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Developed economies have dominated global FDI flows in the past, with outsourcing of labor-intensive production from high-wage industrialized countries (like Germany) to low-wage developing countries (like China). No longer. Since the global financial crisis, this pattern has started to shift, with China emerging as a major global investor. The textile and electronic industry are classic examples.

China Turns the Tables

It is not an exaggeration to say that China has undergone a comet-like rise as a foreign investor in recent years. Developed countries, such as Germany, have become a focus of Chinese investment.

Chinese FDI in Germany have increased considerably in the past five years: In 2013, only 911 million USD of Chinese FDI flowed into Germany. In 2017, however, Germany was the main target country for Chinese direct FDI in the EU and the seventh largest recipient of Chinese FDI worldwide – 3 times of the amount of 2013. Germany however only accounted for USD 2.7 billion or 1.7 percent of China’s global FDI outflows.

In the course of this development, Chinese M&A transactions in Germany have also increased sharply. According to our research, there were at least 47 Chinese M&A transactions in Germany in 2017. For comparison: the consulting firm EY reports a total of 25 Chinese M & A transactions in Germany, i.e. roughly half, in 2013. High-profile transactions include Daimler, Kuka or Deutsche Bank.

In connection with this growing interest, there is also rising concern in Germany that China is systematically buying up German key technologies in order to promote its own development. Heated debates on this issue are ongoing – not only in Germany and other EU countries but also and even the more heated in the United States.

Chinese Investment in Europe Targets Foreign High-tech Firms.

To get a better understanding of Chinese investment in Germany, we examined 175 Chinese M&A transactions in Germany between 2014 and 2017 in our recently published study. Our analysis shows that 112 and thus almost two thirds of these investments (64 percent) take place in the 10 key sectors in which China aims to achieve a globally leading role by 2025. These include, for example, cars with alternative driving technology, bio-medicine and robotics. These sectors are defined in the industrial policy strategy “Made in China 2025” (MIC 2025) announced by the Chinese government in 2015. The aim of the strategy is to turn China into one of the world’s leading industrial and technological locations.

Is it Politics or Industrial Policy Driving China’s Investment Strategy?

It is important to emphasize, though, that only because Chinese M&A transactions fit this industrial policy strategy, there is no evidence as to whether these transactions are actually politically motivated. Many Chinese companies, like companies from other countries, are now pursuing their own internationalization strategy. They are looking for access to sales markets, technologies and qualified employees abroad. From the perspective of economic history, it is frequently observed that companies expand abroad when their competitiveness and financial strength have reached a certain level, certain production factors on their home market are no longer available in sufficient quality or quantity, or the market is saturated.

Chinese M&A Transactions in Germany

Hand-Wringing Aside What Options do Germany (and other EU countries) have?

For Germany and the EU, it is important to take a prudent approach to future investments from China and other DCs: Currently, the fear of technological sell-offs dominates the public debate. But foreign direct investment usually brings in fresh capital and creates jobs in the host economy. In addition, Chinese investors have so far shown a long-term interest in their M&A targets and in some cases even issued location guarantees.

At the same time, Germany and the EU should demand reciprocity and speak with one voice to economic powers such as China. If state influence distorts competition or discriminates against companies, Europeans should intervene with one voice. While the EU and Germany grant foreign investors free market access, China still deliberately protects key industries from foreign investors. Even 17 years after China’s accession to the World Trade Organization, there is no equal footing in mutual economic relations.

An important step towards achieving more reciprocity would certainly be the conclusion of the bilateral investment agreement between the EU and China, which has been under negotiation since 2014. In times of increasing global protectionism, both China and the EU are more dependent than ever on reliable partnerships. It should therefore be in both sides’ interests to actively promote the maintenance of an international rules-based economic order. Increasing FDI from DCs will be an integral part of this order.

If you enjoy reading this post you may also be interested in our post: Is China Systematically Buying Up German Key Technologies?