Journal of World Business 47 (2012) 45–53
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Journal of World Business
journal homepage: www.elsevier.com/locate/jwb
FDI location choice of Chinese multinationals in East and Southeast Asia:
Traditional economic factors and institutional perspective
Yuanfei Kang a,*, Fuming Jiang b,1
a
b
School of Management, Massey University, Auckland, New Zealand
Centre for Asian Business, International Graduate School of Business, University of South Australia, Adelaide, Australia
A R T I C L E I N F O
A B S T R A C T
Keywords:
Outward foreign direct investment
Location choice
Institutional perspective
Economic factors
Chinese multinationals
This paper investigates the factors determining foreign direct investment (FDI) location choices of
Chinese multinational firms. We developed a conceptual framework that synthesizes traditional
economic factors and institutional perspective. Then several hypotheses were developed in line with the
framework and empirically tested using panel data of Chinese outward FDI to eight economies in East
and Southeast Asia across a time period of thirteen years. Our findings suggest that institutional factors
demonstrate a higher level of significance, complexity and diversity in determining FDI location choice in
comparison with economic factors, while both types of factors influence the FDI location choice of
Chinese multinational firms. We also found that the FDI location choices of Chinese firms have a dynamic
nature, as statistical evidence indicates a heterogeneous response of Chinese FDI towards different
economic groups and during different time periods.
ß 2010 Elsevier Inc. All rights reserved.
1. Introduction
The dramatic growth in recent years and anticipated future
prospects of China’s outward foreign direct investment (FDI) has
attracted considerable attention from international business
scholars. A number of studies have examined a series of issues
regarding China’s outward FDI, including the trend and driving
forces of China’s outward FDI (e.g. Morck, Yeung, & Zhao, 2008; Rui &
Yip, 2008), the determinants and motivations of Chinese firms’
involvement in overseas investment activities (e.g. Buckley et al.,
2007), and FDI entry mode decisions of Chinese multinational
enterprises (MNEs) (e.g. Cui & Jiang, 2009). However, another
important issue, namely, the FDI location choice of Chinese firms,
has not received a great deal of research attention. To our knowledge,
this issue has not been empirically examined in the literature. The
current research is designed to address this theoretical gap.
Existing literature has suggested that FDI made by MNEs from
emerging economies presents characteristics different with that
made by multinationals from developed countries, so that extensions of FDI theories are needed in order to understand and explain
internationalization of firms from emerging economies (Buckley
et al., 2007; Child & Rodriguez, 2005; Mathews, 2006). More
* Corresponding author. Tel.: +64 9 4140800x9577; fax: +64 9 4418106.
E-mail addresses: [email protected] (Y. Kang), [email protected]
(F. Jiang).
1
Tel: +61 8 8302 5796; fax: +61 8 8302 0709.
1090-9516/$ – see front matter ß 2010 Elsevier Inc. All rights reserved.
doi:10.1016/j.jwb.2010.10.019
particularly, it has been argued that in comparison to other
theoretical perspectives, such as transaction cost theory, resourcebased theory, and agency theory, the institutional approach is the
most useful theory when studying business strategy in emerging
economies (Wight, Fliatotchev, Hoskisson, & Peng, 2005). However,
while acknowledging the importance of institutions is important, it is
more important to understand how institutions affect FDI behaviour.
Logically, researchers call for more research on how institutional
factors matter when determining FDI strategy of MNEs from
emerging economies (Peng, Wang, & Jiang, 2008). In responding
to this call, we endeavour to address this ‘‘how’’ issue by focusing on
the impact of institutional forces, together with traditional economic
factors, on FDI location choice of Chinese MNEs.
This study aims to make contributions to the literature in three
ways. First, it develops an integrated theoretical framework that
incorporates an institutional perspective (Scott, 2001) along with
traditional economic factors (Buckley, Cross, Tan, Liu, & Voss, 2008;
Dunning, 1993) to provide a more comprehensive framework for
empirical investigation on the location choice issue. Second, with
empirical evidence, this study provides explicit insights explaining
the factors influencing FDI location choice of Chinese firms and
revealing the divergent and dynamic impacts of various institutional factors on FDI location choice. Third, it enriches the extant
research by distinguishing between two subgroups (i.e., the Asian
developed and developing economy subgroups) and two time
periods (i.e., 1995–2000 and 2001–2007), exposing the different
patterns of FDI location choice of Chinese firms for different
economy groups and over different time periods.
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Y. Kang, F. Jiang / Journal of World Business 47 (2012) 45–53
The rationale for a focus on the East and Southeast Asian region
is based on three aspects. First, theory suggests that internationalization of firms is an incremental process achieved mainly through
regional expansion rather than global expansion (Johanson &
Vahlne, 1977), and most existing MNEs are regional rather than
global players (Qian, Li, Li, & Qian, 2008; Rugman, 2005). It is even
argued that a lack of firm-specific advantages for Chinese firms will
lead to a trend that Chinese FDI flows mainly intra-regionally
rather than globally in the foreseeable future (Rugman & Li, 2007).
Second, geographically, FDI from China has mainly flowed into this
region. A calculation based on Chinese official data source of
outward FDI (MOFCOM, 2008) demonstrates that by the end of
2007, 67% of Chinese FDI stock was located in the Asian region, of
which 93% went to eight Asian economies, including Hong Kong,
Korea, Japan, Indonesia, Malaysia, Philippines, Singapore and
Thailand. Therefore, this region as FDI location for Chinese firms
deserves a special research attention. Third, this study aims to
investigate different patterns of FDI location choice at a subregional level. Most prior studies have debated on the issue at
global and/or regional levels (e.g. Rugman, 2005), but little
attention is given to a sub-regional level perspective. The
heterogeneity among Asia economies with respect to their political
and legal systems, socio-cultural differences, development stages,
and degree of economic dynamics, are expected to affect the
location choice of Chinese FDI. The empirical findings reported in
this paper have given weight to this argument. Such investigation
benefits from a relatively small sample size and from splitting the
full sample into different subgroups. The rationale for such an
intra-group split comes from the literature that acknowledges the
influential role of distinctive institutional regimes and economic
development levels in different countries on business strategy
(Meyer, Estrin, Bhaumik, & Peng, 2009; Peng et al., 2008).
