‘Treat with caution: Foreign direct investments by state-owned multinational enterprises– unique creatures in Central and Eastern Europe context’

State-owned enterprises (SOEs) are commonly associated with undue advantages due to preferential treatment by the state. Simultaneously they are often quoted as handicapped given the notorious state interference, management problems and agency tensions. They used to be regarded as a mainly domestic issue but in the context of globalisation and the fact that states enter treaties with new obligations, SOEs’ performance ceased to be solely a domestic problem, increasingly so as state-owned multinational enterprises (SOMNEs) emerge. This article presents the results of research on Polish SOEs’ outward foreign direct investment (OFDI). It offers an overview of overseas activities of nine major Polish firms with a state stake and aims to contribute to the conceptual literature on foreign investments conducted by SOMNEs. We distinguish between FDI by SOMNEs as specific – privileged (facilitated) or discriminated (hampered) – investments subject to the home country’s state power and the host country’s state perception.

I. Introduction Foreign direct investment (FDI) has long been exercised by multinational enterprises (MNEs) from industrialized countries. However, during the 1980s and 1990s some developing countries, especially the newly industrialized economies (NIEs) in East Asia, rapidly emerged as one of the major sources of world FDI flows (Suh and Seo 1997; UNCTAD 1995; Petri 1995). During this same period, annual flows of Korean outward FDI increased at an unprecedented pace. For example, Korea's total approved outward FDI, in nominal terms, increased by about 24-fold between 1985 and 2003: from US$219 million in 1985 to US$5,437 million in 2003. Manufacturing was the leading sector, representing almost 53 per cent of the total outward Korean FDI during this period. The trading sector was the next largest sector, with 24 per cent of the total amount (Korea Export-Import Bank 2003). In terms of factor intensity, labour-intensive manufacturing industries mostly relocated to developing countries, particularly ASEAN countries and China, while most Korean FDI conducted in industrialized countries was capital-intensive manufacturing (Tcha 1998). Such a rapid increase in outward FDI has raised some concern among policy-makers and researchers, primarily about the impact of outward FDI on the domestic economy, and potential welfare implications. (1) One major impact of outward FDI is the trade effect, particularly on the exports of a home country. As for the relationship between FDI and trade, theoretical arguments have been made that the two complement or substitute each other. Earlier theoretical efforts, like Mundell (1957), highlight the trade-substituting nature of FDI, and more recent efforts tend to favour FDI being trade-complementing (Markusen 1983, 1984; Helpman 1984, 1985; Helpman and Krugman 1985; Kojima, 1978, 1991 among others). As Petri (1995) and Pfaffermayr (1996) argue, however, the relationship is not predictable because the trade impact of FDI can be influenced by a range of factors, such as firm strategies, motivations for FDI, and government policies. Therefore, the relationship between FDI and trade remains a subject requiting empirical investigation. There is a mixture of results from empirical studies of FDI on home country exports. Some, like Mundell (1957) and Svensson (1996), found FDI had a negative effect on home country exports. Others found outward FDI had a positive effect on exports: Lipsey and Weiss (1981), Helpman (1984), Grossman and Helpman (1989), Lin (1995), Pfaffermayr (1996), Lim and Moon (2001), KOTRA (1997), Hejazi and Safarian (2001). More recently, Lewer and Terry (2003) demonstrate in their evaluation of the impact on trade stemming from capital account liberalization, that foreign capital in general--and FDI--have strong trade creating effects. In this paper, we study the trade impact of Korean outward FDI in four major ASEAN countries. Lim and Moon (2001) have shown the trade impact of FDI using Korean firm-level information. However, their study tends to show foreign affiliates' inclination to export back to the home country, as do other firm-level studies, rather than the trade-creating or displacing effects of FDI. This arises because they did not control for other trade-affecting factors, such as income and prices. Furthermore, firm-level studies ignore the possibility that foreign affiliates in a host country may drive out local firms in an export-oriented industry. In this case, a foreign affiliate's exports may not necessarily be complementing a home country's exports. Therefore, other trade-related variables need to be appropriately controlled in this type of analysis. In the next section, we discuss the theoretical background as to how FDI and trade are potentially related. In section III, a simple econometric model is constructed to empirically investigate the relationship between FDI and trade. The model is set to consider the impact of outward FDI on exports and imports separately, while taking into account country-specific fixed effects. …

