MSc East Asian Development and the Global Economy - Dissertation - Ruth Millar

The China Challenge
The Theoretical, Policy and Strategic Implications of its FDI
This dissertation is submitted in partial fulfilment of the requirements for the
award for the degree of MSc in East Asian Development and the Global
Economy.
__
This dissertation contains no plagiarism, has not been submitted in whole or in
part for the award of another degree, and is solely the work of Ruth Millar.
Ruth Millar
Candidate Number: 61619
2013/2014
Word Count: 14,544
Signature:
3rd
September 2014

Acknowledgements
I would like to express my gratitude to my supervisor Professor Jeffrey Henderson,
whose advice and support has been invaluable.

Abstract
This dissertation was undertaken to ascertain whether or not the EU has altered its
theoretical, policy and strategic approach to China with regards to FDI, using a combination
of secondary data analysis and qualitative questionnaires. The focal point of the research is
policy analysis, as policy forms a critical link between theory and strategy. Research has been
undertaken on China’s divergence from traditional FDI theories but it falls short of
considering the development of new theories and likewise the implications of said
divergence for theory/policy/strategy choices. Similarly, much research has been carried out
on EU policy change, Francoise Nicolas’ working paper on China’s Direct Investment in the
European Union: Challenge and Policy Responses, but such research fails to capture the
underlying causes of policy change. As such, this paper seeks to combine the two and
ultimately advance a more comprehensive understanding of their symbiotic relationship.
Analysis of global FDI trends illustrates China’s growing stature within it. However it also
shows limited Chinese investment in the EU, to date. The paper then identifies the key
explanations for China’s divergence from traditional theories: it is a developing country
investing increasingly heavily in developed countries (a ‘reverse’ of the conventional
situation), psychic distance, a lack of Chinese diaspora in the EU, China’s own comparative
advantages, the distinct institutional and cultural traits of China and the drivers of its FDI.
Alternative theories are therefore considered but a number of caveats inhibit their complete
application to China: the framework for an entirely new theory is subsequently put forward.
The theoretical divergence is then applied to the EU: theoretical, policy and strategic change
is outlined. In essence, China’s divergence has signalled a move toward regulatory measures
supported by the strategic desire to level the playing field. Analysis of the UK and Ireland
further confirms these findings. Based on this conclusion a number of recommendations are
suggested, including the need to develop a more in-depth understanding of Chinese FDI, to

The China Challenge: The Theoretical, Policy and Strategic Implications of its FDI
1Abstract
complete the framework for a new theory wholly relevant to the situation, to acknowledge
the relationship between theory, policy and strategy and incorporate it into policy-making to
make it more effective, and finally to address institutional coherence at all levels, especially
if the implementation of an EU-wide policy is to be successful.

Table of Contents
Table of Figures ..........................................................................................................................1
List of Tables...............................................................................................................................1
Appendices .................................................................................................................................2
List of Abbreviations...................................................................................................................3
1. Introduction.........................................................................................................................4
1.1 The Rise of China and Foreign Direct Investment .......................................................4
1.2 The Research Questions ..............................................................................................7
1.3 Structure ......................................................................................................................7
1.4 Defining the Concepts..................................................................................................8
1.4.1 FDI...............................................................................................................................8
1.4.2 Theory, Policy and Strategy........................................................................................9
1.5 Literature Review.......................................................................................................10
1.6 Methodology..............................................................................................................12
2. Foreign Direct Investment: Data ..........................................................................................14
2.1 Global FDI Trends............................................................................................................14
2.2 Chinese OFDI...................................................................................................................17
2.3 Chinese OFDI and the EU................................................................................................20
3. The Theoretical Framework ..............................................................................................28
3.1 Mainstream Theories.................................................................................................28
3.2 How is it challenging mainstream theory? ................................................................33
3.3 Alternative Theories...................................................................................................35
3.4 A Whole New Theory? ...............................................................................................38
4. EU FDI Policy towards China .............................................................................................41
4.1 The United Kingdom ..................................................................................................50
4.2 Ireland........................................................................................................................55
5. Conclusion.........................................................................................................................60
5.1 Summary....................................................................................................................60
5.2 Key Findings ...............................................................................................................63
5.3 Key Recommendations ..............................................................................................64
Appendix...................................................................................................................................65
Bibliography..............................................................................................................................81

1Table of Figures
Table of Figures
Figure 1: Global FDI flows.........................................................................................................14
Figure 2: Top ranking destination country by average value of investment project...............16
Figure 3: Job Creation by Sector...............................................................................................16
Figure 4: China's OFDI versus Global OFDI...............................................................................18
Figure 5: Industrial Sector Distribution of ODI.........................................................................19
Figure 6: Strategic reasons for investing in the EU ..................................................................24
Figure 7: Chinese OFDI in the EU by Industry...........................................................................27
Figure 8: Business Network Internationalisation Process........................................................30
Figure 9: Linkage, Leverage and Learning Model.....................................................................33
Figure 10: The 6 Dimensions of Hofstede's Cultural Theory....................................................35
Figure 11: The Stages of the Evolutionary Life Cycle Model....................................................37
Figure 12: National Investment Policy Changes.......................................................................43
Figure 13: Plot of EU Countries on the OECD FDI Regulatory Restrictiveness Index...............44
Figure 14: The Correlation between China's Rise and the Shift toward Regulation................45
Figure 15: Number of Future Investments by Destination Country in EU27 ...........................47
Figure 16: Chinese Investment in the UK .................................................................................52
Figure 17: A Comparison between General and Chinese Investment in the UK .....................53
Figure 18: Industries targeted in China as Identified by UKTI..................................................54
Figure 19: Key Findings of this Paper .......................................................................................63
List of Tables
Table 1: FDI flows, by Major Region.........................................................................................15
Table 2: Top 10 destinations of China’s OFDI...........................................................................20
Table 3: Stocks held by the rest of the world in the EU27.......................................................22
Table 4: China’s Perception of the EU business environment .................................................22
Table 5: Chinese OFDI Stocks & Flows in the EU, the Form of Investment Made and Rank
Compared with Global Ranking.........................................................................................25
Table 6: Comparison between OLI and LLL Frameworks .........................................................36
Table 7: Framework for a Theory Germane to Chinese OFDI ..................................................39

2Appendices
Appendices
Appendix 1: Chronology of China's Rise..................................................................................60
Appendix 2: A Brief Historical Overview of Sino-EU Relations................................................66
Appendix 3: Ghemawat’s CAGE Framework ...........................................................................67
Appendix 4: Institutional Reform in China: Goals, Means and Limiting Forces...................... 68
Appendix 5: The 6D Model of Hofstede’s Cultural Theory...................................................... 69
Appendix 6: The Change in the Political and Ideological Attitude of EU Member States
toward China Pre and Post Euro Crisis.............................................................................70

3List of Acronyms
List of Acronyms
BIT Bilateral Investment Treaty
CAGE Cultural, Administrative, Geographic and Economic
DJEI Department for Jobs, Enterprise and Innovation
EC European Commission
EEAS European External Action Service
EDO Economic Development Organisation
ELCM Evolutionary Life Cycle Model
EU European Union
EUCCC European Union Chamber of Commerce in China
FDI Foreign Direct Investment
FCO Foreign and Commonwealth Office
GDP Gross Domestic Product
GI Greenfield Investment
IB International Business
ICT Information and Communication Technology
IDA Industrial Development Agency
IMF International Monetary Fund
IP Intellectual Property
IPA Investment Promotion Agency
LLL Linkage, Leverage and Learning Model
M&A Merger and Acquisition
MNC Multinational Corporation
NM Network Model
OECD Organisation for Economic Co-operation and Development
OFDI Outward Foreign Direct Investment
OLI Ownership, Location and Internationalisation
PI Policy Instrument
PRC People's Republic of China
SOE State-Owned Enterprise
TC Transaction Cost
TNC Transnational Corporation
UKTI UK Trade and Investment
UM Uppsala Model
UNCTAD United Nations Conference on Trade and Development
WTO World Trade Organisation

4Introduction
Introduction
1.1 The Rise of China and Foreign Direct Investment
Having overtaken Japan in 2011, China now constitutes the world’s second largest economy.
Recent recalculations reveal it will surpass the US economy as the largest this year. This
prediction is derived from the surge in China’s economy relative to the US: it was recorded
at 43% of the US economy in 2005 compared to a staggering 87% in 2011 (Monaghan, 2014).
This is no surprise. China has experienced unprecedented growth since the 1980s –
averaging 10% GDP growth per annum and accumulating over £1.2 trillion1
in foreign
reserves (Chow, 2010).
China’s remarkable rise (outlined in appendix one) is attributed to an economic model
known as ‘socialism with Chinese characteristics’ - although a market economy, China
exhibits considerable government involvement. This model forms the basis of the Beijing
Consensus, and offers a strong alternative to the widely advocated Washington Consensus2
of neoliberal Western economies. SOEs and protectionist policies to foster firms capable of
global leadership also contributed to China’s rise (Harvey, 2005). Evidence of this model
dates back to the founding of the PRC in 1949. A number of initiatives were implemented by
its founder (Mao Zedang) including the ‘Great Leap Forward’ of 1958 and a ‘Cultural
Revolution’ programme (1966 to 1976). Although both were catastrophic failures, state
involvement was maintained by Mao’s eventual successor – Deng Xiaoping. Deng’s reform
process began with the Four Modernisations, a set of goals devised to strengthen four
fundamental sectors: agriculture, national defence, industry, and science and technology
(Chow, 2010). They incorporated an Open Door policy which permitted foreign investment
into China for the first time. Numerous reforms have since been implemented, e.g. the 1986
1
All currencies were converted on the 11/8/2014. The US$ was valued at £0.59 and the € at £0.79. The
currency of tables and figures is unchanged.
2
A term referring to the liberal economic policies of Structural Adjustment Programmes implemented in
developing countries. They implied trade and capital liberalisation, privatisation, deregulation and
macroeconomic stability (Williamson, 1993).

