What motivates Chinese multinational firms to invest in Asia? Poor institutions versus rich infrastructures of a host country

Abstract

What explains the phenomenal rise in China's outward foreign direct investment to the regional economies of Southeast and East Asia? In order to answer the question, we examine the relative efficacy of two contrasting approaches for explaining the upsurge in outward foreign direct investment – namely, the place-based approach of economic geography vis-à-vis the pollution haven hypothesis. We use China's outward foreign direct investment in a sample of 12 Southeast and East Asian countries, over the period 2003–2018, to arrive at the following results. First, as suggested by economic geography, regional infrastructures - such as mobile phone telecommunication, fixed broadband, and electricity infrastructure - played a crucial role in encouraging Chinese multinational firms to invest in Asian countries, while telephone telecommunication had a quadratic effect. Secondly, institutions' effects are complex. For instance, political stability in host countries promoted China's outward foreign direct investment in the Asian region before 2009 became a deterrent in the post-2009 era, while other indicators of quality of institutions (e.g., voice and accountability and regulatory quality) acted as barriers for the Chinese overseas foreign direct investment (OFDI) throughout the whole period. Thirdly, we find that the pollution haven hypothesis is untenable for the chosen countries. Fourthly, a significant pull factor for the Chinese OFDI is environmental quality of host countries.