Bachelor Thesis in Economics and Business Economics

The People’s Republic in the European Union:

China’s New Investment Imperative after the

Sovereign Debt Crisis

Author: Supervisor:

Vincent Coon Dr. B. Karreman

369198

August 17th, 2015

Academic Year 2014/2015

Table of Contents

1. Introduction ......................................................................................................................... 3

2. Theoretical Framework.................................................................................................... 6

2.1 The eclectic (OLI) paradigm................................................................................................... 6

2.2 Recent theoretical extensions................................................................................................7

2.3 OLI paradigm applied to Chinese MNEs in Europe..........................................................7

2.4 Beyond the eclectic paradigm................................................................................................8

3. Hypothesis development.................................................................................................. 9

3.1 Geographic choice of FDI in the European Union............................................................9

3.2 Industry-specific choice of FDI in the European Union...............................................12

4.Data and Methodology..................................................................................................... 16

4.1. The European Sovereign Debt Crisis and Data sub-sampling.................................16

4.2. Investment Data...................................................................................................................... 17

4.3. Methodology: choice of model............................................................................................21

4.4. Dependent variable................................................................................................................22

4.5. Independent variables and data aggregation...............................................................25

5. Results.................................................................................................................................. 27

5.1 The MNL Model: Drivers and interpretation of model................................................27

5.2. Hypotheses evaluation..........................................................................................................30

5.2.1. Hypothesis 1.......................................................................................................................... 30

5.2.2 Hypothesis 2...........................................................................................................................30

5.3 Robustness................................................................................................................................. 32

6. Conclusion.......................................................................................................................... 32

Bibliography........................................................................................................................... 34

Appendix.................................................................................................................................. 41

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1. Introduction

The 2009 Sovereign Debt and Banking Crisis has left continental Europe in a dire

economic state. Stagnating GDP figures, sluggish productivity growth, volatile

inflation expectations about the Euro and an unsatisfied labor market have engulfed

the European Union and together, yield a gloomy outlook for an economic recovery

of the EU. Countries within the EU have emerged in varying degrees of economic

stability from the crises, and the European Central Bank as well as the fiscal

authorities of member states struggle to find a unifying policy to stop the intra-

European divergence of economic performance. Such conditions seem heinous to

most investors, and many have eschewed Europe as a destination for new capital

investments. This attitude stands in stark contrast to China. The People’s Republic

has moved in the opposite direction of the general financial consensus and flooded

the European market with capital for cash-strapped industries (Anderlini, 2014).

China’s willingness to lean against the wind despite a global economy that has been

succinctly punctured by the 2008 global financial crisis and 2009 European

sovereign debt crisis is particularly exemplified through their outward foreign

direct investments (OFDIs). In 2008, global OFDIs fell by 15 percent, while Chinese

OFDI has doubled (Davies, 2012). Even with the onset of the 2009 crisis, while

global OFDI has collapsed by a staggering 43 percent, China has still managed to

grow its OFDIs by 1 percent (UNCTAD, 2012).

With such vast scaling back of investments on a global level, liquidity in the

European market had dried up and left an investment gap for many governments in

need for financial support. Governments desperate for funding are putting ‘assets up

for sale’ (Hook & Sakoui, 2012). China has filled this void of lacking capital support

and stepped into the situation by making Greenfield FDI investments available.

While the rest of the world secured their money in financial save havens, China has

taken a calculated risk in using a highly receptive equity market that was left by the

financial mayhem of 2009. Assets were cheap and equities undervalued (The

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European Union Chamber of Commerce in China , 2013). Specifically, while Chinese

OFDIs in Europe between 2004 and 2008 were a mere EUR700 million, this number

increased threefold to EUR2.3 billion in 2009 and 2010, and again tripled in 2011

alone to an astonishing EUR7.4 billion (Hanemann & Rosen, 2012). Clearly, changes

have occurred in Chinese investment behavior after the crisis, but these are not

simply changes in magnitude. The People’s Republic was able to opportunistically

diversify its portfolio of investments, and secure a solid foothold in various

European industries and countries. While the rest of the world was retrenching,

China was spending (LI & FUNG Limited , 2009 ). As will be explained in the

‘Investment Data’ section of this paper, this increase in magnitude has to be

evaluated against an overall small Chinese investment portfolio in the European

Union. When compared to China’s investments in other regions of the world, such as

Hong Kong, the Americas and Africa, their investment in the EU is only a small

fraction.

Prior to 2009, China has traditionally invested in key economies within the EU and

geographically clustered its capital flows around countries such as Germany, France

and the UK (Clegg & Hinrich, 2012), all of which had to offer strong prospects for

Chinese investors to get know-how, technology and efficiency. Its OFDIs were thus

by no means evenly distributed amongst the 27 EU member states. Not only the

‘western European core’ (highly developed economies such as Germany) has seen

Chinese OFDI, but also peripheral and less progressive economies of the EU (such as

Spain, Greece or Italy) have experienced Chinese FDI investments (Hanemann &

Rosen, 2012).

This investigation proposes that there is a parallel narrative developing in the EU.

The crisis has opened up new opportunities for China to cheaply expand its quest

for investment in European countries. While key economic players in the region will

continue to attract capital (Hanemann & Rosen, 2012), it is assessed whether China

will also divert capital to a new frontier of less developed, crises stricken countries

within the EU, as such countries offer a comparatively inexpensive avenue for

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Chinese consolidation within countries. Additionally, the post-crisis economic

landscape provides an opportunity for China’s intentions of rebalancing its economy

from an outdated growth model with a heavy focus on manufacturing towards a

more service-based economy. With its strong dependence on production, China has

a gravely underdeveloped service sector (Farrell & Grant, 2005; Hope, Yang, & Li,

2003, p208), a disadvantage it could decimate through strategic investments in the

European Union after the crisis.

This paper will delve into the idiosyncrasies of this modified approach and identify

how the 2009 crisis changed the Chinese investment attitude compared to their pre-

crisis objectives. In this sense, the main research question this paper will answer is

the following:

How has the Chinese Foreign Direct Investment behavior changed after the

2009 European Sovereign Debt Crisis relative to before?

No paper in the academic literature has thus far attempted to comprehensively

disentangle the change in Chinese foreign direct investment behavior post-crisis. On

the one hand, this analysis will determine whether, geographically, the destinations

for Chinese capital have been diversified and broadened to increasingly cater the

financial needs of peripheral European economies. On the other hand, additional

focus is put on the approach. In particular, it will be investigated, across the

European Union, to what extent a shift has occurred from a strategy revolving

around manufacturing investments to adopting a strategy that supports Chinese

efforts to mature as an economy and realign their global growth strategy with the

demands of the 21st century. It is crucial to appreciate the intentions and

motivations of massive Chinese capital flows within the European Union. Much of

the economic stability within the European Union depends on how China will

allocate its resources across the member states. Investment decisions of the

People’s Republic will undoubtedly steer the direction and pace of the economic

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recovery and future prosperity of the European Union, and an intricate

understanding of such decisions is thus essential.

