MSc East Asian Development and the Global Economy - Dissertation - Ruth Millar

The China Challenge

The Theoretical, Policy and Strategic Implications of its FDI

This dissertation is submitted in partial fulfilment of the requirements for the

award for the degree of MSc in East Asian Development and the Global

Economy.

__

This dissertation contains no plagiarism, has not been submitted in whole or in

part for the award of another degree, and is solely the work of Ruth Millar.

Ruth Millar

Candidate Number: 61619

2013/2014

Word Count: 14,544

Signature:

3rd September 2014

Acknowledgements

I would like to express my gratitude to my supervisor Professor Jeffrey Henderson,

whose advice and support has been invaluable.

Abstract

This dissertation was undertaken to ascertain whether or not the EU has altered its

theoretical, policy and strategic approach to China with regards to FDI, using a combination

of secondary data analysis and qualitative questionnaires. The focal point of the research is

policy analysis, as policy forms a critical link between theory and strategy. Research has been

undertaken on China’s divergence from traditional FDI theories but it falls short of

considering the development of new theories and likewise the implications of said

divergence for theory/policy/strategy choices. Similarly, much research has been carried out

on EU policy change, Francoise Nicolas’ working paper on China’s Direct Investment in the

European Union: Challenge and Policy Responses, but such research fails to capture the

underlying causes of policy change. As such, this paper seeks to combine the two and

ultimately advance a more comprehensive understanding of their symbiotic relationship.

Analysis of global FDI trends illustrates China’s growing stature within it. However it also

shows limited Chinese investment in the EU, to date. The paper then identifies the key

explanations for China’s divergence from traditional theories: it is a developing country

investing increasingly heavily in developed countries (a ‘reverse’ of the conventional

situation), psychic distance, a lack of Chinese diaspora in the EU, China’s own comparative

advantages, the distinct institutional and cultural traits of China and the drivers of its FDI.

Alternative theories are therefore considered but a number of caveats inhibit their complete

application to China: the framework for an entirely new theory is subsequently put forward.

The theoretical divergence is then applied to the EU: theoretical, policy and strategic change

is outlined. In essence, China’s divergence has signalled a move toward regulatory measures

supported by the strategic desire to level the playing field. Analysis of the UK and Ireland

further confirms these findings. Based on this conclusion a number of recommendations are

suggested, including the need to develop a more in-depth understanding of Chinese FDI, to

The China Challenge: The Theoretical, Policy and Strategic Implications of its FDI

1 Abstract

complete the framework for a new theory wholly relevant to the situation, to acknowledge

the relationship between theory, policy and strategy and incorporate it into policy-making to

make it more effective, and finally to address institutional coherence at all levels, especially

if the implementation of an EU-wide policy is to be successful.

Table of Contents

Table of Figures .......................................................................................................................... 1

List of Tables ............................................................................................................................... 1

Appendices ................................................................................................................................. 2

List of Abbreviations ................................................................................................................... 3

1. Introduction......................................................................................................................... 4

1.1 The Rise of China and Foreign Direct Investment ....................................................... 4

1.2 The Research Questions .............................................................................................. 7

1.3 Structure ...................................................................................................................... 7

1.4 Defining the Concepts .................................................................................................. 8

1.4.1 FDI............................................................................................................................... 8

1.4.2 Theory, Policy and Strategy ........................................................................................ 9

1.5 Literature Review ....................................................................................................... 10

1.6 Methodology .............................................................................................................. 12

2. Foreign Direct Investment: Data .......................................................................................... 14

2.1 Global FDI Trends ............................................................................................................ 14

2.2 Chinese OFDI ................................................................................................................... 17

2.3 Chinese OFDI and the EU ................................................................................................ 20

3. The Theoretical Framework .............................................................................................. 28

3.1 Mainstream Theories ................................................................................................. 28

3.2 How is it challenging mainstream theory? ................................................................ 33

3.3 Alternative Theories................................................................................................... 35

3.4 A Whole New Theory? ............................................................................................... 38

4. EU FDI Policy towards China ............................................................................................. 41

4.1 The United Kingdom .................................................................................................. 50

4.2 Ireland ........................................................................................................................ 55

5. Conclusion ......................................................................................................................... 60

5.1 Summary .................................................................................................................... 60

5.2 Key Findings ............................................................................................................... 63

5.3 Key Recommendations .............................................................................................. 64

Appendix ................................................................................................................................... 65

Bibliography .............................................................................................................................. 81


1 Table of Figures

Table of Figures

Figure 1: Global FDI flows ......................................................................................................... 14

Figure 2: Top ranking destination country by average value of investment project ............... 16

Figure 3: Job Creation by Sector ............................................................................................... 16

Figure 4: China's OFDI versus Global OFDI ............................................................................... 18

Figure 5: Industrial Sector Distribution of ODI ......................................................................... 19

Figure 6: Strategic reasons for investing in the EU .................................................................. 24

Figure 7: Chinese OFDI in the EU by Industry ........................................................................... 27

Figure 8: Business Network Internationalisation Process ........................................................ 30

Figure 9: Linkage, Leverage and Learning Model ..................................................................... 33

Figure 10: The 6 Dimensions of Hofstede's Cultural Theory .................................................... 35

Figure 11: The Stages of the Evolutionary Life Cycle Model .................................................... 37

Figure 12: National Investment Policy Changes ....................................................................... 43

Figure 13: Plot of EU Countries on the OECD FDI Regulatory Restrictiveness Index ............... 44

Figure 14: The Correlation between China's Rise and the Shift toward Regulation ................ 45

Figure 15: Number of Future Investments by Destination Country in EU27 ........................... 47

Figure 16: Chinese Investment in the UK ................................................................................. 52

Figure 17: A Comparison between General and Chinese Investment in the UK ..................... 53

Figure 18: Industries targeted in China as Identified by UKTI .................................................. 54

Figure 19: Key Findings of this Paper ....................................................................................... 63

List of Tables

Table 1: FDI flows, by Major Region ......................................................................................... 15

Table 2: Top 10 destinations of China’s OFDI ........................................................................... 20

Table 3: Stocks held by the rest of the world in the EU27 ....................................................... 22

Table 4: China’s Perception of the EU business environment ................................................. 22

Table 5: Chinese OFDI Stocks & Flows in the EU, the Form of Investment Made and Rank

Compared with Global Ranking ......................................................................................... 25

Table 6: Comparison between OLI and LLL Frameworks ......................................................... 36

Table 7: Framework for a Theory Germane to Chinese OFDI .................................................. 39


2 Appendices

Appendices

Appendix 1: Chronology of China's Rise .................................................................................. 60

Appendix 2: A Brief Historical Overview of Sino-EU Relations ................................................ 66

Appendix 3: Ghemawat’s CAGE Framework ........................................................................... 67

Appendix 4: Institutional Reform in China: Goals, Means and Limiting Forces ...................... 68

Appendix 5: The 6D Model of Hofstede’s Cultural Theory...................................................... 69

Appendix 6: The Change in the Political and Ideological Attitude of EU Member States

toward China Pre and Post Euro Crisis. ............................................................................ 70


3 List of Acronyms

List of Acronyms

BIT Bilateral Investment Treaty

CAGE Cultural, Administrative, Geographic and Economic

DJEI Department for Jobs, Enterprise and Innovation

EC European Commission

EEAS European External Action Service

EDO Economic Development Organisation

ELCM Evolutionary Life Cycle Model

EU European Union

EUCCC European Union Chamber of Commerce in China

FDI Foreign Direct Investment

FCO Foreign and Commonwealth Office

GDP Gross Domestic Product

GI Greenfield Investment

IB International Business

ICT Information and Communication Technology

IDA Industrial Development Agency

IMF International Monetary Fund

IP Intellectual Property

IPA Investment Promotion Agency

LLL Linkage, Leverage and Learning Model

M&A Merger and Acquisition

MNC Multinational Corporation

NM Network Model

OECD Organisation for Economic Co-operation and Development

OFDI Outward Foreign Direct Investment

OLI Ownership, Location and Internationalisation

PI Policy Instrument

PRC People's Republic of China

SOE State-Owned Enterprise

TC Transaction Cost

TNC Transnational Corporation

UKTI UK Trade and Investment

UM Uppsala Model

UNCTAD United Nations Conference on Trade and Development

WTO World Trade Organisation


4 Introduction

Introduction

1.1 The Rise of China and Foreign Direct Investment

Having overtaken Japan in 2011, China now constitutes the world’s second largest economy.

Recent recalculations reveal it will surpass the US economy as the largest this year. This

prediction is derived from the surge in China’s economy relative to the US: it was recorded

at 43% of the US economy in 2005 compared to a staggering 87% in 2011 (Monaghan, 2014).

This is no surprise. China has experienced unprecedented growth since the 1980s –

averaging 10% GDP growth per annum and accumulating over £1.2 trillion1 in foreign

reserves (Chow, 2010).

China’s remarkable rise (outlined in appendix one) is attributed to an economic model

known as ‘socialism with Chinese characteristics’ - although a market economy, China

exhibits considerable government involvement. This model forms the basis of the Beijing

Consensus, and offers a strong alternative to the widely advocated Washington Consensus2

of neoliberal Western economies. SOEs and protectionist policies to foster firms capable of

global leadership also contributed to China’s rise (Harvey, 2005). Evidence of this model

dates back to the founding of the PRC in 1949. A number of initiatives were implemented by

its founder (Mao Zedang) including the ‘Great Leap Forward’ of 1958 and a ‘Cultural

Revolution’ programme (1966 to 1976). Although both were catastrophic failures, state

involvement was maintained by Mao’s eventual successor – Deng Xiaoping. Deng’s reform

process began with the Four Modernisations, a set of goals devised to strengthen four

fundamental sectors: agriculture, national defence, industry, and science and technology

(Chow, 2010). They incorporated an Open Door policy which permitted foreign investment

into China for the first time. Numerous reforms have since been implemented, e.g. the 1986

1 All currencies were converted on the 11/8/2014. The US$ was valued at £0.59 and the € at £0.79. The

currency of tables and figures is unchanged. 2 A term referring to the liberal economic policies of Structural Adjustment Programmes implemented in

developing countries. They implied trade and capital liberalisation, privatisation, deregulation and macroeconomic stability (Williamson, 1993).


5 Introduction

General Principles of Civil Law which laid the foundation for a market economy and the

reforms entailed with its 2001 WTO accession, predominantly bilateral investment

negotiations regarding market access (Center for Strategic and International Studies, 2014).

FDI, promoted through various reforms, for instance, the aforementioned open door policy

which advanced China’s global economic integration, has been integral to China’s rise. It has

provided China with the necessary tools to further its domestic economic growth, e.g. capital,

foreign market access and labour market training (Chow, 2010). Its benefits quickly

materialised throughout China, most notably job creation, innovation and higher

productivity (Nicholls, 2012) hence the cultivation of an environment conducive to inward

investment via the creation of a readily available human capital supply and various market

institutions. This, together with the gap between China and more advanced economies, gave

China several competitive advantages, specifically cheap labour and production costs (Chow,

2010). Subsequently, China’s FDI inflows soared reaching £71.5 billion in 2012 according to

the EUCCC (2013).

China’s emergence as a source of FDI is, however, a more recent phenomenon, having

evolved through three phases (Wenbin and Wilkes, 2011, p.1):

1. Initiation (1979-1990): State economic planning and government regulations controlled

companies’ activities. Only selected SOEs were allowed to invest overseas under strict

supervision. Foreign exchange reserves were limited. OFDI averaged £0.53 billion p.a.

(Chen, 2009 cited in Wenbin and Wilkes, 2011, p.1).

2. Unstable development (1991-2001): Although OFDI gathered pace, it fluctuated greatly

since it was not considered an economic priority. In 1992 OFDI totalled £2.34 billion, it

dropped to £1.19 billion in 1994, increased again between 1995 and 1998 before

decreasing significantly in 1999 to less than £0.6 billion.


6 Introduction

3. Rapid and steady development (2002-present): China’s ‘Going Out’ 3 strategy,

implemented in 2001, stimulated OFDI hence the £71.5 billion recorded in 2012.

Access to natural resources drove initial OFDI. Since then motivations have diversified to

include access to technology and the maintenance of existing markets (Deng, 2003). This has

advanced China’s role as a major source of FDI: it overtook Russia as the largest source

among emerging market investors in 2009, and its global share reached 5% in 2010

(Hanemann and Rosen, 2012). Its rise is expected to continue given various new regulations,

e.g. Chinese local firms no longer require government approval for deals below c. £596

million (Jianxin and Wong, 2014).

The EU4 has been slow to capture Chinese investors’ attention despite being the world’s

largest single market and recipient of global FDI, its secure and legal framework and

welcoming status toward developing5 countries. The situation is compounded by a new

reality whereby developed countries now find themselves competing with new markets and

economies for a share of the economic pie. Additionally, since the global financial crisis of

2008, developed countries have frequently found themselves competing amongst

themselves for new sources of FDI, most obviously Chinese, hence the heightened strategic

significance of FDI policies. The literature has yet to analyse the implications of Chinese OFDI

for policies; this discussion seeks to fill this void.

3 A strategy promoted following China’s WTO accession to maintain economic reform processes and advance

industry champions (Cheung and Qian, 2009). 4 Note: although the EU is the sole focus of this paper, it was not always possible to isolate EU from European

data. 5 This paper employs the UNCTAD classification of developed/developing countries: developed countries

include OECD members (except Chile, Mexico, the Republic of Korea and Turkey) plus all EU members who are not OECD members, plus Andorra, Bermuda, San Marino, Monaco and Liechtenstein. Developing countries include all those not mentioned above (cited in Yuefang et al., 2013).


