What determines Chinese outward FDI?
Introduction
Is Chinese outward foreign direct investment (FDI) primarily drawn to poorly governed countries with abundant natural resources? In recent years, the Chinese financial presence globally has increased substantially, in terms of loans provided, investments made, and other types of flows. In particular, there has been a marked rise in outward Chinese foreign direct investment in recent years. This has spurred discussion and analyses of the motivation and implications of an increased Chinese presence, not least in developing economies. On the one hand, increased Chinese investment may be good for host countries, since more companies vie for locations and markets, and potentially expand opportunities for transfer of technology. On the other hand, however, concerns have been voiced that Chinese investment or financial flows more generally have contributed to propping up bad regimes in host countries, and have been conducted with a view to exploiting their natural resources. To borrow a headline from The Economist, is China simply “a ravenous dragon” or is there more to Chinese investment than this?2
Though Chinese outward FDI has generated considerable interest, concern and controversy, few empirical studies have been conducted to test the motives behind or consequences of the presence of Chinese multinationals in other countries. There is by now a large econometric literature on the host country determinants of FDI in general, which, if anything, suggests that FDI is attracted to countries with good institutions (Globerman & Shapiro, 2002). Since FDI in general is dominated by flows from developed countries, it is an open question whether these results generalize to Chinese outward FDI. Moreover, there is an emerging literature on FDI flows from emerging economies that suggests that these flows may differ from those of developed economies (Filatotchev, Strange, Piesse, & Lien, 2007). Most studies of FDI related to China, have focused on China as a location for FDI from other countries, rather than as a source of FDI. To date there are only three econometric studies of the determinants of Chinese outward FDI that we are aware of, which present mixed results. Buckley et al. (2007) find that Chinese FDI is attracted to countries with bad institutions (high political risk), whereas Cheung and Qian (2008) find no significant effect of institutions. The latter study finds Chinese FDI to be attracted by natural resources, the former gets this result only for later time periods. A third study by Cheng and Ma (2008) does not include institutions nor resources as explanatory variables.
This paper presents new econometric results on the host country determinants of Chinese outward FDI, which significantly improve on previous studies. A main problem with the studies of Buckley et al. (2007) and Cheung and Qian (2008) is that their data on FDI captures approved investment, rather than actual investment.3 The results are therefore potentially biased, as investment that is publicly approved may be of a character different from investment decisions that are less visible. For instance, non-approved flows may reflect private investment decisions based on different objectives than government approved flows, or public investment decisions reflecting motives a government may be reluctant to reveal, such as a drive for natural resources, or the exploitation of host countries with poor institutions. This paper uses more recent data on actual Chinese FDI flows, and therefore provides more reliable results on the impact of host country institutions and resources on Chinese investment. Moreover, previous studies have looked at institutions and natural resources in isolation, and not explored whether the two have a joint influence on Chinese FDI. By contrast, this study tests and finds of significant importance an interacted effect of institutions and resources, suggesting that Chinese investment is more attracted to a country with natural resources, the worse the institutional environment of that country. This result holds even when controlling for the stage of resource exploitation of host countries, which suggests that it is not due to China having only poorly governed countries left to invest in as a latecomer in foreign direct investment.
The paper is structured as follows. Section 2 provides a descriptive overview of Chinese FDI flows, and relates this to the existing empirical literature on the topic. Since there are suggestions that Chinese FDI reflects different motives than FDI generally, Section 3 reviews theoretical arguments as to why this may be the case, leading to a set of testable hypotheses relating to the impact of natural resources and institutions. Section 4 then presents the empirical strategy and the data of the paper. Results on the impact of institutions and natural resources on Chinese FDI are presented and discussed in Section 5, which also addresses the robustness of the results. Section 6 concludes the study.
