The Influence Of Institutional Distance On The Efficiency Of China’s OFDI

During the visit to Central Asia and Southeast Asian countries in September and October 2013,President Xi proposed major proposals for the construction of the "Silk Road Economic Belt" and the "the 21st-Century Maritime Silk Road"(hereinafter referred to as "the Belt and Road").With the proposal and solid progress of " the Belt and Road" strategy,China’s foreign direct investment in countries along " the Belt and Road " has increased rapidly.ASEAN,with its superior geographical location,relatively safe and stable political and economic environment,relatively open market conditions and considerable potential market capacity,has become the focus and priority area for China to carry out "the Belt and Road" strategy.However,some scholars have suggested that China’s direct investment in some countries along "the Belt and Road" is inefficient and has more room for improvement.Is China’s direct investment in ASEAN also inefficient? With the deepening of the research on investment efficiency,the unpredictable and uncertain cost in the investment process has gradually become the main factor affecting the inefficiency of foreign direct investment.And the institutional distance is the main reason of the uncertain cost in investment.Therefore,it is necessary to analyze the impact of institutional distance on the efficiency of OFDI,so as to better understand the reasons for the inefficiency of OFDI and improve the efficiency of China’s OFDI.Based on the stochastic frontier gravity model,this paper measures the institutional environment in China and the host countries by using the data in the World Governance Index,the International Country Risk Guide and the Corruption Perception Index,and measures the institutional distance by using the distance indexes of Kogut and Singh(1988),to study the influence of institutional distance on China’s direct investment in ASEAN countries,and then to get the influence of institutional distance on China’s direct investment efficiency in ASEAN countries.The conclusions are as follows: China’s direct investment in ASEAN countries is inefficient.The main cause of inefficiency is the institutional distance between China and the host country,including the distance between law and order,corruption control,democratic accountability,ethnic tension and religious tension.The distance between political stability and regulatory quality of the two countries have no significant influence on China’s direct investment in the host country.The distance between law and order and the degree of democratic accountability have a positive impact on the efficiency of China’s OFDI.The distance between corruption control,ethnic tension and religious tension has a positive impact on China’s OFDI.At the end of this paper,some pertinent suggestions are given for both enterprises and the government.At the enterprise level,first of all,when Chinese enterprises making direct investments in ASEAN countries,they need to understand the institutional differences between the host country and China,be familiar with the institutional environment of the host country,consider the uncertain costs brought by institutional distance and aviod it.Secondly,enterprises need to pay special attention to countries with low investment efficiency,such as the Philippines,Malaysia,Indonesia and so on.Although the frontier value of investment in these countries is relatively larger than the actual value,there are many " Troubled Transactions " in China’s investment in these countries,which involve a large amount of money and greate risks,especially in the energy industry,the metal industry and the transportation industry.At the government level,firstly,the Chinese government can try to further develop mutually beneficial and win-win bilateral diplomatic relations with the host countries with lower investment efficiency,sign or re-sign targeted agreements,so as to reduce the uncertain costs of transnational investment brought by institutional distances such as laws and policies,to improve the efficiency of China’s foreign direct investment;Secondly,the Chinese government can popularize the institutional distance between China and the host country to multinational enterprises,and provide multinational enterprises with more high-quality and detailed investment guidance documents,such as "Guidelines for Countries(Regions)of Foreign Investment Cooperation".To reduce the situation that enterprises are afraid to invest because they do not understand the institutional distance between the two countries,and reduce the situation that investment projects are blocked because they do not understand the institutional distance between the two countries.