The role of context-specific factors in IFDI’s influence on OFDI of developing country. Evidence from China
| DOI | https://doi.org/10.1108/JCEFTS-03-2017-0008 |
| Pages | 172-187 |
| Date | 05 June 2017 |
| Published date | 05 June 2017 |
| Author | Mengting Zhang,Changbiao Zhong,Feng Yu |
| Subject Matter | Economics,International economics |
The role of context-specific
factors in IFDI’sinfluence on
OFDI of developing country
Evidence from China
Mengting Zhang
Economic School of Shanghai University, Shanghai, China
Changbiao Zhong
School of Business, Yunnan University of Finance and Economics, Yunnan, China, and
Feng Yu
School of International Trade and Economics,
Central University of Finance and Economics, Beijing, China
Abstract
Purpose –Although prior research has highlightedthe importance of foreign direct investment (FDI) on a
country’s internationalization, it has largely focusedon developed countries. As a result, the FDI performance
of a developing country, whichdiffers fundamentally from that of developed countries in their environment,
remains unclear. Under the newly development environment, the traditional FDI theories have been
challenged by the increasinginvestments from emerging and transition economies. The theory system needs
a fresh situation’ssupplement urgently.
Design/methodology/approach –On the basis of a literature review, this paper constructed an
empirical modelto further study the moderating effects of context-specificfactors on the influence of inbound
foreign direct investment (IFDI) on outbound foreign direct investment (OFDI). China was chosen as the
representation of a developingcountry, and its data of mutual investments with 125 countries from 2003 to
2014 were usedto carry out hypothesis testing.
Findings –The analysisand results of this paper suggested: first, for China,the overall influence of IFDI on
OFDI is positive.That is to say, IFDI’s positive spillover effect is greaterthan the negative competition effect.
Second, innovationaldistance’s effect on FDI is complicated. It can either be positiveor negative, which calls
for further investigation. Third, economic distance negatively affects OFDI and negatively moderates
IFDI’s effect on OFDI, especially the export. To some extent, the moderating effect that resulted from the
competitioneffect will reduce overseas investment by extruding some of the localenterprises. Fourth, cultural
distance’seffect is closely related to the spillover effect thatwill positively moderate IFDI’sinfluenceon OFDI.
Originality/value –This paper enriched the international investment theoretical system by adding a
mechanism of multiway international investment of a developingcountry. The research also has a guiding
significance for developing countries’governments in coordinating mutual internationalinvestments. Also,
these results have important implications for how policymakers promote OFDI and put forward new
theoreticalavenues for conceptualizing the internationalizationprocess.
Keywords OFDI, Moderating effect, Context specific, IFDI
Paper type Research paper
1. Introduction
Since 2003, when the dominating status of developed countries in the international
investment field was rocked by the emerging and transition economics, the conclusions
JCEFTS
10,2
172
Journalof Chinese Economic and
ForeignTrade Studies
Vol.10 No. 2, 2017
pp. 172-187
© Emerald Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-03-2017-0008
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1754-4408.htm
drawn by geo-economics were also being challenged. The UNCTAD (United Nations
Conference on Trade and Development) analyzed that nowadays most multinational
enterprises (MNEs) tend to have a sit-tight attitude toward international investment or to
diversify their investments among several countries. It can be observed from the data that
the MNEs in emerging and transition economics, mainly referringto the BRICS, are having
a much more active attitude to outbound investment strategies. From the analysis of
traditional international direct investment theory, the purpose of MNEs’international
investments is to combine their ownership advantages and internalization advantage with
location advantage of the host country and can eventually minimize their running cost
(Dunning, 2001). However,the analysis can only partly explain the international investment
behavior of emerging and transition economics. In fact, many enterprises in emerging and
transition economics start having international investments before they form certain
advantages, which also challenged the main traditional advantage theory of MNEs. The
theoretical system calls for supplements from the reality and data of developing countries.
The significant ways in which emerging markets differ from developed economies limit
scholarly understanding of relationship between inbound foreign direct investment (IFDI)
and outbound foreign direct investment(OFDI). We address this important phenomenon by
focusing on one of the largest and most diverse emerging countries, China. By analyzing
China’s mutual internationalinvestments with 125 countries from 2003 to 2014, we explored
the moderating effect of IFDI’sinfluence on OFDI from the perspective of context-specific
attributes.
According to UNCTAD (2016), the global foreign direct investment (FDI) inflows have
increased by 38 per cent and reached US$1,760bn, and the direct investment outflows
reached US$1,470bn in 2015[1], which has been the highest level since the 2008 global
financial crisis. Thereinto, China’s outward direct investment achieved a historic
breakthrough such that the outward investment flows ranked second in the world for the
very first time, and its proportionin the world has been promoted to 9.9 per cent. It was the
first time that China’s outward investmentexceeded its inward investment, making it a net
capital exporter and a fully deserved big investment country. By the end of 2015, direct
investments from China had covered 188 countries (regions) in the world, accounting for
80.7 per cent of the total number. As for the inward investment into China, by the end of
2015, there are 26,584 enterprises run with foreign capital,and the actual amount of foreign
investment is $135,577m, accounting for 1.5 per cent of the investment in fixed assetsin the
whole society. Internationalization is defined as the expansion of market across boundaries
in terms of geography (Hitt et al., 1997). The process contains two aspects, IFDI and OFDI.
For the prior research studies that considering IFDI’sinfluence on OFDI (Sauvant, 2011;
Sialm and Tham, 2015;Yao et al.,2016), conclusions are not yet consistent. In other words,
some of them hold the view that IFDI has positive effects on OFDI for the spillover of
knowledge and technology (Aitken et al.,1997;Kneller and Pisu, 2007), whereas some other
studies revealed that IFDIusually brings great competition that will negatively affectOFDI
(Wang et al., 2012a,2012b). IFDIhas either a positive or negative influence on OFDI (Chang
and Xu, 2008); these two effects have been empirically tested in prior studies. Further, it
seemed that they have led to two contradictory conclusions. Therefore, we hope to find
things that make differentcombinations of the spillover effect and the competition effect.
The main findings of this paper can be summarized into four points. First, at this stage,
China’s IFDI have an overallpositive influence on OFDI, which means the IFDI’s knowledge
spillover effect is greater than the competitiveeffect. In other words, IFDI’s positive spillover
effects is greaterthan negative competitive effect, making the overallresult positive. Second,
the innovational distance’seffect on FDI is complicated. It can either be positive or negative,
IFDI’s
influence on
OFDI
173
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