A Panel Data Analysis of Locational Determinants of Chinese and Indian Outward Foreign Direct Investment

Date21 May 2009
DOIhttps://doi.org/10.1108/15587890980001512
Pages1-15
Published date21 May 2009
AuthorJing‐Lin Duanmu,Yilmaz Guney
Subject MatterStrategy
Journal of Asia Business Studies SPRING 2009 1
INTRODUCTION
The rise of China and India is one of the defining events of the
20th century. While China has captured the world’s attention by its
phenomenal FDI inflows and impressive GDP growth, India is swiftly
developing its offshore IT outsourcing and other service sectors with
its language and institutional advantages. The sheer size of the two
countries, along with their rapid growth, means that some of the most
important impacts are likely yet to be seen. With significant deregula-
tion within the two countries on FDI abroad, those companies that
have gained more confidence and accumulated more financial capital
are now spreading their wings and investing overseas. Table 1 shows
that from 1982 to 1992, Chinese FDI rose from 44 US$ million to
4000 US$ million, while India’s outward FDI, beginning at only 1
US$ million in 1982, rose slowly to 24 US$ million in 1992 and then
grew steadily from 82 US$ million to 2222 US$ million in 2004.
The upsurge of Chinese and Indian FDI raises an unanswered
question about the locational determinants of direct investment
from the two countries. It is important to pursue such an under-
standing for several reasons. First, FDI from developing countries,
especially big economies such as China and India, becomes a new
source, alongside FDI from developed nations. MNEs from develop-
ing countries may foster positive spillovers because of narrower tech-
nological gaps between them and firms in developing nations (Battat
and Aykut 2005). They are less corporatized and more informal than
western models, and are often more appropriate to the host country
context (Gelb 2005). In the light of significant decline in investments
from developed nations, FDI from developing countries plays an
important role in sustaining FDI flows to developing nations. Host
country governments and agencies have an incentive to learn what
attracts this type of investment in order to design their investment
promotion policies. Furthermore, their investments may or may not
have different determinants vis-à-vis FDI originating in developed
nations. A systematic investigation will give us empirical evidence to
take part in this debate. Third, a comparative study will enable us to
explore whether Chinese and Indian FDI react to host characteristics
differently and why they do so.
Using unbalanced panel data, we find that Chinese and Indian FDI
are attracted to countries with large market size, low GDP growth, high
volumes of imports from China or India, and low corporate tax rates.
We also find important differences between China and India. While
Chinese FDI is drawn to countries with open economic regimes, de-
preciated host currencies, better institutional environments, and Eng-
lish speaking status, but deterred by geographic distance and OCED
membership; none of these factors are important for Indian FDI.
The remainder of the paper is set out as follows. Section 2 reviews
literature on the locational determinants of FDI and studies on FDI
from developing countries. Section 3 presents our research hypothe-
ses. Section 4 explains the data, measurements and methodology. Sec-
tion 5 reports the results. Finally, we summarise our findings, discuss
policy implications, and acknowledge the limitations of the study.
LITeRaTURe RevIew
LOCATIONAL DETERMINANTS OF FDI
As an important component of globalisation, FDI has grown far
more rapidly than international trade during the last two decades (Gas-
ton and Nelson 2002). Accordingly, there has been a vast amount of
A Panel Data Analysis of Locational Determinants of Chinese and
Indian Outward Foreign Direct Investment
Jing-Lin Duanmu
University of Surrey
Yilmaz Guney
University of Hull
absTRaCT
The upsurge of Chinese and Indian outward foreign direct investment (FDI) raises an unanswered question about locational
determinants of direct investment from the two countries. Using an unbalanced bilateral FDI database, we find that Chinese and
Indian FDI are attracted to countries with large market size, low GDP growth, high volumes of imports from China or India, and
low corporate tax rates. We also find important differences between China and India. While Chinese FDI is drawn to countries with
open economic regimes, depreciated host currencies, better institutional environments, and English speaking status, none of these
factors are important for Indian FDI. Chinese FDI is also deterred by geographic distance and OCED membership. However, neither
of these has any impact on Indian FDI.
Keywords: Outward Foreign Direct investment, China, India
We are grateful for the comments given by Russell Pittman from U.S. Department of Justice on an earlier draft of the paper.

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