Chinese Outward FDI Determinants
China's rise as a global commerce powerhouse has generated a flurry of practical partnership engagements and research. The striking GDP growth has, moreover, further spurred interest in China as a unique economic development model. Holding on to non-democratic political practices, China has managed to maintain a steady rise in international status as an economic power by embracing free market, neoliberal economic practices. The cumulative effect has focused, consequently, attention on China's inflows. That is, by focusing on China's capacity for economic growth based on macroeconomic metrics, including GDP, China has been studied largely based on her capacity for investment retention (indicative, presumably, of "solid" economic system) and repatriation (indicative, presumably, of China's growing clout as a global skill home). Consequently, a considerable body of research – particularly FDI activities – has been invested in investigating China's FDI inflows. Put differently, China has little been researched as a source of Outward FDI (OFDI).
China has shown notable expansion into world markets. Notwithstanding scarcity of data on actual OFDI activities, choices made by Chinese (public and private) companies to invest in specific markets more intensively or to opt for one market entry mode over another is an area which remains in research infancy phase. Indeed, given her late entry as an FDI major player, Chinese investment practices require further investigation. More specifically, for current purposes, motivations for China's OFDI need to be properly identified. If conventional OFDI practices of major developed economies exhibit specific characteristics for investment – including, for example, political stability, public institution proper functioning and adequate resources – China has shown – based on available data and initial literature review – differential characteristics. Thus, in order to put China's OFDI into perspective a broad discussion of literature is required. More specifically, China's motivations for OFDI are explored in-depth. For current purposes, Kolstad and Wiig (2012) seminal paper on China's OFDI motivations is critiqued. The critique is, more specifically, a synthesis of variables contributing to shaping Chinese companies' decision to invest abroad. Based on critique, a viable explanation model could emerge. This initial engagement's aim is, hence, an attempt to corroborate evidence on China's OFDI motivations.
Notably, Kolstad and Wiig perform a study based on actual (as opposed to approved) OFDI. This bears significance, as is shown in study, on actual Chinese companies' investment decisions. Surveying literature, Kolstad and Wiig note scarcity of data on China's OFDI. Hypotheses are, hence, made namely:
"Hypothesis 1. Chinese FDI is attracted by countries with poor institutions."
"Hypothesis 2. Chinese FDI is attracted by countries with large natural resources."
"Hypothesis 3. Chinese FDI is negatively related to the interaction of natural resources and institutions."
The above hypotheses are aimed to examine how Chinese OFDI decision is informed by "poor institutions" and "large natural resources" variables which, when interacted, influence actual OFDIs.
Further, one underlying assumption in Kolstad and Wiig is China's lateness as a major OFDI player. That is, China's late entry into world markets as a foreign investor may justify her motivations for specific market entries. More specifically, given nature of markets Chinese companies choose to invest in internationally political and economic macro-ecosystems are questioned by Kolstad and Wiig as to highlight both investment decisions and ownership options. Two main Chinese OFDI patterns emerge: developed / developing host market and structural / institutional ecosystem.
Characteristically, China exhibits a unique investment pattern which is differentiated in developing and developed countries. Specifically, based on UNCTAD data, Kolstad and Wiig state, whereas China's OFDI in developed countries is more likely to be in service industry her OFDI in developing countries is more likely to be resource-oriented. A second interesting feature in China's OFDI is how state ownership impacts on investment decisions and choices. That is, although Chinese state-owned and private companies may be politically motivated, state-owned-companies appear to be more driven by political ideologies opting for unprofitable investment decisions. Private companies, however, are more profit-oriented but, given China's business structural and organizational dysfunctions, private companies are more likely to opt for institutionally weak host countries in which corruption and bad governance practices prevail. Interestingly, a source OFDI country's institutional and industrial ecosystem is shown to impact on OFDI decisions. Three conceptual frameworks – namely, institutional theory, industrial organization economics and resource-based company view –, argues Wang, Hong, Kafouros, and Boateng (2012), form a basis by which Chinese OFDI decisions can be analyzed at firm, industry and country level respectively. This is, in fact, an interesting research point which may need further advancement. More specifically, given noted structural and networking similarities between Chinese and host country – particularly developing economies – China's OFDI motivations and decisions could be explained away based on organizational culture affinities basis in addition to more common motivations of resource availability, strategic assets or political ideology.
