Smarter, smaller aompanies offer improved values sought in Chinese economic reform

In the first half of 2013, foreign direct investment from the European Union grew rapidly, up 15 percent year-on-year - a great improvement considering the continuing international economic downturn. Small and medium-sized enterprises played a vital role in this recovery.

SMEs' direct investment from Germany, the Netherlands and France grew significantly, but it also increased from Italy and other southern European countries. And they have all shown increasing interest in operating in China.

This comes as a result of the companies' rational assessment of the EU and Chinese markets under pressure of a continuing crisis, and the policies adopted by the two sides.

Expectation of development prospects in both markets was a direct reason for European SMEs adding more investments in China.

Since late 2008, European countries have been hit by financial crisis, economic crisis and sovereign debt crisis, and they are not out of the recession yet. Although the debt crisis has gradually subsided, the economic governance and reforms aimed at solving the fundamental problems are still far from complete. Therefore, a downturn in investment and consumption in Europe will linger in the short term.

Given that SMEs are generally vulnerable to such a crisis, they have stronger motivation to seek breathing space and expansion outside their own market.

From the Chinese perspective, although economic growth this year is slowing mildly, China is still able to maintain a growth rate of about 7 percent, and profit margins for investment are still quite large.

China's per capita income has grown rapidly in recent years, and consumption is increasing, which is generating demand for European products with established brands and quality.

Compared with the other emerging countries, China has an advanced infrastructure, a good logistics system and a comprehensive industrial structure, and so is more attractive for foreign investors in terms of industry chains.

It is the push within the European market and the pull from the Chinese market that is contributing to the boom in European SMEs investing in China, and policies from both China and the EU have played an important role in promoting that investment.

Since the outbreak of the international financial crisis, the business environment has become increasingly difficult for European SMEs.

To address this, the EU specifically formulated an "SME internationalization strategy" to vigorously support companies in seeking new opportunities via investment in high-growth markets such as those of the BRICS countries.

To help SMEs enter the Chinese market, the European Commission founded an EU SME Center in Beijing in 2010 that is committed to helping European SMEs overcome difficulties in investment and export to China by providing services such as market-entry and legal advice and information about Chinese technical norms, standards and financing. The center also organizes activities between European SMEs and potential Chinese investors, customers and partners, to promote understanding and facilitate deals.

For the SMEs with a limited skilled personnel, finance and international experience, government help has greatly reduced costs of investigation and made decision-making on investment easier and safer.

In China over the past two years, and especially since the new government took office in March this year, more effort has been put into economic restructuring and reform, and the importance of attracting quality foreign investment has been highlighted.

Energy saving and environmental protection, resource conservation, product quality and food safety have been made priorities, and there has been increased openness, all of which leads to better investment opportunities for European SMEs that specialize in these areas.

China's current economic growth model also faces challenges in transforming from being investment driven to innovation driven. As well as encouraging independent innovation, this also improves the level of innovation through international cooperation.

A large number of European SMEs are invisible champions in a variety of specialized technologies and products, with a world-class mastery and influence. Compared with the large enterprises that value low labor costs, investment from European SMEs in China pays more attention to labor quality and cooperation between upstream and downstream enterprises along the value chain.

If Chinese companies can fully seize the opportunity through cooperation to learn the techniques and management practices from European counterparts, then the market for technology seems to be a more achievable goal.

In the long run, investment by European SMEs in China would help explore the complementary areas for business development in China and the EU at a micro level, which will deepen China-EU economic cooperation.

The author is with the Institute of European Studies at the Chinese Academy of Social Sciences. She specializes in European industrial economics and policies, and the Italian economy.

(China Daily European Weekly 08/02/2013 page9)