A merry host makes bolder guests: An analysis of cross‐border investment choices of Chinese firms

• Author: Reza Yamini,Daria Soloveva,Jiuchang Wei
• Date: 01 March 2021
• Published date: 01 March 2021
• DOI: http://doi.org/10.1002/tie.22171

RESEARCH ARTICLE

A merry host makes bolder guests: An analysis of cross-border

investment choices of Chinese firms

Daria Soloveva

1

| Reza Yamini

2

| Jiuchang Wei

1,3

1

School of Management, University of Science

and Technology of China, Hefei, China

2

School of Public Affairs, University of Science

and Technology of China, Hefei, China

3

School of Management, Center for Crisis

Management Research (Sponsored by Beijing

Planning Office of Philosophy & Social

Science), School of Public Policy &

Management, Tsinghua University, Beijing,

China

Correspondence

Daria Soloveva, School of Management, East

Campus of University of Science and

Technology of China, 9th floor, Building of

Management Academy, No. 96, Jinzhai Rd,

Hefei 230026, Anhui, China.

Email: dariasolar@mail.ustc.edu.cn, daria.

solovjova@aol.com

Abstract

This article explores the influence of a host country's conditions on foreign equity

investment decisions made by China-based firms using the assumptions of the institu-

tional theory and transaction cost approach. We use multinomial logit regression to

analyze a sample of 1,018 cross-border investments by Chinese firms categorized into

majority acquisitions, minority acquisitions, joint ventures (JVs), and venture capital.

According to our findings, Chinese investors prefer to conduct foreign direct invest-

ment in the same industry. This, in turn, highlights their desire to gain market influence

and learn or obtainstrategic knowledge and resources.Furthermore, taxation is proved

to encourage theestablishment of foreign JVs. Theinteraction between the host coun-

try's tax levels and majority acquisitions in the same industry reveals the concern of

Chinese investorswith after-tax returns and influencein the new market.

KEYWORDS

China, foreign investment, institutions, latecomers, sectorial difference, taxation

1|INTRODUCTION

Cross-border investment, both inward and outward, is largely respon-

sible for the changes observed in the Chinese economy over the past

few decades. By investing overseas, Chinese enterprises pursue

resources, new technology, and knowledge, searching for ways to

increase their influence in foreign markets (Rui & Yip, 2008). The

majority of prior studies have analyzed China as a target for overseas

investors (Huang, 2003; Laurenceson & Qin, 2008; Long, Yang, &

Zhang, 2015; Wang & Wang, 2015). Looking at China as a major

cross-border investor, on the other hand, is a comparatively recent

focus of study (Collison, Brennan, & Rios-Morales, 2017; Gaur, Ma, &

Ding, 2018; Gonzales & Ohara, 2019; Shi, Sun, Yan, & Zhu, 2017). Like

other foreign investors, China-based firms are exposed to the restric-

tions a host country's government implements to protect its domestic

industry and enterprises. These restrictions, or lack thereof, influence

whether a particular strategy would be deemed as infeasible by an

overseas investor (Meyer, Estrin, Bhaumik, & Peng, 2009; Schwens,

Eiche, & Kabst, 2011). Other influences are the location choices

(Arregle, Miller, Hitt, & Beamish, 2013; Child & Marinova, 2014) and

subsequent performance of an investment (Beugelsdijk, Kostova,

Kunst, Spadafora, & van Essen, 2018; Hutzschenreuter & Voll, 2008;

LiPuma, Newbert, & Doh, 2013).

The entry mode framework is used most frequently to answer

questions aboutforeign investment choicesof multinational enterprises

based on the cross-border perspective (Ahammad, Leone, Tarba,

Glaister, & Arslan, 2 017; Wrona & Trąpczy

nski, 2012). This framework

captures the challenges an investor could anticipate in a new market.

The barriers that governments impose on foreign investors along with

the level of a host country's economic and political stability is often

approached from the perspective of institutions (LiPuma et al., 2013;

Meyer et al., 2009; Romero-Martínez, García-Muiña, Chidlow, &

Larimo, 2019). The concept of institutions in cross-border investment

analysis has previously been combined with the transaction costs

approach (Foss, Klein, & Bjørnskov, 2019; Meyer, 2001). Political and

economic turmoil and inefficient laws serve as precursors of increased

costs of information acquisitionand doing businessfor foreign investors

(Foss et al., 2019;Meyer et al., 2009).

Daria Soloveva and Reza Yamini contributed equally to this study.

DOI: 10.1002/tie.22171

Thunderbird Int. Bus. Rev. 2021;63:175–190. wileyonlinelibrary.com/journal/tie © 2020 Wiley Periodicals LLC. 175

Previous overseas investment research concentrated on two

(Hennart & Reddy, 1997; Yiu & Makino, 2002) and, more rarely, three

(Cai & Karasawa-Ohtashiro, 2018; Meyer et al., 2009) possible str ate-

gies. Various combinations of those strategies have been used. For

instance, Hennart and Reddy (1997) focused on the choice between

mergers and acquisitions (M&A) and joint ventures (JVs). The authors

joined majority acquisitions and mergers into a single category. Yiu &

Makino,(2002) consideredthe selection betweenwholly owned subsidi-

aries andJVs in their analysis.(Cai & Karasawa-Ohtashiro, 2018)studied

the choice between greenfield investment, M&A, and export, while

(Meyer et al.,2009) analyzed the influence of institutional factorson the

choicesbetween acquisitions, JVs,and greenfield investments. However,

limitingthe focus to foreigndirect investment(FDI) and exportstrategies

have constrained our understanding of foreign investment actions to

only those presumably followed by the start of business operations.

