China's outward foreign direct investment

China's outward foreign direct investment (FDI) is steadily increasing. The United States is now a key target for China's outward FDI, and the response by the American public tends to fall at opposite ends of the spectrum: fever or fear. Chinese FDI in the United States faces challenges posed by its liability of foreignness in political, cultural, marketing, and technological aspects. Utilizing mini case studies, we herein examine the polarized responses to Chinese outward direct investment, its history, and the challenges faced by Chinese multinational corporations operating in or attempting to enter the U.S. market. Finally, strategy suggestions are proposed.     

The determinants of China's outward foreign direct investment

Globalisation has led to a rapid increase in the growth of foreign direct investment (FDI) globally. Over the last decade China has become the largest recipient of FDI whilst simultaneously increasing its outward FDI dramatically. The growth in China's outward FDI has attracted little attention from scholars in mainstream research publications. The motivation behind this paper is to investigate the factors driving this growth from both economic and strategic backgrounds. The paper employs panel data analysis covering the period 2003–2009 where we quantify the main drivers of China's outward FDI across a range of variables including bi lateral and multi lateral trade, market size, GDP growth, openness and resource endowment.     

Comprehending the outward FDI from Latin America and OCED: A comparative perspective

This study examines the determinants of outward foreign direct investment (FDI) from Latin American countries and compares it with their OECD counterparts. Our analysis is based on a sample of 45 countries, 13 from Latin America and 32 from the OECD, over the period 2001–2012. We find that the outward FDI from Latin America is more likely to be located in geographically proximate countries and in countries with similar culture and language than that from their OECD counterparts. We also show that Latin American outward FDI is less likely to be resource seeking. This presumably reflects the rich natural resource endowments and agricultural potential in major Latin American countries. Further, outward FDI from Latin America is more likely to be concentrated in countries with a similar corruption environment than that from their OECD counterparts. This might indicate a broadly similar nature of corruption across Latin America due to shared cultural, political and economic legacies.     

Chinese foreign direct investment in the United States: Location choice determinants and strategic implications for the State of Indiana

Identifying the unique U.S. state-level factors that more often give rise to Chinese firm-led investment is the central focus of this article. Looking at Chinese investment in the United States between 2007 and 2011, this article (1) explores the determinants underlying the locational choices of Chinese firms, (2) seeks to understand why some U.S. states receive relatively greater amounts of investment from China, (3) assesses whether prior trends are likely to continue into the future; and—perhaps most importantly—(4) seeks to identify what (if anything) the state of Indiana can do to better position itself to capture greater amounts of Chinese investment moving forward. We recommend the following actions for the state of Indiana: (1) firm targeting—Indiana is a prime FDI target for private, firm-led, greenfield investment; (2) differentiation— Indiana has distinct advantages over other locations in the Midwest; (3) promotions—trade missions and overseas office locations are investments, not costs; (4) investments in relationships—cultural sensitivity and friendship make the difference.     

Heterogeneity of political connections and outward foreign direct investment

By examining the heterogeneity of political connections (PCs), this study reconceptualises the relationship between PCs and outward foreign direct investment (OFDI). Drawing upon resource dependence theory, we hypothesise that firms with ascribed PCs benefit from top political privileges in their home market and have a low OFDI commitment. Firms without any PCs have a medium OFDI commitment because they have to avoid the discriminative competition associated with their inferior political status. Firms with acquired PCs possess relatively strong political and market resources and face exchange pressure; thus, they exhibit a high OFDI commitment. The aforementioned hypotheses are supported by empirical results from probit and Tobit models based on panel data of 482 listed Chinese firms with OFDI from 2003 to 2014.     

Ethnic ties, location choice, and firm performance in foreign direct investment: A study of Taiwanese business groups FDI in China

This paper examines ethnic ties and their impact on FDI location choice and firm performance. Drawing on social network theory and using data from 88 Taiwanese business groups, the study tests the impact of ethnic ties on firm FDI location choice and performance outcomes in China. Results show that ethnic ties of top managers matter in facilitating firm FDI location choice. In contrast to our expectations however, ethnic ties do not help to improve firm performance in China. Implications of these results are discussed in view of existing literature and future research opportunities are delineated.     

Leader narcissism and outward foreign direct investment: Evidence from Chinese firms

Researchers use the upper echelons theory to establish how leaders’ attributes affect firms’ outward foreign direct investment (OFDI), a proxy for foreign operations. This extant literature has largely ignored the impact of leaders’ psychological attributes, particularly, narcissism. We use a narcissism index of leaders of Chinese listed companies to examine the relationship between leader narcissism and firm-level OFDI for the period 2007-2017. We show that leader narcissism has a positive and significant impact on firm-level OFDI. In addition, we find that firms with state ownership and political connections show a greater positive effect of leader narcissism on the firm’s OFDI. Our results suggest that leader narcissism appears to be a stimulus to corporate OFDI, and thus in recruiting top corporate executives who are responsible for managing the international investments of the corporation, this psychological trait should be given special consideration in addition to other qualifications.     

