such SOE’s depict nearly seventy percent of
Chinese OFDI in Europe. Secondly, the continuing financial and economic hurdles since the
GFC of 2008 means there has been a huge desire for Chinese cash to finance the
infrastructure or bail-out firms that are debt-ridden (Carol et. al, 2016). Nevertheless, even
though the flows are impressive, yet it is significant to remember to take into account that on
a stock basis, China’s average investment in Europe is still moderate in nature. Moreover, by
the end of 2014, the cumulative OFDI of China reflected only 3-4% of all the foreign direct
investment in Europe, and the workforce directly influenced by such Chinese FDI was a petty
two percent of the number of Europeans operating in American-owned European firms
(Brookings, 2017). The increasing trend of such Chinese investment, however, raises few
interesting political and economic questions for the leaders of Europe. The wave of Chinese
investment establishes various challenges for the European companies and other policy-
makers. For firms, the immediate emergence of hungry and adequately-financed Chinese
acquirers has allowed incumbent organizations to step up their efforts of mergers and
acquisitions in order to maintain their firmness on the market. The attempts into the European
market by the leading construction firms of China most likely played a key role in prompting
the purchase of Finnish (crane company) Konecranes by its rival company Terex based in
America. Similarly, an unexpected bid by ChemChina for Syngenta has resulted in a disquiet
among the chemical firms of Europe.
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(Seaman et. al, 2017)
In relation to policy arenas, there are two major issues standing in this scenario. The narrower
one is associated with reciprocity wherein Chinese firms are free to purchase companies in
any European sector without prevention, foreign companies are prevented from investment in
a host of Chinese sectors including insurance, banking, construction, media, and healthcare.
One significant solution is to incorporate provisions in China-EU bilateral investment treaty
under account. Overall, the recent shifts in Chinese OFDI patterns in Europe not only depict
how altering sectoral strategies affect where investment will progress, they also state that
such wave of Chinese investment in Europe is driven by economic motivations instead of
political considerations (Bodie et. al,, 2014). Companies from South Korea, Japan, and
Taiwan before them, firms of China are now creating business affairs in potential export
markets and establishing their international brands, thereby creating firm-specific benefits
and competitive positions. In relation to the current scenario, such trend will further decrease
China’s historic importance on investment of resources. Even though present levels of OFDI
through China may still be too petty to attract the attention of huge MNC’s, the establishment
of a powerful network of business operations in the key markets of China will ultimately
assist more Chinese companies to establish direct connections with sellers and buyers. FDI
into China has assisted in a rapid growth in its exports over the last twenty years. This is the
reason why Chinese companies are gearing up for an enhanced approach that can provide
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them better control over their supply chains, sales, and marketing abroad (Seaman et. al,
2017). This long-term approach may contrast with their strategy just after China joined the
WTO when fewer Chinese companies were curious about their survival and rushed to
purchase foreign brands (Backaler, 2015). Overall, going by the scenario and expectations of
the Chinese officials, additional USD one trillion dollars in OFDI is decided to be invested
into foreign companies of Europe. Even though this enhancement in investments is a mere
structural story and there is a basic expectation that so-called purchasing spree of China will
increase, there are various downside risks for such Chinese outbound investments that have
emerged in the current years (Carmichael & Graham, 2012).
(Seaman et. al, 2017)
Nevertheless, the belt and road initiative of China has assisted it to enhance connectivity
betwixt Europe and itself but with such connectivity, there comes an enhanced flow of
Chinese goods and a flood of low-priced items from its excess capacity industries like
building materials and steel (Seaman et. al,, 2018). In response to such apparent dumping of
Chinese goods in Europe, the EU adopted a non-binding resolution to reject China’s claim to
market economy status in the WTO. In the present, the Commission now faces the choice of
rejecting China’s claim (an action that can cause economic issues from Beijing) or accepting
it (detrimental to producers of Europe). A feasible midway in such scenario will be to identify
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China’s market status but to design a variety of expectations to safeguard significant
industries of Europe.
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References
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