Does Institutional Environment deter China’s Outward Foreign Direct Investment (OFDI) Location Choice?: Evidence from Firm-level Data

Abstract

China’s outward foreign direct investment (OFDI) has been growing rapidly in the last decade. Since 2014, China has emerged as the second-largest country for OFDI in the world. Empirical investigation of the determinants of OFDI is very important for the formulation of OFDI policies, because OFDI brings various benefits to both investing countries and recipient countries. On the one hand, FDI transfers not only financial resources but also technology and managerial know-how from investing country to recipient country. On the other hand, for investment country, FDI can enable them to use their resources efficiently.

In the light of important contributions that OFDI delivers to both investing and recipient countries, it is useful to discern the factors that would promote China’s OFDI. However, few papers have studied the determinants of China’s OFDI. By using firm-level OFDI data covering the period 2005–2015, this paper attempts to fill this gap by investigating the determinants of China’s ODI.

This paper focus on how the destinations’ institutional environment affects China’s OFDI location choice. We apply principal component analysis to six dimensions of world governance indicators, and use the first principal component as an institutional environment proxy. As the method of empirical analysis, this paper uses the conditional logit model. We also use the probit model and logit model to do the robustness checks. The results do not show a significant relationship between the destinations’ institutional environment and China’s OFDI. However, the results show a significant relationship between OFDI by Chinese State-Owned Enterprises and the destinations’ institutional environment.

We find that sizable local market, low-wage labor, and abundance of natural resources in the recipient countries are important factors that attract Chinese firms’ OFDI. Furthermore, the results show that the accumulation of Chinese enterprises in recipient countries play an important role on attracting China’s OFDI. This paper also investigates the impacts of RMB revaluation and it’s volatility on China’s OFDI. However, the results do not show significant relationships.