Outward foreign direct investment and domestic innovation performance: Evidence from China

Recent years have witnessed substantial outward foreign direct investment (OFDI) from many emerging economies. Should the governments of these economies encourage OFDI in order to promote domestic innovation? Much OFDI by emerging economy multinational enterprises (EMNEs) has been undertaken to acquire strategic assets overseas, but do these acquisitions bring innovation benefits at home? The empirical analysis presented in this paper considers the effects of OFDI on regional innovation performance, using a panel of Chinese provinces, and finds that OFDI has a very significant impact on domestic innovation. Furthermore, we also identify three contingent factors – absorptive capacity, foreign presence, and the competition intensity of the local market – that moderate the impact of OFDI on innovation performance.     

Firm heterogeneity and location choice of Taiwanese multinationals

This paper examines the extent to which production location decisions of Taiwanese multinationals reflect underlying patterns of firm productivity. In our theoretical model, heterogeneous firms in a middle-income country decide on the optimal production locations for serving three geographically separate markets: domestic, foreign high-income and foreign low-income. The model shows that the equilibrium decision of a firm depends on the fixed investment costs of establishing foreign subsidiaries, production costs, transportation costs, market size and its own productivity level.

Using firm-level data in 2000, Taiwanese electronics firms are divided into four different categories: non-FDI, investors in China only, investors in the U.S. only, investors in both China and the U.S. We use a multinomial logit model to link firms' location choices with their productivity, controlling for country, industry and other firm characteristics. Our empirical results are consistent with the predictions of the theoretical model. We show that more productive firms engage in outward FDI, with the most productive ones investing in both China and the U.S. We also provide evidence indicating that Taiwanese multinationals investing only in the U.S. are more productive than those investing exclusively in China due to smaller fixed investment costs in China relative to the U.S.     

Firm heterogeneity and location choice of Taiwanese multinationals

This paper examines the extent to which production location decisions of Taiwanese multinationals reflect underlying patterns of firm productivity. In our theoretical model, heterogeneous firms in a middle-income country decide on the optimal production locations for serving three geographically separate markets: domestic, foreign high-income and foreign low-income. The model shows that the equilibrium decision of a firm depends on the fixed investment costs of establishing foreign subsidiaries, production costs, transportation costs, market size and its own productivity level.Using firm-level data in 2000, Taiwanese electronics firms are divided into four different categories: non-FDI, investors in China only, investors in the U.S. only, investors in both China and the U.S. We use a multinomial logit model to link firms' location choices with their productivity, controlling for country, industry and other firm characteristics. Our empirical results are consistent with the predictions of the theoretical model. We show that more productive firms engage in outward FDI, with the most productive ones investing in both China and the U.S. We also provide evidence indicating that Taiwanese multinationals investing only in the U.S. are more productive than those investing exclusively in China due to smaller fixed investment costs in China relative to the U.S.     

The relationship between domestic and outward foreign direct investment: The role of industry-specific effects

Previous research has been inconclusive as regards the effect of outward foreign direct investment (FDI) on domestic investments. In this article, we show that this inconclusiveness can be explained at a disaggregated level as a function of the way industries are organized. Based on a simple theoretical framework including monitoring and trade costs, we argue that a complementary relationship can be expected to prevail in vertically integrated industries, whereas a substitutionary relationship can be expected in horizontally organized production. The empirical analysis confirms a significant difference between the two categories of industry as regards the impact of outward FDI on domestic investment. The results may thus have profound policy implications. JEL no. F12, F21, F23, G34.     

Performance shortfalls and outward foreign direct investment by MNE subsidiaries: Evidence from China

Foreign subsidiaries of multinational enterprises (MNEs) have been conducting outward foreign direct investment (OFDI) into new overseas destinations. Drawing upon the behavioural theory of the firm, we explain that such OFDI can occur in response to performance shortfalls relative to aspirations. When performance shortfalls in subsidiaries are attributed to the institutional distance between them and the home country of the parent firm, these subsidiaries select institutionally closer destinations for their own OFDI. Our study goes beyond the direct investment of MNE headquarters and advances the internationalisation process model by investigating the underexplored, secondary and springboard-based internationalisation, and by underscoring the value of a subsidiary’s OFDI behaviour.     

The role of regional formal institutions and foreign direct investment in innovation in Chinese enterprises

China features high degrees of income inequality, regional disparity and regional institutional diversity. With disparities in institutional development across regions, Chinese firms tend to have different levels of innovation as the costs, risks, efficiency and incentives of firms in innovation are affected by the regional institutional building. This article investigates the role of regional formal institutions in the innovation process in Chinese enterprises. It suggests that regional formal institutions (reflected by government support), financial institutions, educational institutions and taxation institutions promote innovation in Chinese firms, while they fail to discover such an impact from legal institutions. Also, regional formal institutions positively moderate Foreign Direct Investment (FDI) spillovers on process innovation.     

Foreign ownership and firm performance in German services

This study provides the first comprehensive analysis of foreign-controlled enterprises in the German service sector based on new micro-data from official German statistics. Various performance measures were examined via comparison of unconditional and conditional means and through use of quantile regression techniques. Foreign-controlled affiliates consistently performed better than German-owned affiliates. In contrast, profitability exhibited precisely the opposite trend. Moreover, labour productivity did not significantly differ when the comparison group consisted of domestically owned affiliates with a high degree of internationalization. A breakdown by country of origin showed that European affiliates pay lower wages and export less relative to non-European affiliates, and US firms have no productivity advantage as in manufacturing.     