7 Introduction

1.2 The Research Questions

The primary research questions this paper will address are:

1. To what extent does China diverge from mainstream FDI theory?

2. What implications has this had for the EU in terms of theory, policy and strategy?

The discussion will also focus on two EU member states; two secondary research questions

are thus implied:

1. How has the UK responded to such implications?

2. How has the [Republic of] Ireland responded to such implications?

1.3 Structure

The paper will first define the key concepts in question (FDI, theory, policy and strategy),

present a short literature review surrounding the theoretical framework of FDI and briefly

outline the methodology employed. It will then summarise global FDI trends and those of

China generally, and regarding the EU. The dominant theories of FDI, drawn from the IB

school of thought, will then be investigated including the eclectic paradigm, the UM and NM,

and the concept of internationalisation. This will ultimately show that China warrants

adapted or new theories more relevant to its situation, namely that of ‘late developers’ and

an evolutionary framework. The discussion will consider the significance of China’s

divergence from mainstream theories regarding policy choices to attract FDI. The empirical

evidence will have already underlined limited Chinese investment in the EU; based on this

the response of the EU and its member states will be illustrated. The discussion will then

focus on two member states – the UK and Ireland – to analyse the implications further. The

conclusion is somewhat intricate: China’s rise has had economic, political, social and cultural

implications. This has led many nation states to reconsider traditional policies and prepare to

adapt to a possible new global economic order where China plays a major role. Despite this

recognition, and the subsequent development of China strategies, institutional incoherence


8 Introduction

is limiting their successful implementation, a limitation which is undoubtedly preventing the

formulation of effective policy measures.

1.4 Defining the Concepts

1.4.1 FDI

A basic definition denotes FDI as a measure of foreign owned productive assets. It is

considered a measure of economic globalisation6 and source of growth for the host country

(Foreign Direct Investment, 2003). A more comprehensive definition defines it as “an

investment involving a long-term relationship and reflecting a lasting interest and control by

an entity resident in one economy (foreign direct investor or parent enterprise) in an

enterprise resident in another economy….” (OECD, 1996 cited in EC, 2013, p.120). It has two

dominant forms: GIs, whereby foreigners create productive assets, and M&As through which

foreigners purchase existing assets. It is a defining aspect of the global economy in that a

country’s ability to engage in FDI is an indicator of their global performance and

competitiveness (Eurostat, 2013). Four dominant factors drive FDI (EC, 2013):

1. Market-seeking: to access customers and serve markets directly rather than via exports.

Factors including market size and the access it can provide to other regional or global

markets dictate market attractiveness.

2. Resource-seeking: to access labour resources, raw materials, physical infrastructure and

technological assets etc.

3. Strategic-asset seeking: to obtain access to advanced technologies, skills and other

relevant capabilities to increase overall competitiveness and cultivate comparative

advantages.

6 Defined as an international system characterised by the integration of information, technology and capital

across borders resulting in the development of a ‘global’ village (Friedman, 2000)


9 Introduction

4. Efficiency-seeking: to exploit economies of scale and scope through locating different

parts of the production chain in different countries. Advances in ICT, transportation and

trade liberalisation have popularised this determinant.

The growing global recognition and appreciation for FDI has led to the creation of over

10,000 EDOs and IPAs worldwide with the sole purpose of attracting FDI. There is a global

scramble for investment therefore policies have acquired a new found crucial status

(Nicholls, 2012).

1.4.2 Theory, Policy and Strategy

To extensively evaluate China’s divergence from mainstream FDI theory and the subsequent

implications, one needs to understand the prime concept – policy – and its relationship with

theory and strategy.

Theory is essentially a “system of ideas explaining something” (Allen, 1990, p.1266). In

economic terms theory would therefore be, for example, the adherence to liberal economic

theory which advocates “that free, competitive markets would result in the greatest

prosperity for all.” (Vandevelde, 2010, p.75).

A basic definition of policy is untenable given ambiguity but agreement has been reached on

some of its general interpretations. For example, it is regarded as a bid to define, structure

or direct methodical courses of action, especially where uncertainty prevails. Policy involves

determining and prioritising the means to an end, as well as identifying their relationship.

Policy-making is also considered a continuous and indefinite process. It is believed that

values and ideology inform this process (Jenkins, 2007, p.25) thus its formulation and

implementation is viewed as “a prime medium in modern nation states for the packaging,

communication and promotion of values and ideology.” (ibid, p.28). Policy is furthermore

considered as defined and constrained by its theoretical premise, i.e. one’s choice of theory

limits the policy variables available (Gregg, 1976).


10 Introduction

Many wrongly assume policy and strategy as twofold but policy is the means to achieve a

strategy. Henry Mintzberg, a renowned strategy scholar, provides a widely-advocated

definition: “Strategies are both plans for the future and patterns from the past.”(Mintzberg,

1987, p.66). Based on this, DeWit and Meyer (2010, p.5) maintain that strategies are

composed of three elements: process - how a strategy has come to be, content - the product

of the process and context - the circumstances from which process and content have been

derived.

Based on the above, one could argue that the relationship between the three is as follows:

theory is the context from which a strategy is developed; policy comprises the content

component; and the strategy formulated is a product of these two. Put simply, policy,

defined by theory, is the means to an end, the strategy. It becomes apparent that to

comprehensively assess the EU’s policy response, consideration of both theory and strategy

is intrinsic.

1.5 Literature Review

There is a strong body of literature surrounding FDI stimulants. This will be discussed in

further detail later but to understand the motivations behind the research questions it is

fundamental to debate the basics of the current literature. The focus of this review will be

on the theoretical literature as (a) theory informs policy which in turn leads to strategy and

(b) disagreement is confined to theory rather than policy (Walt, 2005); this focus facilitates

the analysis of both primary research questions.

The IB school of thought largely dominates FDI theory. Such theories were initially hatched

in response to global FDI trends but are now predominantly theory driven, mostly derived

from the concept of internationalisation, defined as “the consequence of a process of

incremental adjustment to changing conditions of the firm and its environment.” (Aharoni,

1966 cited in Johanson and Vahlne, 1977, p.26). IB advocates agree that the individual


11 Introduction

manager, firm, industry and environment comprise the most important levels of analysis

(Buckley and Lessard, 2010). However differences of opinion surface at this point.

Despite both Dunning and Johanson and Vahlne (1977) advocating a rational economic

school of thought (which “views internationalisation as engagement in cross border activities

motivated by rational economic considerations.” (Buckley and Hashai, 2010, p.26)) they

posit varying motivations for FDI. Dunning’s eclectic paradigm argues that FDI is a means to

exploit one’s comparative advantages abroad. Conversely, Johanson and Vahlne’s UM

postulates psychic distance - defined as “the sum of factors preventing the flow of

information from and to the market.” (Johanson and Vahlne, 1977, p.24), e.g. religion or

business practices - as the defining factor. Ghemawat’s (2001) CAGE framework reinforces

this idea, illustrating how distance can inhibit the development of investment relations

between two nations. What separates the CAGE framework from psychic distance however

– and thus frequently places Ghemawat on the opposing side - is Ghemawat’s concurrent

proposition that distance can be exploited to create a competitive advantage. Johanson and

Vahlne have, however, acknowledged the limitations of psychic distance as the sole factor,

hence their NM (2009) which instead focuses on networks/relationships as the prime

motivations. Supply and demand, which directs efforts toward minimising TCs, divides Hirsh

from his IB counterparts. Hirsch believes his propositions are superior to those supporting

rational economic considerations for a multitude of reasons including the distinction made

between the cost of flows and the performance of specific value-adding activities, its

inclusion of behavioural motivations alongside economic driver and the simultaneous

consideration of destination/resource-abundant countries (Buckley and Hashai, 2010).

However IB theory has its shortcomings. It remains confined to traditional sources of FDI –

the West – despite its evolution alongside globalisation, e.g. Johanson and Vahlne’s NM.

Furthermore its focus is on why investment goes global therefore it falls short of considering


12 Introduction

what happens ‘on the ground’. The analysis of the relationship between economic

development and FDI is consequently limited. Finally, China’s rise as a major source of FDI

has resulted in the emergence of a global discourse on whether or not China falls in line with

mainstream theories. For example, SOEs are a key feature of Chinese FDI: IB theory does not

consider the owner(s) a prime unit of analysis.

State paternalism (Child and Tse, 2001), a distinction between push and pull factors (Deng,

2003), the idea of comparative disadvantages driving FDI (Child and Rodrigues, 2005) and

ideological differences (He and Lyles, 2008) are the dominant concepts informing this

discourse, arguing against its application. Each calls for the extension of existing theory -

some for a new theory - to better understand Chinese OFDI. However, there is a significant

dearth of scholars responding to this call. Yuefang et al. (2013) attempted to devise a

feasible alternative but their framework folds when considered against empirical evidence.

Warner et al. (2004) appears to be the sole exception to have provided a credible alternative:

the ELCM which can be contextualised hence its relevance, though they themselves

acknowledge its caveats.

The arguments which inform the discourse are compelling and lead many to question their

original position toward China. Theory is a causal explanation: it allows us to identify the

central forces acting on real-world behaviour and thus render reality comprehensible (Walt,

2005). The EU has arguably recognised China’s divergence from mainstream theory and has

subsequently begun to respond.

1.6 Methodology

To comprehensively analyse the implications of China’s rise for FDI policies a large body of

empirical data will be employed. The majority, extracted from European and Chinese

publications, will be secondary in nature. Although obtained from reputable sources, there

are issues concerning its accuracy. It is likely to be understated given the discrepancies


13 Introduction

between approved data when compared with realised data, and likewise the omission of

investment data which has not undergone the formal approval process. Furthermore, the

publication of Chinese figures has only been published in line with IMF and OECD guidelines

since 2003 (Cheung and Qian, 2009). Moreover, China tends to publish its figures

significantly later than its counterparts, high levels of confidentiality often skew the data and

it is frequently regarded as erroneous given the complexities of FDI itself. Finally, the

empirical evidence abstracted from European sources differs significantly when compared

with Chinese sources (Hanemann and Rosen, 2012). It should also be noted that efforts have

been made to use the most recent data available thus the year referenced varies throughout.

To strengthen the findings of this secondary data a qualitative questionnaire has been sent

to two European IPAs: UKTI and IDA Ireland. They have been chosen for strategic reasons:

the former has managed to attract the most OFDI from China of any member state, whilst

the latter, despite its global success in attracting FDI, has failed to captivate its Chinese

audience. The qualitative nature of the questionnaire facilitated a more in-depth study than

would have otherwise been accomplished, for example more extensive information was

requested when required. However, it must be noted that despite this, extrapolation of the

findings is limited given the small sample size.

Finally, both sets of data will be combined with the theoretical background of FDI allowing a

more thorough analysis of the issue at hand. Given the somewhat predictable nature of the

conclusion, it is fair to say that the methodology supports a deductive logic. This

combination of methodologies provides a solid foundation from which to draw the most all-

inclusive conclusion possible.


14 2. Foreign Direct Investment: Data

2. Foreign Direct Investment: Data

2.1 Global FDI Trends

Following the 2008 financial crisis, global FDI flows dropped by c.39% between 2007 and

2009. However 2010 brought a 15% increase, restoring figures to levels similar to the pre-

crisis average (figure one). New market access and capacity-building in preparation for a

full rebound are driving recovery, though this process remains incomplete (Kearney, 2010

cited in Nicholls, 2012, p.7).

Figure 1: Global FDI flows

Source: UNCTAD, 2014, p.1

The crisis has also had considerable implications for the composition of flows. In 2013, for

the 2nd consecutive year, developed countries recorded historically low shares of FDI inflows

(39%) compared with their developing country counterparts who achieved a record 52%, or

£452 billion, in 2013 (UNCTAD, 2014). Europe’s share dropped by 7% between 2011 and

2012, whilst both the US and Asia realised increases of 3% each. The US was ranked the top

global destination for 2012, and the UK first for Europe (IBM, 2013).

0

500

1000

1500

2000

2500

Pre CrisisAverage

2005-2007

2007 2008 2009 2010 2011 2012 2013

Global FDI flows (billions US$), average 2005-2007 & 2007 - 2013 (US$ Billion)



Table 1: FDI flows, by Major Region

Global Flows by Region 2011-2013 (US$ Billion)

Region/Economy 2011 2012 (revised) 2013 (estimated)

Growth Rate 2012-2013 (%)

World 1691 1317 1461 10.9

Developed Economies

866 516 576 11.6

Europe 521 236 296 25.2

EU 473 207 286 37.7

North America 267 211 223 5.8

Developing Economies

729 715 759 6.2

Africa 46 53 56 6.8

North Africa 9 14 14 -1.8

Other Africa 37 39 42 10.0

Latin America & the Caribbean

242 250 294 17.5

South America 131 144 134 -6.8

Central America 22 25 48 92.7

Caribbean 79 82 113 37.8

Developing Asia 439 409 406 -0.8

West Asia 49 48 38 -19.6

East Asia 236 216 219 1.1

South Asia 44 32 33 3.2

South East Asia 110 113 116 2.4

Transition Economies

96 87 126 45.1

Source: UNCTAD, 2014, p.4.

Regarding job creation Costa Rica replaces the US whilst Ireland succeeds the UK as Europe’s

top destination, in relative terms. Considering FDI in terms of value – where value is derived

from both the sector and business activity of the project – further modifies global trends.

2011 saw Ireland ranked first in this instance (IBM, 2013).



Figure 2: Top ranking destination country by average value of investment project

Source: IBM, 2013, p.5

The final aspect which must be considered concerns sectoral distribution. Transport

equipment has dominated the global FDI industry throughout both 2011 and 2012. However

2012 resulted in a downward trend in terms of jobs created throughout the leading sectors.

