Outward Foreign Direct Investment Motivation,Political Risk, Institutional Distance And Location Choice

Being a representative of emerging economy country, China’s study on outward foreign direct investment (ODI) always attracts the focus of academic attention. In recent years, China’s ODI shows a trend of accelerated development. By the end of2012, the volume of China’s ODI has ranked fifth all over the world, ranked first among the developing countries. However, while China’s ODI firms making prominent achievements, they are suffering from huge threats of host-country political risk. Therefore, the topic of this study how political risk affects outward foreign direct investment for the current Chinese firms, and how institutional distance affects host-country political risk are of important practical significance.In contrast to the rapid development of emerging economics’ODI, the traditional ODI theory of developed and developing country grows slowly, which is unsuitable to apply in explaining the emerging economies’ODI.As known to all, China is one of the major emerging economies. In the course of its rapid ODI’s development, China’s ODI shows many features that traditional theory cannot explain. On the one hand, the traditional ODI theory emphasizes that firms could be internationalized under conditions of their own competitive advantages. However, Without ODI advantages, Chinese firms actively invest abroad with successful results. On the other hand, the effects caused by host-country institutional factors for China’s ODI firms are inconsistent with the traditional theory. Compared to developed countries, China’s ODI owns political risk investment preferences heterogeneity, that is, Chinese ODI shows high political risk preferences in location choice.Traditional ODI theory emphasizes the importance of institutional factors in host country. Host-country political risk directly affects the ODI firms’ overseas business. Considering the differences between developing and developed countries firms, scholars propose that decision-making process for emerging economies firms should study not only the quality of the host-country environment, but also the differences between the host-and home-country institutional quality and the environment, namely institutional distance. This is because compared to developed countries, the institutional quality has volatility in emerging economies, and the effect on ODI caused by home-country institutional quality does not have the consistency and robustness.Location choice, an important strategic decision of ODI, determines the success and risk management of firm’s investment. China’s ODI theory includes institution-based theory, resource-based theory and their derived theory:eclectic theory of international production and risk aversion theory. However, these theories for China’s ODI are still no consensus. This is because they ignore that the ODI firm external factors exert direct or indirect impact on ODI. Therefore, we need to utilize more theories to reveal the mechanism of the deep impact on institutional factors, resource factors and China’s ODI. In view of this, to improve the existing ODI theory defects, this paper builds a new theoretical analysis system, and establishes an integrated research framework:the host-country resources and institutional factors, to analyze the ODI location choice for emerging economies firms.Existing researches assume that the motivation and institutional distance of ODI firms are homogeneous, which actually ignores the different ODI effects caused by target resources and institutional distance types. To facilitate a better understanding of how the resource factors and institutional factors impact on China’s ODI, this paper commits a decomposition of the above two types (institution type:high institutional distance country, low institutional distance country; resource factors:natural resources motivation, strategic asset motivation, market motivation), and studies the difference of China’s ODI effect caused by the changing types of resource factors and institutional factors.In this study, we establish an analytical framework as China’s ODI motivation, political risk, institutional distance, and ODI location choice to analyze the relationship during the four China’s ODI factors. Besides, this study proves that China’s ODI location choice tends to invest in countries with high political risk. To answer why and how it happens, the analysis of impact mechanism and genetic mechanism are committed in this paper. Utilizing the data of2003-2010China’s ODI to48countries to make empirical research, this paper develops several studies below:Study1, theory study on emerging economies ODI motivationIn recent years, there is a big change in international ODI, which is, international business in new economies countries develop very quickly with huge volume. Such investments have become an important force in the international ODI market, and they are of tremendous influence. In contrast, the traditional ODI theories demonstrate their weakness in explaining emerging economies ODI behaviors. Traditional theory mainly treat developed countries as their research objects, so that they cannot reasonably explain emerging economies ODI characteristics, such as ODI firms commit ODI without ownership advantages.To explain these phenomena, scholars establish integrated theory analytical framework with resource-based view and institution-based view to make the analysis of emerging economies’ODI. This is because these emerging economies ODI firms are different from those from developed countries, that is, institutional factors exert great influence on firms when they carry out ODI. For example, as a major force in China’s ODI, Chinese state-owned firms have to attain both national strategy and firm strategic plan, which means they are easily affected by institutional factors. Thus, in theprocess of ODI, both host-country resource factors and institutional factors significantly affect China’s ODI decision-making process.Existing theoretical studies are analyzed by separately using a direct impact of institution factors and resource factors on ODI or indirect