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Foreign bank entry and the outward foreign direct investment of companies: evidence from China

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Abstract

Globalization is motivating many emerging market firms (EMFs) to expand operations through outward foreign direct investment (OFDI). General FDI theories, such as internalization theory and the OLI paradigm, are based on industrialized countries, leading to inevitable gaps in explaining the OFDI activities of EMFs. We extend the literature by establishing a connection between international finance and the internationalization of EMFs. We argue that foreign banks operating in emerging markets offer a diverse set of resources that can help EMFs expand globally. Under gradually easing foreign bank entry restrictions in China, utilizing a panel dataset of Chinese listed companies spanning 2001–2018, we find a positive association between foreign bank entry and the OFDI activities of Chinese companies. The identified channels include direct loan support from foreign banks, information support from foreign banks’ global branch networks, a high level of internationalization, and close proximity to local companies, as well as loan support from domestic banks under foreign bank competition. The entry of foreign banks particularly stimulates OFDI in non-state-owned, higher profitability companies, in medium-sized, low financial marketization, and node cities designated in the Belt and Road Initiative. These findings provide new insights into emerging market financial openness and the internationalization of EMFs.

Plain language summary

In a world where businesses are progressively expanding beyond their boundaries, understanding the elements that motivate companies to invest overseas is essential. One aspect that has not been deeply investigated is the connection between the existence of foreign banks and the international investments of companies, especially in developing markets. This study investigates how the internationalization of banks can affect the outward foreign direct investment (OFDI is a business strategy where a domestic firm expands its operations to a foreign country either via a Greenfield investment, merger/acquisition and/or expansion of an existing foreign facility) of domestic companies. The research concentrates on China as an example, studying the period after China’s admission into the World Trade Organization in 2001, which resulted in a surge of foreign banks. The study employs a difference-in-differences methodology (a statistical technique used in econometrics to measure the effect of a specific intervention or treatment), comparing the OFDI activities of Chinese firms before and after foreign banks entered their cities. The dataset comprises information on the entry of foreign bank institutions into China from 2001 to 2018 and their impact on Chinese OFDI. The study reveals that the entry of foreign banks into Chinese cities positively affects the OFDI of Chinese firms. This influence happens through three primary channels: foreign bank loans, which provide extra capital for international investments; information intermediary functions, where foreign banks offer valuable insights into overseas markets; and increased competition, which encourages domestic banks to enhance their services and offer more support for OFDI. In conclusion, the presence of foreign banks appears to assist domestic companies in developing markets like China to grow internationally by providing financial support and reducing information barriers. This research suggests that policymakers should consider attracting foreign banks with robust international networks to support domestic firms’ global aspirations. The findings also imply that companies looking to invest overseas could benefit from building relationships with foreign banks that have a presence in their target investment destinations.

Résumé

La mondialisation incite de nombreuses entreprises des marchés émergents (Emerging Market Firms – EMFs) à développer leurs opérations grâce aux IDE sortants (Outward Foreign Direct Investment – OFDI). Les théories générales des investissements directs à l’étranger, telles que la théorie de l’internalisation et le paradigme OLI, sont basées sur les pays industrialisés, ce qui entraîne d’inévitables lacunes dans l’explication des activités d’OFDI des EMFs. Nous élargissons la littérature en établissant un lien entre la finance internationale et l’internationalisation de ces dernières. Nous argumentons que les banques étrangères opérant sur les marchés émergents offrent un ensemble diversifié de ressources qui peuvent aider les EMFs à se développer à l’échelle mondiale. Dans le cadre de l’assouplissement progressif des restrictions à l’entrée des banques étrangères en Chine, nous trouvons une association positive entre l’entrée des banques étrangères et les activités d’OFDI des entreprises chinoises, en utilisant un ensemble de données de panel de celles-ci cotées en bourse entre 2001 et 2018. Les canaux identifiés comprennent le soutien direct des banques étrangères en matière de prêts, le soutien en matière d’information provenant des réseaux mondiaux de filiales des banques étrangères, le degré élevé d’internationalisation et la proximité étroite avec des entreprises locales, ainsi que le soutien des banques domestiques en matière de prêts dans le cadre de la concurrence des banques étrangères. L’entrée de ces dernières stimule particulièrement les OFDI ​​dans les entreprises non publiques, à plus forte rentabilité, dans les villes de taille moyenne, à faible commercialisation financière, et dans les villes-nœuds désignées dans le cadre de l’initiative Belt & Road. Ces résultats apportent de nouveaux renseignements sur l’ouverture financière des marchés émergents et l’internationalisation des EMFs.

