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Country-of-Origin Effects of Foreign Direct Investment

An Industry Level Analysis

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Abstract

  • 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.

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Notes

  1. The exception has been a limited number of studies that look at rivalistic behaviour in oligopolised host country industries.

  2. Region and industry are different approaches of analysis. What is found to be an important determinant for FDI at the regional level may turn out to be unimportant at the industry level. This is partly caused by the nature of the data. For example, wage rates do not vary as much between regions as between sectors within China.

  3. For FDI flows between industrialized countries, consistent significant labour cost effects have not been reported (Cushman 1987).

  4. Labour productivity is widely used as a proxy for the level of technological change (e.g., Blomström/Wolff 1994, Jordaan 2005).

  5. In these industries, data for firms with annual sales of at least five million Yuan are provided. The Yearbook also provides data for firms of all sizes without a threshold, but it is at a greater level of aggregation with a total number of thirty manufacturing sectors only.

  6. Country level studies usually do not examine the effects of return on capital. However, this is a key variable for industry level analysis as foreign investors tend to enter industries with high profitability or future profit potential. Furthermore, the Chinese manufacturing industry is characterized by a high degree of inter-industry variation in profitability (Rawski 1994), reflecting the transitional nature of the Chinese economy.

  7. Like many developing and transitional economies, China features a complex regulatory environment for MNEs. Due to data constraints, we are unable to consider the full potential effects of government policy.

  8. This small difference is caused by the fact that the R squared values in the first stage of the 2SLS process are very high, making the estimated FOS similar to the actual FOS in magnitude.

  9. In 2002, foreign affiliates accounted for 52percent of the total value of Chinese exports (Wang et al. 2009).

  10. Some studies find that labour cost is a deterrent to FDI inflows (Cheng/Kwan 2000, Coughlin/Segev 2000, Fung et al. 2002), while others show a positive relationship between labour cost and FDI inflows (Guimaraes/Figueiredo/Woodward 2000, He 2001, Cheng/Stough 2006) and for these studies labour cost is interpreted as a proxy for qualifications and skills. Still others indicate an insignificant relationship between labour cost and inward FDI inflows (Broadman/Sun 1997, Chen 1996).

  11. We are grateful to one of the reviewers for this point. Similarly, Wei et al. (2006) found that Chinese diaspora firms possessed traits of both locally owned and foreign owned firms.

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Authors and Affiliations

  1. Nottingham University Business School, University of Nottingham, Nottingham, UK

    Chengqi Wang

  2. School of International Trade and Economics, University of International Business and Economics, Beijing, China

    Chengqi Wang

  3. Leeds University Business School, University of Leeds, Leeds, UK

    Jeremy Clegg (Jean Monnet Chair in European Integration and International Business Management)

  4. Leeds University Business School, University of Leeds, Leeds, UK

    Mario Kafouros

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  1. Chengqi Wang
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  2. Jeremy Clegg
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The authors gratefully acknowledge the financial support of China Natural Science Foundation for this research (Grant number: 70673048)

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Wang, C., Clegg, J. & Kafouros, M. Country-of-Origin Effects of Foreign Direct Investment. MANAGE. INT. REV. 49, 179–198 (2009). https://doi.org/10.1007/s11575-008-0135-4

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