5Introduction
General Principles of Civil Law which laid the foundation for a market economy and the
reforms entailed with its 2001 WTO accession, predominantly bilateral investment
negotiations regarding market access (Center for Strategic and International Studies, 2014).
FDI, promoted through various reforms, for instance, the aforementioned open door policy
which advanced China’s global economic integration, has been integral to China’s rise. It has
provided China with the necessary tools to further its domestic economic growth, e.g. capital,
foreign market access and labour market training (Chow, 2010). Its benefits quickly
materialised throughout China, most notably job creation, innovation and higher
productivity (Nicholls, 2012) hence the cultivation of an environment conducive to inward
investment via the creation of a readily available human capital supply and various market
institutions. This, together with the gap between China and more advanced economies, gave
China several competitive advantages, specifically cheap labour and production costs (Chow,
2010). Subsequently, China’s FDI inflows soared reaching £71.5 billion in 2012 according to
the EUCCC (2013).
China’s emergence as a source of FDI is, however, a more recent phenomenon, having
evolved through three phases (Wenbin and Wilkes, 2011, p.1):
1. Initiation (1979-1990): State economic planning and government regulations controlled
companies’ activities. Only selected SOEs were allowed to invest overseas under strict
supervision. Foreign exchange reserves were limited. OFDI averaged £0.53 billion p.a.
(Chen, 2009 cited in Wenbin and Wilkes, 2011, p.1).
2. Unstable development (1991-2001): Although OFDI gathered pace, it fluctuated greatly
since it was not considered an economic priority. In 1992 OFDI totalled £2.34 billion, it
dropped to £1.19 billion in 1994, increased again between 1995 and 1998 before
decreasing significantly in 1999 to less than £0.6 billion.

6Introduction
3. Rapid and steady development (2002-present): China’s ‘Going Out’ 3
strategy,
implemented in 2001, stimulated OFDI hence the £71.5 billion recorded in 2012.
Access to natural resources drove initial OFDI. Since then motivations have diversified to
include access to technology and the maintenance of existing markets (Deng, 2003). This has
advanced China’s role as a major source of FDI: it overtook Russia as the largest source
among emerging market investors in 2009, and its global share reached 5% in 2010
(Hanemann and Rosen, 2012). Its rise is expected to continue given various new regulations,
e.g. Chinese local firms no longer require government approval for deals below c. £596
million (Jianxin and Wong, 2014).
The EU4
has been slow to capture Chinese investors’ attention despite being the world’s
largest single market and recipient of global FDI, its secure and legal framework and
welcoming status toward developing5
countries. The situation is compounded by a new
reality whereby developed countries now find themselves competing with new markets and
economies for a share of the economic pie. Additionally, since the global financial crisis of
2008, developed countries have frequently found themselves competing amongst
themselves for new sources of FDI, most obviously Chinese, hence the heightened strategic
significance of FDI policies. The literature has yet to analyse the implications of Chinese OFDI
for policies; this discussion seeks to fill this void.
3
A strategy promoted following China’s WTO accession to maintain economic reform processes and advance
industry champions (Cheung and Qian, 2009).
4
Note: although the EU is the sole focus of this paper, it was not always possible to isolate EU from European
data.
5
This paper employs the UNCTAD classification of developed/developing countries: developed countries
include OECD members (except Chile, Mexico, the Republic of Korea and Turkey) plus all EU members who are
not OECD members, plus Andorra, Bermuda, San Marino, Monaco and Liechtenstein. Developing countries
include all those not mentioned above (cited in Yuefang et al., 2013).

7Introduction
1.2 The Research Questions
The primary research questions this paper will address are:
1. To what extent does China diverge from mainstream FDI theory?
2. What implications has this had for the EU in terms of theory, policy and strategy?
The discussion will also focus on two EU member states; two secondary research questions
are thus implied:
1. How has the UK responded to such implications?
2. How has the [Republic of] Ireland responded to such implications?
1.3 Structure
The paper will first define the key concepts in question (FDI, theory, policy and strategy),
present a short literature review surrounding the theoretical framework of FDI and briefly
outline the methodology employed. It will then summarise global FDI trends and those of
China generally, and regarding the EU. The dominant theories of FDI, drawn from the IB
school of thought, will then be investigated including the eclectic paradigm, the UM and NM,
and the concept of internationalisation. This will ultimately show that China warrants
adapted or new theories more relevant to its situation, namely that of ‘late developers’ and
an evolutionary framework. The discussion will consider the significance of China’s
divergence from mainstream theories regarding policy choices to attract FDI. The empirical
evidence will have already underlined limited Chinese investment in the EU; based on this
the response of the EU and its member states will be illustrated. The discussion will then
focus on two member states – the UK and Ireland – to analyse the implications further. The
conclusion is somewhat intricate: China’s rise has had economic, political, social and cultural
implications. This has led many nation states to reconsider traditional policies and prepare to
adapt to a possible new global economic order where China plays a major role. Despite this
recognition, and the subsequent development of China strategies, institutional incoherence

8Introduction
is limiting their successful implementation, a limitation which is undoubtedly preventing the
formulation of effective policy measures.
1.4 Defining the Concepts
1.4.1 FDI
A basic definition denotes FDI as a measure of foreign owned productive assets. It is
considered a measure of economic globalisation6
and source of growth for the host country
(Foreign Direct Investment, 2003). A more comprehensive definition defines it as “an
investment involving a long-term relationship and reflecting a lasting interest and control by
an entity resident in one economy (foreign direct investor or parent enterprise) in an
enterprise resident in another economy….” (OECD, 1996 cited in EC, 2013, p.120). It has two
dominant forms: GIs, whereby foreigners create productive assets, and M&As through which
foreigners purchase existing assets. It is a defining aspect of the global economy in that a
country’s ability to engage in FDI is an indicator of their global performance and
competitiveness (Eurostat, 2013). Four dominant factors drive FDI (EC, 2013):
1. Market-seeking: to access customers and serve markets directly rather than via exports.
Factors including market size and the access it can provide to other regional or global
markets dictate market attractiveness.
2. Resource-seeking: to access labour resources, raw materials, physical infrastructure and
technological assets etc.
3. Strategic-asset seeking: to obtain access to advanced technologies, skills and other
relevant capabilities to increase overall competitiveness and cultivate comparative
advantages.
6
Defined as an international system characterised by the integration of information, technology and capital
across borders resulting in the development of a ‘global’ village (Friedman, 2000)

9Introduction
4. Efficiency-seeking: to exploit economies of scale and scope through locating different
parts of the production chain in different countries. Advances in ICT, transportation and
trade liberalisation have popularised this determinant.
The growing global recognition and appreciation for FDI has led to the creation of over
10,000 EDOs and IPAs worldwide with the sole purpose of attracting FDI. There is a global
scramble for investment therefore policies have acquired a new found crucial status
(Nicholls, 2012).
1.4.2 Theory, Policy and Strategy
To extensively evaluate China’s divergence from mainstream FDI theory and the subsequent
implications, one needs to understand the prime concept – policy – and its relationship with
theory and strategy.
Theory is essentially a “system of ideas explaining something” (Allen, 1990, p.1266). In
economic terms theory would therefore be, for example, the adherence to liberal economic
theory which advocates “that free, competitive markets would result in the greatest
prosperity for all.” (Vandevelde, 2010, p.75).
A basic definition of policy is untenable given ambiguity but agreement has been reached on
some of its general interpretations. For example, it is regarded as a bid to define, structure
or direct methodical courses of action, especially where uncertainty prevails. Policy involves
determining and prioritising the means to an end, as well as identifying their relationship.
Policy-making is also considered a continuous and indefinite process. It is believed that
values and ideology inform this process (Jenkins, 2007, p.25) thus its formulation and
implementation is viewed as “a prime medium in modern nation states for the packaging,
communication and promotion of values and ideology.” (ibid, p.28). Policy is furthermore
considered as defined and constrained by its theoretical premise, i.e. one’s choice of theory
limits the policy variables available (Gregg, 1976).

10Introduction
Many wrongly assume policy and strategy as twofold but policy is the means to achieve a
strategy. Henry Mintzberg, a renowned strategy scholar, provides a widely-advocated
definition: “Strategies are both plans for the future and patterns from the past.”(Mintzberg,
1987, p.66). Based on this, DeWit and Meyer (2010, p.5) maintain that strategies are
composed of three elements: process - how a strategy has come to be, content - the product
of the process and context - the circumstances from which process and content have been
derived.
Based on the above, one could argue that the relationship between the three is as follows:
theory is the context from which a strategy is developed; policy comprises the content
component; and the strategy formulated is a product of these two. Put simply, policy,
defined by theory, is the means to an end, the strategy. It becomes apparent that to
comprehensively assess the EU’s policy response, consideration of both theory and strategy
is intrinsic.
1.5 Literature Review
There is a strong body of literature surrounding FDI stimulants. This will be discussed in
further detail later but to understand the motivations behind the research questions it is
fundamental to debate the basics of the current literature. The focus of this review will be
on the theoretical literature as (a) theory informs policy which in turn leads to strategy and
(b) disagreement is confined to theory rather than policy (Walt, 2005); this focus facilitates
the analysis of both primary research questions.
The IB school of thought largely dominates FDI theory. Such theories were initially hatched
in response to global FDI trends but are now predominantly theory driven, mostly derived
from the concept of internationalisation, defined as “the consequence of a process of
incremental adjustment to changing conditions of the firm and its environment.” (Aharoni,
1966 cited in Johanson and Vahlne, 1977, p.26). IB advocates agree that the individual