The investigation is structured the following way. The subsequent section will delve

into the theoretical grounding of this paper and discuss the factors that lead to

foreign direct investments as well as the decisions of domestic Chinese companies

to go abroad and seek out international opportunities. The third section will

organically build upon these decisions and reason more specifically why and how

China uses OFDIs in the European Union. Embedded the most recent academic

literature, the hypotheses of this investigation will be derived. The fourth and fifth

section will explain the methodology of the analysis in tandem with the data sources

utilized in this context, as well as the results that have been found in the course of

this analysis. Finally, section six will conclude the investigation and add

recommendations for further research.

2. Theoretical Framework

2.1 The eclectic (OLI) paradigm

China’s motives for expanding overseas and venturing beyond their domestic

borders through outbound investments are diverse. Most notably, however,

Dunning’s (1993) OLI paradigm provides a solid theoretical foundation for

addressing the questions of why multinational enterprises (MNEs) decide to invest

abroad through FDIs. The acronym OLI stands for ‘Ownership’, ‘Location’ and

‘Internalization’, and each letter in the acronym represents a possible advantage

that can arise due to a firm deciding to invest abroad through FDIs. The OLI

paradigm therefore highlights how MNEs stand to gain a competitive edge. For one,

some forms of ownership (O) are more conducive to business abroad than others,

and the burden of operating costs in foreign territory may be alleviated through a

firm’s ownership idiosyncrasies. This ‘ownership related effect’ (Dunning, 2001) is

often intangible in nature (e.g. a particular brand name may provide broader access

to financial capital). Further, distinct advantages can be derived from the location of

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the host country (L). Factors such as labor costs are non-transferrable factors

unique to the country that a MNE decides to invest in. Finally, the internalization of

an MNE refers to the benefits reaped from a particular entry mode into a foreign

economy, through which cross-border activities and untapped synergy effects may

arise.

2.2 Recent theoretical extensions

However, often countries and companies feature unique characteristics that make

this elementary theoretical framework somewhat inadequate to describe its

intentions and actions of going abroad. Dunning himself has addressed this

insufficiency in his most recent work (Dunning & Lundan, 2008), which adds the

element of ‘institutional analysis’ to the existing OLI framework. In their work,

Dunning & Lundan propose that certain governmental and institutional procedures

directly impact every aspect of the OLI paradigm, either through incentive

structures, or how these are enforced. Specifically, they propose four

microeconomic factors that prompt firms to engage in outward foreign direct

investment, namely 1) Securing Natural Resources, 2) Exploring New Markets, 3)

Buying Strategic Assets, 4) Improving Efficiency of Operations across borders. This

extension is especially applicable to Chinese MNEs, which are tightly woven into a

market economy that is prone governmental sophistry. The OLI theoretical

framework has thus been suitably refurbished to account for the institutional reality

of Asian economies. Sun et al. (2010) have further highlighted the role the state

plays in influencing the OLI factors of Chinese MNEs, while Liang, Ren, & Zhu (2011)

have extended Dunning’s work by adding an institutional dimension. Such

extensions are a testament to the fact that the OLI theory is a solid starting point for

iliciting the motivation behind FDI investments, but that it has to be complemented

with various layers of explanation to account for the ideosycrasies of China and its

MNEs (Lu, Liu, & Wang, 2011).

2.3 OLI paradigm applied to Chinese MNEs in Europe

For this investigation, the question of how far Dunning’s OLI framework is able to

explain the choices made by Chinese MNEs to invest in Europe is paramount. In

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Europe, China has few ownership advantages (O) and can rarely capitalize on

intangible abilities such as management and marketing skills. They often operate in

a knowledge vacuum, as their understanding and appreciation of foreign business

practices is at best, limited (Child & Rodrigues, 2005; Rugman & Li, 2007). Given this

lack of operational proficiency in foreign territory and a slow cultural integration

process of Chinese MNEs, China tries to compensate for this disadvantage by

strategically positioning themselves in Europe. Chinese investments are therefore

predominantly geared towards strengthening their market presence (Buckley et al.

2007). Yet, China has been able to wield influence and bridge this knowledge-gap

through an ethnicity-based support system, which operates by sharing information

and know-how of the host country’s business milieu (Redding, 1995). Through such

a network, Chinese MNEs are able to, at least partially, overcome the information

asymmetry in foreign countries such as Europe. The ultimate goal is to facilitate a

firm embedding of Chinese MNEs in the economic sphere of the European Union.

The location of Europe (L) bears a heavy weight in the case of this investigation, as

one of the key drivers of Chinese FDI there are the unique local circumstances. The

European debt crisis and concomitant business environment can be interpreted as a

‘non-transferable’ factor exclusively present in the EU. China could inexpensively

situate itself in the very center of Europe and reorganize their business activities

beyond the Chinese borders. Greenfield investments in the EU after the crisis gives

China an opportunity to organically grow at a fraction of the cost compared to

entering Europe during times of economic prosperity. The reasoning behind this

will be elaborated upon in the following section. The crisis has thus been a window

of opportunity for establishing a business in line with companies’ long-term growth

strategies. The situation of Europe as host country goes hand in hand with the

Internalization (I) aspect of Dunning’s paradigm. Without delving deeper into the

technicalities of whether the key investment instigator is the Chinese government,

or whether there are overarching political motives regarding the FDI streams into

certain industries, the OLI framework provides a convincing motivation for why

Chinese MNEs seek investment opportunities in the European Union.

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2.4 Beyond the eclectic paradigm

Despite the OLI paradigm, there are also more compact theories that aim to explain

the motivations behind sending capital abroad. Brezis, Krugman, & Tsiddon (1993)

coined the term ‘Leapfrogging’ in connection with technological innovation and the

cyclical development of international competition. This term encompasses the

systematic process through which ‘lagging countries’ replace the ‘leading countries’

in an industry by applying a novel breakthrough technology. The lagging country

leapfrogs past the leading country. However, since its inception, leapfrogging has

been used in a variety of ways and is attached liberally to any mechanism in which a

country or company is able surpass a current market leader through not just a

breakthrough technology, but an ability to avoid the pitfalls of earlier adopters of a

particular technology, business plan, incentive structure etc. For instance, the

academic literature has used leapfrog developments of China in areas such as

sustainable innovation (Watson & Sauter, 2011), energy technologies (Gallagher,

2006) and particularly, how China uses OFDI in Europe to leapfrog Research &

Development processes (Di Manina, Zhang, & Gammeltoft, 2012).

Interestingly, the motivations of going abroad defined by the OLI paradigm are

almost identically reflected in China’s ‘going out’ policy of the 21st century. Their 12th

Five Year Plan states that China must promote ‘outbound investments’ (Robinson,

2013). The theoretical framework of this investigation is thus mainly comprised of

Dunning’s eclectic (OLI) paradigm, which is instrumental in describing the

motivations behind Chinese FDI streams to the EU, but naturally, elements of

leapfrogging are also inherent in the Chinese approach to economic expansion.

