New advantages, new challenges
As more Chinese enterprises go global and invest in developed economies, they should be prepared to encounter more barriers and face fiercer competition
Data from the State Administration of Foreign Exchange show that China's outbound direct investment amounted to $185.3 billion in 2023, and the importance of ODI is expected to grow in the coming years.
China's ODI started to be on track for steady growth in 2003 and peaked in 2016 at $196.1 billion. The typical feature of this round of ODI growth compared to previous ones is that more Chinese companies with great competitiveness are investing abroad, a feature that is particularly evident in China's investments in developed economies.
Developed economies are an important investment destination for Chinese firms, but that investment is never easy — Chinese companies face different difficulties at different stages.
In the early days, Chinese enterprises' outbound investment was in sync with the enhancement of their competitiveness. Investment in developed economies helped strengthen the competitiveness of Chinese enterprises.
However, China's investments in developed economies dropped in the years from 2020 to 2022 after some developed economies prevented and restricted Chinese investments on grounds of "noneconomic motives".
As China's outbound investment entered a more mature stage, Chinese enterprises with comparative advantages started to scale up their overseas investment. Their investment behavior is similar to that of enterprises in developed countries, and the pattern of China's outbound investment is closer to that predicted by traditional investment theories.
At the same time, the possibility of host countries enhancing investment barriers is also increasing. Taking Chinese companies' investments in Europe as an example, the following aspects illustrate the transformation of Chinese companies' advantages and the potential challenges they face.
First, the share of private enterprises has risen.
Chinese State-owned enterprises were the forerunners in the early days of China's outward investment. In recent years, however, there has been a rapid rise in the importance of private enterprises, whether in terms of the investment value, the share or typical cases.
According to the Rhodium Group, investments by Chinese private companies in Europe totaled $7.69 billion in 2022, accounting for 92.4 percent of China's total investment in Europe, a significant increase from $398 million, or 14.3 percent of the total, in 2010.
There have also been some big investments by Chinese private enterprises in recent years, such as ByteDance's $810 million investment in Norway in February 2023 and Tencent's $1.15 billion investment in British video game developer Sumo in December 2022.
The declining share of SOEs is related to the stage of Chinese investment and the discriminatory policies of developed countries.
In the early stage of Chinese companies' outbound investment, SOEs accounted for a large share as investments were often focused on sectors where SOEs played a prominent role, such as energy, infrastructure, and finance.
SOEs often face discriminatory treatment for their investments in developed economies, with the host countries imposing more rigorous regulations on their investments and projects, including rules on investment reviews, compliance, supply chains, subsidies and so on. Not only in Europe, SOEs face similar restrictions in other developed economies.
China's private companies with great competitiveness have also been given "special attention".
Second, the importance of greenfield investments has risen.
Traditionally, mergers and acquisitions are the main means of Chinese investment in Europe.
According to the Rhodium Group, from 2010 to 2019, the total M&A value accounted for about 95 percent of the total Chinese investment in Europe, and greenfield investment often accounted for less than 5 percent of the total. However, the situation has changed since 2020, with the share of greenfield investment rising sharply. From 2020 to 2022, China's greenfield investment in Europe was $1.49 billion, $3.9 billion, and $3.58 billion, accounting for 16.5 percent, 32.7 percent and 43 percent, respectively, of the total Chinese investment in Europe.
A higher share of greenfield investment in Europe indicates that Chinese investors are willing and able to pay higher costs, bear the risks and uncertainties of investing in the host country, and invest in Europe in the form of "heavy assets".
To avoid trade barriers, greenfield investments by Chinese companies will be more common in the future. However, in response to this new trend, investment restrictions imposed by some developed economies have extended from M&A to greenfield investment.
At the same time, M&A of advanced technology companies in developed countries by Chinese companies remains under close scrutiny and has a low rate of being approved.
Third, the outbound investment value by industries where China has comparative advantages, such as the auto industry, has increased. Earlier, China's investment in Europe's manufacturing industry accounted for a considerable share. Based on the early investment in Europe, coupled with the advantages accumulated domestically, China's auto and parts makers have become a bright spot for their rising investment in Europe.
In 2022, China's investment in Europe's auto industry amounted to roughly $4.4 billion, and its investment in European auto companies and relative industry chain is very representative. For example, in May and July 2023, Chinese automaker Geely invested $290 million and $910 million in the United Kingdom and Spain, respectively. In June 2023, Chinese battery supplier Shanghai Putailai New Energy Technology invested $1.28 billion in Sweden to build an integrated production and R&D base with an annual production capacity of 100,000 tons of lithium-ion anode material.
Chinese automakers have accumulated their advantages through economies of scale in the domestic market both in terms of space and time.
From the perspective of space, China's super-large market has been of great significance to the development of the auto industry's advantages. The auto industry is a market-oriented one — large and affluent consumer markets are where major automakers are located. This is why auto production was concentrated in North America, East Asia and Europe before 2000.The size of the market is equally important for China's auto industry, as the country's growing per capita disposable income and expanding middle-income population provide support for auto consumption.
From the perspective of time, it has taken Chinese automakers a long time to build up advantages. Starting with the introduction of foreign capital to establish joint venture auto companies, China's auto industry has gone through decades of development.
Chinese automakers and other industries with comparative advantages will likely encounter more barriers and face fiercer competition when investing in developed economies in the years to come.
In the face of such a situation, first, Chinese enterprises should fully anticipate the challenges arising from overseas operations, understand the concerns of the host country, comply with the regulatory requirements of the host country, better localize their operations, and create true value for the host country.
Second, China can consider improving the mechanisms designed for protecting Chinese companies' overseas rights and interests. The country should safeguard the rights and interests of Chinese enterprises through law, diplomacy, public opinion, politics and other means. It should help them grow amid overseas competition to increase Chinese people's wealth and back-feed and support the domestic economy.
Finally, China should advocate a more open and inclusive global investment environment, oppose investment protectionism, and urge host countries to provide a favorable institutional environment for Chinese enterprises, so as to inject momentum into international investment and sustained economic growth.
Pan Yuanyuan is an associate research fellow at the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. Huang Jiajing is an associate professor at the School of E-Commerce at Jiangxi College of Foreign Studies.
Editor:Yu Hui
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