11Introduction
manager, firm, industry and environment comprise the most important levels of analysis
(Buckley and Lessard, 2010). However differences of opinion surface at this point.
Despite both Dunning and Johanson and Vahlne (1977) advocating a rational economic
school of thought (which “views internationalisation as engagement in cross border activities
motivated by rational economic considerations.” (Buckley and Hashai, 2010, p.26)) they
posit varying motivations for FDI. Dunning’s eclectic paradigm argues that FDI is a means to
exploit one’s comparative advantages abroad. Conversely, Johanson and Vahlne’s UM
postulates psychic distance - defined as “the sum of factors preventing the flow of
information from and to the market.” (Johanson and Vahlne, 1977, p.24), e.g. religion or
business practices - as the defining factor. Ghemawat’s (2001) CAGE framework reinforces
this idea, illustrating how distance can inhibit the development of investment relations
between two nations. What separates the CAGE framework from psychic distance however
– and thus frequently places Ghemawat on the opposing side - is Ghemawat’s concurrent
proposition that distance can be exploited to create a competitive advantage. Johanson and
Vahlne have, however, acknowledged the limitations of psychic distance as the sole factor,
hence their NM (2009) which instead focuses on networks/relationships as the prime
motivations. Supply and demand, which directs efforts toward minimising TCs, divides Hirsh
from his IB counterparts. Hirsch believes his propositions are superior to those supporting
rational economic considerations for a multitude of reasons including the distinction made
between the cost of flows and the performance of specific value-adding activities, its
inclusion of behavioural motivations alongside economic driver and the simultaneous
consideration of destination/resource-abundant countries (Buckley and Hashai, 2010).
However IB theory has its shortcomings. It remains confined to traditional sources of FDI –
the West – despite its evolution alongside globalisation, e.g. Johanson and Vahlne’s NM.
Furthermore its focus is on why investment goes global therefore it falls short of considering

12Introduction
what happens ‘on the ground’. The analysis of the relationship between economic
development and FDI is consequently limited. Finally, China’s rise as a major source of FDI
has resulted in the emergence of a global discourse on whether or not China falls in line with
mainstream theories. For example, SOEs are a key feature of Chinese FDI: IB theory does not
consider the owner(s) a prime unit of analysis.
State paternalism (Child and Tse, 2001), a distinction between push and pull factors (Deng,
2003), the idea of comparative disadvantages driving FDI (Child and Rodrigues, 2005) and
ideological differences (He and Lyles, 2008) are the dominant concepts informing this
discourse, arguing against its application. Each calls for the extension of existing theory -
some for a new theory - to better understand Chinese OFDI. However, there is a significant
dearth of scholars responding to this call. Yuefang et al. (2013) attempted to devise a
feasible alternative but their framework folds when considered against empirical evidence.
Warner et al. (2004) appears to be the sole exception to have provided a credible alternative:
the ELCM which can be contextualised hence its relevance, though they themselves
acknowledge its caveats.
The arguments which inform the discourse are compelling and lead many to question their
original position toward China. Theory is a causal explanation: it allows us to identify the
central forces acting on real-world behaviour and thus render reality comprehensible (Walt,
2005). The EU has arguably recognised China’s divergence from mainstream theory and has
subsequently begun to respond.
1.6 Methodology
To comprehensively analyse the implications of China’s rise for FDI policies a large body of
empirical data will be employed. The majority, extracted from European and Chinese
publications, will be secondary in nature. Although obtained from reputable sources, there
are issues concerning its accuracy. It is likely to be understated given the discrepancies

13Introduction
between approved data when compared with realised data, and likewise the omission of
investment data which has not undergone the formal approval process. Furthermore, the
publication of Chinese figures has only been published in line with IMF and OECD guidelines
since 2003 (Cheung and Qian, 2009). Moreover, China tends to publish its figures
significantly later than its counterparts, high levels of confidentiality often skew the data and
it is frequently regarded as erroneous given the complexities of FDI itself. Finally, the
empirical evidence abstracted from European sources differs significantly when compared
with Chinese sources (Hanemann and Rosen, 2012). It should also be noted that efforts have
been made to use the most recent data available thus the year referenced varies throughout.
To strengthen the findings of this secondary data a qualitative questionnaire has been sent
to two European IPAs: UKTI and IDA Ireland. They have been chosen for strategic reasons:
the former has managed to attract the most OFDI from China of any member state, whilst
the latter, despite its global success in attracting FDI, has failed to captivate its Chinese
audience. The qualitative nature of the questionnaire facilitated a more in-depth study than
would have otherwise been accomplished, for example more extensive information was
requested when required. However, it must be noted that despite this, extrapolation of the
findings is limited given the small sample size.
Finally, both sets of data will be combined with the theoretical background of FDI allowing a
more thorough analysis of the issue at hand. Given the somewhat predictable nature of the
conclusion, it is fair to say that the methodology supports a deductive logic. This
combination of methodologies provides a solid foundation from which to draw the most all-
inclusive conclusion possible.

142. Foreign Direct Investment: Data
2.1 Global FDI Trends
Following the 2008 financial crisis, global FDI flows dropped by c.39% between 2007 and
2009. However 2010 brought a 15% increase, restoring figures to levels similar to the pre-
crisis average (figure one). New market access and capacity-building in preparation for a
full rebound are driving recovery, though this process remains incomplete (Kearney, 2010
cited in Nicholls, 2012, p.7).
Figure 1: Global FDI flows
Source: UNCTAD, 2014, p.1
The crisis has also had considerable implications for the composition of flows. In 2013, for
the 2nd
consecutive year, developed countries recorded historically low shares of FDI inflows
(39%) compared with their developing country counterparts who achieved a record 52%, or
£452 billion, in 2013 (UNCTAD, 2014). Europe’s share dropped by 7% between 2011 and
2012, whilst both the US and Asia realised increases of 3% each. The US was ranked the top
global destination for 2012, and the UK first for Europe (IBM, 2013).
0
500
1000
1500
2000
2500
Pre Crisis
Average
2005-2007
2007 2008 2009 2010 2011 2012 2013
Global FDI flows (billions US$), average 2005-2007 & 2007 -
2013 (US$ Billion)

Table 1: FDI flows, by Major Region
Global Flows by Region 2011-2013 (US$ Billion)
Region/Economy 2011 2012 (revised) 2013
(estimated)
Growth Rate
2012-2013 (%)
World 1691 1317 1461 10.9
Developed
Economies
866 516 576 11.6
Europe 521 236 296 25.2
EU 473 207 286 37.7
North America 267 211 223 5.8
Developing
Economies
729 715 759 6.2
Africa 46 53 56 6.8
North Africa 9 14 14 -1.8
Other Africa 37 39 42 10.0
Latin America &
the Caribbean
242 250 294 17.5
South America 131 144 134 -6.8
Central America 22 25 48 92.7
Caribbean 79 82 113 37.8
Developing Asia 439 409 406 -0.8
West Asia 49 48 38 -19.6
East Asia 236 216 219 1.1
South Asia 44 32 33 3.2
South East Asia 110 113 116 2.4
Transition
Economies
96 87 126 45.1
Source: UNCTAD, 2014, p.4.
Regarding job creation Costa Rica replaces the US whilst Ireland succeeds the UK as Europe’s
top destination, in relative terms. Considering FDI in terms of value – where value is derived
from both the sector and business activity of the project – further modifies global trends.
2011 saw Ireland ranked first in this instance (IBM, 2013).

Figure 2: Top ranking destination country by average value of investment project
Source: IBM, 2013, p.5
The final aspect which must be considered concerns sectoral distribution. Transport
equipment has dominated the global FDI industry throughout both 2011 and 2012. However
2012 resulted in a downward trend in terms of jobs created throughout the leading sectors.
Tourism was the obvious exception with a 15% increase between 2011 and 2012 (IBM, 2013).
Figure 3: Job Creation by Sector
Source: IBM, 2013, p.8
5.36
5.37
5.41
5.44
5.63
5.64
5.74
5.83
6.24
6.46
Finland
Sweden
Australia
Hong Kong
Switzerland
UK
South Korea
Singapore
Denmark
Ireland
Top Ranking Country by Average Value based on World
Average in 2011
World Average Increase of 5.1% on 2011
-25 -20 -15 -10 -5 0 5 10 15
Transport Equipment
Tourism
Chemicals
Business Services
Electronics
ICT
Job Creation by Sector: Percentage Change 2011-2012

The data highlights a relatively erratic FDI environment. The crisis has evidently had
profound implications, one of which has been the opportunity for China to project its new
status as a global player through advancing its involvement in FDI. The following section
outlines its current position.
2.2 Chinese OFDI
As previously noted China’s OFDI has grown significantly; net outflows are expected by the
end of 2014 (Cheung and Qian, 2009). China thus represents a prime example of a
developing country challenging the notion that only developed countries can be a source of
FDI, and is leading the changing composition of global trends. Its increasing OFDI to
developed economies is driven by China’s pursuit of international competitiveness and
resources, e.g. technology and human capital. Access to such capabilities and resources will
allow China to foster production competitiveness and sustainability. China’s 12th
5 Year Plan
(for the period 2011-2015) outlines a number of targets aimed at promoting OFDI (Huang
and Wang, 2011), each heightened by China’s recognition of the need for “a more balanced
growth model, in which we place equal stress on imports, exports, attracting foreign capital
and promoting outbound investments, instead of the current dependence on exports and
foreign capital.” (The National People’s Congress, 2011 cited in EUCCC, 2013, p.6). The
targets to reach by 2015 are (Huang and Wang, 2011):
1. To increase OFDI flows by 17% p.a. to £89 billion;
2. To achieve an OFDI stock £298 billion;
3. The number of overseas contracted projects is to total £107 billion with a turnover
exceeding £71.5 billion;
4. To have more than 1 million nationals working overseas;
5. To accord priority to the energy, energy conservation, raw materials, biotechnology,
agriculture, services, high-end manufacturing and innovative technology sectors.

