Manuela Tvaronavičienė (2019).

Insights into global trends of capital flows’ peculiarities:

emerging leadership of China. Administratie si Management Public, (32), pp. 6-17,
DOI: 10.24818/amp/2019.32-01.

Insights into global trends of capital flows’ peculiarities:

emerging leadership of China
Manuela TVARONAVIČIENĖ1

Abstract: The presented paper aims to reveal the latest trends of the international
capital movement. The following countries/regions are being considered: China,
Eastern Europe, Latin America, North America and Western Europe during the years
of 2013-2017. Classic economic theory suggests that better developed countries are
capital donors, and less developed countries, respectively, are capital recipients.
Analysis of the foreign direct investments (FDI) intensity, outflows complimented by
mergers and acquisitions (purchases) indicator allows to conclude that the recent
picture does not comply statements of classic economic theory, since China, being
comparatively less developed country demonstrates vivid economic leadership in terms
of exporting its capital to other countries. This behavior can condition accelerated
development of China via acquisitions of additional market to own production.

Keywords: capital flows, economic leadership, China

JEL: E4, E5, F2

DOI: 10.24818/amp/2019.32-01

Introduction

The introduction is about production factors and output of the economic

activity. Classic economic theory says that there are two major factors of
production, i.e. labor and capital. This means that productive capacity of any
country is determined by availability, and of course use of those factors. Those
theoretical foundations lie under further ample and more sophisticated
elaborations. Those elaborations are related tothe quality of labor (conventionally
estimated via education and longevity), productivity, level of labor costs, and a
wide variety of characteristics of capital, such as capital intensity (% of total
GDP), capital structure, understood as the ratio of movable and immovable (fixed)
assets. The movable part of the capital, which includes equipment participates
directly in the process of production, while immovable capital, or, to put into

1
Professor, PhD, Vilnius Gediminas Technical University, Saulėtekio 11, LT-10223,
Vilnius, Lithuania, e-mail: manuela.tvaronaviciene@vgtu.lt

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 Insights into global trends of capital flows’ peculiarities: emerging leadership of China

another way, fixed assets, which include buildings, infrastructure, serve as a

precondition of the smooth functioning of the production process. This
comprising part of total capital is undoubtedly important, alas, does not contribute
directly to the production of goods and services. Therefore, a separate strand of
scientific literature is devoted to capital structure with the purpose to find the best
composition, which would accelerate the growth of GDP. Before switching to the
question of capital movement, let us stop briefly on the question related to the
estimation of countries productive output. This passage is important for further
elaboration related to the effect of capital movement and consequent economic
leadership.
Hence, the main conventional indicator of the wealth of any country is
GDP, which is understood as the value of goods and services sold via one year.
If we want to measure the average wealth of people, who live in a country, we
use an indicator of GDP per capita. It is obvious that both mentioned above
indicators have to be used for different purposes. We can have a country with
high GDP per capita, alas with low GDP, which makes this country rather weak
in the bigger geographical landscape. If to return to average wealth of
inhabitants of any country, GDP per capita may not reflect the living level of
average class if the distribution of income has specific characteristics, i.e. if the
high-income class or low-income class prevails (Tvaronavičienė and Gatautis,
2017). Therefore, another indicator for estimating the level of welfare is used.
That is Human Development Index (HDI), which along with GDP per capita,
takes into account literacy level and longevity (Prakash, Garg, 2019).Despite
this indicator in comparison with GDP per capita indicator is much more
progressive, it does not solve an issue of estimation of the wellbeing of
inhabitants of a country. The components, which are included in this indicator
are limited, integration mode of different aspects is under discussion (Dirzytė et
al. 2016; Androniceanu et al. 2018).
Apart from GDP which constitutes a component of this composite
indicator does not reflect nor deterioration of our planet, neither costs required
for its preservation and restoration (e.g. Arbidane and Mietule, 2018).
This passage to the estimation of productive efforts of a country is
introduced with a purpose to provide a proper context to the understanding of
economic leadership which is outlined, discussed and presented in this paper.