Together, they build a theoretical framework for this investigation and explain the

causes of Chinese economic involvement in the European Union.

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3. Hypothesis development

3.1 Geographic choice of FDI in the European Union

As Chinese investments in the European Union are of major geo-political interest, a

considerable proportion of the literature in this field has been comprised of

extensive, often government subsidized, reports. The academic literature, however,

also covers aspects of Chinese OFDIs. The findings of these expansive reports as well

academia point to the same direction and draw a similar picture of where the Sino-

European economic relationship stands. However, there is no unified indication of

what to expect in the future and how the crisis has impacted Chinese investment

behavior post-2009.

Fundamentally, it is crucial to acknowledge that FDIs originating from China are

unequally distributed in the EU. Countries differ substantially in their ability to

court capital from Chinese investors (Drogendijk & Blomkvist, 2015), and there are

consolidated patterns of investment streams. The consensus in the academic

literature is that Chinese FDIs are concentrated on a small fraction of the 27

European Union member states, and is confined to ‘a few leading member states’

(Clegg & Hinrich, 2012), especially referring to economies such as Germany and the

UK. These sentiments are echoed by the China Council for the Promotion of

International Trade (2010), which concludes that there is a ‘strong preference’ on

the People’s Republic side towards countries that already have strong economic ties

with China, such as France, Germany and the UK. European Union Chamber of

Commerce in China (2013) similarly stresses that Chinese ‘investments are

concentrated in Western Europe’. While acknowledging the apparent clustering of

investments, the European Union Chamber of Commerce in China has also

mentioned in their report Chinese Outbound Investments in the European Union

that particular technologies and labor skills are responsible for China gravitating

towards key economic payers in the European Union. UK’s expertise in high

technologies and financial services or Germany’s manufacturing capabilities,

automotive expertise and advances in electronics are frequently cited as major pull

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factors for China (The European Union Chamber of Commerce in China , 2013).

Investments are hence allocated strategically around countries and industries that

are deemed most useful for the expansionary intensions of China.

There is, nonetheless, a mounting body of evidence in the academic literature that

indicates a shift away from this clear-cut agglomeration of FDIs around key

economic players in the EU. FDI streams are not only a function of how strategic it is

to invest, but also a function of economic strength of the country. While a strong

economy may signal the prospect of gaining know-how and other valuable

resources, weak economies similarly attract investments (Kottaridi, 2005). This can

be through the prospect of, for instance, company bargains or cheap land and labor

supply. Similarly, an in depth Financial Times series has investigated these new

streams of allocation of capital within the European Union. Research conducted by

Anderlini (2014) highlights that, given the ramifications of the 2009-crisis, cash is

‘flowing from China into some of the hardest-hit countries of the Eurozone

periphery’, a clear indication for a shift in geographical preferences. Xu, Thieß and

Tianlong (2012) also conclude in their lengthy report that China’s outward foreign

direct investment strategy towards Europe has changed. While the wealth of

academic research conducted on Chinese geographical preferences concurs on the

distribution of investments, a new research frontier that questions this distribution

has emerged. Yet, given that the sovereign debt crisis is very recent occurrence, the

research is still relatively scarcely populated with purely academic sources, and to a

larger extent based on institutional and governmental research.

This investigation identifies with the new body of research. The analysis aims to

build upon the new stream of literature developing and intends to contradict the

historic distributional investment pattern. It is argued that post the 2009 sovereign

debt crisis, geographical investments have turned more opportunistic in nature.

Given the near break down of the European financial system, China’s intentions

have strayed from solely investing strategically, to geographically seizing

opportunities elsewhere in the European Union that have surfaced after the crisis.

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This investigation argues that especially financially constrained countries have been

pushed to the center of attention of Chinese investment aspirations, as they provide

an environment where they can drastically increase their presence in the European

market and explore this market cheaply and with a competitive edge. In an

environment of fringe economies where the crisis either forced companies out of

business, or those remaining in business, are unwilling to invest (Lin, 2013), China’s

financial commitments are welcome sources of capital. Peripheral countries are

seeking the potential benefits Chinese Greenfield investments yield for them.

Whether through knowledge spillovers, technology transfers or job creation, it is

evident that crisis stricken economies are very receptive to foreign direct

investments from China. Consumers stand to benefit not just through such factors,

but also through the increased competition a Chinese presence induces as well as

access to one of the largest and fastest growing economies in the world.

Yet China similarly sees the value of using Greenfield investments to operate more

efficiently in the European Union by specializing, increasing its economies of scale

and hence reducing production costs. For instance, Hanemann & Rosen (2012)

argue that Europe has workforce skills that are desperately required for Chinese

production chains. This mutually beneficial situation, where countries that have

been severely impacted by the crisis identified the need for such investments, and

the People’s Republic that uses this receptiveness and need as an opportunity to

integrate their business practices and facilities in the European market as an

integral economic driver. These claims will be substantiated through empirical

research and econometrically strengthen the observations that fringe economies

receive relatively more investments after than crisis than their core-country-

counterparts. Given the prospect of synergies for both involved parties, in addition

to China’s willingness and need for deeper European market penetration, the first

hypothesis proposed by this investigation is the following:

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Hypothesis 1:

Compared to the pre-crisis period, the post-crisis period is more likely to see

Chinese Greenfield investments in fringe economies1 as opposed to core

economies2

3.2 Industry-specific choice of FDI in the European Union

However, assuming that the root cause of China’s willingness to invest in more

peripheral economies is solely based on the country’s favorable financial

environment and countries’ responsiveness to financial and economic stimuli, is

unrealistic. It is of great importance to reason further and appreciate the intentions

of Chinese foreign direct investments. While there is evidence that China has shifted

its geographical focus and loosened its hardline approach to only a select few

economies, this may not only be a result of cheap access to fringe economies. The

flipside of being able to inexpensively set up a physical presence in Europe through

Greenfield investments is that the countries in which these investments occur may

be qualitatively inferior to their ‘core’ counterparts. Such qualitative differences

pose varying degrees of risk for the investing country (Bouchet, Clark, &

Groslambert, 2003). In this sense, the macroeconomic shock of the sovereign debt

crisis may have exposed or magnified countrywide structural weaknesses, yet is it

by no means the only reason for the grim situation some countries in the European

Union find themselves in. There are country level heterogeneities that decisively

influence the decision of Chinese MNLs to invest. China does not simply send FDI

streams to capital deprived fringe economies in hope of finding attractive deals.

Much rather, this paper proposes that Chinese firms were able to capitalize on the

crisis and invest strategically in various industries according to their expansion

desires. This investigation therefore suggests that the drivers of Chinese Greenfield

investments in peripheral economies of the European Union are specific industries.

