The European Chamber advocates the mutual openness of both Chinese and European markets, so the trend of increasing Chinese investment in the EU is therefore viewed positively. It is hoped that this will be a factor in the increasing openness of China’s markets to European companies in the future.
Therefore, in early-summer 2012, the European Chamber commissioned an initiative to examine Chinese outbound direct investment (ODI) in the EU. To help with this, two major multinational firms with experience assisting Chinese companies invest in Europe —KPMG and Roland Berger Strategy Consultants—agreed to contribute by providing access to Chinese enterprises with experience of investing in the EU.
The result was the publication Chinese Outbound Investment in the European Union, which was released on 31st January, 2012, in Beijing. What follows is an overview of this report.
Chinese ODI across the world is a phenomenon that has been gathering increasing attention in recent years. Rarely a week goes by without an article appearing in mainstream media detailing the latest figures or analysing a recent deal. Commentary flows from prominent think tanks, and conferences spring up across China and the rest of the world. Clearly this aspect of China’s continued economic rise is one of great interest across economic and political spheres as people look to better understand it and work out the implications.
Background information: Chinese ODI in context
Since market reforms began in 1978, and particularly since the 1990s, there has been a large and fairly constant stream of foreign direct investment (FDI) from other countries into China, which has contributed to its economic growth. Chinese ODI on the other hand remained relatively small for much of this period, yet in recent years there has been a notable increase and ODI has become a prominent part of Chinese Government strategy. As stated in China’s 12th Five-Year Plan: “China must adapt to a more balanced growth model, in which we place equal stress on imports, exports, attracting foreign capital and promoting outbound investments, instead of the current dependence on exports and foreign capital.”
The world of FDI statistics is a fairly murky affair, with large discrepancies between official data sources, but according to data from the United Nations Conference on Trade and Development (UNCTAD), China’s ODI flows in 2011were USD 65 billion and total ODI stock had reached USD 366 billion. Chinese Government information states that by the end of 2011 more than 13,500 Chinese enterprises had established over 18,000 overseas enterprises in 177 different countries across the world.
With regards to China-EU investment relations, in 2011 EU FDI flow to China amounted to EUR 17.5 billion and Chinese ODI flow to the EU totalled EUR 3.2 billion. This would mean that mainland Chinese investments only counted for 1.4 per cent of total ODI into the EU in 2011, whereas the EU accounts for around 20 per cent of investment into China.
From the statistics though it can be seen that Chinese ODI to the EU is increasing year-on-year and this drive to increase Chinese ODI can also be seen in the Chinese Government’s own targets relating to ODI for the period of the 12th Five-Year Plan(2011-2015). These include:
- ODI will increase at an annual rate of 17 per cent and will total USD 150 billion in 2015;
- The amount of China’s overseas contracted projects will reach USD 180 billion and turnover will be USD 120 billion by 2015, with an annual growth rate of six per cent;
- 550,000 Chinese nationals will go to work overseas during 2012, with the total number being over one million by the end of 2016.
The basis for the study was a uniquely compiled questionnaire which was completed by 74 enterprises originating from Mainland China with experience of completing at least one investment in an EU country.
In addition to the questionnaires, qualitative information was gathered from a number of face-to-face interviews with senior figures from Chinese enterprises, Chinese Government bodies with scope over ODI, representatives of European investment promotion agencies in China, and other figures from European companies in China involved in facilitating such investments.
Evidence from the study suggests that Chinese companies are motivated to look outside of their home market primarily for reasons related to increased domestic competition. This leads them to a) seek new markets for sales and/or b) become more competitive by acquiring new technologies, brands or expertise.
The European market is therefore primarily considered by Chinese companies as a market to sell their goods and services, while a smaller, but increasing, number are looking to acquire technologies, expertise and brands through mergers and acquisitions (M&A) with European companies to improve their capacity to compete both at home and abroad. Data gathered, both through this study and from external sources, indicates that to date the majority of Chinese investments into the EU so far have been relatively small in size but larger M&A deals are becoming more common.
There are differences across sectors though, as illustrated in this survey response:
“China has a number of leading IT & Telecommunications enterprises that are capable of competing in the European market on the strength of their products, however, this is not the case for Chinese auto-components enterprises where they need to start small and gradually build up the capacity to compete in overseas markets.” —Chinese survey respondent enterprise.
Chinese enterprises perceive the EU as a stable investment environment with advanced technologies, skilled labour and a transparent legal environment.
Within the EU, Chinese companies decide the destination according to various factors such as the local market for sales, having a local business partner, the availability of technologies and labour, the tax regime and logistical factors. The different 27 member states of the EU are also differentiated according to their business environment and industry strengths as well as soft factors such as language and presence of a Chinese diaspora.
Key statistic: 85% of respondents are in Europe, for Europe and are primarily looking to sell their goods and services in the EU market.