Tourism was the obvious exception with a 15% increase between 2011 and 2012 (IBM, 2013).

Figure 3: Job Creation by Sector

Source: IBM, 2013, p.8

5.36

5.37

5.41

5.44

5.63

5.64

5.74

5.83

6.24

6.46

Finland

Sweden

Australia

Hong Kong

Switzerland

UK

South Korea

Singapore

Denmark

Ireland

Top Ranking Country by Average Value based on World Average in 2011

World Average Increase of 5.1% on 2011

-25 -20 -15 -10 -5 0 5 10 15

Transport Equipment

Tourism

Chemicals

Business Services

Electronics

ICT

Job Creation by Sector: Percentage Change 2011-2012



The data highlights a relatively erratic FDI environment. The crisis has evidently had

profound implications, one of which has been the opportunity for China to project its new

status as a global player through advancing its involvement in FDI. The following section

outlines its current position.

2.2 Chinese OFDI

As previously noted China’s OFDI has grown significantly; net outflows are expected by the

end of 2014 (Cheung and Qian, 2009). China thus represents a prime example of a

developing country challenging the notion that only developed countries can be a source of

FDI, and is leading the changing composition of global trends. Its increasing OFDI to

developed economies is driven by China’s pursuit of international competitiveness and

resources, e.g. technology and human capital. Access to such capabilities and resources will

allow China to foster production competitiveness and sustainability. China’s 12th 5 Year Plan

(for the period 2011-2015) outlines a number of targets aimed at promoting OFDI (Huang

and Wang, 2011), each heightened by China’s recognition of the need for “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 National People’s Congress, 2011 cited in EUCCC, 2013, p.6). The

targets to reach by 2015 are (Huang and Wang, 2011):

1. To increase OFDI flows by 17% p.a. to £89 billion;

2. To achieve an OFDI stock £298 billion;

3. The number of overseas contracted projects is to total £107 billion with a turnover

exceeding £71.5 billion;

4. To have more than 1 million nationals working overseas;

5. To accord priority to the energy, energy conservation, raw materials, biotechnology,

agriculture, services, high-end manufacturing and innovative technology sectors.



Current data indicates China is on track to successfully conclude this Plan: as previously

noted its OFDI flows reached £71.5 billion in 2012 whilst its stocks were recorded at £255

billion in 2011 (Tusiad, 2013). This follows generally positive trends experienced since 2000:

Figure 4: China's OFDI versus Global OFDI

Source: UNCTAD, PBOC/SAFE, Rhodium Group cited in Hanemann and Rosen, 2012, p.11

Based on figure four China’s share of global flows and stocks is approximated at 4.4% and 2%,

respectively: its growth surpasses global levels. Many cite SOEs as the dominant source of

FDI but new regulations are encouraging more private investment; by the end of 2011 66.2%

of China’s stock originated from SOEs, 3% less than 2010 (Tusiad, 2013). It must be noted

that private investors were not permitted to invest abroad until much later than their SOE

counterparts.

Regarding sectoral distribution the picture is varied. Previously directed towards goods,

current trends depict a growing preference for services sectors. However FDI is still largely

confined to the lower levels of the industries, especially labour-intensive and energy sectors

where China has already achieved a mature domestic market.

0

500

1000

1500

2000

2500

3000

1985 1990 1995 2000 2005 2010

China's OFDI versus Global OFDI 1985-2010 (US$ Billion)

Global Outward FDI Flows Chinese Outward FDI Flows



Figure 5: Industrial Sector Distribution of ODI

Source: 2011 Statistical Bulletin of China’s Outward Foreign Direct Investment cited in Tusiad, 2013

GIs and M&As dominate China’s foreign entry mode although the use of equity investment,

stock exchange and investment funds is growing. GIs precede M&As, comprising 86.9% of

total deals made in 2011 and accounting for 53.3% of total value accumulated (World

Investment Report 2012 cited in Tusiad, 2013). Asia attracts the majority of Chinese OFDI at

61% but Europe, Africa and Oceania are proving increasingly attractive with respective

increases of 22.1%, 50.4% and 75.6% between 2010 and 2011. The regional distribution in

2011 was: Asia (61%), Latin America (16%), Europe (11%), North America (3%), Africa (4%)

and Oceania (5%) (Tusiad, 2013). Just three European countries featured in the top 10

destination countries:

0 100 200 300

Leasing & Business ServicesMining

Wholesale & Retail TradesManufacturing

Financial IntermediationTransport, Strorage & Post

Real EstateProduction & Supply of Electricity, Gas &…

ConstructionAgriculture, Forestry, Animal Husbandry…Scientific Research, Technical Service &…

Information Transmission, Computer…Services t Households & Other Services

Management of Water Conservancy,…Hotel & Catering Services

Other Sectors

Industrial Sector Distribution of ODI 2011 (US100 million)



Table 2: Top 10 destinations of China’s OFDI

Top 10 Destination Countries for China’s OFDI in 2011

Country US$ Million

Hong Kong, China 35655

Virgin Is. (E) 6208

Cayman Islands 4936

France 3482

Singapore 3269

Australia 3165

United States 1811

UK 1420

Luxemburg 1265

Sudan 912

Source: Ministry of Commerce China cited in Tusiad, 2013

However as China further diversifies its FDI motivations, EU member states find themselves

in receipt of more Chinese OFDI, as evident below.

2.3 Chinese OFDI and the EU

Sino-EU diplomatic relations (established in 1975) were initially focused solely on economic

relations. The chronology in appendix two is an extract from one published by the EEAS

(2013). A number of factors should be noted:

1. Events included in the appendix are those which have been highlighted in the original

document: they relate predominantly to the EU-China Summit.

2. The word investment appears just four times in the document.

3. Relations appear reliant on agreements and dialogues rather than actions and outputs.

4. There is no mention of the launch of negotiations for the EU-China investment

agreement.

Although it is not explicitly referred to, the two formally declared their relations a Strategic

Partnership in 2003, i.e. “a long-term commitment by two important actors to establish a

close relationship across a significant number of policy areas.” (Crossick and Reuter, 2007,



p.4). The partnership is based on the 1985 Trade and Cooperation Agreement and was

spurred on by accelerating trade relations as well as common goals, including the aspiration

to improve national security and combat piracy (EEAS, 2013). Among all of the EUs ‘new

generation’ strategic partnerships this is the most developed and mature. It has diversified

to a bilateral, multilateral and global level. It includes third party issues, e.g. China’s relations

with Africa, and is increasingly institutionalised through annual summits and political

dialogues etc. Despite this, the partnership is often considered aimless (Smith and Xie, 2010).

Tensions constantly plague economic relations (particularly China’s trade surplus), political

sensitivity provokes poor mutual trust and both appear somewhat disappointed with the

partnership’s progress. Such adversities relate back to the partnership’s establishment: no

consensus on its meaning was ever agreed. The result has been a somewhat elusive

partnership with little substance. At most it is a bilateral economic cooperation and a means

to mutually respond to global challenges (Zhonping, 2007). Furthermore, its economic

cooperation has been largely confined to trade. Both parties are nevertheless seeking to

change this, hence the EU’s identification of China as a prime target for OFDI attraction and

the initiation of negotiations for an investment agreement. This agreement could signify a

watershed for investment relations, especially considering Europe’s low share of Chinese

investment (accounting for just 0.3% of EU stock) and China’s continued preference for

other regions (Eurostat, 2014; EUCCC, 2013):



Table 3: Stocks held by the rest of the world in the EU27

Stocks held in the EU27 by Region 2009-2012 (€ Billion)

2009 2010 2011 2012

Total extra EU27 2783.4 3144.7 3768.1 3947.4

Europe (non EU) 540.8 625.2 865.1 959.2

Africa 37.3 40.2 47.2 77.7

North America 1214.8 1394.0 1665.7 1679.4

Central America 397.9 433.8 597.1 610.9

South America 79.2 101.0 112.9 113.3

Asia 299.3 343.9 412.5 459.3

Of which China 5.9 6.1 18.5 26.8

Oceania 32.8 33.0 39.4 37.6

Offshore

Financial Centres

642.1 709.2 917.0 947.3

Source: Eurostat, 2014

Table 4: China’s Perception of the EU business environment

Perception of the EU Business Environment for Chinese Investment, when compared with

other regions

Region EU is more favourable EU is less favourable EU is the same

Africa 15% 85% 0%

Australasia 11% 26% 63%

The Middle East 15% 69% 15%

Latin America 31% 56% 13%

North America 33% 21% 45%

Southeast Asia 48% 28% 24%

Source: EUCCC, 2013, p.16

FDI flows depict a similar situation. Between 2004 and 2010 just 5% of OFDI flows were

destined for Europe, compared with 72% for Asia. However recent figures demonstrate

growth in Chinese OFDI to Europe - it increased threefold between 2006 and 2009, and

tripled again by 2011 reaching £6 billion. The number of deals made exceeding £596 million

also reached c.100 in 2011 (Hanemman and Rosen, 2012, p.3; Rapoza, 2012). Finally the EU



is welcoming an increasing percentage of China’s large-scale GIs and M&As, 22% and 24%

respectively, where the value surpasses £596,000. M&As dominated in terms of value

(c.87.5%) whilst GIs led as regards projects (approximately 58%) for 2011 (EUCCC, 2013).

China’s interest in the EU is evidently limited but increasing. Many attribute this to the euro-

crisis which challenged EU solvency and viability but also led the EU to emphasize its

openness to FDI. Positive developments have ensued primarily as a result of increased cross

border M&A activity “as corporations have sought to restructure and stabilise their

operations in the wake of the crisis…” (Nicholls, 2012, p.15). Numerous efforts were also

made to reinstate its attractiveness as an FDI destination, for example its Communication

Towards a Comprehensive European International Investment Policy of 2010. The policy was

devised to increase market access to the EU as well as foster an investment environment

that is stable, fair and properly regulated. Likewise various countries were identified as

targets for FDI promotion – as noted this includes China (EC, 2014b).

Chinese companies, alongside capitalising on the euro-crisis, have identified a number of

reasons for increasing investment in Europe7:

7 Findings are based on the result of 74 surveys carried out August-November 2012. Only respondents from

mainland China who had completed a minimum of one investment in the EU were chosen (EUCCC, 2013).



Figure 6: Strategic reasons for investing in the EU

Source: EUCCC, 2013, p.13

Regarding which EU country to invest in a number of other factors aside from those in figure

six feature; local market access/EU entry point (71%), the presence of a local business

partner (26%), ease of doing business (21%), technology access (17%), ‘other’ (13%),

competitive costs (8%) and government incentives (4%). Research has also shown that an

industry agglomeration - where a strong cluster has developed and has initiated a ‘catalyst

effect’ – incentivises investment further. For example, Sweden is linked with

telecommunications whilst the UK is coupled with financial services and high-technology

industries (EUCCC, 2013, p.15). Such strategic reasons and agglomeration effects arguably

explain the distribution of Chinese FDI in the EU278 outlined in table five:

8 Although Eurostat and MOFCOM data was presented in the text, only Eurostat data is reference here. It must

also be noted that the data was compiled prior to Croatia joining the EU in 2013 hence EU27.

0% 50% 100%

To provide goods/services for the European market

To provide goods/services for the Chinese market

Use local intellectual and R&D resources

To provide goods/servives for other markets (not…

Meeting request from Chinese customers/partners…

Logistical and production reasons

Other

Meeting request from EU/EU Member State…

Meeting request from Chinese authorities to enter…

Primary Strategic Reasons for Investing in the EU as Identified by Chinese Investors



Table 5: Chinese OFDI Stocks & Flows in the EU, the Form of Investment Made and Rank

Compared with Global Ranking

Chinese OFDI Stocks & Flows in the EU (2010), Form of FDI (2000-2010) and Rank

Compared with Global Ranking

FDI Stock

($ Million)

FDI Flows

($ Million)

Number GIs

2000-2010

Number

M&As

2000-2010

Rank Compared

to the Rest of the

World 2000-2010

Euro Area

(16)

5,833 -261 N/A

EU-27 8,927 977 N/A

Austria 184 4 6 5 +1

Belgium -742 147 12 3 -3

Bulgaria 23 7 6 1 +1

Cyprus N/A N/A 0 1 +1

Czech

Republic

72 3 10 1 0

Denmark 506 19 6 1 -7

Estonia 7 -3 0 0 -

Finland 68 86 1 4 +1

France 472 33 46 14 +2

Germany 1,060 412 113 33 -1

Greece 5 N/A 5 0 +14

Hungary 139 131 14 4 +14

Ireland -1,182 -1,060 6 1 -9

Italy 423 -27 31 16 -2

Latvia 423 -27 1 +5

Lithuania 3 0 0 0 -

Luxembourg N/A 73 1 1 -5

Malta 7 3 0 0 -

Netherlands 345 252 32 15 0

Poland 325 11 15 1 -3

Portugal N/A 3 5 0 +1

Romania 69 -9 13 1 +4



Slovakia 49 23 0 0 -

Slovenia 0 0 0 0 -

Spain N/A N/A 22 1 -8

Sweden 1,468 N/A 14 6 +4

UK 618 13 69 26 -1

Source: Eurostat, Rhodium Group, UNCTAD, 2011 cited in Hanemann and Rosen, 2012, pp.34 & 38

France, Germany and the UK (often referred to as the EU’s Troika) attract ample Chinese FDI.

Ireland, despite its noteworthy global status, lags considerably, dropping nine places when

compared with its global ranking. Hungary and Greece are the ‘outliers’. Both countries rank

significantly higher when compared with their global placement though there is a valid

explanation. China’s Yantai Wanhua Polyurehanes acquired Hungary’s Borsodchem for £1.13

billion whilst China’s Ocean Shipping (Group) Company was awarded a long-term lease for

the Greek port of Piraeus, an investment that came with a £417 million modernisation fund.