Hence, it is not just the geographical destination of investments that has changed in

the course of the sovereign debt crisis, but also the industries in which foreign direct 1 Portugal, Italy, Ireland, Greece, Spain 2 Germany, France, Great Britain, Netherlands

13

investments are made. A general trend, even before the crisis has hit Europe, has

been that China is in a transitioning phase of its economy. Domestically, China is

experiencing a move away from low value adding manufacturing activities, and a

significant transition to a higher echelon in the value chain. The focus has shifted

from the mere provision of goods, to providing value added products. Thus, China is

rebalancing away from manufacturing to services (Jen, 2013), and this has been

evident through Chinese inward FDI. The growth of FDI in the service sector in

China has been hailed as ‘the most significant development’ in the Chinese economy

(KPMG, 2015), and surpassed the manufacturing FDI in 2014. This domestic

development will naturally be mirrored by Chinese investment intentions beyond

their domestic borders. The IMF frequently stresses the importance of China’s

‘process of rebalancing’ the economy ‘from manufacturing to services’. (Lagarde,

2015). The economic consensus is firm on its conclusion that services are to become

the most important and economically decisive sector in the Chinese economy (The

Economist, 2013; Broadman & Sun, 1997). These domestic developments have been

on their way since the trade liberalization of 2001 and Going Global policies of 2000,

yet are only starting to manifest themselves in Chinese outward FDI recently.

Overall, a major channel for this transformation will be OFDI streams into western

service economies.

The momentum of rebalancing the economy towards services and away from

manufacturing has been reflected in OFDI investment strategy in the second half of

2000-2010. Outward Greenfield FDI has been boosted by service enhancing

investments in the European Union. For one, the need for more sophisticated

distribution networks, which are required for the export of higher quality goods

arose. Therefore, ports such as the one in Piraeus (Van der Putten, 2014) but also in

Naples and Antwerp have become an important destination for Chinese

investments. Greenfield OFDI is however not only required for such pragmatic

solutions to the export constraints for the market of high quality goods. Beyond

trade facilitating infrastructure, China is also aiming to explore the European market

itself and compete with local, western service providing firms. In this sense, modern

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sales infrastructure is a key area for growth of service firms, as they provide

branding and after-sales services (see Huawei, China Unicom, Covec etc.) Banks,

telecommunication companies, but also real estate and construction companies

have identified the need to invest abroad and strengthen their competitiveness

through Greenfield FDI in Europe (Hanemann & Rosen, 2012). Hanemann & Rosen

(2012) further find out in their research that China is entering Europe increasingly

through Greenfield investments. Accordingly, China stands to benefit significantly

from the service-oriented environment of the European Union, not only for the

fiercely competitive environment in China itself, but also for starting to compete in

the European market. Therefore, this investigation expects a move away from the

manufacturing industries such as low-, mid- and high tech manufacturing, and focus

on realigning their intentions in Europe in accordance with domestic Chinese

economic development towards services.

This means that while there has been a wealth of investment targets available in the

European Union, China may selectively seize the opportunities left by the sovereign

debt crisis. It can be argued that if China’s economy has been transforming

domestically to a service based economy, they have used Greenfield FDI in the

service sector of western economies all along, without the occurrence of a crisis.

This investigation does not debate this. However, this is not the focus of this paper.

Much rather, it is argued that given the Chinese orientation towards a service-based

economy, the sovereign debt crisis has served as an opportunity to materialize this

orientation and invest accordingly in the European Union. Through the very

definition of Greenfield investment, it is argued that because machinery, land and

means of production (Wang, 2009) can be acquired more economically, the

investments into particular industries in the service sector have been exacerbated.

The analysis of this paper is directed towards identifying this behavior post crisis

and pointing out that the change in investment behavior is in line with China’s long-

term needs of taking its economy from a labor intensive one to a more service based

one. Europe’s advanced industries and developed economies served China through

service provision opportunities and an ability to establish new operating platforms

15

through Greenfield investments. Ultimately, this allowed China to develop its

competitive economic edge. Given this background, this investigation’s second

hypothesis is derived to be the following:

Hypothesis 2

Compared to the pre-crisis period, the post-crisis period is more likely to see

Chinese FDI investments in service industries as opposed to manufacturing

industries

While academia has made it clear that investments have increased in quantity and

value, no paper has thus far comprehensively looked at where and how this wealth

of capital has been distributed in the European Union post the 2009 crisis.

Essentially, the picture has changed in the last half decade, but it is still unclear how

exactly. So far, the literature has made clear that 1) China has a strong geographical

focus in the EU on developed economies and that 2) China’s economy is undergoing

a transformation from manufacturing focused to service focused. The changes in

types of industries that has been invested in and geographical destination of OFDI

are scrutinized. This paper will address the duality of deviations that have occurred

after the crisis in Chinese investment behavior and will empirically assess the

validity of the hypotheses derived.

4.Data and Methodology

4.1. The European Sovereign Debt Crisis and Data sub-sampling

The 2008 financial crisis exposed and magnified the deeply rooted financial

problems of the European Union. Historically, before the monetary union has

formed, yields on government bonds3 have been radically different. Investors and

banks knew that yields have to converge once the Euro currency is shared, and thus

saw an arbitrage opportunity, essentially a ‘free lunch’. Once the 2008 financial

3 They represent the risk factor associated with lending money to a country. The higher the yield, the higher the risk of not recouping the money

16

crisis evolved, the same bonds that increased substantially in value due to yield

convergence now lost nearly all of their value through yield divergence. Banks,

investors and governments were left with a worthless position on peripheral debt,

and as this debt was often bought with a high leverage factor or used on balance

sheets as assets, the situation in Europe was a seemingly insolvable conundrum. At

this point, a cash abundant Chinese Republic became involved in the European

Union. While the whole of Europe was pulled into a downward spiral of systemic

risk and financial distress, a more isolated and remote financial system in China has

stepped into to alleviate the consequences of unsustainable budget deficits and

bankrupted balance sheets. Therefore, amidst the ensued sovereign debt crisis, the

role of China has been to provide the financial investment many countries were

seeking.

In light of how the data is segmented in this paper, it is vital to realize how different

the economic environment has been pre and post the crisis. Before it, investors

seemed oblivious to the fundamentals of peripheral economies, seeing only a

currency union and not the individual member states that comprised it. Yet after

late 2009, the overspending and over borrowing has been exposed, and the financial

system nearly collapsed, as both banks and countries were holding large amounts of

worthless peripheral debt. This investigation thus splits the dataset into two

subsamples. The first will capture the somewhat tranquil period from 2003-2009,

while the second will contain the tumultuous scramble for financing from 2010-

2013.

