Geographic Distribution of Chinese FDI

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2012) The CIC and with it the entire spectrum of multinational companies from China, have thus reached a turning point towards establishing a global reach- making it possible to acquire a foothold across all industries, worldwide.

5.6 Geographic Distribution of Chinese FDI

If the amount of media coverage were taken into consideration for this analysis, it may appear that the PRC has indeed been steadily on track to buy up the entire global M&A market. Given its immense foreign exchange reserves, this view appears all the more likely. In a similar vein, the statistics of the Chinese ministry of trade, as well as those issued through OECD and UNCTAD appear to underline the tremendous increase in FDI outflows from China over the past years. While already starting in the billion dollar range, analysts underline that OFDI from China multiplied by factor nine between 2002 and 2007 alone.

It is indeed breathtaking how quickly Chinese enterprises appear on foreign markets even in the most remote parts of the world. However this should not obstruct the observation that China’s OFDI is still rather limited. In 2009, it measured up to only one quarter of that of Hong Kong. (Heidel 2010a, 9) While if Hong Kong and

Mainland China were counted together it would make for around the same amount of OFDI as Germany, still the parity is considerable. Furthermore, a large share of Chinese FDI is regionally concentrated. In 2009, 75 per cent of Chinese investments went to neighboring Asian countries. According to the Chinese Ministry of Trade, Asian countries were followed by Latin America with around 12 per cent, Africa with only 4 per cent and Europe accounting for a mere 2.6 per cent.

Those leading the pack as Chinese investment destinations in Asia were Hong Kong, Singapore and Macau. This is by far no surprise- all of the above serve as tax havens to Chinese businesses. In fact, if all streams of OFDI emerging from China are

analyzed on a global scale, we can find a surprisingly large amount of money going to tax havens such as the British Virgin Islands or Bermuda:

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„The top locations are Hong Kong and Caribbean tax havens. These consistently account for about 70% of the flow. These countries provide confidentiality to foreign investors, and so are commonly used by

multinational firms to store wealth beyond the purview of tax authorities (Harris, 1993). (...) Chinese subsidiaries in these countries might serve as holding companies for investments elsewhere (...)“ (Morck 2007, 4)

Indeed this poses a grave analytical problem. If a substantial part of Chinese OFDI is in fact flowing to tax havens and is then redistributed through holding companies, it becomes difficult to comment on the true size or geographical distribution of Chinese FDI. (Quer/ Claver/ Rienda n.d., 7) As FDI that is channeled into tax havens and offshore financial centers will typically be invested elsewhere, or remitted to a prior destination at favorable terms, these tax havens are not the ultimate point of

investment for the FDI. (Cheng et al 2008, 19)

This may well indicate, that a substantial part of Chinese FDI is indeed not FDI in the actual sense of the word, but much rather “(…) flows following circuitous routes through tax havens (Virgin Islands, Cayman Islands or Bermuda)” (Milleli et al 2008, 10) and ultimately back into China. Indeed this raises another question with regards to Chinese OFDI, as some officials from Chinese firms may use tax havens moving funds abroad to acquire them for self-enrichment- thus casting doubt upon the very

“(…) extent to which economic fundamentals genuinely drive China’s outward FDI.“

(Morck 2007, 5)

While this may cut down the actual amount of OFDI from China, other factors further obstruct our knowledge from another angle. As China has gradually opened up the possibility to raise funds abroad, a large share of what is raised (through reinvestment of earnings, loans through the parent company or new equity through financial

markets) is not taken into consideration by official statistics. Beyond this, a Chinese company may prefer to discount the amounts invested for fear of facing foreign exchange controls. (Milleli et al 2008, 10) However given the gradually liberalized FDI regime in China, this influence should have substantially diminished in size and importance.

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While numbers themselves are clearly more obstructing than in any way helpful, the only possibility is to analyze Chinese OFDI excluding the dominant tax havens of Cayman Islands and British Virgin Islands. If analyzed exclusively, “(…) the top 10 recipients of China’s FDI in 2005 were Hong Kong (which is also a tax haven), South Korea, US, Russia, Australia, Germany, Sudan, and Kazakhstan. In 2004, Indonesia, Singapore, and Nigeria replaced South Korea, Germany, and Kazakhstan.“ (Ma/

Cheng 2007, 9) Interesting to note is the mixture of highly developed countries and resource rich nations alike. The China Council for the Promotion of International Trade found in its 2010 Survey on “Intentions of Outbound Investment by Chinese Enterprise”, that developed countries (EU and US) have an increasing appeal for Chinese investment. (CCPIT 2010, 8) The most attractive countries for Chinese investors are „(...) the United States, followed by Japan, France, Germany and Hong Kong. Chinese companies seem thus to prefer big markets by investing in the Triad but also geographically close markets (...)“ (CCPIT 2010, 54)

Likewise, the growth rates for Chinese FDI in markets that are either resource rich or highly developed have increased faster than in other investment destinations. In Africa, the Chinese investments grew by factor 19 between 2003 and 2009. The same is true for the European countries, which experienced a growth of FDI from China by factor 18 within the same time-span. While Chinese investment has overall

experienced a growth rate by factor four between 2005 and 2009, the rates achieved in Europe and Africa by far outpace those achieved in Asia or other parts of the world.

(Heidel 2010a, 10) In general, two types of thriving destinations for Chinese FDI can thus be distinguished:

„Europe and North America aiming at strategic-assets and efficiency seeking investments (in capital and technology-intense goods and

services) and Asia, including Central Asia and Russia, Middle East, Latin America and Africa as a market and resource-seeking (OFDI labour-intense).“ (Krusiewicz 2011, 10)

Furthermore it appears, that while China follows one motive in developing countries (resources and markets), its strategies in the developed markets are multifaceted and

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driven by a host of motives. These include access to markets, technology, knowledge, management skills, brands and efficiency gains. (Zhang/ Filipov 2009, 10)

The developed markets take a special place among Chinese investment destinations.

While technology and skills are what drives Chinese investors to them in general, still the sectors of interest for Chinese FDI are different from US to Europe. The largest proportion of investment towards the USA was in the banking and finance sectors (with a total value of 19,50 billion US$, accounting for two thirds of all Chinese OFDI in North America). Europe, on the other hand has been the main target for investment in energy, power and transport sectors. (Krusiewicz 2011, 24)

The US as well as Europe are both on the cusp of becoming important investment destinations for the Chinese. Both US and Europe are themselves investors to other parts of the world and have experienced an inflow of investment to their domestic markets. Thus both the US and Europe are familiar with foreign investment, yet the case of Chinese OFDI is somewhat of a different nature:

„Prima facie, the rise of Chinese investment in Europe differs from earlier waves of investment from the United States and later from Japan. Many Chinese firms are going abroad to become globally competitive rather than to exploit advantages developed at home.“ (Nicolas et al 2008, 2)