These one-off large investments have somewhat distorted the distribution. This explanation

is linked with China’s aforementioned interest in fiscally troubled countries who are

privatising assets as a result of the euro-crisis, especially infrastructure where China can reap

a long-term return on investment (Hanemman and Rosen, 2012, p.38; Rapoza, 2012).

China’s industry investment is dictated by efforts to move up the value chain, i.e. away from

labour-intensive industries characterised by cheap labour costs towards building a

comparative advantage that can help to increase their EU market share. This parallels the

diversification away from SOE led investment in Europe where the majority of Chinese

investors are in fact private: 63% of deals made between 2000 and 2011 were private, e.g.

Geely’s purchase of Sweden’s Volvo. However it must be noted that private investors

dominate only with regard to the number of jobs created and deals made; SOEs account for

72% of value derived from FDI as they made a small number of large acquisitions, e.g. China

Investment Corporation purchased GDF Suez’s exploration business for £1.9 billion (ibid).



This is most likely a result of the concentration of SOEs in specific industries, e.g. energy and

infrastructure.

The top ten industries targeted in the EU are:

Figure 7: Chinese OFDI in the EU by Industry

Source: Rhodium Group cited in Hanemann and Rosen, 2012, p.41

In sum the 2008 crisis caused an unprecedented drop in global FDI flows, though pre-crisis

levels are being restored. What remains is the power shift to emerging economies; they

retain a significant share of global FDI. Developed countries are vying for a share of these

non-traditional sources with many targeting China. China’s increased contribution to FDI

flows is the result of domestic and international initiatives and developments. Originally

directed toward market and natural-resource seeking industries, the flow of Chinese OFDI is

shifting to the benefit of the EU. However the EU’s share remains limited when considered

against its noteworthy global status. Nonetheless clusters and a highly competitive business

environment continue to serve the region well. The EU’s challenge, now, is to continue to

attract China. The investment agreement does represent the start of a new policy stance

with respect to China but to be successful, it needs to be based on a clearly understood

theoretical premise.

0

20

40

60

80

100

120

$0$500

$1,000$1,500$2,000$2,500$3,000$3,500$4,000

Chinese OFDI in the EU by Industry, 2000-2011

Value ($ Million) Number of Projects


28 The Theoretical Framework

3. The Theoretical Framework

The literature review indicated the IB school of thought as a prime informer of FDI theory. To

assess the extent, if any, of China’s divergence from this school requires the application of

each theory to the Sino-EU context. One can then determine if alternative theories are

necessary.

3.1 Mainstream Theories

Dunning’s eclectic paradigm, or OLI framework, is a strong starting point from which to

initiate discussions. Its principles are simple: a country will engage in FDI if it has ownership

advantages relative to indigenous firms, e.g. a competitive advantage in technology; a

location advantage which denotes resources favouring international distribution and

ultimately FDI, and finally an internationalisation advantage which promotes FDI based on

the potential net benefits derived from foreign production (Dunning and Narula, 1996;

Dunning, 2000, pp.163-164). Numerous factors are accounted for including the economic

and political context of the home and host country, the industry’s nature and value-adding

activities, the firm itself and finally the motivation behind FDI. Contextualising this

framework enables one to analyse the significance of FDI, debate its challenges and

opportunities, and question the motivation for engaging in FDI (Dunning, 2000). It must be

noted that the OLI framework is a culmination of elements from other theories; its

inapplicability to the context at hand is a result of this and will become apparent as the

discussion progresses. Besides this, it is considered more relevant in explaining FDI to

developing rather than developed economies (Yuefang et al., 2013, p.594). We now move to

consider two dominant IB theories and assess their relevance to the Sino-EU context.

Johanson and Vahlne’s UM (1977) construes decision-making as occurring in stages: the firm

exports via a host country agent, a sales subsidiary is eventually established and ultimately

the firm builds production facilities in the host country. The aforementioned physic distance



concept dictates the time-scale. Although similar findings on the incremental process have

been documented, e.g. Knickerbocker (1973 cited in Johanson and Vahlne, 1977, p.24), they

fail to explain how internationalisation is brought about: psychic distance is used to fill this

void. Through the UM’s lens one can understand China’s [initial] reluctance to invest in

Europe: the psychic distance between the two is self-evident. For example, almost 5,000 km

divides Beijing from Brussels while there are some 290 languages spoken across mainland

China compared with just 23 in Europe. This is despite a universal belief that ICT revolutions

have created a small and homogenous global market, a belief strongly refuted by Ghemawat

(2001). He employs a CAGE framework to argue his case (appendix three) which again

highlights the distance between the two, e.g. in 2012 the EU’s GDP was recorded at £9.9

trillion compared with China’s £4.9 trillion (World Bank, 2014). Likewise the EU operates on

the premise of liberal democracy whilst China is socialist with Chinese characteristics. This

affirms the UM’s unsuitability with respect to the Sino-EU investment context.

The UM understood the business market as neoclassical in nature with numerous

independent customers and suppliers operating simultaneously. This has since been revised

to interpret the market as a network or web of relationships which define the market and

help to foster the trust and commitment essential in accumulating the knowledge required

for FDI. This revision led to the NM which replaces psychic distance with ‘outsidership’ [of a

network] as the prime factor dictating the pace of FDI (Johanson and Vahlne, 2009).

This NM incorporates some original features of the UM, e.g. the establishment chain, but

allows for deviation given the advance of globalisation since 1979. For example, it can

explain the concept of ‘born global’ (whereby a firm is born a MNC) as it allows for a firm’s

rapid internationalisation given the knowledge and learning a network provides.

Internationalisation, under the NM, is deemed a bilateral process (Anderson and Weitz, 1992

cited in Johnanson and Vahlne, 2009, p.1414): without mutual reciprocation the relationship



cannot proceed and “A firm that does not have a position in a relevant network is an

‘outsider’…” (Johanson and Vahlne, 2009, p.1415). Any attempts to enter a foreign market

are likely to incur both the liability of foreignness9 and ‘outsidership’. In essence the NM

posits that a firm is embedded in a constraining and enabling business network;

internationalisation, and with it FDI, are understood as a means to strengthen one’s position

within this network (ibid, p.1423). To understand how this model drives FDI its basic

mechanism must be considered:

Figure 8: Business Network Internationalisation Process

Johanson and Vahlne’s Business Network Internationalisation Process Model

(2009 Version)

Source: Johanson and Vahlne, 2009, p.1424

Opportunities, which comprise a subset of knowledge, form the mechanism’s core. A firm’s

network position facilitates the pursuit of opportunities within the network, which can be

used to facilitate mutual learning and trust-building. Relationship commitment can then

9 “all the additional costs incurred by MNCs operating in a foreign country which local firms don’t have to bear.”

(Kindleberger, 1969 cited in He and Lyles, 2008, p.489).



increase or decrease, strengthening or weakening a firm’s network position. Through this

analysis two prime FDI drivers are identified:

1. The firm can follow existing, or identify new opportunities in a foreign market;

2. The partner firm may incentivise the firm to follow its internationalisation strategy or

push the firm into a new market.

Essentially the state variables – knowledge opportunities and network position – initiate the

internationalisation, or FDI, process (ibid, pp.1424-1425).

Looking back to the empirical data on Chinese OFDI it is evident that Asia has received the

majority. One could argue that the large numbers of Chinese diaspora dispersed throughout

Asia (who facilitate the emergence of networks and relationships) are principal explanations.

The number of Chinese in Europe pales in comparison to Asia; 4.73% and 78.10%,

respectively (Latham and Wu, 2013, p.18). The argument is reinforced by the previous

evidence on psychic distance. All things considered one can firmly assert that neither of

Johanson and Vahlne’s models can comprehensively explain Chinese OFDI10.

One must therefore look to alternative schools – in this case a model based on firm

configuration and internationalisation. The model is derived from a paper by Seev Hirsch (An

International Trade and Investment Theory of the Firm) which looks to supply and demand as

the deciding factor between trade and investment. The model goes beyond the home-host

country view by accounting for foreign resource-abundant countries. Two factors

characterise the decision-making process: the location – where is the cheapest location

regarding overall costs, and control – which value-adding activities should be internalised or

externalised so as to minimise overall costs. The ultimate decision represents the optimal

configuration to minimise TCs. In sum “The choice between alternative configurations is

10

This is somewhat hypocritical: Chinese investment in Africa probably incurred similar challenges regarding psychic distance and a lack of diaspora. However, Africa’s significant endowment with natural resources most likely counteracted such challenges.



captured as a systematic comparison between the costs of value-adding activities and the

cost of product and knowledge flows…” (Buckley and Hashai, 2010, p.47). Although more

scope is provided for alternative motivations (given the aforementioned superiorities of this

model) it still fails to explain increasing Chinese OFDI into Europe. Many Chinese firms’

comparative advantages are derived from domestically low costs, predominantly labour. In

fact the surge of investment into China was to minimise MNCs’ costs and capture a share of

the Chinese market: it is more relevant in explaining inward, rather than outward, flows

(Buckley and Hashai, 2010).

Finally we consider the LLL model which seeks to identify how latecomers challenge the

global economy through FDI (Matthews, 2006a cited in Yuefang et al., 2013, p.596). It posits

that MNEs from ‘latecomers’ turn disadvantages into advantages through knowledge

absorption (Humphrey and Schmitz, 2002 cited in Yuefang et al., 2013, p.596). LLL states that

“Latecomers will attach the highest importance to ensuring that national firms become

global players through an emphasis on outward FDI as well as on inward FDI.” (Yuefang et al.,

2013, p.596) - the early stages of Chinese OFDI outlined in the introduction reference the

promotion of national champions as global leaders. The process of knowledge acquisition,

which facilitates the procurement of technological capabilities and the identification of new

opportunities for knowledge acquisition, operates as follows:



Figure 9: Linkage, Leverage and Learning Model

The Mechanisms behind the Linkage, Leverage and Learning Model

Source: Yuefang et al., 2013

Although the authors posit the LLL as the most plausible concerning China, given its

explanation for investing in developed countries, I would hesitate to agree: the model takes

a firm-based view of the process and fails to incorporate institutional and cultural elements,

both of which are integral to Chinese OFDI.

It is evident that China diverges from conventional IB theories. The explanation behind EU

investment is therefore limited and alternative options require consideration. Generality is

being challenged and we need to know how if the ‘correct’ policies are to be implemented

(Buckley and Lessard, 2010).

3.2 How is it challenging mainstream theory?

The basic tenets of China’s divergence are indicated above. However two primary

aforementioned explanations require further consideration:

1. State paternalism arguably represents China’s most potent challenge to mainstream

theory. The basic premise of this challenge is institutional reforms (outlined in appendix

four) and the resulting “massive inter-dependent, multi-level network whose logic of

Linkage:

Globalisation enables firms to access the

existing global network

Leverage:

This new access allows firms to leverage

opportunties for their own benefit i.e upgrade their product portfolio

Learning:

i.e. the integration of new knowledge with firms's pre--existing

knowledge



operation depends as much on political influence and personal relationship as on

concern for efficiency.” (Child and Tse, 2001, p.6) the result of which has been the

emergence of multiple business ownership and governance systems (Boisot and Child,

1996 cited in Child and Tse, 2001, p.6).

2. China’s OFDI does somewhat correspond with dominant FDI motivations advocated by

mainstream IB theorists, e.g. it uses strategic asset-seeking to acquire IP. However it

exhibits some unique drivers, such as the need to access foreign capital markets given

limited access to capital in China and the frequent desire to gain foreign citizenship

benefits. China is also understood to operate on ‘pull’ rather than ‘push’ factors, e.g.

circumvent host-country trade barriers and generate hard rather than appreciating

currencies (Deng, 2003, p.120).

It is this last point – pull factors – which dominates Child and Rodrigues’ (2005) argument to

extend mainstream theory. Other MNCs act on push factors, most notably the exploitation

of a comparative advantage but Child and Rodrigues proffer the possibility of MNCs

engaging in FDI to acquire the necessary assets to overcome comparative disadvantages, i.e.

using FDI as a means to close the gap. For example, Chinese MNCs may capitalise of FDI to

overcome institutionally and culturally embedded disadvantages including regional

protectionism, limited access to capital and high transaction costs given the uncertainties of

the Chinese legal system (Child and Rodrigues, 2005). He and Lyles (2008, p.489) put forward

one additional disadvantage which relates to the CAGE framework and psychic distance: the

ideological differences between China and the West which constitute a political liability.

They reference Geert Hofstede’s cultural theory (appendix five) to highlight the

discrepancies between China and other countries. For example if one compares the position

of China and Ireland on the theory’s six dimensions the disparities are unquestionable.



Figure 10: The 6 Dimensions of Hofstede's Cultural Theory

Source: The Hofstede Centre, 2014

Wang et al. (2012) reiterate this idea of mainstream literature failing to capture the essence

of push factors. They note MNCs from emerging economies are unlikely to engage in FDI to

exploit a comparative advantage but to do so instead based on ‘learning objectives’. Their

conclusions are similar to both Child and Rodrigues, and Child and Tse: Chinese FDI is

institutionally embedded and incurs unique challenges, a factor unaccounted for by IB

theories.

