Determinants of Chinese direct investments in the European Union

ABSTRACT

This article analyses the determinants of Chinese foreign direct investment (FDI) activities in the European Union (EU). Evidence is based on panel Poisson models drawing on two investment monitors at the individual project level. Greenfield investments (GI) and mergers and acquisitions (M&A) are distinguished. The findings indicate that market size and bilateral trade are the main factors for Chinese investment in the EU. In contrast, business-friendly institutions do not foster FDI. Probably, Chinese investors are risk averse, and prefer regions with less competitive markets. The striking difference between GIs and M&As is related to unit labour costs. Higher costs make the host country less attractive for the establishment of new firms, but do not affect the involvement in existing firms. The sectoral dispersion of Chinese FDI in the EU did not change much since the global financial crisis. Most relevant shifts have occurred in research and development (R&D), where low-income EU countries have become increasingly attractive.

KEYWORDS:

• China FDI
• greenfield investments
• mergers and acquisitions

JEL CLASSIFICATION:

• F21
• E22
• C25

Acknowledgement

The authors like to thank an anonymous referee for comments and suggestions. They have substantially improved the article.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ As a check for robustness, the impact of the global financial crisis is investigated by dropping the information prior to 2009. However, this does not affect the main conclusions. While market size and openness are the main factors in case of M&As, real unit labour costs are of high importance for GIs. Similarly, the distinction between old and new EU member states as destinations for Chinese investments do not substantially affect the results. Additional results are available from the authors upon request.

² Per capita GDP in the initial period (2003 and 2009) is relevant in this regard, as it is known by the investors at the time when the GI decision is made. The allocation of countries to the income group is very stable between the two periods. Low-income countries include Bulgaria, Estonia, Croatia, Latvia, Lithuania, Hungary, Poland, Romania and Slovakia. Middle-income countries are the Czech Republic, Greece, Spain, Italy, Cyprus, Portugal and Slovenia. The high-income group encompasses Belgium, Denmark, Germany, Ireland, France, Luxembourg, Netherlands, Austria, Finland, Sweden and the U.K.