Sophie Meunier, a Research Scholar at Princeton University’s Woodrow Wilson School of Public and International Affairs, sat down with the Georgetown Journal of International Affairs to discuss the growth of Chinese foreign direct investment (FDI) into European and other Western nations.
GJIA: Foreign direct investment is typically imagined to flow from economically developed countries to developing countries. In what ways have China’s recent investments departed from this traditional conception of FDI?
SM: Initially, Chinese investment behaved like the traditional version of FDI. Investment went to developing countries in Africa and Latin America. China also invested in raw materials and resources in Canada and Australia. Only later, towards the end of the last decade around 2008, did it start to invest in Europe and the United States. These investments pose different kinds of political challenges for host economies, simply because these nations are not used to having an emerging economy invest in them. The first kind is what I call the existential challenge: precisely the fact that FDI traditionally has been an instrument or evidence of power. In this traditional model, the powerful economy, with its plentiful capital and superior technology, invests in economies where either materials or labor are cheap. Although there are downsides, the host economy benefits from the investment because technology spills over and diffuses locally. In [the case of Chinese investment in Western nations], however, this is not what is happening. Second, there is also the fear of asset-stripping, the idea that a Chinese investor is going to invest in American or European companies and, once it owns the company, take all the assets, bring them back to China, and eventually close up shop and lay off all the workers. The third fear associated with this is what an Italian scholar has called the reverse ‘Marco Polo’ effect: that China is investing in [Western] companies to get access to their technology and then leaving the assets and the workers but bringing the technology back to China. This is not the same as assetstripping [because the idea is that] eventually the Chinese company will use the technology to become as advanced and competitive as the original company. These fears are associated with an emerging economy investing into more developed economies, and create all kinds of existential questions about where the world is headed. Is the West in decline while China is rising? Is this the end of the Western world?
It is hard to make any judgments [about whether these fears have been realized], however, because everything is so recent. I don’t think the asset-stripping has taken place at all so far, not even in the high-tech sectors. There was barely any Chinese investment in Europe or the United States before 2008 and, though it has been growing almost exponentially since, the numbers are still extremely small. China represents less than 1 percent of total FDI stock in Europe and the U.S. So we can’t judge that yet.
GJIA: What factors have fueled this surge of Chinese FDI into developed economies?
SM: There are three reasons. The first is political. This is a conscious choice that the Chinese government has made. Initially featured in the five-year plan that came out in 2000, it is an explicit policy goal, which has been translated into English as the “going out” or “going global” policy. The Chinese government tells companies, both private and public, to go out, expand, and make investments abroad. The second reason is that China has money. Gigantic capital foreign exchange reserves have come out of trade, so these companies believe they should invest it somewhere. Up until recently, a lot of this investment has taken place in sovereign debt. Although China is the largest foreign holder of American debt, at the time of the 2008 financial crisis there was a desire in China to diversify, to not put all their eggs in the same basket. One strategy was to diversify away from the United States and, therefore, to invest in Europe—among other places—as well. Another strategy was to diversify away from sovereign debt into real assets. This third reason, diversification, is where foreign direct investments come in.
GJIA: Are there specific industries or services in which China has predominantly invested? What strategic factors are motivating these investments?
SM: In terms of whether we see any particular sectors targeted, the most interesting observation is actually that this does not happen. Instead it seems a free-for-all, with all sectors up for grabs. There is a lot of investment in the real estate sector, but there is also investment everywhere. The biggest Chinese acquisition in the United States last year—the largest Chinese acquisition in the United States ever—was in the food sector. It was a Smithfield company that makes pork products like Virginia ham, a seven billion dollar acquisition by the Shuanghui Chinese company. The food sector is big, the energy sector is big, the autoparts sector is big. Everything from tourism and hotels to fashion and batteries is up for purchase. There is no particular pattern that suggests a directed strategic motive.
GJIA: To what degree has China invested in Western industries compared to other nations, and how dependent are the receiving industries on these investments? How do you expect this will change in the future?
SM: Chinese investment represents 1 percent of the total FDI stock [in United States], and was around 3 percent total of flows going into Europe in 2012. These are still very low numbers compared to whoever else is investing. I am predicting that Chinese investment will continue to increase in a variety of sectors. As to how dependent the receiving countries are, there have been some cases in which Chinese investors were the only investors available—nobody else wanted to buy the company or inject capital into it. So they were very welcome, obviously, and, if they had not been there, the company and the jobs would not have been saved. There have been many other cases in which Chinese investors have been part of a competitive bidding process to invest in that company. In almost all of these cases, Chinese investors were the highest bidder, which is quite interesting.
