International Conference/Conferencia International
The BRICS in Turmoil/Los BRICS en la Tormenta
La Universidad de Guadalajara
&
Le Séminaire BRICS (FMSH) Paris
Chapala, June 5-7, 2017
Chinese FDI in the EU and the US:
Catching up, Market shares and/or
Integrating international value chains ?
Xavier Richet
Emeritus Professor of Economics
Jean Monnet Chair
University Sorbonne nouvelle , Paris
Main points
• FDI from emerging countries
and new globalization
• The drivers of
internationalization
• Chinese FDI in the EU and the
EU
• Catching up, diversification,
dependencies?
Before the last globalization….
• The Asian Dragons
• Taiwan: high specialization, small domestic market, strong innovation: finding
outlets. South Korea: innovation, upscale, industrial policies, link-state-enterprises.
• In both cases, early internationalization, absence of foreign presence, importance of
reverse engineering
• Japanese Experience (not quite an emerging one):
• Industrial policy, nature relation state-enterprises (cooperation-competition).
Reverse engineering very advanced, absence of foreign capital.
• Majority of Japanese FDI in the 70s-80s: Blank investments. Technological,
organizational and managerial advantages pre-exist. Not the case of China
• Substitution of imports, closed economies
• Soviet Fiasco
• Brazil: Dualism?
Emerging economies and Internationalization
• A new phenomenon, located mainly in Asia but other experiences: the
BRICS (J. Vercueil), Breakout Nations (R. Sharman)
• Emerging economies: Regular growth, creation / exploitation of
competitive advantages, financing methods, emergence of new operators,
openness, role of the State, foreign capital (inward FDI), mode of
integration in the world economy.
• China: Capacity of endogenization, diffusion through the industrial
network, technological catching-up in key sectors.
• India: Exploitation of sectoral competencies (drugs, communications) and
organizational (private conglomerate structures), but strong industrial and
social fragmentation, limited dissemination
• But still dependent economies? Hierarchization within the globalization?
The « New Globalization »..
• Change of mind (Richard Baldwin: The Great Convergence)
• Reduction of time, distance, production.
• Firms of developed market economies: Principals
• Host countries of eastern Europe, southern countires: receptors.
• Face-to-face investment in technologies and low costs:
• The leverage effect
• International Value Chains
• Issuing centers: innovation, finance, design, organization
• Receiving countries: reception of fragments of production, services, research ..
• Receiving country strategies: catching up
• No more territory as a base (trade, tariff, protection),no more "national capitalism".
• Ability to integrate, Mastering know-how, technology?
MNC Growth and Globalization
• A new industrial and financial system within globalization
• Cross-border investments between developed countries: the main trend
• At the heart of each regional production system (+ European FDI -> US than to Asia)
• Barriers to entry in China: proction from competition
• MNC from emerging economies
• Companies operate in traditional industries (mining, metallurgy), protected (banks,
telecom), generally state-owned firms
• Catch-up, innovation in certain sectors
• FMN from emerging countries: strong growth recently (W. Andreff)
• Western MNC within Globalization:
• Main actresses, first beneficiaries in terms of production, volume, innovation, profit,
market dominance
• Apple and Boeing stock market capitalization = Chinese outgoing IDE stocks.
China: Still a limited Internalization of Firms
• In terms of:
• Capitalization of multinational firms. Exceptions Tencent, Alibaba, (= Exxon, half Apple)
• Methods of financing: limited capacity of non-political banks (i.e. related to central
government
• Integration through the multiplication of sites: pb of international and intercultural
management,
• Tendancy to acquire companies in bankruptcy: IBM, Volvo, PSA, McCormick, Club Med or
segments of companies with low or medium value added
• Strategic alliances to conquer some markets:
• Nuclear power plants with EDF -> Great Britain
• Many barriers to entry: Hostilities and protection measures (US, Germany, soon
EU)
• Impact of the anti-corruption campaign, the devaluation of the Yuan, the decline
in Chinese financial reserves on financing capacities
China: Conquer the world market or dominate the
domestic market
• Paradox of Acquisition Strategies
• Acquire strategic (high-tech) assets to repatriate technology to the domestic market
• Geely / Volvo (Sweden): Purchase of a subsidiary of Ford, bankrupt, at a good price. Develop
in China on the premium segment, then export to the US new models designed in China
(Model Lynk & Co ..)
• YTO / McCormick (France): Competition between state and private Chinese firms and then
disassembly? Bringing technology back to China.
