«Chinese FDI strategy in Italy: the ‘Marco Polo’ effect Carlo Pietrobelli* Inter-American Development Bank, 1300 New York Avenue NW, Washington DC ...»
Int. J. Technological Learning, Innovation and Development, Vol. 4, No. 4, 2011 277
Chinese FDI strategy in Italy: the ‘Marco Polo’ effect
Inter-American Development Bank,
1300 New York Avenue NW,
Washington DC 20577, USA
Università Roma Tre, Via G. Chiabrera,
199 – 00145 Rome, Italy
Department of Economics and Quantitative Methods,
Università del Piemonte Orientale, Via Perrone 18, 28100 Novara, Italy and Orkestra-Instituto Vasco de Competitividad, Mundaiz, 50 (Campus Universidad de Deusto), 20012 San Sebastián, Spain Fax: +39-0321-375305 E-mail: email@example.com Marco Sanfilippo Robert Schuman Centre for Advanced Studies, European University Institute, Via delle Fontanelle, 19, 50014 – San Domenico di Fiesole, Firenze, Italy and UNICEF Innocenti Research Centre, Piazza SS. Annunziata 12, 50122 Florence, Italy Fax: +39-055-4685770 E-mail: firstname.lastname@example.org Abstract: This study investigates the motivations driving Chinese outward direct investment to Italy. The analysis is based on secondary sources and in-depth interviews with key informants and senior managers of Chinese affiliates in Italy. The evolution of the Chinese firms’ pattern of entry in Italy confirms the model followed by Chinese firms in other European countries, but we obtain some additional interesting results. Chinese investments in Italy are increasingly targeting the acquisition of technological capabilities and of design skills and brands to tap local competences available in specialised manufacturing clusters in sectors such as automotives and home appliances.
They try to link, leverage and learn from foreign acquisitions. The main Copyright © 2011 Inderscience Enterprises Ltd.
278 C. Pietrobelli et al.
industries of specialisation of Chinese OFDI in Italy reflect this approach and appear to be related to China’s strategy to increase the sophistication of its exports and to move away from standardised commodities and intermediate manufactures and components.
Keywords: Chinese FDI strategy; linkage; leverage; learning; acquisitions;
Reference to this paper should be made as follows: Pietrobelli, C., Rabellotti, R. and Sanfilippo, M. (2011) ‘Chinese FDI strategy in Italy: the ‘Marco Polo’ effect’, Int. J. Technological Learning, Innovation and Development, Vol. 4, No. 4, pp.277–291.
Biographical notes: Carlo Pietrobelli is the Lead Economist at the Inter-American Development Bank (IADB), Washington D.C. and a Professor of Economics at CREI, University of Roma Tre. He published his last books with Harvard University Press, Edward Elgar, Routledge and MacMillan. He is a regular advisor of governments and international organisations on private sector development strategies.
Roberta Rabellotti is a Professor of Economics at the Università del Piemonte Orientale. She has published in many academic journals and with publishers such as Harvard University Press, Edward Elgar and MacMillan. She has worked as a consultant for several international organisations on issues related with clusters, global value chains and industrial policy.
Marco Sanfilippo holds a PhD in Development Economics at the University of Florence and is currently a Research Fellow at the European University Institute in Florence and a Consultant at UNICEF IRC. His main research interests are on FDI from emerging economies, on the internationalisation of Chinese multinationals, on the economic relations between China and Africa and on development studies.
The presence of Chinese enterprises in Europe is increasing at a very fast pace. So, it is the literature aimed at understanding the motivations of these outward foreign direct investments (OFDI), which do not follow the traditional attempt of exploiting ownership advantages, such as proprietary access to a superior production technology or to a valuable brand, as envisaged by the so-called ownership-localisation-internalisation (OLI) model (Dunning, 1981). In fact, the internationalisation activity of firms from countries such as China in the developed world reflects attempts to acquire and augment strategic assets, such as new technologies and brands and to secure access to distribution networks, rather than exploiting existing assets. This view has inspired an alternative to the OLI model, the linkage-leverage-learning (LLL) framework proposed by Mathews (2002) to capture the idea that latecomer firms use foreign direct investment and global linkages to leverage their existing cost advantage and learn about new sources of competitive advantages.
