Institutional Risk Preference and Asymmetric Role of Institutional Distance: An Examination on the OFDI of China

Yawei Qi,Guangping Rao,Daqing Gong

doi:10.1155/2021/3506404

Abstract

With the implementation of the “Going Out” policy and the “Belt and Road” initiative, Chinese outward foreign direct investment (OFDI) in the countries along the “Belt and Road” increased substantially in the past decade. This paper analyzes the impact of institutional distance on Chinese OFDI and whether Chinese OFDI exhibits institutional risk preferences, using data on Chinese OFDI in 41 countries along the “Belt and Road” for the period from 2003 to 2018. We find that political institutional distance and economic institutional distance are both positively related to China’s OFDI scale, while cultural distance has a negative impact on the investment scale. We also find that institutional distance has an asymmetric effect on China’s OFDI. In particular, the worse the host country’s political environment, the larger the Chinese OFDI, indicating that Chinese OFDI exhibits the political institutional risk preference. On the other hand, Chinese multinational enterprises are more willing to invest in host countries with high economic freedom. Culture institution environment of the host country has a positive but insignificant impact on the Chinese OFDI scale, indicating that Chinese OFDI shows the characteristics of cultural distance proximity.

Highlights

With the continuous development and implementation of the “Going Out” policy, China’s outward foreign direct investment (OFDI) has risen rapidly in the past decade
Using the two-stage Heckman model with trade gravity, we find that large political distance reduces the willingness of Chinese multinational enterprises (MNEs) to invest abroad, but once investment decision is made, the amount of Chinese OFDI is positively related to political distance
Based on the theory of institutional arbitrage, Li and Hu [33] believe that institutional constraints and lack of institutions during the institutional transition period are important reasons why China’s OFDI is highly concentrated in tax havens. ere are institutional arbitrage motivations when companies carry out OFDI activities, and institutional arbitrage and policy support have weakened the influence of conventional factors such as geographic distance, cultural distance, economic distance, and political risks on the OFDI location selection and geographical distribution of Chinese MNEs. us, we propose Hypothesis 1

Summary

Introduction

With the continuous development and implementation of the “Going Out” policy, China’s outward foreign direct investment (OFDI) has risen rapidly in the past decade. In the twenty-first century, under the background of the new international trade and investment rules, the political risks and institutional preferences faced by Chinese state-owned enterprises have undergone structural changes. This paper constructs a Heckman two-stage model with trade gravitation to analyze the impact of institutional environment of the host country and bilateral institutional distance on China’s OFDI. E remainder of this paper is structured as follows: In Section 2, we explore the interrelated theories and propose the related hypothesis; Section 3 takes China’s OFDI to 41 countries along the “Belt and Road” from 2003 to 2018 as a sample and builds Heckman model with trade gravity; Section 4 is empirical results, used to analyze the impact of host countries’ institutional quality and institutional distance on OFDI decision-making and scale; Section 5 is conclusions and related suggestions

Hypothesis Development

Model and Variable Selection

Empirical Model

Empirical Results

Conclusions