Revisiting the OLI Paradigm: The Institutions, the State, and China’s OFDI

Abstract

Existing theories fail to explain the fast-growth of OFDI by Chinese firms even under the institutional disadvantages, and studies on the role of the state in changing the OFDI landscape lack a systematic framework. Our previous work (Ren, Liang, and Zheng, 2011) has built up a theoretical institutional framework which identifies the formal institutional determinants such as policy, bureaucratic administration and government ownership, as well as the informal institutional determinants such as state ideology and national pride through which the state changes Chinese firms’ ownership, location, and internalization (OLI) advantages and promote their OFDI activities. In this paper we supplement that predefined framework by further looking at the impact of direct FDI policy schemes, macroeconomic policy schemes, and the state-controlled financial intermediations. Through modifying the OLI paradigm by incorporating the role of the state, we try to link our theory to the recent occurrences in China’s OFDI activities. This paper, along with our previous paper (Ren et al., 2011), aim to combine three streams of literature on institutional theory, political economy and international business by incorporating the analysis of the role of the state into Dunning’s OLI paradigm, to explain the specific OFDI patterns by Chinese firms in the recent decades. Under our modified OLI framework we also examine the potential concerns surrounding these state-backed OFDI, such as political conflicts and the round-trip money motivation. Our study contributes in bridging the gap between institutional analysis and FDI theories, and enhancing our understanding on the trajectories through which the state influences Chinese firms’ OFDI. It also draws attention to several most recent discussions such as the OFDI of China’s banking sector and the impact of appreciation of Renminbi on Chinese firms’ international investment. In the end we raise the debate on how should we perceive China’s fast-growing OFDI and the social responsibility of Chinese economics and management scholars in interpreting its long-term sustainability.