A Study On China’s Outward Foreign Direct Investment: The Developing Stage, Determinants And Countermeasures

Globalization subjects all nations or economies inevitably involved into the world system of labor division and exchange. The accelerated movement of products, technology and information greatly encourages the optimization of resources allocation. Cross-border direct investment has become one of the critical factors that affects world economy and no economy can realize economic development by living only on its own resources, capital, technology and market. All in all, internationalization has turned into the only way to in the globalization era. Nowadays, China’s opening-up oriented economy has entered a new stage. One of the most significant changes is that China’s Outward Foreign Direct Investment (OFDI) has expanded dramatically, making China the fifth largest FDI flow sourcing country world-widely in 2009.The domestic as well as international environment of Chinese firms’OFDI is very complicated as follows:Firstly, with the internationalization of production and the trend of market-opening orientation, international competition transferred into domestic market and visa versa which put domestic firms under more fierce competition environment. Secondly, under the impact of world finance crisis, many countries set up trade barrier again to release domestic market pressure. Meanwhile, China’s BOP takes on the situation of "double surplus" which pushes RMB to continuous record high and in turn poses rigid threat to Chinese export. Thirdly, China’s foreign reserve has accumulated up to 285 million by the end of 2010, becoming the largest foreign reserve holder in the world. The vast stock of foreign reserve, on one hand, contributes to the stability of Marco-economy, on the other hand poses great pressure on domestic inflation. Meanwhile, a large account of foreign reserves takes the form of the USD which is short of security and profitability due to the economic recession undergone by U.S. recently. Therefore, it is expedient to develop new channel of using the foreign reserves. Fourthly, with the fast growing of domestic economy and the process of urbanization, the insufficient resource supply has been an increasing grim issue to deal with. Fifthly, due to the strict security measures imposing on technology, Chinese firms have much difficulty in accessing the cutting-edge technology and the managerial expertise from MNEs’ subsidiaries in China. Sixthly, Chinese government has formulated and implemented the strategy of "going global" which was designed to facilitate Chinese firms’ outward foreign direct investment. All in all, the complicated external and internal environment is conducive for Chinese corporations to undertake holistic and upgraded internalization in order to compete for the global market and resources. Only by making use of both domestic and international resource and market (which can also be interpreted as "two resources and two markets") can Chinese firms meet the requirement of the era of globalization and further realize the sustainable development of China.Despite of the rapid increase in volume recent years, China’s OFDI has many misunderstandings and blank both in theory and practice due to the historical, institutional and economic factors, therefore this dissertation focuses on the development of in-depth, objective and systematic study on China’s OFDI. As is known for all, the classic theory of FDI is originated from the practice of developed countries. But with the emerging phenomenon of development of OFDI since 1970s and 1980s, scholars found that the explanatory power of these theories are limited, so they gradually came to find solutions by developing theories based on developing countries. But it turned out that these theories are mostly developed under the framework of classic FDI theories, lacking comprehensiveness and depth. Although both the developed and developing countries’ FDI theories are still universally persuasive, they are in a less explanatory power situation and when it comes to the uniqueness of China, given the influence of economic environment, ownership advantage, governance structure and support or constraint of policies on the economy. The study on China’s OFDI will not only benefits the academic field by enriching and boosting the FDI theories on developing countries and providing theoretical references for other scholars, who are interested in this topic, but contribute to the policymakers and practitioners as guideline to some extent.Based on extensive data collection, the dissertation employs various approaches summarized as:normative and empirical approaches, theoretical and policy approaches, systematical and international comparison approaches. The dissertation is arranged as the following six parts:The first part is introduction. This part serves as the introduction of general background in which the research significance, structure, methodology, basic concepts and literatures are elaborated. In the literature part, the dissertation reviewed the research on OFDI features from developing countries, investment path, driving factors (pull and push) and the evolvement of theoretical framework from home and abroad scholars, based on which the following studies are developed.The second part is analysis on the status quo and the features of China’s OFDI. In this part, the dissertation first reviews the history and policy related to China’s OFDI. Then by calculating on the collected data into charts and tables, the dissertation comes up with the basic features of the status quo of China’s OFDI. Secondly, in the light of the current situation, the dissertation looks into the insight of China’s frog-leap feature, makes comparison internationally and finds out the distinction between China, first-movers of developing countries and traditional developed countries in an effort to explore the new features on OFDI from developing countries in the ongoing globalization.The third part is a study on the investment development stage of China’s OFDI, which is the key chapter of the dissertation. Applying the Investment Development Path (IDP) theory, this