Purpose: This paper's research objective was to determine if the scale of outward foreign direct investments (OFDI - outward FDI) from Central and Eastern Europe (CEE) countries is determined by the key home country's institutional factors. Design/Methodology/Approach: To achieve the assumed research aim, an econometric power panel model illustrating the interdependencies between the natural logarithms of the CEE countries' outward FDI per capita stocks values and the levels of natural logarithms of their explanatory variables, which were the key home country's institutional factors, during or at the end of the years 2004-2018, that constituted a balanced data panel, were used. The slope coefficients of the model indicated the percentage change the dependent variable (i.e., the value of the OFDI stocks of CEE countries growth pace) changes if a given exogenous institutional variable decreases or grows by 1.0%, which enables to determine if the scale of outward FDI from the CEE region was significantly determined in the examined period by the considered key home country's institutional factors. Findings: The empirical results show that the home country's institutional factors determine OFDI stocks' scale from the CEE countries. Practical Implications: Improving the quality of the institutional environment of the country of origin of FDI would contribute to increasing the scale of foreign capital expansion of enterprises from the CEE region. Originality/value: The conducted study enabled to indicate the key directions of possible future improvements in the institutional environment of CEE enterprises, which would enable to significantly increase the scale of their foreign capital expansion, which would result in the growth of their exports that in turn would result in their further economic development, which was the case of many other well developed, as well as emerging economies. Such a result would contribute to the significant improvement of the effectiveness of the region's countries' economic and institutional policies in terms of supporting international economic cooperation.

In Central and Eastern Europe, outward foreign direct investment (FDI) has not yet become as a prominent factor in the region’s reintegration into the world economy as trade liberalisation used to be in the early 1990s or inward foreign direct investment is currently. In the terminology of the investment–development path, with the notable exception of the Russian Federation, the region is in stage 2, whereby inward flows are still growing faster than outward flows. This article argues that a combination of the latecomer status of the region’s transnational corporations and the transition shock can explain most of that laggard situation. It hypothesises that the enlargement of the European Union (EU) would give a major push to the outward foreign direct investment flows of Central and Eastern Europe (CEE), on condition that adequate government policies to promote those investments are put in place. The impact on the investment–development path, however, is uncertain, because accession to the EU is often accompanied by a surge in foreign direct investment inflows, too. Finally, the article also looks at the options available to deal with the specific problems of the Russian Federation in relation to capital flight, including ways of regularisation and potential return to the home economy.

China’s outward FDI reached a peak in 2016, making it as important a foreign investor as Germany, France and the United Kingdom. In this paper, we investigate the main motivations behind Chinese investments in developing countries, Central and Eastern Europe (CEE) in particular. Although the size of Chinese investment in CEE is small, the region is strategic for China as it is a gateway into Western Europe under the Belt Road Initiative. As new or future members of the EU, the CEE countries also provide access to the single market. We find that the motivations to invest in developing countries differ according to regions. Based on outward FDI data provided by the Chinese authorities, the number of Chinese FDI greenfield and M&A projects from Financial Times and Zephyr respectively, as well as face-to-face interviews with companies with investments in CEE, we find that for the case of CEE, domestic markets, access to the larger EU market, strategic assets like technology and prior relationship with the CEE are main reasons for investing.

This chapter examines how multinational enterprises (MNEs) headquartered in the region or investing from outside manage their production capacities in Central and Eastern Europe (CEE) through inward and outward foreign direct investment (FDI), or other forms of engagement of those firms in host countries. It shows that Western and intra-regional MNEs adjust their strategies to local conditions dictated by the regulatory framework of individual host countries, the availability and quality of local business partners, and the quality of available skills and infrastructure. It points at different ways through which local and international MNEs adapt their production plans to a context that in the bulk of the region can be called “post-transition.” These choices in turn affect the decisions that different types of MNEs take in locating various parts of their value chains in the region, and their strategies vis-à-vis the upgrading or relocation of existing capacities.