Hence, other strategies used for learning and obtaining information

about a foreign market or newtechnology were not considered by this

literature and were investigated separately (Gonzales & Ohara, 2019;

Guler & Guillén,2010; Laurenceson & Qin,2008). Additionally,by limit-

ing the scopeof investigation to mostly culturaland political factors, the

majority of prior studies have ignored other host country's conditions

affecting cross-border investments. One such condition is taxation.

While taxation arguablydoes not serve as a primarymotivation ora bar-

rier for foreign investors, it affects the amounts of profit a foreign inves-

tor can expectto shift into a home country(Kopits, 1976).

The purpose of this study is to investigate possible motivations

for cross-border investments of China-based firms based on the

institutions-transaction costs framework. Host country institutional

conditions that might affect the costs of doing business are defined as

barriers and restrictions. These conditions are measured as institu-

tional characteristics of the nations receiving an investment. This

study uses the term institutions to refer to the extent to which a host

country's regulatory frameworks enforce rules, support market partici-

pants' rights and freedoms, and facilitate information flow (Meyer

et al., 2009). Another component of this study is the sectorial differ-

ence, also called industrial relatedness, serving as an indicator of

shared industrial expertise between a foreign investor and a target.

Applying these premises, we analyzed the locations of outward

investments made by China-based firms in 2010–2016. Four invest-

ment modes were selected, two of which are FDI (acquisitions and

JVs), and two which are non-FDI investments (venture capital

[VC] and minority stakes). These investments are different in nature,

strategic goals, and risk, as well as the level of control and involve-

ment of an investor (Roberts & Berry, 1984). Moreover, each of the

aforementioned investments depends on how market conditions react

differently to host environments (Becker & Fuest, 2010; Cai &

Karasawa-Ohtashiro, 2018; Groh, von Liechtenstein, & Lieser, 2010).

The article is organized as follows. First,we present a review of the

literature on institutions, taxation, and investment strategies. Next, we

draw hypotheses based on the discussed premises. Afterward, we

explain the dataset selected for this research and the method used for

the analysis. Finally, we discuss the results, draw conclusions, describe

the limitationsof the study, and providethoughts for future research.

2|LITERATURE REVIEW

2.1 |Host country conditions and cross-border

investment

2.1.1 |Institutions and foreign investment

The institutional approach has received substantial attenti on from

scholars in multiple fields such as economics, management, and business

ethics (Kostova, Roth, & Dacin, 2008; Mizruchi & Fein, 1999;

Scott, 2008a). Institutions can be defined as regulations or norms that

form the basis of society and behavior (D. North, 1990; Scott, 2008b).

Institutions can be formal or informal. Previous research argued about the

higher importance of formal norms in terms of sustaining a country's mar -

ket stability and reducing uncertainty (Arregle et al., 2013). Some types of

government involvement, such as the enforcement of property rights,

can make cross-border deals more attractive for foreign investors since,

with better regulated and well-protected property rights, uncertainty for

foreign investors is reduced (D. C. North, 1991; Williamson, 2000). How-

ever, not all types of government involvement can be as attractive for

conducting cross-border deals. Previous studies have reported that per-

ceived transaction costs of doing business increase as government regula-

tions become stricter and more ubiquitous (Brouthers, 2002; Yiu &

Makino, 2002). Hence, government regulations and control can either

add or decrease transaction costs for cross-border investment. In this

study, institutions are represented by the market participants' rights,free-

doms, and frameworks that facilitate information flow and that are regu-

latedbyahostcountry'sgovernment(Meyeretal.,2009).

The literature classifies institutions as strong or weak depending

on the extent to which they sustain and stimulate efficiency and infor-

mation transparency in their markets. The strength of institutions can

determine the efficiency of a country's market mechanisms. Strong

institutions guarantee the protection of property rights, promote

healthy financial markets, and minimize opportunistic behavior. Under

stronger institutional conditions, foreign investors do not have to

incur additional costs in order to obtain necessary information con-

cerning their investment targets, business partners, and other factors.

In contrast, institutions identified as weak have limited capabilities to

ensure the safety and protection of market players or to reduce infor-

mation asymmetries (Meyer et al., 2009). Weaker institutions make it

more difficult to obtain access to the correct and trustworthy infor-

mation that is necessary for an investor to achieve its goals in a for-

eign country's market. Thus, foreign investors face higher risks and

bear higher costs in countries where institutions are weak (Tong,

Reuer, & Peng, 2008).

2.1.2 |Taxation and foreign investment

Outright bans of ownership types or sizes of equity have become less

common over the years (Meyer & Nguyen, 2005). Nowadays, restrictions

are more closely associated with measures such as tax policies, through

which governments can exploit foreign entrants (Delios & Henisz, 2000).

176 SOLOVEVA ET AL.