Essays on China's Outward Foreign Direct Investment

Abstract

China has witnessed tremendous economic growth since the well-known economic reforms that started in 1978. One of the most crucial policies of this economic reform, the “open up” policy, made China open its economy to the world. With the implementation of the “go global” policy in 2000, and both the establishment of the Asian Infrastructure Investment Bank and the proposal of the Belt and Road Initiative in 2013, China now seems to be taking a bigger role in the global economy, and engaging more in foreign trade. China has now become the world’s largest foreign direct investment (FDI) recipient country; as well, it is one of the countries with the largest outward direct investment (ODI) in the world. The recent significant increase in China’s ODI amount has raised the awareness of scholars and policymakers alike. However, China’s ODI behavior has not been investigated to the same extent as in the literature on Chinese FDI inflows. Undertaking a comprehensive analysis to explain China’s ODI behavior is therefore important. This thesis documents four studies. The first study descriptively analyzes the characteristics and pattern of China’s ODI. The second investigates the conventional determinants of China’s ODI in both full sample and sub-samples. The third examines the impacts of corporate governance on ODI from a macro-perspective. The fourth, which shifts from a macro- to a micro-perspective, investigates how firm-level corporate governance influences FDI decisions on China’s firms. The descriptive analysis on China’s ODI delivers an overview of the China’s FDI policies, including both outward and inward FDI flows. In addition, a detailed description of the locational distributions of China’s FDI and dominant industrial sectors of FDI is provided in order to better understand the motivations of China’s ODI. To empirically investigate the determinants of China’s FDI, this research uses pooled ordinary least squares and random effects methods to estimate the models for a comprehensive set of 171 countries. Results suggest that market size, export, and natural resources variables are strongly related to the Chinese ODI flows and stocks. This indicates that Chinese ODI decisions are driven by both market-seeking and resource-seeking motivations. The results from the sub-sample period test, which lend even stronger support to the resource-seeking motivation for ODI, show that China’s export and ODI are complimentary. Consistent with sub-sample period tests, sub-group results indicate that the principal purposes of having China’s ODI in the top 100 countries are natural resources explorations and production line replacements. The research also undertakes an empirical study addressing the role of corporate governance on China’s ODI at a national level, using the Kaufmann, Kraay, and Zoido (1999) dataset covering the period 2003-2012. Results suggest the effects of macro-corporate governance are distinct in different sample periods, as well as in geographical and economic regions, when attracting China’s ODI. Indicators such as political stability, the absence of violence, regulatory effectiveness, regulatory quality, the rule of law and the control of corruptions are found to be positively related to China’s ODI. To examine the impact of firm-level corporate governance on China’s ODI, a sample from 2009 to 2015 of Chinese listed firms with panel regression is utilized. Results suggest that ownership concentration, share ownership and executive compensation influence Chinese ODI decisions and that they are positively associated with ODI in both full-sample and sub-sample estimations. These findings show that corporate governance is a vital mechanism for motivating managers to adopt the ODI strategy. The significance of share ownership indicates that managers are encouraged to make long-term decisions such as internationalization. This research contributes to the empirical studies on FDI flows from China. Most existing ODI studies stem from both a macro-economic perspective and the motives of host countries investing overseas; this thesis, which stems from both macroeconomic and microeconomic perspectives, analyzes China’s ODI pattern and characteristics through an empirical analysis of China’s ODI determinants. The impact of both macro country-level corporate governance and firm-level corporate governance on China’s ODI is investigated. China’s FDI inflows and outflows policies, the development of FDI and the pattern of China’s FDI, including FDI geographical and sectoral distributions, are analyzed. The findings and analysis in this research contribute to an evaluation of motivations behind China’s FDI since both amount and composition of Chinese ODI have undergone a rapid change during last decade. The research uses aggregate-level data including a broad sample of 171 developing and developed host countries to provide an empirical investigation of the motivations for China’s ODI. The comprehensive dataset allows a recent examination of motivations behind China’s outbound FDI flows. Reliable empirical findings derived from the thesis could lead to valuable and important recommendations being made to the Chinese and host country’s government, as well as to policy makers. The research also adds to the relevant literature as it utilizes the well-developed governance structure index to empirically analyze the impact of governance structure on China’s ODI decisions. The Kaufmann, Kraay, and Zoido (1999) dataset is used to measure country-level corporate governance. This research differs from previous studies examining the impact of governance structure on the ODI because of the utilization of this database. The Kaufmann, Kraay, and Zoido (1999) dataset contains indicators which are not used in the literature on China’s FDI literature, such as indices measuring the level of corruption and regulatory environment. This research not only uses macro-level data to investigate whether a country’s corporate governance influences China’s ODI, but also attempts to study the impact of firm-level corporate governance on ODI from China by using the micro-level dataset for the period 2009-2015. This recent micro-level dataset provides new understandings on China’s ODI pattern, compared to previous studies which use aggregate-level data. This study, one of the first to examine corporate governance effects on China’s FDI strategies, integrates the framework which combines both agency theory and international business theories. Adopting the integration theory model helps to provide new insights into how firm-level corporate governance indicators affect ODI strategies.