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Press Release of 5 April 2017

Chinese investment strategy in Europe differs according to region

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Technology transfer primary motive behind Chinese OFDI in Western Europe; access to EU internal market motivates OFDI in Central and Eastern Europe; factors influencing investment decisions differ based on type of investment

China’s investment strategy in the EU differs depending on the target country. With investment in Western Europe, the main motivation is gaining access to advanced technologies. There, a majority of Chinese capital is invested in M&A – specifically in the acquisition of hidden champions, world leaders in their respective market segments. Investment in Central and Eastern Europe, on the other hand, is more oriented toward new ventures; such investment is more about facilitating Chinese access to the EU's internal market.

These are the findings of a new study conducted by the German Institute for Economic Research (DIW Berlin), which also investigates the precise determinants of the two different types of investment.

Accordingly, the main factors that determine Chinese investment activities are the market size in the target country, and the intensity of bilateral trade between that country and China. When it comes to new ventures, unit labor costs, the size of the industrial sector, and the regulatory density have a negative impact on Chinese investment.

“Sound institutions, which are indicative of heavily regulated, highly competitive markets, tend to deter Chinese investors,” explains study author Christian Dreger, Research Director in the Department of International Economics at DIW Berlin. “Here, Chinese investors may have a different sense of risk from their Western counterparts, who are less reluctant to set up new ventures in highly competitive target regions.” In other respects, however, the determinants of Chinese direct investment differ very little from conventional patterns.

Differing strategies make coordinated EU-level policy response difficult

Chinese OFDI amounted to 145 billion USD in 2015, with the EU as the primary target region. In some EU countries, Chinese capital is welcomed – for example, in countries who consolidate their budgets through privatization or suffer from chronic investment weaknesses. Increasingly, however, the skepticism surrounding these investments is growing, and there have been calls for more reciprocity – that is, for European investors to have easier access to the Chinese market, where they currently face numerous restrictions. But the fact that Chinese investment strategies differ from country to country is making a coordinated EU-level response more difficult.

“Hindering Chinese companies’ acquisitions in specific technologies, or even blocking them, are unlikely to work,” says Dreger. “Rather, we need to aim at EU-China agreement that will make it easier for European companies to access the Chinese market, among other things”

Links

DIW Economic Bulletin 14/2017 | PDF, 0.76 MB

China's Investment Strategy Is Different for Western and Eastern Europe: Five Questions for Christian Dreger | PDF, 90.91 KB

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German Institute for Economic Research

Founded in 1925, DIW Berlin (the German Institute for Economic Research) is one of the leading economic research institutes in Germany. The Institute analyzes the economic and social aspects of topical issues, formulating and disseminating policy advice based on its research findings. DIW Berlin is part of both the national and international scientific communities, provides research infrastructure to academics all over the world, and promotes the next generation of scientists. A member of the Leibniz Association, DIW Berlin is independent and primarily publicly funded.

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