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International experience and FDI location choices of Chinese firms: The moderating effects of home country government support and host country institutions

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Abstract

We examine the extent to which Chinese government support of foreign direct investment (FDI) projects and host country institutional environments interact with prior entry experience by Chinese firms, and how this interrelationship affects FDI undertaken by Chinese firms. We hypothesize that home country government support and well-established host country institutions enhance organizational capabilities to take risks in FDI. As such, they reduce the need to accumulate experiential knowledge and capabilities relating to entering host countries based on prior entry experience in a particular country when undertaking follow-up investment projects. Using a unique, hand-collected panel data set of Chinese publicly listed firms during 2002–2009, we find that home government support and well-developed host country institutions reduce the importance of prior entry experience and significantly increase the likelihood of FDI entry into a host country. Further, from our subsample analyses we identify differences between entering developed and developing host countries in terms of the impact of home country government support and quality of host country institutions. Our findings help explain the puzzle concerning why emerging economy firms have rapidly internationalized in a short period of time and do not follow the pattern predicted by classical IB theories.

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Notes

  1. It is possible that a balanced panel which excludes delisted firms during the sample period may cause survival bias. However, unlike some other countries (e.g., the United States) where delisting is common, delisting is very rare in China. During 2002–2012, there were only 75 firms delisted from China’s stock exchanges. In a robustness check, we coded outward FDI of firms delisted during the sample period and replicated analyses reported in the paper, and found robust results.

  2. In annual reports required by Chinese authority, 20% of equity is the threshold of disclosure of subsidiaries. Ownership percentages in overseas subsidiaries established during the period 2003–2009 range from 23.3% to 100%. We also use 50% and 100% equity as alternative thresholds for robustness check, and found the results are robust to the results using 20% as the threshold.

  3. Annual reports are collected from reliable data sources including the Shanghai and Shenzhen Stock Exchanges, the China Security Regulation Committee (CSRC), websites of listed firms, and database of leading commercial business information providers (e.g., Wind and SinoFin).

  4. These countries include Afghanistan, Antigua and Barbuda, Democratic Republic of Congo, Cayman Islands, Republic of Korea, Romania, and British Virgin Islands.

  5. Following the suggestion of a reviewer, we also construct a sample of firms that make investment in a given year among countries that had received investment from any firm in the sample until the year. The sample comprises 347 firm-year groups. The results of this robustness test are consistent with results for the sample reported in the paper.

  6. Given that the United States has received by far the largest number of entries by the sample firms, we excluded the United States from the sample and found the results to be as robust as those for the full sample including the United States.

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Acknowledgements

We are grateful to the Editor-in-Chief John Cantwell, Professor Xavier Martin and anonymous reviewers for their insightful comments. This paper was partially funded by research grants from the National Science Foundation of China (#71172020; #71132002) and Guanghua-Cisco Leadership Institute.

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Authors and Affiliations

  1. Peking University, Beijing, China

    Jiangyong Lu

  2. Loughborough University, Loughborough, UK

    Xiaohui Liu

  3. Imperial College London, London, UK and EMLyon Business School, Lyon, France

    Mike Wright

  4. City University London, London, UK and Vienna University of Economics and Business, Vienna, Austria

    Igor Filatotchev

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  1. Jiangyong Lu
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Accepted by Xavier Martin, Guest Editor, and John Cantwell, Editor-in-Chief, 17 November 2013. This paper has been with the authors for five revisions.

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Lu, J., Liu, X., Wright, M. et al. International experience and FDI location choices of Chinese firms: The moderating effects of home country government support and host country institutions. J Int Bus Stud 45, 428–449 (2014). https://doi.org/10.1057/jibs.2013.68

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