The paper studies how geopolitics plays a role in China's outward foreign direct investment (FDI) decisions. The more specific focus is on the European Union (EU). The community has recently introduced a screening framework to prevent that foreign acquisitions of assets, especially involving key technologies and strategic sectors, jeopardise the functioning of the internal market. Based on the empirical analysis applied to a panel of 14 EU sectors observed over the period 2005–2022, the estimation results confirm that purely economic reasoning behind China's outward FDI in the EU plays only a limited role. Instead, China is likely to pursue foreign investment strategies that are closely related to the achievement of important geopolitical goals. This brings about important economic policy implications, which are discussed in the paper.
Policy Implications
- The evidence of not purely economic but rather geo-political considerations underlying outward FDI from China in the EU provides new foundations to articulate and implement economic policy responses.
- International openness strategies need to be adapted to a challenging environment in which companies do not only compete on economic merit but are exposed to state-dominated companies from countries where state interventionism, protectionism and, most importantly, geopolitically motivated industrial policy goals prevail.
- Although the EU has already pursued adaptive steps via the investment screening mechanism, important adjustments to the current framework are still needed. Most importantly, an enhanced uniformity of the screening mechanism across countries would help close loopholes and thus reduce the risk of overlooking investments that could pose a threat. It would also permit investors to have a clearer understanding of the rules, reducing uncertainties that might deter beneficial investments.
- Moreover, explicit rules that apply to greenfield FDI or to R&D activities should be established. The lack there of keeps the backdoors open for undesirable consolidation of influence from untrusted partners.
- Finally, more attention should be offered to a comprehensive inter-ministerial approach towards economic and political relations with non-like-minded countries. This should include an extensive monitoring of on-going strategic changes in multiple areas, that is eco-nomic, political, scientific, social and military spheres.
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