Section snippets
Descriptive overview of Chinese outward FDI
Outward foreign direct investment from China has increased considerably in recent years, and China is the source of FDI in a great number of host economies. While the open door policy in the late-1970s lead to modest outward FDI, the liberalization associated with Deng Xiaping's tour of South China in 1992, and the Go Global strategy initiated in 1999, lead to boosts in Chinese outward FDI. Outward FDI in recent years has increased substantially (Buckley et al., 2007, Cai, 1999, Cheng and Ma,
Is China different? Theoretical arguments
These studies suggest that Chinese investors may respond differently to host country factors than other investors, at least with respect to institutions. Theoretical studies argue that good host country institutions will reduce risk and costs of doing business and increase productivity (Blonigen, 2005), and hence attract FDI. Most recent empirical studies of total FDI flows also document a positive relationship to host country institutions (Asiedu, 2006, Gani, 2007, Globerman and Shapiro, 2002,
Data and methodology
Consistent with the theory and hypotheses formulated, our empirical specification includes institutions and natural resources as well as their interaction as explanatory variables. More precisely, the main estimated equation is:
Table 3 presents the proxies used for the main variables, and the sources of data. Our dependent variable is Chinese outward FDI flows, for which UNCTAD has data
Results
Table 5 presents the main results from our analysis, where the annual average of Chinese outward FDI flows for the period 2003–2006 are regressed on annual averages of the explanatory variables. The first two columns of the table show estimation results for the full sample of 104 countries for which data is available, while in the last two columns the sample is split into OECD and non-OECD countries.
In the first regression, the interaction effect between institutions and natural resources is
Concluding remarks
The results of this paper show that institutions and natural resources have an interactive effect on Chinese outward foreign direct investment. The worse the institutional environment of a host country, the more is Chinese FDI attracted by the country's natural resources. These results add significantly to our understanding of Chinese FDI, since previous studies have not included these types of interaction effects, and therefore fail to capture an important relation between resource riches and
References (47)
- et al.
The resource curse revisited and revised: A tale of paradoxes and red herrings
Journal of Environmental Economics and Management
(2008) Outward investment by Chinese MNCs: Motivations and implications
Business Horizons
(2004)Why do Chinese firms tend to acquire strategic assets in international expansion?
Journal of World Business
(2009)The eclectic paradigm as an envelope for economic and business theories of MNE activity
International Business Review
(2000)- et al.
Global foreign direct investment flows: The role of governance infrastructure
World Development
(2002) - et al.
China's outward foreign direct investment
Business Horizons
(2008) - et al.
Is transparency the key to reducing corruption in resource rich countries?
World Development
(2009) - et al.
It's the rents, stupid! The political economy of the resource curse
Energy Policy
(2009) - et al.
Political foundations of the resource curse
Journal of Development Economics
(2006) - et al.
Foreign acquisitions by Chinese firms: A strategic intent perspective
Journal of World Business
(2008)
Multinational corporations and host country institutions: A case study of CSR activities in Angola
International Business Review
Foreign direct investment in Africa: The role of natural resources, market size, government policy, institutions and political instability
World Economy
Institutions and international trade: A reconsideration of comparative advantage
Journal of Economic Surveys
Institutional determinants of foreign direct investment
The World Economy
A review of the empirical literature on FDI determinants NBER Working Paper No. 11299
The determinants of Chinese outward foreign direct investment
Journal of International Business Studies
Outward foreign direct investment: A novel dimension of China's integration into the regional and global economy
The China Quarterly
The determinants of foreign direct investment: Sensitivity analyses of cross-country regressions
Kyklos
The pattern and magnitude of China's outward FDI in Asia
The empirics of China's outward direct investment
The internationalization of Chinese firms: A case for theoretical extension
Management and Organization Review
On the origins of comparative advantage
Journal of International Economics
Cited by (594)
Extradition treaties and emerging market firms’ host country location choice<sup>✰</sup>
2024, Journal of World BusinessRepackaging FDI for inclusive growth: Nullifying effects and policy-relevant thresholds of governance
2024, Transnational Corporations ReviewUnveiling new insights into China's marine ecosystem: Exploring the fishing grounds load capacity curve
2024, Journal of Cleaner ProductionDoes geopolitical risk affect exports? Evidence from China
2024, Economic Analysis and PolicyHave the Chinese national oil companies paid too much in overseas asset acquisitions?
2024, International Review of Financial AnalysisUnleashing the spillover potential: Exploring the role of technology-seeking investment in driving green innovation of host countries
2024, Technological Forecasting and Social Change
- 1
Tel.: +47 47 93 81 23; fax: +47 55 31 03 13.