Motivations underlying overseas market selection: the case of outward foreign direct investment by enterprises from China

Abstract

Inspired by the rapid growth of China's outward foreign direct investment (FDI), this paper presents a systematic approach to identifying the characteristics of aggressive global expansion by firms from China's transitional economy. Specifically, the paper seeks to investigate relationships between overseas market selection by enterprises from China and the investing firms' investment motivations, moderating by firm ownership advantages. Specific to the China context, the investigation shows how FDI location determinants are different from the acknowledged patterns based on the experience of multinational enterprises (MNEs) from developed countries and other emerging economies. Outward FDI by firms from China show distinctive features, characterized by geographical concentration and relatively weak in ownership advantages of the investing firms. On the basis of recent theoretical developments (e.g. Child and Tse, 2001; Dunning, 1998, 2002; Nohria and Garcia-Pont, 1991; Li, 2003; Madhok, 1997; Srivastava, Shevany and Fahey, 1998; Yeung, 1994) and empirical findings (e.g. Chen and Chen, 1998b; Child and Rodrigues, 2005; Makino, Lau and Yeh, 2002), this paper argues that outward FDI by enterprises based in China are likely to be understood as a way to augment and develop the investing firm's ownership advantages in host countries, rather than conventional FDI that aims at exploiting a firm's existing competitiveness. Meanwhile, the study shows how domestic institutional environment of China underpins heterogeneously distributed firm-specific advantages among China-based enterprises, and how it ultimately influences the ability of firms from China to build new competitiveness through outward FDI. In combination with the availability and accessibility of complementary resources in host countries, FDI motivations and firm ownership advantages explain the geographical distribution of FDI investors from China. Through a review of the evolution of China's outward FDI and mainstream theories, a number of hypotheses relating to FDI market selection by Chinese investors are presented, leading to an empirical investigation and a theoretical extension based on the OLI paradigm (Dunning, 1977, 1981a, 1988, 1993). The paper concludes with theoretical implications and suggestions for future research. It is hoped that this study will serve as a stepping stone towards a better understanding, and empirical analysis, of the rapid growth of outward FDI by firms from China's transitional economy.