A visit to the capital city of any developing country rich in commodities is likely to provide a sighting of Chinese businessmen looking to strike a deal on their next mining or infrastructure project. But while Chinese investors have become a staple of the FDI landscape in emerging markets in the past decade, they have tended to be much more reserved when it comes to developed countries. That was until 2014, when a record high for Chinese investments into Europe was recorded by international law firm Baker & McKenzie.

"We are observing an increased number of Chinese investments into advanced economies, unlike in the early 2000s when most investments were into the developing world," says Thilo Hanneman, research director at New York-based consultancy Rhodium Group. "The most important reason for that shift is the maturing of the Chinese economy from an investment-driven, resource-intensive market to a more knowledge-intensive, service-based one."

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And greater investor activity in Europe is not the only such change to occur in Chinese outward FDI. While Chinese investors have generally been keener on putting their money into M&A rather than completely new operations, Baker & McKenzie research shows that greenfield projects accounted for 69% of all the money invested by Chinese companies in Europe last year.

According to Mr Hanneman, although Chinese investors still prefer to enter Europe by acquiring existing businesses, the growing activity in greenfield investment in 2014 was not just a one-off. "Chinese companies have been choosing to enter European markets through M&As because it is faster," he says. "However, we are definitely observing growth in the value of greenfield FDI invested by Chinese companies in Europe."

Localising trend

The spike in Chinese greenfield FDI expenditures in Europe is particularly visible in manufacturing, according to Mr Hanneman. This might seem like an odd sector for investments by Chinese companies, given that cheap domestic manufacturing is what has been fuelling Chinese economy for the past few decades. Yet there is a rationale. "Factors such as production cost or compliance in China are either already changing or are about to change," says Mr Hanneman. "So many Chinese companies shift cost differentials between developed markets and China by localising manufacturing closer to their customers."

Alongside manufacturing sectors such as industrial machinery and automotive OEM, Chinese companies have been investing heavily in real estate, committing more than $1.2bn in 2014 according to data from greenfield tracker fDi Markets. Meanwhile, the greatest number of new ventures launched by Chinese companies in 2014 were in financial services, communications and industrial machinery.

Among the most active Chinese investors last year were Huawei, a Shenzen-headquartered telecommunications company that launched at least six projects in western Europe in 2014, and Bank of China, a state-owned banking institution which launched five.

Germany and the UK accounted for more than 50% of all new projects launched by Chinese companies in western Europe in 2014. London and Frankfurt were the top locations, attracting eight and six greenfield projects respectively, according to data from fDi Markets.

No walk in the park

Yet establishing a presence in Europe is not an easy task for Chinese companies. According to a research published in March by Columbia University's FDI Perspectives Journal, one of the biggest problems for Chinese investors coming to Europe is the work permit process, as visa applications are seen as arduous and complex.

Another major challenge has to do with Chinese corporate culture, which weaves traditional hierarchical structures into its managerial practices. This makes it difficult for Chinese companies to operate in a more autonomous Western corporate environment.

There are also concerns over the fact that China has been involved in multiple cybersecurity controversies, which for some Westerners means Chinese investment in sectors such as telecommunications are a potential threat to national security.

Balancing act

So while the volume of Chinese FDI into Europe has risen, could the hurdles outlined in the FDI Perspectives Journal reverse the trend? Louis Brennan, author of the research and a professor of business studies at Trinity College, Dublin, remains upbeat. Although far from ideal, "the climate of receptivity towards Chinese investments in Europe has improved”, he says, attributing this to a greater appetite for investment among Western countries as a result of the eurozone crisis. 

In fact, Mr Brennan expects Chinese outward FDI to remain on an upward trajectory in the years to come. "Chinese enterprises are extremely ambitious and there is recognition among them that they are ready to move up the value chain. Access to know-how from the developed countries will be important to their growth and upgrading," he says.

Mr Hanneman believes that Chinese companies are unlikely to be discouraged by the hurdles they have to deal with when investing in Europe. "[These companies] are definitely up for the challenge. Not that they have much of a choice, if they want to grow internationally," he says.

But are they ready to be more flexible in their management style, thereby eliminating one of the main issues that could stand in the way of their success in Europe? "That is the million-dollar question. On the one hand, there are sound reasons for Chinese companies to adapt to Westerns norms and system of governance. On the other, the hierarchical way is well established and embedded in the culture," says Mr Hanneman. He believes that business interests will eventually surmount cultural differences. "For commercial reasons Chinese enterprises will adapt. It might not be easy, but they will adapt," he says.