Dimensions of international expansions by US firms to China: Wealth effects, mode selection, and firm-specific factors

Abstract

China's recent efforts to attract foreign investment have been viewed favorably by US firms, who have explored a variety of strategies for expanding to China. This paper provides evidence related to a comprehensive set of strategies used by US firms to expand to China. For the 302 announcements of expansion by US firms into the Chinese market, several firm-specific factors are found to affect both the choice of mode entry and the reaction of investors to the announcement of the expansion. The results suggest that firms with a high investment in proprietary assets prefer foreign direct investment (FDI) modes to non-FDI modes, as do firms with high levels of geographic diversification. Firms entering the Chinese market utilize non-FDI modes, while those who have established a presence in China prefer FDI modes. The reaction of the stock market to expansions to China is positive; average excess returns of 0.75% are observed for the two days surrounding the announcement. Both FDI and non-FDI categories of expansion have statistically significant excess returns. Analysis by mode of expansion shows that expansions through joint ventures (JVs) and contracts are the most desirable alternatives. Other modes of expansion do not result in significant excess returns. Finally, a firm's prior financial performance has a significant influence on its ability to profitably expand to China.