Influence of Factor Mobility on Chinese Multinationals’ ODI Mode Choice: Theoretical and Empirical Analysis

Abstract

ODI by Chinese multinationals’ has grown rapidly in recent decades, and the ratio of M&A investment to aggregate ODI flow has demonstrated a “W” shape history, while the global ratio has demonstrated an “M” shape history. The recent theoretical progress in new century supplied a new perspective focused on firm heterogeneity such as the firm’s factor mobility to explain the diversity of international organization of production choices including the mode choice of ODI. Respectively, we supposed three hypothesizes based on theoretical discussion with combining the new-classical international direct investment theory and the frontier theoretical progress of international organization of production. We use micro level data for more than 2200 large scale ODI transactions by Chinese multinationals to study the relationship between cross-border factor mobility and ODI mode choice with a panel logit estimation. Our results testified all three hypothesizes supposed. Firstly, the results provide evidence that cross-border factor mobility affects the choice between Greenfield and M&A ODI. Secondly, the results also support the view that ODI mode choices are influenced by characteristics of host economies. The ease of registering property has a positive effect on the probability of choosing Greenfield ODI, while the ease of obtaining credit, enforcing contracts and trading across borders has a positive effect on the probability of choosing M&A. Finally, we find that the probability of choosing M&A increases when a multinational belongs to an industry that relies on obtaining natural resources or investment takes place in an economy with high labor costs. In general, our research shows that ODI mode choices by Chinese multinationals varies across host countries and industries due to the internal trade-off impact from the firm heterogeneity such as factor mobility. Moreover, at the end we discussed two short boards of our empirical process due to the data shortage problem and take a positive prospect for the following research.