FDI Entry Mode Choice Of Chinese Firms:a Heterogeneous Firm Perspective

After World War II, with the progress of opening-up and the rapid development of social productivity, as the microscopic main body of economic globalization, multinational enterprises has got unprecedented development. The activities of invest took by multinational enterprises accelerate the integrated development of the global production. As the intensifying of China’s system reform, the multinational enterprises in China have played a major role in the global production step by step. In order to expand production scale and market competition space, more and more Chinese enterprises take foreign direct invest (FDI) as their long-term strategy. However, Chinese enterprises are just at the beginning of "going out", they are still facing a lot of difficult choices. Choosing the right entry mode not only determines the efficiency of foreign direct invest, but also influence the long-term development of the enterprises. Given that, the FDI entry mode of multinational enterprises has always been the research emphasis and hotspot home and abroad. For China, the research of FDI entry mode choice of multination enterprise also has important practical significance in the economic transform period.Since China joined the World Trade Organization (WTO), China’s foreign direct investment has increased significantly. A large number of enterprises adopt foreign direct investment to explore the international market. Even in2009, the global direct investment has fallen sharply, Chinese enterprise foreign direct investment has reached the highest point. But many Chinese enterprises "going out" effect is poor, many enterprises suffered heavy losses. Especially in recent years, there are many foreign direct investment failed. In the process of market transition, Chinese enterprises also have to cope with the international market in the meantime. They are still lack of information, international experience, talents, and facing financial difficulties. Many Chinese enterprises are overwhelmed by the interwoven determinants and the volume of information that needs to be possessed. They cannot estimate the potential risks accurately, and take the wrong action, which cause the failure of foreign direct investment.Based on the retrospection of preceding theories in FDI entry mode theory, this study develops a decision-making framework of FDI entry mode choice by including firm heterogeneity. Then this framework is applied to the analysis of determinants on FDI entry mode choice between mergers and acquisition (M&A) and joint venture (JV) made by Chinese enterprises. Based on theoretical analysis, this paper uses empirical analysis to further its validation. First, this study analyses four advantages in heterogeneous enterprises, and dissect the inner logical relationships between the heterogeneous characteristics and the FDI entry mode choice. The more heterogeneous enterprises are, the more they value heterogeneous core resource. The ability of macro-control are stronger, they are reluctant to share profits with local firms. In this case, protecting heterogeneous core resource will be their priorities, so as to keep the resources superiority inside their international management system. While enterprises with weak heterogeneous characteristics have shortcomings in competitive technologies and core knowledge and competence they possess. In the host-country, these multinational enterprises will be at a competitive inferior position. In this case, joint venture with local firms will help to obtain resources from international market. This study combines FDI binary choice model with data of Chinese enterprises, and analyzes the determinants of FDI entry mode choice made by Chinese enterprise systematically, and presents a series of hypotheses. In this study, the following five independent variables will be used to reflect firm heterogeneity: strategic assets, firm size, international experience, managerial ability, and marketing density. In addition, the study incorporates correlative factors of host country environment (governance quality, economic liberalization degree, market size, and geographical distance) to build index system, and conducts empirical tests using data on48international M&As and29international JVs made by Chinese firms during2002-2010. The main research results are summarized below. First, the heterogeneous characteristics of, such as the size and strategic assets of the investing firm and international experience have a significant impact on the FDI entry mode choice. While the management ability and marketing density impacts turn out to be small. Second, besides heterogeneous characteristics of firms, the host country’s governance quality, market size, and geographical distance also affect the FDI entry mode choice. Third, Chinese firms often made wrong decision-making on the FDI entry mode choice. Some firms choose JV entry modes when they should have entered a new market through M&As, which result in operating inefficiency and lower profitability. At last, based on the theoretic and empirical research above, this study presents several policy recommendations from two levels(firm level and government level) to accelerate Chinese FDI shifting from quantity to quality, make FDI entry mode choice more scientifically, and promotes the enterprise’s health and stable development.