Last working version before publication in Julien Chaisse ed., CHINA'S THREE-PRONG INVESTMENT STRATEGY: BILATERAL, REGIONAL, AND GLOBAL TRACKS (London: Oxford University Press, February 2019) BEWARE OF CHINESE BEARING GIFTS: Why China’s Direct Investment Poses Political Challenges in Europe and the United States Sophie Meunier* From a non-existent player fifteen years ago, China has now become one of the largest senders of Foreign Direct Investment (FDI) flows in the world. By and large, this new provenance of capital has been welcomed by host countries, especially given the drop in other sources of FDI in the wake of the American financial crisis in the late 2000s. This new investment has created jobs locally, it has enabled to keep some troubled firms afloat, and it has often opened up the Chinese market for local companies. FDI is indeed the backbone of economic globalization and a crucial source of transmission of capital, technology, and people across borders. The exponential growth of Chinese direct investment, however, has also been accompanied in some cases by controversy and even resistance, both in developing and in developed economies. Around the world, critics have expressed fears and denounced some of the potential dangers of this investment, such as lowering of local labor standards, hollowing out of industrial core through repatriation of assets, and acquisition of dual use technology. Alarmist media headlines have warned against a Chinese takeover of national economies one controversial investment deal at a time. The ensuing political backlash has often received considerable media attention and increased scrutiny over subsequent deals. What explains the political challenges posed by the recent explosion of Chinese direct investment in the United States (U.S.) and the European Union (EU)? How and why have attitudes and policies in the West changed over the past decade towards Chinese FDI? This chapter considers two alternative explanations for the political challenges triggered by Chinese investment in Western countries. The first is that Chinese FDI causes political unease because of its novelty. The second is the perception that there is something inherently different about the nature of Chinese FDI and therefore it should not be treated politically like any other foreign investment. These two explanations lead to a different set of predictions for the future of Chinese FDI in Europe and the U.S. The first section analyzes how the novelty of Chinese FDI may pose political challenges to Western politicians and publics and compares the current phenomenon with past instance of politically problematic sources of FDI. Section Two examines the argument that there is something inherently different about Chinese FDI, notably as stemming from an emerging economy, a unique political system, and a non-ally in the security dimension. The third section explores the domestic political context in which these challenges are raised: in Europe, the euro crisis and the rise of populism; in the U.S., the focus on geopolitical competition and the rise of economic nationalism. The conclusion raises some implications of these political challenges on the future of Chinese outward investment. I. THE NOVELTY OF CHINESE FDI AS POLITICAL CHALLENGE From CNOOC’s lease of the Greek port of Piraeus and Geely’s acquisition of Swedish automaker Volvo to Dalian Wanda’s purchase of AMC Cinemas, Fosun’s takeover of hotel chain ClubMed and Suning’s investment in the InterMilan soccer club, foreign investment emanating from China has captured the attention of the European and American media. One explanation for this heightened public attention on instances of Chinese direct investment comes from its novelty. This section explores the novel phenomenon of Chinese direct investment in Europe and the U.S., compares it with past instances of politically controversial sources of foreign investment, and analyzes the existence of a political threshold for FDI. Chinese direct investment, a novel phenomenon Chinese investment in Europe and the U.S. barely existed a mere decade ago. This novelty has proven by itself a source of anxiety; initially people did not know what to make of this new phenomenon and expressed worries. This perception of a new source of investment as something to be feared is consistent with a long-held finding in the management literature on FDI about the “liability of foreignness”1 and the “costs of doing business abroad”.2 New and foreign is challenging, at least temporarily, especially if the institutional and cultural distance between host and home country is large. It is not only the novelty but also the rapidity of the expansion that proved cause of alarm. Indeed, Chinese investment in Western economies has risen almost exponentially over the past *Senior Research Scholar, Woodrow Wilson School of Public and International Affairs, Co-Director European Union Program, Princeton University. Acknowledgments: Many thanks to Julien Chaisse and the participants to the Asia FDI Forum II at the Chinese University of Hong Kong Graduate Law Center, 29-30 November 2016. 