1. Economic leadership and capital movement

If economists and were asked to formulate what economic leadership is,

the majority most likely would associate economic power and economic
leadership (Katina et al. 2018; Tvaronavičienė 2018; Goncharenko et al. 2019;
Stukalo et al. 2019). Here we wanted to raise a question if economic power is
associated with wellbeing. The answer most likely would be that the well-
developed countries, which are either big or belong to alliances pose economic
power and therefore economic leadership. That is rather unanimously adopted,

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 Insights into global trends of capital flows’ peculiarities: emerging leadership of China

a conventional approach, which could be found in economic development

textbooks. This economic power and wellbeing would be suggested by all
variations of economic indicators provided above irrespective to nuances they
reflect.
Those well-developed countries, as a rule, have the highly qualified labour
force and have sufficient capital. This capital internationalizes into less
developed countries in order to use the advantage of lower labour costs. Here
we could draw a generalization that well-developed countries are donors of
capital, which flow to less developed countries. As a result, both parties benefit
- donors of capital benefit in terms of returns of capital invested, and recipients
of capital benefit through spill over of knowledge or, to put in a bit modern way,
through spill-over of technology (Monni et al., 2017; Zemlickiene et al., 2017)
In case one wants to maintain the logic presented above, the resulting
picture of capital movement should be as follows: the less developed countries
are foreign capital recipients, while well-developed countries are donors.
Let us look at the landscape, which is being reflected by capital movement
data of the latest 5 years. The methodological approach is: we admit that
indicator of foreign direct investment (FDI) intensity, expressed in percentage
of GDP, reflects the attractiveness of the capital destination. The higher FDI
intensity in a country, the more inflows of foreign capital it received if to
compare to another foreign capital recipient country. Another indicator, which
we will take into account is FDI outflows. This indicator is in USD million in
current prices. We admit that a country (or alliance/block of countries), which
is the most powerful capital donor is an economic leader. The leadership is
perceived in the sense of wanting to benefit from a return on investment.
Anyway investing abroad requires an abundance of capital, which in the most
common cases is scarce. We believe that in parallel with the movement of
foreign capital (both inflow and outflow), an indicator of mergers and
acquisitions has to be taken into account. There are two kinds of indicators
reflecting mergers and acquisitions: purchases and sales. We will take into
account specifically an indicator of purchases since we want to know which
countries purchase companies in other countries. Buyers of companies, similarly
as capital donors are seen as economic leaders. If the leaders are emerging
countries, or as conventionally perceived, well-developed ones, it will be
revealed by examining the most recent statistic data. Source of the data
employed is UNCTAD, accessed through database Passport, powered by
Euromonitor International.

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 Insights into global trends of capital flows’ peculiarities: emerging leadership of China

Figure 1. FDI intensity (% of total GDP) in China, Eastern Europe,

Latin America, North America and Western Europe in 2013-2017

6.0 5.4
4.8
5.0 4.4
4.0 4.1
4.0 3.5
3.2
3.0 2.6 2.7
2.4
2.0 1.8 1.9 2.0 1.8
2.0 1.3 1.5 1.31.3 1.4
1.2 1.21.2 1.2 1.1
1.0

0.0
2013 2014 2015 2016 2017

China FDI Intensity Socio‐economic indicators % of total GDP ‐
Eastern Europe FDI Intensity Socio‐economic indicators % of total GDP ‐
Latin America FDI Intensity Socio‐economic indicators % of total GDP ‐
North America FDI Intensity Socio‐economic indicators % of total GDP ‐
Western Europe FDI Intensity Socio‐economic indicators % of total GDP ‐

(Source: Euromonitor International, 2019)

2. Recent tendencies of economic leadership

In order to answer the question about the most recent tendencies of

economic leadership, reflected through capital movement, we will take into
consideration the following countries/regions: China, Eastern Europe, Latin
America, North America, and Western Europe. The rationale of talking those
geographic is as follows. China is assumed as an emerging economic power,
despite its comparative low development. We want to test how its capital
movement looks if juxtaposed to such economic leaders as North America and
Western Europe. In order to have a clearer picture of the global landscape,
besides China, two other regions have been taken, i.e. Easter Europe and Latin
America. Eastern Europe cannot be comparable with Latin America, of course,
alas, it can be comparable with Western Europe. Eastern Europe is perceived as
a destination of FDI since it is considerably lagging behind Western Europe
according to its economic development level. There are respective economic
policies adopted with a purpose to attract FDI into Eastern Europe. Hence, we
will see if those policies are efficient by monitoring the final result expressed by
FDI intensity. We will compare FDI intensity with such regions as Latin
America, and China, of course, which is in the centre of our focus. Let us look
at Figure 1 above in which FDI intensities in chosen countries/regions are
depicted. The reflected data signals, that Latin America is the top destination of

