ORIGINAL PAPER
Different cases, different faces: Chinese investment
in Central and Eastern Europe
Wade Jacoby
Published online: 13 March 2014
# Springer-Verlag Berlin Heidelberg 2014
Abstract Chinese investment in Central and Eastern Europe (CEE) is booming. As
China’s investment pattern has emerged so far, it appears to have little to do with
Chinese firms’ preferences for liberal policy regimes, tolerance for corruption, or
reliance on communist-era networks. This article documents the current size and shape
of Chinese firms’ efforts to internationalize in this economic space, demonstrating an
important difference between Chinese investment behavior in CEE and in the EU-15,
namely the region’s much more active use of greenfield activity (and lighter use of
M&A and strategic alliances). Case studies of each mode (greenfield, M&A, and
strategic alliances) reveal little evidence of a “China, Inc.” approach and much evidence
that Chinese firms are more motivated by market access than by technology or
management assistance.
How has the Chinese “Scramble for Europe” (Godement et al. 2011) played out in the
eastern part of the continent? Do Chinese firms behave differently in Central and
Eastern Europe (CEE) from those investing in the “old” 15-member states of the
European Union (EU)? If so, do those behavioral differences have implications for
politics in the region?
This article addresses these questions with case studies that reveal different “faces”
of Chinese investment in CEE. While the surge in FDI in CEE is premised on the
Chinese state’s broad “going out” strategy discussed in the introduction to this special
issue, the empirical patterns seen so far in CEE resist any easy summation under the
various sensationalist forms of the “China, Inc.” label (Meunier et al. 2014). The
different high-profile cases reveal very different faces, undermining a number of
plausible-sounding theoretical claims. In that sense, many of the article’s most important
findings are negative ones that cast doubt on several of the sophisticated rumors
swirling around Chinese investment in Europe. Specifically, as China’s investment
pattern has emerged so far, it appears to have little to do with Chinese firms’ preferences
for liberal policy regimes, tolerance for corruption, or reliance on communist-era
networks.
Asia Eur J (2014) 12:199–214
DOI 10.1007/s10308-014-0380-z
W. Jacoby (*)
Brigham Young University, Provo, USA
e-mail: wade_jacoby@byu.edu
The article documents the current size and shape of Chinese firms’ efforts to
internationalize in this economic space, demonstrating an important difference between
Chinese investment behavior in CEE and in the EU-15, namely the region’s much more
active use of greenfield activity (and less use of M&A and strategic alliances). I restrict
my analysis to the ten CEE states that have become members of the EU.1
These states
already exhibit tremendous diversity. This is true in terms of population (from 1.3
million people in Estonia to 38 million in Poland) and per capita GDP (from $27,400 in
the Czech Republic to $12,600 in Romania).2
Some states have had consistently liberal
policy regimes—particularly the Baltics but also Slovakia—while others have been
corporatist (e.g., Slovenia). They also vary in terms of corruption and ease of doing
business (Bohle and Greskovits 2012; Bohle and Jacoby 2014).
This article’s outcome of interest is the internationalization choices of Chinese firms,
which include FDI, but are not limited to that choice alone. Aside from trade, Chinese
firms have three basic options in the process of “going out,” and only two of them
involve FDI (Zhang and Filippov 2009). First, strategic alliances with European firms
could allow Chinese firms to remain legally independent and also draw on the expertise
or guidance of local firms for a particular range of transactions. Second,
internationalizing Chinese firms could choose FDI through mergers and acquisitions
of existing European companies.3
M&A, of course, requires firms to “digest” another
firm, a process that can be exceedingly tricky when foreign firms are absorbed in a
foreign regulatory environment. Third, Chinese firms can turn to greenfield FDI, which
allows them to maximize their autonomy within a given regulatory environment. Each
choice has risks and benefits that are well-established in the theoretical literature (Cave
1996; Dunning 1993; Bandelj 2008).
In short, CEE is a varied region. Chinese firms, whose immense variation in legal
status and financial resources is well known (Clegg and Voss 2012), have, beyond the
current $50 billion annual trade in goods and services between China and CEE, three
more principal options for internationalization or “going out.” This article begins with a
brief sketch of the broad empirical pattern of Chinese FDI and strategic alliances in
CEE and then moves to three case studies that capture the political dynamics of some of
the highest-profile cases from each form of internationalization. It concludes with
broader lessons of the pattern of Chinese investment behavior in CEE to date.
Chinese FDI in CEE: basic patterns and initial theoretical intuitions
After an early bout of CEE skepticism about FDI in the first years after the collapse of
communism (c.f., Bandelj 2008; Appel 2004), foreign investment generally has been
welcome across the CEE region for well over a decade. The Chinese activity of recent
years is no exception. Table 1, adapted from the Rhodium Group (Hanemann 2014, p.
1
Chinese investment in the former Soviet Union and Turkey is a fundamentally different game in which about
70 % of investment is in the energy sector (Apoteker 2012).
2
At PPP in 2011.
3
For many firms, the least risky form of internationalism is to sell goods and services in another country.
However, while trade is desirable, it is not always possible. Barriers of one kind or another often stimulate
FDI, and an enormous international political economy literature pictures FDI as a common alternative to open
trade (Choudhri and Marasco 2012).