3.3 Alternative Theories

Alternative theories to explain China’s OFDI trends are scarce. Yuefang et al. (2013)

attempted to develop a relevant framework through modifying Dunning’s OLI framework

and combining it with the LLL model. Its fundamentals are outlined below:

0

20

40

60

80

100

Power Distance Individualism Masculinity UncertainityAvoidance

Pragmatism Indulgence

Ireland versus China according to the 6 Dimensions of Hofstede's Cultural Theory

Ireland China



Table 6: Comparison between OLI and LLL Frameworks

Combination of Modified OLI and LLL Model

Criterion Modified OLI LLL

Resources utilized Proprietary resources Resources accesses through

linkage with external firms

Geographic scope Location established as part of

vertically integrated whole

Locations tapped as part of

international network

Make or buy? Bias towards operations internalized

across national borders

Bias towards operations

created though external

linkage

Learning Not part of OLI framework Learning through repetition

of linkage and leverage

Process of

internationalization:

Not part of OLI framework Proceeds incrementally

through linkage

Driving paradigm Transaction cost economics Capturing of latecomer

advantages

Time frame Comparative static observations,

comparing one point in time with

another

Cumulative development

process

Source: Matthews, 2006a cited in Yuefang et al., 2013, p. 597

However, case studies have illustrated its shortcoming: its modified OLI aspect failed to

account for specific traits of latecomers from developing countries, e.g. step-by-step

internationalisation, whilst its LLL aspect fell short with regard to the inclusion of host

country influential factors (Yuefang et al., 2013).

Therefore, we turn to Warner et al. (2004) who introduce a model, not unlike the UM, that is

more applicable to China: the ELCM. Evolutionary, in this context, denotes a transition from

ethnocentric to geocentric to polycentric, in that [Chinese] firms progress from the domestic

to the regional to the global market (p.325). This model depicts Chinese MNCs’ progression

through four stages as they proceed through a spectrum of maturity.



Figure 11: The Stages of the Evolutionary Life Cycle Model

A Four-Stage Evolutionary Model for a Globalised Transnational Firm

Source: Warner et al., 2004, p.327

The resources and market opportunities available to a firm, as well as its ability to internally

integrate across geographically dispersed units and the benefits expected with time, dictate

the firm’s FDI model and strategy, and ultimately its progression through the model. If one

reconsiders the evolution of China’s OFDI from a more individual/firm-level point of view,

rather than the country-wide view presented in the introduction, its suitability is apparent

(Warner et al., 2004, pp.330-331).

1. Fragmented efforts at enterprise level (1979-1984): This coincides with Deng’s

modernisations and revolves around international trade facilitation, e.g. establishing

representative posts in importing countries.

2. Outward Activities at the National Level (1985-1990): Regulations concerning OFDI were

codified by the state to govern SOEs’ overseas operations. Increased and more diverse

activities were encouraged.



3. An Era of Accelerated Growth and Development (1991-1999): The performance and

integration of overseas MNCs activities advanced significantly. They gradually assumed

the form of a TNC but maintained activities at the lower end of industries. They

remained limited in scale and experience

4. Global Strategic Development (2000-Present): The operations of newly established TNCs

were increasingly positioned proactively, especially given WTO accession. TNCs began

converging “with the model of a globally integrated production and value-adding chain.”

(Warner et al., 2004, p.332). TNCs learned through first focusing on East Asia before

expanding elsewhere.

The option to contextualise this model is integral: it can be adapted to fit a firm’s

institutional and cultural environment. Despite its applicability to a number of case studies,

e.g. The Wanxiang Group, one cannot ignore its caveats. For example, the ELCM assumes

firms will procure foreign know-how thus facilitating technology transfer but this is

recognised as a factor more relevant in some industries than others (Warner et al., 2007).

Regardless, it offers a plausible explanation for increasing Chinese investment in the EU.

3.4 A Whole New Theory?

The formation of a comprehensive theory wholly suited to Chinese OFDI goes well beyond

the scope of this paper. A framework will, however, be introduced which could later be

expanded on, incorporating aspects of the above theories. The inherent primary elements

are:



Table 7: Framework for a Theory Germane to Chinese OFDI

Basic Framework for the Development of a Theory Wholly Relevant to China

Government

involvement in the form

of both OFDI restriction

and promotion

Restriction: initial ban on outward investment, current capital

restrictions and the strict process of approval/registration

companies must undergo.

Promotion: government initiatives such as the ‘Going Out’

strategy of 2000 and subsidies domestic companies can access.

Geographical Location The tendency to first invest in geographically close areas so as to

procure the necessary experience for further investment.

Changing FDI Drivers The transition in motivations for FDI from securing access to raw

materials to acquiring technological and management know-how

etc.

Opportunistic The exploitation of the global/euro crisis to acquire ‘cheap’

infrastructure and debt-ridden companies in Europe, and

likewise elsewhere.

Link with Infrastructural

Development

The coupling of FDI with infrastructure development, most

notably in Africa but also in the EU, e.g. the aforementioned £5.5

million modernisation fund linked with the purchase of Greece’s

Piraeus Port.

Collectively, these elements indicate the following theoretical rationale behind Chinese

investment: Chinese firms (initially SOEs) invest based on government direction with respect

to geographical location and industry choice. The direction is dictated by national objectives

and industrial policies. As confidence grows, SOEs are permitted to invest in more diverse

locations. Once the benefits of FDI are realised, private firms are authorised to engage in FDI

but only those considered ‘industry champions’ willing to undergo strict supervision. This

also implies industry diversification. The motivations behind FDI also begin to change as

firms realise their inferior competitive stance compared with their international

counterparts. Government involvement implies the infrastructural element of FDI, and



further diversifies the industrial investment. Over time, the experience and knowledge

required for FDI is accrued, meaning the FDI can become more opportunistic and

commercially driven, facilitating the acquisition of cheap infrastructure and debt-ridden

companies.

This framework must not be understood as theoretically complete. It merely attempts to

outline the basic theoretical motivations behind Chinese OFDI and why it is now increasing in

the EU.


41 EU FDI Policy towards China

4. EU FDI Policy towards China

Based on the findings of the discussion so far, one can now move on to clearly assess

whether or not policy change has followed the rise of China.

China’s divergence from mainstream IB theory has already been confirmed but a

comprehensive analysis also warrants consideration of the EU’s theoretical standing with

respect to FDI.

The EU is globally acknowledged as liberal in nature, an assertion dating back to its founding

as the European Economic Community in 1957 - the Treaty of Rome (the policy document

instrumental to its founding) was strikingly economically liberal. Its objectives included the

abolition of qualitative trade restrictions, facilitation of free movement of capital, people,

services and goods across national borders and the establishment of a common commercial

policy. However its principles did not acquire superior status until it was constitutionalised in

the 1970s. Since then various factors have re-affirmed the EU’s commitment to liberalism:

the completion of a single European market (1993), monetary union achieved with the

introduction of the euro (2002) and the adoption of the Lisbon Agenda (2000) which

incorporated two strands: to foster a more flexible and responsive labour market, and to

further integrate its financial markets via the introduction of the euro (McCann, 2010).

The advent of the Lisbon Treaty in 2009 is, however, of utmost significance to this discussion.

Its implementation brought a number of changes: EU competence was extended and

clarified, external trade and investment policy were brought under EEAS auspices and the

role of the Parliament increased. The EU gained authority to develop EU-wide investment

agreements, one of which will be with China (Woolcock, 2010). Prior to this, EU investment

policy proceeded on the basis of member state BITs, defined as an agreement “drafted to



address a specific circumstance: that of an investor or one state (the home state) locating

assets in the territory of another state (the host state).” (Vandevelde, 2010, p.1).

BITs gained global momentum as liberal economic policies proliferated worldwide and the

advantages of FDI become more appreciated and understood. The first was concluded

between Germany and Pakistan in 1959; there are now over 2,860 worldwide (UNCTAD,

2013). Given the growing freedom of capital and goods etc., BITs were engaged to promote

and protect investment (Sauvant and Sachs, 2009) through incorporating six primary

principles including access, non-discrimination and due-process. They enhance transparency

and consequently reduce the risks associated with FDI (Egger and Pfaffermayr, 2009) whilst

also advancing liberal economic theory through, for example, increasing productivity via

efficiency gains (Vandevelde, 2010). Alongside a growing number of BITs, trade and

investment provisions have been implemented at regional and multilateral levels, e.g. the

Agreement on Trade-Related Investment Measures. Given their impact on national policy

making it is unsurprising that national FDI policies have embraced liberal traits (teVelde,

2006). For example, 95% of policy changes made in the 1990s were devised to create more

welcoming environments for MNEs (Sauvant, 2012). By the beginning of the 21st century,

however, change was evident. 32% of policies in 2009/10 were considered ‘unwelcome’,

compared with just 6% in 2001/2. Screening mechanisms were being strengthened regarding

M&As and SOEs were identified as warranting separate rules (Sauvant, 2012). UNCTAD

(2012) have documented similar findings:



Figure 12: National Investment Policy Changes

Source: UNCTAD, 2012 cited in Zhan, 2013, p. 8

Irrespective of this, the EU is still regarded as altogether liberal in nature when compared

with its global counterparts. It is deemed more welcoming than the US in that it is more

lenient and exhibits less political opposition (Zhang and VanDenBulcke, 2014). Plotting EU

countries on the OECD’s FDI Regulatory Restrictiveness scale11 demonstrates its continued

openness, with the exception of Austria and Latvia.

11

A country’s restrictiveness is based on common forms of restrictions: foreign equity limitations, screening and approval mechanisms, operational rules and the restrictions placed on employing foreigners as key personnel. 1 indicates full restriction on inward FDI whilst 0 indicates the contrary (Zhang and VanDenBulcke, 2014).

0

50

100

150

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

National Investment Policy Chages, 2000-2011 (Percentage of Measures)

Liberalisation/Promotion Regulation/Restriction



Figure 13: Plot of EU Countries on the OECD FDI Regulatory Restrictiveness Index

Pre & Post Establishment Conditions in EU Countries as Measured by the

OECD FDI Regulatory Restrictiveness Index (2012)

Source: Zhang and VanDenBulcke, 2014, p.164

However this is not to say that the EU is not following global trends in the advance towards

regulation, e.g. Zhan (2013) notes the falling preference for IIAs - only 30 were signed in

2012, the lowest figure in 20 years. Likewise, figures one and two of appendix six illustrate

the move away from liberal economic attitudes post-crisis toward more protectionist

tendencies regarding China. A number of factors can explain this trend. It has become

apparent that not all FDI is equally beneficial. The need for sustainable FDI, defined as FDI

“that makes a maximum contribution to economic, social and environmental development

and takes place within mutually beneficial governance mechanisms while being

commercially viable” (Sauvant, 2012) is progressively promoted. Competing objectives

plague policymakers and pressure to protect the interests of civil society has heightened.

The number of treaty-based disputes has increased and the benefit of BITs is increasingly

questioned, especially given their context is progressively more fragmented and complex, a

factor compounded by the growing number of developing countries involved in FDI. Finally,

the shift is a result of increasing FDI from emerging economies and the subsequent rise of

SOEs engaging in FDI (Sauvant, 2012; UNCTAD, 2013). By and large “We are…moving toward



a regulatory approach that is more protective of sovereigns by allowing more policy space

for governments to regulate FDI in the public interest…” (Sauvant, 2012).

The reference to emerging markets/SOEs bears utmost importance in this paper. It is

glaringly obvious that the rise of regulatory policies coincided with China’s rise as a global

FDI player:

Figure 14: The Correlation between China's Rise and the Shift toward Regulation

Source: Personal Graph based on Figures 4 and 12

Bearing this in mind, the EU’s contemplation of a more regulated approach should be no

surprise, and has come at an opportune time. All but one EU state – Ireland – concluded a

BIT with China. The majority are due to expire “which provides a window of opportunity to

address inconsistencies and overlaps in the multi-faceted and multi-layered regime of

international investment treaties, and to update the investment regime in light of

development paradigm shifts.” (UNCTAD, 2013, p.1). The investment agreement under

negotiation will result in the replacement of all member state BITs with one bilateral

agreement (UNCTAD, 2013). Although it is difficult to predict its exact provisions some

speculations have been made, one of which has been the possibility to extend investment

coverage to pre-investment. This would be consequential for EU investors looking to China

given its restrictive inward investment regime, and also bears significance for the EU’s desire

to include a liberalisation provision which would enforce equal treatment of foreign and

0

10

20

30

40

50

0

1000

2000

3000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

The Parallel between China's Rise andthe Increase in Regulatory Measures

Chinese OFDI Flows (US$Billion) Regulation/restrction (% of Measures)



national investors. Although China has shown willingness to embrace some liberal

tendencies, e.g. its 2012 BIT with Canada included a provision to extent the Most Favoured

Nation standard to the admission of investments, full acceptance seems unlikely. Concerning

post-establishment, of significance is the likelihood that it will include a thorough provision

for investor-state arbitration (Poulsen et al., 2013).

There are a number of general aspects, aside from those specified above, which arguably

reflect the EU’s recognition of the need for a more regulated environment:

1. As China transitions from an export/investment led economy to one of domestic

consumption its impact on EU manufacturing and services sectors is increasingly

negative. Remnants of the euro-crisis, which is continuing to cause rivalry among

member states for Chinese investment, aggravate the situation (Zhang and Rubinacci,

2013).

2. This rivalry has highlighted the need for the EU to adopt a more unified stance. A surge in

investment from any country causes “unrest both at the level of the governments about

the loss of national sovereignty and the local companies about the competitive threats

emanating from the so-called intruders.” (Zhang and VanDenBulcke, 2014). Should the

EU act collectively, its bargaining power would be strengthened. State-involvement in

Chinese OFDI, as well as its desire to acquire EU technology strategic assets etc.

heightens this need.

