- Introduction and Background
The focus of the study is to examine the motives and effects of Chinese Direct Investment in Europe. The choice for a country to specifically penetrate established foreign markets is to explore opportunities and benefit from the same towards revenue creation. The author of this paper holds that China has been keen exploring opportunities in Europe as a strategy for market development of its domestically manufactured products; also, it can be opined that Europe provides China with a stable market for its product due to high purchasing power parity among others. According to a report by the European Central Bank (2019) foreign direct investment in the region has been recording a surge for the period 2000-2016. Further, majority of the inflow comes from Multinational Enterprises (MNEs) that venture into the region through Greenfield investment (GIs). On the same note, European region has received enormous benefits as a result of foreign direct investment; for instance, the inflow of MNEs has continued to enhance efficiency due to increased competition including stabilisation of prices across the industries, low exploitation and monopolistic tendencies. The other benefit is that FDI increases productivity spillovers since MNEs re-align their manufacturing processes to those of domestic firms in backward and forward linkages. MNEs render the domestic regions to access new technology including providing accessibility to new markets; enhance training and skills development of the domestic workforce, increase wages and employment opportunities. However, for the host nations to benefit from the activities of MNEs, they must portray a potential for absorptive capacity (Blomström and Kokko, 2018).
MOFCOM (2011) indicated that at the global scale approximated investments by 2010 from China were €52 billion or US$69 billion. Further, in the early times, investments from China were targeted towards the industrialised regions such as Canada, Australia and the United States. However, such has changed since currently China directs investments to both emerging and developing markets. As Kolstad and Wiig (2012) noted one of the major pull for investments in China are natural resources present in host nations such as oil or energy (See also, Duanmu, 2012). The study by Clegg and Voss (2012) indicates that enterprises such as British Virgin Islands, Hong Kong, and Cayman Islands covered about 75.3% of initial investments from China. Also, Sutherland et al., (2010) held that Luxembourg countries have been gateways for FDI inflows from China including the fact that they create more opportunities for professional services as well as institutional support that is inaccessible in China.
The thesis statement, therefore, posits that: the process of direct investment in Europe by China should lead to more prosperity in the region in terms of economic growth, openness to trade, and mutual cooperation of the two regions. Therefore, it must be so that both Europe and China have the capacity to benefit from each other i.e. mutual cooperation evidenced in the bilateral agreements of the various governments since Europe is a conglomeration of countries. In order to fully detect the motives and benefits driving Chinese direct investment in Europe, the case analysis is going to be narrowed to Eurozone region.
1.1 Problem Statement
According to Nicolas (2009) a greater part of the problems linked to Chinese ODI trace back to the challenges in integrating acquired firms (host firms) with an already unique culture; thus, such creates a crisis between Chinese investors and the host firms in Europe. The other problem is that Chinese enterprises portray to have been ill-prepared to guide on the integration process with target firms in EU. Luo and Tung (2007) address the difficulties involved during post-acquisition which among many include lack of effective and sound working relationships with host firms in EU, respective stakeholders; also inabilities to have sound reconciliation of culture at both national and corporate level, involvement in complex tasks that complicate integration of operations involved between home and target firms in EU. In this context, Chinese multinationals entering EU markets prove to be unprepared in taking up new relationships and partnerships with foreign market partners, industry regulators, courts, employees, unions, and financial institutions (Nicolas, 2009). In the same vein, (Luedi, 2008) held that another problem is that during post-acquisitions experiences Chinese enterprises demonstrate to have minimal experience in handling M&As leading to poor managerial decision making, inexperience in effective management of international brands not to mention their low capacity for innovation. Schuller and Turner (2005) held that such lack of knowledge and understanding of the business attitude at the local context weakens success of Chinese investments in EU markets.
1.2 Research Questions
The research questions for the study included the following:
Q1. Chinese direct investments to Europe are driven by both tangible and intangible factors for mutual or unilateral benefits; hence, what have been the primary motives of China considering expanding its direct investment in the European region to date?
Q2. Considering the fact that China has entered Europe through direct investment, what significant effects have these had to both the micro and macro economy of the region to date?
Q3. In light of the motives and effects established in the investigations under Q1 and Q2, should Europe consider Direct Investment from China as an opportunity or as a threat?
1.3 Research Objectives
The main research objectives stated as follows:
- To analyze the contributions of Chinese direct investments towards economic and industry growth in the European region
The focus of objective 1 is to detail out the benefits or negative outputs that have been characterized by Chinese direct investment in Europe. In order to demonstrate the key contributions the author shall analyze trends specifically for Chinese DI in the region and the spillover effects to Europe’s GDP, Openness to Trade, Employment, Technology, among others. Also, in light of Greenfield investments from Chinese Multinationals the author is keen to establish how such has influenced competition of domestic products in the market, demand and supply, and pricing factors of local firms in Europe.
- To justify the motives of direct investment from China as penetration strategies in the European region and whether they violate or suppress or catalyze growth prospects at different industries
In the second objective, the focus is to understand fully the motives underlying the surge to enter European markets by Chinese multinationals, for example, and whether they are in line with established models for drivers of FDI decisions.