influence of resource factors affected by institution factors on ODI. On the one hand, only studying the institutional factors as determinants of ODI, the study will exaggerate the positive effects on ODI behaviors. On the other hand, only studying the indirect influence of resource factors affected by institution factors on ODI, the importance of institutional factors will be ignored. In fact, only integrated analysis of both the indirect effects and the direct effect of institutional factors and resource factors can give us a more complete understanding of the reason why emerging economies invest abroad.Study2, empirical research on China’s ODI determinants based on resource-based view and institution-based viewIn this study, we establish a theoretical analytical framework as institution-based view and resource-based view to explore the effect of institutional and resource factors on China’s ODI.Firstly, according to the existing literature on resource-based view, this paper establishes resource-based analytical framework, including resource-seeking motivation, strategic asset-seeking motivation and market-seeking motivation. Resource-based view emphasizes that firms to invest abroad obtain scarce resource to enhance their capability of competitive advantages. This paper commits empirical research to explore the effect of host-country resource factors on China’s ODI, testing the impact of China’s ODI firms target resources on China’s ODI location choice. To demonstrate the variable characteristics as far as possible, this paper uses multiple indicators of natural resource factors (ores and metals exports to host-country merchandise exports, energy production), strategic asset factors (number of patent applications, high-tech exports to GDP), and market factors (GDP, per capita GDP, GDP growth rate) for China’s ODI to study how they affect the China’s ODI location choice. The study finds that China’s ODI firms have resource-seeking, strategic asset-seeking and market-seeking motivations, that is, resource factors exert significant impact on China’s ODI.Secondly, according to the existing literature on institution-based view, this paper establishes institution-based analytical framework. This paper selects and builds new proxy variables to commit empirical research.This paper builds institutional distance and political risk indexes. Existing researches usually use psychological distance and cultural distance to proxy institutional distance. However, besides psychological distance and cultural distance, economical distance, law distance and political distance exert significant effect on institutional distance as well. Moreover, a few studies build institutional distance indexes, but they focus on macro factors, and give less importance to micro factors. In contrast to existing studies, this paper utilizes culture distance, law distance, macroeconomic distance, and microeconomic distance to build a new institutional distance index. Likewise, we use government stability, socio-economic environment, investment environment, internal conflict, external conflict, corruption, military forces, religious, law and order, ethnic conflicts, democracy and bureaucratic quality to form political risk index, which demonstrate the effect on both macro and micro level.This paper finds that all political risk and institutional distance exert significant influence on China’s ODI. China’s ODI firms incline to invest in countries with high political risk and low institutional distance. Small institutional distance helps firms to lower political risk in host country.By establishing theoretical analytical framework with resource-based view and institution-based view, this paper finds that China’s ODI are affected by not only host-country target resources but also host-country institutional factors. Host-country institutional factors can affect China’s ODI in direct way and in indirect way.Study3, analysis on the moderate effect of China’s institutional factors on resource factorsTo provide the empirical research for the integrated theoretical analytical framework with resource-based view and institution-based view, this paper proves that both institutional factors and resource factors are determinants of China’s ODI, and institutional factors can moderate the relationship between the resource factors and China’s ODI.This paper establishes the analytical framework as China’s ODI motivation, political risk, institutional distance and ODI location choice to analyze the relationship during the four China’s foreign direct investment factors. This paper finds that the political risk preference and institutional distance preference are different as motivations change. In high institutional distance country, resource-seeking ODI, strategic asset-seeking ODI, and market-seeking ODI firms tend to invest in low political risk country. In low institutional distance country, political risk exerts little effect on resource-seeking ODI firms. moreover, strategic asset-seeking and market-seeking ODI firms incline to invest countries with high political risk. This paper proves that institutional factors moderate the relationship between resource factors and China’s ODI. That is to say, the intergrated analytic framework with institution-based view and resource-based view has strong power to explain the China’s ODI. This paper obtains several findings as follows:Firstly, China’s ODI firms incline to invest in countries with high political risk and low institutional distance.Secondly, China’s resource-seeking ODI firms tend to invest in high political risk countries. Strategic asset-seeking ODI firms tend to invest in countries with lowpolitical risk. Market-seeking ODI firms tend to invest in low political risk countries.Thirdly, in high institutional distance countries, China resource-seeking ODI, strategic asset-seeking ODI, and market-seeking ODI firms tend to invest in countries with low political risk.Finally, in low institutional distance countries, political risk exerts little effect on China’s resource-seeking ODI. Moreover, strategic asset-seeking ODI and market-seeking ODI firms tend to invest in countries with high political risk.