THE DETERMAINANTS OF THE RECIPIENT COUNTRY CHOICE FOR FOREIGN DIRECT INVESTMENT BY CHINESE MULTINATIONALS
Abstract
The dynamics of Chinese outward direct foreign investments has been analyzed taking into account that underdeveloped financial market and weak institutions in China have a widespread political rent. The research has proven that in the absence of political ties, manufacturing enterprises that could enter the foreign markets cannot find the necessary funding to cover additional initial costs and lose the opportunity to increase their profits through international economic activity. On the other hand, enterprises with strong political ties easily compensate for their lower efficiency and invest in foreign countries. Finally, foreign affiliates managed by less efficient companies suffer losses rather than make a profit. This situation with regard to Chinese inefficient subsidiaries abroad is not uncommon and is described in many studies, which have been analyzed in the article. The empirical study has been carried out on the basis of a unique set of data for the analysis of factors that influence the choice of country for FDI by Chinese MNEs with the use of both country-level and firm-level characteristics. The firm-level characteristics include: the coefficient of overall factor productivity, the political ties, the average level of education directors, the intensity of the use of skilled labor, and the location of the parent MNE via a province dummy and an industry dummy. The countrylevel characteristics include: gross domestic product, trade restrictions, transportation costs, natural resources and three indicators of the existence of cultural networks. The results prove that the marginal political ties are higher for countries with higher entry costs, which is consistent with the hypothesis that political relations facilitate the obtaining of external financing under conditions of liquidity constraints and high entry costs. The analysis showed the existence of strong motives for Chinese MNEs to enter the country well-stocked with capital, skilled labor and natural resources. Chinese MNEs are also more likely to invest in countries with strong political ties with China, measured through humanitarian aid projects offered by China to potential recipient countries.
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