200 W. Jacoby
42), shows FDI into the ten CEE EU members between 2000 and 2011. Four points
stand out.
First, and consistent with the pattern for Europe as a whole reported elsewhere in this
special issue, Chinese investment remains modest (Clegg and Voss 2012, Freeman
2012). Even the Rhodium data, which generally picks up higher figures for Chinese
FDI than does MOFCOM and Eurostat, shows that only in the Hungarian case is
aggregate Chinese investment above 1 % of GDP.4
Second, Chinese investment is
skewed towards weaker economies—especially the three CEE member states that had
IMF programs (Hungary, Romania, and Latvia). As seen in column three, each of these
countries received a higher amount of Chinese FDI than would be predicted simply by
looking at its FDI from the rest of the world. Of these, Hungary’s increase (+14 %) is
again the largest. Meanwhile, CEE’s largest economy (Poland) and its richest (Czech)
each have some FDI but no more than what we would expect based on stocks from the
rest of the world. Third, greenfield activity substantially outnumbers M&A in all cases
where n>1. This trend runs directly counter to findings by Zhang and van den Bulcke
(2014) for the EU-15, where M&A predominates. Finally, four CEE states—including
relatively sizable and wealthy economies like Slovakia, as well as poor economies like
Lithuania—show no Chinese FDI at all.
We can glean important negative findings from this data, as it suggests that several
existing explanations for Chinese investment behavior do not hold much explanatory
power across the region, at least at this early stage. First, while Zhang and van den
Bulcke (2014) note some lingering legal barriers to FDI across Europe, the only CEE
state they single out for its legal barriers—Latvia—is actually drawing more Chinese
investment than we might predict from its global averages alone. This suggests that
national legal barriers may not be decisive in shaping patterns of FDI in CEE.
Table 1 China’s FDI in the CEE-10, 2000–2011
CEE
countrya
Investment
value (USD
million)a
Rank compared
with FDI from
ROWa
Number of
greenfield
projectsa
Number of
acquisitionsa
Ease of doing
business global
rankb
Perceived
Corruption
Index 0–100c
Hungary 2,085 +14 14 4 54 55
Romania 299 +4 13 1 72 44
Poland 190 −3 15 1 55 58
Czech Republic 76 0 10 1 65 49
Bulgaria 47 +1 6 1 66 41
Latvia 3.8 +5 1 0 25 49
Estonia 0 – 0 0 21 64
Lithuania 0 – 0 0 27 48
Slovakia 0 – 0 0 46 46
Slovenia 0 – 0 0 35 61
a
Source: Hanemann (2012); ROW=rest of the world
b
Source: World Bank (2013)
c
Source: Transparency International (2013)
4
Hungary’s 2011 GDP was $130 billion, of which $2.1 billion is 1.6 %.
Different cases, different faces: Chinese investment 201
Second, where Burgoon and Raess (2014) show that Chinese investment does not
seem to be driven by variation in labor regulations, column 6 adds the implication that
business regulations also seem incapable of explaining the variation so far. The World
Bank’s Ease of Doing Business ranks countries from 1 to 185 based on subrankings
across ten regulatory domains.5
The values for CEE states are in Column 6 of Table 1.
We see there that Chinese FDI has, so far, generally avoided the CEE states with
rankings “easier” than 50 (while Latvia has almost $4 million in Chinese FDI, the other
states in this cluster have none). All the investment has flowed to places ranked worse
than 50. This suggests that Chinese investors do not, so far, shy away from more
complex regulatory environments.
A third hypothesis—essentially the opposite of the previous one—is that Chinese
investors may actually welcome business environments with substantial levels of
corruption. More generally, there is evidence Chinese firms have invested in locales
with extreme levels of corruption in both Asia and Africa (Nyíri 2011). In CEE,
however, the data do not support the hypothesis. Column 7 lists the CEE countries’
aggregate 2012 rankings from Transparency International. “Perceived Corruption”
scores run from 0 (highly corrupt) to 100 (very clean), with the global leaders currently
at 90 (Denmark, Finland, and New Zealand). We see that the scores for CEE are
somewhat lower than in the EU-15, whose states make up 8 of the top 20 scores
globally (indeed, only Italy (42) is below any of the CEE states). Since Chinese FDI
goes disproportionately to the old EU-15, this is already inconsistent with the notion
that Chinese investors prefer an “ethically fluid” environment, at least in Europe.
Moreover, within the CEE cases, Hungary has the second best score in the region
and yet also the most FDI.6
It is true that some countries with relatively high scores for
the region also have little or no FDI (e.g., Estonia and Slovenia), but so also do states
with less corruption (Lithuania and Slovakia). Romania is the one case that clearly fits
the expectation that more corrupt countries may draw more Chinese FDI, as it has a low
score (second worst in the region) and yet draws 4 % more Chinese FDI than
anticipated by its global average). In general, however, corruption scores show no
correlation with FDI choices.
Fourth, other research suggests little evidence for the intuition that ties from the
communist era explain investment patterns since China and then-Eastern Europe had a
relationship of “reciprocal indifference” during the Cold War (Bondiguel 2007, p. 2).
