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

Leeds University Business School 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 2

Leeds University Business School Understanding Chinese FDI

Leeds University Business School Chinese global OFDI stock UNCTAD (2012) USD bn % 4

Leeds University Business School UNCTAD (2012) Chinese global OFDI flow USD bn % 5

Leeds University Business School Resource giants Oil and gas - CNPC - Sinopec - CNOOC Mining and metal - Chinalco - Minmetals - SinosteelEnergy - China Power - Huaneng Group - State Grid Service dominators Transport - COSCO - China Shipping - Air ChinaTelecom - China Unicom - China Mobile - China TelecomConstruction - CSCEC - CCCC - SINOHYDRO Manufacturing stars - Huawei - COFCO - Lenovo - Geely - China North Ind. - China Shipbuilding - ZTE - ChemChina … Conglomerates - China Resources - China Merchants - CITIC Group - China Poly Group - Beijing Enterprises - GDH LTD. … Top 50 Investors Liang (2012) Who is behind the Chinese OFDI? 6

Leeds University Business School Chinese OFDI stock in Europe Eurostat (2012) Euro bn % 7

Leeds University Business School Chinese OFDI flow into Europe Euro bn % Eurostat (2012) 8

Leeds University Business School Chinese OFDI flows into Europe Clegg & Voss (2012) USD mn 9

Leeds University Business School 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 10

Leeds University Business School MotivePercentage Accessing oversea markets Building global brands Obtaining international managerial talents and experience Increasing sales Adapting to the trend of the world economy Obtaining raw materials and natural resources Obtaining new technologies Accelerating capital operation 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 11

Leeds University Business School MotiveProjects % of FDI Projects Companies % of Companies Market Growth Potential Proximity to markets or customers Regulations or business climate Skilled workforce availability Infrastructure and logistics IPA or Govt support Industry Cluster / Critical Mass Natural Resources Lower Costs Attractiveness / Quality of Life Other Motive De Beule (2012) Motives of Chinese OFDI: Another perspective 12

Leeds University Business School 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 13

Leeds University Business School 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 14

Leeds University Business School 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). Government influence on China’s OFDI 15

Leeds University Business School Government influence on China’s OFDI Brennan & Rios-Morales (2012) 16

Leeds University Business School The potential impacts of Chinese OFDI

Leeds University Business School 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? 18

Leeds University Business School 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 19

Leeds University Business School 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 20

Leeds University Business School 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 21

Leeds University Business School 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 22

Leeds University Business School 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 23

Leeds University Business School 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 24

Leeds University Business School Looking Ahead

Leeds University Business School 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) 26

Leeds University Business School 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? 27 Xing (2012)

Leeds University Business School 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 28

Leeds University Business School 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) 29

Leeds University Business School - Thank You -

Leeds University Business School Further reading Clegg & Voss Chinese Overseas Direct Investment in the European Union. London: ECRAN. Available here: 31

Leeds University Business School 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 The Chinese automobile industry in Europe. Brennan, L. and Rios-Morales, R The Emergence of Chinese Investment in Europe. Brown, K Reactions in the EU to Chinese FDI. Cook, M How to Research Chinese Outward Investment ? Davis, K The Sustainability of Chinese FDI in the EU. Denzer, A Home Country effects of Chinese OFDI Elia, S Multinational firms from Emerging to Developed Countries. Enderwick, P Chinese Investments in Oceania. Knoerich, J Chinese FDI in the EU and Germany. Levesley, D Business Panel Discussion. Liang, G.Y What can we learn about the impact of political factors on Chinese Outward FDI. Xing, Y.Q China's OFDI. Zhang, H.Y. & van den Bulcke, D The Performance of Chinese-owned firms. Other references Clegg, L.J. and Voss, H Chinese Overseas Direct Investment in the European Union. London: Europe China Research and Advice Network. Economist