- To consider various policies i.e. current bilateral policies between China and Europe on direct investment and whether they have been violated by the existing activities of direct investment enterprises from China.
The third objective is aimed to explore the bilateral pacts between China and Europe to understand whether they have provided adequate oversight on Chinese investment activities in the region. Thus, proceed to propose more recommendations on what may be required as a way forward to ensure DI from China is an opportunity to the region rather than a threat to that effect. Therefore, the study shall propose a need for more tolerant policies towards Chinese DI or the vice versa.
1.4 Significance of the study
The study based on the proposed objectives seeks to have a 360 degrees investigation which captures the entire rationalization for Chinese direct investment in Europe to date. Thus, the study will manifest a critical review of both theory and empirical documentation of the phenomenon to provide better platforms for Europe to govern direct investment activities from China’s government or Multinational Enterprises. In fact, the study may serve as a benchmark for other regions not only in Europe to understand the situation with their economy as a result of direct investment from China.
1.5 Thesis structure
The development of the thesis shall base on five chapters: chapter one features the background of the study, research questions, research objectives, problem statement, and significance of the research. Chapter two is the critical literature review drawn from published literary works on direct investment in Europe by China and motives cited by experts among other issues. The same chapter features the gaps in knowledge and a model framework to guide further empirical investigations of the problem study. Chapter three is the methods section that outlines the research model, sources of data, design and data analysis implementation. Chapter four consists of the analysis and findings meant to test hypotheses whether motives and effects of direct investment from China have had incremental effects to growth in Eurozone. Chapter five presents key summary of findings, implications to foreign direct investment policies in Europe, and further recommendations to key stakeholders.
2.0 Literature Review
2.1 Theoretical framework
2.1.1 Information based model
2.1.2 Eclectic paradigm/OLI Model
2.2 Motives of Chinese direct investment in Europe
As held by Clegg and Voss (2012) there were shifts in the strategic intent of investors from China towards EU market given the stakeholders drifted away from resource-rich targets. For instance, enterprises from China became opportunistic acquirers of host firms and such was evident on the collapsing firms especially due to the crisis within the equity value of corporations. From the above finding, a motive can be detected in that China considered pursuing foreign regions to explore more their rich natural resources where oil is unquestionable. The researcher sees the motive as transactional in the sense China sought to enter such markets to benefit from the competitive advantage of the target nation, gain monopoly in manufacturing of the same, and then trade it across the other markets in the world. Later in the study, however, it shall be shown that China began to re-think its strategy by considering other market-driven opportunities in target nations other than natural resources; for instance, acquisition of crippling firms due to global financial crisis especially in the EU regions. According to Nicolas (2009) direct investment from China to Europe is reported to be relatively insignificant. For instance, in relation to greenfield investments, such began from a lower mark thus considered to remain at modest levels in EU. On the other hand, China has accounted for about 1.2% in terms of greenfield investment s within Europe in the period 2004-2006which ranks higher than India but with equal levels with Korea. In addition, China’s ODI first destination has been United Kingdom and Germany and that the choice of a country is usually opportunistic. For instance, in the case where there is an available acquisition target. China is more attracted to ODI in the service sector i.e. 55% involving manufacturing activities in different sectors in Europe. Also, the manufacturing sector in Europe mainly encapsulates technologies in the information and communication including automobile industry. Notably, China capitalises on directing its ODI to key strengths i.e. competitive advantages of host nations. The motive, therefore, is for the Chinese investors to access and capitalize on the strategic assets derived from the target acquisitions in Europe. In line with the assertions above UNCTAD (2008) notes that Chinese direct investors in Europe aim to access the externalities establish through the host nations’ technologically-driven clusters. In fact, observations led by UNCTAD (2003) were indicative that Chinese multinationals establish R&D centers while in EU so as to capture human capital with advanced skills in technology thus get to benefit from economies of scale. Good examples of the stated claims refer to Huawei’s investment in the R&D hub in Sweden, Haier enterprise located in Germany and JAC A.J. enterprise situated in Turin, all these aimed to benefit from the closeness to the resources within the regions. Also, Chinese investors are keen to partner with other entities but based on the capacity of the distribution network and not just merely on their proprietary technology. In the same vein, (Yao and Yin (2005) concurs with the above by asserting that Chinese investors consider teaming up with firms that enjoy stable establishments in order to easily access EU market. For instance, a good example refers to the joint venture involving Chinese companies and host EU companies especially in the telecommunication industry. In a similar context Hay, Milelli and Shi (2008) refer to the strategy involved in the acquisition of France’s Le Cabanon/Conserves de Provence where Chalkis, a Chinese investor sought to have accessibility to the region at the same time capitalizing on that target’s well established distribution network across the European market.
