Author: Hinrich Voss and L. Jeremy Clegg, Leeds University Since China embarked on its ambitious opening and reform process, its commercial relationship with the European Union has flourished. Although bilateral trade growth has been an important part of this, European multinational enterprises (MNEs) have been swift to  target China for foreign direct investment (FDI). With the path blazed by large MNEs, increasingly smaller firms are following in the footsteps of the European majors such as the carmaker Volkswagen, or the chemical firm BASF, to use FDI to get a foothold in the Chinese market. Now the roles are shifting as Chinese investors descend on Europe. Reportedly, Chinese firms have been willing to acquire any ailing European firm, and are lining up to make major new large-scale investments. These perceptions are fuelled by acquisitions like Nanjing Automobile Corporation’s and Shanghai Automobile Industry Corporation’s acquisition of UK-based MG Rover in 2004–5, by Geely of Swedish-based Volvo in 2010, or of business units belonging to Thomson and Alcatel by TCL in 2004–5. These developments have caused two types of reactions. European governments and regional institutions have started to court Chinese companies and quarrel about who has been most successful in doing so. In some countries investment attraction has been nationally orchestrated to more effectively increase Chinese FDI, as in the case of the United Kingdom, with its government-run UK Trade & Investment network within China reaching out to Chinese firms. This network has been supported within the UK by regional investment promotion agencies. Other European countries have followed suit, by establishing their own networks within China. Cautionary voices have argued that, if the enterprise sector in the EU is bought out by China, the EU will risk losing its domestically-owned industrial capabilities and technological leadership. This has led to a call to  monitor and screen investments into the EU, in particular from China and other emerging markets, for their fit with European objectives. Both stances — positive and apprehensive — toward Chinese FDI need to be put into perspective, and understood in terms of the motives of the Chinese investors themselves. Broadly speaking, there are two types of Chinese investor. Large state-owned firms with favourable access to government capital seek to diversify their portfolios of real assets, and thereby the wealth portfolio of the Chinese state, through the acquisition of western assets. In contrast, investors originating in the vibrant Chinese domestic private sector are seeking profitable investment opportunities to upgrade their industrial capabilities and to grow their business. For these firms the purchase of strategic assets is made on the basis of fit with their corporate industrial strategy. However, for private firms, the opportunities offered by Chinese domestic market growth reduce the pull of markets abroad, which are growing at a slower pace. This certainly applies to EU market growth, with the exception of the high growth (but generally small) economies of the twelve countries joining in 2004 and 2007. The implications of this Chinese investment behaviour are visible across the EU. The EU-27 has collectively played only a very minor part in China’s outward investment strategy. Less than 3 per cent of China’s global investment stock was located in the EU in 2009. However, discounting the  entrepôt and investment hub Luxembourg, of this investment the 12 newly acceded countries attracted over 10 per cent of the EU’s total. This is a greater proportion than their share of EU GDP, and suggests that Chinese investment decisions are driven primarily by growth. If we were to characterise the spatial distribution of Chinese FDI within the EU, it might be said to mirror that of South Korean investment, rather than Japanese, which favours the larger economies. However, Chinese investment in the EU is still at a level where a clear pattern is yet to be established; over the last decade there is little evidence of a continuous and focused investment strategy in particular countries. While the EU has been of limited importance in China’s outward investment strategy, Chinese investment has equally  kept a low profile within the EU . The numbers of Chinese affiliates are low across the Union, and Eurostat figures show that their contribution to employment is minor — it should be noted that individual member states can report significantly higher values for selected FDI data than Eurostat does. Can we expect Chinese investments in the EU to grow? Chinese investments in Hungary, Poland and Romania have recently picked up. These transition economies have been especially attractive to Chinese firms, largely because they offer growth and are coupled with deep privatisation and liberalisation (Hungary), a large market (Poland) and a favourable business environment in the eyes of Chinese investors (Romania). The recent increase in Chinese investments in Central and Eastern European countries may also reflect a change in Chinese investment strategies towards targeting lower production cost sites within the EU, as a means of expanding market shares across the EU via export. Another development that could lead to an increase of Chinese investment over the coming years is the Treaty of Lisbon. Following this Treaty, as with Trade, one commissioner represents the EU in the sphere of FDI and is responsible for investment liberalisation. Now the authority for FDI policy resides at the EU level, it can have a single, united voice when dealing with China. This should make it easier for the EU as a whole to articulate its policy towards China, and to bring some coherence to the bewildering range of diverse institutional systems within the EU that are faced by the much sought after Chinese investor. Hinrich Voss is Roberts Fellow at the Centre for International Business at Leeds University Business School. L. Jeremy Clegg is Jean Monnet Professor of European Integration and International Business Management at Leeds University Business School. Europe needs to screen Chinese investment Traps for Chinese investment overseas Chinese investment in Australian resources