Institutional Distance,International Investment Agreements And The Choice Of Overseas Investment Entry Mode For Chinese Enterprises

As the number and scale of Chinese enterprises’ overseas investments climb year by year,the country-level factors between the host and home countries are becoming increasingly important factors in the choice of entry modes for Chinese enterprises’ overseas investments.Institutional distance,as a natural internal institutional variability or similarity at the country level,has an objective impact on the choice of overseas investment entry mode for enterprises.And international investment agreements,as more formal and artificial institutional arrangements between countries at the national level,involve many contents such as national treatment,most-favored-nation treatment,expropriation compensation,umbrella clause and third-party dispute settlement mechanism,which provide convenience and protection for enterprises’ overseas investment.To this end,this paper introduces institutional distance combined with international investment agreements into the overseas investment entry mode decision model of Chinese firms using data on firms with cross-border M&A and greenfield investment among Chinese A-share listed firms from 2000 to 2020,and empirically examines how institutional distance and international investment agreements affect firms’ OFDI entry mode choice.The research results show that:(1)The greater the formal institutional distance,the more likely Chinese enterprises will choose cross-border mergers and acquisitions as their overseas investment mode.A larger formal institutional distance brings a certain outsider disadvantage,and enterprises can smooth market transactions to some extent by choosing cross-border mergers and acquisitions;(2)The greater the informal institutional distance,the more likely Chinese enterprises will choose greenfield investment as their overseas investment mode.A larger informal institutional distance also brings an outsider disadvantage,but when the informal institutional distance is larger,the coordination and integration costs generated by cross-border mergers and acquisitions may exceed their benefits,thus enterprises can obtain internal legitimacy more efficiently by coping with outsider disadvantage through greenfield investment;(3)International investment agreements can play a role in narrowing both formal and informal institutional distances between countries,thus weakening the impact of institutional distance on Chinese enterprises’ overseas investment entry mode choice.International investment agreements can compensate for the lack of host country system and the imbalance in home country system support;(4)International investment agreements can provide enterprises with a certain external legitimacy,thereby increasing the probability of multinational enterprises choosing greenfield investment as their entry mode.Therefore,Chinese enterprises should fully grasp the situation of institutional distance between countries before investing overseas,so as to provide reference for choosing an appropriate entry mode.Chinese enterprises should also fully exert their subjective initiative to make use of international investment agreements,so as to safeguard their legitimate rights and interests in host countries.In addition,China needs to actively sign and improve international investment agreements with various countries in the future,which is not only conducive to promoting overseas investment by Chinese enterprises,but also provides them with a certain external legitimacy in host countries.