2. Theoretical background
The eclectic paradigm developed by Dunning (1977, 1993)
provides a holistic approach to explain FDI activities. It elaborates
that firms’ FDI behaviour is determined by ownership, location and
internalization advantages. Location advantages can be investigated through host country specific variables, while both ownership and internalization advantages are examined by firm specific
factors. Arising from the business environment associated with a
particular geographical location, these location specific advantages
define the degree of attractiveness of a host economy to the
investing MNEs. Focusing on the rationale of economic efficiency,
the eclectic paradigm suggests that foreign firms are motivated to
exploit location specific advantages provided by the host country
through internalizing their firm specific advantages. Firms with
different motivations choose locations with different sets of
location advantages. The mainstream theory on location issue
identified four primary motivations for FDI, namely marketseeking, nature resource-seeking, efficiency-seeking and strategic
asset-seeking (Dunning, 1977, 1993). Recent studies have demonstrated that these motivations are also relevant to the FDI location
choice of Chinese MNEs (Buckley et al., 2007, 2008).
Economic efficiency however can provide only a partial
explanation for FDI location choice of MNEs, as investing firms
also require institutional legitimacy in order to survive and
succeed in a challenging foreign environment (Kostova & Zaheer,
1999). The crucial difference between the eclectic paradigm and
the institutional approach in addressing the issue of FDI location
choice lies in the primary criterion for selecting a location. The
eclectic paradigm focuses on economic efficiency as the ultimate
determinant of location choice. From this perspective, the
intersection of MNE investment strategy and the institutional
environment is an analysis of the ability of institutions to reduce
the transaction costs associated with FDI that result from an
uncertain environment (Hoskisson, Eden, Lau, & Wright, 2000). On
the other hand, the institutional approach regards institutional
legitimacy as the primary criterion. The central premise of
institutional theory is that organizations are embedded in, and
must adapt to their institutional environment to attain legitimacy
(Zukin & DiMaggio, 1990). MNEs are therefore motivated to
enhance their legitimacy by becoming isomorphic with their
environment, even in the absence of evidence that such actions
increase efficiency (Yiu & Makino, 2002). It is even argued that the
need to integrate institutional factors into FDI theory can hardly be
over-emphasized (Sethi, Guisinger, Ford, & Phelan, 2002). Noticing
a lack of institutional content in the eclectic paradigm, Dunning
(2006) pointed out that it is important to incorporate institutional
factors in an extension of the model. More recently, it is further
suggested that institutions affect all three components of the
paradigm (Dunning & Lundan, 2008). Incorporating an institutionbased view into FDI theory is even more important for the case of
emerging countries. Traditional FDI theory was established on the
experience of MNEs from western countries, where fully developed
market-based institutions provide background conditions for
business activities, although these institutions are almost invisible.
On the contrary, the absence of formal market-based institutions is
conspicuous in emerging countries (Peng et al., 2008) and thus
firms are constrained by institutional context, characterized by
highly visible state interference.
In the case of China, the significant influence of government has
been identified as a striking feature of FDI by Chinese MNEs. The
biggest sources of outward FDI are from state-controlled companies and the largest FDI players highly overlap with the most
profitable state-owned-enterprises (Morck et al., 2008). The
government stance on outward FDI regulations has also continuously been evolving during the past three decades from tight
control to actively sponsoring and even to direct funding (Buckley
et al., 2007; Zhang, 2003). In more recent years, the domestic
institutions provided strong support to Chinese MNEs, facilitating
their desire to accelerate the internationalization process and to
catch up with MNEs from developed countries (Voss, Buckley, &
Cross, 2009). As a result of these observations, it may be fair to
argue that a failure to consider the influence of China’s unique
institutions will undermine the robustness of any meaningful
attempt in seeking to understand the FDI behaviour of Chinese
MNEs. More specifically for the FDI location issue, recent studies
have also suggested that the decisions made by Chinese MNEs
about their FDI location choice are likely to be shaped by
institutional forces in their home country (China) (Buckley et al.,
2008) and their host countries (Globerman & Shapiro, 2002). Based
on this theoretical background, we developed a conceptual
framework for this study by incorporating the institutional
perspective along with the traditional economic factors that are
derived from the eclectic paradigm.
Regulative, normative and cognitive systems are identified as
three pillars of the institutional environment. Each of them
provides a basis for legitimacy. The regulative pillar involves the
capacity to establish rules, to ensure conformity with the rules, and
to manipulate sanctions for influencing future behaviour. The
normative system imposes constraints on social behaviour
through prescriptive and obligatory values and norms. The
cognitive pillar refers to the established structures in society that
are taken for granted (Scott, 2001). Realizing that most existing
studies from an institutional perspective examined only the
regulative dimension of institutions, leaving the other two
institutional dimensions untouched (Trevino, Thomas, & Cullen,
2008), our study included all three institutional pillars with the
aim to capture the influence of institutional forces on the FDI
location choice of Chinese firms.
Y. Kang, F. Jiang / Journal of World Business 47 (2012) 45–53
3. Hypothesis development
3.1. Market-seeking
Factors related to the host country market are the most widely
tested variables influencing FDI location decisions. Empirical
research has revealed a strong positive relationship between the
market size of the host country and FDI inflows (Bevan & Estrin,
2004). A large market size offers increased opportunities for
investors to reach cost effectiveness and to realize economies of
scale through local production (Braunerhjelm & Svenson, 1996;
Venables, 1999). Thus, the larger the market size, the more
attractive the host country is. Moreover, a fast growing economy
provides more profit-making opportunities than those economies
that are growing slowly or stagnant. Rapid economic growth in the
host economy leads to a high level of aggregate demand for
product and stimulates greater demand for FDI inflows. Thus, the
higher the economic growth rates, the more FDI that is attracted to
the host country. In the case of China’s outward FDI, recent studies
suggest that market seeking is one of the major driving forces for
Chinese firms (Buckley et al., 2007, 2008; Deng, 2004). Increased
competitive pressure in the home market and Chinese firms’
ambitions to develop new markets and brand awareness abroad
have been responsible for a large proportion of Chinese marketseeking outward FDI. When a Chinese firm is motivated to pursue
and penetrate new markets through FDI, it will take an interest in
the market size and economic growth of the host market.