EU FDI Policy
It is reported by Chinese companies that the EU is perceived as a relatively open market, with few market access barriers and little history of opposition to Chinese investments on national security grounds:
“We have not encountered the opposition on the grounds of national security in the EU which we have in the US and other regions.” —Chinese survey respondent enterprise.
Key statistic: 48% of respondents report encountering regulatory approval obstacles in Europe, with these mostly arising at the local level.
EU operating environment
The EU is not regarded as a particularly easy market to operate in, however, and is reported to suffer from bureaucratic barriers and high costs. In this regard the EU is not necessarily viewed as having a particularly favourable operating environment in comparison to other major regions.
Key obstacles reported relate to obtaining visas and work permits for Chinese employees, dealing with European labour laws, human resources (HR) costs, and cultural differences in management style. Understanding various operating regulations such as tax laws are an issue as these are complex due to the lack of uniform legislation across the 27 EU member states and the reality of 23 different EU languages.
“Currently transferring knowledge from the parent company in China is difficult due to difficulties in temporarily transferring staff to Europe.” —Chinese survey respondent enterprise.
“Labour laws are the key issue. Lack of labour market flexibility and working hours are hard to cope with, especially in France. Taxes on labour are very high too. This is probably a cultural issue that we need to adapt to.” —Chinese survey respondent enterprise.
Recommendations by Chinese enterprises to EU policy makers captured in the study focus on these operational issues. Notably few respondents made recommendations relating to the lifting of market access barriers in the EU market, which can be contrasted with the priorities of European businesses in China.
Key statistic: 78% of respondents report encountering operational difficulties in the EU, mostly related to issues of bureaucracy and high costs.
Chinese ODI Policy
Chinese enterprises report that government ODI encouragement policies are largely viewed to be of assistance to state-owned enterprises (SOEs) only, with private enterprises getting little help. Outbound investment approval processes from within China are seen by some as in need of further streamlining and this has been recognised by the Chinese Government with, for example, foreign exchange control liberalisation steadily taking place, which should reduce administrative burdens in this regard. Recommendations made here by Chinese investors to the Chinese Government focus on the desire for improved advisory and support services both in China and in Europe, and the greater streamlining of outbound investment approval processes from the relevant regulatory bodies in China.
“[We recommend that Chinese policy makers should] provide more convenient outbound investment procedures. MOFCOM, SAFE and other relevant authorities should provide integrated services.”—Chinese survey respondent enterprise.
Key statistic: 27% of respondents report encountering outbound investment approval processes from within China as an obstacle.
Future outlook and strategy
The future outlook for Chinese investment in the EU is overwhelmingly positive with nearly all respondents indicating that they will make future additional investments in the EU, with the vast majority of these planning to invest at higher amounts. Companies are looking to expand investments, localise to a greater degree and invest in technology and human resource development.
“Investing overseas is an opportunity to gain experience, even if it means failing sometimes. We start small and progressively expand.” —Chinese survey respondent enterprise.
Key statistic: 97% of respondents indicate that they will make future additional investments in the EU, with the vast majority of them planning to invest higher amounts than their current investments.
Conclusions and recommendations
Based on the findings of the study, a number of conclusions and recommendations are made:
European policy makers with responsibility for inbound investment should examine the comments and recommendations put forward in this study by Chinese enterprises and examine what can be done to better encourage future investment, including:
- Look to address the operational issues relating to bureaucracy and cost which are frequently raised here;
- Look to offer practical solutions to minimise the complexities of a market of 27 separate legal and tax regimes with 23 different languages, such as establishing a source of consolidated legal information for all EU member states in one language;
- Investigate the reported obstacles in the FDI approval processes and see if these can be streamlined;
- Better communicate the openness of the EU market due to the reported lack of awareness amongst potential Chinese investors.
Chinese Government bodies charged with encouraging ODI should likewise examine the opinions put forward by their domestic enterprises, this should include:
- Review existing advisory and support mechanisms for Chinese enterprises looking at making outbound investments from within China;
- Review on-the-ground support in Europe and establish a chamber of commerce for Chinese enterprises with coverage for the whole EU;
- Review outbound approval processes and further streamline where possible.
From a macro perspective, the EU should maintain its openness for foreign investment and continue to encourageODI from China. China should look to develop various aspects of its international relations for the benefit of Chinese enterprises going overseas through means such as opening up the domestic market to foreign firms and, in particular, remedying situations where Chinese companies can invest in certain European sectors, when the reverse is not possible.This should nullify this issue as an irritant and lessen the chance of greater opposition to Chinese investment as aretaliatory measure in return.
“As China’s economic strength and foreign investment increases, the risks of intervention and restrictive policies from foreign governments may also increase.” —National Development and Reform Commission, July 2012, 12thFive-Year Plan on Foreign Investment Utilisation and Outbound Investment.
By Anthony Robinson