3. One investment agreement would also facilitate a more level playing field. At present

member states frequently cite limited access to the Chinese market. This is considered

unfair and discriminatory given the extensive access to the EU their counterparts enjoy

(Zhang and VanDenBulcke, 2014; DeGucht, 2012). A level playing field could also benefit

those outside the ‘Troika’ as Chinese companies have no plans, yet, to diversify



investment away from them (China Council for the Promotion of International Trade,

2010).

Figure 15: Number of Future Investments by Destination Country in EU27

Source: China Council for the Promotion of International Trade, 2010, p. 45

4. China’s ‘Communist’ political system is often noted as the cause of its poor transparency

regarding the rationale behind investment. Should this be alleviated, EU concerns that

China is ‘buying up Europe’ may dissipate (Rosen and Hanemman, 2009).

5. The move away from trade-dependency has two primary implications. The first is

heightened economic interdependence. The second is the potential for synchronised

business cycles to develop: FDI could become a vehicle of disturbance transmission

(Jansen and Stokeman, 2007).

6. Chinese investment was originally directed towards neighbouring countries

demonstrating familiar business conditions and cultures, lower costs and ethnic ties.

Naturally occurring pull factors evidently played a major role but the EU does not

encapsulate such traits thus policies to attract FDI acquire more attention (Cai, 1999).

7. Its home country embededdness, albeit an impediment at times, is driving the

emergence of its own comparative advantages, aided by capital market imperfections

and ownership advantages. For example, firms can access capital below market rates

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which creates a semi-permanent disequilibrium in the capital market which outward

investors can then exploit (Buckley et al., 2010).

The opportunity to implement an investment agreement will allow the EU to mitigate many

of these issues, which BITs alone cannot resolve. In this way one can understand the

agreement as an FDI PI12 as it will entail “analytical and regulatory dimensions [which] are

required to manage the landscape of MNEs’ FDI operations in order to maximise positive

externalities accruing to the host location, as well as optimising the allocative efficiencies

involved in FDI.” (Bartels and deCrombrugghe, 2009, p.1).

FDI policy forms the basis of a country’s overall industrialisation strategy and therefore

impacts on a country’s economic well-being; ergo PIs should be aligned with a host country’s

industrial policy. However difficulties arise when considering the EU as the ‘universal policy-

maker’ as its policy-making “is a complex and interwoven process of formulating a common

interest that spans different values.” (Algieri, 2008, p.65). In other words, the EU is

challenged with finding the common denominator between all 28 EU member states

regarding industrial policies, interests and objectives, as well as having to account for

differing levels of economic well-being. Loewandahl (2001 cited in Bartels and

DeCrombrugghe, 2009, p.9) cites four main areas in FDI where PIs arbitrate:

1. Strategy and organisation: setting the national context and objectives, identifying a

competitive stance and establishing a targeting strategy.

2. Lead generation: relates to marketing and company targeting.

3. Facilitation: getting the investment, and both pre and post-project management.

4. Investment services: after-care and monitoring/evaluating the investment.

12

PIs include structural adjustment measures fostering macroeconomic competitiveness and instilling FDI confidence in the economy (Bartels and DeCrombrugghe, 2009).



One has to realise that the EU will be unable to devise a policy relating to each of the four

areas. For instance, it would be unrealistic to think that the EU could dictate a universal

policy to facilitate investment nor could it encapsulate after-care services. Member states

will have to maintain some control which will alleviate some of the EU’s difficulties in

identifying the common denominator etc.

The EU’s explicit strategic agenda provides further insight into the potential nature of the

policy. Until now the EU has arguably operated on the basis of ‘unconditional engagement’

in that it “gives China access to all the economic and other benefits of cooperation with

Europe while asking for little in return.” (Fox and Godement, 2009, p.2). China has realised

this and has subsequently learned to exploit it (Fox and Godement, 2009). The EU therefore

hopes that “By bringing China into a multilateral and institutionalized forum the

predictability and stability of EU relations…” will increase (Algieri, 2008, p.79) and ‘reciprocal

engagement’ will ensue. Likewise, it will provide greater scope for the establishment of long-

term investment opportunities which will create employment and growth, as well as

ensuring fair treatment and the free-flow of payments between the EU and China (EC, 2014a,

2014b). It is hoped that the agreement “will boost two-way investment and enhance the

China-EU Comprehensive Strategic Partnership.” (Jiabao, 2014) by ensuring that both

markets welcome investment (EC, 2014c).

Based on this one can assert that, on the basis of China’s divergence from mainstream

theory and the increased tendency of the EU to adopt regulatory measures, as well as what

the EU wants to achieve strategically, the rise of Chinese investment in the EU has stirred

transformation in the realm of EU policy. Some believe this inevitable: China is a new player

to the international system and it is a non-Western superpower constantly challenging the

ideals of Western liberal democracies. Yet China remains a paradox of its own in that “it



seeks to promote reach and influence yet it is constrained by a domestic political

environment that sometimes undermines that same reach and influence.” (Lavin, 2013).

To draw a more robust conclusion, an examination of two EU member states – the UK and

Ireland – will be employed. The reason they were chosen has already been outlined in the

introduction. Particular emphasis will be on their IPAs as their policies and strategies

arguably reflect a nation’s economic policy (Filippov, 2012).

4.1 The United Kingdom

The UK’s open-door policy, a 40 year legacy, confirms its alignment with European liberalism,

further validated by ‘business-friendly’ initiatives which have constituted the focus of

successive governments (Driffield et al., 2012, p.6). This is again reinforced by its position on

the regulatory restrictiveness scale where the UK’s regulatory restrictiveness ranked at 0.038

re pre-establishment and 0.025 re post-establishment.

Such economic liberalism has arguably formed the basis of the UK’s BIT with China, signed

and enforced on June 15th 1986. It encapsulates many of the common traits of a BIT, e.g. it

seeks to ensure that all investors are subject to fair and equitable treatment (UNCTAD, 1986)

but does contain one specific advantage, also held by New Zealand, in that it does not

require that the ‘seat’ of the investment company be in the other party of the BIT therefore

companies can invest in China via the UK so long as they are legally based in the UK (Dutson

and Batada, 2011). Such an element arguably reinforces the preference for liberal aspects.

It has not been possible to ascertain the UK’s specific policy stance on FDI generally, or

toward China: the UK’s strategy will instead be comprehensively analysed.

UKTI’s current five year general strategy - Britain Open for Business, launched in May 2011 -

declares the UK’s focus on China as a means to exploit China’s growing middle class for the

UK export market, e.g. China’s urbanisation rate is set to reach 65% by 2030. The strategy



incorporates four growth pathways each of which are underpinned by a focus on rebalancing

the UK’s economy, leveraging the 2012 Olympics’ success and focusing on high-growth

markets. The most relevant of the pathways, here, is ‘Targeted Inward Investment’ which

looks to diversify its source of funds/FDI through targeting sovereign wealth funds and

investment in large scale infrastructure (UKTI, 2014c). The impact of the crisis on the type of

FDI attracted by the UK and the way it is funded has advanced the need to expand sources

further. For instance, UK banks previously funded inward FDI but the UK is now looking,

instead to cash-rich Indian and Chinese firms seeking brand names and M&A opportunities

(Driffield et al., 2012, p.4). This strategy has evidently proven successful, most obviously

through China’s involvement13 in the construction of the UK’s first new nuclear station for a

generation (BBC, 2013).

The FCO recently remarked that “China’s rise in global political and economic influence has

made it one of [the UK’s]…most important bilateral relationships.” (2013, p.23). Such

recognition of the importance of their relations, which have progressed significantly over the

years14, has prompted a number of more specific UK-China initiatives, e.g. establishing an

economic and financial dialogue, high-level exchanges and the publication of its first China

strategy paper in 2009 – The UK and China: A Framework for Engagement (FCO, 2013;

Chinese Embassy, 2010). The strategy entails three pillars: to get the best of China’s growth

for the UK through implementing the ‘right’ policies, to foster a China that is a responsible

global player and to promote China’s reform in a sustainable manner. It acknowledges the

UK’s need for China to restore its economy, as well as its need to access business

opportunities in China. Specific targets are also identified such as setting a goal to get 100

13

China National Nuclear Corporation and China General Nuclear Power Corporation hold minority shares in the project. 14

The UK was the first major Western power to recognise the PRC in 1950. Diplomatic relations were established in 1954 at charge d’affaires level, advancing to an ambassadorial level in 1972. In 1998 the two formed a comprehensive partnership, promoted to a comprehensive strategic partnership in 2004 (Chinese Embassy, 2010).



Chinese companies onto the London Stock Exchange. Granted it was published in 2009, but

it gives some indication of the UK’s shared desire with the EU to achieve a level playing field

and encourage Chinese investment in the UK (FCO, 2009). Such specific efforts have proven

successful to date - Chinese investment grew at 31% per annum between 1999 and 2012

(Office for National Statistics, 2014). It accounted for 88 projects in 2013, 25% more than

2012, and created 1,812 new jobs whilst safeguarding 3,638 (UKTI, 2014a). However, this

growth has been somewhat volatile and unpredictable, a reflection of China’s domestic

context (outlined in the introduction).

Figure 16: Chinese Investment in the UK

Source: The Heritage Foundation and The American Investment Enterprise Institute, 2014

The sectoral distribution of Chinese investment in the UK depicted below largely correlates

with general UK investment trends, especially in the finance and energy sectors. Recent

investment deals include a £1.5 billion investment announced by China Minsheng

Investment Corporation which involves opening a European HQ in London and will cover

investments in financial services, advanced technology, new energy, environmental

protection and offshore engineering (UKTI, 2014b).

0

1

2

3

4

5

6

7

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Chinese Investment in the UK 2005-2013 (US$ Billion)



Figure 17: A Comparison between General and Chinese Investment in the UK

Source: UKTI, 2014b, p.11; The Heritage Foundation and The American Investment Enterprise Institute, 2014

Despite such success and the consistency between both strategies, the findings of the

questionnaires (appendix seven) reveal incoherence. Two UKTI employees responded; two

sets of results emerged. The first questionnaire will hereinafter be referred to as Q1, and the

latter Q2. For instance, Q1 answered that UKTI had always targeted Chinese investors whilst

Q2 indicated 1998/1999. Some of the more alarming discrepancies concern the industries

targeted, the UK and China’s positions on the value chain, and the overall position of China

in terms of UKTI’s overall strategy. The figure below depicts the differing opinions regarding

industries targeted, where just three were identified by both respondents:

24%

22% 22%

17%

9% 6%

Advanced Manufacturing Creative Industries & ICT

Financial & Professional Services Energy & Infrastructure

Life Sciences Electronics & Telecoms

Overall Projects by Industry Group in the UK 2013/2014

3% 1% 7%

30%

10%

20%

21%

8%

Metals Technology Transportation Real Estate Agriculture Finance Energy Other

Chinese Investment in the UK by Sector 2005-2014



Figure 18: Industries targeted in China as Identified by UKTI

Difference in Opinion with regard to Industries Targeted according to Q1/Q2

In terms of value chain, Q1 believes them to hold similar positions, and that China is

incorporated into UKTI’s overall strategy. Q1 considers UKTI a customer-focused service

delivery organisation and was therefore unable to answer question nine. Likewise, they were

unable to answer question 10 as maintaining investment flows was not deemed a core

function of UKTI. Q2, on the contrary, believes the UK and China to hold different positions

on the value chain but maintains that through targeting each other’s leading industries, the

potential for negative externalities to arise as a result of this is mitigated. Q2 also asserts

that China warrants a separate strategy given market differentiations regarding maturity,

conditions and resources. The global/euro-crisis was considered inconsequential given

China’s long-term, rather than short-term, perspective. This corresponds with their belief

that China’s ‘going out’ strategy explains increased investment in the EU rather than either

crisis. Q2’s answers concerning the strategic motivations behind Chinese investment in the

EU largely correlated with those identified by the EUCCC (figure seven), with the exception

of failing to recognise the need to provide goods and services for markets outside of Europe

and China. Q1, on the other hand, selected just four of the strategic motivations, indicating a

potential misunderstanding of Chinese investors. Similar opinions were held regarding the

UK’s differentiating factors (tax and legal reasons), with the exception of Q2’s reference to

Both:

ICT, Energy and Advanced

Engineering

Q2: Environment, Life Sciences, Business and Professional

Services

Q1: Infrastructure,

Healthcare, Properties,

Creative Industries



UK’s brands. Q2 felt that both the UK’s BIT and the forthcoming EU-China investment treaty

were beneficial to the UK, as any agreement regarding investment promotion would be,

whilst Q1 did not answer question 13 and agreed with Q2 with respect to the forthcoming

agreement.

It is evident that institutional incoherence prevails within UKTI. One could reach differing

conclusions depending on the respondent chosen. For example, if one were to proceed on

the basis of Q2 – whose answers reflect the UK’s general and China strategy more-so than

Q1 - policy change would be evident: given China is regarded as warranting a separate

strategy, and given the relationship between theory, policy and strategy already discussed,

one could argue that policy change has ensued. However the aforementioned institutional

incoherence makes this difficult to argue with certainty. The inclusion of both completed

questionnaires in this discussion serves to highlight the fact that the UK has not yet devised a

comprehensive understanding of Chinese investment which arguably explains the disjointed

relationship toward the strategies previously discussed. Granted the EU-China investment

treaty may ‘fill the gap’ but inconsistencies will remain where the EU cannot intervene at a

policy level.