Chinese market-seeking FDI is also related to the market
openness of a host economy. International business theory suggests
that when the economic orientation in a host country fits more easily
into the patterns of global production and trade, the country is more
attractive to foreign investors (Vernon, 1966). It has been pointed
out that the rise of tariff and non-tariff trade barriers, such as export
quotas and other ‘anti-dumping’ measures against Chinese exporters, has prompted some Chinese firms to establish offshore
manufacturing plants in order to ensure access to foreign markets
(Taylor, 2002; UNCTAD, 2003). In most cases, this type of FDI has
been used as a springboard to serve developed markets such as the
US and EU countries. Thus, the exporting capability of a host
economy becomes an important factor in attracting Chinese FDI.
Market openness reflects the competitiveness and export orientation of an economy and is used as a variable to accommodate the
market-seeking motive of Chinese investing firms.
Hypothesis 1a. The choice of a Chinese firm’s FDI location is
positively associated with the market size of the host economy.
47
has been regarded as one of the key strategic considerations for
Chinese outward FDI. This motivation has been highlighted by a
number of high-profile resource-based Chinese acquisitions in the
world (Deng, 2004). Therefore, locations that have rich natural
resources are likely to be more attractive for Chinese FDI.
Hypothesis 2. The choice of a Chinese firm’s FDI location is positively associated with the richness of natural resource endowment
of the host economy.
3.3. Efficiency-seeking
The Chinese domestic markets provide ample supplies of
relatively low-cost labour, land and other factor inputs. Chinese
firms axiomatically enjoy a comparative advantage in low-cost
labour and labour-intensive production domestically. It is unlikely
that greater efficiency is currently a major driver for Chinese firms
investing overseas (Buckley et al., 2008). While the efficiencyseeking aspect has been applied mainly to explain why firms invest
in overseas markets, dealing with the choice between home and
overseas markets (Vernon, 1966), the focal point of this study deals
with the FDI location choice among overseas markets. Locations
that have a lower cost of labour can attract more FDI flows (Sethi,
Guisinger, Phelan, & Berg, 2003). Therefore, variations in factor
endowments in those overseas markets are expected to have an
impact on the flow of Chinese FDI into those locations.
Hypothesis 3. The choice of a Chinese firm’s FDI location is negatively associated with the labour cost in the host economy.
3.4. Strategic asset-seeking
Recent studies have revealed that one of the major forces that
drove Chinese firms to conduct FDI is to compensate for their
competitive disadvantages in terms of proprietary technology,
management know-how, product brands, and distribution networks, while competing with multinationals from developed
countries (Buckley et al., 2008; Luo & Tung, 2007). The underlying
rationale for such asset-seeking FDI is the strategic need to
compete at a global level (Deng, 2007). By resorting to FDI, Chinese
firms can acquire strategic assets from mature multinationals to
compensate for their competitive weaknesses. Therefore, locations
that have more strategic assets are likely to be attractive for FDI
flows from Chinese firms.
Hypothesis 1b. The choice of a Chinese firm’s FDI location is
positively associated with the market growth of the host economy.
Hypothesis 4. The choice of a Chinese firm’s FDI location is positively associated with the availability of strategic assets in the host
economy.
Hypothesis 1c. The choice of a Chinese firm’s FDI is positively
associated with the market openness of the host economy.
3.5. Regulative institutions
3.2. Natural resource-seeking
Acquiring and securing a continual supply of natural resources is
one of the major motives for FDI activity (Dunning, 1993). It is the
central argument for backward vertical FDI. The objective for
resource-seeking FDI is to provide inputs to downstream operations
of the investing firms. Internalization theory emphasizes the
importance of equity-based control in the exploitation of scarce
natural resources (Buckley & Casson, 1976). It is common for MNEs
both from developed and developing countries that FDI is induced by
the need to gain access to foreign natural resources. As per capita
availability of natural resources is low in China, particularly in the
areas of minerals, petroleum, timber and fisheries, resource-seeking
The regulative dimension of the institutional environment
establishes the rules of the game that structure interactions as well
as ensure stability and order in societies (North, 1990). Organizational action is bounded by these rules. When deciding whether or
not to enter a particular foreign market, the most appealing
concern for an investing firm is its ability to gain market
legitimacy. Through emphasizing conformity to rules, regulative
institutions provide such required legitimacy to organizations.
Legitimate organizations are those established by, and operating in
accordance with, relevant legal and quasi-legal requirements
(Scott, 2001). From the regulative institutional perspective, a
decision on location choice for MNEs is to determine favourable
locations where regulative institutional constraints are less
repressive to FDI activity so that MNEs can more readily conform
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Y. Kang, F. Jiang / Journal of World Business 47 (2012) 45–53
to the regulative constituents of the host countries. Prior empirical
studies have confirmed that regulative institutions in host
countries have a strong influence on FDI inflows and that
institutions ‘‘friendly’’ towards FDI, such as stable economic
policy, security of property rights, less ownership restriction, and
non-corrupt bureaucracy, are conducive to attracting FDI from
MNEs (Bevan, Estrin, & Meyer, 2004; Grosse & Trevino, 2005;
Pajunen, 2008). Regulative institutions are measured in three
dimensions in this study as: economic regime, political and legal
regime, and institutional regime directly regulating FDI activities.
