China´s quest to climb up further the
value-added chain by acquiring leading-edge technology firms has made Germany a
favorite M&A target in the recent past years. Audi´s slogan “Vorsprung
durch Technik” (lead by tech), that´s what the Chinese are currently after: producers
of high-end machines (Krauss Maffei, Putzmeister), fork-lift trucks (Kion), LED
chip plants (Aixtron), graphic electrodes (SGL Carbon) and now industrial roboters
(Kuka). Early 2016, the Chinese conglomerate ChemChina offered to purchase the Swiss agribusiness Syngenta for $43 billion, the
biggest deal so far. A storm of protectionist sentiment is greeting these Chinese acquisitions,
not only by politicians (EU competition tsar Oettinger, German Economic
Minister Gabriel) but also by academics, such as former IFO president
Hans-Werner Sinn and Merics (Mercator Institute for
China Studies) director
Sebastian Heilmann [1].
As summarised in
Table 1, China´s old growth model, embracing trade integration with a fairly
closed capital account, has come to an end ten years ago. Since then, China´s global
inward FDI has first boomed from 2005 to 2010 but since then stagnated as
rising dollar wages have reduced its appeal for investment in the manufacturing
sector. Meanwhile, China´s outward FDI has been booming and increasingly targeted
advanced countries rather than resource-rich developing countries.
Table 1: China´s FDI flows and FDI Restrictiveness
2005
|
2010
|
2015
|
|
Inward FDI, $billion
|
104.1
|
243.7
|
249.9
|
Outward FDI, $billion
|
13.7
|
58.0
|
187.8
|
FDI Restrictions (0 to 1)
|
0.56
|
0.42
|
0.38
|
Source:
http://stats.oecd.org/Index.aspx?QueryId=64225#;
http://stats.oecd.org/Index.aspx?datasetcode=FDIINDEX#
Following (what
is now mainstream) economic policy advice, capital-account liberalisation has
been gradual but continuous. It is noteworthy that China has received far more
inward FDI than it invested abroad, despite being relatively closed as measured
by the OECD restrictiveness index. This index, running from 0 (very open) to 1
(closed) indicates a composite of equity restrictions; screening and approval requirements; restrictions on foreign
key personnel; and operational restrictions such as on land acquisition and
capital repatriation. Despite all the noise from Western industry lobbies and
politicians, China has steadily liberalised its capital account, from an index
score of 0.56 in 2005 to 0.38 in 2015. Importantly, however, China still allows
joint ventures only.
China’s
state-guided outbound industrial and technology policies, aimed at
technological leapfrogging through acquisitions pose more industrial,
competition, and security concerns than acquisitions by SWFs that seek higher risk-adjusted
returns and diversification via passive investments[2].
Some of these policy concerns have been thoroughly discussed by Hanemann and
Huotari (2015)[3].
The most relevant, in my mind, are:
·
Asymmetry in market access. Between
Germany (as part of the EU) and China, there is no level playing field. Germany
belongs to the most open economies (the OECD restrictiveness index score is
0.023 since 2010) while high (> 60%) Chinese local content requirements (“Made
in China 2025”) hit German companies in sectors where Germany is very competitive:
power equipment, new energy, medical technology, industrial robots, large
tractors, and IT for connected cars.
·
Subsidies and non-market advantages. Many
of China´s globally operating companies are receiving preferential treatment
from local or central governments. These subsidies are a source of unfair
competition leading, e.g., to distorted bidding processes in global markets.
·
Technology transfer and industrial hollowing out. It is feared that Chinese
state-controlled owners will end up absorbing key technologies and know-how,
leading to a hollowing out of the industrial base of their Western competitors.
As quipped in a comment to Heilmann´s FT article: “Those takeovers are like the
giant bug in the movie Starship Troopers. It punches a hole in the head and
sucks out the brain, leaving a dead shell.” The erosion of network
externalities - strong in the case of Germany´s car upstream suppliers –
can punctuate and ultimately destroy an entire industry as well as industrial
region.
·
National security threats. Concerns
relate to the erosion of national defence industries, the creation of new channels
for infiltration, surveillance and sabotage. To be sure, the German AWG (Aussenwirtschaftsgesetz, or Foreign
trade & Payments Law)) or CFIUS, the Committee on Foreign Investment in the United States, provide sufficient tools to restrict Chinese
FDI.
In the absence of a multilateral agreement on
foreign direct investment, these policy concerns, however valid, give easily
rise to distortive and discriminatory policy response. It needs strong
independent minds to not follow Professor Heilmann´s FT (op.cit.) fatal ad-hoc recommendations such as to combat
state-driven Chinese companies through state aid or to build discriminating
rules based on the nationality of acquirers. Let´s hope that Angela Merkel did
not fall prey to such bad advice on her recent China trip. Given China´s market
size, policymakers should be aware of costly retaliation measures.
From an economic (rather than from an
industry-lobby) perspective, most of China´s FDI acquisitions provide no reason
for policy intervention. An important yardstick to gauge the broad welfare
effect of China high-tech acquisitions from a trade theory perspective is how
it impacts on Germany´s terms of trade[4].
Welfare gains from international trade are unaffected by China´s acquisitions
as long as they don´t move Germany´s terms of trade, present and future. China´s inward FDI and the ensuing technology transfer can
even improve Germany´s welfare if it falls on industry branches with a
competitive disadvantage (net import position): Germany´s terms of trade
improve, as net imports become cheaper. The reverse holds if China acquires
high-tech in areas where Germany is a net exporter as its competitive advantage
will suffer from lower premium prices; in that case, China´s FDI will likely worsen Germany´s terms
of trade. The Kuka acquisition may be such case. Trade theory provides economic food for thought to reset the examination of Chinese FDI.
[1] Sebastian
Heilmann (2016), “Europe
needs tougher response to China’s state-led investments”, FT 9th
June.
[2] Helmut Reisen (2008), “How
to spend it: Sovereign wealth funds and the wealth of nations”, Voxeu, 5th
June.
[3] Thilo Hanemann and Mikko Huotari (2015), “Chinese
FDI in Europe and Germany: Preparing for a New Era of Chinese Capital”,
Merics/Rhodium Group, Berlin, June.
[4] See Henning Klodt (2008), „Müssen wir uns vor Staatsfonds schützen?“, Wirtschaftsdienst, Vol. 88, Iss. 3, pp.
175-180, http://dx.doi.org/10.1007/s10273-008-0772-z
for excellent analysis (in German).