chapter makes the judgment on China’s IDP stage. By regression on GDP per capita on OFDI and the balance of Inward and Outward FDI, the chapter comes out with the conclusion that China has already in the third stage of IDP, when the GDP per capita reached around USD 3000 in 2008. This result showcases the shorter development path than expected by the IDP theory, which makes exploratory revision on the theory and thus reflects the methodology of interaction between the case and theory.The fourth part is research of motives of China’s OFDI from the perspective of host countries’pull factors, which is the key part of the dissertation. The paper designs a theoretical framework upon the motives and strategies for emerging countries’OFDI based on Resource-based View (RBV), according to which the motives are classified into three types, namely resource-intensifying, resource-implementing and resource-developing. Then it is assumed that the location choice on OFDI offers the best fit with their strategy and motives, thus employing reverse reasoning can help us achieve the goal. Applying panel data from 53 Chinese OFDI destinations during 1998-2008, the dissertation tries to tap into the motives of Chinese OFDI and their evolvement through time and configuration. The results support most of the hypotheses and reveal that the strategies of Chinese firms in OFDI are mostly resource-intensifying and resource-implementing, and the resource-developing motive is not clear but already exhibits a vague sign. The results also justify the framework of sequence in OFDI motives developed by the author and therefore may contribute to the innovative studies of the dissertation.The fifth part is study on motives of China’s OFDI from the perspective of home country’s push factors, which is also the key part of the dissertation. Based on the Resource-Industry-Institution framework, a comprehensive and systematic analysis has been undertaken on the extent of influential factors from the internal, external and institutional push factors. By the guide of literature and theories, the sub-factors which have strong causation relation with the above-mentioned perspectives are found. Furthermore, in order to measure the extent of influence of these sub-factors, the dissertation also finds the related proxy variables as media, from whose significance can be used to measure the extent of pushing power of the influential factors and thereby uncover the determinant pushing factors of China’s OFDI. The results indicate the following factors as key pushing forces:the relevant experience of internationalization (i.e. OEM and outsourcing), R&D expenses and efficiency, the stress of supply and demand in natural resource, exchange rate and foreign reserves, capital market and positive policy incentives. The results also reveal the following factors as weak pushing forces:the level of enterprise managerial skills, the ability of learning and absorbing, the domestic market demand, the fierceness of industrial competition, the relevant industrial support and ethnical links.The sixth part is the analysis on the challenges and countermeasures with regard to China’s OFDI. Under the surface of the frog-leaping emergence in the international market, China takes on the prospect of "apparent strength and maturity". Both Chinese government and firms are not fully ready for encountering many distinct challenges and tough issues. In this part of dissertation, the challenges behind the prosperous development of OFDI are elaborated and the targeted and operational countermeasures are put forward on the part of government and firms, which reflects the practical value of the dissertation.The seventh part is the conclusions. According to the analysis of previous parts, this part concludes the dissertation by systematic combing the main points achieved.The dissertation attempts to seek innovation in the following aspects:firstly, systemize on the theoretical framework of FDI, finding the complementary and internal relations between OLI, LLL and Resource-Industry-Institution framework. The dissertation maintains that the Resource-Industry-Institution framework is more comprehensive in explaining the OFDI from developing countries. Secondly, due to the heterogeneity of developing countries, it is imperative to distinguish China with the traditional developing countries’ features in OFDI. Thirdly, employing the regression and net FDI performance index, the dissertation estimates China’s stage in the investment development path, and makes tentative revisions on IDP theory in ongoing economic globalization. Fourthly, finding the relation between OFDI motives with pull forces from host countries, the dissertation developed a theoretical framework concerning the motives of emerging developing countries based on Resource-based View, and holds that the motives follow certain sequence. Fifthly, the Resource-Industry-Institution framework has just emerged in the relative academic fields, but is seldom applied to Chinese situation. In this study, the framework is employed to discover the push factors of Chinese OFDI.The weaknesses of the dissertation are as follows:firstly, the lack of data. As the relevant data for variables, especially from the firm level, are hard to obtain, it is difficult to prove its pushing function from the perspective of the differentiation of firms’ resources. With the same token, it is very unlikely to use the firm-level data to analysis their OFDI motives, therefore, the pull factors of the host countries are used to help deduct the motives without observing the possibility of motives on following supplier, customer or even competitors rather than the attraction of host countries’ pull factors. Secondly, the difficulty in quantifying relevant variables. Since institution variable falls into the normative social factors, it is hard to use data to test its causality with the OFDI but through existing theoretical reasoning. Thirdly, the power of both pull factors and push factors are still remain unclear. Although the dissertation explores the dual forces that influence China’s OFDI, which type of factors play major role need to be further studied.