4.2. Investment Data

This paper’s data sample is composed of Chinese Greenfield foreign direct

investments to the European Union between 2002 and 2013. To put the investments

into the EU into perspective, one has to appreciate that only around 5% of all

Chinese outward foreign direct investments are targeted at the EU, while a large

part (72%) stays mostly within Asian boundaries (Xu, Thieß, & Tianlong, 2012). The

analysis uses exclusively Greenfield data for some key reasons. As the European

17

Chamber for Commerce in China points out, Chinese investment profile in the EU is

more common as FDI in the form of Greenfield investments, as opposed to M&A and

other forms (The European Union Chamber of Commerce in China , 2013) Further,

M&A only comprises as small fraction of Chinese outward FDI compared to

Greenfield (Salidjanova, Going Out: An Overview of China’s Outward Foreign Direct

Investment , 2011). Overall, Greenfield has been the most common and

predominant form of FDI for China, which is why this paper uses the relative wealth

of data for such investments. Contrasting this, the amount of instanced of M&A deals

in the European Union are highly limited, and do not necessarily provide a

comprehensive and accurate representation of any trends forming after the crisis. In

addition to the lack of M&A deals in the region, these deals would have been

gathered from a separate database. Consequently, industry specifications and names

are different to the Greenfield dataset used in this investigation. Efforts to merge

and match respective industries would have, in addition to the restricted number of

deals, increased the scope for errors and imprecision.

The Greenfield dataset used in this paper encompasses all 28 EU-member states

except for Malta, Slovenia and Austria. After cleaning the dataset and removing all

irrelevant (non-EU countries) observations, 764 deals remained to be scrutinized.

The Greenfield data on investment projects has been gathered from fDi Markets

(2003-2013), which covers the broadest spectrum of cross border Greenfield

investment activity and provides information for all countries and the respective

sectors. As a service provided by the Financial Times, it is highly reputable source of

data with absolute reliance. The database provides essential information on deal

specifications and especially the fact that fDi markets is amongst the most utilized

Greenfield databases in the industry adds weight to the quality it represents.

Data on FDI flows are recorded on a deal-by-deal basis, as opposed to deal-values.

This means that a one-off multibillion-dollar deal between China and an EU member

state will not make the respective country a number one recipient of FDI. Rather

than detailing the investment value, this dataset records the instances of the deal

18

itself. No matter how substantial China’s financial commitment is across the deals,

this bears no significance for this investigation. Only the fact that a deal has been

made in the first place between China and EU counterparty is recorded. The

intuition behind a deal-by-deal analysis is that even if a country receives a

substantial amount of funding in a single deal after the sovereign debt crisis, this

does not represent the attractiveness of this country. Much rather, the frequency of

deals is the focus of this paper’s data analysis. An increase in frequency is hence

indicative of an increase in attractiveness. While this approach by no means proves

causality, the data sample allows for a meaningful interpretation of the data in a

post-crisis economic environment.

Further, an important aspect of this research is the time-parameter. The period

from 2003-2013 has been chosen for two factors. One factor is the undeniable surge

in Chinese interest and OFDI in Europe in this time period. China’s Going Global

policy and membership of the World Trade organization in 2001 started to

economically reform the country and the policy truly started to unfold in the first

decade after its initiation. Annualized inflow of capital increased threefold from

2006-2009, and tripled again from 2009-2011 to EUR7.4 billion (Hanemann &

Rosen, 2012). The main focus of this paper gyrates around the 2009 sovereign debt

crisis, it is paramount to properly assess the timing of investments after the crisis.

Firstly, it is crucial to pinpoint the exact date of the crisis. While many scholars

agree that the sovereign debt crisis arose in late 2009 (Moody & Sandri, 2012), it

was Greece’s new government’s revelation of a more than double increase in their

adjusted budget deficit from 6% to 12.7% that ultimately sparked the sovereign

debt crisis (Gibson, Hall, & Tavlas, 2012). Thus, the consensus on when the

sovereign debt crisis started is the point at which Greece publicly announced its

technical bankruptcy, which will also be used in this paper as the starting date of the

crisis. As the crisis only fully unfolded during 2010 and commenced near the end of

2009, this investigation will include the deals from 2010 onwards as the post crisis

period, yet still count the 2009 period to the pre-crisis sub-sample. The economic

intuition behind this is that all deals for which the sovereign debt crisis has been a

19

decisive factor and where it has been explicitly taken into account will

predominantly come into existence after 2010. A ‘break’ or reorientation in

investment behavior forms not immediately after the actual occurrence of the shock,

but only once opportunities for China have crystallized from the crisis. Negotiations

and preliminary talks will have occurred after suitable areas for Chinese FDI

investments have been identified in 2010, once the extent and severity of the crisis

has been accurately determined. The four-year time span after 2010 is thus an

extensive period in which China processes and evaluates the economic standing of

the respective EU-member states and implements its FDI investing strategy that this

investigation aims to capture. On the other hand, the pre-2009 period in this sample

offers enough time for a solid Chinese investment pattern to have formed on a non-

macroeconomic-shock-basis. This will be China’s FDI investment behavior that is in

line with their going global investment policy of 2000. It is essential to work with

this ‘base standard’ of investments, which can be seen as a benchmark and

compared to any anomalies arising after the crisis.

As this paper works with Chinese investments data, it is also important to touch

upon the caveats that accompany the collection and interpretation of deals

originating from China. Clarification of where this paper’s data sample comes from,

what it measures and how it measures it, is vital. Yet, there is one principal concern

with Chinese outbound FDIs. The nature and methodology of data collection varies

drastically amongst countries and institutions, and can often be opaque due to

disclosure constraints. For instance, while UNCTAD, the IMF or OECD give a general

overview of international investment flows, Central Banks across the world attempt

to give a more disaggregated perspective on FDI flows. The National Bureau of

Statistics in China yet again draws a biased picture of their investment activities.

Eurostat in the EU only provides Europe-related FDI activity from abroad. Given the

complexity of international financial markets (i.e. tax optimization, shell companies

etc.) and multitude of players involved, only seldom is a similar account of FDI flows

produced by two independent parties. This leads to incomplete or heavily delayed

statistical data and inference. What China claims to invest in Europe and Europe

20

claims to have received in FDI from China is, in the majority of cases, dissimilar.

Linking these concerns of working with investment data of the people’s republic of

China back to the analysis of this paper, it is important to appreciate that even if this

investigation only consulted a high quality data source, accuracy and reliability of

this data can be skewed. The picture drawn by this investigation is based upon data

that may not be entirely representative of Chinese investments in the European

Union.

4.3. Methodology: choice of model

This paper will evaluate the relationship between the deal frequency between China

and an EU member state, and the particular region in which these deals occur, i.e.

the higher the amount of deals, which region is most likely to receive these deals.

