The Effects of Institutional Difference and Resource Seeking Intent on Location Choice of Chinese Outward FDI

Abstract

This study seeks to explain how differences in political risk and economic freedom between host and home countries interact with investing firms' resource-seeking intent to influence the firms' outward foreign direct investment (FDI) location choice. Using panel data covering Chinese outward FDI in 62 host countries during the period of 2003-2014, we performed panel data regression analysis. The results show that when firms' resource seeking intention is high, the FDI location choice is negatively associated with the differences in political risk, but positively associated with the differences in economic freedom between China and the host countries. The results also show that there is a substituting effect between political risk and economic freedom in their interactions with resource-seeking intent to influence FDI location choice. The findings suggest that the Chinese firms' outward FDI location choice is a result of the interplay and the fit between the firms' external legitimacy in the host countries and the firms' internal legitimacy within the multinational organization.

The Economic Benefits of Supporting Private Social Enterprise at the Nexus of Water and Agriculture: A Social Rate of Return Analysis of the Securing Water for Food Grand Challenge for Development

“…This ineffectiveness is further exacerbated by aid allocations still traditionally being used as export promotion tools and falling short of the Paris Declaration in 2015 which promised disbursing aid to poorer nations with good governance, [38]. This use of aid and trade as an export promotion tool is exemplified by Chinese FDI and foreign aid which contrarily to US and OECD foreign aid and FDI, has little to no evaluative framework, is concentrated in African countries with weaker governance for resource extraction purposes, and in recipient countries with higher political risk [39,40]. Chinese aid projects also fuel local corruption and anti-union labor policies [41].…”

Do institutional risk preferences exist in Chinese direct investments in ASEAN countries? A case study of Chinese-funded enterprises in Laos

“…Contrarily, Chinese enterprises are experienced in coping with corruption due to China’s unique institutional environment growth. Especially, Chinese energy companies rely on national policy support and tend to invest in host countries with high levels of corruption and abundant resources (Blomkvist and Drogendijk, 2013; Kang and Li, 2018; Kolstad and Wiig, 2012). We, however, believe that the level of corruption is an overestimated institutional preference factor in resource- and market-seeking Chinese enterprises investing in Laos.…”

“…In particular, the heterogeneity of enterprise ownership can change the magnitude of this influence and even change its concentration. Compared to POEs, Chinese SOEs are more likely to invest in countries with higher political risks (Amighini et al , 2012; Cui and Jiang, 2012; Duanmu, 2012; Gao et al , 2015; Lee and Hwang, 2014; Ramasamy et al , 2012; Wang et al , 2012b), especially countries with abundant natural resources and poor institutional quality (Buckley et al , 2007; Duanmu, 2012; Kang and Li, 2018; Kolstad and Wiig, 2012; Liu et al , 2018; Ramasamy et al , 2012). This strategy represents an unlikely passive or imitative behavior (Quer et al , 2018) because resource-seeking SOEs are initially motivated by their expectations and willingness concerning home country institutions rather than their economic rationality (Ren et al , 2019).…”

“…Drawing from the mainstream eclectic paradigm (Dunning, 1993) and the theory of new institutional economics (North, 1990), we analyzed two key variables (namely, enterprise investment motivation and enterprise heterogeneity) to reveal the complex and interactive roles of the institutional factors of home and host countries, enterprise investment motivation and enterprise ownership in determining Chinese OFDI location choices. To some extent, this study responds to the demands of academia to focus on the interactive effects of institutional and other factors (Jain et al , 2016; Kang and Li, 2018; Nielsen et al , 2017). In other words, unlike previous studies, this study introduces the relationship effect as an intermediate variable that influences the location choices of enterprises to invest in countries with underdeveloped institutions and verifies the significant roles of bilateral political relations and network relations in OFDI location decisions of SOEs and privately-owned enterprises (POEs).…”

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