Does state ownership facilitate outward FDI of Chinese SOEs? Institutional development, market competition, and the logic of interdependence between governments and SOEs

State-owned (SO) multinational enterprises (MNEs) from emerging economies face two contradictory effects on their foreign operations due to their linkage with their home-country governments. Although home governments provide SO MNEs with resources, the affiliation also exposes SO MNEs to the legitimacy challenges in the host countries. Given this theoretical debate, we propose that home government support may facilitate SO MNEs’ post-entry operations in the host markets. Furthermore, because the legitimacy pressures directed at SO MNEs may be contingent on the interstate relations between the host and home governments facilitated by China’s Belt and Road Initiative (BRI), the BRI cooperative relations may shift the effect of home government support. Using survey and archival data, we find that home government support has a positive impact on the foreign performance of SO subsidiaries. This effect is weaker in countries that are cooperating with the BRI than in those that are not. Moreover, institutional distance weakens the negative interactive effect between BRI cooperation and home government support on the performance of SO MNEs’ foreign subsidiaries. These findings extend the institutional perspective by highlighting an alternative source of legitimacy for MNEs with distinctive attributes and in various host conditions.

The inflow of foreign capital from multinational companies from all over the world, in the form of foreign direct investments (FDI), intensified economic dynamics and contributed to the improvement of macroeconomic performance. In certain economic sectors and activities, FDI has become the carrier of economic growth, encouraged by intensive processes of deindustrialization and reindustrialization. Namely, FDI can have both positive and negative impact on economic growth and development. This depends on the ability of the economic sectors to overcome the negative effects of FDI in a certain period of time, which can only be achieved if the sectors are exportoriented and introduce new technologies into their operations, thereby increasing productivity and competitiveness. Ordinary Least Squares (OLS) panel regression showed this was not the case in the primary and secondary sectors in the countries of Central and Eastern Europe (CEE) and the Western Balkans (WBs), which are still predominantly labor-intensive and therefore have a negative impact on economic development. As opposed to the agricultural and industrial sectors, the services, under the influence of technological progress, is profiled as a capital-intensive sector with a statistically significant positive impact on economic growth and development.

The European Union (EU) Member States in central and eastern Europe (CEE) witnessed a surge in outward foreign direct investment (OFDI) between 2000 and the start of the global financial crisis. This article investigates whether the European integration process altered the relative importance of host country location factors. In particular, we investigate to what extent knowledge‐seeking is a relevant investment motive, which has been documented as a key determinant for OFDI from other emerging economies. We apply a discrete choice approach to model foreign location choice of firms from CEE countries (CEECs) within the EU 27 (1996–2010). We find that the EU integration process is related with increasing importance of market access and less emphasis on labour cost advantages. We find heterogeneity in the valuation of foreign knowledge‐related assets. The location probability within the EU15 is positively associated with knowledge‐seeking. It also plays a role for technology‐intensive industries and larger firms.

In the current complicated and volatile international situation, maintaining the sustainable development of OFDI is critical to the economic recovery and growth of all countries. This study aims to examine the influence of foreign direct investment (FDI) and migration on the sustainable development of outward foreign direct investment (OFDI), the moderating effects of intellectual property rights (IPR) protection on the relationship between FDI and OFDI, and the relationship between migration and OFDI. Using the panel data of 85 countries from 2006 to 2018, we find that, globally, FDI positively affects OFDI and that the positive effect of FDI on OFDI is strengthened by the improvement of IPR protection. Migration negatively affects OFDI, and the influence of IPR protection on the relationship between migration and OFDI is not statistically significant. The study shows that in high-income countries, FDI positively affects OFDI, and IPR protection positively moderates the relationship between FDI and OFDI. For upper-middle-income countries, FDI positively affects OFDI, and IPR protection negatively moderates the relationship between FDI and OFDI. For lower-middle and low-income countries, the influence of FDI on OFDI is not statistically significant. Moreover, the influence of migration on OFDI is not significant in high- or upper-middle-income countries. For lower-middle and low-income countries, migration negatively affects OFDI, and IPR protection positively moderates the relationship between migration and OFDI.

