The Research On The Influence Of Institutional Distance Effect On Chinese OFDI Location Selection

With the rapid growth of foreign direct investment (hereinafter referred to as OFDI) in China, China’s OFDI ranked among the top list. Previous literature has done a thorough research about the size of the market, factor endowment, taxation, trade policy, exchange rate, the policy of interest rate, the cost of production, infrastructure and other factors.In recent years, more and more attention has been paid to how the institution affects foreign direct investment. On the other hand, the investors face a variety of economic or the political risks because of the institutional distance. Then, investors realize that the bilateral investment treaties (BIT) can protect them. The institutional distance and bilateral investment treaties become the focus both in foreign direct investment theory and practice.In this context, this paper researches OFDI through the institutional distance and bilateral investment treaties, and how these two factors affect the OFDI location choice. First, this thesis reveals how these two factors treaties affect the OFDI location choice in theory. Then, the theory is tested by empirical data. Based on this research, some policy suggestions are given on China’s OFDI.Based on the research ideas and methods above, this paper is divided into six chapters:chapter one is introduction which touches upon research background, significance and research ideas, and describes the innovations and shortcomings of the thesis. Chapter Two mainly lists the related literature about foreign direct investment theory, institutional distance and bilateral investment treaties. Chapter Three firstly analyzed how the institutional distance influence OFDI location choice from the perspective of transaction costs, and then theoretically analyses bilateral investment treaties affect OFDI. Chapter Four mainly analyzes the status quo of OFDI and BIT, and obtains the characteristics and the problems of China’s OFDI. Chapter Five, based on China’s OFDI data from 2003 to 2013 in 101 countries, empirically tests the institutional distance and bilateral investment agreements effect on OFDI by using threshold regression methods and obtained the optimum institutional distance interval. Chapter Six summarizes the main research conclusions and gives the corresponding policy suggestions on the basis of theoretical and empirical research.By means of theoretical and empirical research, this thesis reaches the following conclusions:first, there is a negative correlation between the political and economic institutional distance and China’s OFDI, namely, the institutional distance significantly hinder China’s OFDI. The main reason is that the investors face the risks and costs related with foreign direct investment. Second, BIT not only plays a positive role in promoting foreign direct investment, it also shortens the institution distance between two countries. Third, the sample countries was divided into two parts:the developed countries and the developing countries. The empirical results show that compared with the developed countries, bilateral investment treaties have a significant impact on the developing countries while the bilateral investment treaties mainly exert indirect effects on the developed countries, that is, reduce the risks and costs caused by the institutional distance. Fourth, based on the Threshold regression methods, the thesis tests the effect of institutional distance on bilateral investment treaties. Under the role of political institutional distance, BIT has double thresholds and effect OFDI in three intervals.