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 Insights into global trends of capital flows’ peculiarities: emerging leadership of China

the foreign capital since FDI intensity is this region fluctuates around 4,5
percent. This result significantly outperforms other considered destinations.
Eastern Europe with its clearly articulated economic policy directed to
encouraging of foreign capital inflows considerably lags behind Latin America,
alas outperforms China, which, according to classic logic presented above,
should be not less attractive foreign capital destination as Latin America.
Depicted data show the considerable difference between Latin America and
China in terms of FDI intensity: Chinas’ FDI intensity is twice lower if to
compare to Latin America’s FDI intensity. It might mean that economic policies
approach towards the phenomenon of foreign capital inflows is different in the
considered countries. Latin America encourages this inflow, while China does
not. Let us examine the latest capital outflow patterns in the considered
countries/regions (Figure 2).

Figure 2. FDI outflows (USD million in current prices) in China, Eastern Europe,
Latin America, North America,
and Western Europe in the years 2013-2017

(Source: Euromonitor International from UNCTAD)

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 Insights into global trends of capital flows’ peculiarities: emerging leadership of China

The data depicted above and showing the capital outflows reveal that the
major donor of capital in recent years is China. This phenomenon seems to be
not compatible with classic theories, which assume that capital flows from more
developed countries to less developed countries. China’s active channeling of
its capital towards other countries already gained attention among scholars and
practitioners (Shuyan and Fabuš, 2019). The indicated incompatibility is
conditioned, most likely, by China’s state policy rather by market-driven
intentions, that’s what conventional economic theory says, since states policy
can direct capital flows having a specific purpose (e.g. Fabuš and Csabay, 2018;
Nikitina et al., 2018). North America and Western Europe act in this area as
donors of capital for the rest of considered countries (except China), alas this
action is much less intensive if to compare to China’s one. Here we can
formulate an important insight: China’s capital donorship to other countries is
not market-driven, but policy-driven. Capital export is very intensive if to
compare with conventional capital donorship of well-developed countries
(Ohanyan &Androniceanu, 2017). This unnatural behavior, which we named
“emerging economic leadership” has to be taken into account by other countries
since globalization is related to competitiveness are related, ultimately
(Mikhaylov, 2018, Tvaronavičienė, 2018, Zeibote et al., 2019).
In order to verify obtained results and support already formulated
insights let us now glance at one more indicator, i.e mergers, and acquisitions.
As it was mentioned above, there are two indicators available, which this
international phenomenon: purchases and sales. Classical economic theory
suggests that economically stronger market actors buy smaller and financially
less viable companies. If to predict statistics in this area, not knowing it in
advance, it would be suggested that better-developed countries are more active
in both merger and acquisition activities, i.e. purchasing and sales. Now let us
examine Figure 4, in which purchases of companies in considered countries are
presented. Let us recall that we focus on the period of 2013-2017 years.
The above-provided data suggest that instead of North America and
Western Europe being the most active purchasers of foreign companies, China
is a leader in this area. China outperforms mentioned well-developed
countries/regions 4 times, e.g. in the year 2017. Thence, we might assume that
this tendency appears to be compatible with China‘s behavior in exporting its
capital. China’s activity in purchasing of foreign companies we see as policy-
driven instead as market driven. We do not provide here a figure reflecting sales
of companies, and just inform a reader that origin of companies which are is
North America and Western Europe (Vasile & Androniceanu, 2018). Hence, if
to be very specific, we can claim that China is engaged in buying companies of
well-developed countries, what again witnesses about emerging economic
leadership of China.

