Financial development and natural resources: The dynamics of China’s outward FDI

Abstract

China experienced fast and large growth in terms of outward foreign direct investment (OFDI) in the last two decades. According to UNTCAD, the proportion of China's OFDI position to worldwide FDI position has increased by 13.64 times, from 0.36% in 2003 to 4.91% in 2016 (Figure 1a). The average annual growth rate of China's OFDI position was 31.8% during this period, which is around 2.3 times of its GDP growth rate (Figure 1b). The World Investment Report (2018) documents that China was the third largest overseas investor in the world, following the U.S. and Japan, in 2017.Given the importance of China in global OFDI, which factor determines the destination choice of China's OFDI is an important question in the literature. One strand of literature emphasises the role of the natural resource endowment of the host country (e.g., Buckley et al., 2007;Kolstad & Wiig, 2012;Yang et al., 2018). This argument seems plausible as shown in the industrial decomposition of China's OFDI in Table 1. Mining industry is the industry receiving the largest fraction of China's OFDI. 1 Such a view, however, faces two challenges in recent years. One comes from the fact that the Chinese OFDI destinations have been gradually switching from developing economies towards 1 For instance, in 2003, the share of mining sector was 18% (30.34% when excluding Hong Kong in 2008). When we restrict our focus to Asia, which is the largest recipient of China's OFDI, mining again is the sector with a substantial fraction of China's OFDI (see Table A1). 2 Hanemann and Rosen (2012) document that the focus of China's OFDI has shifted from mainly being natural resourceseeking investments in Asia, Latin America and Africa towards being assets in the European Union, in particular, those heavily hit by the debt crisis, such as Greece, Portugal and Spain. Dreger et al. (2017) also document the rising trend of China's OFDI in the European Union. 3 These regions are typically viewed as offshore financial centres and tax heavens. It has widely been accepted that capital | 741 FENG Et al.

Outward foreign direct investment productivity along the belt and road

“…The theory suggests that a country's OFDI should initially remain focused on the marginal industrial sector and that such sectors should subsequently be successively transferred abroad, which can enable the home country to upgrade its technology. Moreover, the host country's clear or potential comparative advantages can be exploited, resource costs can be reduced through the use of the host country's natural resources (Feng et al, 2022; Khan et al, 2023; Ren & Yang, 2020; Yang et al, 2018), labor productivity can be improved and labor costs can be reduced (Cozza et al, 2015; Ma et al, 2020), overseas R&D institutions can be established, overseas R&D expenses can be shared, employees can be sent overseas for training (Aminullah et al, 2013), and overseas markets can be expanded (Liu et al, 2014; Nie et al, 2023) to increase overseas earnings, offering potential means of improving corporate innovation performance. In this process, equipment, technology, production lines, and management capabilities are also transferred to meet local development needs.…”

Host‐country terrorism and outward foreign direct investment location choice of Chinese multinational firms: The moderating roles of state ownership and immigrant influence

“…Regarding OFDI location choice, Dunning (1981) pointed out that firms can first internalize ownership advantages and then, based on the differences in overseas production factors, comprehensively weigh the pros and cons of different locations before selecting the host country for investment. Subsequently, extensive research has focused on factors influencing OFDI location choice, such as market conditions in the host country (Anand & Delios, 1997; Buckley et al, 2007), financial development (Feng et al, 2022), resource endowment (Dowell & Killaly, 2009; Peng, 2001), strategic assets (Cui et al, 2014; Dunning, 1998), knowledge and relationship networks (Cantwell, 2009; Gaur et al, 2018; Lyles et al, 2014), and institutional environment (Asmussen & Goerzen, 2013; García‐Canal & Guillén, 2008; Henisz, 2000; Li et al, 2022; Witt & Lewin, 2007). These studies found that OFDI is mainly concentrated in countries with large and promising markets, high financial concentration, abundant resource endowments, complementary strategic assets, well‐developed knowledge, and rich relationship networks.…”

Do Financial Development, Institutional Quality and Natural Resources Matter the Outward FDI of G7 Countries? A Panel Gravity Model Approach

“…By examining the interaction conditions between institutional quality and non-fuel resources, they demonstrated that outward FDI from China is not affected by institutional quality. Using a gravity model approach, Feng et al [51] explored the shifting contributions of 173 host economies' natural resources and financial development in attracting Chinese outward FDI over the period 2003-2015. They discovered that China's outward FDI location decisions are mostly influenced by the host nation's natural resource endowment.…”