As already shown, CEE states generally do not draw disproportionate shares of Chinese
OFDI. Moreover, if there is a state in the region that is a clear outlier and that has drawn
Chinese disproportionate shares of Chinese FDI, that state is Hungary. Yet Hungary
was among the least orthodox communist societies in all of the Eastern Europe (and,
partly for that reason, was more open to a substantial wave of Chinese immigration just
before and after the end of Communism (Nyíri 2011, 2007)). Thus, at most,
communist-era developments have a very indirect effect through migration policies,
not through pre-existing “ties.”
5
One category, access to electricity, is not a regulatory issue.
6
While Hungary’s Fidesz government has drawn fierce criticism for its 2012 reforms, the confidence interval
around its score (which is based on 10 surveys) is no larger than for many other states. Moreover, even if its
corruption score should fall in coming years, Chinese investors cannot have known that trajectory in advance
of their investment decisions that have long since made Hungary a favored location.
202 W. Jacoby
Of course, as this special issue consistently stresses the recent vintage of Chinese
investment in Europe, it would be hasty to conclude from this survey alone that these
four theoretical propositions will not matter in the long run. There are ample grounds
from alternative theoretical paradigms to suspect they may (e.g., Dunning 1993;
Bandelj 2008). To date, however, they seem not to be driving the broad patterns of
investment in the region, at least not in any simple monotonic relationship.
Greenfield FDI, M&A, and strategic alliances: using case studies to map
the internationalization choices of Chinese firms
The Cross Border Investment Monitor (CBIM) provides additional “bottom up” data
on Chinese greenfield investment in CEE. To an extent, these data tell a similar story,
suggesting an upward trajectory in investment deals.7
Where Rhodium reports 59
greenfield projects between 2000 and 2011, Table 2 shows a total of 107 greenfield
projects announced in the press between 2005 and 2013. In the first 5 years, the figures
were in single digits, rising to 10 in 2010 and jumping noticeably to 22 in 2011 and 23
in 2012 before dropping a bit to 18 in 2013. In short, there is some evidence for a robust
jump in the number of projects in recent years, consistent with other papers in this
special issue and showing an even stronger trend than in the Rhodium data.8
At the same time, there are puzzling inconsistencies between these roughly stable
2011–2012 figures for greenfield investments and the sharp spike in M&A activity
reported by the private equity firm A Capital. According to the Wall Street Journal, A
Capital data show a 95 % jump in Chinese M&A activity in Europe over the 12 months
between June 2011 and June 2012.9
That spike is not reproduced in this greenfield data.
Along with the trends reported from Hanemann, this would suggest we should not
expect M&A and greenfield activity to move in tandem. This is also consistent with the
theoretical expectations that see M&A and greenfield as alternative strategies towards
internationalization (Dunning 1993). Greenfield FDI is generally selected for its location
advantages (e.g., preferential tax or regulatory policies, market access, and labor
conditions). Conversely, M&A may promise access to new technology, marketing
ideas, logistical advantages, management techniques or a host of other possibilities.
At the same time, the internationalization of Chinese firms also has not been
happening through strategic alliances with European firms in the CEE region.
Strategic alliances occur when firms undertake a specific and mutually beneficial
project while remaining legally autonomous. Unlike a joint venture, there is typically
7
As it reports announced deals before they are closed, it may overreport to an extent. Of course, because many
Chinese investors are exceedingly cautious and prefer to acquire small stakes or use other techniques to remain
invisible, all data sets likely underreport some FDI positions as well (not to mention portfolio positions). Also,
there does not seem to be much overreporting when we look at CBIM’s data on the four countries where
Rhodium showed no Chinese greenfield investment between 2000-2011. Both Estonia and Slovenia also show
no projects in the CBIM data, while small projects are reported for Lithuania (1) and Slovakia (2).
8
For comparison, adding Russia, Turkey, and Southeast Europe to the data still suggests caution about the size
of Chinese ambitions in CEE. Over the same period, these figures show 222 projects (107 of which were, as
shown in Table 2, in the ten EU member states in the region) with about euro 15.7 billion (Euro 4.5 billion of
which was CEE) and 88,245 jobs (25,201 of which were in CEE).
9
Wall Street Journal, 10 September 2012. http://online.wsj.com/article/BT-CO-20120910-713850.html
Different cases, different faces: Chinese investment 203
no separate legal entity established, and unlike FDI, there is no change in ownership
such that one firm acquires the other. The theoretical literature establishes and case
studies below confirm the importance of including strategic alliances in studies of FDI
(Cave 1996). Zhang and Filippov (2009) analyzed the Thomsen SDC database of over
9,500 strategic alliances recorded between Chinese and foreign firms between 1985 and
2008. Only 111 cases involved Chinese firms working with European firms in
European markets, and only 11 were from the CEE region. Over the period, Europe
had 23 % of China’s total outbound strategic alliances. Only 2 % of this total, however,
were in CEE locations—primarily alliances built around mid-technology and geared to
“market access through low-cost competitive advantage” (2009, pp. 16–19), a claim
consistent with the later findings of Clegg and Voss (2012, pp. 64–65) for the region.