This investigation then goes beyond merely assessing the region in which deals

occur, and delves into analyzing which industries amongst these regions were more

or less likely to be the recipient of Chinese FDI flows. This paper uses a categorical

dependent variable of nominal nature, with more than two outcome categories, yet

there is no intrinsic order in these categories. It is assumed that China will invest in

regions and industries that will maximize the benefit they derive from making such

investments. Thus, according to utility maximization theory, the discrete choice

model that offered itself for the purpose of this analysis is a Multinomial Logit Model

(MNL) (Wrigley, 1985). From a technical perspective, a key assumption of this

model is the property of independence of irrelevant alternatives, or IIA. It

essentially demands that with any particular set of choices for the dependent

variable, alternatives within this set must be independent from one another (for a

more detailed picture, see Wrigley, 1985). Applying this property to the choice of

investments for China within the EU, it must hold that any country must be different

from its alternatives and equally competitive. Through a re-estimation with a

multinomial probit model (MNP), it will be assessed how severe the impact of the

IIA assumption is on the MNL model results. With similar outcomes, it can be

assumed that the IIA properties are no hurdle for robust results and a robust model.

21

Although all countries in this data set exist in a union (the European Union) with

one another, and some of them even operate through a uniform monetary policy

regime (Eurozone), this paper stipulates that they the countries as investment

choices are independent from one another. Fiscal policy is unique for every country

in the EU and each individual country has exclusive perks to offer to its investors.

From varying market saturation levels, to particular resources, skills, knowledge

and technology, the European Union could not be more diverse as a destination for

Chinese investments. Therefore, it is assumed that random components of all the

alternatives in this investigation’s sample are indeed independent and not

correlated with one another. As an additional note to the particulars of the IIA

assumption, one has to realize that when the alternative choices are fixed in nature,

the impact of an IIA violation is negligible but often overestimated. As this paper’s

data set fully meets the requirements of the MNL regression, it is the model of

choice for this investigation. Further, in order to establish whether the pre- and

post- crisis periods are significantly different in this model, a likelihood ratio test

will be performed. This is a key insight that will further drive the answer to the main

question of this paper of whether or not Chinese investment is different for the two

periods investigated.

4.4. Dependent variable

The dependent variable for this investigation will be the choice between three

distinct types of aggregated countries. Each type of country is composed of EU-

member states that fall into a certain category. This means that each of the 25 EU

member states used in for this investigation is categorized into one of three types.

The intuition behind this is based largely upon the academic literature about the

European Sovereign Debt Crisis and Chinese investment behavior in the EU. The

first region (Region 1) is comprised of countries that have suffered majorly form the

sovereign debt crisis. This is in line with this investigation’s first hypothesis that

China will divest from most common recipients of FDI to peripheral economies that

have been severely affected by the ensuing credit crunch of the crisis.

22

In particular, the clustering of Region 1 is done in accordance with the

contemporary academic literature on the weak peripheral economies of the

European Union and the relation to the European sovereign debt crisis; Portugal,

Ireland, Italy, Greece and Spain, the so called ‘PIIGS’ or ‘GIIPS’. While Byström

(2011), Melander et al. (2011) and Pu & Jianing (2012) use the term ‘PIIGS’ in their

more technical papers as an established phenomenon, Pitelis (2012, p. 83) uses

PIIGS more holistically to trace down the root causes of the crisis through Greece,

and Hallet and Jensen (2011) explain how the term PIIGS has become a synonym for

severely impacted economies of the sovereign debt crisis (for the earliest accounts

of variations of this clustering see Borzel, (2001, p12) and for an etymological and

critical account of this clustering, see Brazys and Hardiman (2013). Clare (2008) is

said to have been the father of the term PIGS, although with one ‘I’, and stresses that

this ‘I’ can be used for both Italy and Ireland. The analysis of this paper will thus use

the clustering of Region 1 in tandem with the existing academic literature and

aggregate Region 1 as such.

The second region (Region 2) will be composed of the so-called ‘core’ recipients of

Chinese FDI Investment concentrated in Europe. These are the countries that have

received the largest amount (not value) of deals in the European Union historically.

The data on this is, unfortunately, different for Chinese and EU official sources.

However, detailed independent research specifically conducted to explore China’s

investments in the European Union (either commissioned and certified by

representative bodies of the European Union4 or in close collaboration with

representatives of various European bodies5) revealed a clear consensus on which

countries receive the largest share of Chinese OFDI (see The European Union

Chamber of Commerce in China , 2013; Hanemann & Rosen, 2012, ). They are

Germany, France, the UK and the Netherlands. Together, these countries will build

the second type of region (Region 2). This region will also be the baseline outcome

for the MNL regression analysis, as results should reflect how likely it is that China

4 The European Union Chamber of Commerce in China5 Hanemann & Rosen, 2012

23

has diverted from these core investment regions to other regions. Region 2 is

purposely chosen as the pivotal element of this investigation, and any result will be

interpreted in comparison to the baseline outcome of it.

The third region (Region 3) will be comprised of the remaining countries in the

European Union, which have neither been as severely impacted by the sovereign

debt crisis as Region 1, nor have they had the significant trade relationship with

China as Region 2. This does not mean that these countries have not been affected

by the crisis, or that they have no trade relations with China. Rather, Region 3 is a

region of moderation, which has not been created according to particular attributes,

but emerged by default. With moderate amounts of Chinese trade relations and

being moderately impacted by the sovereign debt crisis, it has been comparatively

ordinary. In this sense, Region 3 can be interpreted the normal; a standard region

contrasting two more volatile ones6.

As can be seen in Table 1, the distribution of deals in the European Union according

to respective regions in a particular time frame already gives a first indication of

how the above-mentioned Regions behave. Particularly, Region 1 transitions from a

mostly single digit deal frequency to double digits post-2009. Region 3 has also

6 For an overview of regional aggregation see Appendix B

24

experienced very strong growth and consistent increase in deals, which doubled

from the pre-crisis to the post-crisis environment. Table 2 further highlights how

manufacturing at any level is China’s industrial foundation for investments. They

clearly outnumber the other investment industries. Interestingly, Table 3 shows

how after the crisis, Region 2 experienced vast reductions in deal frequency. Region

1 and 3 on the other hand see almost exclusively increasing numbers of deal

frequencies. Particularly Region 3 has experienced a surge in investments. These

frequency distributions already suggest that there is momentum towards the

periphery and less established economies, and immense downscaling of deal

frequencies within the core economies.

25

4.5. Independent variables and data aggregation

The independent variable of this investigation will be based on the different sectors

China invests in. Given the popularity of fDi Markets as a data source for Greenfield

investments, many useful classification schemes have been developed and applied

in the academic literature, and thus proven themselves. While initially the

Greenfield deals have been allocated to very specific industries in the dataset,

methodologies of aggregating these individual industries into broader categories

have been devised. The reasoning behind this categorization is that individual

industries are so distinctive and idiosyncratic, that no meaningful interpretation of

Chinese investment patterns and trends would be possible when leaving the data

compartmentalized into unnecessarily specific industries. In this sense, Burger et al.

(2013) have devised a categorization template which groups the industry sectors of

the fDi Market database into larger categories7. However, as this analysis is

particularly interested in how the service industries fair relative to the

manufacturing industries, Karreman, Burger and Van Oort (2015) have adopted a

slightly modified version of Burger’s initial categorization and used both

‘Commercial Services’ and ‘Consumer Services’ in a unified ‘Commercial & Other

Services’ category. As this dataset has only recorded five deals in the ‘Consumer

Services’ industry, this analysis adopted the categorization of Karreman et. al (2015)

7 See Appendix A for an overview of the categorization

26

and merged the respective deals into the ‘Commercial & Other Services’ category.

