The Determinants and Motivations of China's Outward Foreign Direct Investment: A Spatial Gravity Model Approach

Abstract

The study attempts to investigate the features and determinants of China's outward foreign direct investment (OFDI) into 138 countries and Chinese firms' investment strategies over the 2003–2009 period using an augmented gravity model with spatial linkages. The respective evaluations of China's OFDI are indicative of the important role played by non-financial OFDI. At the same time, Chinese firms prefer to invest in high-tech industries in developed countries while also focusing on the extraction of natural resources around the world. The empirical findings show that the host country's economic size has a significantly positive effect in terms of promoting Chinese OFDI. Chinese firms favour a complex-vertical platform in the developed countries while they prefer a market potential foreign direct investment (FDI) surrounding the host developing countries and an export-platform FDI in the petroleum exporting countries based on the surrounding market potential effect and spatial effect. The fuel extraction motive plays a key role in China's OFDI in line with the realities of Chinese FDI strategies in recent years.     

Empirical study on location choice of Chinese OFDI

China's outward foreign direct investment (OFDI) flow has shown steady growth, from US$2.85 billion in 2003 to US$196.15 billion in 2016, increasing by 68.8 times. This study measures national distance from five dimensions—geographical distance, cultural distance, institutional distance, economic distance and informational distance—for Chinese OFDI. Taking 2006–2016 as the time window and national distance as the perspective, the study looks into the location choice of Chinese OFDI by using an OFDI size determination model. The results show that geographical distance, economic distance and informational distance will significantly promote Chinese OFDI, while institutional distance will restrain it, and cultural distance will not have a significant effect on Chinese OFDI. In addition, Chinese OFDI has strong natural resource-seeking motivation. In order to obtain natural resources, Chinese enterprises will overcome geographical distance and cultural difference to conduct OFDI in the countries far away from China.     

Exporting National Champions： China＇s Outward Foreign Direct Investment Finance in Comparative Perspective

We examine the extent to which Chinese development banks have financed the globalization of China＇s ＂national champion ＂firms： specifically, through outward foreign direct investment （OFDI）. We create a database of Chinese fnance for OFDI and compare our results to the existing literature and available data on Japan, Korea and other Asian nations. We estimate the total value of China＇s OFDI finance from 2002 to 2012 at US$14Obn. As a percentage of total OFDI, China＇s lending is roughly three times higher than Japan ＇s, the previous global leader in OFDl finance. We identify two major reasons for China＇s high （31 percent） ratio of OFDl lending to total OFDI. First, China has a greater incentive to give OFDI loans than Japan or Korea ever did because its borrowers are statelowned so it can more easily channel funds to targeted areas. Second, China has a greater capacity to give OFDI loans because it has significantly higher savings and foreign exchange reserves than Japan and Korea.     

Host countries’ growth opportunities and China's outward FDI

In 2014, China proposed the Belt and Road policy, which has pushed China's outward foreign direct investment (OFDI) to over tens of billions of US dollars. However, existing studies have not reached a consensus about the decisive factors in China's OFDI. To verify whether China's OFDI activities are motivated by profits, this paper applies a measure of country‐specific growth opportunities adopted by Bekaert et al. (2007) to measure the growth opportunities of the target countries for China's OFDI. A multinational panel data model, based on data from 51 countries from 2003 to 2012, is used to explore the relationship between host countries’ growth opportunities and China's OFDI. Overall, the analysis finds that China's OFDI does not follow the host countries’ growth opportunities but exhibits different features toward developed countries and developing countries. For developed countries, China's OFDI follows host countries’ growth opportunities to some extent. In the case of developing countries, China's OFDI does not follow host countries’ growth opportunities. When we consider factors such as a host country's financial development and political stability, improvement in these factors improves the attractiveness of the host country to China's OFDI. It is also found that the 2008 global financial crisis did not have a very significant impact on China's OFDI activities.     

Has China displaced the outward investments of OECD countries?