This article next analyzes this broad pattern through case studies of each of these
three modes of internationalization. As this special issue is focused on the politics of
Chinese FDI, the article uses high-profile cases that are most likely to spark political
interest—whether support, opposition, or both—of political actors in CEE. The first
case—government procurement in Poland—establishes a worst-case baseline that
comes from an internationalizing Chinese firm attempting to work in Europe without
FDI and without local partners as part of a strategic alliance. The second case—from
the Hungarian chemical sector—works through the largest example of the comparatively
rare Chinese choice of M&A in CEE. Next, as going it alone is fraught with risk
and M&A opportunities are rare, the third and longest case is devoted to the most
important modality of Chinese internationalization in CEE, greenfield investment.
Here, the focus is on the Bulgarian auto sector, but the article adds information on a
number of smaller cases in light of the importance of this mode of entry.
Internationalism alone: public procurement and the Covec case in Poland
FDI decisions are not taken in a vacuum but represent distinctive firm choices over a
strategy for internationalization (Dunning 1993), as well as prevailing political regimes
(Bandelj 2008). In principle, firms might prefer trading or strategic alliances with firms
already located in their target market over the more demanding greenfield or M&A
activity, as noted above. The first case study helps establish the case for FDI
Table 2 Aggregate Chinese
greenfield FDI in CEE EU
member states
Capex figures are millions of Euros.
Data accessed 13 December, 2013
Year Projects Capex Jobs
2013 18 851 3,016
2012 23 563 3,675
2011 22 474 5,351
2010 11 476 2,135
2009 6 259 2,372
2008 9 412 3,682
2007 7 167 2,647
2006 5 1,130 2,042
2005 8 139 1,291
Total 109 4,477 26,191
204 W. Jacoby
motivations by looking at the disastrous outcomes that can result when large Chinese
firms attempt to go it alone in Europe, replicating the rejection of strategic alliances and
joint ventures that the same firm had preferred in earlier African cases (Centre for
Chinese Studies 2006, pp. 83–84).
Chinese firms would love to capture lucrative international business in public
procurement. European governments routinely spend up to 50 % of their national
GDP, and a significant amount procures goods and services. The EU Single Market
ensures public procurement is open to companies bidding from any member state, and
increasingly non-EU members have submitted tenders. China has long bid on and
executed such projects in the developing world, but European sensitivities here are
keen, especially since China’s own public procurement market is effectively closed to
foreigners (Godement et al. 2011).
Selling goods and services to European governments may impact local political
debates in ways similar to FDI—making procurement far less routine than trade in
goods and making strategic alliances with local firms a potentially attractive option. As
noted above, strategic alliances have been rare to this point for Chinese firms in CEE.
However, this may be a risky omission. The foreign firms’ very presence represents the
arrival of a new competitor in local markets, and thus foreign firms generally do not
engage in public procurement activities without national partners, knowing that using
public funds on foreign contractors may well be politically sensitive for the government
in question (Wellhausen 2012). Moreover, such firms also generally need access to
local labor markets, and indeed creating employment for host-country workers may be
an explicit (and is almost always an implicit) requirement for successful bidding (de la
Porta and Jacobsson 2012). For all these reasons, there must inevitably be a delicate
politics of procurement bidding and contract execution.
This politics is only complicated when Chinese business activity is accompanied by
woefully inadequate understanding of European business practices and a conspicuous
lack of strategic alliances with local firms. Certainly, that seems to have been the case in
the high-profile bid won in Poland by the Chinese Overseas Engineering Company
(Covec). In 2009, Covec won a tender to build two sections of a major highway in
Poland. This was an important project since it was part of a series of major infrastructure
tenders in advance of the 2012 European Cup soccer championships co-hosted by
Poland. This was a novelty not only inside CEE but represented the first major public
tender won by a Chinese company in the entire EU. Within about 18 months, however,
Covec had abandoned the project. What happened?
In part, the Covec fiasco is attributable to misplaced Chinese confidence in their
ability to renegotiate the contracts so long as their ties with the national government in
Poland remained strong (Ni et al. 2011; CEED 2012, pp. 29–31). Such renegotiation is
a relatively common feature of Chinese engineering projects in African and Middle
Eastern states. It seems possible that Covec officials eschewed strategic alliances with
local firms, in part, because they felt confident they had a more important alliance with
the government. Local firms, however, organized against Covec, denying them access
to necessary supplies and complicating their efforts to recruit on local labor markets
(Millner 2012; Grzeszak 2011).
The Polish state had little scope to rescue Covec. The company had bid less than half
the amount Poland had budgeted for the project, so the Polish government had asked
Covec to double check the terms it was offering. However, when Covec then
Different cases, different faces: Chinese investment 205
encountered difficulties, the state dug in its heels and insisted the firm deliver. When
Covec complained of unforeseen costs, the Polish government pointed to EU regulations
that forbade it from offering subsidies not part of the initial contract.
Covec made a number of disastrous public and private missteps, and though it is
impossible to be sure, strategic alliances might have saved them from some of them.
Alongside clumsy gestures such as trying to talk business at the funeral of the Polish
President and others killed in the Smolensk crash or timing a business delegation to
arrive in Warsaw on Good Friday, Covec officials refused to talk to the media. This
may have contributed further to the overwhelming sentiment of Poles that the government
was correct to break its contract with Covec.10
Local and German construction
firms used the media to paint Covec as an unfair competitor. The absence of strategic
alliances hurt badly as local subcontractors banded together to deny Covec access to
local machinery and materials (Grzeszak 2011).
