| The tremendous growth in China’s Outward Foreign Direct Investment (OFDI) has astounded the world of late, becoming the world’s third largest source of FDI in2012. China has accelerated the implementation of "going global" strategy by vigorously promoting foreign investment ventures. However, there is a drastic change in geographical distribution of China’s OFDI over the passage of time. For instance, Asia is getting substantial chunk of China’s OFDI as its share has increased from16%(1991) to73.8%in (2012). The concentration of FDI in Asia raises the fundamental question that what determines and motivates China’s FDI in Asia? The large market size and abundant natural resources of Asia make it worth investigating to test and develop FDI theory. In addition to this, there is common explanation that China’s FDI is attracted by the naturally rich resource countries with poor institutional environment. However, empirical research regarding joint effect of natural resources and institutional factors on China’s FDI provides evidence against the theoretical logic of FDI and extant literature.The purpose of this study is to analyze the determinants and motivations of China’s OFDI in Asia. In addition, the joint effect of institutional factors and natural resources on Chinese firms’decisions has been investigated. The study has been carried out for panel data of37Asian countries and the sample is further decomposed into four regions and income groups as classified by World Bank. A series of empirical analysis for balanced panel data was carried by employing various econometric techniques such as panel Ordinary Least Square (OLS) and Random Effect (RE) Generalized Least Square estimation method with clustered standard error corrected at the country level. Breusch-Pagan Lagrange Multiplier (LM) test is conducted for the choice between pooled OLS and random effects model.Firstly, this study investigated the determinant of China’s FDI in Asia. Our findings for whole sample revealed that inflation, natural resource endowment, infrastructure, bilateral trade and openness to the trade have positive and significant impact on China’s FDI in Asia. Political stability being a key institutional variable is significant but negatively associated with FDI. Regional analysis reported that bilateral trade and infrastructure have positive and statistically significant impact on China’s FDI in all of the regions. Trade openness is found to be significant and positively associated with China’s FDI in Middle East and South Asia. Interestingly, it has been observed that inflation has a significant positive with China’s FDI. This relationship is justified on the ground that Chinese investors are attracted by moderate demand inflation. The natural resource endowments in East&South East Asia and Central Asia have attracted Chinese firms. I observed that the financial development in Middle East and East&South East Asia impedes China’s FDI. Political stability has positive association with China’s FDI in East&South East Asia, while negatively related in Middle East. The positive relationship between the variables is in line with the conventional logic that political stability augments FDI, while the inverse relationship can be justified on the notion of China’s resource seeking FDI in Middle East with bad governance of institutions. Corruption, the institutional variable has a significant negative association with inflows of China’s FDI in South Asia. For income groups’analysis, our findings for high income group revealed that natural resources, bilateral trade, trade openness, inflation and infrastructure have strong positive influence on China’s FDI. Trade openness, bilateral trade, fuel endowment and political stability were found major determinants of China’s FDI in upper middle income countries, while inflation, fuel endowment, natural resources, infrastructure and corruption have been found influencing China’s FDI significantly in lower middle income countries. I observed that bilateral trade, trade openness and financial development variables are associated positively, while inflation and corruption related negatively with China’s FDI in low income countries.Secondly, Dunning’s Ownership, Location and Internalization (OLI) framework is used to empirically investigate motivations of China’s FDI in Asia. I found strong market seeking motivation of China’s FDI for whole sample of countries in Asia, while results for resource seeking and efficiency seeking motivations are not robust. By considering regional analysis, it has been observed that China’s FDI is seeking large market of Middle East region. However, unexpectedly, I did not find strong evidence for resource seeking FDI despite the fact that the region is rich in energy resources. This finding can be justified on the theoretical background known as "Dutch disease or "resource curse" i.e. countries with substantial oil reserves devise policies that in turn hold back the FDI influx. Both market seeking and resource seeking motivations of FDI have been observed in East&South East Asia region, which are consistent with recent empirical evidences. Our findings revealed that China’s FDI is predominately motivated for natural resources (both fuel and non-fuel) in Central Asian region, while results for market seeking motivation is not robust. For South Asian region, market seeking is found to be a key motivation for China’s FDI. The analysis based on income group of the countries, I found that seeking resources is primary chief objective of China’s FDI in high income countries, while the evidence for market seeking motivation is weak. The results are robust for both market and resource seeking FDI in upper middle income countries. I observed that China’s FDI is strongly lured for seeking resources in lower middle income countries, while, low income countries with enlarged market size have attracted China’s FDI.Finally, the joint effect of institutional variables and natural resources on China’s FDI has been analyzed. In general, China’s FDI is attracted to resource rich countries with weak institutions as evident from extant literature. However, the interaction terms for institutional factors and ores/metals produced positive coefficients, which suggest that availability of natural resources increases the positive impact of institutional factors on China’s FDI. In other words, host countries with abundant natural resources (non-fuel) and better institutions attract China’s FDI. Contrarily, the interaction impact of institutional factors and oil resources on China’s FDI is insignificant. This authenticates the adaptation of "Dutch disease" or "resource curse" theory to FDI flows i.e. countries rich in energy resources attract less FDI inflows which negates the general theoretical concept that natural resources tend to attract resource seeking FDI.
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