Research On Determinants Of Entry Mode Choice Of Foreign Direct Investment In China

This study theoretically and empirically explores determinants which impact on entry mode choice of foreign direct investment (FDI) in China.Substantively, a model of entry is an institutional arrangement chosen by the firm to operate in the foreign market, and the ultimate purpose of entry mode choice is to generate and distribute the organizational rents. Integrating the exclusive resource theory, transaction-cost theory, and bargaining power theory, this study develops a theoretical model of entry mode choice which based on ownership structure in FDI enterprises. The model ties together the roles played by a host of factors in the entry mode decisions. The results show that in choosing an ownership structure or entry mode, foreign investors (transnational corporations), local entrepreneurs, and local governments consider the exclusive resources that participants and the host country bring to the enterprise. In equilibrium, the foreign equity share and the probability of choosing wholly foreign-owned subsidiaries rise with the exclusiveness of foreign investor resources and decline with the contribution of local resources towards the amount of organizational rents in the FDI enterprise. Government policy and institutional structure of the host country, home country specificities of the foreign investors, also affect the ownership structure and the mode of entry.Based on the theoretical model analysis, this study empirically tests determinants of entry mode choice of FDI in China. Firstly, it empirically explains determinants of entry mode choice and ownership structure in FDI enterprises (wholly foreign-owned subsidiaries vs. equity joint ventures). Secondly, it analyses location characteristics of entry mode of FDI in China, and empirically explores the impacts on entry mode choice of FDI from local factors. Thirdly, it empirically explains the reasons that wholly foreign-owned subsidiaries becoming the dominant entry mode of FDI into China market. The empirical analysis basically supports the conclusions of the theoretical model.