China's outward investment is expected to catch-up with inbound FDI (foreign direct investment) by 2017 and Ireland is not among the top 67 destinations for Chinese outbound investment in 2014, which illustrates the challenges faced by IDA Ireland, the inward investment agency, in diversifying from dependency on the United States.
The Economist Intelligence Unit (EIU) says in its China Going Global Investment Index 2014 report [free access to English and Mandarin versions after registration] that in 1984 a group of 11 engineers founded the predecessor to the Lenovo Group—then known as Legend—with US$25,000 and a plan to resell televisions. In 2005 Lenovo acquired IBM’s flailing personal computer (PC) business for a whopping US$1.75bn. Since then, Lenovo has grown into the world’s largest producer of PCs, with operations in more than 60 countries.
"That acquisition was the opening shot for China’s outbound direct investment (ODI). 2005 marked the beginning of a new era: China’s ODI had previously been minimal compared with foreign direct investment (FDI); however, that year alone saw ODI jump to US$14bn, from US$2bn in 2004. It has since skyrocketed to US$163bn in 2013, half the size of FDI. China is now reaching another turning point, where the hunger for FDI is overshadowed by a push to invest overseas. The EIU expects that by 2017 China’s ODI will close in on FDI, to make the country a net investor in the world" with ODI reaching US$264bn. (The EIU's forecasts for ODI are based on balance-of-payments methodology provided by the IMF.)
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China going global
The EIU says its China Going Global Investment Index is built on two pillars, Opportunity and Risk. Each pillar consists of four categories. These categories are based on survey results from an earlier EIU report, 'A Brave New World: The Climate for Chinese M&A Abroad,' which asked 110 Chinese companies, both state-owned and private, about their motivations and challenges regarding overseas investment. A weight is assigned to each category based on its importance as rated by survey respondents.
For 2014 the basic structure of the index has not been changed, apart from the addition of two indicators: services sector as a percentage of GDP and research and development (R&D) as a percentage of GDP. Leveraging The EIU's extensive country coverage and data from international organisations, the China Going Global Investment Index features 55 quantitative indicators, selected based on their strength in describing most effectively a country's attractiveness under each category. For instance, the domestic political and regulatory risk category comprises a number of indicators from the EIU business environment rankings. They range from the risk of social conflict to government policy towards foreign capital.
US tops the rankings
The US continues to top the index as the most attractive destination for Chinese ODI (out of 67 countries). It has the world's largest economy, with a stable political and social environment. It also has a sizable natural resources sector, tops the ranking for intellectual property and scores highly in cultural proximity by having an established Chinese community. According to a data service provider, CEIC, China's ODI to the US reached around US$4bn in 2013, making it a top recipient of Chinese overseas investment.
Singapore and Hong Kong remain in second and third place in the index for 2014. Both economies are very open to foreign investment. They also have excellent infrastructure and offer free capital and labour markets, making it easy to do business. With their strong cultural links with China, they rank as the least risky destinations for Chinese ODI.
The EIU says Japan falls by two places to sixth in the 2014 rankings. Decades of deflation and lacklustre economic growth have discouraged Japanese companies from investing in new technology and human resources. The IMF estimates that corporate investment declined from around 20% of GDP in the early 1990s to 13.5% in 2013. The reduction is blunting Japan's edge in innovation: according to a UK consulting firm, Brand Finance, only 41 of the world's 500 most valuable brands were Japanese in 2014, down from 48 in 2013.
Cooling Sino-Japanese relations also put constraints on Chinese investment into the country. When asked about their attitudes towards China in Pew Research's Global Attitudes Project in 2012, only 15% of Japanese who responded viewed China as "very favourable" or "somewhat favourable"—the lowest level among all of the countries surveyed; the rate was 30% in 2011. The deterioration in perception increases Japan's risk level to Chinese investors; as such, Japan saw its ranking in the Risk pillar rise by two places.
The EIU says European economies are ranked among the top destinations for Chinese investments, especially those in northern Europe. However, some countries, including Germany and France in Western Europe, see their rankings slip. The scores of Germany and France in the Opportunity pillar do not deviate much from their northern neighbours, but their Risk pillar scores are slightly higher, owing to more rigid labour-market regulations and less liberal environments towards foreign investment.
The report says Spain, Italy and Portugal, on the other hand, score much lower in the Opportunity pillar. Even so, the weak economic performances of those countries are forcing more businesses to sell at a discount, generating buying opportunities for Chinese investors. Bloomberg estimates that China made acquisitions worth US$3.4bn in Italy this year, making the country the second-largest target in Europe (after the UK).
African and Latin American countries generally rank below Asian and European economies, but performances diverge at the national level. Libya's ranking plummets by 23 places, reflecting a downward adjustment in its economic growth prospects. GDP is estimated to have shrunk by 3% in 2013, and we estimate that GDP will continue to slide in 2014 as a result of ongoing social and political unrest and lacklustre oil revenue.
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