Study Of Multinational Corporations’ FDI Investment Mode Choice Based On Host Country’s Country Risk

Multinational corporations’ foreign direct investment (FDI) mode is one of thefocuses in the international business field. Scholars, according to different researchpurposes, classify FDI investment mode into two kinds, one is market entry mode,including Greenfield investment and transnational mergers and acquisitions (M&A),and the other is equity entry mode, including joint venture and wholly-owned pattern.So far these two types of FDI investment mode are studied separately, but in factwhen multinational corporations (MNCs) choose their market entry mode they alsohave to consider the equity mode. From the perspective of the country risk MNCs face,this paper combines the two types of FDI investment mode by putting the country riskfactor into the MNCs’ investment decision-making game model with the technologytransformation factor. This paper develops a Cournot model and finds that themultinational companies tend to choose a higher controlling stake to manage andcontrol the technology transformation cost effectively. Given a technologytransformation cost level, it depends on the difference of the country risk these twokinds of market entry mode facing for the MNCs to choose the Greenfield investmentor M&A. When risk is high, multinational companies tend to choose Greenfieldinvestment. When the country risk reduces, multinational companies tend to takewholly-owned pattern in both market entry modes so as to maximize their profit.In this paper, some of the model analysis conclusions were tested empirically.Using a panel data of82countries and regions, I found that multinational firmschoose M&A more in a lower political risk country, and are more likely to chooseGreenfield investment in a higher political risk state. Using the data of multinationalcompanies’ direct investment in China’s30provinces, this paper shows that thechange of MNCs’ equity investment mode, especially the emergence of wholly-ownedpattern, is the result of our country risk’ reduction. MNCs’ investment strategy inChina is a progressive process from the joint venture to wholly-owned pattern withthe risk reduction. This strategy countermeasures the investment risk in the earliereffectively. After jointed into WTO, China’s foreign direct investment grows rapidly.Risks and opportunities coexist in the overseas market, along with the high growththere is a large amount of investment loss. With the MNCs’ successful equityarrangement in China as a comparative analysis, this paper holds that in order to invest successfully and to ensure the quality of the "going out" for our country’senterprise, it is crucial to manage and control the investment risks effectively.