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May 2007

Valtteri Kaartemo
THE MOTIVES OF CHINESE FOREIGN INVESTMENTS IN THE BALTIC SEA REGION
Electronic Publications of
PanEuropean Institute, 7/2007

Download the publication in PDF format.

Executive Summary

The annual FDI outflows from China were in 2005 already worth US$ 11 billion, up some 500 % from previous average level, and are expected to grow 2 to 5 times even in the near future. Most of the planned FDI outflows have earlier been found to be targeted in diverse sectors in Asia, Europe and North America. Earlier motives indicate that Chinese companies invest overseas to seek new markets, natural resources, technology or brands.

This is the first research, which aims at exploring the motives of Chinese foreign investments in the Baltic Sea region (BSR). In order to analyse Chinese companies from the perspective of their competitiveness, the research problem was further elaborated into two subquestions:

1. What are the existing sources of competitive assets which the Chinese companies exploit when investing in the Baltic Sea region?

2. What are the alternative sources of competitive assets which the Chinese companies are seeking by investing in the Baltic Sea region?

The empirical part consists of five case studies. The case studies were conducted during the springsummer 2006. The case studies rely mainly on the interviews. In addition, secondary data was collected from statistical resources, Internet and expert interviews as a background material for the research.

Chinese exports account already a significant share of imports of the region. As a trade partner, individual countries, such as Germany and Russia, are also important target markets for China. Despite of increasing trade and great potential, Chinese companies are not yet remarkably present in the Baltic Sea region. They have invested only some hundreds of millions, and where statistics are available, their share of total inward FDI stock remain a fraction of a percent.

However, some Chinese companies have already invested in the Baltic Sea region to improve their presence in the market. In the Baltic Sea region, Chinese companies are mainly interested in local knowledge, access to local and global company networks, productrelated knowhow, and a possibility to improve image. Thus, it seems like the Baltic Sea region would not be that exceptional case as a target of Chinese foreign investments. The FDI in natural resources in the Baltic Sea region is however less emphasised and was not found in case studies, which can be partly explained by their industry.

It was found out in the research that Chinese invest in region to improve their market position. For many companies, they have earlier been relying on local partners to take care of the sales, but have later become interested in internalising the local knowledge about the market by buying or setting up joint ventures with their longterm partner (China Shipping Container Lines, COSCO), by buying new partners (Dalian Machine Tool Group), or by establishing an affiliate on greenfield basis (Air China, Hongfa). One of the main benefits of having a branch office is the outside appearance that people know that the company is in Europe to stay and that they are committed to their European business activities. It was also emphasised that local market knowledge was available only by investing in the market.

It was found out that the investments were aimed at getting access to local network. It was considered in many companies that the investment improves their possibility to cooperate with local companies more easily.

This was stated also in Hongfa, which has before operated mainly on its own. Investments in the Baltic Sea region may also improve the company’s position in the global networks. It was, for instance, mentioned that the outside appearance is very important for a Chinese company to show that it is a good and a solid company. Thus, investments in the Baltic Sea region may improve their image by internalising local branding and designing skills.

Thus, it can be seen that Chinese companies should not only raise concerns among local companies as they also provide opportunities for growth. Firstly, Chinese companies need partners and services abroad. Secondly, cooperation with them may provide a valuable linkage to the Chinese market. Thirdly, some Chinese companies have already become significant sources of information, and these companies can be important partners in research and development projects.

The existing competitive advantages of Chinese companies stem from established networks with other, mainly Chinese, companies, from low cost level, and from productrelated knowhow, which has accumulated from inward FDI in China and from other modes of cooperation with international companies. Especially, when Chinese companies are able to internalise the value adding activities of the Baltic Sea region to improve their products, their companies can soon be surprisingly more competitive. It has often been thought that this should wait for China’s further development, but with massive foreign reserves they have all the money which is needed for the shortcut.

It is notable that access to local knowledge is a kind of an asset which benefits the investor only in the Baltic Sea region markets. Other sources of competitiveness which the Chinese companies were found to seek from the Baltic Sea region, namely access to networks, productrelated knowhow, and image, improve the investors position not only in the Baltic Sea region but can also be exploited in the home market and globally.

Spatially determined sources of competitiveness seem to have lost their relevance, and this seems also to be the case among Chinese investors in the region, which are interested in company networks. As the motives of Chinese companies to invest in the Baltic Sea Region are diverse and the investments are anticipated to increase in the future, this requires activities from the local business, policymakers and the academia to better adapt to the changes caused by the emergence of Chinese companies in the future. Although the competitive pressure does not seem to be the most current issue, it should be one of the first things in mind when companies place themselves in the development of the global economy.

Chinese investments in the knowledgeintensive network economy raises new challenges for policy makers within the Baltic Sea region. One of the most important challenges is how to attract Chinese investments into the region. It is suggested in the paper that the idea on a common, regional investment promotion agency should be further elaborated, and to become a kind of a matchmaker which would enable the region to take the most of the available benefits of the new phenomenon.

Download the publication in PDF format.


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