In Europe, the expansion of Chinese investors is taking place in countries with economic systems as diverse as France, Germany, Italy, the Netherlands and the UK. The Chinese FDI strategy in Italy 279 diversity of sectoral specialisation of these economic systems calls for empirical research to investigate the motivations of Chinese investments. Nevertheless, with the exceptions of a few studies on the UK (Cross and Voss, 2008; Liu and Tian, 2008) and Germany (Schüler-Zhou and Schüller, 2009), the literature available has not yet undertaken detailed firm surveys at the country level.
In this paper, we study what motivates Chinese companies to invest in Italy, being the Italian context of particular interest because of the peculiarity of its economic system, which share with the Chinese economy features such as a strong presence of small and medium enterprises (SMEs) and a specialisation in ‘traditional’ industries (Amighini and Chiarlone, 2005). Traditionally, Italy has not been very attractive as a destination for foreign investments and the reasons for this poor performance include poor infrastructures, high levels of criminal activity in some areas of the country, high levels of bureaucracy and rigid labour market regulation (Committeri, 2004; Daniele and Marani, 2008). In terms of attractions, the results of a survey conducted by the Bank of Italy on foreign investors stress the importance of the size of the domestic market and the lower labour costs compared to other EU countries (Committeri, 2004). Also, a recent empirical analysis shows that strong location advantages linked to local specialisation among agglomerations of firms are attractive to FDI in both high and low technology sectors (De Propris et al., 2005). It is therefore particularly interesting the study of the main factors of attraction of the increasing presence of Chinese companies in Italy.
In terms of stock, in 2009 Italy is ranked sixth among the countries of Europe (excluding Russia and the Luxembourg) with more than 190 million US$, corresponding to a share of 2.2%. Considering flows, these have consistently increased from 2003 to 2007, with just a small decline in 2008 and a considerable recovery in 2009.1 This trend is also confirmed by a recent survey undertaken by the China Council for the Promotion of International Trade (2010) in cooperation with the European Commission and UNCTAD on a sample of more 1,300 Chinese companies interviewed with a questionnaire in nearly 30 Chinese provinces. According to this survey, when Chinese companies invest in the EU, they mainly locate in Germany, the UK, France, and Italy, and they consider the same countries for future investment plans.
For the empirical analysis, we have compiled an original proprietary database from multiple sources, including the whole population of Chinese companies. Moreover, we have undertaken in-depth interviews with key informants and senior managers of some of these Chinese affiliates. This allows us to draw a detailed map of Chinese investments in Italy, exploring their characteristics in terms of size, choice of location, sector of specialisation and activities undertaken. With regard to their motivations, we discover that what is happening today mirrors, in the opposite direction, what happened centuries ago when Marco Polo visited China in the XIII Century and lived there for over a decade.
The famous Venetian traveller was astonished by the level of civilisation achieved by the Asian country and brought back important scientific and technological discoveries, like the use of compass, money and coal. In these days, Chinese enterprises appear to be increasingly interested in acquiring and learning knowledge and technology being developed by companies in advanced countries through a rapid increase of their foreign investments. In Italy, Chinese companies are attracted by the high skills in designintensive sectors, by the high sophistication of customers, whom global rising stars like Haier would like to learn how to satisfy, by well known brands and by the small size of 280 C. Pietrobelli et al.
the enterprises, which makes acquisitions a relatively easy target for the new wave of Chinese companies in their international strategy.
The paper is organised as follows. Section 2 provides a review of the literature on the motivations behind Chinese OFDI, Section 3 presents the analysis of the empirical findings on Chinese OFDI in Italy and explores their motivations and Section 4 concludes.