As China has rapidly emerged as one of the world's largest investors abroad, there has been a hectic debate in the literature on whether its emergence as a major foreign investor may have undermined the importance of western industrialised economies, including those in the Organisation for Economic Cooperation and Development (OECD). This paper aims to investigate whether this is the case. The study uses a panel dataset covering 155 countries, including 33 in the OECD, where China had invested during 2003–09. This is by far the most comprehensive dataset of China's outward foreign direct investment (OFDI). A two-stage least squared (TSLS) regression approach is adopted for our econometric models according to an established augmented gravity model in the literature. The empirical results show clear evidence that China's OFDI displaces that of the OECD countries, but the argument that China's emergence is a ‘new colonialism’ is not supported as OECD countries' OFDI in resource abundant host countries, particularly that in Africa and Latin America, does not appear to have been displaced by China's OFDI.     

Forty Years Development of China's Outward Foreign Direct Investment: Retrospect and the Challenges Ahead

Outward foreign direct investment (OFDI) has increasingly become an important method for China to integrate into the world economy. This paper comprehensively reviews and analyzes policy development and the changing pattern of China's OFDI over the past 40 years. We divide the development into “restricted” (1978–1999), “relaxed” (2000–2016) and “regulated” (2017 onwards) stages. This paper also reviews literature on the impact of Chinese OFDI on China and host countries. Despite its generally positive effects, large‐scale and unbalanced OFDI activities have alarmed Chinese policymakers. Both developing and developed host countries have expressed their concern over national security and the misbehavior of some Chinese overseas enterprises. Therefore, greater supervision and adjustment from quantity to quality growth is necessary for the future development of China's OFDI.     

Can China's Diplomatic Partnership Strategy Benefit Outward Foreign Direct Investment?

In the context of global integration, whether a diplomatic partnership strategy can promote outward foreign direct investment (OFDI) and how it works are very important issues for China. Based on a dataset featuring China's partnerships collected from the Ministry of Foreign Affairs website, we establish an empirical framework to assess the role of China's diplomatic strategy in its OFDI arising from partnerships since 1993. The results show that the establishment or upgrade of partnerships has had a positive effect on Chinese firms’ decisions on OFDI for at least the short term, especially for firms with higher demand for policy guarantees from the government, such as non‐central firms and non‐Beijing firms. The results also show that the increase in OFDI is concentrated in host countries with higher political risks, such as developing countries, neighboring countries, and Belt and Road countries, which is consistent with China's diplomatic focus. Our research proves that China's diplomatic strategy can assist firms to invest abroad.     

Factors Influencing FDI Location Choice in China＇s Inland Areas

Since 1978, the bulk of foreign direct investment （FDI） has gone to the south-eastern coastal areas in China, with only a small portion received inland. With the launch of the Western Development Strategy in 2000 and the Central China Rising Strategy in 2004, the choice of investment locations has expanded to inland areas. Based on panel data covering 98 inland cities from 1999 to 2005, this study identifies location preference variables for FDI invested in China＇s inland areas, and finds that well-established factors such as natural resources and low labor costs are not important factors in determining FDI locations within China＇s inland. Instead, policy incentives and industrial agglomeration are the most important factors. The findings of the present study have policy implications for both host country authorities and multinational corporations.     

Dynamic relationship between China's inward and outward foreign direct investments

This paper studies the dynamic relationship of China's inward and outward foreign direct investments (FDI). It first identifies the key determinants of China's outward FDI (OFDI) in 172 host countries during 2003–2009 using a partial stock adjustment model. It finds strong evidence of dynamic adjustment in China's OFDI stock with an agglomeration effect. The dynamic adjustment and agglomeration effects are stronger in “high-tech” countries than in “low-tech” ones but indifferent in host country's resource endowments and income levels. The empirical results suggest that there exists a substantial adjustment cost in China's OFDI and that China's existing OFDI stock can gradually adjust toward its long-term equilibrium level, which is not only greater but also more volatile than the actual stock. Of particular interest is that we find a strong and positive relationship between lagged inward FDI (IFDI) and contemporaneous OFDI, implying that capital outflow from China has been partially induced by the countries which have invested in China.     

Impact of China's Outward Foreign Direct Investment on Its Regional Economic Growth

This paper investigates the impact of China's outward foreign direct investment (OFDI) on its economic growth. By using a provincial‐level panel dataset and applying fixed‐effects and instrumental variable regression techniques, the study finds that both OFDI from provincial firms and OFDI from state‐owned enterprises have a positive impact on China's provincial economic growth. The positive impact of OFDI on provincial economic growth may be the result of reverse knowledge spillovers from OFDI to the home provincial economy through demonstration and imitation, labor movement, and backward and forward industrial linkages, thus increasing the productivity and the efficiency of home firms and promoting the growth of the home economy.     

