Location Determinants of China's Outward Foreign Direct Investment

• Author: Pan Wang,Dan Luo,Shujie Yao,Fan Zhang
• DOI: http://doi.org/10.1111/cwe.12218
• Date: 01 November 2017
• Published date: 01 November 2017

©2017 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 1–27, Vol. 25, No. 6, 2017

1

Location Determinants of China’s

Outward Foreign Direct Investment

Shujie Yao, Fan Zhang, Pan Wang, Dan Luo*

Abstract

Compared to inward foreign direct investment, outward foreign direct investment

(OFDI) from China is a relatively new phenomenon. However, the volume of China’s

OFDI increased rapidly from 2004. There has been an increasing amount of literature

on the motivations of China’s OFDI, but few studies have focused on its location

determinants. The present paper aims to ll this gap in the literature by focusing on

two important location factors, natural resources and technology, which are the most

important determinants of China’s OFDI. We use a large panel dataset comprising 132

countries over the period 1991–2009 and the Tobit as well as the Heckman models

to establish the relationship between the two location factors and China’s OFDI. The

empirical results suggest that although China’s OFDI has been driven by the country’s

desire for a secure supply of natural resources and to attain advanced technology

from the developed world, China’s technology is also a critical attraction for the host

developing economies.

Key words: China, location factors, OFDI, resource seeking, technology seeking

JEL codes: F21, O53

I. Introduction

Complementing the magnicent success in attracting inward foreign direct investment

(IFDI), China’s outward foreign direct investment (OFDI) has increased rapidly over the

past decade.1 In 2016, China was the second largest source country of OFDI, equating to

approximately US$180bn, or US$50bn more than the country’s IFDI (Figure 1).

*Shujie Yao (corresponding author), Chueng Kong Professor of Economics, Chongqing University, and

Special Chair Professor of Economics, University of Nottingham Ningbo, China. Email: yaoshujie@cqu.edu.

cn; Fan Zhang, Ph.D candidate, School of Economics and Business Administration, Chongqing University,

China. Email: zhangfan514@hotmail.com; Pan Wang, Senior Investment Advisor, Agricultural Bank of China,

Zhejiang Branch, China. Email: wangpan110@hotmail.com; Dan Luo, Asociate Professor of Management

Accounting and Financial Management, Henley Business School, University of Reading, UK. Email: Dan.

luo@henley.ac.uk. This research is financially supported by the National Science Foundation of China

(No. 71673033), and the Chinese Ministry of Education (Nos. 16YJA790058 and 2017CDJSK).

1From this point onward, China refers to Mainland China.

Shujie Yao et al. / 1–27, Vol. 25, No. 6, 2017

©2017 Institute of World Economics and Politics, Chinese Academy of Social Sciences

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Figure 1. Flows of China’s Inward Foreign Direct Investment (IFDI) and Outward Foreign

Direct Investment (OFDI), 1990–2016 (US$bn)

200

160

140

80

20

180

100

40

120

60

0

1990 1994 19981992 1996 2000 2004 2008 2012 20162002 2006 2010 2014

Year

China’s OFDI ow China’s IFDI ow

Sources: UNCTAD, World Investment Report 2017.

Despite its massive expansion, China’s OFDI has attracted limited little attention

from researchers due to the relatively small amount of investment in the early stages

(Cheung and Qian, 2008) and limited data availability (Buckley et al., 2010). Most

extant studies focus on the pattern, regulation and policy implications of China’s OFDI

(Cai, 1999; Wu and Chen 2001; Wong and Chan, 2003; Voss et al., 2009), and few

studies pay attention to the determinants of China’s OFDI (Cheung and Qian, 2008;

Zhang, 2009; Buckley et al., 2010). The present paper aims to make a new contribution

to the literature focusing on two important location factors, natural resources and

technology, which have played a critical role in explaining China’s OFDI behavior.

The rest of this paper is organized as follows. Section II summaries the development

of China’s OFDI and reviews the literature on economic incentives for investing in

natural resources and technology. Section III describes the models and addresses some

data issues. Section IV interprets the empirical results and Section V presents robustness

tests. The nal section concludes.

II. Literature and Hypothesis

In 1978, China launched its “open-door” policy to facilitate both IFDI and OFDI. By

1983, China had established over 100 joint ventures, which was rationalized as an

eective way to secure the supply of scare natural resources, to accelerate technological

advancement and to penetrate overseas markets (Guo, 1984). However, despite the

introduction of a more transparent and decentralized approval regime by the central