Place,space, and foreign direct investment into peripheral cities

Perspectives drawn from the economic geography literature are increasingly used to generate insights into locational issues in international business. In this paper, we seek to integrate these literatures further by investigating the locational determinants of foreign direct investment (FDI) into peripheral cities within an emerging economy. Peripheral cities in emerging economies are attracting a growing proportion of global FDI flows, but the international business literature lacks a framework for understanding subnational determinants of FDI, particularly into non-core locations. We draw on the core-periphery model to build and test theory on how spatial interdependencies between subnational locations impact on the distribution of FDI inflows into a large and heterogeneous country China. Our results show that whilst peripheral cities tend to have a negative effect on FDI, this effect is positively moderated by proximity to core cities. The results highlight the importance of considering interactions between place and space when investigating locational issues in international business.     

Outward foreign direct investment and green innovation in Chinese multinational companies

This paper investigates the reverse green innovation spillovers of outward foreign direct investment (OFDI) in Chinese multinational companies and how environmental regulation stringency in host countries moderates the relationship between OFDI and green innovation. The empirical analysis is based on an integrated dataset of publicly listed firms from 2008 to 2018. The findings demonstrate a significantly positive relationship between OFDI and the green innovation performance of multinational companies. It is also shown that environmental regulation stringency in host countries positively moderates the relationship between OFDI and green innovation. Further analysis reveals the variation of the findings across multinational companies in host countries at different development stages, with different ownership and in industries with different pollution intensities. The observations in this paper imply that the institutional environment of investment destinations matters for reverse technology spillovers, particularly reverse green technology spillovers from OFDI.     

Performance feedback and outward foreign direct investment by emerging economy firms

Integrating the behavioral theory of the firm (the BTF) and the self-enhancement motive of managers, this paper examines how performance feedback—the discrepancy between actual performance and aspiration levels—affects the international expansion of emerging economy firms (EEFs). Empirical results using panel data on 876 publicly-listed Chinese manufacturing companies over a 7-year period indicate that performance relative to social aspiration (i.e., peer performance) and relative to historical aspiration (i.e., firms’ own past performance) affects EEFs’ levels of subsequent outward foreign direct investment (OFDI). Specifically, performance below social or historical aspiration enhances levels of OFDI, while the effect of performance below social aspiration is stronger than that of underperforming historical results. The results also show that performance above social aspiration enhances levels of OFDI, while performance above historical aspiration decreases levels of OFDI. Moreover, we uncover the importance of considering the joint effect of historical and social performance feedback, as receiving consistent or mixed signals about firm performance may result in risk-taking behaviors that differ from those triggered by just one performance signal on its own. These findings underscore the impact of performance feedback relative to social and historical aspirations on EEFs’ OFDI activities.     

Portfolio characteristics of outward foreign direct investment and dynamic performance of emerging economy firms: An option portfolio perspective

In recent decades, emerging economy (EE) firms have taken an aggressive approach to international expansion. Drawing upon option portfolio theory, this study develops the characteristics of the OFDI portfolio based on two attributes of a portfolio and two dimensions of host environments. We examine how the characteristics of the OFDI portfolio dynamically influence the OFDI?performance linkage. Using a sample of 545 Chinese listed multinational firms during the period 2009–2018, we find EE firms’ OFDI contributes more to short-term performance when the OFDI portfolio features a higher overall quality of host institutions or a higher diversity of strategic factor market developments in the host countries. However, over a relatively long period, EE firms’ OFDI contributes more to long-term performance when the portfolio features a higher overall diversity of strategic factor markets and institutional environments. These findings offer further knowledge on the OFDI?performance link in emerging economies.     

Outward foreign direct investment of publicly listed firms from China: A corporate governance perspective

This study examines the influence of key corporate governance factors on the internationalization decisions of emerging economy (EE) firms. By integrating the resource-based view and agency theory, it investigates the effects of controlling owner identity, non-controlling shareholder ownership, and the interactions of these with CEO power, in order to reveal their individual and joint effects on the outward foreign direct investment (OFDI) propensity of EE firms. This empirical study of 224 Chinese publicly listed firms found positive effects of ownership of domestic institutional investors and foreign corporations on the OFDI propensity of the firms, which were moderated by the power of the CEOs in these firms.     

Cross-border mergers and acquisitions vs. greenfield foreign direct investment: The role of firm heterogeneity

We develop a general equilibrium model with heterogeneous firms to address two sets of questions: (1) what are the characteristics of firms that choose the various modes of foreign market access (exporting, greenfield FDI, and cross-border M&A), and (2) how does the international organization of production vary across industries and country-pairs? We show that the answers to these questions depend on the nature of firm heterogeneity. Depending on whether firms differ in their mobile or immobile capabilities, cross-border mergers involve the most or the least efficient active firms. The comparative statics on industry and country characteristics display a similar dichotomy.