Locational Determinants And Institutional Distance Of OFDI:A Comparative Study Of China And India

As an integral component of globalization,outward foreign direct investment(OFDI)has grown far more rapidly than international trade within the last two decades.China and India are both emerging economies and members of the BRICS states,sharing similarities in their OFDI strategies while processing differences.In recent years,both countries have taken proactive role in promoting outward foreign direct investment,which leads to their great accomplishment in economic development.Through OFDI,multinational enterprises(MNEs)will enhance their international competitiveness,which is of great significance to achieve sustainable economic development.Although India's total OFDI volume is far less than that of China,its unique advantages and strategies are still worth learning from.Traditional OFDI theories focus more on developed economies where multinational enterprises(MNEs)have obvious inherent advantages in terms of products,brands and technology,but as economies like China and India begin to take the lead in the increasing OFDI trend,the academic world has started to shed light on these developing economies and their OFDI flows.At the same time,since OFDI from emerging countries have less ownership advantages,the role of institution both in home country and host country is increasingly important.Starting from 1990s,research on factors that affect locational determinants for foreign direct investment also began to shift from economic-oriented perspective to a more institutional-oriented perspective.Better institutions provide a well-defined business environment for foreign capital,creating favorable conditions that attract foreign investment.Differences in institutions give rise to more costs in investigating and adapting to new institutional environment.In all,as OFDI from developing economies is playing a larger role in international outward flow of foreign direct investment,the role of institutional factors is increasingly significant other than traditional economic factors.In the previous studies on China and India's OFDI,most studies used qualitative analysis methods due to the scarcity of India's OFDI data.Empirical studies are comparatively less.In addition,most of the empirical studies on China and India's OFDI determinants mainly focused on traditional economic factors,such as market size,openness,technological level,natural resource endowments,and intellectual property rights,without respectively studying the impact of institutional distance.Based on Dunning's classification(1988)of OFDI,this article focuses on examining the impact of institutional distances between host countries and home countries,in addition to traditional economic factors.Previous empirical studies covered the time before or around 2010,which is not up to date.This article uses empirical data from the most recent years after the financial crisis of 2008-2016.In order to further examine the impact of institutional distance on OFDI,this study will classify institutional distances into normative institutional distances and regulatory institutional distances based on Scott's point of view and conduct research by distinguishing institutional distance directions.By using a cross-section panel data approach,the empirical findings are presented as follows.First,OFDI from China and India are both positive with market size in host countries while OFDI from India demonstrates stronger market-oriented motives.Second,seeking natural resources is no longer a major aim for both countries in the process of internationalization,but both of them show the pursuit of strategic assets in different level along with the change in host countries.Third,institutional distance has twofold effect on OFDI in the case of China and India.For China,it is constantly negative related to institutional distance.Therefore,OFDI from China between 2008 to 2016 preferred countries with similar institutional environment rather than countries that differ greatly.However,the overall impact of institutional distance is not significant in the case of India.By classifying institutional distance,this study found that India is positively related to regulative institutional distance.With direction of distance added,this study comes to the conclusion that OFDI from India preferred host countries with higher regulative institutions.The locational determinants of OFDI vary along with home countries and demonstrate different characteristics in different periods.Classical view on institutional distance argues that differences lead to increased uncertainty,risks and higher transaction costs.However,judging from the empirical results,positive institutional distance between host country and home country may also promote the growth of OFDI.Even though,in the process of internationalization,states should always attach great importance to the risks and costs that may be caused by institutional distance.Improving the international competitiveness of enterprises and domestic business environment are still important issues that cannot be ignored.