From the perspective of institutional embeddedness, the
institutional environment in the home country is also a major
shaping force for firms’ FDI behaviour. It has been well suggested
that the institutional environment facing Chinese firms in their
home country is significantly different from their Western
counterparts (Meyer et al., 2009; Peng et al., 2008). A distinctive
and highly dynamic home country institutional environment also
contributes to the uniqueness of Chinese outward FDI. In spite of
the three-decade market-oriented economic reform, the Chinese
economy is still heavily regulated (Heritage Foundation, 2008;
Scott, 2002). A higher level of difference in regulative regimes
between China and a host economy implies that the regulative
institutional environment in a host economy is less repressive but
friendly towards FDI activity. Therefore, it can be suggested that
Chinese firms are more likely to locate their FDI in economies
where the differences in economic regulative regime and
institutional regime directly regulating FDI activities are bigger
between the home and host countries. However, there may be a
different picture for FDI location choice while considering political
regulative regime. It is suggested that Chinese MNEs tended to
disregard political risks in the host countries in their attempt to
catch up with MNEs from developed countries (Ge & Ding, 2009).
Furthermore, probably because Chinese MNEs were able to gain a
strong support from domestic institutions (Voss et al., 2009), they
demonstrated a perverse tendency towards risk management in
comparison with their counterparts from developed countries, in
order to exploit opportunities in countries where MNEs from
developed countries might regard as too risky (Buckley et al., 2007,
2008). Home country embeddedness in terms of political institutions may act as a type of ownership advantage possessed by
Chinese MNEs in their overseas investment.
Hypothesis 5a. The choice of a Chinese firm’s FDI location is
positively associated with the degree of differences in economic
regimes between China and the host economy.
Hypothesis 5b. The choice of a Chinese firm’s FDI location is
negatively associated with the degree of differences in political
and legal regimes between China and the host economy.
Hypothesis 5c. The choice of a Chinese firm’s FDI location is
positively associated with the degree of difference in FDI restriction between China and the host economy.
3.6. Normative institutions
The normative dimension of institutions emphasizes the
stabilising influence of social values and norms, which imposes
constraints on interpersonal and inter-organizational behaviour.
While operating in foreign countries, MNEs need to establish social
legitimacy, as in comparison to their local counterparts, they are
more vulnerable to attacks from local interest groups, and face
more stereotypes and different standards (Kostova & Zaheer,
1999). Establishment of social legitimacy could also be more
difficult than the case for regulative legitimacy, as normative
controls stress a deeper moral base and are more likely to be
internalized than regulative controls (Scott, 2001). Cultural
distance is identified as a major barrier for MNEs gaining
normative legitimacy in host countries (Yiu & Makino, 2002),
and has been found to be a strong influence on FDI location choice
(Bhardwaj, Diets, & Beamish, 2007). The bigger the cultural
distance between the host and home countries, the more difficult it
is for MNEs to gain normative legitimacy in the host country. MNEs
would prefer to invest in the countries where cultural proximity
exists with the home country. Thus, Chinese firms are more likely
to locate their FDI in economies where cultural differences
between China and the host economy are smaller.
Hypothesis 6. The choice of a Chinese firm’s FDI location is negatively associated with the cultural distance between China and the
host economy.
3.7. Cognitive institutions
The cognitive dimension of institutions recognizes that internal
interpretive processes are shaped by external stimuli, as mediating
between the external world of stimuli and the response of the
individual organism is a collection of internalized symbolic
representations of the world (D’Andrade, 1984). Based on cognitive
institutional theory, compliance occurs in many circumstances
because other types of behaviour are inconceivable and routines
are followed because they are taken for granted (Scott, 2001). If a
particular type of practice is repeated by many organizations in
high frequency, it will be routinized as a behavioural stereotype
and accepted as a cognitive structure. This behaviour pattern is
named mimetic isomorphism (DiMaggio & Powell, 1983). Although a mimetic behavioural pattern does not provide a
guarantee of reaching the expected high efficiency, it does help
organizations to gain cognitive legitimacy. In the case of FDI
location choice, empirical evidence demonstrates a bandwagon
effect that is resulted from a follow-the-leader approach of
decision-making (Sethi et al., 2002). Frequency in business
dealings between host and home country firms is reflected by
the intensity of economic relations between the two countries,
which can be proxyed by the bilateral trade value of the two
countries. A large trade volume represents a high frequency of
business transactions conducted by firms of the home economy in
a host economy. This repetitive pattern of business dealings in
trade relations can become habitualized and objectified. By
imitating this location pattern in trade relations, investing firms
may expand the business transaction pattern to another similar
area—FDI, especially for those motivated by market-seeking where
the motivation of FDI is to facilitate trade (Buckley et al., 2008). A
high frequency of business dealings resulting from trade relations
can also influence FDI location choice through a cognitive
mechanism named external legitimacy spillover (Kostova &
Zaheer, 1999). If firms in the home country have had intensive
trade relations with firms in a host country, a good reputation for
trading firms may spillover to investing firms, thus facilitating
attainment of legitimacy.
Hypothesis 7. The choice of a Chinese firm’s FDI location is positively associated with the intensity of business transaction between firms of the host and home economies.
4. Data and methods
4.1. Variable measurement
4.1.1. FDI stock
FDI stock from Chinese firms in each of the eight host Asian
economies, rather than FDI flows to these economies, is used as the
Y. Kang, F. Jiang / Journal of World Business 47 (2012) 45–53
dependent variable, as the stock variable is a more accurate
measure of FDI location distribution (Filippaios, Papanastassiou, &
Pearce, 2003). Data for the dependent variable were obtained from
official Chinese sources (MOFCOM), Almanac of China’s Foreign
Economic Relations and Trade (Volumes, 1996–2008), renamed as
China Commercial Yearbook since 2004.
