The purchase of AMC Entertainment by the Chinese conglomerate Dalian Wanda announced on May 20 will make it the world's largest movie distributor. Valued at $2.6 billion, with a promise by Wanda to invest an additional $500 million to update facilities, the deal seems like a win-win for the current owners and employees of AMC, as well as for Chinese investors intent on learning the business of movie distribution and extending China's soft power. However, this deal highlights the complex questions raised by foreign direct investment (FDI) coming from China into the U.S. and Europe.
Is there something fundamentally different when "parent" investors are Chinese companies? The answer is both no and yes.
Political fears surrounding the influx of FDI have happened before. In Europe, a precedent is the "coca-colonization" by American multinationals, which occurred from the 1950s on. The fear was that investment was about more than money. American capital came accompanied by American management style and American cultural values, which eventually would displace and destroy local cultures.
In the U.S., the best historical parallel is the explosion of investment from Japan in the late 1980s and the American hysteria that ensued. Underscored by high-profile deals such as the purchase of Rockefeller Center by the Mitsubishi Group in 1989 and Universal Studios by Matsushita Electric in 1990, the conspicuous spike in Japanese FDI took place against a political backdrop that bears striking similarity to that underlying Chinese investment today: trade frictions, currency disputes, debates over state subsidies, and perceptions of economic threat and relative decline.
With the hindsight of both cases, we now know that on balance the consequences of FDI on the host economy are positive: increased economic vitality and efficiency, creation and preservation of jobs, high-wage jobs, innovation and spillovers from R&D, and greater economic interdependence. Looking back at historical precedents suggests that Chinese FDI will gain mainstream acceptance as it leads to economic growth, despite initial domestic political resistance.
However, Chinese investment also confronts Europe and the U.S. with novel challenges without historical precedent.
First, the influx of Chinese FDI is a new situation for affluent countries more accustomed to investing in emerging, problematic economies than being treated like one of them. Throughout the 20th century, direct investment flowed almost exclusively from developed to developing economies. Europe and the United States were, and still are, the largest investors worldwide and the largest stakeholders in each others' economies.
Outward direct investment originating in developing countries exploded in the past decade, mainly in the direction of other emerging economies, such as India investing in Brazil or China in Africa. A much more recent phenomenon is that emerging countries, chief among them China, are now starting to invest in developed countries. Investing in Europe and the U.S. enables Chinese companies to move up the global value chain, but this may be posing some "existential" problems for some European politicians. Moreover, much of Chinese investment will likely be supportive of Chinese exports (through distribution, parts and service) and therefore may not create the type of well-paying jobs that FDI from rich countries has created and supported in the past.
A second novelty is the nature of the political regime under which Chinese investors operate --the Soviet Union did not invest in the West. China's authoritarian state and "capitalism with socialist characteristics" heightens sensitivity toward Chinese FDI in Western democracies. While the full extent of the Communist party's control of private and quasi-private firms in China is not clear, it is estimated that 66 percent of the stock of Chinese direct investment abroad comes from state-owned enterprises. In many countries, a company's investment abroad would be a purely commercial decision. In China, however, where the state owns a controlling interest in a variety of FDI-seeking companies, one can suspect that these companies are acting to fulfill strategic, rather than profit-maximizing, goals.
The security environment poses a third novel challenge. China is both a potential military rival, as well as a heavy investor in "rogue" states such as North Korea and Iran. One concern is that Chinese FDI in certain sectors runs the risk of enabling commercial and state espionage and creates the possibility of dual-use technologies transferring into the hands of the People's Liberation Army or pariah regimes. A second concern is that, contrary to historical precedents, the flow of technology has so far been rather unidirectional, with the investors learning the technology in the host country and exporting it back to China, instead of bringing in technology along with the investment. A third concern is that European countries will become dependent on Chinese investment, which could provide China with political and security leverage.
So the recent explosion of Chinese outward foreign direct investment presents a complicated dilemma for American and European policymakers. On the one hand, Chinese acquisitions have the exciting potential to improve and perhaps save struggling companies, benefitting employees, shareholders, and local economies. On the other hand, Chinese investment comes with several national security concerns, which carry particular significance because of China's non-market economy, pattern of economic espionage, and poor track record with national security and human rights. It also comes without a guarantee to provide the above benefits.