Current data indicates China is on track to successfully conclude this Plan: as previously
noted its OFDI flows reached £71.5 billion in 2012 whilst its stocks were recorded at £255
billion in 2011 (Tusiad, 2013). This follows generally positive trends experienced since 2000:
Figure 4: China's OFDI versus Global OFDI
Source: UNCTAD, PBOC/SAFE, Rhodium Group cited in Hanemann and Rosen, 2012, p.11
Based on figure four China’s share of global flows and stocks is approximated at 4.4% and 2%,
respectively: its growth surpasses global levels. Many cite SOEs as the dominant source of
FDI but new regulations are encouraging more private investment; by the end of 2011 66.2%
of China’s stock originated from SOEs, 3% less than 2010 (Tusiad, 2013). It must be noted
that private investors were not permitted to invest abroad until much later than their SOE
counterparts.
Regarding sectoral distribution the picture is varied. Previously directed towards goods,
current trends depict a growing preference for services sectors. However FDI is still largely
confined to the lower levels of the industries, especially labour-intensive and energy sectors
where China has already achieved a mature domestic market.
0
500
1000
1500
2000
2500
3000
1985 1990 1995 2000 2005 2010
China's OFDI versus Global OFDI 1985-2010 (US$ Billion)
Global Outward FDI Flows Chinese Outward FDI Flows

Figure 5: Industrial Sector Distribution of ODI
Source: 2011 Statistical Bulletin of China’s Outward Foreign Direct Investment cited in Tusiad, 2013
GIs and M&As dominate China’s foreign entry mode although the use of equity investment,
stock exchange and investment funds is growing. GIs precede M&As, comprising 86.9% of
total deals made in 2011 and accounting for 53.3% of total value accumulated (World
Investment Report 2012 cited in Tusiad, 2013). Asia attracts the majority of Chinese OFDI at
61% but Europe, Africa and Oceania are proving increasingly attractive with respective
increases of 22.1%, 50.4% and 75.6% between 2010 and 2011. The regional distribution in
2011 was: Asia (61%), Latin America (16%), Europe (11%), North America (3%), Africa (4%)
and Oceania (5%) (Tusiad, 2013). Just three European countries featured in the top 10
destination countries:
0 100 200 300
Leasing & Business Services
Mining
Wholesale & Retail Trades
Manufacturing
Financial Intermediation
Transport, Strorage & Post
Real Estate
Production & Supply of Electricity, Gas &…
Construction
Agriculture, Forestry, Animal Husbandry…
Scientific Research, Technical Service &…
Information Transmission, Computer…
Services t Households & Other Services
Management of Water Conservancy,…
Hotel & Catering Services
Other Sectors
Industrial Sector Distribution of ODI 2011 (US100 million)

Table 2: Top 10 destinations of China’s OFDI
Top 10 Destination Countries for China’s OFDI in 2011
Country US$ Million
Hong Kong, China 35655
Virgin Is. (E) 6208
Cayman Islands 4936
France 3482
Singapore 3269
Australia 3165
United States 1811
UK 1420
Luxemburg 1265
Sudan 912
Source: Ministry of Commerce China cited in Tusiad, 2013
However as China further diversifies its FDI motivations, EU member states find themselves
in receipt of more Chinese OFDI, as evident below.
2.3 Chinese OFDI and the EU
Sino-EU diplomatic relations (established in 1975) were initially focused solely on economic
relations. The chronology in appendix two is an extract from one published by the EEAS
(2013). A number of factors should be noted:
1. Events included in the appendix are those which have been highlighted in the original
document: they relate predominantly to the EU-China Summit.
2. The word investment appears just four times in the document.
3. Relations appear reliant on agreements and dialogues rather than actions and outputs.
4. There is no mention of the launch of negotiations for the EU-China investment
agreement.
Although it is not explicitly referred to, the two formally declared their relations a Strategic
Partnership in 2003, i.e. “a long-term commitment by two important actors to establish a
close relationship across a significant number of policy areas.” (Crossick and Reuter, 2007,

p.4). The partnership is based on the 1985 Trade and Cooperation Agreement and was
spurred on by accelerating trade relations as well as common goals, including the aspiration
to improve national security and combat piracy (EEAS, 2013). Among all of the EUs ‘new
generation’ strategic partnerships this is the most developed and mature. It has diversified
to a bilateral, multilateral and global level. It includes third party issues, e.g. China’s relations
with Africa, and is increasingly institutionalised through annual summits and political
dialogues etc. Despite this, the partnership is often considered aimless (Smith and Xie, 2010).
Tensions constantly plague economic relations (particularly China’s trade surplus), political
sensitivity provokes poor mutual trust and both appear somewhat disappointed with the
partnership’s progress. Such adversities relate back to the partnership’s establishment: no
consensus on its meaning was ever agreed. The result has been a somewhat elusive
partnership with little substance. At most it is a bilateral economic cooperation and a means
to mutually respond to global challenges (Zhonping, 2007). Furthermore, its economic
cooperation has been largely confined to trade. Both parties are nevertheless seeking to
change this, hence the EU’s identification of China as a prime target for OFDI attraction and
the initiation of negotiations for an investment agreement. This agreement could signify a
watershed for investment relations, especially considering Europe’s low share of Chinese
investment (accounting for just 0.3% of EU stock) and China’s continued preference for
other regions (Eurostat, 2014; EUCCC, 2013):

Table 3: Stocks held by the rest of the world in the EU27
Stocks held in the EU27 by Region 2009-2012 (€ Billion)
2009 2010 2011 2012
Total extra EU27 2783.4 3144.7 3768.1 3947.4
Europe (non EU) 540.8 625.2 865.1 959.2
Africa 37.3 40.2 47.2 77.7
North America 1214.8 1394.0 1665.7 1679.4
Central America 397.9 433.8 597.1 610.9
South America 79.2 101.0 112.9 113.3
Asia 299.3 343.9 412.5 459.3
Of which China 5.9 6.1 18.5 26.8
Oceania 32.8 33.0 39.4 37.6
Offshore
Financial Centres
642.1 709.2 917.0 947.3
Source: Eurostat, 2014
Table 4: China’s Perception of the EU business environment
Perception of the EU Business Environment for Chinese Investment, when compared with
other regions
Region EU is more favourable EU is less favourable EU is the same
Africa 15% 85% 0%
Australasia 11% 26% 63%
The Middle East 15% 69% 15%
Latin America 31% 56% 13%
North America 33% 21% 45%
Southeast Asia 48% 28% 24%
Source: EUCCC, 2013, p.16
FDI flows depict a similar situation. Between 2004 and 2010 just 5% of OFDI flows were
destined for Europe, compared with 72% for Asia. However recent figures demonstrate
growth in Chinese OFDI to Europe - it increased threefold between 2006 and 2009, and
tripled again by 2011 reaching £6 billion. The number of deals made exceeding £596 million
also reached c.100 in 2011 (Hanemman and Rosen, 2012, p.3; Rapoza, 2012). Finally the EU

is welcoming an increasing percentage of China’s large-scale GIs and M&As, 22% and 24%
respectively, where the value surpasses £596,000. M&As dominated in terms of value
(c.87.5%) whilst GIs led as regards projects (approximately 58%) for 2011 (EUCCC, 2013).
China’s interest in the EU is evidently limited but increasing. Many attribute this to the euro-
crisis which challenged EU solvency and viability but also led the EU to emphasize its
openness to FDI. Positive developments have ensued primarily as a result of increased cross
border M&A activity “as corporations have sought to restructure and stabilise their
operations in the wake of the crisis…” (Nicholls, 2012, p.15). Numerous efforts were also
made to reinstate its attractiveness as an FDI destination, for example its Communication
Towards a Comprehensive European International Investment Policy of 2010. The policy was
devised to increase market access to the EU as well as foster an investment environment
that is stable, fair and properly regulated. Likewise various countries were identified as
targets for FDI promotion – as noted this includes China (EC, 2014b).
Chinese companies, alongside capitalising on the euro-crisis, have identified a number of
reasons for increasing investment in Europe7
:
7
Findings are based on the result of 74 surveys carried out August-November 2012. Only respondents from
mainland China who had completed a minimum of one investment in the EU were chosen (EUCCC, 2013).

Figure 6: Strategic reasons for investing in the EU
Source: EUCCC, 2013, p.13
Regarding which EU country to invest in a number of other factors aside from those in figure
six feature; local market access/EU entry point (71%), the presence of a local business
partner (26%), ease of doing business (21%), technology access (17%), ‘other’ (13%),
competitive costs (8%) and government incentives (4%). Research has also shown that an
industry agglomeration - where a strong cluster has developed and has initiated a ‘catalyst
effect’ – incentivises investment further. For example, Sweden is linked with
telecommunications whilst the UK is coupled with financial services and high-technology
industries (EUCCC, 2013, p.15). Such strategic reasons and agglomeration effects arguably
explain the distribution of Chinese FDI in the EU278
outlined in table five:
8
Although Eurostat and MOFCOM data was presented in the text, only Eurostat data is reference here. It must
also be noted that the data was compiled prior to Croatia joining the EU in 2013 hence EU27.
0% 50% 100%
To provide goods/services for the European market
To provide goods/services for the Chinese market
Use local intellectual and R&D resources
To provide goods/servives for other markets (not…
Meeting request from Chinese customers/partners…
Logistical and production reasons
Other
Meeting request from EU/EU Member State…
Meeting request from Chinese authorities to enter…
Primary Strategic Reasons for Investing in the EU as
Identified by Chinese Investors