GDP per capita (GDPP) captures the market size of a host
economy. GDP growth (GDPG) captures the market potential of a
host economy and is measured by the annual growth rate of the
economy. Market openness (OPEN) is used as a proxy accommodating export-substituting FDI and is measured as a ratio of an
economy’s exports over its total foreign trade. Resource (RESO)
captures the resource-seeking motive of the investing firms and is
measured as ratio of ore and metal exports to merchandise exports
in the host economy. Data for these four variables were taken from
‘‘World Development Indicators (WDI) 2008’’ published by the
World Bank. Unit labour cost (ULC) captures investing firms’
efficiency-seeking motive and is measured by the average wage in
the manufacturing industry of the host economy. Data for ULC
were collected from Labour Statistics, published by International
Labour Organisation (2008). Patent (PATENT) applications in the
host economy are used as a proxy of development level for
technology and management know-how to accommodate strategic asset-seeking motivation of the investing firms, and data were
taken from Statistics on Patents, a database published by WIPO
(2008).
Economic freedom (EFREE) represents the economic regulative
regime in the institutional environment. Five component items in
the domain of economic regulative institutions were used to
conceptualize this variable, including (1) business freedom, (2)
monetary freedom, (3) financial freedom, (4) property rights and
(5) freedom from corruption. These five items were derived from
the Economic Freedom Index 1996–2008, developed by the
Heritage Foundation, which provides time series data for most
of the countries in the world. An internal reliability test generated
the Cronbach’s alpha of 0.893 for these five measurement items
and a correlation test found that scores for these five items were
highly correlated for the eight economies under study. Thus, these
five items were merged into a composite variable of economic
freedom. As suggested in Hypothesis 5a, relative differences of
regulatory institutions between China and the host economy,
rather than the regulatory institutions of the host economy, are to
be investigated as a variable influencing FDI location choice of
Chinese firms. Using mean score data taken from the Economic
Freedom Index, the variable of difference in economic freedom
between China and the host economy was measured and operated.
Political influence (POLITIC) represents the political and legal
regulative regime in the institutional environment. Six component
items including political system, bureaucracy, legal and regulatory
framework, government economic policies, corporate tax, and
OFDIit
protectionism were adopted to configure this variable. Data for
these six component items were obtained from the World
Competitiveness Yearbook (WCY) 1995–2008, which is a data
collection of annual surveys published by IMD International and
the World Economic Forum. After an internal reliability test (with
the Cronbach’s alpha index of 0.948) and a correlation test, the six
component items were merged into a composite variable of
political influence, and the mean scores of the six items were used
to measure this variable. Following the method used in measuring
the variable of difference in economic freedom, the variable was
49
measured as the difference in political influence between China
and the host economy.
FDI restriction (RESTR) is used as the variable presenting the
institutional regime directly regulating FDI activities. It measures
the extent to which foreign firms experience difficulties in
acquiring control over a domestic firm in a host country. Following
the same method in the case for the two variables of economic
freedom and political influence, FDI restriction is measured by the
relative difference between China and the host economy, and data
were obtained from WCY 1995 to 2008.
Cultural distance (CULTR) measures the extent to which
normative forces influence FDI activities. In this study, cultural
distance is defined as the difference between the national culture
of the home country (China) and those of the eight host economies.
It is measured through the four cultural dimensions of power
distance, uncertainty avoidance, individualism and masculinity, as
identified by Hofstede (1983). Using the scores for individual
countries provided by Hofstede (2005) and following the method
developed by Kogut and Singh (1988), culture distance was
measured by using a composite variable consisting of the four
cultural dimensions. A low score on this measurement represents
cultural proximity and a high score means culturally more distant
between China and a host economy.
Bilateral trade (TRADE) between China and a host economy is
used to measure the influence of cognitive institutions on Chinese
FDI flows. The variable of trade has been widely used as an
economic variable (e.g. Bevan & Estrin, 2004; Buckley et al., 2007),
which reflects the economic relationship between host and home
countries. From the perspective of institutional approach, the
variable of bilateral trade indicates the intensity of transactional
dealings and choice in terms of exporting destinations, and
importing sources by firms from the home country. If a particular
destination choice for trade is repeated in high frequency over time
so that it is institutionalized in managers’ mindsets, expanding
trade destination choice to FDI location choice will become a way
to gain legitimacy. Thus, the variable of bilateral trade between
China and a host economy was used as a proxy for mimic pattern of
FDI location choice. Data for this variable were sourced from the
State Statistical Bureau of China (SSBC).
A control variable of inflation (INFLA) was included to reveal the
impacts of the main variables. As inflation imposes a high risk to
firms operating in the economy, a negative relationship between
inflation in the host economy and the location choice of Chinese
FDI is expected. This variable is measured by the annual inflation
rate and data were taken from WDI 2008.
4.2. Estimation method
Following discussion on variables used in the current study, we
formulated the regression model as follows:
¼ ait þ b1 GDPPit þ b2 GDPGit þ b3 OPENit þ b4 RESOit þ b5 ULCit
þb6 PATENTit þ b7 EFREEit þ b8 POLITICit þ b9 RESTRit þ b10 CULTRit
þb11 TRADEit þ b12 INFLit þ uit
where i = 1, . . ., 8 represents host country i and t = 1995, . . ., 2007
indicates the time period.
This regression model was adopted for empirical estimation of
FDI location choice by Chinese firms and the panel data estimation
method was adopted, pooling together the cross-section data of
eight Asian economies over the period 1995–2007. After conducting a Lagrangian multiplier test, the random-effects model was
selected as the model specification. Table 1 presents the
descriptive statistics and correlation matrix for independent
variables. The variance inflation factor (VIF) was also checked
Y. Kang, F. Jiang / Journal of World Business 47 (2012) 45–53
50
Table 1
Descriptive statistics and correlation matrix for independent variables.
Variables
Mean
S.D.