Does Outward Foreign Direct Investment Facilitate China's Export Upgrading?

This paper empirically investigates the impact of China's outward foreign direct investment (OFDI) on its export sophistication. Using a provincial‐level panel dataset and applying fixed effects and instrumental variable regression techniques, the study finds that, on average, OFDI has no significant impact on China's export sophistication. However, after the full sample is divided into different regions, the study finds that OFDI has a positive and significant impact on export sophistication in the developed coastal region, but no such impact is observed in the less developed inland regions. Further investigation using a panel threshold model reveals that only when GDP, per capita GDP, human capital, and the research and development intensity of a home economy reach a certain level can OFDI promote export sophistication. The findings suggest that accelerating eco nomic development and increasing absorptive capacity can facilitate the contribution of OFDI to China's export sophistication.     

Chinese Outward Foreign Direct Investment and Industrial Upgrading from the Perspective of Differences among Countries

This paper constructs a two‐sector model to identify the effects of outward foreign direct investment (OFDI) in different countries on China's industrial upgrading and conducts an empirical analysis using provincial‐level panel data from 2003–2015. The results show that China can benefit from industrial upgrading via OFDI in developed countries by way of reverse technology spillover. This effect is significant in the eastern region, but not in the central and western regions. China can also benefit from industrial upgrading via OFDI in developing countries and countries along the Belt and Road through marginal industrial transfer. This effect is more significant in the central region, followed by the western and eastern regions. Our results imply that China should promote technology‐seeking OFDI in developed countries, and enhance efficiency‐seeking OFDI in developing countries, especially in countries along the Belt and Road.     

Overseas industrial parks and China's outward foreign direct investment

We manually collect data on China's overseas industrial parks from 2007 to 2018, and match it with data on the country’s outward foreign direct investment (OFDI), using the system generalized method of moment (system GMM) approach to test how constructing overseas industrial parks affects China's OFDI. The results indicate that each new overseas industrial park established significantly increases China's OFDI by 2.89%. And the effect only exists in non-high-income host countries, rather than high-income host countries. We also investigate the effects of different types of industrial parks, and find that agricultural, light industrial, high-tech, comprehensive and heavy industrial parks have significant effects, while logistics parks do not. The mechanism analysis suggests that establishing overseas industrial parks increases China’s OFDI by reducing host countries’ economic and financial risks, and improving bilateral political relations. We further find that establishing overseas industrial parks is more likely to promote OFDI in host countries with imperfect infrastructure, impeded capital flows and low levels of unimpeded information. Our findings shed light on how developing countries could enlarge and stabilize OFDI.     

The quality of host government and China’s OFDI: Construction of micro-evaluation model of government quality

Government is not only an important participant in the process of national governance, but also a firm executor and supervisor of national policies. In the process of China’s active promotion of outward foreign direct investment (OFDI), the risks caused by the poor quality of the host government have not been paid enough attention to. This paper builds a micro-evaluation model of government quality from four aspects based on the quality of government expert survey. The results show that although the scores of developed countries are generally higher than those of developing countries, the growth of China’s OFDI in developing countries is higher than in developed countries. In particular, the growth of investment to the member states of The Belt and Road Initiative is more significant. How to realize mutually beneficial achievements between China's overseas investment and host countries with low government quality is an important issue for China.     

Why does so much FDI from Hong Kong and Taiwan go to Mainland China?

While the European Union, the US, and Japan (the Triad) supply 90% of global foreign direct investment (FDI) and China is the second largest FDI recipient in the world, most FDI into China did not come from the Triad but from Hong Kong and Taiwan (HKT). Evidence presented in the paper reveals that the unusually large amount of Hong Kong–Taiwan direct investment (HKTDI) cannot be fully appreciated without understanding China's location characteristics and differences between HKTDI and the Triad FDI. Four determinants of the dominant HKTDI in China are identified: China's export-promotion FDI strategy, its large pool of cheap labor, HKT's specific advantages in export-oriented FDI, and their unique links with China (the Chinese connections). Empirical results suggest that HKTDI was primarily motivated by low labor costs while FDI from the Triad was market-oriented. As China's domestic markets become more open to foreign investors, the share of HKTDI may shrink and the importance of FDI from the Triad may rise.     

