Investors at the Gate: Chinese Foreign Direct Investment and the European Economic Crisis

Abstract

The rise of China as a global investor in the past decade ushers in a new era of geopolitical and geoeconomic challenges and opportunities. Chinese outward foreign direct investment (OFDI) has emerged as a substantial player in the global investment sphere, driven by policy liberalization and structural economic adjustments. As the country’s economy matures, domestic firms have progressed through a series of growth and overseas investment phases in pursuit of a competitive edge. Scholars have proposed numerous theories regarding the political, economic, and security concerns of hosting Chinese foreign direct investment (FDI) and investment motives of Chinese state-owned enterprises and private firms. In the European Union (EU), the surge in Chinese OFDI has occurred concomitantly with the onset of the European economic crisis. Indeed, by some calculations, the EU has been the top destination for Chinese investment in the world since 2011. In the context of China’s shifting role in political and economic networks, the central question asked by this thesis is: how did the euro crisis affect Chinese foreign direct investment in Europe? This thesis explores three hypotheses for analyzing the impact of the euro crisis on Chinese investment in Europe: (1) The high supply and low demand for European assets caused by the EU economic crisis resulted in a “bargain basement” environment from which Chinese investors could snatch up many cheap acquisitions; (2) Chinese investment decisions are primarily motivated by commercial interests, such as obtaining technology, business management intelligence, international brand recognition; and (3) The crisis weakened political foreign investment barriers to attract “helicopter money” for newly privatized assets and companies close to bankruptcy via investment promotion agencies. This thesis utilizes mixed methods, including regressions analysis and in-depth case studies of Chinese deals in the EU, to produce quantitative and qualitative findings about how the euro crisis has affected Chinese FDI in Europe. The central finding of this thesis is that the European sovereign debt crisis did not fundamentally impact the commercially motivated Chinese investment decisions in the EU. High supply and low demand for European distressed assets created a bargain basement environment. The weakened political barriers to FDI in the capital-crunched EU also provided easier access to Chinese firms targeting European firms. However, for Chinese investors, bargains and countries’ investment promotion incentives were not primary decision factors. Ultimately, commercial motives have been the most important driver of Chinese OFDI. Chinese companies were already venturing abroad to serve foreign consumer demand, upgrade technologies, internationalize brands, and gain managerial knowledge. The relationship between a country’s level of technological advancement and its receipt of Chinese FDI is found to be positive and significant. Given that the bulk of Chinese OFDI has been initiated fairly recently, the positive and negative downstream impacts of these deals have yet to fully manifest.