1
2
3
4
5
6
7
8
9
10
11
1. GDPP
2. GDPG
3. OPEN
4. RESO
5. ULC
6. EFREE
7. POLITIC
8. RESTR
9. CULTR
10. TRADE
11. INFL
16,260.130
2.788
0.479
2.192
942.390
2.426
1.570
2.548
1.421
4,078,789.51
3.854
12,753.790
3.968
0.180
1.866
986.185
1.933
1.468
2.948
1.400
5,123,689.50
6.562
1.000
0.095
0.451
0.338
0.781
0.766
0.457
0.642
0.151
0.598
0.432
1.000
0.010
0.061
0.069
0.005
0.073
0.103
0.027
0.080
0.415
1.000
0.037
0.370
0.641
0.374
0.665
0.378
0.272
0.156
1.000
0.231
0.297
0.078
0.103
0.287
0.060
0.403
1.000
0.631
0.347
0.359
0.100
0.546
0.381
1.000
0.620
0.592
0.080
0.257
0.337
1.000
0.390
0.356
0.062
0.160
1.000
0.251
0.298
0.292
1.000
0.430
0.176
1.000
0.286
1.000
when performing the regression analysis (see Table 2), and the
results indicate that no serious multicolinearity exist between the
independent variables.
In our empirical estimations, a structural break method was
used to investigate heterogeneity within the data. First, the eight
economies were separated into two groups of developed economies (Hong Kong, Japan, Korea and Singapore) and developing
economies (Indonesia, Malaysia, Philippines, and Thailand).
Second, the full sample was split into two time periods (1995–
2000 and 2001–2007). The year 2001 was selected as a cut-off
point as it marked a milestone in outward FDI from China, when
the Chinese government formalized the ‘‘Go Global’’ strategy in its
five-year plan to encourage outward FDI and the country became a
formal member of WTO. To statistically support the two-way split
of the full sample, structure break tests (Chow test) were
performed. The results from Chow tests were highly significant
for the selected break points of both cases, showing that H0 (the
subsamples along the two breaking lines are statistically similar)
was rejected at p < .00 level. Thus, the estimation of four subsamples after two-way splits of the full sample is statistically
justified.
5. Modelling results and discussions
Table 2 provides the summary of estimation results.
5.1. Results from full sample testing
The preliminary regression testing indicated that the variable
patent never gained significance. The correlation tests showed that
this variable was highly correlated with several other independent
variables. Thus, the variable patent was dropped from the final
model estimation and we did not statistically test the hypothesis
related to strategic asset-seeking (Hypothesis 4) in this paper. The
results from the full sample estimation provided limited support
for the hypotheses for traditional economic variables. Among the
Table 2
Results for VIF test and model estimation.
Full model
Developed economies
Developing economies
Period one (1995–2000)
Period two (2001–2007)
(1)
(2)
(3)
(4)
(5)
Independent variables (traditional economic factors)
GDPP
7.8956
0.1267
0.4410
(0.2827)
GDPG
1.5630
0.6399
0.1650
(0.1168)
OPEN
3.5037
0.2854
0.1745
(0.1642)
RESO
1.6381
0.6104
0.2435
(0.2207)
ULC
3.561
0.2808
0.8104**
(0.2507)
0.2917
(0.3002)
0.0218
(0.0788)
1.858***
(0.2899)
0.3970
(0.0917)
0.2026*
(0.0897)
0.5934
(0.5234)
0.1295
(0.1578)
0.1915y
(0.1040)
0.7657***
(0.2054)
0.5019
(0.4572)
0.0054
(0.3218)
0.0218
(0.0446)
0.0499
(0.1087)
0.1392
(0.1080)
0.0102
(0.2704)
0.3149
(0.3467)
0.2528y
(0.1339)
0.9562**
(0.2671)
0.1589
(0.2634)
0.5772**
(0.2034)
Independent variables (institutional perspective)
EFREE
4.9368
0.2026
0.6326***
(0.1785)
POLITIC
2.2427
0.4459
0.3124**
(0.1091)
RESTR
3.1746
0.3150
0.1252
(0.1624)
CULTR
2.6824
0.3728
0.3518y
(0.1959)
TRADE
3.3010
0.3029
0.6785***
(0.1614)
0.4669**
(0.1337)
0.1384
(0.0860)
0.1404
(0.1483)
1.7129
(1.2043)
0.5018*
(0.2074)
0.1816*
(0.1042)
0.1931
(0.1310)
0.0129
(0.0972)
0.6566***
(0.1154)
0.6848*
(0.2563)
0.1111
(0.1160)
0.0863
(0.0732)
0.2869***
(0.0694)
0.3550
(0.4685)
0.0933
(0.2214)
0.0250y
(0.3653)
0.0849
(0.1454)
0.5755*
(0.2464)
0.3240
(0.2148)
0.6679**
(0.2182)
0.1688*
(0.0820)
52
0.8388
0.0038
(0.0954)
52
0.7501
0.0128
(0.0503)
48
0.5014
0.1772
(0.2154)
56
0.8255
Variable
VIF
Control variable
INFL
2.0430
Tolerance
0.4895
Obs.
Adj.R2
Standard errors are in parentheses.
y
p < .10.
*
p < .05.
**
p < .01.
***
p < .001.
0.1074
(0.1007)
104
0.5118
Y. Kang, F. Jiang / Journal of World Business 47 (2012) 45–53
tested four economic variables, only unit labour cost (ULC) was
significant. Hypothesis 3 is supported, as a negative impact of
variable ULC was expected and found, indicating that a higher
labour cost in a host Asian economy served as a deterrent for
Chinese FDI. Given the fact that China has the largest pool of cheap
labour, this result is conventional. This result suggests that FDI
activities by Chinese firms are becoming more conscious of profitmaximising.
Empirical results demonstrate that institutional systems had a
strong influence on the location choice of Chinese FDI. Four of the
five institutional variables are statistically significant. Two of the
three regulative variables were found to have a significant effect. A
highly significant and positive effect of variable economic freedom
(EFREE) confirms Hypothesis 5a. This result suggests that Chinese
firms would prefer FDI locations where a big difference in levels of
economic freedom existed between the home and host economies.
