Academic journal article Management International Review

Country-of-Origin Effects of Foreign Direct Investment: An Industry Level Analysis

Academic journal article Management International Review

Country-of-Origin Effects of Foreign Direct Investment: An Industry Level Analysis

Article excerpt


* Employing detailed industry-level data, this paper examines the country-of-origin effects of foreign direct investment in China.

* The analysis demonstrates that there are significant differences in behaviour between investors from non-Chinese Western (NCW) source countries and those from Hong Kong, Macau and Taiwan (HMT).

* The findings show that NCW investors target local market, while HMT investors are export-oriented. Furthermore, NCW firms are more responsive to local labour quality and technological capability than their HMT counterparts.

Keywords: FDI * Determinants * MNEs * Country-of-origin * Industry * China


Previous studies have recognised that inward foreign direct investment (FDI) plays a key role in fostering China's economic growth, innovation and restructuring (Bevan/Estrin 2000). As such, many studies have examined the determinants of FDI. It is theoretically accepted that these determinants relate to a wide range of industry-, market- and ownership-related idiosyncrasies. However, even though these effects have been a point of concern at the conceptual level, the lack of detailed and recent data, along with the rapidly changing Chinese environment, made it difficult for previous empirical research to test the validity of these general predictions.

This study contributes to the current debate on the determinants of FDI. The paper differs from previous studies in two ways. Firstly, it examines whether MNEs from different countries respond differently to the location advantages (e.g., large market and cheap labour) that China offers to foreign investors. This objective is consistent with theory that predicts that characteristics, such as ownership advantages and investment motives, vary widely depending on the country of origin (or nationality) of each firm (Dunning 1988). In contrast to previous empirical papers that implicitly assumed that multinational investors had similar characteristics, this study breaks down the data by ownership of foreign investors. This approach allows us to examine whether the responses of MNEs depend on the home country-of-origin of the investor, and generally to accurately evaluate and understand variations in inward FDI.

Secondly, the value-added of the study also arises from the fact that it utilizes industry-level data. The use of such data is important because the transitional nature of the Chinese economy presents considerable inter-industry variation of key attributes such as government control, investment opportunities, industry asset intensity, and profitability. Indeed, whilst the Chinese government has adopted a favourable attitude towards FDI, distinct episodes in the evolution of policy can be identified in which sectoral FDI restrictions were either tightened or loosened. As much of the existing empirical research has been carried out either at the country- or regional-level (e.g., Fung et al. 2002, Zhao/Zhu 2000) (1), industry-specific factors remain inadequately measured (Caves 1996, Makhija et al. 1997). (2) This is surprising given that FDI is fundamentally industry, rather than country, specific.

Analyzing a dataset of 157 sectors, we also attempt to examine the role of a number of host industry characteristics that previous studies (Kim/Lyn 1987, Chen 1996, Fung et al. 2002) found to be important determinants of FDI: Market size, labour cost, labour quality and technological capability. An industry-level analysis may also shed light on the industrial specialization of both home and host countries (Barrell/Pain 1997), and allows us to separate the effects that are the result of an industry's characteristics from those which are general to the Chinese economy as a whole. In general, an industry-level analysis is particularly appropriate to the Chinese industrial setting. MNEs embarking on FDI in emerging markets, such as China, are responding to a number of strategic opportunities that arise from the structural transformation of the Chinese industry during the period of transition from command to market economy. …

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