2 The literature on the motivations for Chinese FDI
Much of the work that investigates the motivations for FDI refers to the four categories identified by Dunning (1993): resource seeking; efficiency seeking; market seeking and strategic asset seeking. Resource seeking FDI are mainly directed to resource-rich countries, especially in Africa and Latin America. Chinese enterprises have so far had little incentive to seek cheap input factors abroad, and particularly in Europe, given the large domestic supply of low-cost labour, land and capital (Buckley et al., 2008), and their motivation to seek efficiency by exploiting economies of scale and scope and/or securing access to cheaper input factors has been therefore rather weak. Thus, these two motivations are not very relevant in the case of Chinese FDI going to European countries and our focus is on the remaining two driving forces as the main attractors to Europe.
Starting with market seeking investments, the host market size appears as one of the significant determinants of Chinese market-seeking investments in an econometric exercise undertaken by Buckley et al. (2007). Therefore, we can expect this motivation to play a positive and significant role also for investments going to the European countries.
The literature is also stressing that in the early 1990s most of Chinese FDI were mainly defensive (i.e., FDI following trade) as firms set up foreign affiliates in order to serve their customers better and to increase customer loyalty (Buckley et al., 2008).
Increasingly, market-seeking investments also reflect a strategy of taking advantage of preferential access to the developed country market (e.g., investments in Turkey targeting the EU market, and investments in sub-Saharan African countries to enjoy preferential treatment from developed markets in textiles) (OECD, 2008; Kaplinsky and Morris, 2009). In the case of FDI towards developed countries, investments are used as a springboard to bypass trade barriers and may be motivated by the attempt to avoid quota restrictions and accusations of dumping (Luo and Tung, 2007). These are, for example, the cases of Haier, which built a manufacturing plant in the USA to avoid quota restrictions, and TCL, which acquired an insolvent German television maker, Schneider Electronics, to elude dumping accusations in the EU market.
A further reason for defensive market seeking investments is the attempt to escape from the excessive competition at home, given the large number of foreign MNEs in China and the obligation to open the Chinese domestic market under the WTO accession terms. This has caused profit margins to fall and resulted in overcapacity in some mature industries, such as textiles and clothing, pushing Chinese firms to find new markets overseas by establishing local sales and distribution centres, but also overseas production bases (OECD, 2008).
Chinese FDI strategy in Italy 281 More recently, market seeking investments have also increasingly become offensive (i.e., trade following FDI), aimed at developing new markets, improving brand recognition, adapting products to market requirements and at raising company profiles in markets with growth potential (Buckley et al., 2008).
The other main attractor of Chinese firms to developed countries is access to strategic assets such as technology, know-how, managerial and marketing skills, recognised brand names, distribution networks and reputation. Chinese companies use these investments to rapidly overcome their disadvantages in terms of technology, knowledge and skills (Amighini et al., 2010; Hong and Sun, 2006; Luo et al., 2010). This is also an expressed goal of state-directed Chinese FDI (Deng, 2009). Evidence from the UK confirms that the need to acquire new and advanced management skills and to tap into pools of local knowledge is a key reason for Chinese internationalisation (Cross and Voss, 2008).
Further empirical evidence of these motivations is provided by case studies on the white goods sector (Bonaglia et al., 2007) and on well known Chinese MNEs such as Haier, Lenovo, BOE and TCL (Li, 2007; Liu and Buck, 2009).
The intensification of cross-border merger and acquisition (M&A) activities by Chinese companies is a confirmation of the importance of the strategic asset seeking motivation (Cui and Jiang, 2009). As new international players, Chinese firms generally carry out cross-border M&A primarily to speed up acquisition and control of strategic assets. In many cases, the firms acquired are loss-making businesses, which are purchased to use their brand names. This, together with the little prior international experience of many Chinese companies, may raise some doubts about their ability to successfully manage the acquired companies (Buckley et al., 2008). More in general, there is not yet enough empirical evidence available to assess how the process of rapid acquisition of strategic assets and capabilities through OFDI is effectively leading to absorption and adaptation of these resources within Chinese companies.