Perhaps most striking, Covec officials appear not to have even translated many
portions of the contract into Chinese (Ni et al. 2011). One might think this was an
inexperienced company with more money than skill, yet Covec had already completed
nearly 30 major projects in Africa, including many in which strategic alliances with
local firms were central (Centre for Chinese Studies 2006). Their behavior in Poland
rather lends credence to the claim that the consortium intended from the outset to
renegotiate a better price as the contract progressed. This would certainly be consistent
with their previous behavior in Africa. In the European context, however, it meant the
Polish government held all the high cards. Covec’s commercial ties with Polish
subcontractors were far too weak to stimulate the Polish government to renegotiate
the terms of the deal.
To be sure, Covec faced a combination of bad luck and tight environmental
regulations. Harsh winter weather was followed by a “plague” of rare frogs, protected
by EU environmental regulations. However, bad luck aside, all reports agree that
Chinese business practices presupposed their partners would take a flexible approach
to loose contracts and that Covec overestimated its own market power over clients and
subcontractors even as it overestimated its ability to renegotiate the terms of the deal.
Nevertheless, renegotiation of signed infrastructure deals is always complex, and even
US construction giant Bechtel had Romania break a much better-written contract
(Wellhausen 2012, Chapter 6).
Covec’s behavior sparked strong political reactions by European actors. Covec’s
original bid was immediately castigated as price dumping by EU-based construction
firms. This suspicion led the Polish negotiators to engage in extra meetings to ensure
that Covec could deliver at the promised price (CEED 2012, p. 29). Poland-based
suppliers were apparently surprised to field calls from people claiming Covec affiliation
and offering to make private deals for supplies in exchange for kickbacks. Eventually,
the Polish state banned Covec from further competitions for three years and put in
claims for 741 million zloty against the company and the Bank of China (Ni et al.
2011). In short, such “internationalism alone” may feel less risky than taking on
10
In the event, the A2 between Warsaw and Berlin opened one day before the Cup began, after Czech and
French crews worked around the clock to complete the section left after Covec walked away. Euronews, 7
June 2012.
206 W. Jacoby
major corporate partners as strategic allies or subsidiaries. Yet when CEE states
have many other options, Chinese firms may find their vulnerabilities are keen.
Internationalization through M&A: going after established firms
in the Hungarian chemical sector
Like strategic alliances, Chinese M&A has been rare. Internationalizing Chinese firms
often have gone after mature European firms, but far less often in CEE than in the EU-
15. Between 2000-2010, Thompson Reuters data show 84 Chinese M&A deals in the
EU-15. Only seven such deals were registered in CEE—five in Hungary and two in
Bulgaria. Moreover, none of these were in industrial sectors (Clegg and Voss 2012, pp.
27, 32). The most obvious explanation for this is that while CEE has plenty of
struggling industrial firms and many firms with excellent technology, twenty years of
intense FDI interest from Western Europe has left it with few firms that fit both
descriptions and thus make likely M&A targets.
European M&A more generally clearly is important for Chinese firms. Deloitte
forecasts that Europe will be the site of about half of all Chinese M&A activity abroad
by 2014 (up from only 15 % in 2007).11
One potential motive for M&A lies in
European firms’ technology (Hanemann and Rosen 2012). Many of the splashy
potential M&A deals have involved West European auto companies, and there has
been an obvious reluctance of Western automaker to sell even highly distressed assets
like Saab to Chinese firms (Harris 2012).
At the same time, technology is far from the only issue. Nicolas and Thomsen argue
that, for some (e.g., Deng 2007, p. 71), “Chinese MNCs are motivated primarily by the
quest for strategic resources and capabilities, and […] the underlying rationale for such
asset-seeking FDI is strategic needs” (Nicolas and Thomsen 2008, p. 24). For others, by
contrast, “only to a minor extent do MNCs go abroad to gain access to knowledge and
technology” (e.g., Rugman and Li 2007, p. 341). Nicolas and Thomsen concur that
Chinese FDI motives are primarily about gaining market share in host countries. von
Keller and Zhou (2003) found that when asked about their motives for investing
abroad, 56 % of internationalizing Chinese firms cited the “search for new markets”
versus just 16 % who cited “obtaining technology and brands.”12
A good illustration of this pattern can be seen in the takeover of a very large
Hungarian chemical firm (BorsodChem) by a Chinese firm (Wanhua Industrial
Group). 13
Valued at $1.7 billion, this investment was meant to provide Chinese
engagement “up and down the value chain,” in the words of Wanhua’s CEO (Bryant
2011). The acquisition positions Wanhua as a major producer of raw materials for the
foams deployed in the auto, insulation, construction and furniture sectors. The deal also
obliges Wanhua to invest about 140 million Euros in a separate new greenfield plant in
Eastern Hungary. When the UK-based investment group that owned BorsodChem
initially resisted outside overtures, Wanhua, working with the Budapest-based branch
11
Based on data from MergerMarket (Deloitte 2012). The North American share is projected to remain stable
at about 25 % while Asia is projected to lose most of the FDI flowing to Europe over this period.
12
These answers referred to all FDI and not just that in Europe. Respondents could name multiple motives.
13
The firm also has plants in Poland and the Czech Republic.
