Elsevier

China Economic Review

Volume 69, October 2021, 101672
China Economic Review

One country, many industries: Heterogeneity of Chinese OFDI motivations at meso level

https://doi.org/10.1016/j.chieco.2021.101672Get rights and content

Highlights

  • Analysis of aggregate FDI obscures important differences within FDI flows, especially sectoral specificities.

  • The industry-based view can inform understanding of FDI, in complement to resource and institution-based views.

  • Both the motivation for FDI and the sector in which it takes place matter to understanding the determinants of investment flows.

  • Certain characteristics of industrial sectors, in both host and home countries, encourage different types of FDI.

Abstract

Research on the stimulants for Chinese Foreign Direct Investment (FDI) is extensive. However most analysis incorporates theoretical models based on the Institution-Based View or, to a lesser extent, the Resource-Based View (RBV). These highlight the importance of the macro (country) and micro (firm) level, while largely ignoring the meso (industry) level. In addition, although investments are known to have several different motivations, stimulated by quite different factors, analysis tends to focus on aggregate FDI flows. We contribute to the literature by proposing an ‘industry-based view’ of FDI which takes account of heterogeneity across industries and FDI motivation. We apply this framework to Chinese OFDI in Europe, differentiating both in terms of investment motivations and sectoral characteristics at (meso) industry level and at (micro) firm level, in home and host countries. Using logistic and multinomial logistic models, our analysis confirms that different types of Chinese FDI (in terms of motivation) are stimulated by different industry-level characteristics in both home and host countries.

Introduction

In the early years of this century, Foreign Direct Investment (FDI) from China has rapidly become an important global phenomenon - the fourth most important source of FDI in 2019, after Japan, the US and the Netherlands (UNCTAD, 2020). Although there has been extensive work on FDI by Chinese (and other Emerging Market) firms (see work by Deng, 2013, Jormanainen & Koveshnikov, 2012, Luo & Zhang, 2016, Paul & Benito, 2018), many unanswered questions remain. This paper seeks to shed light on underexplored aspects of the phenomenon, focusing on Chinese investment in Europe, where it has been widely spread across the economy. High-profile examples include Geely' s acquisition of Volvo (cars) (Balcet, Wang, & Richet, 2012), Zoomlion' s acquisition of Cifa (concrete machinery) (Spigarelli, Alon, & Mucelli, 2015), and Kuka' s acquisition by Midea (robotics) (Hooijmaaijers, 2019). In spite of the recent conclusion of the China-EU Comprehensive Agreement on Investment (CAI), such Chinese FDI has sometimes been controversial (EP., 2018; Nicolas, 2014). Some see the new EU FDI screening mechanism, which focuses on investments in certain critical industries like AI and energy, as particularly targeted towards Chinese companies (Duchatel, 2020). More detailed analysis can also help to inform the wider policy debate, by providing a better understanding of the different sectoral factors that impact on the motivations of Chinese firms who invest in the EU.

The key novel aspects of our approach are, firstly, we highlight the important mitigating effect of FDI motivation. Although it is now many years since Dunning (1993) highlighted that a variety of motivations underlie FDI, analyses which differentiates between them is quite limited (Franco, Rentocchini, & Vittucci Marzetti, 2010; He, Xie, & Zhu, 2015; Makino, Lau, & Yeh, 2002; Zhang & Roelfsema, 2013). Most research on the determinants of FDI looks at aggregate figures. These include investments with quite different underlying motivations. The fact that results of such empirical research are sometimes conflictual may be due, in part, to a failure to fully account for this heterogeneity (Franco et al., 2010).

