6 ADMINISTRAȚIE ȘI MANAGEMENT PUBLIC  32/2019 Insights into global trends of capital flows’ peculiarities: emerging leadership of China Manuela… [628195]

6 ADMINISTRAȚIE ȘI MANAGEMENT PUBLIC  32/2019

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, econom ic 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 capit al. This means that productive capacity of any
country is determined by availability, and of course use of tho se factors. Those
theoretical foundations lie under further ample and more sophis ticated
elaborations. Those elaborations are related tothe quality of l abor (conventionally
estimated via education and longevity), productivity, level of labor costs, and a
wide variety of characteristics of capital, such as capital int ensity (% of total
GDP), capital structure, understood as the ratio of movable and immovable (fixed)
assets. The movable part of the capital, which includes equipme nt participates
directly in the process of production, while immovable capital, or, to put into

1 Professor, PhD, Vilnius Gediminas Technical University, Saulėte kio 11, LT-10223,
Vilnius, Lithuania, e-mail: [anonimizat] Manuela Tvaronavičienė (2019). Insights into global trends of c apital 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: em erging leadership of China

ADMINISTRAȚIE ȘI MANAGEMENT PUBLIC  32/2019 7 another way, fixed assets, which include buildings, infrastruct ure, serve as a
precondition of the smooth functioning of the production proces s. 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 s witching to the
question of capital movement, let us stop briefly on the questi on related to the
estimation of countries productive output. This passage is impo rtant for further
elaboration related to the effect of capital movement and conse quent economic
leadership.
Hence, the main conventional indi cator of the wealth of any cou ntry is
GDP, which is understood as the value of goods and services sol d 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 men tioned above
indicators have to be used for d ifferent purposes. We can have a country with
high GDP per capita, alas with low GDP, which makes this countr y rather weak
in the bigger geographical landscape. If to return to average w ealth of
inhabitants of any country, GDP per capita may not reflect the living level of
average class if the distributio n of income has specific charac teristics, 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 Inde x (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 m uch more
progressive, it does not solve an issue of estimation of the we llbeing of
inhabitants of a country. The components, which are included in this indicator
are limited, integration mode of different aspects is under dis cussion (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, nei ther costs required
for its preservation and restora tion (e.g. Arbidane and Mietule , 2018).
This passage to the estimation of productive efforts of a count ry is
introduced with a purpose to provide a proper context to the un derstanding of
economic leadership which is out lined, discussed and presented in this paper.
1. Economic leadership and capital movement

If economists and were asked to formulate what economic leaders hip is,
the majority most likely would a ssociate economic power and eco nomic
leadership (Katina et al. 2018; Tvaronavičienė 2018; Goncharen ko et al. 2019;
Stukalo et al. 2019). Here we wanted to raise a question if eco nomic power is
a s s o c i a t e d w i t h w e l l b e i n g . T h e a n s w e r m o s t l i k e l y w o u l d b e t h a t the well-
developed countries, which are either big or belong to alliance s pose economic
power and therefore economic lead ership. That is rather unanimo usly adopted,

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

8 ADMINISTRAȚIE ȘI MANAGEMENT PUBLIC  32/2019 a conventional approach, which could be found in economic devel opment
textbooks. This economic power and wellbeing would be suggested by all
variations of economic indicators provided above irrespective t o nuances they
reflect.
Those well-developed countries, as a rule, have the highly qual ified labour
force and have sufficient capital. This capital internationaliz es into less
developed countries in order to use the advantage of lower labo ur costs. Here
we could draw a generalization that well-developed countries ar e donors of
capital, which flow to less developed countries. As a result, b oth parties benefit
– donors of capital benefit in terms of returns of capital inve sted, and recipients
of capital benefit through spill over of knowledge or, to put i n a bit modern way,
through spill-over of technology (Monni et al., 2017; Zemlickie ne et al., 2017)
In case one wants to maintain th e logic presented above, the re sulting
picture of capital movement should be as follows: the less deve loped countries
are foreign capital recipients, while well-developed countries are donors.
Let us look at the landscape, which is being reflected by capit al movement
data of the latest 5 years. The methodological approach is: we admit that
indicator of foreign direct inves tment (FDI) intensity, express ed 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 capit al recipient country. Another i ndicator, 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 c ountries), which
is the most powerful capital dono r is an economic leader. The l eadership is
perceived in the sense of wanting to benefit from a return on i nvestment.
Anyway investing abroad requires an abundance of capital, which in the most
c o m m o n c a s e s i s s c a r c e . W e b e l i e v e t h a t i n p a r a l l e l w i t h t h e m o vement of
foreign capital (both inflow and outflow), an indicator of merg ers and
acquisitions has to be taken into account. There are two kinds of indicators
reflecting mergers and acquisitions: purchases and sales. We wi ll take into
account specifically an indicator of purchases since we want to know which
countries purchase companies in other countries. Buyers of comp anies, similarly
as capital donors are seen as eco nomic 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 b y
Euromonitor International.