Different cases, different faces: Chinese investment 207
of the Bank of China, moved secretly to acquire substantial interest in the firm. In the
end, the Chinese interest was revealed, and the takeover was not hostile. Post-deal
publicity stressed the expanded opportunity for BorsodChem in Asian markets, and the
Fidesz Party government in Hungary backed the accord (BorsodChem 2011).
Chinese M&A activity is generally more risky for firms and for states than is
greenfield. This is not primarily a matter of political fireworks—after all, virtually
none of these takeovers (including BorsodChem) have been hostile. Instead, the risk is
commercial and “cultural.” On the one hand, internationalizing Chinese firms are
essentially buying European brands whose values have declined but not disappeared
entirely. To date, Chinese M&A in Europe has not been notably profitable, although
this is a common pattern in M&A more generally (Nicolas and Thomsen 2008, p. 27).
Still, win–win scenarios are possible. When only a single brand is sold, the Western
firm essentially gives up some ownership of part of its product line for a partnership
with a Chinese firm that is confident it can make the lower-end product profitable.
Meanwhile, the European firms generally hope to gain access to Chinese home markets
for another part of their production basket. In the best-case scenario, this helps Western
firms overcome exit barriers from a sector (often linked to strict employment rules in
traditional industries) while letting Chinese firms overcome entry barriers.
Chinese firms’ emphasis on greenfield FDI: the Great Wall case in Bulgaria
As Table 2 demonstrated, Chinese firms have recently become active in greenfield
investments in CEE states, especially since about 2011. CEE states, in turn, had made
attracting greenfield FDI a central objective since well before Chinese investors arrived
(Drahokoupil 2009; Bandelj 2008). Greenfield investment generally provides the
investing firms greater control over their own environment than M&A, where a foreign
firm must digest an established management team, workforce, technology, and physical
plant—all while trying to make more money than the original firm in its own home
market.14
Greenfield investments start fresh, generally with new buildings, new
workers, new products and, often, new relationships. This relative freedom for the
internationalizing Chinese firms is especially relevant in the context of a host state that
has promised a range of assistance and, in some cases, incentives to stimulate investment
location.15
All ten CEE states have investment promotion agencies (IPAs) that
offer some range of both pre- and postinvestment decision support to Chinese investors.
Of these, only Latvia has a Chinese language Website (several IPAs in the EU-15 have
one). Hungary has three offices in China, and the Czech Republic and Estonia each
have one office (Clegg and Voss 2012, p. 58).
An important motive for Chinese greenfield investment in Europe is the disappointing
failure of Chinese automakers to benefit from their strategic alliances with Western
auto firms in their own home market. Chinese automakers hope proximity to European
consumers can spur Chinese firms to move up the quality ladder. Few car companies
seem more in need of such innovation than China’s Great Wall Motors—China’s
14
In the dominant OLI paradigm, Greenfield investments are typically seen to have lower transaction costs
than do M&A. See e.g., Andersson 2004, p. 442
15
Within the limits of fairly strict EU limits on “state aids.”
208 W. Jacoby
largest private auto firm16
and its second largest auto exporter (after Chery). While
Chery is invested in major production facilities in Turkey, Russia, and Israel (but not
CEE), Great Wall announced in 2011 its intention to build a major plant in Bulgaria.
The plant opened in early 2012 and should increase production to 50,000 cars a year by
2014.17
Great Wall is betting on expanded exports in a period of general economic crisis in
already-saturated low-end market segments. While Great Wall Motors’ corporate motto
is “Attack the consciousness like a wolf while sensing danger like a rabbit,” its
corporate strategy seems to have been to aggressively combine the technology of
several different recent (and not-so-recent) Asian models into one pickup-like amalgamation
called the Wingle (a combination of the words “wind” and “eagle”). Of
course, there is a long tradition of deriding the lack of technological and marketing
savvy in up and coming auto producing nations, some of which (e.g., Japan and Korea)
later turn out to be highly competitive. In addition to the Wingle, Great Wall is
producing an SUV and two-passenger cars in its new Bulgarian plant in partnership
with the local firm Litex Motors.18
Moving up the quality ladder has often required such strategic alliances. The main
domestic Chinese auto producers generally do have strategic alliances with Western
producers in which the Western companies supply technology and designs. Indeed, just
over half the cars sold in China (now the world’s largest auto market) are made under
Western brands.19
However, though Great Wall was tenth among Chinese auto producers
in 2011, producing about 2.6 % of cars sold in the country, it had no such
relationship until the partnership with Litex (The Economist 2012).
Why the Chinese preference for greenfield investment when internationalizing to
CEE? Much of the initial evidence points to market access. Here, the auto sector is
exemplary. Chinese auto firms lag substantially behind the timeline envisioned by the
Chinese government, which once expected them to have gained a solid foothold by
now in lucrative Western markets using their own technology and marketing (Anderson
2012). Unlike the Korean and Japanese states, China has not offered domestic automakers
protected home markets as a basis for later export success. Instead, China has
allowed in European and American producers. However, while this approach might
well have afforded Chinese producers a basis for successful indigenization, it largely
failed. Anderson explains the failure with reference to high turnover of top auto
officials. Tempted by the more lucrative prospect of employment in high party circles,
they have failed to invest in longer term capacities, such as substantial R&D spending
(Anderson 2012).
China thus faces lots of obstacles in its efforts to export and secure its own market.
