Distance of doing business and outward foreign direct investment: An empirical study of China

Abstract

Differences between the business environment in the home country and the host country are an important factor when enterprises consider their location choice with regard to outward foreign direct investment (OFDI). However, this is ignored by much existing literature. Based on the trade‐off framework of international firms between exporting and participation in OFDI under the condition of heterogeneous enterprises, this paper constructs a theoretical model of the impact of distance of doing business (DDB) on OFDI. We take China's OFDI as an example and use the World Bank Group's Ease of Doing Business Index to construct the DDB indicator, as well as test the impact of the DDB on China's OFDI by combining the macro‐location panel data of China's OFDI between 2004 and 2017. The results showed that increasing DDB significantly reduces the scale of China's OFDI. The effect is robust. The mechanism is that DDB significantly decreases the success rate of OFDI and increases the cost of OFDI, thereby decreasing the scale of OFDI. Further analysis then finds that official acts, such as building partnerships, and folk acts, such as increasing cultural identity, can significantly reduce the negative effect of DDB on OFDI.