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

ADMINISTRAȚIE ȘI MANAGEMENT PUBLIC  32/2019 9 Figure 1. FDI intensity (% of total GDP) in China, Eastern Euro pe,
Latin America, North America and Western Europe in 2013-2017

(Source: Euromonitor International, 2019)

2. Recent tendencies of economic leadership

I n o r d e r t o a n s w e r t h e q u e s t i o n about the most recent tendencie s of
economic leadership, reflected thr ough capital movement, we wil l take into
consideration the following countries/regions: China, Eastern E urope, Latin
America, North America, and Western Europe. The rationale of ta lking those
geographic is as follows. China is assumed as an emerging econo mic power,
despite its comparative low development. We want to test how it s capital
movement looks if juxtaposed to such economic leaders as North America and
W e s t e r n E u r o p e . I n o r d e r t o h a v e a c l e a r e r p i c t u r e o f t h e g l o b a l landscape,
besides China, two other regions have been taken, i.e. Easter E urope and Latin
America. Eastern Europe cannot be comparable with Latin America , of course,
alas, it can be comparable with We stern Europe. Eastern Europe is perceived as
a destination of FDI since it is considerably lagging behind We stern Europe
according to its economic development level. There are respecti ve economic
policies adopted with a purpose to attract FDI into Eastern Eur ope. Hence, we
will see if those policies are efficient by monitoring the fina l 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 fo cus. 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 1.3 1.2 1.2 1.2 1.12.0 1.9
1.22.7
2.05.4
4.04.8
4.44.1
1.51.32.62.4
1.41.8
1.33.53.2
1.8
0.01.02.03.04.05.06.0
2013 2014 2015 2016 2017China 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 ‐

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

10 ADMINISTRAȚIE ȘI MANAGEMENT PUBLIC  32/2019 the foreign capital since FDI intensity is this region fluctuat es around 4,5
percent. This result significantl y outperforms other considered destinations.
Eastern Europe with its clearly articulated economic policy dir ected to
encouraging of foreign capital inflows considerably lags behind Latin America,
alas outperforms China, which, according to classic logic prese nted above,
should be not less attractive for eign capital destination as La tin America.
Depicted data show the considera ble difference between Latin Am erica and
China in terms of FDI intensity: Chinas’ FDI intensity is twice l o w e r i f t o
compare to Latin America’s FDI intensity. It might mean that ec onomic policies
approach towards the phenomenon of foreign capital inflows is d ifferent in the
considered countries. Latin Ameri ca encourages this inflow, whi le 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 curre nt prices) in China, Eastern Europe,
Latin America, North America,
and Western Europe in the years 2013-2017

(Source: Euromonitor International from UNCTAD)

