Institutional Distance, Location And Performance Of Southern OFDI： Theoretical And Empirical Analysis

FDI has been playing the important role in the world economy in the past twodecades.. The21century witnessed the rapid growth of FDI outflow from Southerncountries, which is reflected that the share of the Southern countries in the world FDI isincreasing substantially. South and North differs in OFDI in a range of aspects, especiallyin the location choices. However, the traditional theories of foreign direct investmentfocus on explaining the OFDI of North. The rising of South in the global OFDIchallenges the theories of foreign direct investment. This dissertation intends to examinethe OFDI of Southern by considering the institutional distance’s role in the location andperformance of South OFDI.Based on the background of the upsurge "south-south FDI",this paper systemicallyexplores the influences and mechanisms of regulatory and normative institutionaldistances on the location and performance of South OFDI, which explains howinstitutional distances impact on the location and performance of South differently withtraditional northern OFDI.Empirical tests also show the applicability of the mechanismof OFDI from the South. Based on these findings,the paper provide policy advices on thebehavior and performance of OFDI from the south.According to the above thought and methods, this thesis includes six chapters.Chapter1introduces the research background, thoughts, relative concepts and maincontributions. Chapter2systematically outlines the theoretical and empirical literature oninstitutional distance and OFDI. Chapter3investigates the new features and uniquecompetitive advantages of southern MNCS, theoretically analyses the impacts ofinstitutional distances on the location of southern OFDI,institutional initiatives ofsouthern OFDI,and differentiating mechanisms of "south-south OFDI" from that of"south-north OFDI".Chapter4examines modes and impacts of regulative as well asnormative institutional distances on OFDI location with cross-country panel data. The result demonstrates that OFDI from the South has a systematically different pattern thanOFDI from the North.Institutional distance has an asymmetric effect on FDI dependingon whether investors choose countries with better or worse institutions. Chapter5develops a series of hypotheses on the influences of regulatory and normative institutionson the performance of Chinese firms after their cross border acquisitions theoreticallyand empirically.The difference in difference empirical results confirm that regulative andnormative intuitional distances have significantly improved the operational performanceof Chinese firms several years after their cross border acquisitions.Chapter6concludesthe main points of the paper and provides practical suggestionsThrough theoretical and empirical analysis, the findings are the followings:First, we demonstrate that OFDI from the South has has a systematically differentpattern than that from the North. OFDI stemming from the South has a more importantlyregional exposure, as common border and common language appear to be significantlyimportant for the southern investors. Normative institutional distance impacts locationand performance of OFDI from the south and north with no difference.Secondly, North are repelled not just by bad institutions, but by institutionaldifferences between home and host countries. Northern investors prefer investing intocountries with institutionally similar environments and avoid countries with much worseor much better institutions.Thirdly, the relationship between OFDI and institutional distances is more complexfor the south:When investors from the South that choose countries with the best possibleinstitutional environment and, in this case, appear not to be deterred by an “institutionaldistance”. Such large institutional difference is a driving force for the “asset-seeking”nature of OFDI, as southern investors acquire new technologies, brands, and intellectualproperty. Despite unfamiliarity, such an institutional environment is the most transparentfor potential strategic assets due to the low corruption, sound property rights, andpolitical stability.Fourthly, when investors from the South that choose countries with a similar institutional environment, these investors have a comparative advantage due to theirexperience of once working with poor institutions at home which helps explain thephenomenon of "South-South FDI".Fifthly,although investors from the south often invest in countries with similarlypoor institutions, they are usually deterred by institutions that are much worse than athome. Yet there is an important exception to this rule. The negative effect of very poorinstitutions is systematically outweighed by the appeal of natural resources, whichappears to be a very important force behind OFDI from the south.Sixth,the acquirer voluntarily bootstraps itself to the higher governance standardsof the target, resulting in a positive valuation impact for the acquirer.Post-acquisition performance improvement is interrelated to time. Learning effect plays amain role three years after Chinese firm’s cross border acquisitions.The financial ratios ofChinese Firms improves about three years after their cross border acquisitions.Seventh, Multinational business is subjected to the constraints of the humanisticenvironment of the host countries’ ideology, values and accepted social customs.Thesefactors determine the public responsibilities foreign affiliates need to take and thecorporate advantages to play. Foreign investors confuse on the local social norms andhabits, which deters the establishment and maintenance of legitimacy in the multifacetedhost environment. Failures of the internal institutional integration and externalrelationship network consolidation accrete operating costs, and erode the performance offoreign firms ’cross border acquisitions.Thus foreign investors failed to achieve thesynergistic effect.