The data of the dependent variable in this investigation has therefore been grouped

in a way that is conducive to discovering meaningful trends in Chinese investment

behavior in the European Union.

Additionally, it is crucial to control for unobserved exogenous shocks that occur in

the macro environment of this analysis, and which are not relevant to this

investigation. It is possible that the phenomenon of Chinese investment behavior

varies due to reasons that lie beyond the scope of this paper’s focus, and that such

reasons may not be fully accounted for the industry explanatory variables. However,

even if such factors are not properly captured by the independent variables, the

inclusion of time fixed effects in the regression will allow the investigation to absorb

external shocks and better assess Chinese investment behavior.

5. Results

5.1 The MNL Model: Drivers and interpretation of model

27

In the MNL model of this investigation, Region 2 is used as the base outcome. It is

important to note that the regression output of the coefficient’s magnitude is not to

be interpreted. Only the sign, positive or negative, indicates whether, based on the

industry, a particular region is more or less likely to be invested in by China

compared to the baseline. The decision to invest into a particular kind of region by

China is explained by the category of industries it invests in. Therefore, a change in

the independent variable affects the probability of which region China will invest in,

relative to the probability of China investing in the base outcome of Region 2.

Table 4 shows the outcomes of the MNL regression. The first model in table 4

provides the results of the total data sample period, that is, from 2003-2013. It is

interesting to see that on an overall basis, China, compared to low-tech

manufacturing, is significantly more likely to invest in the Processing Industries and

Natural Resources/Energy relative to the core countries. This may be due to the fact

that especially Poland and Sweden are very resource rich countries. In particular,

Poland’s silver reserves, as well as their sulfur and copper sources are in high

demand with Chinese still very dominant manufacturing industry. Sweden with high

Zinc, Lead, Copper and Iron Ore are similarly attractive targets for Chinese

industries active in the natural resource business (National Geographic, 2015).

Further, compared to low-tech manufacturing, China is significantly more likely to

invest in Region 3’s Software and ICT industries.

However, this picture changed when looking at model 2 and 3 and the situation that

persisted before and after the 2009 crisis, as opposed to looking at the overall

situation of both sub-samples combined. The pre- and post- crisis environment is

the primary focus of this investigation. A comparison between these two periods

reveals several significant differences between them. Firstly, Region 3 has yielded

very surprising results. For all investigated industries, Region 3 has seen positive

and highly significant coefficients for the post-crisis period. This indicates that,

compared to low-tech manufacturing, China has been significantly more likely to

invest in Region 3 relative to the baseline of Region 2 after the sovereign debt crisis.

28

This vast breadth of investing interest in this region on China’s side has been

unexpected and runs against the rational of this paper’s first and second hypothesis.

Region 3 has not been expected, relative to Region 2, to attract such wide scope of

investments. As Table 1 indicates, after 2009, there have been overall more

investments in each Region, irrespective of the particular industries targeted.

Clearly, the attitude towards Europe has changed to being a more attractive

destination for Chinese investments across the board. Given that, except for a

decreased likelihood of Chinese investment in Region 3 compared to Region 2 pre-

crisis, Model 2 of the pre-crisis results shows none of these positive and significant

coefficients of Model 3, these results question the rationale of hypothesis 1 and 2.

These ‘post-period-only’ findings in Model 3 imply that after the crisis, China has not

cherry-picked various industries in Region 3 that may or may not coincide with

their long-term objectives of establishing a more service-focused economy. An

interpretation of this feature could be that the post crisis period has seen a ‘new’

China emerge; a China that is not driven by political motives or ambitions to further

strategic placements of investments that may contribute to ulterior agendas of

China as a country. It seems that the single most important motive that Chinese

investors are striving after is commercial success. Given the variety of industries

China invests in, the immense geographic breadth of their interests and

investments, the findings of this paper suggest that Chinese investors are seeking

profits above all other considerations through their Greenfield investment

endeavors.

Secondly, after the sovereign debt crisis, the financial services industry in Region 1

is positive and highly significant, in contrast to before the crisis, where it is not. This

means that compared to the low-tech manufacturing industries, China is

significantly more likely to invest in Region 1 post-crisis compared to the baseline of

Region 2. These results are in line with both hypotheses of this investigation,

expecting that the peripheral economies will be pushed into the center of Chinese

investment intentions, and that these intentions are expressed through investments

29

in the service industry. Especially the financial service industry has received a large

quantity of Greenfield investments, as the sovereign debt crisis has left a debilitated

and paralyzed financial services system.

Further, the industry of Software & ICT has a positive and significant coefficient,

meaning that compared to low-tech manufacturing, China has also been more likely

to invest in this industry in Region 1 as opposed to Region 2. Given that a majority of

this industry is comprised of areas such as Software & IT services as well as

Communications, it could be implied that these results are in line with the

expectations of this paper and reiterate the hypothesis of service-oriented

investments in severely impacted economies of Region 1. Additionally, running the

Likelihood Ratio test for the models of this investigation revealed a significant

difference between the pre- and post crisis period. This is a key indication for a

changed investment behavior on the side of the People’s Republic and positively

answers the question of whether China has changed its investment behavior after

the crisis. Thus, the fact that China behaved differently in the pre- and post- periods

can be established. See Appendix C for relevant values.

5.2. Hypotheses evaluation

5.2.1. Hypothesis 1

Particularly Region1 in Model 3 strongly suggests that Chinese investment behavior

has changed in the post-crisis environment in line with what this investigation has

predicted. China is, compared to Region 2, significantly more likely to invest into the

peripheral economies of Region 1 through particular industries. It is however

important to also consider the implications of Region 3’s results. The vastness

across industries of investments in Region 3 suggest that it is certainly not merely

Region 1 that has been pushed to the center of attention of China. Region 3 has

become a major recipient of investments. While these results do not negate the first

hypothesis of this investigation, they shine light on how attractive the whole of

Europe has become for Chinese investors. The results do not point towards a

uniform interpretation of why exactly China’s investment approach to the European

30

Union has changed; yet they nonetheless provide significant evidence for the fact

that it has changed. Among this, China has become significantly more likely,

compared to Region 2, to invest in peripheral economies of Region 1, and therefore,

this paper does not reject Hypothesis 1.

5.2.2 Hypothesis 2

While it is apparent that there has been an overall surge in investments post crisis,

and that this surge has manifested itself in both the peripheral and normal regions

of the European Union, the reasons for this are diverse. Nonetheless, Region 1 in

Model 3 confirms the hypothesis that the service industry is of particular interest to

China, as it is more likely compared to Region 2 to invest in these industries in

Region 1. Therefore, the second hypothesis of this investigation is also not rejected .