Western firms have modular designs based on the same platforms plus excellent
systems integration and splashy technology options like fully integrated smart phone
usage. Meanwhile, car prices are falling significantly. Thus, several Chinese auto firms
have been active in recent markets for traditional European producers. SIAC—which
16
“Private” firms sometimes get substantial state assistance for FDI projects, and it is widely suspected this
happened in the Great Wall case.
17
Great Wall has at least seven other such plants for assembling “knock-down kits” outside China.
18
Great Wall has been developing a dealer network in the UK for at least a decade, but these cars were not
built in Europe.
19
The Chinese auto market matters greatly for the West. For example, 25 % of Skoda sales are now in China.
Different cases, different faces: Chinese investment 209
sells nine times as many cars in China as Great Wall—has bought Rover. Geely bought
Volvo from Ford, BAIC bought technology from Saab, and Chery is hovering on the
periphery of the EU (now in Kalinigrad, directly on the Polish and Lithuanian border)
(The Economist 2012). However, none of these are in CEE, and all brought access to
technology in ways that greenfield investment does not.
Great Wall is part of a larger phenomenon in which Chinese auto firms pursue
markets abroad in no small part because their profit margins are so compressed and
contested at home. For example, China’s BYD Electronics, which manufactures
electric cars, opened a new greenfield plant in Bulgaria in February 2013 on the basis
of a 50–50 joint venture with Bulgaria’s Bulmineral. The plant manufactures 40–60
electric buses per month, as well as supplying batteries and LED components for other
sectors (China Auto Web 2012). Another Chinese auto firm, Norinco, announced plans
in early 2013 for a greenfield project that will employ 500 in the Czech Republic
making locks for automobiles (FDIMonintor.com).
Other sectors in CEE are also seeing new greenfield investments from China. For
example, Chinese firms have been active in the business machines sector, which
includes products like LCD television screens and computer monitors.20
In 2006
Admiral Overseas announced plans for a $127 million investment in Gorzow,
Poland, which was associated with about 1,500 jobs. A similar Admiral Overseas
venture in Zyradow, Poland in 2007 brought an additional $97 million and about 1,000
jobs.21
Both of these envisioned flat panel displays, rather than the cathode-ray tubs that
doomed the TCL-Thomson deal earlier in the decade.
Chinese greenfield activity can also be seen in the CEE renewable energy sector.
This is a very recent phenomenon, with a flurry of projects in 2012 after very little prior
activity. While some of these projects are quite small (e.g., a $1 million solar park in
Romania or a DP Clean Tech engineering hub in Poland), others appear substantial. In
September 2012, a subsidiary of China’s Hareon Solar technology put into operation an
$80 million photovoltaic plant in Bulgaria, only three months after another Chinese
company (Chint Solar) opened its own photovoltaic plant in (relatively sunny)
Bulgaria. In May 2013, China’s Lightway Solar announced plans for a $105 million
photovoltaic park in Romania. These examples underscore the Chinese tendency to
prefer greenfield investment over both M&A and strategic alliances in their internationalization
choices in CEE.
Conclusions and outlook
This paper addressed two research questions. First, what is the empirical pattern of
Chinese FDI in the ten Central and Eastern European EU member states in the first few
years of its arrival in the region? Second, what clues does that pattern—however fluid it
might be—hold for the broader debate about Chinese motives in the region?
20
Much early M&A with mature firms in the EU-15 had ended badly in this sector. For example, the Chinese
electronics firm TCL had, by 2006, admitted defeat in its acquisition of both Schneider Electronics (Germany)
and Thomson Electronics (France), both of which it closed after heavy losses (Nicolas and Thomsen 2008, p.
29).
21
Investment data from FDIMarkets.com; See also TPV 2009 Annual Report, p. 10. http://www.tpvholdings.
com/attachment/2010042319320100980010_en.pdf
210 W. Jacoby
Empirically, this article showed that Chinese behavior in CEE is somewhat different
from in the EU-15, whose own patterns are documented more fully in several other
articles in this issue. Specifically, CEE has drawn less investment, to date, than have the
EU-15 states (see Hanemann 2014), and what investment has come has been disproportionately
greenfield FDI rather than M&A-oriented FDI. Strategic alliances have
also been much more rare in CEE than in the EU-15. This pattern is consistent with the
claim that the motives for Chinese firms’ internationalization choices have more often
been market access and less often access to technology and management practices, both
of which are more available with M&A and/or strategic alliances with local firms. With
the surge in greenfield less than three years old, however, this judgment must remain
tentative.
In addition, the scarcity of Chinese M&A deals in CEE is also likely related to the
relative paucity of the kind of technologically advanced but struggling mature firms
that make common M&A targets. With 20 years of intense privatization immediately
preceding the Chinese arrival, most such firms are gone from the CEE market. Again,
this much greater relative reliance on greenfield strategies by Chinese investors seems
primarily designed to tap into the EU market in manufacturing sectors with important
consumer demand going forward. In some cases, these involved sectors where the EU
has anti-dumping measures in place against China, including electronic equipment,
textiles, and luggage (Clegg and Voss 2012, pp. 64–65).