Secondly, we highlight the importance of sectoral differences to FDI motivation. As underlined by Jormanainen and Koveshnikov (2012), although analysis of the determinants of FDI is extensive, it has tended to focus on the macro and micro levels. There has been very little analysis of OFDI (either from China or elsewhere) at the meso level of industrial sectors.1 This is despite the fact that, building on the work of Porter (1990), it is widely accepted that the decision to invest is affected, not only by home (and host) institutions and firm-level resources, but also by the characteristics of the industry in which the firm is nested (e.g. Yang, Lim, Sakurai, & Seo, 2009). Indeed, this was the basis for of the ‘strategy tripod' s; approach to understanding FDI proposed by Peng, Wang, and Jiang (2008). Nevertheless, the industry-level factors which may impact on firms' s; FDI decisions have rarely been explored in depth.

The failure to consider industry differences in most work on FDI is problematic. Large sectoral variations could be expected in the importance of different factors of production, not least technology, while governments' s; industrial policies tend to focus on promoting certain ‘strategic’ industries (UNCTAD, 20182). Indeed, the few studies that have analyzed FDI across industries have highlighted important differences, especially in relation to the impact of FDI on host countries (Bijsterbosch & Kolasa, 2010; Fillat & Woerz, 2011).

This paper seeks to contribute to these gaps in the literature by exploring FDI at the meso level, highlighting how the motivations behind Chinese OFDI are affected by the industrial context of the firm. Specifically, we address the interactions between industry-level characteristics in home and host countries and the motivations for FDI. For reasons of feasibility and data availability, the characteristics we explore are not exhaustive or, indeed, symmetrical across home and host countries. Our core objective is to draw attention to the pertinence of an industry-level approach to analyzing FDI motivation and lay the groundwork for future research exploring a wider range of industry characteristics and country dyads.

The paper is structured as follows. Firstly we will explore the key theoretical approaches to FDI, especially Chinese FDI and highlight the potential of better incorporating an ‘industry-based' s; view in this context. We then summarize the key insights, as well as inconsistencies, which emerge from existing empirical analyses of aggregate FDI from China and into the EU. Drawing on work exploring FDI motivation and sectoral factors which may impact it, we propose a series of hypotheses on the interactions between FDI motivation and industrial characteristics. We present the data and methodology used to test these hypotheses and the results of our analysis. We conclude the paper by highlighting the key findings which emerge from this work, their policy implications and the further research avenues which they open, in addition to highlighting some research limitations.

Section snippets

Theoretical approaches to analyzing Chinese OFDI

The literature on FDI is vast. In this paper we focus on the most pertinent studies which inform our understanding of Chinese OFDI. Although there is a burgeoning literature on the subject, many unanswered questions remain, especially the extent to which it can be explained by existing theories of FDI, or requires new theoretical (Knoerich, 2019) and/or empirical approaches (Ramamurti & Hillemann, 2018).

In terms of the theoretical lenses through which Chinese OFDI has been analyzed, researchers

Research context

We test our theoretical framework by exploring Chinese investment into the EU. The region has been a particularly important destination for Chinese OFDI in recent years, both for traditional ‘market-seeking’ Chinese investment and that focused on technology and production (Huang & Zhang, 2017; Knoerich & Miedtank, 2018). The heterogeneity of the EU means that patterns of FDI differ across countries (Baker & McKenzie, 2015). Europe thus provides a varied context in which to analyze the

Chinese and host EU industry-level factors and OFDI motivation

The above analysis confirms our key point that variations in FDI motivation and sectoral differences are important to understanding investment patterns. Specifically, when we include the variables related to industrial characteristics of Chinese and EU countries in the logistic regression, the explanatory power of most of the control variables diminishes significantly, while the models as a whole become more significant, especially for R&D motivation (models A4, B4 and C4). This implies that

Conclusions and avenues for further work

In this paper, we have sought to identify the extent to which industrial characteristics in both China and EU host countries can be seen to stimulate Chinese OFDI with different motivations. Our analysis confirms that certain industrial characteristics are associated with specific investment motivations, underlining one of the key points of this paper: that exploring FDI in aggregate terms obscures important differences within FDI flows. Fig. 4 summarizes the key findings of our paper.

In terms

Acknowledgements

This paper was funded by the National Natural Science Foundation of China (n° 71872168, n° 71472173).

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