This result indicates that Chinese FDI tended to locate in a host
economy with a higher orientation towards a market economy
regime so that the investing firms could more readily conform to
the economic regulative constituents of the host economy.
Variable political influence (POLITIC) is also significant and bears
a negative sign as expected, confirming Hypothesis 5b. This result
suggests that the smaller the difference in the political and legal
regulative regime between China and a host economy, the more
attractive it was for Chinese firms to locate their FDI there. Data
from the World Competitiveness Yearbook (IMD, 1995–2008)
suggest that the Chinese economy scored relatively low on this
variable when compared to the eight host economies. A lower
score value means that the regulative regime of the political and
legal dimension in an economy is more repressive and centrally
controlled thus more risky, and vice versa. The result for this
variable suggests that Chinese firms prefer to locate their FDI in
relatively higher risky locations. A possible explanation could be
that by operating in a politically unstable and risky environment in
their home country, Chinese firms may find that they can more
readily gain institutional legitimacy in a similar political environment when competing with developed country MNEs in FDI
activity. The political embeddedness in a home country could be
internalized as firm specific advantages, which provide them with
expertise in adaptation to a similar institutional environment,
characterized by high volatility and bureaucratic intervention. An
interesting and important finding regarding the regulative
institutional influence is the opposite impact directions for the
two variables of economic freedom and political influence. This
finding suggests that Chinese MNEs tended to locate their FDI to
those locations, which have a high level of economic freedom but
are politically repressive and risky. This tendency clearly reflects
the influence from regulative institutions in the home country on
FDI location choice.
Hypothesis 6 regarding normative institutions gained some
support, since a negative influence from variable cultural distance
is predicted and confirmed with a marginal significance level at
10%. This result suggests that Chinese firms tended to locate FDI
operations in economies with which China had a smaller cultural
distance. Full sample estimation provided a strong supportive
result to Hypothesis 7, as the variable of bilateral trade (TRADE)
had a positive and highly significant impact on Chinese FDI,
suggesting that frequent business transactions of bilateral trade by
Chinese firms with the firms from a host economy indeed have an
impact on the mindset of Chinese managers while making
decisions regarding FDI location choice.
5.2. Results of two economy groups
Estimation results justified the initial intent to split the full
sample into two economy groups. Empirical results for the two
51
economy groups were sharply different with those generated from
full sample testing and also between the two groups, especially for
variables drawn from the institutional approach, suggesting that
FDI from Chinese firms followed different location patterns when
flowing to different economy groups.
For the developed economy group of Hong Kong, Japan, Korea,
and Singapore, two economic variables (openness and ULC) and
two institutional variables (economic freedom and trade) were
significant, and all of them carried the predicted signs. The positive
and highly significant impact of variable OPEN suggests that a
strong exporting orientation of the host economy facilitated
Chinese FDI for the Asian developed economies. This result may
help to provide an explanation for the insignificance of conventional market-seeking variables. While seeking market expansion
in Asian developed economies through FDI, Chinese firms may aim
to serve broader foreign markets, rather than the domestic market
in the host economy. Thus, the market-seeking motive is mainly
realized through facilitating export expansion to other foreign
markets from overseas FDI bases. Hong Kong has been most
evident for this case. The negative effect from the variable of unit
labour cost (ULC) is consistent with the result from the full sample
testing, suggesting that the high labour cost in Asian developed
economies served as a deterrent for Chinese FDI to flow into this
economy group. Two institutional variables – economic freedom
(EFREE) and trade (TRADE) – were significant. Consistent with the
case in the full sample testing, the significant and positive impact
of variable economic freedom reflects the fact that Chinese firms
preferred a FDI location which had a stronger market orientation.
Similar to the full sample result, variable TRADE had a positive
relationship with Chinese FDI for developed Asian economies,
although at a less significant level (5%), suggesting China’s trade
pattern had a positive impact on the FDI location choice of Chinese
firms.
For the developing economy group of Indonesia, Malaysia,
Philippines, and Thailand, two (openness and resource) of the five
traditional economic variables were significant. Variable openness
carried a positive sign as expected, and was significant at a
marginal (10%) level, suggesting that market-seeking Chinese FDI
was facilitated by an export orientation of the host Asian
developing economy, rather than their absolute market size.
Different with the cases both in the full sample and developed
economy group, variable resource (RESO) gained strong significance and carried a positive sign as expected, suggesting that
Chinese FDI flows were attracted to natural resources in these
Asian developing economies. Turning to the institutional variables,
three of the five institutional variables were significant. The
variable of economic freedom was significant, but different to the
results from both the full sample and the developed economy
group, this variable carried a negative sign here, suggesting that a
smaller difference between China and the developing Asian
economies, in terms of economic regulative regime, served as an
attraction for Chinese firms. Cultural distance (CULTURE) was
statistically significant, but contrary to the case in the full sample
testing as it carried a positive sign here, suggesting that Chinese
FDI was flowing into the Asian developing economies that were
culturally distant from China. The variable of bilateral trade is
positive and significant here Consistent with the results from both
the full sample and the developed economies group.
5.3. Results for two time periods
Modelling results changed again when the full sample was split
along the time dimension, indicating the dynamic nature of FDI
location choice by Chinese firms. For the 1995–2000 period, only
one institutional variable (FDI restriction) was statistically
significant and had a positive sign as predicted. The highly
52
Y. Kang, F. Jiang / Journal of World Business 47 (2012) 45–53
significant and positive influence of the variable FDI restriction
(RESTRI) suggests that a difference between China and the host
economy in the FDI regulating regime acted as a strong attraction
for Chinese FDI flows. Considering that China had a rather rigid
regime in restricting foreign ownership for this period, this result
demonstrates that Chinese firms did prefer a friendly regulative
regime directly linked to FDI activity, while not paying much
attention to the broad regulative environment in a host economy.