Further, Lu, Liu, and Wang (2010) show Chinese private companies are motivated by supportive government policies in seeking OFDI, emphasizing a nuance in a company's competitive advantage, high level of industry research and development (R&D) intensity as a primary motivation for strategic asset-oriented OFDI as opposed to a company's export experience and high domestic industry competition for market-oriented OFDI.
Congruent to an ownership dichotomy, Ramasamy, Yeung, and Laforet (2012) show OFDI decision-making based on location is determined by natural resources and risky political ecosystems for state-owned companies as opposed to market-seeking motivation for private companies. Moreover, Chinese companies seeking strategic assets appear to be attracted to commercially viable innovations vis-à-vis core search content. However, given data scarcity on actual OFDI decisions – particularly in more advanced, innovation-oriented industries – Ramasamy, Yeung, and Laforet's findings cannot be corroborated unless over more extended periods as opposed to study's 2006-2008 span.
Thus, in seeking investment opportunities in developed countries Chinese companies appear to seek strategic resources (Deng, 2007) but might also be avoiding challenges posed by "liability of foreignness" in political, cultural, marketing, and technological aspects (He & Lyles, 2008), an aspect which Kolstad and Wiig refers to as justifying Chinese low profile in major, advanced economies as opposed to growing presence in emerging, less- / underdeveloped / resource-rich economies.
Kolstad and Wiig's study full sample suggests main sets of determinants for Chinese OFDI are: market size and natural resources coupled by poor institutions. Implications for western multinationals are mainly centered on growing challenging competitive situation in host countries China's organizational culture and networking practices exhibit more affinities to.
In advancing Kolstad and Wiig's proposition, Buckley et al. (2007) divides up Chinese OFDI practice between 1984 and 2001. Based on official Chinese OFDI data collected between 1984 and 2001, China exhibits an OFDI practice marked by high political risk in and cultural proximity to host country in addition to market size and geographic proximity over 1981-1991 compared to an OFDI practice marked by seeking host natural resources endowments over 1992-2001. Temporal variation is, as noted, appears to be significant in analyzing China's OFDI practice. That is, given how broad motivations are for China's OFDI decisions – let alone data scarcity – identifying China's actual OFDI decisions require prolonged spans for more informed analyses. Spatial variation is, moreover, no less significant. Given a noted Chinese OFDI pattern of investing in politically unstable, resource-rich countries, spatial orientation should be coupled by temporal orientation as to confirm evidence of purely political, resource-seeking motivations or a combination of both.
Given how recent China's entry into world markets as a major OFDI player, significant considerations should be made for China's macroeconomic situation. More specifically, in investigating China's motivation for OFDI at large one broad question arises as to why Chinese companies should seek international expansion, particularly since remarkable research body identifies resource-seeking, strategic asset-seeking, political leverage motivations, all or each independently coupled by weak institutional practices in host countries. Based on exogeneity models, Liu, Buck, and Shu (2005) show China's OFDI decisions are based on economic development motivations and do not follow Dunning's investment development path. This is an interesting – broader – motivation which deserves further pursuance. Indeed, if coupled by China's Confucian, harmony-seeking culture, OFDI decisions could be understood from less aggressive, gain-seeking perspective. If anything, in a context of increasingly overlapping practices and motivations culture may not be understood as organizational culture only in identifying China's OFDI decisions but should be considered from a broader perspective. After all, organizational cultures are not born in vacuum.
Placed in a broader context of emerging countries, China's OFDI may not be surprising. Congruent to an increasing pace of OFDI decisions by emerging market companies, Chinese enterprises appear to be motivated by economic imperatives and institutional complementariness as to offset competitive disadvantages in global competition (Luo, Xue & Han, 2010). Indeed, in seeking to establish full subsidiaries or to engage in joint ventures, Chinese companies may be seeking to advance market competiveness by reducing costs (tax havens) or reengineering organizational processes as to leverage performance.
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