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 Insights into global trends of capital flows’ peculiarities: emerging leadership of China

Figure 3. Mergers and acquisitions: purchases

(USD million in current prices) in China, Eastern Europe, Latin America,
North America and Western Europe in years 2013-2017

(Source: Euromonitor International, 2019)

3. Foreseeing future tendencies of capital basing on forecasted

economic development of selected countries out of considered ones

Let us look at forecast of development of considered regions. As

forecasting tool we will use analytics of database Passport owned by
Euromonitor International. This tool allows to get main macroeconomic
indicators, specifically, real GDP growth, unemployment rate, inflation and
interest rate forecasted until selected period. We select year 2022. Below there
are provided forecasts for China, Germany and USA (Fig.4, Fig.5, Fig. 6). The
selection of countries under scrutiny is explained in the following way: China is
in focus, therefore economic development pattern of this country is crucial factor
determining it’s capacity of exporting of its capital to other countries. Selection
of Germany for further analysis is conditioned by assumption that this country
would conditionally stand for Western Europe in this case. This assumption is

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 Insights into global trends of capital flows’ peculiarities: emerging leadership of China

research limitation, of course. The third country, i.e. USA stands for North
America. As it was described above, according classic theory of economic
development, Western Union and USA, should be main exporters of foreign
capital. Let us juxtapose China’s economic development patterns and
Germany’s and USA development patterns with purpose to reveal if current
economic leadership of China is persistent.

Figure 4. Real GDP growth, unemployment rate, inflation and interest

rate forecasted until year 2022 in China

(Source: Euromonitor International, 2019)

Fig. 4 reveals that China’s impressive real GDP growth rate recorded in
years 2013-2017, during which we examined its capital export, is diminishing.
The overall economic situation is worsening. This insight is supported by
forecasted data of another 3 macroeconomic indicators, i.e. unemployment rate
and inflation, both will increase; inflation will soar. The economic forecast
would seem rather gloom, if not the fact that China’s development slowdown,
which is recorded in year 2013, approximately, starts from economic
development heights, i.e. after reaching 8.2 percent of real GDP growth. Event
after reaching its “bottom” at the end of forecasting period in year 2022, it is
still above 2 percent, what is, according classics of economic theory, sufficiently
good growth rate of real GDP. Let us examine economic patterns of Germany
and USA (Fig. 5 and respectively Fig. 6).

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 Insights into global trends of capital flows’ peculiarities: emerging leadership of China

Figure 5. Real GDP growth, unemployment rate, inflation

and interest rate forecasted until year 2022 in Germany

(Source: Euromonitor International, 2019)

Figure 6. Real GDP growth, unemployment rate, inflation
and interest rate forecasted until year 2022 in USA

Source: Euromonitor International (2019)

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 Insights into global trends of capital flows’ peculiarities: emerging leadership of China

Data depicted in Fig. 5 and Fig.6 shows that development patterns of

Germany an USA until year 2022 are rather similar: after some fluctuation real
grow of GDP will near 1.6 percent, unemployment will diminish and interest will
grow in both countries. To generalize, China will maintain its economic
development growth, despite its slow-down, it will be still slightly higher than in
Germany and USA. Judging from provided data it could be stated that China will
maintain its potential to export its capital to other countries, and, most likely, will
do that in case if economic policy remained unchanged.

3. Conclusions

Overall, everyone would agree that the classic economic theory claims
that in contemporary world economic leadership of any country depends on the
current level of economic development. Economic development is conditioned
by two major production factors, i.e. labor and capital. More development
countries usually are donors of capital, and less developed countries are seen as
recipients. The analysis of the most recent data of international capital
movement suggests that China appear to undertake economic leadership in
driving its own capital to other countries. China is the most active purchaser of
foreign companies, while well-developed countries are the sellers. China’s
behavior is not typical for less developed countries. It can be claimed that China
may accelerate its development via obtaining new markets through active export
of own capital and foreign companies purchasing. Analysis of forecasted
development patterns of China, Germany and USA allows to come to a
conclusion that China’s leadership in its capital export may remain unchanged
during the nearest 3-5 years.
Research limitations: in the provided research ceteris paribus assumption has
been adopted.

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