In tandem with the above findings, Nicolas (2009) further affirmed that Chinese MNEs in Europe have a tendency to create joint ventures with EU multinationals but first from home region; it means the investors begin negotiations and co-partnerships within China prior to taking their investment overseas. The mode of joint venturing for China involves utilization of joint ventures as well as M&As in order to have direct benefit from advanced production, leadership and managerial skills, and technology prowess. In conjunction Luedi (2008) observed that while targeting EU markets Chinese investors are keen to have outright acquisitions deals or opt to begin from a strategic investment process that is then seconded by a total takeover. The same author further notes that Chinese MNEs consider engaging in minority-state acquisitions in a bid to strengthen their partnership with EU players at the same time have a good grip of the market from the beginning. In similar point of view (Luo and Rosalie, 2007) asserted that in respect to the varying types of investments used by Chinese investors to access EU markets, the basic goal is usually to have accessibility to the brand name as well as the distribution network. A good case example would refer to acquisition deal between TCL and Schneider and Thomson; also, Chinese firms in Germany have considered acquisitions of industries such as Lutz, Welz and Schiess as strategy to have good grip on the German machinery sector including metal industries. Pamlin, Dennis, and Long (2007) held that Chinese investors capitalise on Greenfield investments including creating research and development centers with the motive to have accessibility to the market in Europe including being in a position to customise products for the local consumers. Yao and Yin (2005) supports the above claims by noting that greenfield investments used by Chinese firms is meant to enhance feasibility especially for firms targeting logistics, service and telecommunication industries; as an example the establishment of R&D centers in France such as Huawei not to mention Shenhyang Machine Tool located in Germany. In consideration of the push factors, intensifying competition and government policies continues to rise within China’s business environment. Therefore, Nicole (2009) stated that Chinese firms lack the traditional advantage of ownership required to generate superior technologies as well as in building brand equity with internal recognition; thus the motive embeds on the advantage that Chinese investors exploit in the sectors within the host nations that still value the demand regardless of its diminishing effects.
2.3 Effects of Chinese direct investment in Europe
Research indicates that the EU region has witnessed a rise in Chinese direct investment inflows; for instance, in the period 2003 to 2009 the region recorded a rise from €0.3 billion to€4.5 billion in terms of direct investment from China. Therefore, such is considered a growth rate to 57.0% from 39.5% in FDI stock from China to EU (NBS, MOFCOM and SAFE, 2010). However, it is held that in the period 2006-09, the growing trend in investment inflow from China in the EU was decoupled due to the global trends on the same; thus, the investments from China continued to increase in a faster rate. The emergence of the global financial crisis led to decreased performance in global investments a result of which saw more decline in investments in UE from China. For instance, a greater part of the small and medium enterprises (SMEs) in China rethought their strategy by first seeking to lower their engagement in overseas investments in preference for exploring more opportunities in the domestic markets (CCIPT, 2009). Figure 2.1 manifests a trend for GDI growth from Chinese enterprises in EU and globally.
Figure 2.1: Trend on OFDI (annual growth rate); Source: (NBS, MOFCOM and SAFE, 2010)
As can be seen in figure 2.1, growth rate of Chinese FDI in EU has been higher compared to that at the global scale but then with a sharp decline in the period 2008. The researcher believes that the shock was as a result of the global financial crisis but then depicting more growth towards the period 2009. However, it is evident that Chinese investment inflows in EU have been higher compared to its indulgence at the global scale over the years. The same can be considered a reason to hold that China has been attentive to the EU markets as opposed to other markets in the world.
MOFCOM (2010) indicated that investment inflows from China to EU have been targeted to a few countries such as Germany, France and United Kingdom. The region has accounted for 36.8% on average in terms of annual investment for China for the period 2003-2009. On the other hand, United Kingdom, Germany and France gain from the total production estimated values by Chinese affiliates. Also, UK, Italy, France, Finland and Germany are said to benefit from Chinese affiliates in terms of productivity in labour. Knoerich (2010) depicts that U countries at large have benefited from income generation from Chinese affiliates; a good example cited is Denmark where employment has been rising due to activities of Chinese affiliates. In addition to the findings above, the analysis by Klossek, Linke and Nippa (2012) asserts that the significant contributions of Chinese direct investments can be differentiated as greenfield investments (i.e. creation of firm’s assets de novo) or brown investments (mergers and acquisitions). In the UE, it is cited that acquisitions by Chinese firms have led to establishment of a long-term impact to the economy. In addition, the acquired and bidder firms gain from the enhanced and expanded product portfolios including the benefits derived from the wider geographical coverage. Here, it can be subsumed that China creates more synergies to the existing local firms in EU which enables them to revamp from harsh economic conditions. As held, Chinese firms indulge in extensive high-end product development which elevates existing local firms that engage in low-end products hence through synergetic interventions, get to jointly design and promote mid-range products (Clegg and Voss, 2012). Knoerich (2010) asserted that due to Chinese direct investment, Germany has managed to benefit from such due to penetration of developing markets. Klossek et al., (2012) have opined that brownfield investments are much effective in execution and take-off as opposed to greenfield investments; also, the former creates opportunities for long-term returns.
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