Resumen

La globalización está provocando que muchas empresas de mercados emergentes expandan sus operaciones mediante la salida de inversión extranjera directa (OFDI por sus iniciales en inglés). Las teorías generales de inversión extranjera directa, como la teoría de internacionalización, o el paradigma de propiedad, localización e internalización (OLI por sus iniciales en inglés), están centradas en países industrializados, llevando a brechas innegables al explicar las actividades de inversión extranjera directa saliente de las empresas de mercados emergentes. Ampliamos la literatura al establecer una conexión entre las finanzas internacionales y la internacionalización de las empresas de mercados emergentes. Sostenemos que los bancos extranjeros que operan en mercados emergentes ofrecen una serie de recursos diversos que pueden ayudar a las empresas de mercados emergentes a expandirse globalmente. Con la reducción de restricciones de entrada en China a bancos extranjeros, y usando una base datos panel de las empresas chinas listadas en bolsa que abarca entre el 2001 al 2018, encontramos una asociación positiva entre las entradas de los bancos extranjeros y las actividades de inversión extranjera saliente de las compañías chinas. Los canales identificados incluyen apoyo para préstamos directos de los bancos extranjeros, la información suministrada por las redes de bancos extranjeros de sus sucursales globales, un grado mayor de internacionalización, y una proximidad mayor a las empresas locales, también el apoyo a préstamos en bancos locales en el marco de la competencia con bancos extranjeros. La entrada de bancos extranjeros estimula especialmente la salida de la inversión extranjera en las empresas que no son de propiedad estatal, en las empresas más rentables, en empresas medianas y de bajo mercado financiero y las ciudades nodo designadas en la iniciativa de la iniciativa de la Franja y de la Ruta. Estos hallazgos dan nuevos aportes sobre la apertura financiera de los mercados emergentes y la internacionalización de las empresas de mercados emergentes.

Resumo

A globalização está motivando muitas empresas de mercados emergentes (EMFs) a expandirem suas operações por meio do investimento direto estrangeiro (OFDI). Teorias gerais sobre FDI, como a teoria da internalização e o paradigma OLI, baseiam-se em países industrializados, conduzindo a inevitáveis lacunas na explicação de atividades de OFDI de EMFs. Ampliamos a literatura estabelecendo uma conexão entre finanças internacionais e a internacionalização de EMFs. Argumentamos que bancos estrangeiros que operam em mercados emergentes oferecem um conjunto diversificado de recursos que podem ajudar EMFs expandirem-se globalmente. Sob a gradual flexibilização de restrições à entrada de bancos estrangeiros na China, utilizando um conjunto de dados em painel de empresas chinesas listadas abrangendo 2001 a 2018, encontramos uma associação positiva entre a entrada de bancos estrangeiros e as atividades de OFDI de empresas chinesas. Os canais identificados incluem apoio direto a empréstimos de bancos estrangeiros, suporte com informações sobre redes globais de sucursais de bancos estrangeiros, elevado nível de internacionalização e maior proximidade com empresas locais, bem como apoio a empréstimos de bancos nacionais sob concorrência de bancos estrangeiros. A entrada de bancos estrangeiros estimula particularmente OFDI em empresas não estatais de maior rentabilidade, em cidades médias e de baixa comercialização financeira e em cidades nó designadas na Iniciativa “Belt and Road”. Estas conclusões fornecem novos insights sobre a abertura financeira de mercados emergentes e a internacionalização de EMFs.

摘要

全球化正在促使许多新兴市场公司 (EMF) 通过对外直接投资 (OFDI) 扩大业务。一般的FDI理论, 如内部化理论和OLI范式, 都是基于工业化国家, 导致在解释EMF的OFDI活动时不可避免地存在空白。我们通过建立国际金融和EMF国际化之间的联系来扩展文献。我们认为, 在新兴市场运营的外资银行提供了可以帮助EMF在全球范围内扩张的多种资源。在中国逐步放宽外资银行准入限制的情况下, 利用2001年至2018年中国上市公司的面板数据集, 我们发现外资银行准入与中国企业OFDI之间存在着正相关关系。已确定的渠道包括外资银行的直接贷款支持、外资银行全球分支机构网络的信息支持、国际化程度高、靠近当地企业, 以及在外资银行竞争下国内银行的贷款支持。外资银行的进入尤其刺激了非国有、盈利能力较高的企业、中等规模、金融市场化程度低的企业以及“一带一路”节点城市的OFDI。这些发现为新兴市场金融开放和EMF国际化提供了新洞见。

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Notes

  1. These statistics are obtained from the 2020 Work Report of Foreign Banks released at the Foreign Bank Jilin Bank Symposium.