Table 5: Chinese OFDI Stocks & Flows in the EU, the Form of Investment Made and Rank
Compared with Global Ranking
Chinese OFDI Stocks & Flows in the EU (2010), Form of FDI (2000-2010) and Rank
Compared with Global Ranking
FDI Stock
($ Million)
FDI Flows
($ Million)
Number GIs
2000-2010
Number
M&As
2000-2010
Rank Compared
to the Rest of the
World 2000-2010
Euro Area
(16)
5,833 -261 N/A
EU-27 8,927 977 N/A
Austria 184 4 6 5 +1
Belgium -742 147 12 3 -3
Bulgaria 23 7 6 1 +1
Cyprus N/A N/A 0 1 +1
Czech
Republic
72 3 10 1 0
Denmark 506 19 6 1 -7
Estonia 7 -3 0 0 -
Finland 68 86 1 4 +1
France 472 33 46 14 +2
Germany 1,060 412 113 33 -1
Greece 5 N/A 5 0 +14
Hungary 139 131 14 4 +14
Ireland -1,182 -1,060 6 1 -9
Italy 423 -27 31 16 -2
Latvia 423 -27 1 +5
Lithuania 3 0 0 0 -
Luxembourg N/A 73 1 1 -5
Malta 7 3 0 0 -
Netherlands 345 252 32 15 0
Poland 325 11 15 1 -3
Portugal N/A 3 5 0 +1
Romania 69 -9 13 1 +4

Slovakia 49 23 0 0 -
Slovenia 0 0 0 0 -
Spain N/A N/A 22 1 -8
Sweden 1,468 N/A 14 6 +4
UK 618 13 69 26 -1
Source: Eurostat, Rhodium Group, UNCTAD, 2011 cited in Hanemann and Rosen, 2012, pp.34 & 38
France, Germany and the UK (often referred to as the EU’s Troika) attract ample Chinese FDI.
Ireland, despite its noteworthy global status, lags considerably, dropping nine places when
compared with its global ranking. Hungary and Greece are the ‘outliers’. Both countries rank
significantly higher when compared with their global placement though there is a valid
explanation. China’s Yantai Wanhua Polyurehanes acquired Hungary’s Borsodchem for £1.13
billion whilst China’s Ocean Shipping (Group) Company was awarded a long-term lease for
the Greek port of Piraeus, an investment that came with a £417 million modernisation fund.
These one-off large investments have somewhat distorted the distribution. This explanation
is linked with China’s aforementioned interest in fiscally troubled countries who are
privatising assets as a result of the euro-crisis, especially infrastructure where China can reap
a long-term return on investment (Hanemman and Rosen, 2012, p.38; Rapoza, 2012).
China’s industry investment is dictated by efforts to move up the value chain, i.e. away from
labour-intensive industries characterised by cheap labour costs towards building a
comparative advantage that can help to increase their EU market share. This parallels the
diversification away from SOE led investment in Europe where the majority of Chinese
investors are in fact private: 63% of deals made between 2000 and 2011 were private, e.g.
Geely’s purchase of Sweden’s Volvo. However it must be noted that private investors
dominate only with regard to the number of jobs created and deals made; SOEs account for
72% of value derived from FDI as they made a small number of large acquisitions, e.g. China
Investment Corporation purchased GDF Suez’s exploration business for £1.9 billion (ibid).

This is most likely a result of the concentration of SOEs in specific industries, e.g. energy and
infrastructure.
The top ten industries targeted in the EU are:
Figure 7: Chinese OFDI in the EU by Industry
Source: Rhodium Group cited in Hanemann and Rosen, 2012, p.41
In sum the 2008 crisis caused an unprecedented drop in global FDI flows, though pre-crisis
levels are being restored. What remains is the power shift to emerging economies; they
retain a significant share of global FDI. Developed countries are vying for a share of these
non-traditional sources with many targeting China. China’s increased contribution to FDI
flows is the result of domestic and international initiatives and developments. Originally
directed toward market and natural-resource seeking industries, the flow of Chinese OFDI is
shifting to the benefit of the EU. However the EU’s share remains limited when considered
against its noteworthy global status. Nonetheless clusters and a highly competitive business
environment continue to serve the region well. The EU’s challenge, now, is to continue to
attract China. The investment agreement does represent the start of a new policy stance
with respect to China but to be successful, it needs to be based on a clearly understood
theoretical premise.
0
20
40
60
80
100
120
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
Chinese OFDI in the EU by Industry, 2000-2011
Value ($ Million) Number of Projects

28The Theoretical Framework
3. The Theoretical Framework
The literature review indicated the IB school of thought as a prime informer of FDI theory. To
assess the extent, if any, of China’s divergence from this school requires the application of
each theory to the Sino-EU context. One can then determine if alternative theories are
necessary.
3.1 Mainstream Theories
Dunning’s eclectic paradigm, or OLI framework, is a strong starting point from which to
initiate discussions. Its principles are simple: a country will engage in FDI if it has ownership
advantages relative to indigenous firms, e.g. a competitive advantage in technology; a
location advantage which denotes resources favouring international distribution and
ultimately FDI, and finally an internationalisation advantage which promotes FDI based on
the potential net benefits derived from foreign production (Dunning and Narula, 1996;
Dunning, 2000, pp.163-164). Numerous factors are accounted for including the economic
and political context of the home and host country, the industry’s nature and value-adding
activities, the firm itself and finally the motivation behind FDI. Contextualising this
framework enables one to analyse the significance of FDI, debate its challenges and
opportunities, and question the motivation for engaging in FDI (Dunning, 2000). It must be
noted that the OLI framework is a culmination of elements from other theories; its
inapplicability to the context at hand is a result of this and will become apparent as the
discussion progresses. Besides this, it is considered more relevant in explaining FDI to
developing rather than developed economies (Yuefang et al., 2013, p.594). We now move to
consider two dominant IB theories and assess their relevance to the Sino-EU context.
Johanson and Vahlne’s UM (1977) construes decision-making as occurring in stages: the firm
exports via a host country agent, a sales subsidiary is eventually established and ultimately
the firm builds production facilities in the host country. The aforementioned physic distance

concept dictates the time-scale. Although similar findings on the incremental process have
been documented, e.g. Knickerbocker (1973 cited in Johanson and Vahlne, 1977, p.24), they
fail to explain how internationalisation is brought about: psychic distance is used to fill this
void. Through the UM’s lens one can understand China’s [initial] reluctance to invest in
Europe: the psychic distance between the two is self-evident. For example, almost 5,000 km
divides Beijing from Brussels while there are some 290 languages spoken across mainland
China compared with just 23 in Europe. This is despite a universal belief that ICT revolutions
have created a small and homogenous global market, a belief strongly refuted by Ghemawat
(2001). He employs a CAGE framework to argue his case (appendix three) which again
highlights the distance between the two, e.g. in 2012 the EU’s GDP was recorded at £9.9
trillion compared with China’s £4.9 trillion (World Bank, 2014). Likewise the EU operates on
the premise of liberal democracy whilst China is socialist with Chinese characteristics. This
affirms the UM’s unsuitability with respect to the Sino-EU investment context.
The UM understood the business market as neoclassical in nature with numerous
independent customers and suppliers operating simultaneously. This has since been revised
to interpret the market as a network or web of relationships which define the market and
help to foster the trust and commitment essential in accumulating the knowledge required
for FDI. This revision led to the NM which replaces psychic distance with ‘outsidership’ [of a
network] as the prime factor dictating the pace of FDI (Johanson and Vahlne, 2009).
This NM incorporates some original features of the UM, e.g. the establishment chain, but
allows for deviation given the advance of globalisation since 1979. For example, it can
explain the concept of ‘born global’ (whereby a firm is born a MNC) as it allows for a firm’s
rapid internationalisation given the knowledge and learning a network provides.
Internationalisation, under the NM, is deemed a bilateral process (Anderson and Weitz, 1992
cited in Johnanson and Vahlne, 2009, p.1414): without mutual reciprocation the relationship

cannot proceed and “A firm that does not have a position in a relevant network is an
‘outsider’…” (Johanson and Vahlne, 2009, p.1415). Any attempts to enter a foreign market
are likely to incur both the liability of foreignness9
and ‘outsidership’. In essence the NM
posits that a firm is embedded in a constraining and enabling business network;
internationalisation, and with it FDI, are understood as a means to strengthen one’s position
within this network (ibid, p.1423). To understand how this model drives FDI its basic
mechanism must be considered:
Figure 8: Business Network Internationalisation Process
Johanson and Vahlne’s Business Network Internationalisation Process Model
(2009 Version)
Source: Johanson and Vahlne, 2009, p.1424
Opportunities, which comprise a subset of knowledge, form the mechanism’s core. A firm’s
network position facilitates the pursuit of opportunities within the network, which can be
used to facilitate mutual learning and trust-building. Relationship commitment can then
9
“all the additional costs incurred by MNCs operating in a foreign country which local firms don’t have to bear.”
(Kindleberger, 1969 cited in He and Lyles, 2008, p.489).

increase or decrease, strengthening or weakening a firm’s network position. Through this
analysis two prime FDI drivers are identified:
1. The firm can follow existing, or identify new opportunities in a foreign market;
2. The partner firm may incentivise the firm to follow its internationalisation strategy or
push the firm into a new market.
Essentially the state variables – knowledge opportunities and network position – initiate the
internationalisation, or FDI, process (ibid, pp.1424-1425).
Looking back to the empirical data on Chinese OFDI it is evident that Asia has received the
majority. One could argue that the large numbers of Chinese diaspora dispersed throughout
Asia (who facilitate the emergence of networks and relationships) are principal explanations.
The number of Chinese in Europe pales in comparison to Asia; 4.73% and 78.10%,
respectively (Latham and Wu, 2013, p.18). The argument is reinforced by the previous
evidence on psychic distance. All things considered one can firmly assert that neither of
Johanson and Vahlne’s models can comprehensively explain Chinese OFDI10
.
One must therefore look to alternative schools – in this case a model based on firm
configuration and internationalisation. The model is derived from a paper by Seev Hirsch (An
International Trade and Investment Theory of the Firm) which looks to supply and demand as
the deciding factor between trade and investment. The model goes beyond the home-host
country view by accounting for foreign resource-abundant countries. Two factors
characterise the decision-making process: the location – where is the cheapest location
regarding overall costs, and control – which value-adding activities should be internalised or
externalised so as to minimise overall costs. The ultimate decision represents the optimal
configuration to minimise TCs. In sum “The choice between alternative configurations is
10
This is somewhat hypocritical: Chinese investment in Africa probably incurred similar challenges regarding
psychic distance and a lack of diaspora. However, Africa’s significant endowment with natural resources most
likely counteracted such challenges.