Yet, the drivers of China’s investment intentions are also of interest for this

investigation, and this paper proposed that the main driver of the decision to invest

in a particular region is the different industries targeted. However, the question of

why China is more likely to invest in a particular region is a matter of high

complexity. Certainly, the contradictory results of Model 3 are a testament to this

multifaceted problem of disentangling or establishing the driving forces behind this

decision making process.

The service-focused investments of China in Region 1 may follow a different

rationale that the one outlined in this paper, namely that such investments have

been made in an effort to take the Chinese economy from a manufacturing to service

providing economy. It seems like no coincident that China has filled the void of an

inadequately capitalized financial system after the credit crunch (Acharya et al.,

2014) through establishing its financial service business in severely hit economies.

Has it been China’s intention to push into the service industry in Region 1 as part of

their efforts to create a more service oriented economy, or was the service industry

merely the industry most urgently requiring capital investments after the crisis, and

thus most attractive to enter? The results for Region 3 in model 3 make the latter

interpretation a more reasonable alternative, implying pragmatic and need-oriented

31

investment decisions, as opposed to ones that are guided by the imperative of

making the Chinese economy a more sophisticated service provider.

Overall then, Region 1 in Model 3 provides evidence to believe that China has used

the opportunities after the sovereign debt crisis to establish itself as a market force

within the financial (and other) service industry. However, with regards to Region 3

in Model 3, there is also evidence that China has simply increased their quantity of

investments, without a particular agenda in mind and merely attempting to extract

as much revenue as possible from any industry in any of the region’s countries.

Bearing the novelty of the sovereign debt crisis and its consequences in mind, there

are also very few schools of thought in the academic literature explaining Chinese

investment behavior and intentions. Hence, few reference points offer themselves as

guiding principles among which the results of this analysis could be situated,

meaning that few scientific investigations exists that could add weight to - or

question - the conclusions drawn by this analysis.

5.3 Robustness

In order to ensure the robustness of this investigation’s results, additional steps

have been taken. On the one hand, a multinomial probit model (MNP) has been

32

estimated, to see if the IIA properties are a serious problem to the estimation of the

MNL regressions. As can be seen from Table 5, the results of the MNP re-estimation

lead to extremely similar results to the MNL regression. This suggests that that IIA is

no obstacle to the results found in the MNL regressions, and poses no problem for

this paper’s finings. On the other hand, two separate cut-off dates were used to

estimate the MNL regressions and investigate how valid the results are when

alternating the cut-off point. Both 2008 and 2011 have been used as break-dates.

2008 has been chosen because in late 2007, the global financial crisis ensued and

also affected the European economies. 2011 has been chosen because it could be

argued that the transition time it took for China to adapt to the new economic

reality in the EU and act upon the opportunities it presented. As can be seen from

Table6, the results of 2011 point to the same findings of the originally used cut-off

date, 2009, thus confirming the results of the MNP re-estimation. The 2008 model of

Table7 on the other hand has some anomalies that have to be elaborated upon. In

particular, the highly significant negative coefficient for the financial services

industry in Region 1 of Model 2 stands in contrast to the other estimated models.

33

The interpretation of this that the Financial Service industry is, compared to the

baseline of Region 2, significantly less likely to receive Greenfield investments from

China. As 2008 is as an earlier cut of date than 2009, it could be argued that the

global financial crisis originating in the United States already had an adverse impact

on PIGGS countries in the time period from 2008-2009. The significant coefficient

could suggest that before 2008, China actively avoided investments in these regions,

as they did not present any opportunities, but that this aversion dissipated in the

year from 2008 to 2009. However, given the unusually large negative coefficient of

15.387, it can also be argued that this coefficient is simply the result of a dataset

anomaly, such as a zero-observation. Given that neither the MNP re-estimation nor

the 2 alternative cut-off dates share this result, this coefficient is deemed unreliable

and does not impact the overall interpretation of this investigation’s results.

Therefore, given that with the remaining alternative cut-off dates as well as the MNP

re-estimation similar results are found, the robustness of the results as well as the

chosen cut-off date of 2009 can be established.

34

6. Conclusion

The topic of this investigation is one of relative novelty. The recent financial as well

as sovereign debt crisis have thrown the financial system in the European Union

into grave economic difficulties, and the response of especially central banks has

been equally novel. Zero-bound monetary policies pushed central banks to the brink

of their ability to intervene in financial markets. Quantitative easing and negative

bound interest rates are all phenomena that have never been seen in the European

Union, and the effects are unpredictable, despite a compelling narrative central

banks lay upon the economic development. In this sense, the implications of this

paper are to be interpreted with caution.

This investigation sought out to examine how Chinese investment behavior in the

European Union has changed after the sovereign debt crisis. In particular, the

analysis aimed to find the drivers of Chinese Greenfield FDIs for specific

geographical regions in the European Union before and after the sovereign debt

crisis. It has been argued by this paper that China’s decision of where to invest is

predominantly driven by the different industries that are targeted, i.e. China is more

likely to invest in a given region, depending on the industry they target. Overall,

while this study has been able to establish that a change in investment behavior

occurred, the rationale behind why it has changed only partially aligns with the

hypotheses of this investigation. It is clear, however, that the results for the post-

crisis period indicate a break in Chinese investment behavior, even if this break

cannot be classified further through establishing the main drivers of Chinese

investment decisions. Thus, overall the characteristics of Chinese investment

behavior have changed. Through this papers analysis, and the acceptance of

hypothesis 1 and 2, the main research question of how Chinese Foreign Direct

Investment behavior has changed after the 2009 European Sovereign Debt Crisis

can be answered. Relative to the pre-crisis main recipients of Chinese Greenfield

OFDI, Region 2, it has been shown that industries in Region 1 and the majority of

industries in Regions 3 are significantly more likely to receive Chinese Greenfield

35

investments in the post-crisis environment. Therefore, Chinese investment behavior

has changed in that it diverted its investment focus to peripheral economies8 as well

as ‘normal’ economies, as opposed to a continuation of core economic investment

focus, which is the main finding of this investigation. China’s heightened interest in

the European Union as a whole is indisputable, and it investment behavior has

evidently changed, while its intentions behind this change remain ambiguous.

This investigation could have been made more conclusive through several aspects.

Most importantly, the data sample could have been enlarged to include an even

greater variety and number of deals. While practical and logistical reasons made it

unreasonable to use Mergers and Acquisitions data in the analysis, the conclusions

drawn would have benefitted from additional observations. Further, it can be

argued that the first hypothesis is based upon a trend that may be too vast and

continuous in nature to be observed in a time frame as short as this investigation’s

time parameter. The re-orientation of China towards a service economy may be in

progress, yet is it difficult to determine how advanced China as a transitional

economy has come thus far, and how relevant its ambitions to expand into the

European service sector actually are.

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Appendix

Appendix A: Taxonomy of investments by sector.

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Appendix B: Country aggregation per region

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Appendix C:

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