B|Brief : Cash in Hand - Welcome Chinese Investors

APRIL 13, 2012

CASH IN HAND: WELCOME CHINESE INVESTORS

by Ting Xu Over the past decade, outward investment from China has grown at a blistering pace: It has risen nearly 50 percent annually since 2002. At the same time, Beijing’s foreign direct investment (FDI) has migrated from the developing to the developed world. In 2010, Chinese investment in Europe and North America reached US$9.54 billion, more than quadruple the level only two years prior. The timing of this financial injection could not come at a better time for those regions’ liquidity-constrained markets seeking foreign capital.

But the trend raises challenging new policy questions for the developed world and China: How can the benefits of such investments be maximized? How can a predictable, secure and cooperative business climate be cultivated for Chinese investors? More fundamentally, how can the gap between political and business cultures be narrowed to facilitate coordination and understanding among partners?

To suggest a way forward, the Bertelsmann Foundation has just released a report addressing the importance of creating a framework for Chinese FDI in the developed world. “Cash in Hand: Chinese Foreign Direct Investment in the US and Germany” examines the investment policies and climates of two rapidly growing destinations for Chinese investment.

As recently as five years ago, industrialized countries had little cause to discuss Chinese FDI within their borders. Now, however, old assumptions about the confinement of China's "going out" strategy to a quest for natural resources are outdated. Beijing is increasingly adapting its FDI strategy to its evolving needs, and that means access to new technologies, skilled labor and new markets, reduced currency reserves, asset diversification, and a greater capacity to provide for an aging population.

To meet these goals, the Chinese see the US and Germany as two attractive investment destinations. Both countries offer skilled labor forces, an extensive array of highly respected brand names, and a generally welcoming investment climate.

Chinese investment – particularly through mergers and acquisitions – in the US and Germany has grown exponentially recently but still accounts for less than 0.2 percent of each country’s total inward FDI. You wouldn’t know that, though, from many media reports, especially in the US, which have portrayed China’s moves as national-security threats and consequently raised tensions in bilateral relations. Highprofile political firestorms over CNOOC’s unsuccessful attempt to acquire Unocal and Huawei’s failure to buy 3Com have overshadowed successes such as Lenovo’s alliance with IBM and Suntech’s jobcreating investments in solar-panel manufacturing and R&D. This has had a chilling effect on potentially advantageous future investment.

Security concerns are not the only impediment. The Chinese corporate sector has an inadequate understanding of navigating the American and European business and political landscapes. In the US, many Chinese business representatives lack a nuanced understanding of Congress’ central role in shaping investment policy.

Chinese businesses have had until recently a smoother ride in Germany and throughout Europe. But a recent acquisition attempt in the Netherlands has raised European concerns about investment. Xinmao Group’s unnecessarily (and unsuccessful) high bid for Dutch cable manufacturer Draka – the Chinese conglomerate bid nearly 20 percent more than its nearest competitor – was a sign for Europeans that Chinese companies may derive an unfair advantage from access to cheap state credit. As a result, a proposal circulating in Brussels calls for Europeans to set up an FDI investigation committee similar to the Committee on Foreign Investment in the United States (CFIUS).

Moving Forward: A Unified Approach Given the gaps in information and understanding, all parties should have an interest in building mechanisms for coordination and cooperation. Trade fairs, for example, are effective tools for spurring business. An annual US-EU-China investment fair could prove a similarly powerful catalyst for FDI. Agreements, such as the currently moribund US-China bilateral investment treaty, could be resurrected through trilateral consultations that include the EU. And an effort to establish international standards for data would provide investors with a reliable resource for making informed business decisions.

Beijing should also take the initiative by establishing investment-promotion agencies with local branches that support investors and collaborate with counterparts abroad.

There’s much at stake. Chinese investors, cash in hand, are now regularly knocking on doors throughout the developed world. Countries willing to let them enter will reap the benefits that accrue from foreign investment: more and better jobs, and stronger economic growth. Countries that keep the door shut have much to lose. The US and Germany need to put out the welcome mat while having a clear strategy for protecting their interests. And once invited in, Chinese investors need to be better prepared for the new business climate in which they wish to operate.

Ting Xu is a senior project manager at the Bertelsmann Foundation. ting.xu@bfna.org ABOUT THE BERTELSMANN FOUNDATION The Bertelsmann Foundation is a private, non-partisan operating foundation, working to promote and strengthen trans-Atlantic cooperation.

Serving as a platform for open dialogue among key stakeholders, the foundation develops practical policy recommendations on issues central to successful development on both sides of the ocean. ©Copyright 2012, Bertelsmann Foundation. All rights reserved.

1101 New York Avenue, NW, Suite 901 • Washington, DC 20005 USA • Tel: +1.202.384.1980 www.bfna.org