The close development of the economic relations between China and Central and Eastern Europe (CEE) since 2012 has triggered the European Union’s criticism of China’s foreign policy towards Eastern European countries. The European Union believes that China’s investment growth has led to a governance crisis in CEE countries. Based on the global governance indicators of the World Bank and the outward foreign direct investment (OFDI) data of the Ministry of Commerce of China, this paper conducts a test using the panel data model and the regression discontinuity method. An imbalanced panel dataset is adopted, covering 16 CEE countries from 2000 to 2018. The empirical research results indicate that, representing a small proportion of the investment inflows to CEE countries, China is not yet able to exert a domination effect on the region, and China’s economic power is far less than the European Union’s regulatory influence. Furthermore, China’s share of the OFDI in CEE has a U-shaped effect on the regulatory quality of host countries, and the two have a mutually causal relationship. Specifically, the impact on the host country’s regulatory quality is first manifested in the Shanghai effect, and when China’s share reaches a certain level, it is manifested in the California effect. The U-shaped effect is associated with the strategic factors of CEE countries and China’s positive contribution to good global governance.

Essays on China's Outward Foreign Direct Investment

This paper presents a systematic literature review on the relationship between outward foreign direct investment (OFDI) and technological upgrading in Chinese state-owned enterprises (SOEs), emphasizing the moderating role of political ties and subnational institutions. Analyzing 51 core papers from 2011 to 2022, the study synthesizes key theories on how political ties influence Chinese SOEs’ technological upgrading through OFDI. It also finds that political ties affect motivations and resources of SOEs with various types of state ownership and thus affect their OFDI strategies and innovation capabilities. This research further explores the impact of subnational institutions and their interactions with political ties. The findings underscore the perspective that subnational institutions shape a firm’s learning capability, and their impact is moderated by SOEs’ political ties. Finally, the study identifies key issues in SOEs’ technological upgrading through OFDI and offers valuable insights for policymakers and SOE managers. Future research directions are outlined to understand the impact of OFDI on the technological upgrading of Chinese SOEs.

Encouraged by the going out” policy in 2001 and the Belt and Road initiative in 2013, China’s outward foreign direct investment (OFDI) has spurred since the beginning of this century. For example, in 2016, the figure from Statistical Bulletin of China’s OFDI shows that China has become the world second largest OFDI source country after USA, with the outflow of OFDI reaching to 196.15 billion USD. However, with thousands of Chinese firms investing overseas, especially for those OFDI conducted irrationally and blindly, the risk of high leverage resulting from the failure of OFDI not only increase the pressure of repayment of debts, but also might infect national financial institutions, increasing the financial risk of national finance sector. There exists optimal leverage in firms, that is, targeted leverage, and therefore, whether the leverage for a firm is appropriate not only requires the focus of actual leverage, but also excess leverage, which is the deviation of actual leverage from targeted leverage. Extant literature shows that in China, targeted leverage varies with the ownership. Or precisely, state-owned enterprises (SOEs) have higher targeted leverage due to the implicit guarantee. Thus, firms with different ownership vary in excess leverage. Based on the above analyses, this paper examines the relationship between OFDI and excess leverage from the perspective of ownership.Taking China’s A-share listed firms from 2007 to 2015 as a sample, this paper shows that NSOEs with OFDI are more likely to have excess leverage than SOEs, and the higher the government level of SOEs, the greater the difference of excess leverage. Using OFDI samples, this paper also finds that the difference of excess leverage between NSOEs and SOEs only exists in the target technology seeking of OFDI. Further tests on the economic consequence of OFDI, the nature of property rights and excess leverage show that the excess leverage of NSOEs with OFDI compared with SOEs will reduce the enterprise value; during the period when government departments strengthen the risk supervision events of OFDI, the market reaction of NSOEs with excess leverage is worse than that of SOEs.This paper extends the research of OFDI’s leverage from the relationship between OFDI and leverage level to the relationship between OFDI and excess leverage, enriches the research in this field, and provides policy enlightenment for the government and financial institutions to assess the leverage risk related to OFDI and strengthen supervision. This paper finds that the excess leverage of NSOEs with OFDI will reduce the value of enterprises. Therefore, the government should pay attention to the excess leverage of NSOEs with OFDI, prevent the decline of enterprise value from causing its debt repayment crisis, and causing the financial risk of financial institutions.