• Kaku (Robots): -> robotization of the Chinese industry
• Various reasons for acquisition (and, to a less extent) greenfields:
• Specialization and Deepening in certain sectors: in the case of technology companies:
acquisition, market shares in the north
• Diversification: financial companies, real estate, insurance & finance, leisure, hotels,
entertainment (Hollywood!)
• Breakdown: New entrants, small family investors, firms with high potential in terms
of innovation: global
A Limited Internationalization?
• South-South: limited internationalization:
• No integration, no training of regional value chains (Latin America, Africa)
• Difficult to acquire firms in the strategic sectors (oil, raw materials): the largest
companies in these regions are state-owned firms
• Inadequate financial resources:
• Chinese financial resources kept for the protection of the domestic financial system
• Under-developed domestic market . Solicitation of foreign financing for operations
abroad (Serbia, Poland). Financing on the US bond market to increase capital
• Difficult arbitration between capital increase, bond issue, borrowing, use of own
funds (cash flow)
• Trade Off IDE / Provision of Services:
• Construction of highways, railways in remote places. Who is financing?
China: Inward FDI and Dependency?
• Role of inward FDI in the development of many sectors,
• Telecoms, automotive, finance.
• Sectoral and intersectoral propagation, downstream, upstream (innovation).
• Role of domestic and foreign subcontracting
• A particular economic model:
• State-private, "fragmented authoritarianism" (power of the provinces), a continental
space, economies of scale (try and errors)
• Shadow banking, underdeveloped markets and institutions: capital, labor, saving,
health, retirement -> Poor allocation of resources.
• Manipulation of the exchange rate. Commercial surplus, dependence on a model of
growth driven by imports difficult to give up.
• Search for a new growth model
• Endogenous growth, the importance of innovation, change the range of products,
especially exportable.
Different stages of internationalization
• Different phases and directions, different actors
• Several steps: low profile under Deng Xio Ping; Going global, late 90s-early 00s, Acceleration with accession to the WTO and
the crisis of 2007-2008.
• Different actors:
• State enterprises, companies of capital, foreign subsidiaries, private firms
• OBOR / BRI: an ambitious project: sinocentric globalization fereting several province, companies..
• Different reasons:
• Access to primary resources (South-South): Central Asia and Middle East, Latin America, Africa: access to raw materials,
« reprimarization « of exporting countries - Brazil (P. Salama)
• Market access: Specialization (low-cost, low- and medium-value-added products, south and north.)
• aturated domestic markets: automobiles in Uruguay, Belarus, Algeria ...
• Access to strategic assets: south-northInsertion into regional and global value chains: smiling curve ..
• Escaping capital
• Abundant financial resources ..
• Soft budget constraints
• Political Finance
• But melting reserves? (Capital flight)
At the heart of specialization: State Industrial
policies + Inward FDI
• At the heart of specialization
• State enterprises, privileged access to R & D, financing, access to markets (JF Huchet)
• State enterprises, non-state companies, foreign firms: cooperation / competition
• The dualistic R & D eco-system , different modes of access, different strategies
• Know-how Transfer and Mastering
• Learning Curve: Limited? (Th. Pairault)
• Innovation / imitation .. Duplication or enrichment of technology
• National innovation system specificity (Zhao Wei) -> different pace of innovation, of access to
finance,
• Breakout Technologies
•
•
•
•
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High-speed trains, Comac C999 aircraft: technology transfer
GAFAM (Google, Apple, Facebook, Amazon, Microsoft) vs. BATX (Baidu, Alibaba, Tencent, Xiaomi)
Electric cars, solar panels ...
Lenovo, Huawei ... at the frontier of two eco-systems
Communications, e-commerce, telephony (Tecent, Alibaba)
A Mixed Innovation System
Value Chain and Catching Up
Chinese Outward FDI
• Almost exponential growth since joining the WTO and the 2007-2008
crisis
• Global distribution with concentration in certain regions
• The Dunning Investment Development Path?
• FDI or benefit abroad?
• Capital outsourcing, outsourced productionForeign service: production of
foreign infrastructure financed by Chinese and / or foreign capital:
motorways, railway lines in the Balkans, Central Europe.
• Outbound FDI by Western FMN branches?
• Automotive sector: Chinese FDI in Algeria and Morocco by Chinese
subsidiaries of Ford and Renault based in China. Nesting trusses ..(Th Pairault)
Asset Acquisition or Multinationalisation?