Capital or knowhow: The role of foreign multinationals in Sino-foreign joint ventures

China's success in attracting foreign direct investment has been cast in doubt as mainly a transfer of capital, not knowhow, because its financial system is incapable of allocating domestic savings and hard-earned foreign reserves to domestic enterprises. To shed light on this debate, we examine the determinants of equity sharing in Sino-foreign joint ventures with the premise that the roles of foreign direct investment (in transferring capital or knowhow) should be reflected in equity sharing between multinational firms and local firms. Our empirical analysis offers strong evidence for foreign direct investment as a transfer of knowhow, but limited support for foreign direct investment as a transfer of capital, which points to the need for further reform in China's financial system.     

Outward FDI and efficiency in within-firm resource allocation – Evidence from firm-level data of China

With the rapid expansion of outward foreign direct investment (OFDI) in China over the last two decades, OFDI has become an increasingly important way of internationalization for firms. This paper documents how firms’ OFDI and its different patterns may affect their internal resource allocation efficiency by adopting PSM-DID method and using firm-level data of China. Our results show that China's OFDI significantly improves the overall efficiency of resource allocation within enterprises, which has a time lag effect. Furthermore, we find that different patterns of firms’ OFDI display significant heterogeneity in their performances. All results remain robust when we replace key variables with different indexes, change the matching method, recalculate parameter, and change the sample size. The key implication of the paper is that both the value and the pattern of OFDI of Chinese enterprises do have significant influences on its internal resource allocation.     

Impact of Outward Foreign Direct Investment on Chinese Manufacturing Firms' Financialization and Servitization

This study examines the impact of outward foreign direct investment (OFDI) on Chinese manufacturing firms' financialization and servitization. Using a difference-in-differences approach with propensity score matching, we found that OFDI encouraged firms' financial and service activities. The effects of OFDI on financialization were stronger for firms specializing in short-term financial assets, operating in labor and technology-intensive sectors, investing overseas to pursue production, resources and markets there, and investing in non-OECD and Belt and Road Initiative (BRI) countries. Meanwhile, firms investing overseas were more likely to provide services at the sale or postsale stages. Outward foreign direct investment has also boosted the service activities of firms operating in the technology-intensive sector by investing overseas to seek resources and markets, as well as investing in non-OECD and BRI countries. Finally, OFDI partially influenced the extent of financialization and servitization of firms by affecting their profit-making ability.     

FDI对我国制造业升级的影响研究——基于省级面板数据的实证

当前FDI流入我国增速已经放缓;然而,FDI流入高技术制造业的比重却正在提高。FDI流向正在发生的深刻变化将对我国制造业升级产生深远影响。在FDI流入总量及流向正发生深刻变化的新条件下,探讨如何更加合理有效地利用FDI,促推我国制造业升级,正成为急需探讨的新课题。本文运用1996~2014年中国省级面板数据,通过构建FGLS模型,对FDI影响制造业升级的效应进行了实证检验,结果表明：从全国层面来看,FDI对劳动密集型与技术密集型制造业发展都有明显的促推作用;而对资本密集型制造业的发展则存在较为明显的负向影响。从分地区层面来看,FDI促进了劳动密集型制造业从东部向中部地区转移,资本密集型制造业由东部向中、西部地区转移;此外,FDI还促进了东部地区技术密集型制造业占比提高。但是,FDI在西部对制造业的投资方向过于单一,主要集中于资本密集型制造业,这对我国西部地区制造业的长期发展不利。因而,要顺应FDI新变化,发挥政府宏观调控作用,更加合理、有效地利用好FDI。     

Why Do Chinese Private Enterprises Seek Outward Foreign Direct Investment?

China is currently in a period of economic transformation and the reform of the factor market still lags behind that of the product market. This study explores the reasons causing China's private enterprise to expand abroad from the perspective of domestic factor market imperfection. Using data for Chinese listed firms between 2002 and 2020, it examines whether outward foreign direct investment (OFDI) has been undertaken by private enterprises as a response to domestic factor market imperfection. It finds that private enterprises located in regions with greater factor market imperfection have had a greater tendency to engage in OFDI. This effect has been more pronounced among firms with high productivity or high innovation capability, and among medium and small private enterprises.