Comparative corporate strategies: What determines Chinese outward FDI?

Transcription

1 Comparative corporate strategies: What determines Chinese outward FDI? Ivar Kolstad and Arne Wiig, Chr. Michelsen Institute CEIC-CMI conference, 30 June 2009

2 Main result Brief background: The Economist: China as a ravenous dragon Main results of our paper: Chinese outward FDI attracted by natural resources and the more so the worse the institutional environment

3 Focus and motivation of paper China not only a host of FDI, but increasingly also a source What country characteristics attract FDI from China? Does China invest in countries rich in natural resources and with poor institutions? Few empirical results on this Our contribution: Econometric results on determinants of Chinese outward FDI based on newer and more accurate data Expanded empirical model which includes interaction effects

4 Pattern of Chinese outward FDI flows. (mill) Table 1. Largest 15 host countries of Chinese outward FDI, , current USD and shares Total Share Cayman Islands Hong Kong, China British Virgin Islands Korea, Republic of Russian Federation United States Australia Sudan Germany Algeria Singapore Nigeria Mongolia Indonesia Kazakhstan Total (all countries)

5 Chinese FDI to African countries Total Sudan Algeria Nigeria South Africa Zambia Congo, Democratic Republic of Guinea Ethiopia Egypt Mauritius Angola Congo, Rep Total

6 Regional distribution of Chinese outward FDI Table 2. Regional shares of Chinese outward FDI, Total Africa Asia Europe Latin America and the Carribean North America Oceania

7 Focused summary of previous empirical studies Buckley et al (2007): Data on approved FDI from China, Results: Chinese FDI attracted by poor institutions Chinese FDI attracted by natural resources (subperiod ) Cheung and Qian (2008): Data on approved FDI Results: Institutions insignificant Chinese FDI attracted by natural resources Cheng and Ma (2008): Data on actual FDI Specification does not include institutions nor natural resources

8 Theoretical arguments Important background characteristics: State ownership of multinationals Institutional setting in China Possible implications: Competitive advantage in countries with weak institutions? Experience in navigating complex patron-client relationships Less stringent regulation Networks as substitute for formal instutions Incentives leading to excessive risk taking? Ideological support of undemocratic regimes? Hypothesis 1: Chinese FDI is attracted by countries with poor institutions

9 Theoretical arguments cont. Another possible implication: Investment to promote energy security Primary motive for China s involvement in Africa (Frynas and Paolo, 2007) Hypothesis 2: Chinese FDI is attracted by countries with large natural resources In addition, interaction of natural resources and institutions may be important: Returns to competitive advantage in poorly governed countries greater where there are large appropriable rents? Hypothesis 3: The effect of natural resources on Chinese FDI is larger the worse the institutions of a country

10 Specification Chinese outward FDI?? 3 (Institutions i i???? 1 Institutions * Natural resourcesi )??Controls i?? i?? 2 Natural resources i i Hypothesis 1:?? negative? Hypothesis 2:?? positive? Hypothesis 3:?? negative? The latter term is an interaction effect: Total impact of resources on FDI is (?? +?? * Inst.) If?? negative, natural resources attract FDI more the weaker the institutional environment

11 Data Table 3. Main variables Variable Explanation Source Chinese outward FDI Annual inflow of Chinese FDI UNCTAD GDP Host country GDP World Bank World Development Trade Inflation Distance Institutions Natural resources Total import and exports as share of GDP Inflation rate Distance between capital of host country and China Rule of law Fuels, ores and metals exports as share of GDP Indicators 2008 World Bank World Development Indicators 2008 World Bank World Development Indicators 2008 CEPII, World Bank Institute (WBI) Governance Indicators, from Quality of Government Institute World Bank World Development Indicators 2008

12 Results Table 4. OLS regression results, dependent variable Chinese outward FDI Regression 1 Regression 2 OECD Non-OECD GDP 1.24e-11*** 1.15e-11*** 1.08e-11* 6.96e-11 (2.50e-12) (2.68e-12) (5.63e-12) (4.87e-11) Trade (0.069) (0.073) (0.308) (0.048) Inflation (0.166) (0.144) (0.824) (0.157) Distance * (0.001) (0.001) (0.009) (0.001) Institutions (3.364) (3.560) (34.331) (3.364) Natural Resources ** (20.682) (18.911) ( ) (14.760) Institutions* Nat. Resources ** (21.263) ( ) ** (20.382) Constant (15.976) (15.944) (71.861) (7.724) Obs R-sq White standard errors in parentheses, *** indicates significance at the 1% level, ** at 5%, * at 10%.

13 Results Institutions insignificant Natural resources insignificant But interaction effect negative: Chinese investment more attracted by natural resources in countries with poor institutions Controls: Only market size (GDP) matters Significance of interaction effect robust to additional control variables Same result using other institutional proxies reflecting institutional effectiveness (but not indices of democracy) Significant interaction effect for fuels but not ores and metals

14 OECD vs Non-OECD recipient countries Different determinants for OECD and non-oecd countries OECD: Chinese investment driven by market size (GDP) Institution, resources and their interaction insignificant Non-OECD: Natural resources attract Chinese FDI Interaction with institutions negative Hence: Implications similar to full sample results Distance significant and negative GDP insignificant

15 Summary of results Chinese outward FDI attracted to countries with large natural resources, and more so the worse the institutions Related to non-oecd countries Also holds for subsample of African countries Economically significant effects: For Angola, whose institutional score is approx. -1.5, an increase of natural resource exports in GDP of 10 percentage points brings an additional Chinese investment of almost 10 million USD Problematic as Chinese FDI feeds into institutional dysfunctions central to the resource curse