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

ADMINISTRAȚIE ȘI MANAGEMENT PUBLIC  32/2019 11 The data depicted above and showing the capital outflows reveal that the
major donor of capital in recent years is China. This phenomeno n seems to be
not compatible with classic theo ries, 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 am ong scholars and
practitioners (Shuyan and Fabuš, 2019). The indicated incompati bility is
conditioned, most likely, by China’s state policy rather by mar ket-driven
intentions, that’s what conventi onal economic theory says, sinc e states policy
can direct capital flows having a specific purpose (e.g. Fabuš and Csabay, 2018;
Nikitina et al., 2018). North Ame rica and Western Europe act in this area as
donors of capital for the rest o f considered countries (except China), alas this
action is much less intensive if to compare to China’s one. Her e we can
formulate an important insight: China’s capital donorship to ot her countries is
not market-driven, but policy-driven. Capital export is very in tensive if to
compare with conventional capital donorship of well-developed c ountries
(Ohanyan &Androniceanu, 2017). Th is unnatural behavior, which w e named
“emerging economic leadership” ha s 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 formula ted
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 econom ic theory
suggests that economically stronger market actors buy smaller a nd financially
less viable companies. If to predict statistics in this area, n ot knowing it in
advance, it would be suggested t hat 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 2013-20 17 years.
The above-provided data suggest that instead of North America a nd
Western Europe being the most act ive purchasers of foreign comp anies, China
is a leader in this area. China outperforms mentioned well-deve loped
countries/regions 4 times, e.g. in the year 2017. Thence, we mi ght assume that
this tendency appears to be comp atible 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 figur e 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 clai m that China is engaged in buyi ng companies of
well-developed countries, what ag ain witnesses about emerging e conomic
leadership of China.

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

12 ADMINISTRAȚIE ȘI MANAGEMENT PUBLIC  32/2019 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 on es

Let us look at forecast of development of considered regions. A s
forecasting tool we will use anal ytics of database Passport own ed by
Euromonitor International. This tool allows to get main macroec onomic
indicators, specifically, real GDP growth, unemployment rate, i nflation and
interest rate forecasted until se lected 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 follo wing way: China is
in focus, therefore economic dev elopment pattern of this countr y 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 th at this country
would conditionally stand for Western Europe in this case. This assumption is

Insights into global trends of c apital flows’ peculiarities: em erging leadership of China

ADMINISTRAȚIE ȘI MANAGEMENT PUBLIC  32/2019 13 research limitation, of course. The third country, i.e. USA sta nds for North
America. As it was described abo ve, 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 i f 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 impr essive real GDP growth rate rec orded in
years 2013-2017, during which we examined its capital export, i s diminishing.
The overall economic situation is worsening. This insight is su pported by
forecasted data of another 3 macroeconomic indicators, i.e. une mployment rate
a n d i n f l a t i o n , b o t h w i l l i n c r e a s e ; i n f l a t i o n w i l l s o a r . T h e e c o nomic forecast
would seem rather gloom, if not the fact that China’s developme nt slowdown,
which is recorded in year 2013, approximately, starts from econ omic
development heights, i.e. after reaching 8.2 percent of real GD P 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. Le t us examine economic patterns of Germany
and USA (Fig. 5 and res pectively Fig. 6).

Insights into global trends of c apital flows’ peculiarities: em erging leadership of China

14 ADMINISTRAȚIE ȘI MANAGEMENT PUBLIC  32/2019 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 forecaste d until year 2022 in USA

Source: Euromonitor International (2019)

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

ADMINISTRAȚIE ȘI MANAGEMENT PUBLIC  32/2019 15 Data depicted in Fig. 5 and Fig.6 shows that development patter ns of
Germany an USA until year 2022 are rather similar: after some f luctuation real
grow of GDP will near 1.6 percent, unemployment will diminish a nd interest will
grow in both countries. To generalize, China will maintain its economic
development growth, despite its slow-down, it will be still sli ghtly 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 d epends on the
current level of economic development. Economic development is conditioned
by two major production factors, i.e. labor and capital. More d evelopment
countries usually are donors of capital, and less developed cou ntries are seen as
recipients. The analysis of the most recent data of internation al capital
movement suggests that China appear to undertake economic leade rship in
driving its own capital to other countries. China is the most a ctive purchaser of
foreign companies, while well-developed countries are the selle rs. China’s
behavior is not typical for less developed countries. It can be claimed that China
may accelerate its development via obtaining new markets throug h active export
of own capital and foreign companies purchasing. Analysis of fo recasted
development patterns of China, Germany and USA allows to come t o a
conclusion that China’s leadership in its capital export may re main unchanged
during the nearest 3-5 years.
Research limitations: in the provided research ceteris paribus assumption has
been adopted.

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