The Dragon Is Flying West: Micro-level Evidence of Chinese Outward Direct Investment

Abstract

Outward direct investment (ODI) from the People's Republic of China (PRC) is surging. A common perception is that it was driven by the country's resource-seeking and technology-seeking motives. Using a new, unique, and comprehensive dataset that covers close to 10,000 Chinese ODI deals from 1998 to 2009, we find that in contrast to the common perception, over half of the ODI deals are in service sectors, with many of them appearing to be export-related. In addition to documenting the pattern and trend of the PRC's ODI, we empirically examine both the determinants and effects of ODI at the firm level. We find that ex ante larger, more productive, and more export-intensive firms are more likely to start investing abroad. Using matching estimation techniques, we find that ODI is associated with better firm performance, including higher total factor productivity, employment, and export intensity, and greater product innovation. To assess the relative contributions of technology transfer, export promotion, and resource seeking to the positive effects of ODI, we use ODI data merged with customs transaction-level trade data. We find that firms’ ODI participation is associated with significantly better trade performance, measured by export and import volumes, export and import unit values, and number of export destinations. Contrary to perceived technology-seeking and resource-seeking motives, we find no evidence that ODI firms import more capital or intermediate inputs compared to non-ODI firms.

The impact of outward FDI on the performance of Chinese firms

“…Our vector of observable characteristics, X, includes a number of standard variables that can affect the probability of investing overseas (see Debaere et al, 2010;Chari et al, 2012;Chen and Tang, 2014), including age and age squared, as proxies for the firm's experience, size (number of employees), capital intensity, and financial performance (measured by the return on assets), 10 and a dummy variable equal to 1 if the firm is listed on the stock exchange (and 0 otherwise) as a proxy for the capacity to access financial capital. 11 The specification also includes 2-digit industry dummies, to control for industry-specific performance and to take account of incentives and policies aimed at specific sectors, and provincial dummies based on the geographical distribution of firms within provinces and autonomous municipalities to control for the heterogeneity of local policies, which might affect the firm's decision to invest.…”

“…A recent study by Chen and Tang (2014) investigates the effect of OFDIs on different dimensions of Chinese firms' performance. The paper is based on MOFCOM approved investments 3 and finds positive effects of OFDIs on productivity, employment and various dimensions of export performance.…”

“…The related empirical literature focuses mainly on analysing the drivers of internationalization and the location choices, at both country (Buckley et al, 2007;Deng, 2009) and firm levels (Amighini, Rabellotti & Sanfilippo, 2013;Ramasamy, Yeung & Laforet 2012). Some recent notable exceptions include a paper by Chen and Tang (2014) investigating the impact of Chinese OFDIs on firm performance, on the basis of data from the Chinese Ministry of Commerce, and a study by Edamura, Haneda, Inui, Tan & Todo (2014), dealing with the impacts of acquisitions, based on a Chinese financial database (ChinaVenture).…”

Outward foreign direct investment and domestic innovation performance: Evidence from China

“…Furthermore, there is considerable evidence to suggest that many Chinese MNEs are active seekers of strategic assets (Chen & Young, 2010;Deng, 2012;Edamura, et al, 2014;Ning & Sutherland, 2012;Ramasamy, et al, 2012;Rugman & Li, 2007;Williamson & Yin, 2012) and technology (Chen & Tang, 2014) overseas. China therefore provides an appropriate context to explore the link between OFDI and innovation performance.…”

“…EMNEs active in highly-competitive domestic markets may have neither sufficient resources nor the time to conduct R&D (Breschi & Lissoni, 2001;Hu et al, 2005), and thus their abilities to assimilate and apply the knowledge acquired through their OFDI activities may be limited Chen & Tang, 2014). Furthermore, the lack of sufficient and robust legal systems to protect intellectual property rights undermines the intention of many EMNEs to undertake R&D activities, especially for those firms facing high competitive pressures (Luo & Tung, 2007;Rui & Yip, 2008).…”