This article’s other central finding is that Chinese investment is spread quite
unevenly across states in the region. Hungary has been a major host location for
Chinese FDI, which has also favored Bulgaria and Romania. Meanwhile, other states
like Estonia, Lithuania, and Slovenia remain virtually untouched by Chinese investment,
and important commercial states like Slovakia and the Czech Republic are
engaged by China very little. This avoidance remains hard to explain given evidence
that neither corruption scores, nor policy liberalism, variations in labor law, nor
communist-era networks can explain the overall pattern of variation in CEE. Neither
can the most obvious macropolitical considerations. For example, the Czechs have
traditionally been very warm to the Dalai Lama, which might seem to explain the lack
of investment there. And yet so too have other CEE states that have drawn Chinese
FDI, including Hungary, which the Dalai Lama has visited seven times, most recently
in 2010. There is little evidence that Chinese investors systematically prefer “easy”
liberal regulatory environments, nor “hard” environments with ample corruption.
Rather, they seem (so far) more or less open to both environments.
Turning now to the second question, the sheer diversity of Chinese investors’
motives and behaviors would seem to run strongly counter to propositions of a
“China, Inc.” approach to CEE. Although case selection was partly justified on grounds
that the cases were different from one another and revealed different faces of Chinese
behavior in the region, other surveys, including ones in the EU-15, have also stressed
the broad diversity of Chinese approaches in Europe (Fichtner 2013).
This diversity of motives may have been reassuring to CEE states, who still appear
quite open to Chinese investment. While there has been a steep learning curve for some
internationalizing Chinese firms—especially in the Covec case—there have been no
major political confrontations over Chinese investment in the region. Even when
Chinese investors used a stealth approach—in the BorsodChem case—the takeover
caused no stir with the Hungarian government or in public opinion. Meanwhile, the
Different cases, different faces: Chinese investment 211
greenfield investments are politically unproblematic, as all CEE states have been
aggressively seeking such investment through their IPAs for well over a decade now.
These developments clearly matter for Europe more broadly. Many West European
governments fear CEE states will drive poor bargains in their dealings with Chinese
investors. Some analysts note that the modest economies of the region might make
states there more likely to defect from broader multilateral European efforts to manage
the relationship with China (Godement 2012). Others still worry Chinese firms may
avoid strict labor regulation in their locational choices, thus rewarding lax regulatory
regimes (Burgoon and Raess 2014). In addition, where economic crisis has left hard-hit
localities, sectors, and countries, more spectacular concessions may be in the offing.
Hungary now offers permanent resident status—and a path to citizenship—to anyone
who buys (or whose firms buys) at least 250,000 Euro in Hungarian government bonds.
The offer clearly was aimed at Chinese investors, and hundreds have now begun the
paperwork with immigration lawyers. The indignation this generated elsewhere in
Europe epitomizes the fear of EU members that China’s traditional developing world
strategy of playing regional neighbors against one another might well pay dividends
(Dunai 2012).
This political acceptance of Chinese investment may well be tested going forward.
In April 2012, China announced a $10 billion “special credit line” for Chinese
investment in CEE. It remains to be seen if this fund becomes a tool for “herding”
Chinese investors into priority areas for Beijing. If so, this article’s tentative conclusion
against the “China, Inc.” model may require revision. In the meantime, China intends to
use the fund to develop one “economic and technological zone” in each CEE country.22
This announcement also came with the establishment of a “Business Forum” to
coordinate the growing interest in CEE, where Chinese Premier Wen Jiabao has listed
12 priorities for investment. A follow-up coordination meeting in Beijing was used to
promote these objectives to representatives from 11 Chinese provinces, regions, and
municipalities.
In September 2012, China then established a Secretariat for China-Central and
Eastern Europe Cooperation. The Secretariat includes all ten CEE states in this article
plus six others, mostly in the Western Balkans. It involves 18 units of the Chinese
government and is led by the Ministry of Foreign Affairs (2012). Each CEE state is to
appoint one lead official or agency to coordinate its interactions with the Secretariat.
Given that the proposed investment figures are roughly three times the size of existing
Chinese investment in CEE, the Secretariat is potentially a very large development. To
date, there is little evidence of actual projects being funded, though China Daily has
spoken of “many cooperation deals” having been signed (China Daily 2012). If these
bear fruit, scholars would need to reconsider the proposition—not supported in the
evidence so far—that CEE’s more liberal policy regimes (as compared with the EU-15)
may do better in attracting Chinese FDI.
In the meantime, rather than try to impose a new analytical narrative on the data, this
article has developed three images or “faces” of Chinese investment in CEE alongside a
presentation of the available aggregate data. If and when Chinese investment grows to
very high levels in CEE, the cases in this article may begin to resolve into a pattern.
Some of the cases grabbing attention today will, in retrospect, appear more as outliers,
22
An additional $500 million has been designated as an “investment cooperation fund” for CEE.
212 W. Jacoby
and cases that today appear isolated may later come to look more like harbingers. The
sheer range of CEE country cases makes the region an exciting place for analytically
informed speculation, which is all that is possible given the modest current levels of
investment in CEE.
Acknowledgements Thanks to Weston Baxter, Brian Burgoon, Johnny Harris, Sophie Meunier, Pál Nyíri,
Werner Pascha, Herman Schwarz, Rachel Wellhausen, and an anonymous reviewer for comments on an earlier
version.
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