GJIA: Which countries or regions is China targeting specifically for investment?
SM: It seems that there are several European Unions when it comes to Chinese investment, and they do not necessarily overlap with one another. The first is Western Europe. The top three destinations for Chinese investment in Europe are the three largest economies: Germany, the United Kingdom, and France. There was a lot of Chinese investment in the United Kingdom last year, both in industry as well as property and real estate, especially in London. In Germany there is a lot of Chinese investment, mostly in the Mittelstand companies, and I would not be surprised if in the next couple years Germany is the number one destination for Chinese investment. There has also been a lot of Chinese investment in France, but it has been harder to promote foreign investment in this context for a variety of French internal political reasons.
The second European Union, when it comes to Chinese investment, is Central and Eastern Europe. There is a lot of Chinese investment into countries in this region—Hungary is actually one of the top destinations for Chinese investment in Europe—but for different reasons. The chief reason is cheaper labor and some interesting assets, but also an ease of access that is not found in other countries. Most countries in Central and Eastern Europe have very lax regulations, if not no regulations at all, controlling inflows of foreign direct investment. Anyone who wants to invest there is welcome. That creates different dynamics and different types of investment. For instance, Chinese companies have set up a car assembly plant in Bulgaria, the first Chinese car assembly plant in Europe.
Then you have a third group: countries from Southern Europe that have been hit especially hard by the European crisis. Greece, for instance, but also, to some extent, Spain and Portugal, where they are trying to sell a lot of privatization assets to Chinese investors. There has been quite a bit of Chinese investment in Greece; not as much as Greek leaders would have liked, but they have certainly tried to give all kinds of incentives to Chinese investors.
GJIA: What do China’s increased Western investments say about its future plans or commitments to other regions it has made investments into, such as Latin America and Africa?
SM: Chinese investments in Africa and Latin America preceded Chinese investment in Europe and the United States. They will continue, but they are very different kinds of investment—mostly in resources and cheaper labor, in these regions and in Asia as well. There is a lot of Chinese investment now in Asian countries that have lower labor costs than China. Chinese investment in Europe and the United States is a very different phenomenon because the kinds of resources that Chinese companies are investing in are not, for the most part, raw materials. They do so in Canada and Australia, and a little bit in the United States, but certainly not in Europe. The resources they are looking for there are more in the realms of technology, know-how, reputation, brands, consumer markets, and infrastructure. So these are two independent phenomena.
GJIA: Is there a tendency within the United States to view Chinese investment as politically or economically exploitative, or even insidious?
SM: Interestingly, although Chinese investments in Europe and the United States are quite similar, the political reactions on the two sides of the Atlantic have been quite different. On the European side, a lot of the fears that existed initially when Chinese investment started to appear in the late 2000s have dissipated. The rhetoric in some European countries—mostly in France—that was quite negative about China invading the European continent with its investment has subsided, and instead given way to a rhetoric of rescue. This rhetoric is also found in the United States, but to a much lesser extent. This is because a lot of the rhetoric here is still dominated by issues of national security, which are absent, for the most part, in Europe. There is a tension between savior and predator rhetoric in the United States, and it is mostly a tension between the local and federal level. Investment promotion in the United States is not very effective when it is done at the federal level because the resources are extremely small. Promotion goes through the Commerce Department, which does not have many resources, a good website, or a very large presence in China. Investment efforts at the local level—something like the city of San Francisco, for instance—are very different. Mayors and governors, especially in Midwestern states, are incredibly active in trying to attract Chinese investment, and extremely happy to do so. At the local level, Chinese investments in auto-part companies save jobs and create links to the big demand in China for these parts. But at the national level, many politicians in the Senate make loud speeches [against Chinese investment] and sometimes even block investments that have been cleared through the interagency process in the executive branch. For political reasons, they create political backlash so the investment does not go through. It is important to note this discrepancy in America between local and national politics.
Dr. Sophie Meunier is a Research Scholar at the Woodrow Wilson School of Public and International Affairs, as well as Co-Director of the European Union Program, at Princeton University.
Dr. Meunier was interviewed by Elaine Li and Ian Philbrick on 11 April 2014 in Washington, DC.