1 Srilata Zaheer, 'Overcoming the Liability of Foreignness' (1995) 38 Academy of Management Journal 341– 63, doi:10.2307/256683; Lorraine Eden and Stewart R Miller, 'Distance Matters: Liability of Foreignness, Institutional Distance and Ownership Strategy' in Theories of the Multinational Enterprise: Diversity, Complexity and Relevance, Advances in International Management (Emerald Group Publishing Limited, 2004) 187–221, doi:10.1016/S0747- 7929(04)16010-1. 2 Steven Hymer, The International Operations of National Firms (Lexington, MA: Lexington Books, 1976) 1. decade: from virtually non-existent in 2005, China is now one of the top three home countries for FDI in the world in flows. In the United States, the stock of Chinese investment grew from almost zero in 2005 to close to $150 billion by the end of 2016.3 In the European Union, the stock of Chinese investment had reached 50 billion euros by late 2015. Even more so than stock, flows contributed to shaping the impression of momentum, and therefore danger. Over half of all Chinese FDI flows in Europe and the U.S. since 2000 have taken place in the past three years.4 Chinese FDI rose 50% between 2015 and 2016 and has doubled since 2012.5 In the U.S., Chinese FDI flows surpassed $50 billion in 2016. They tripled between 2015 and 2016.6 In the EU, FDI from China rose 90% in the past year.7 In Germany, FDI deals from China were multiplied by 10 from $1.3 billion in 2015 to $12.1 billion in 2016.8 Moreover, it is not only the novelty but also the ubiquity of the expansion that fuels worries. China is investing everywhere in the world: Europe and the U.S. are the latest destinations in a long list that started with resource-rich African countries and now includes the majority of countries in the world, from Australia to Canada by way of Central Asia. Chinese investment is also ubiquitous in every economic sector, including information technology, infrastructure, food products, tourism, industrial machinery, financial services, entertainment, and real estate.9 An additional source of worries has been the coupling of the novelty of Chinese direct investment with its rapidly expanding relative weight compared to other sources of FDI. Chinese investment was rising everywhere in absolute terms but it was also rising in relative terms. Indeed, the take-off of Chinese direct investment in Europe and the U.S. coincided with the sharp decline of FDI worldwide until 2012 in the wake of the U.S. financial crisis, especially in the EU. This relative growth has amplified the new phenomenon of Chinese investment to the public and made it seem scarier. Finally, the nature of the investment deals initially made by Chinese companies increased the public spotlight. In general, greenfield investment is seen as more innocuous and less politically problematic than mergers and acquisitions. Yet the vast majority of Chinese investment in Europe and the U.S. , at least in the early years, were takeovers. In 2016, acquisitions drove 97% of the 3 Derek Scissors, 'Record Chinese Outward Investment in 2016: Don’t Overreact,' AEI (2017) 1, available at <www.aei.org/publication/record-chinese-outward-investment-in-2016-dont-overreact/>. 4 Baker McKenzie, 'Chinese Investment Tripled in US in 2016, Doubled in Europe,' (2017) 1, available at <www.bakermckenzie.com/en/newsroom/2017/02/chinafdi>. 5 Derek Scissors, 'Record Chinese Outward Investment in 2016: Don’t Overreact,' AEI (2017) 1, available at <www.aei.org/publication/record-chinese-outward-investment-in-2016-dont-overreact/>. 6 Baker McKenzie, 'Chinese Investment Tripled in US in 2016, Doubled in Europe,' (2017) 1, available at <www.bakermckenzie.com/en/newsroom/2017/02/chinafdi>. 7 Baker McKenzie, 'Chinese Investment Tripled in US in 2016, Doubled in Europe,' (2017) 1, available at <www.bakermckenzie.com/en/newsroom/2017/02/chinafdi>. 8 Baker McKenzie, 'Chinese Investment Tripled in US in 2016, Doubled in Europe,' (2017) 1, available at <www.bakermckenzie.com/en/newsroom/2017/02/chinafdi>. 9 Baker McKenzie, 'Chinese Investment Tripled in US in 2016, Doubled in Europe,' (2017) 1, available at <www.bakermckenzie.com/en/newsroom/2017/02/chinafdi> value of FDI activity in Europe and the U.S.10 These are more likely to touch off opposition, no matter what the origin of the investment is. Past instances of political challenges posed by novel sources of FDI Chinese FDI startled the media and politicians at the beginning because it was a new phenomenon. It is not the first time, however, that foreign investment poses political challenges in the host country. This section explores briefly two prior instances of political controversy raised by foreign investment in Europe and the United States. In Europe, one precedent is the ‘coca-colonization’ by American multinationals that occurred from the 1960s onwards.