captured as a systematic comparison between the costs of value-adding activities and the
cost of product and knowledge flows…” (Buckley and Hashai, 2010, p.47). Although more
scope is provided for alternative motivations (given the aforementioned superiorities of this
model) it still fails to explain increasing Chinese OFDI into Europe. Many Chinese firms’
comparative advantages are derived from domestically low costs, predominantly labour. In
fact the surge of investment into China was to minimise MNCs’ costs and capture a share of
the Chinese market: it is more relevant in explaining inward, rather than outward, flows
(Buckley and Hashai, 2010).
Finally we consider the LLL model which seeks to identify how latecomers challenge the
global economy through FDI (Matthews, 2006a cited in Yuefang et al., 2013, p.596). It posits
that MNEs from ‘latecomers’ turn disadvantages into advantages through knowledge
absorption (Humphrey and Schmitz, 2002 cited in Yuefang et al., 2013, p.596). LLL states that
“Latecomers will attach the highest importance to ensuring that national firms become
global players through an emphasis on outward FDI as well as on inward FDI.” (Yuefang et al.,
2013, p.596) - the early stages of Chinese OFDI outlined in the introduction reference the
promotion of national champions as global leaders. The process of knowledge acquisition,
which facilitates the procurement of technological capabilities and the identification of new
opportunities for knowledge acquisition, operates as follows:

Figure 9: Linkage, Leverage and Learning Model
The Mechanisms behind the Linkage, Leverage and Learning Model
Source: Yuefang et al., 2013
Although the authors posit the LLL as the most plausible concerning China, given its
explanation for investing in developed countries, I would hesitate to agree: the model takes
a firm-based view of the process and fails to incorporate institutional and cultural elements,
both of which are integral to Chinese OFDI.
It is evident that China diverges from conventional IB theories. The explanation behind EU
investment is therefore limited and alternative options require consideration. Generality is
being challenged and we need to know how if the ‘correct’ policies are to be implemented
(Buckley and Lessard, 2010).
3.2 How is it challenging mainstream theory?
The basic tenets of China’s divergence are indicated above. However two primary
aforementioned explanations require further consideration:
1. State paternalism arguably represents China’s most potent challenge to mainstream
theory. The basic premise of this challenge is institutional reforms (outlined in appendix
four) and the resulting “massive inter-dependent, multi-level network whose logic of
Linkage:
Globalisation enables
firms to access the
existing global network
Leverage:
This new access allows
firms to leverage
opportunties for their
own benefit i.e upgrade
their product portfolio
Learning:
i.e. the integration of
new knowledge with
firms's pre--existing
knowledge

operation depends as much on political influence and personal relationship as on
concern for efficiency.” (Child and Tse, 2001, p.6) the result of which has been the
emergence of multiple business ownership and governance systems (Boisot and Child,
1996 cited in Child and Tse, 2001, p.6).
2. China’s OFDI does somewhat correspond with dominant FDI motivations advocated by
mainstream IB theorists, e.g. it uses strategic asset-seeking to acquire IP. However it
exhibits some unique drivers, such as the need to access foreign capital markets given
limited access to capital in China and the frequent desire to gain foreign citizenship
benefits. China is also understood to operate on ‘pull’ rather than ‘push’ factors, e.g.
circumvent host-country trade barriers and generate hard rather than appreciating
currencies (Deng, 2003, p.120).
It is this last point – pull factors – which dominates Child and Rodrigues’ (2005) argument to
extend mainstream theory. Other MNCs act on push factors, most notably the exploitation
of a comparative advantage but Child and Rodrigues proffer the possibility of MNCs
engaging in FDI to acquire the necessary assets to overcome comparative disadvantages, i.e.
using FDI as a means to close the gap. For example, Chinese MNCs may capitalise of FDI to
overcome institutionally and culturally embedded disadvantages including regional
protectionism, limited access to capital and high transaction costs given the uncertainties of
the Chinese legal system (Child and Rodrigues, 2005). He and Lyles (2008, p.489) put forward
one additional disadvantage which relates to the CAGE framework and psychic distance: the
ideological differences between China and the West which constitute a political liability.
They reference Geert Hofstede’s cultural theory (appendix five) to highlight the
discrepancies between China and other countries. For example if one compares the position
of China and Ireland on the theory’s six dimensions the disparities are unquestionable.

Figure 10: The 6 Dimensions of Hofstede's Cultural Theory
Source: The Hofstede Centre, 2014
Wang et al. (2012) reiterate this idea of mainstream literature failing to capture the essence
of push factors. They note MNCs from emerging economies are unlikely to engage in FDI to
exploit a comparative advantage but to do so instead based on ‘learning objectives’. Their
conclusions are similar to both Child and Rodrigues, and Child and Tse: Chinese FDI is
institutionally embedded and incurs unique challenges, a factor unaccounted for by IB
theories.
3.3 Alternative Theories
Alternative theories to explain China’s OFDI trends are scarce. Yuefang et al. (2013)
attempted to develop a relevant framework through modifying Dunning’s OLI framework
and combining it with the LLL model. Its fundamentals are outlined below:
0
20
40
60
80
100
Power Distance Individualism Masculinity Uncertainity
Avoidance
Pragmatism Indulgence
Ireland versus China according to the 6 Dimensions of
Hofstede's Cultural Theory
Ireland China

Table 6: Comparison between OLI and LLL Frameworks
Combination of Modified OLI and LLL Model
Criterion Modified OLI LLL
Resources utilized Proprietary resources Resources accesses through
linkage with external firms
Geographic scope Location established as part of
vertically integrated whole
Locations tapped as part of
international network
Make or buy? Bias towards operations internalized
across national borders
Bias towards operations
created though external
linkage
Learning Not part of OLI framework Learning through repetition
of linkage and leverage
Process of
internationalization:
Not part of OLI framework Proceeds incrementally
through linkage
Driving paradigm Transaction cost economics Capturing of latecomer
advantages
Time frame Comparative static observations,
comparing one point in time with
another
Cumulative development
process
Source: Matthews, 2006a cited in Yuefang et al., 2013, p. 597
However, case studies have illustrated its shortcoming: its modified OLI aspect failed to
account for specific traits of latecomers from developing countries, e.g. step-by-step
internationalisation, whilst its LLL aspect fell short with regard to the inclusion of host
country influential factors (Yuefang et al., 2013).
Therefore, we turn to Warner et al. (2004) who introduce a model, not unlike the UM, that is
more applicable to China: the ELCM. Evolutionary, in this context, denotes a transition from
ethnocentric to geocentric to polycentric, in that [Chinese] firms progress from the domestic
to the regional to the global market (p.325). This model depicts Chinese MNCs’ progression
through four stages as they proceed through a spectrum of maturity.

Figure 11: The Stages of the Evolutionary Life Cycle Model
A Four-Stage Evolutionary Model for a Globalised Transnational Firm
Source: Warner et al., 2004, p.327
The resources and market opportunities available to a firm, as well as its ability to internally
integrate across geographically dispersed units and the benefits expected with time, dictate
the firm’s FDI model and strategy, and ultimately its progression through the model. If one
reconsiders the evolution of China’s OFDI from a more individual/firm-level point of view,
rather than the country-wide view presented in the introduction, its suitability is apparent
(Warner et al., 2004, pp.330-331).
1. Fragmented efforts at enterprise level (1979-1984): This coincides with Deng’s
modernisations and revolves around international trade facilitation, e.g. establishing
representative posts in importing countries.
2. Outward Activities at the National Level (1985-1990): Regulations concerning OFDI were
codified by the state to govern SOEs’ overseas operations. Increased and more diverse
activities were encouraged.

3. An Era of Accelerated Growth and Development (1991-1999): The performance and
integration of overseas MNCs activities advanced significantly. They gradually assumed
the form of a TNC but maintained activities at the lower end of industries. They
remained limited in scale and experience
4. Global Strategic Development (2000-Present): The operations of newly established TNCs
were increasingly positioned proactively, especially given WTO accession. TNCs began
converging “with the model of a globally integrated production and value-adding chain.”
(Warner et al., 2004, p.332). TNCs learned through first focusing on East Asia before
expanding elsewhere.
The option to contextualise this model is integral: it can be adapted to fit a firm’s
institutional and cultural environment. Despite its applicability to a number of case studies,
e.g. The Wanxiang Group, one cannot ignore its caveats. For example, the ELCM assumes
firms will procure foreign know-how thus facilitating technology transfer but this is
recognised as a factor more relevant in some industries than others (Warner et al., 2007).
Regardless, it offers a plausible explanation for increasing Chinese investment in the EU.
3.4 A Whole New Theory?
The formation of a comprehensive theory wholly suited to Chinese OFDI goes well beyond
the scope of this paper. A framework will, however, be introduced which could later be
expanded on, incorporating aspects of the above theories. The inherent primary elements
are:

Table 7: Framework for a Theory Germane to Chinese OFDI
Basic Framework for the Development of a Theory Wholly Relevant to China
Government
involvement in the form
of both OFDI restriction
and promotion
Restriction: initial ban on outward investment, current capital
restrictions and the strict process of approval/registration
companies must undergo.
Promotion: government initiatives such as the ‘Going Out’
strategy of 2000 and subsidies domestic companies can access.
Geographical Location The tendency to first invest in geographically close areas so as to
procure the necessary experience for further investment.
Changing FDI Drivers The transition in motivations for FDI from securing access to raw
materials to acquiring technological and management know-how
etc.
Opportunistic The exploitation of the global/euro crisis to acquire ‘cheap’
infrastructure and debt-ridden companies in Europe, and
likewise elsewhere.
Link with Infrastructural
Development
The coupling of FDI with infrastructure development, most
notably in Africa but also in the EU, e.g. the aforementioned £5.5
million modernisation fund linked with the purchase of Greece’s
Piraeus Port.
Collectively, these elements indicate the following theoretical rationale behind Chinese
investment: Chinese firms (initially SOEs) invest based on government direction with respect
to geographical location and industry choice. The direction is dictated by national objectives
and industrial policies. As confidence grows, SOEs are permitted to invest in more diverse
locations. Once the benefits of FDI are realised, private firms are authorised to engage in FDI
but only those considered ‘industry champions’ willing to undergo strict supervision. This
also implies industry diversification. The motivations behind FDI also begin to change as
firms realise their inferior competitive stance compared with their international
counterparts. Government involvement implies the infrastructural element of FDI, and

further diversifies the industrial investment. Over time, the experience and knowledge
required for FDI is accrued, meaning the FDI can become more opportunistic and
commercially driven, facilitating the acquisition of cheap infrastructure and debt-ridden
companies.
This framework must not be understood as theoretically complete. It merely attempts to
outline the basic theoretical motivations behind Chinese OFDI and why it is now increasing in
the EU.