• Beside the main destinations:
• Circular investments, financial paradises (HK, British Virgin Islands..) . Refuges to
escape the control of the state or financial palforms to reach other markets
• In the north: asset research, brand purchases, market shares for higher
value-added products
• South: raw materials, agricultural products, markets for low- or mediumsized products V.A., High wage costs in China -> offshoring in Vietnam,
Cambodia
• Chinese Multinationals
• Truly global groups? Very few operate internationally (Haier, Lenovo.Huawei, Geely
• Absorption of technological capacities and Innovation still necessary at the domestic
level but some notable successes: Geely-Volvo s, Born globals companies in high and
medium tech.
Many Actors, Destinations, Sectors..
• Actors:
• State, central government, provinces, state enterprises, non-state, capital, private, family SMEs
Funding. State, commercial and equity banks. (Soft budget constraint for state-owned enterprises)
• Destinations
• The whole world, but first Asia, Am Lat, Africa, Europe, USA. Europe or the United States?
• Objectives:
• Specialization, Deepening vs Diversification. Technologies: medium, high
• Asset seeking vs. Markets
• Evasion, Circular investment, Valuation (real estate)
• Sectors:
• Southern Raw Materials,
• North Technology, Finance, Services
• Entry modes and control:
• Acquisition> greenfield investments
• Majority stakes in strategic investments, minority in financial investments, more risky
Variety of Investors
Slides removed from the original presentation
US: Targeted Sectors
• Agriculture and agri-food: purchase of a hospitality firm
Automobile. Volvo-Geely, electric cars, components. Redemptions and
greenfields
Aviation: purchase of helicopter factory, but limited investments: too sensitive
Chemistry, Metals, Materials: purchase of chemical plant, aluminum. US market
positioning
Consumer goods, services. Purchase of brands (GE Appliance by Haïer): market
penetration
Electronic. Purchase of well-known brands (Lexmark, Multi-fin Electronix) ->
expansion in the US market
Energy: decline in acquisitions in the classic sectors (sprix fall, anti-corruption
campaign). Renewable energies, links with development domestic market.
Targeted sectors..
• Leisure: many investments but decline following the control carried out by the Chinese
authorities
• Financial and business services: strong growth since 2015, accelerated acquisitions
• Health, Pharmaceutical, and Biotechnology: Small Investments Intended to Strengthen
the Domestic Market
• Information and Communication Technology: acquisition of firms, investment in R & D
center (Huawei, Seattle, Baidu in Silicon Valley, investment in artificial intelligence)
• Machinery: Limited, most focused in Europe acquisitions
• Real Estate and Hospitality: Acquisition of hotel chains. Despite controls, pursuit of
sacquisitions (Hilton, Park Avenue ..)
• Transport and infrastructure: 2nd sector of Chinese investment. Warehouse, construction
of infrastructure, attracted by President Trump's plan in this sector
Prospect
• Streamlining Chinese FDI Abroad?
• Control of outward FDI by authorities: fight against escape
• Sufficient resources? After capital flight, fall in reserves
• Constraints on investors: investing in risky projects (Silk Road)
• Host country control / defense policy
• Stronger protection in the United States
• Request for a protective measure in the EU after takeover of high-tech firms
• Real appropriation and insertion in value chains?
• The real question.
• Still little break through Chinese in the high technologies.
• Maintenance of technological dependence?
Prospect
• Mixed results
• Numerous set-up failures
• Passage from LLL to OLI: becoming a true FMN
• Arbitrage global market / internationalization vs. Domestic market /
endogenisation of growth
• Ability to promote advanced Chinese technology through industrial
alliances?
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Electric cars
Solar panels
Telephony
E-commerce
Prospect
• US-China relations:
• Trade agreement sufficient to resolve disputes
• Impact of US protectionist measures
• Increased control of Chinese equity holdings, but Chinese presence for both market
share, brand creation, return to domestic market
• EU-China Relations
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•
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China-EU Bilateral Agreement on Investment
Market economy clause soon granted to China
Increased control of Chinese FDI in sensitive sectors
Market segmentation, plus acquisitions for up-grading
• EU-US-China
• Chinese IDE: a component of the three-player game between the 3 superpowers
• Economic reforms, opening up markets to competition.
Conclusion
• Multinationalization still hesitant, small amount of capital, dispersion
• Learning curve: fast
• Varieties of investment, operators, modes of entry in Europe and the
United States. Not just strategic assets. Begenning of
internationalization of Chinese economy
• Strengthening of the technological base in China to succeed abroad to
be able to compete one day with the large multinationals of the
developed countries.