  2. In 2001, China's OFDI flow amounted to US $6.885 billion, with a stock of US $34.654 billion. By 2020, China's OFDI flow had surged to US $153.71 billion, accompanied by a stock totaling US $2,580.66 billion. The information for 2001 is sourced from the Nations Conference on Trade and Development (UNCTAD), while the information for 2020 is derived from the Statistical Communique of China's Outbound Direct Investment in 2020, published by the Ministry of Commerce of China.

  3. The Belt and Road Initiative is an abbreviation of the "Silk Road Economic Belt" and the "21st Century Maritime Silk Road". It was proposed by President Xi Jinping in 2013, and is a plan for the interconnection of the development strategies of various countries along the routes via the strengthening of infrastructure connectivity, financial integration, people-to-people bonds, mutual benefits, common security, and smooth trade. In 2015, the National Development and Reform Commission, the Ministry of Foreign Affairs, and the Ministry of Commerce jointly issued "The Vision and Actions for Promoting the Joint Construction of the Silk Road Economic Belt and the 21st Century Maritime Silk Road". This clearly mentions 37 provincial capital cities and coastal port cities for the Belt and Road Initiative. We list the corresponding node cities in Section C2 in the Online Appendix.

  4. These statistics are from the 2020 Work Report of Foreign Banks released at the Foreign Bank Jilin Bank Symposium.

  5. The standard is formulated by the Ministry of Commerce of the People’s Republic of China.

  6. The 21 cities are Shanghai, Beijing, Nanjing, Xiamen, Dalian, Tianjin, Ningbo, Guangzhou, Chengdu, Kunming, Hangzhou, Wuhan, Shantou, Haikou, Shenzhen, Zhuhai, Fuzhou, Suzhou, Xi'an, Chongqing, and Qingdao.

  7. The longitude and latitude of the two points on Earth are given as follows: (X1, Y1) and (X2, Y2), where X1 and X2 are longitudes and Y1 and Y2 are latitudes, and the radius of the Earth R is 6,371.0 km; therefore, the distance between the two points is d = R × arcos [cos (Y1) × cos (Y2) × cos (X1–X2) + sin (Y1) × sin (Y2)].

  8. Because we observe that some companies change their industry classifications in some years, the variable Industryk,t is used to represent the industry fixed effect. We downloaded the industry classification information from the CSMAR database, which provides industry classification information for all listed companies using the standard issued by the China Securities Regulatory Commission in 2012.

  9. We calculate the average treatment effects in each group-time, ATT(g, t), and then weight the ATT(g, t) to obtain an estimation of the ATT. Therefore, it is a weighted average of each ATT(g, t), which places greater weight on ATT(g, t)s with larger group sizes. Unlike the coefficient in the TWFE regression specification, this simple combination of ATT(g, t)s immediately rules out any troubling issues due to negative weights.

  10. The principle is to apply the two-stage least squares method to the DiD estimation, identify the group and time effects through the first-stage regression, remove them in the second stage, and then perform the regression for the processing variables.

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Acknowledgements

H.L., Z.Y., and H.S. contributed equally to this work and should be recognized as co-first authors. We would like to thank the Editor-in-Chief Rosalie L. Tung, the Deputy Editor Sjoerd Beugelsdijk, the Editor William Megginson and the anonymous reviewers for their valuable suggestions. We are very grateful for Chao Tu from Southwestern University of Finance and Economics for his contribution as a research assistant. We would also like to thank Jing Shi and Bohui Zhang for many useful comments and Degang Ge for his assistance to obtain the bank data. We acknowledge financial support from the National Social Science Foundation of China (No.19BJY100) and the Science Foundation of Sichuan Province (No. 2021JDR0075). All remaining errors are our own.

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  1. Haiyue Liu, Zhimin Yi and Hua Shang have contributed equally to this work.

Authors and Affiliations

  1. Department of Accounting and Finance, Business School, Sichuan University, Chengdu, Sichuan, China

    Haiyue Liu, Zhimin Yi & Zihan Liu

  2. Research Institute of Economics and Management, Southwestern University of Finance and Economics, Chengdu, Sichuan, China

    Hua Shang

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  1. Haiyue Liu
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Liu, H., Yi, Z., Shang, H. et al. Foreign bank entry and the outward foreign direct investment of companies: evidence from China. J Int Bus Stud (2024). https://doi.org/10.1057/s41267-024-00693-8

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