41EU FDI Policy towards China
4. EU FDI Policy towards China
Based on the findings of the discussion so far, one can now move on to clearly assess
whether or not policy change has followed the rise of China.
China’s divergence from mainstream IB theory has already been confirmed but a
comprehensive analysis also warrants consideration of the EU’s theoretical standing with
respect to FDI.
The EU is globally acknowledged as liberal in nature, an assertion dating back to its founding
as the European Economic Community in 1957 - the Treaty of Rome (the policy document
instrumental to its founding) was strikingly economically liberal. Its objectives included the
abolition of qualitative trade restrictions, facilitation of free movement of capital, people,
services and goods across national borders and the establishment of a common commercial
policy. However its principles did not acquire superior status until it was constitutionalised in
the 1970s. Since then various factors have re-affirmed the EU’s commitment to liberalism:
the completion of a single European market (1993), monetary union achieved with the
introduction of the euro (2002) and the adoption of the Lisbon Agenda (2000) which
incorporated two strands: to foster a more flexible and responsive labour market, and to
further integrate its financial markets via the introduction of the euro (McCann, 2010).
The advent of the Lisbon Treaty in 2009 is, however, of utmost significance to this discussion.
Its implementation brought a number of changes: EU competence was extended and
clarified, external trade and investment policy were brought under EEAS auspices and the
role of the Parliament increased. The EU gained authority to develop EU-wide investment
agreements, one of which will be with China (Woolcock, 2010). Prior to this, EU investment
policy proceeded on the basis of member state BITs, defined as an agreement “drafted to

address a specific circumstance: that of an investor or one state (the home state) locating
assets in the territory of another state (the host state).” (Vandevelde, 2010, p.1).
BITs gained global momentum as liberal economic policies proliferated worldwide and the
advantages of FDI become more appreciated and understood. The first was concluded
between Germany and Pakistan in 1959; there are now over 2,860 worldwide (UNCTAD,
2013). Given the growing freedom of capital and goods etc., BITs were engaged to promote
and protect investment (Sauvant and Sachs, 2009) through incorporating six primary
principles including access, non-discrimination and due-process. They enhance transparency
and consequently reduce the risks associated with FDI (Egger and Pfaffermayr, 2009) whilst
also advancing liberal economic theory through, for example, increasing productivity via
efficiency gains (Vandevelde, 2010). Alongside a growing number of BITs, trade and
investment provisions have been implemented at regional and multilateral levels, e.g. the
Agreement on Trade-Related Investment Measures. Given their impact on national policy
making it is unsurprising that national FDI policies have embraced liberal traits (teVelde,
2006). For example, 95% of policy changes made in the 1990s were devised to create more
welcoming environments for MNEs (Sauvant, 2012). By the beginning of the 21st
century,
however, change was evident. 32% of policies in 2009/10 were considered ‘unwelcome’,
compared with just 6% in 2001/2. Screening mechanisms were being strengthened regarding
M&As and SOEs were identified as warranting separate rules (Sauvant, 2012). UNCTAD
(2012) have documented similar findings:

Figure 12: National Investment Policy Changes
Source: UNCTAD, 2012 cited in Zhan, 2013, p. 8
Irrespective of this, the EU is still regarded as altogether liberal in nature when compared
with its global counterparts. It is deemed more welcoming than the US in that it is more
lenient and exhibits less political opposition (Zhang and VanDenBulcke, 2014). Plotting EU
countries on the OECD’s FDI Regulatory Restrictiveness scale11
demonstrates its continued
openness, with the exception of Austria and Latvia.
11
A country’s restrictiveness is based on common forms of restrictions: foreign equity limitations, screening
and approval mechanisms, operational rules and the restrictions placed on employing foreigners as key
personnel. 1 indicates full restriction on inward FDI whilst 0 indicates the contrary (Zhang and VanDenBulcke,
2014).
0
50
100
150
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
National Investment Policy Chages, 2000-2011 (Percentage of
Measures)
Liberalisation/Promotion Regulation/Restriction

Figure 13: Plot of EU Countries on the OECD FDI Regulatory Restrictiveness Index
Pre & Post Establishment Conditions in EU Countries as Measured by the
OECD FDI Regulatory Restrictiveness Index (2012)
Source: Zhang and VanDenBulcke, 2014, p.164
However this is not to say that the EU is not following global trends in the advance towards
regulation, e.g. Zhan (2013) notes the falling preference for IIAs - only 30 were signed in
2012, the lowest figure in 20 years. Likewise, figures one and two of appendix six illustrate
the move away from liberal economic attitudes post-crisis toward more protectionist
tendencies regarding China. A number of factors can explain this trend. It has become
apparent that not all FDI is equally beneficial. The need for sustainable FDI, defined as FDI
“that makes a maximum contribution to economic, social and environmental development
and takes place within mutually beneficial governance mechanisms while being
commercially viable” (Sauvant, 2012) is progressively promoted. Competing objectives
plague policymakers and pressure to protect the interests of civil society has heightened.
The number of treaty-based disputes has increased and the benefit of BITs is increasingly
questioned, especially given their context is progressively more fragmented and complex, a
factor compounded by the growing number of developing countries involved in FDI. Finally,
the shift is a result of increasing FDI from emerging economies and the subsequent rise of
SOEs engaging in FDI (Sauvant, 2012; UNCTAD, 2013). By and large “We are…moving toward

a regulatory approach that is more protective of sovereigns by allowing more policy space
for governments to regulate FDI in the public interest…” (Sauvant, 2012).
The reference to emerging markets/SOEs bears utmost importance in this paper. It is
glaringly obvious that the rise of regulatory policies coincided with China’s rise as a global
FDI player:
Figure 14: The Correlation between China's Rise and the Shift toward Regulation
Source: Personal Graph based on Figures 4 and 12
Bearing this in mind, the EU’s contemplation of a more regulated approach should be no
surprise, and has come at an opportune time. All but one EU state – Ireland – concluded a
BIT with China. The majority are due to expire “which provides a window of opportunity to
address inconsistencies and overlaps in the multi-faceted and multi-layered regime of
international investment treaties, and to update the investment regime in light of
development paradigm shifts.” (UNCTAD, 2013, p.1). The investment agreement under
negotiation will result in the replacement of all member state BITs with one bilateral
agreement (UNCTAD, 2013). Although it is difficult to predict its exact provisions some
speculations have been made, one of which has been the possibility to extend investment
coverage to pre-investment. This would be consequential for EU investors looking to China
given its restrictive inward investment regime, and also bears significance for the EU’s desire
to include a liberalisation provision which would enforce equal treatment of foreign and
0
10
20
30
40
50
0
1000
2000
3000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
The Parallel between China's Rise andthe Increase in
Regulatory Measures
Chinese OFDI Flows (US$Billion) Regulation/restrction (% of Measures)

national investors. Although China has shown willingness to embrace some liberal
tendencies, e.g. its 2012 BIT with Canada included a provision to extent the Most Favoured
Nation standard to the admission of investments, full acceptance seems unlikely. Concerning
post-establishment, of significance is the likelihood that it will include a thorough provision
for investor-state arbitration (Poulsen et al., 2013).
There are a number of general aspects, aside from those specified above, which arguably
reflect the EU’s recognition of the need for a more regulated environment:
1. As China transitions from an export/investment led economy to one of domestic
consumption its impact on EU manufacturing and services sectors is increasingly
negative. Remnants of the euro-crisis, which is continuing to cause rivalry among
member states for Chinese investment, aggravate the situation (Zhang and Rubinacci,
2013).
2. This rivalry has highlighted the need for the EU to adopt a more unified stance. A surge in
investment from any country causes “unrest both at the level of the governments about
the loss of national sovereignty and the local companies about the competitive threats
emanating from the so-called intruders.” (Zhang and VanDenBulcke, 2014). Should the
EU act collectively, its bargaining power would be strengthened. State-involvement in
Chinese OFDI, as well as its desire to acquire EU technology strategic assets etc.
heightens this need.
3. One investment agreement would also facilitate a more level playing field. At present
member states frequently cite limited access to the Chinese market. This is considered
unfair and discriminatory given the extensive access to the EU their counterparts enjoy
(Zhang and VanDenBulcke, 2014; DeGucht, 2012). A level playing field could also benefit
those outside the ‘Troika’ as Chinese companies have no plans, yet, to diversify

