Foreign direct investment with Chinese characteristics: A middle path between Ownership-Location-Internalization model and Linkage-Leverage-Learning model

Abstract

The majority of multinational enterprises (MNEs) traditionally originate from developed countries. In the last ten years, however, there has been dramatic growth in foreign direct investment (FDI) from China. It is a comparatively new phenomenon that challenges the classic FDI theories. In this paper, we review the pros and cons of two important theories, known as the Ownership-Location-Internalization (OLI) model and Linkage-Leverage-Learning (LLL) model, and use the statistical data and company case studies from China to test the plausibility of these two models. We believe that neither of them suits totally: the OLI model is quite useful for understanding FDI from China to developing economies, while the LLL model is more powerful for explaining the FDI to developed economies. We argue that the companies from China attain a very advantageous position as intermediates in the global economy. They may catch up with the first movers if they integrate OLI-led and LLL-led FDI within one firm. This combination can bring together the most advanced knowledge acquired in developed economies with the knowledge about adaptation needs and the needs for cost reduction in production as expressed in developing economies. It may also accelerate the knowledge transfer globally. We thus fill a gap in research into the geographical pattern of Chinese FDI and offer a deeper understanding of the internationalization of Chinese MNEs and revolving knowledge transfer.