4.2 Ireland

Ireland has embraced liberal economic policies and export-led diversification since the 1960s

(Brennan and Verma, 2013; DJEI, 2014). For example Ireland ranked 20th (of 152) on the

2011 Economic Freedom of the World Index. Although not a direct measure of liberal

economic theory, per se, extensive analysis has found that those who embrace the policies

and institutions which foster economic freedom enjoy higher investment levels and better

economic growth (Fraser Institute, 2013), an analysis confirmed by Ireland’s strong FDI

environment, e.g. total stock increased from £178.5 billion to £205 billion whilst flows grew

by 43% to £23.7 billion between 2011 and 2012 (Central Statistics Office, 2013). Likewise, it



scored 0.037 for pre-establishment and 0.0075 for post-establishment on the OECD’s

regulatory restrictiveness scale. Further analysis of Ireland’s policy environment confirms

these findings. For example, Forfás identified two economic principles of Ireland’s foreign

policy as a liberal global trading environment and adherence to a strong, multilateral and

rule-based trading system in accordance with the WTO (Forfás, 2003 cited in Barry, 2011,

p.1). A recent policy statement released by the DJEI expressed similar sentiments:

Fundamentally, Ireland’s FDI policy is about competing successfully for the right FDI for

Ireland’s economy; it is about ensuring that those investments are sustainable and

contribute optimally to job creation and economic growth; and it is about ensuring that the

decision to invest in Ireland remains strategically the best choice for the multinationals who

are considering many alternatives today. (DJEI, 2014, p.3).

To achieve such ambitions Ireland has evaluated and incorporated key aspects of

international best policy practice into its own. This, alongside an analysis of global FDI trends

and FDI’s contribution to Ireland’s economy, as well as developing an understanding of

global business needs, has led to Ireland’s policy framework to 2020 which includes the

following (ibid, p.7):

1. Sustain Ireland’s strong FDI position in a global context that is progressively competitive

and challenging;

2. Foster a diverse and sustainable FDI portfolio;

3. Provide an ecosystem akin with the demands of MNCs and ‘mobile young companies’;

4. Extract optimum return on investments across all modes of investment;

5. Employ international best practice and gain system-wide coherence and collaboration.

Within this framework, Ireland will strive to maintain its competitive advantages in attracting

FDI whilst simultaneously promoting new factors to further differentiate itself in the realms

of talent, place-making and connecting world-leading research, e.g. the cultivation of



globally competitive and dynamic city-regions. These developments have led to the

development of 14 strategic action points which condense into two points (ibid, p.9):

1. Increase focus on export-oriented FDI to facilitate access to global value chains, improve

Ireland’s innovation potential and deliver wealth and job creation;

2. Identify and encourage the exploitation of FDI opportunities which can increase

productivity, address gaps in the strategic business environment and help with national

challenges, e.g. healthcare.

State intervention and promotional activities aimed at export-oriented firms will remain the

primary focus, as well as the continued targeting of Ireland’s leading sectors: ICT, life

sciences, international financial services, engineering and mobile projects, and content and

consumer business services. Despite incorporating global trends, which one assumes

includes the recognition of China as a major source of FDI, China is mentioned just five times.

However limited Chinese investment is acknowledged and attributed to disparate cultures,

business practices, and nascent business and political relations. It therefore states that one

imminent requirement is “a sustained commitment to high level political engagement and

economic partnership building.” (DJEI, 2014, p.13). Furthermore, it asserts that emerging

markets may require a different policy framework to the ‘mainstream’ hence the

establishment of the Joint Economic Commission with, for example, China (ibid, p.13). This is

considered crucial to establishing strong bilateral relations which have been found to be

positively correlated with Chinese investment in the EU (ibid; Clegg and Voss, 2012, p. 25).

The IDA’s general strategy framework - Horizon 2020 – sets out a number of targets the

most fundamental of which is to attract investment from new high-growth markets including

China (IDA Ireland, 2010). A specific China strategy has also been formulated which

somewhat compensates for the absence of China from this policy statement. It is one of few

documents to acknowledge the link between policy and strategy in achieving coherence and



collaboration (therefore presents a more promising picture than its UK counterpart). The

intent to build on a number of bilateral engagements is indicated, e.g. the Taoiseach’s visit

to China in 2012. Furthermore, plans are in place to advance relations with China, e.g. the

establishment of an inter-departmental and cross-agency working group to sustain the

momentum of developing relations supported by the Strategic Partnership Agreement

(signed in March 2012). Specific targets include maintaining trade and growth levels and

increasing the number of research collaboration and fellowship exchanges by a third. Some

initiatives are already underway, e.g. a Memorandum of Understanding with China’s

Ministry of Commerce (IDA Ireland, 2010). Despite this, Chinese investment in Ireland is

minimal. Just one firm was acquired in the period 2000-2010 and China partook in a mere six

GIs. Ireland also maintains an investment deficit with China regarding both stocks and flows

(Table 5). Exact figures on China’s investment are unavailable, but overall flows were an

estimated £116 million between 2003 and 201215. More recent investments include JY

Aviation’s announcement to establish European headquarters in Ireland in 2014, the third

Chinese aviation company to do so within an 18 month period (IDA Ireland, 2014).

The questionnaire’s findings (appendix nine) reveal general congruence with the above. The

respondent believes increased focus on China began in 2006 with the opening of IDA’s first

China office in Shanghai. China’s sizeable economy, government support for Chinese

companies and the opportunities it presents for Ireland are the prime reasons for targeting

China. It is understood that they maintain different positions on the global value chain but

that potential negativities can be offset through targeting high-end companies, primarily in

ICT, financial services and SOEs, as well as working with the Chinese government to release

funding. China is incorporated into the IDA’s overall strategy but also warrants a separate

strategy to allow the IDA to set specific targets and goals. The global/euro-crisis was not

15

This figure was obtained via the Economic and Commercial Counsellor’s Office at the PRC’s embassy in Ireland.



regarded as influential as the strategy was already in place. However the respondent did

state some difficulty in maintaining flows ‘post-crisis’, hence presence in China has been

increased (two offices have been opened in Beijing and Shenzhen), although this was again

believed coincidental. The key motivations identified to explain Chinese investment

somewhat correlated with those in figure seven. The respondent failed to realise the

strategic impetus to serve the Chinese market, to meet requests from EU/member state

authorities or from Chinese authorities to enter certain industries: as with UKIT’s Q1, a

comprehensive understanding of Chinese OFDI has not yet been developed. Ireland’s small

size was pinpointed as a prime differentiating factor: it facilitates one-to-one client support,

government access, ‘hand holding’, and the ability to access other similar companies,

research centres and the skills/human resources required. It was believed a BIT may have

benefited Ireland, as will the forthcoming EU-China investment agreement through

potentially helping to clarify what Ireland, beyond the IDA, seeks from China. This

corresponds with the respondent’s further comments: although there is a China strategy

there is no overall government initiative therefore no ‘one thought-process’ has evolved.

Likewise, although the IDA has identified what it wants from China – an investment similar to

the Piraeus investment – it remains unsure of how to achieve this. As noted in the DJEI’s

policy statement one overall policy and strategy is required; this sentiment is shared by the

IDA.

It is apparent that Ireland has accepted the need for a unique China policy, a recognition

which arguably stems from its appreciation of China’s divergence from ‘traditional

investment’ (hence its focus on SOEs and collaboration with the Chinese government), but

there is no indication of when this might happen. Its strategies are, therefore, at somewhat

of a loss given the missing link between theory and strategy: a unique China policy. Again,

the EU-China investment treaty may compensate for this, but only to a certain extent.


60 Conclusion

5. Conclusion

5.1 Summary

In conclusion “China’s spectacular re-emergence as a world power is now universally

recognised and the situation is exemplified in FDI, especially the dramatic rise of outward

FDI.” (Lian, 2011, p.104). Despite only actively engaging with the global economy since the

late 20th Century, China has become a major global destination of and source of FDI for

developing and developed countries alike, a feat accelerated by the 2008 global crisis. The

Chinese government has played a significant role in this success, for example SOEs

accounted for 66.2% of China’s OFDI stock in 2011. China is ultimately coming to challenge

the previous understanding that only developed countries can supply FDI. However its EU

investment remains minimal - China accounted for just 0.3% of stocks held in the EU27 in

2012, despite the two maintaining a strategic partnership since 2003. The perception of the

EU’s business environment indicates a continued preference for other locations, most

notably Africa and Latin America. This reflects China’s original motivation for engaging in

OFDI – access to natural resources. Yet the situation is undergoing change with Chinese

investment in the EU increasing significantly since 2006. Although many attribute this to the

opportunities presented by the euro-crisis, predominantly ‘cheap’ infrastructure, the supply

of goods and services to the European markets was identified as the prime incentive

according to a survey carried out by the EUCCC. Likewise, as China’s economy matures its

FDI players are increasingly in pursuit of EU brands, technology and know-how etc. hence its

significant investment in the EU’s leasing and business services, and financial intermediation

industries.

The EU has yet to develop a comprehensive understanding of Chinese OFDI. As the two

commence negotiations to establish a bilateral investment treaty, the need to develop this

understanding has acquired a heightened sense of urgency. This paper, in an attempt to


61 Conclusion

generate a broad understanding, has therefore sought to analyse China’s standing with

respect to mainstream FDI theories belonging to the IB school of thought. The findings were

somewhat predictable. Factors and aspects relating to institutional and cultural traits, state

involvement and diverse FDI motivations all confirm China’s divergence from mainstream

theory. Alternative theoretical motivations were considered but were not found to be fully

pertinent to the case at hand, despite incorporating highly relevant aspects. It is at this point

that the framework for an entirely new theory was put forward, incorporating the key

elements of Chinese OFDI which have been highlighted throughout the paper, e.g. state

involvement and the connection between FDI and infrastructural development.

China’s divergence has been found to have sparked some shift in the EU’s long-held belief in

economic liberalism. The increasing popularity of regulatory measures has coincided with

the rise of China as a major source of FDI; such measures are likely to be incorporated into

the forthcoming EU-China investment treaty. The EU’s strategic agenda further supports this

likelihood as it seeks to level the playing field and alleviate the various concerns associated

with the Chinese OFDI. Despite the shift in theoretical standing and the number of strategic

initiatives to be achieved, the fundamental component to connect these two – policy – has

not yet been finalised. The limitations of the EU’s role in devising a universal FDI policy was,

however, acknowledged hence the consideration of two member states – the UK and Ireland

– both of which follow the EU’s belief in economic liberalism. The findings concerning their

policy and strategy were as follows:

1. In the absence of a publicly available UK policy paper on FDI, its strategy was considered.

Despite the consistency between its general strategy with China and its FDI strategy

toward China, the findings of a qualitative questionnaire sent to UKTI exposed

institutional incoherence. This finding has significant implications for any potential future

policy toward China, especially given the expiry of its BIT with China in the near future


62 Conclusion

and the forthcoming EU-China treaty. UKTI is considered the UK’s national policy-maker

for FDI but its failure to align different departments around one coherent strategy holds

little promise for successful policy integration, defined as “the management of cross-

cutting issues in policy-making that transcend the boundaries of established policy-fields.”

(Meijers and Stead, 2009, p. 1)

2. Ireland’s recent policy statement on FDI has acknowledged the need to focus on

emerging markets such as China. Furthermore it explicitly notes the need to formulate a

unique China policy and to invest more resources in developing more extensive relations.

Its strategy paper, which acknowledges the link between policy and strategy, sets out a

number of initiatives aimed at increasing Chinese investment in Ireland, primarily

through increasing collaboration. Despite said acknowledgment, and the recognised

need for a China policy, it has yet to be devised. The questionnaire’s findings indicate

coherence to the strategy however the respondent noted that this coherence was

confined to the IDA. As with the UK, institutional incoherence prevails and the need to

overcome this was noted in the DJEI’s policy statement.


63 Conclusion

5.2 Key Findings

The findings can thus be summarised as follows:

Figure 19: Key Findings of this Paper

It is evident that theoretical divergence has been recognised, although this has not

necessarily been explicit. This has spurred a move to develop more suitable policy measures,

though these have yet to come to fruition. If the strategic agendas of the EU, the UK and

Ireland are to be achieved the missing link – policy – is urgently required. Granted

investment in the EU is increasing, and the UK has attracted significant investment, but as

The UK and Ireland

Theory: China's divergence from mainstream theory has been inexplicity recognisied.

Ireland has explicitly stated the need for a unique China policy yet the UK, despite developing a strategic agenda for China, has yet to state its intent to do the same.

Strategy: Both have set out strategic objectives, aside from general strategies, aimed at increasing Chinese investment in their respective countries.

Strategy The EU has laid out the strategy it wishes to pursue concerning Chinese investment. Specific reference to a level playing field and the advantages Chinese firms maintain in China confirm a strategic agenda that incorporates both liberal and regulatory policy measures.

Policy The EU is likely to implement a policy that will cover both pre and post establishment investment conditions, a trait distinct from current policy measures enclosed in member state BITs. In essence it will seek to establish an investment environment that is more favourable for both parties., although one cannot say with certainty EU member states are likely to follow a similar path in those policy areas the EU cannot cover. Ireland's indication of the intent to devise a specific China policy confirms recognition of the issues associated with China's divergence from mainstream theory.

Theory China diverges from mainstream FDI theory due to various factors including state involvement and cultural factors. The EU's economic liberal policies are thus challenged to new extremes; regulatory measures come to the fore in an effort to alleviate the concerns of Chinese OFDI in the EU.


64 Conclusion

the global FDI environment intensifies, and its composition continues to undergo change,

relevant policies will acquire more importance and strategic significance. Ultimately, strategy

is derived from theory and is idealistic in that it outlines what is desired. Policy is the means

to realise a strategy and, subsequently, adopts a more realistic stance. As noted the EU-

China agreement will form a large component of each member state’s policy, but its

limitations have also been noted - something no member state can afford to ignore.

5.3 Key Recommendations

Based on such findings, a number of recommendations can be made:

1. An analysis of Chinese OFDI needs to be undertaken at EU level in order to develop an

extensive understanding of its prime motivations and rationale.

