To Escape or Not: How Does Institutional Constraints and Support Affect Chinese Firms’ OFDI?

Abstract

This study explores how China’s regulative, normative, and cognitive institutional constraints and support affect its firms’ outward foreign direct investment (OFDI) strategies at the subnational level. Our model assumes that the main motivation for firms’ OFDI is to escape the home country’s institutional constraints. Moreover, the institutional support of the home country’s government works as a moderator that accelerates the speed at which firms escape. We collected 26,411 firm-year observations, including 7,098 FDIs conducted by 2,401 firms between 2007 and 2017. The logit and panel regression analysis methods measure the effect of institutional constraints and support on Chinese firms’ OFDI. The results show that institutional constraints positively affect Chinese OFDI, confirming that the higher the institutional constraints in China are, the more likely it is that the firm will escape, and as the constraints increase, the faster they will do so. The institutional support for domestic development has positive effects on Chinese OFDI, which is contrary to expectation, while institutional support for internationalization has a positive effect on Chinese OFDI. Additionally, institutional support for domestic development and internationalization positively moderate the relationship between institutional constraints and the speed and number of OFDIs. This study analyzes the concept of “escape OFDI” empirically by examining the effects of subnational institutional constraints on OFDI activities at the firm level. This study advances the understanding of the motivations for OFDI activities by recognizing the existence of both institutional constraints and support in shaping the internationalization strategies of firms from developing countries, thus addressing an important gap in this field. Furthermore, it is a novel attempt to examine the impact of these two kinds of support on firms’ OFDI, which provides a new lens for understanding the internationalization of firms from developing countries.