investment away from them (China Council for the Promotion of International Trade,
2010).
Figure 15: Number of Future Investments by Destination Country in EU27
Source: China Council for the Promotion of International Trade, 2010, p. 45
4. China’s ‘Communist’ political system is often noted as the cause of its poor transparency
regarding the rationale behind investment. Should this be alleviated, EU concerns that
China is ‘buying up Europe’ may dissipate (Rosen and Hanemman, 2009).
5. The move away from trade-dependency has two primary implications. The first is
heightened economic interdependence. The second is the potential for synchronised
business cycles to develop: FDI could become a vehicle of disturbance transmission
(Jansen and Stokeman, 2007).
6. Chinese investment was originally directed towards neighbouring countries
demonstrating familiar business conditions and cultures, lower costs and ethnic ties.
Naturally occurring pull factors evidently played a major role but the EU does not
encapsulate such traits thus policies to attract FDI acquire more attention (Cai, 1999).
7. Its home country embededdness, albeit an impediment at times, is driving the
emergence of its own comparative advantages, aided by capital market imperfections
and ownership advantages. For example, firms can access capital below market rates
0
20
40
60
80
100
120
Austria
Belgium
Bulgaria
Cyprus
CzechRepublic
Germany
Denmark
Estonia
Spain
Finland
France
UK
Greece
Hungary
Ireland
Italy
Lithuania
Luxembourg
Latvia
Malta
Netherlands
Poland
Portugal
Romania
Sweden
Slovenia
Slovakia
Reponsdents Indication of where Future Investments will be
made in the EU27

which creates a semi-permanent disequilibrium in the capital market which outward
investors can then exploit (Buckley et al., 2010).
The opportunity to implement an investment agreement will allow the EU to mitigate many
of these issues, which BITs alone cannot resolve. In this way one can understand the
agreement as an FDI PI12
as it will entail “analytical and regulatory dimensions [which] are
required to manage the landscape of MNEs’ FDI operations in order to maximise positive
externalities accruing to the host location, as well as optimising the allocative efficiencies
involved in FDI.” (Bartels and deCrombrugghe, 2009, p.1).
FDI policy forms the basis of a country’s overall industrialisation strategy and therefore
impacts on a country’s economic well-being; ergo PIs should be aligned with a host country’s
industrial policy. However difficulties arise when considering the EU as the ‘universal policy-
maker’ as its policy-making “is a complex and interwoven process of formulating a common
interest that spans different values.” (Algieri, 2008, p.65). In other words, the EU is
challenged with finding the common denominator between all 28 EU member states
regarding industrial policies, interests and objectives, as well as having to account for
differing levels of economic well-being. Loewandahl (2001 cited in Bartels and
DeCrombrugghe, 2009, p.9) cites four main areas in FDI where PIs arbitrate:
1. Strategy and organisation: setting the national context and objectives, identifying a
competitive stance and establishing a targeting strategy.
2. Lead generation: relates to marketing and company targeting.
3. Facilitation: getting the investment, and both pre and post-project management.
4. Investment services: after-care and monitoring/evaluating the investment.
12
PIs include structural adjustment measures fostering macroeconomic competitiveness and instilling FDI
confidence in the economy (Bartels and DeCrombrugghe, 2009).

One has to realise that the EU will be unable to devise a policy relating to each of the four
areas. For instance, it would be unrealistic to think that the EU could dictate a universal
policy to facilitate investment nor could it encapsulate after-care services. Member states
will have to maintain some control which will alleviate some of the EU’s difficulties in
identifying the common denominator etc.
The EU’s explicit strategic agenda provides further insight into the potential nature of the
policy. Until now the EU has arguably operated on the basis of ‘unconditional engagement’
in that it “gives China access to all the economic and other benefits of cooperation with
Europe while asking for little in return.” (Fox and Godement, 2009, p.2). China has realised
this and has subsequently learned to exploit it (Fox and Godement, 2009). The EU therefore
hopes that “By bringing China into a multilateral and institutionalized forum the
predictability and stability of EU relations…” will increase (Algieri, 2008, p.79) and ‘reciprocal
engagement’ will ensue. Likewise, it will provide greater scope for the establishment of long-
term investment opportunities which will create employment and growth, as well as
ensuring fair treatment and the free-flow of payments between the EU and China (EC, 2014a,
2014b). It is hoped that the agreement “will boost two-way investment and enhance the
China-EU Comprehensive Strategic Partnership.” (Jiabao, 2014) by ensuring that both
markets welcome investment (EC, 2014c).
Based on this one can assert that, on the basis of China’s divergence from mainstream
theory and the increased tendency of the EU to adopt regulatory measures, as well as what
the EU wants to achieve strategically, the rise of Chinese investment in the EU has stirred
transformation in the realm of EU policy. Some believe this inevitable: China is a new player
to the international system and it is a non-Western superpower constantly challenging the
ideals of Western liberal democracies. Yet China remains a paradox of its own in that “it

seeks to promote reach and influence yet it is constrained by a domestic political
environment that sometimes undermines that same reach and influence.” (Lavin, 2013).
To draw a more robust conclusion, an examination of two EU member states – the UK and
Ireland – will be employed. The reason they were chosen has already been outlined in the
introduction. Particular emphasis will be on their IPAs as their policies and strategies
arguably reflect a nation’s economic policy (Filippov, 2012).
4.1 The United Kingdom
The UK’s open-door policy, a 40 year legacy, confirms its alignment with European liberalism,
further validated by ‘business-friendly’ initiatives which have constituted the focus of
successive governments (Driffield et al., 2012, p.6). This is again reinforced by its position on
the regulatory restrictiveness scale where the UK’s regulatory restrictiveness ranked at 0.038
re pre-establishment and 0.025 re post-establishment.
Such economic liberalism has arguably formed the basis of the UK’s BIT with China, signed
and enforced on June 15th
1986. It encapsulates many of the common traits of a BIT, e.g. it
seeks to ensure that all investors are subject to fair and equitable treatment (UNCTAD, 1986)
but does contain one specific advantage, also held by New Zealand, in that it does not
require that the ‘seat’ of the investment company be in the other party of the BIT therefore
companies can invest in China via the UK so long as they are legally based in the UK (Dutson
and Batada, 2011). Such an element arguably reinforces the preference for liberal aspects.
It has not been possible to ascertain the UK’s specific policy stance on FDI generally, or
toward China: the UK’s strategy will instead be comprehensively analysed.
UKTI’s current five year general strategy - Britain Open for Business, launched in May 2011 -
declares the UK’s focus on China as a means to exploit China’s growing middle class for the
UK export market, e.g. China’s urbanisation rate is set to reach 65% by 2030. The strategy

incorporates four growth pathways each of which are underpinned by a focus on rebalancing
the UK’s economy, leveraging the 2012 Olympics’ success and focusing on high-growth
markets. The most relevant of the pathways, here, is ‘Targeted Inward Investment’ which
looks to diversify its source of funds/FDI through targeting sovereign wealth funds and
investment in large scale infrastructure (UKTI, 2014c). The impact of the crisis on the type of
FDI attracted by the UK and the way it is funded has advanced the need to expand sources
further. For instance, UK banks previously funded inward FDI but the UK is now looking,
instead to cash-rich Indian and Chinese firms seeking brand names and M&A opportunities
(Driffield et al., 2012, p.4). This strategy has evidently proven successful, most obviously
through China’s involvement13
in the construction of the UK’s first new nuclear station for a
generation (BBC, 2013).
The FCO recently remarked that “China’s rise in global political and economic influence has
made it one of [the UK’s]…most important bilateral relationships.” (2013, p.23). Such
recognition of the importance of their relations, which have progressed significantly over the
years14
, has prompted a number of more specific UK-China initiatives, e.g. establishing an
economic and financial dialogue, high-level exchanges and the publication of its first China
strategy paper in 2009 – The UK and China: A Framework for Engagement (FCO, 2013;
Chinese Embassy, 2010). The strategy entails three pillars: to get the best of China’s growth
for the UK through implementing the ‘right’ policies, to foster a China that is a responsible
global player and to promote China’s reform in a sustainable manner. It acknowledges the
UK’s need for China to restore its economy, as well as its need to access business
opportunities in China. Specific targets are also identified such as setting a goal to get 100
13
China National Nuclear Corporation and China General Nuclear Power Corporation hold minority shares in
the project.
14
The UK was the first major Western power to recognise the PRC in 1950. Diplomatic relations were
established in 1954 at charge d’affaires level, advancing to an ambassadorial level in 1972. In 1998 the two
formed a comprehensive partnership, promoted to a comprehensive strategic partnership in 2004 (Chinese
Embassy, 2010).

Chinese companies onto the London Stock Exchange. Granted it was published in 2009, but
it gives some indication of the UK’s shared desire with the EU to achieve a level playing field
and encourage Chinese investment in the UK (FCO, 2009). Such specific efforts have proven
successful to date - Chinese investment grew at 31% per annum between 1999 and 2012
(Office for National Statistics, 2014). It accounted for 88 projects in 2013, 25% more than
2012, and created 1,812 new jobs whilst safeguarding 3,638 (UKTI, 2014a). However, this
growth has been somewhat volatile and unpredictable, a reflection of China’s domestic
context (outlined in the introduction).
Figure 16: Chinese Investment in the UK
Source: The Heritage Foundation and The American Investment Enterprise Institute, 2014
The sectoral distribution of Chinese investment in the UK depicted below largely correlates
with general UK investment trends, especially in the finance and energy sectors. Recent
investment deals include a £1.5 billion investment announced by China Minsheng
Investment Corporation which involves opening a European HQ in London and will cover
investments in financial services, advanced technology, new energy, environmental
protection and offshore engineering (UKTI, 2014b).
0
1
2
3
4
5
6
7
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Chinese Investment in the UK 2005-2013 (US$ Billion)

MSc East Asian Development and the Global Economy - Dissertation - Ruth Millar

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