2. The framework outlined in this paper for a theory wholly relevant to China needs to be

developed into a fully comprehensive theory.

3. The relationship between theory, policy and strategy needs to be recognised and noted

at all levels. Acceptance of China’s uniqueness at a theoretical level and the formulation

of strategic objectives are inconsequential if a China policy is not devised. Policy is the

integral element in the relationship between the three: it sets out how the objectives will

be achieved. The EU has a lot to gain from China but such gains will not materialise

without a relevant policy.

4. Institutional incoherence needs to be addressed if policy integration is to be achieved.

This implies coordination and collaboration between all departments in an organisation,

and all relevant parties involved. To achieve this, a number of factors need to be in place,

including consensus on what needs to be achieved, similar resources and goals, and

frequent communication and exchanges of information (Halpert, 1982 cited in Meijers

and Stead, 2009, p. 7).


65 Appendix

Appendix

Appendix 1: Chronology of China's Rise

Date Event

1949 People’s Republic of China founded

1952 1st 5 Year Plan for economic development implemented

1958 Great Leap Forward (abandoned 1961)

1966 Cultural Revolution (lasted until 1976)

1976 UN recognition moved from Republic of China to People’s Republic of China

1978 Deng Xiaoping became de facto ruler: Four Modernisations

1980 PRC becomes a World Bank and International Monetary Fund member

1989 Tiananmen Square

1990 Shanghai and Shenzhen stock markets open

2001 Shanghai Cooperation Organisation created; awarded 2008 World Olympics, WTO accession

2005 Zoellick’s ‘responsible stakeholder’ speech Source: Bergsten et al., 2009


66 Appendix

Appendix 2: A Brief Historical Overview of Sino-EU Relations

May 1975 Diplomatic relations formally established

May 1978 Joint Committee established via signing of trade agreement between European Economic Community and China

May 1985 Signed Agreement of Trade and Economic Cooperation

October 1988 EC opens delegation in Beijing

June 1989 Tiananmen Square: relations with China frozen

October 1990 Agree to re-establish relations (EC)

June 1992 New political dialogue established

July 1995 EC publishes first Communication ‘A long-term policy for China-Europe relations’

Launch of human rights dialogue

April 1998 1st EU-China summit

December 2001 China becomes a WTO member

March 2003 Economic and Trade Office opened by EC in Taiwan

October 2003 China publishes first policy paper on the EU

6th Summit. Agreements reached on:

Galileo satellite navigation system

Industrial Policy Dialogue

EU-China Dialogue on IP

May 2004 Chinese Premier Wen Jiabao visits EC HQ

July 2006 EC President José Manuel Barroso visits China

September 2006 9th Summit: Agreement to open negotiations for new comprehensive framework agreement.

November 2007 10th Summit: Agree to establish High Level Economic and Trade Dialogue.

November 2009 12 Summit: Agree to speed up negotiations regarding Partnership and Cooperation Agreement.

October 2010 13th Summit: Issues regarding global governance, trade and investment as well as how to strengthen political dialogue discussed

November 2013 16th Summit: Adoption of the EU-China 2020 Strategic Agenda for Cooperation

Source: EEAS, 2014


67 Appendix

Appendix 3: Ghemawat’s CAGE Framework

Source: Ghemawat, 2001

Culture

Language, ethnicities, religions

and social norms etc.

Administrative

Colonial ties,monetary/political associations, government policies, political

hostility and institutional weakness etc.

Geographic

Physical remotenss, land borders, sea/river access, climate and size etc.

Economic

Consumer incomes and differences in the cost/quality of human resources and

natural resources etc.

CAGE Framework


68 Appendix

Appendix 4: Institutional Reform in China: Goals, Means and Limiting Forces Goals of Institutional Reform Means of Implementation Limiting Factors

1) Government:

Market economy with socialist characteristics

Withdrawal of government from direct business governance

Strong and globally competitive Chinese firms

Open door policy, creation of a national market and reforms of SOEs

Decentralisation and privatisation

Development of competitive domestic markets and import of foreign technology and know-how

Resistance to change by some political factions and SOEs

Fear of control loss and central-local tension

Difficult for Chinese firms to develop global brands and sustain high R&D costs

2) Structure of industries and firms

An open, competitive structure driven by private and joint stock firms

Achievement of economies of scale and scope

Favoured development of pillar industries

SOE rationalization and experiment with different forms of business

Merger and acquisition in the context of a national market

Retention of government policy involvement in pillar firms

Unemployment and social unrest

Local protectionism

Ability of government to ‘pick winners and to grow SOEs into serious competitors to MNCs

3) Intermediate Institutions

Professional and efficient business support services

Large effort into managerial, professional and technical training

Enlistment of support from foreign professional bodies

Resource deficiency (experience and know-how)

Lack of legal and professional tradition

Government restrictions on selected areas of foreign involvement in services Source: Child and Tse, 2001, p.7


69 Appendix

Appendix 5: The 6D Model of Hofstede’s Cultural Theory

Source: The Hofstede Centre, 2014

•Definition: "the extent to which the less powerful members of institutions and organisations within a country expect and accept that power is distributed unequally."

Power Distance

•Core issue if "the degree of interdependence a society maintains among its members." Individualism

•Refers to extent to which a society is driven by competition, the need to win/be successful, and achievement. Masculinity

•A concept which deals with how a society copes with the unknown. The coping mechanism is embedded in the society's beliefs and institutions. Uncertainty Avoidance

•"This dimension describes how people in the past as well as today relate to the fact that so much happens around us cannot be explained." Pragmatism

•Definition: "the extent to which people try to control their desires and impulses." Indulgence


70 Appendix

Appendix 6: The Change in the Political and Ideological Attitude of EU Member States toward China Pre and Post Euro Crisis.

Source: Godement et al., 2011, pp.8-9


71 Appendix

Appendix 7: UKTI Questionnaire 1

1. What is your position within UKTI?

2. Briefly explain the activities of United Kingdom Trade and Investment (UKTI).

3. In what year (approximately) do you believe that the UK began to increase its focus on

attracting FDI from China?

4. In your opinion, what are the main reasons for targeting China?

5. What are the main industries targeted in China?

6. If possible, can you please identify the primary firms targeted within each industry

named?

7. Do you believe the UK and China maintain similar positions in the global value chain?

Yes x

No

If no, why do you believe the UK continues to target China for FDI given the potential for

negative impact on economic development?

Please find it on our website: www.ukti.gov.uk

The UK has always been focusing on attracting FDI from China, especially with the new investment

target.

Boosting prosperity, booming successful and well performed enterprises/entrepreneurs.

Infrastructure, ICT, advanced engineering, healthcare, properties, creative, energy.

Wanda, Greenland, Huawei

Planning and Performance Management


72 Appendix

8. How would you describe UKTI’s approach to China?

China is incorporated into the overall strategy of the organisation.

China requires an adapted version of the overall strategy.

China warrants a strategy of its own.

Other.

Please explain your answer.

9. Do you feel that the global and/or euro crisis had any impact on the UK’s China strategy?

Yes

No


10. Data shows that Chinese investment flows into the EU (and likewise the UK) increased

following the euro crisis. Has the inflow been difficult to maintain?

Yes

No


11. What do you think are the main motivations behind Chinese investment into the EU?

To provide goods and services for the European market

To provide goods and services for the Chinese market

To use local intellectual and R&D resources

To provide goods and services for other markets (not China or Europe)

Meeting requests from Chinese customers/partners to enter the EU


Meeting a request from an EU Member State or authority

Not able to answer as UKTI is customer focused service delivery organization rather than a research

body.

UKTI’s job is to bringing inward investment projects. Maintenance is not our core job.


73 Appendix

Meeting a request from Chinese authorities to enter strategic industry sectors

Other

12. Are there any motivating factors which differentiate the UK from the EU in terms of

attracting Chinese investment?

Yes

No


13. Do you feel that the UK’s bilateral investment treaty with China has influenced Chinese

investment in your country?

Yes

No


14. Do you feel that the forthcoming EU-China investment agreement will help or hinder the

attraction of FDI for the UK?

Help

Hinder


15. Do you have any further comments?

Favourable policies, taxation policies, transparent and fair business environment, easy to setup, easy

to get Visas

Again, not able to answer. We haven’t been doing any research over such.

Any agreement is supposed to favour both parties.

No.


74 Appendix

Appendix 8: UKTI Questionnaire 2

1. What is your position within UKTI?

2. Briefly explain the activities of United Kingdom Trade and Investment (UKTI).

3. In what year (approximately) do you believe that the UK began to increase its focus on





named?

7. Do you believe the UK and China maintain similar positions in the global value chain?

Yes

No

I am employed by PA Consulting who has an outsource contract from UKTI to deliver FDI in the UK.

This is known as the UKTI Investment Services Team (IST). My role is to lead on emerging markets for

UKTI IST.

UKTI has had an investment team in China since 1998/99.

To attract investment in to the UK that will lead to more jobs and greater economic prosperity for

both countries.

Advanced Engineering, Energy & Environment, Life Sciences, Info Technology, Business &

Professional Services,

No – this is confidential but is usually the largest/leading companies in each sector.

Head of Emerging Markets


75 Appendix

If no, why do you believe the UK continues to target China for FDI given the potential for


8. How would you describe UKTI’s approach to China?

China is incorporated into the overall strategy of the organisation.



Other.


9. Do you feel that the global and/or euro crisis had any impact on the UK’s China strategy?

Yes

No


China takes a long term view of things so short term market disruption did not impact their

plans.

10. Data shows that Chinese investment flows into the EU (and likewise the UK) increased


Yes

No


UKTI has overall aims and targets but each market will deliver against this in a different way

reflecting market conditions, resources and maturity for inward investment.

The investment from China has been growing in to Europe over the last few years. I don’t think this

was anything to do with the euro crisis but a natural growth as part of their “going out” strategy.

There is no negative economic impact. Some industries the UK leads so Chinese companies are

coming here to be suppliers. Other areas, China leads the way so UK companies can supply in to.


76 Appendix


To provide goods and services for the European market








Other

12. Are there any motivating factors which differentiate the UK from the EU in terms of


Yes

No


M

13. Do you feel that the UK’s bilateral investment treaty with China has influenced Chinese

investment in your country?

Yes

No


There are basic inward investment advantages of comparing the UK and China – tax, language, legal.

However, many Chinese value the UK brand. So, Chinese companies setting up here can associate

themselves with this.

Anything that promotes trade and investment between the 2 countries has to be encouraged.


77 Appendix


attraction of FDI for the UK?

Help

Hinder



See previous answer

Happy to discuss.


78 Appendix

Appendix 9: IDA Ireland Questionnaire

1. What is your position within the IDA?

2. Briefly explain the activities of IDA Ireland.

3. In what year (approximately) do you believe that Ireland began to increase its focus on





named?

7. Do you believe Ireland and China maintain similar positions in the global value chain?

Yes

No x

If no, why do you believe Ireland continues to target China for FDI given the potential for a


The IDA is responsible for the development and promotion of foreign industry and enterprise in Ireland. The

IDA is focusing on attracting high value investment into Ireland such as Research & Development activities,

European Headquarters, Advanced manufacturing and supply chain management activities in the following

business sectors: Life Science, ICT, Engineering, Consumer Content & Business Services, and International

Financial Services

IDA Ireland opened its first office in Shanghai in 2006 since then we have expanded our presence with

two additional offices; Shenzhen & Beijing.

It’s the second largest economy in the world. In recent years the Chinese Government granted support to Chinese companies expanding overseas. Huge opportunity with many world leading companies.

ICT & Financial Services.

Confidential

IDA targets the high-end industries and sectors, and seeks volume in jobs where possible. Many of

these are SOEs; IDA does work with the Chinese government to release the necessary funding to

achieve this. And Ireland wants the capital investment.

Business Development Executive – Growth Markets


79 Appendix

8. How would you describe the IDA’s approach to China?

China is incorporated into the overall strategy of the organisation. x



Other.


9. Do you feel that the global and/or euro crisis had any impact on Ireland’s China strategy?

Yes

No x


10. Data shows that Chinese investment flows into the EU (and likewise Ireland) increased


Yes

No



To provide goods and services for the European market x







x

China is part of the wider IDA strategy as part of Growth Market target plan. The China team also

have a specific strategy to achieve the targets set out in the overall IDA strategy.

It was already devised so did not change.

Although it was slightly coincidental IDA’s presence in China has increased. Chinese government has

also proved influential.

x

x

y

x

x


80 Appendix


Other

12. Are there any motivating factors which differentiate Ireland from the EU in terms of


Yes x

No


13. Do you feel that Ireland’s position as the only EU country not to have concluded a

bilateral investment treaty with China has influenced Chinese investment into Ireland?

Yes

No



attraction of FDI for Ireland?

Help

Hinder



Ireland is a small country which enables one-to-one support for clients, and government access. It

also allows for hand-holding, and provides access to other similar companies, research centres, the

skills required and the people needed.

C

C

y

If it were operationalised, may have had a positive impact.

May help to clarify what Ireland is actually looking for as they are still quite unsure.

There is no government initiative toward China meaning no ‘one-thought process’ has evolved. Ida

Ireland do know what’s wanted but still don’t know how to get it: they want a similar situation to

that of the Greek port but to achieve it need more parties on board, e. g. the Department of Finance

and Tourism Ireland. In addition, all parties involved in targeting China, e.g. Enterprise Ireland, need

to follow one policy and strategy; at present all operating off different bats.


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MSc East Asian Development and the Global Economy - Dissertation - Ruth Millar

Documents

policy analysis

eu policy change

policy responses

chinas divergence

theoretical divergence

traditional fdi theories

strategic implications

strategic change