For the more recent 2001–2007 period, the model estimation
generated quite interesting results. Three economic variables
(GDPG, OPEN, and RESO) were significant. Variable GDP growth
gained significance for the first time throughout all the model
estimations and carried a positive sign as expected in H1b. This
result may suggest that the eventual return to the normal track of
economic growth for the East and Southeast Asian economies acted
as an attraction for Chinese FDI flows to this region, after a severe
recession during the Asian financial crisis. Variable OPEN had a
significant and positive impact, and this result is similar to the case
for the developed economy group. A positive impact of this variable
indicates that Chinese FDI outflows preferred economies with a
strong export orientation, demonstrating that the Chinese FDI stock
was used to serve other foreign markets. This result may explain the
insignificance of the more conventional market-seeking variables
(GDP growth and GDP per capita). Variable ULC had a significant and
negative influence, and this result is similar to the result from the full
sample testing. A negative influence here from variable ULC suggests
that it is in this time period when Chinese firms became more profitdriven and conscious of cost reduction while involving FDI activity.
Regarding results for institutional variables, a surprising finding is
that the significant impact of FDI restriction (RESTRIC) changed from
positive for period one (1995–2000) to negative for period two
(2001–2007), suggesting that Chinese firms tended to locate their
overseas operations in economies with which China had a smaller
difference in institutions directly regulating FDI activities. This result
may be taken as a reflection of a positive change in China’s regulative
regime directly related to FDI activities towards market-oriented
direction in the new century, after China became a formal member of
WTO in 2001.
6. Conclusions
This study has sought to contribute to the understanding of the
location choices of FDI by Chinese MNEs by examining the
traditional economic variables derived from the eclectic paradigm
and variables representing the three pillars of the institutional
regime. Two important implications can be drawn from the
empirical findings. First, empirical evidence suggests that while
traditional economic factors have a major role to play in affecting
Chinese MNEs’ decisions on FDI location, institutional factors may
matter more and demonstrate a higher level of complexity and
diversity. An assessment of findings from the full sample, as well as
cross-section sub-samples, reveals that in comparison to traditional economic factors, institutional variables are more likely to
impact on the FDI location choice of Chinese firms, and also
demonstrate more complex relationships with FDI location choice.
The impact directions for the five economic variables are fixed
across all the five full and sub-sample estimations, if they are
significant. On the other hand, the impact directions have changed
for three (economic freedom, FDI restriction and cultural distance)
of the five institutional variables across estimations for the full
and/or sub-samples. The same institutional variables can influence
the location choice of Chinese firms towards different directions,
while crossing different full and sub-sample sections. Thus, it can
be inferred that institutional variables play a more dynamic and
also more significant role in the FDI location choices of Chinese
firms, and that location choices by Chinese MNEs tended to have
different patterns, both for different regional economy groups and
across different time periods.
Second, the findings suggest that while the mainstream FDI
theories and frameworks regarding FDI location choice, which
were generated mainly from studies on developed economies, are
still applicable in the case of Chinese FDI outflows, some important
theoretical modifications and extensions are needed in explaining
location choices by Chinese firms. Some empirical findings from
this study are quite unconventional, such as findings regarding the
contrasting impacts from two regulative institutional variables
(economic freedom and political influence), and regarding changes
in impact directions for variables of economic freedom, FDI
restriction and cultural distance. These findings clearly demonstrate the impact of institutional forces in the home country on FDI
location choice and provide strong support for the notion that the
distinctive and highly dynamic institutional forces in China
contribute to the FDI location choice decisions of Chinese firms.
6.1. Managerial relevance
The findings of this study offer several managerial implications.
First, this study reveals that FDI location choice of MNEs from
China as an emerging economy is determined by a joint influence
of both economic and institutional factors, and thus mangers
should not view these factors in isolation from each other when
making FDI location decisions. Chinese FDI to the East and
Southeast Asian region is motivated to fulfil certain economic
imperatives, such as gaining access to supply of natural resources
and developing overseas market. However, managers should keep
in mind that the institutional factors of host country in relation to
those of home country play an even more significant and important
role in determining their FDI locations in the region.
Second, the finding regarding opposite impacts from the
variables of economic freedom and political influence demonstrates an influence of institutional embeddedness from operating
in home country on FDI location choice by the MNEs from an
emerging market. This finding suggests that Chinese MNEs are
targeting FDI location where it has political and economic
institutions more or less similar to those found in their home
country—with relatively market-oriented economic institutions
and more restrained political institutions. Important managerial
implication for FDI location can be drawn from this finding.
Our data suggest that MNEs from developing countries are able
to turn their disadvantage of operating in a politically oppressive
institutional environment into an advantage when competing
overseas with MNEs from developed countries. Managers from
emerging markets like China should be aware that their
experiences and expertise in adapting to oppressive institutions
could probably make them be more capable in comparison to their
counterparts from developed countries in dealing with the political
and institutional impediments that MNEs may face in developing
country markets.
6.2. Limitations and future research directions
Several limitations of this study need to be noted, leading to
avenues for further investigation. Firstly, some variables used in
this study may not provide an accurate measurement of the
institutional forces in play. A major issue here is the measurement
of the cognitive regimes. Bilateral trade between the host and
home economies was used as variable of cognitive institutions,
capturing the institutionalized behaviour pattern of managers in
the home country. However, the trade variable is more commonly
used as an economic variable, and this study may suffer from
measurement errors. It is difficult to measure the behavioural
pattern of investing firms using aggregate statistical data. Thus,
Y. Kang, F. Jiang / Journal of World Business 47 (2012) 45–53
research at firm level may be helpful in solving this problem.
Secondly, the empirical testing of the conceptual framework was
done in the context of Chinese FDI in the eight Asian economies,
and it is a rather narrow research setting. Future research could be
conducted to examine if similar outcomes can be generated from a
bigger sample size of locations for FDI outflows from China and
from a broad context of emerging economies, such as India, Brazil
or Mexico.
Acknowledgement
We are thankful of the valuable comments and constructive
suggestions provided by Professor Alan Rugman.
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