week 7

Political risk, cultural distance, and outward foreign direct investment: Empirical evidence from large Chinese firms

Diego Quer & Enrique Claver & Laura Rienda

Published online: 13 January 2011 # Springer Science+Business Media, LLC 2011

Abstract The internationalization of Chinese enterprises is a subject that is receiving increasing attention in international business research. This paper analyzes the influence of political risk and cultural distance on the location patterns of large Chinese companies. Our results show some characteristics that differ from the conventional wisdom. A high political risk in the host country does not discourage Chinese multinationals. However, from a more conventional point of view, the presence of overseas Chinese in the host country is positively associated with Chinese outward foreign direct investment (FDI). In addition, firm size and the volume of Chinese exports to the host country have a positive influence.

Keywords Chinese multinationals . Political risk . Cultural distance . Outward FDI

The world economy’s center of gravity is shifting to the Asia-Pacific, particularly to China. According to data from 2009, China is already the second largest economy in the world (purchasing power parity GDP), the first-largest exporter, the second- largest importer, and the second-largest recipient of foreign investments. What is next for China? The next frontier in the economic battlefield is the globalization of Chinese enterprises (Alon & McIntyre, 2008). Chinese outward foreign direct investment (FDI) multiplied by four between 2005 and 2009, accounting for 4.4% of the world’s total (UNCTAD, 2010). It is also estimated that Chinese companies had set up 13,000 overseas enterprises in 177 countries by the end of 2009 (MOFCOM, 2010).

Resource-seeking (especially natural resources), market-seeking (in many cases, trying to avoid export restrictions), or strategic asset-seeking (advanced technology, managerial know-how, or internationally recognized commercial brands) are the main reasons behind such growth of Chinese outward FDI (Deng, 2004; Hong & Sun, 2006; Wong & Chan, 2003; Wu & Sia, 2002). Clearly, because China is itself a

Asia Pac J Manag (2012) 29:1089–1104 DOI 10.1007/s10490-011-9247-7

D. Quer (*) : E. Claver: L. Rienda Department of Management, University of Alicante, P.O. Box 99, 03080 Alicante, Spain e-mail: [email protected]

low-cost production base, cost minimization is not a major motivation (Cheng & Ma, 2007). Chinese outward FDI is helped by the huge foreign currency reserves that have been accumulated from exports, the knowledge acquired by co-operating with foreign companies in China and, of course, by the Chinese government, which sees the international expansion of Chinese companies as a key element to ensuring the country’s continued economic growth (Child & Rodrigues, 2005; Luo, Xue, & Han, 2010; Shoham & Rosenboim, 2009; Zhang & Van den Bulcke, 1996).

Despite the fact that this boom in Chinese outward FDI is relatively recent, deals such as Lenovo acquiring the PC division of IBM, the Nanjing Automobile group buying the British manufacturer MG Rover, and the Industrial and Commercial Bank of China (ICBC) buying stakes in the Standard Bank of South Africa, have brought Chinese multinationals to the attention of economists, politicians, and observers the world over. Chinese multinationals, with a unique mixture of government involvement and private initiatives, are a distinguishing characteristic of 21st

century globalization (Zhang & Alon, 2010). They represent a new generation of latecomer and newcomer multinationals that have been dubbed “Dragon Multinationals” (Mathews, 2006).

They are attracting considerable attention from international business researchers. Following the pioneering works that appeared in the second half of the 1990s (Cai, 1999; Walters & Zhu, 1995; Young, Huang, & McDermott, 1996; Zhang & Van den Bulcke, 1996), by the 21st century this has become a promising research area (Buckley, Clegg, Cross, Liu, Voss, & Zheng, 2007; Chen & Young, 2010; Child & Rodrigues, 2005; Cui & Jiang, 2009a, 2009b, 2010; Deng, 2009; Lau, Ngo, & Yiu, 2010; Liu, Li, & Xue, 2011; Lu, Liu, & Wang, 2011; Xie, 2011; Yuan & Pangarkar, 2010; Zhang, Zhou, & Ebbers, 2011). However, there are still some gaps in the literature, and further research is needed to extend our knowledge of Chinese multinationals. In particular, we still know very little about the factors that influence key strategic decisions in their internationalization process, such as host country choice.

Most studies of internationalization have been grounded in the paradigms of developed countries. However, it is increasingly apparent that the resulting theories may have to be adapted to China—which is one of a kind even among today’s transition economies in terms of the emerging social market economy, uniquely controlled by market forces, government directives, and institutional constraints (Alon & McIntyre, 2008). Research on internationalization of Chinese firms presents the opportunity to extend existing Western-based knowledge (Child & Rodrigues, 2005). Chinese multinationals, like any others, have to meet the institutional requirements of the host country (Rui & Yip, 2008). However, in some countries they face greater institutional barriers than companies from other countries have to overcome, due to reluctance stemming from the state ownership of many Chinese firms, and the possible search for political objectives rather than commercial ones (Globerman & Shapiro, 2009). Chinese multinationals are governed by the market forces of demand and supply, but, they can be aided or injured by the political agenda of the Chinese government (Alon & McIntyre, 2008).

Political risk and cultural distance are two of the most researched host country institutional factors (López & Vidal, 2010; Morschett, Schramm-Klein, & Swoboda, 2010; Quer, Claver, & Rienda, 2007). However, much of the conventional wisdom is

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derived from developed country multinationals. Empirical research focusing on Chinese multinationals is scarce and mainly based on a small number of cases or on aggregate statistical data. Therefore, more empirical studies are needed to analyze the influence of political risk and cultural distance on the location decisions of Chinese companies.

In order to fill this gap, the aim of this paper is to investigate how political risk and cultural distance affect location choice of Chinese multinationals. More precisely, we try to answer the following question: Does the conventional wisdom, mainly based on developed country multinationals, apply in the case of Chinese firms? Drawing on a sample of the largest Chinese companies, this paper offers some contributions. First, our work extends previous research undertaken in other contexts and shows the extent to which conventional arguments regarding political risk and cultural distance need to be reconsidered. Second, given the increasing wave of foreign acquisitions by Chinese firms, this study contributes to our understanding of some of the factors that influence their location patterns.

The paper is organized as follows. First, building on the institutional perspective, we propose a series of hypotheses concerning the impact of political risk and cultural distance. We then test these hypotheses using firm-level data from a sample of large Chinese companies listed on the Fortune Global 500. After a discussion of the results, we conclude by suggesting possible avenues for future research.

Theory and hypotheses

In the past few years, the institutional perspective has become one of the most suitable theoretical frameworks for analyzing strategic decisions made by companies from emerging or transition economies (Peng, Wang, & Jiang, 2008). Institutions are more than just background conditions. Institutional theory makes it possible to establish solid grounds to explain the internationalization of companies from emerging economies entering other emerging economies and the markets of more developed countries alike (Wright, Filatotchev, Hoskisson, & Peng, 2005).

Institutional differences are particularly important for multinationals operating in more than one institutional context (Meyer, Estrin, Bhaumik, & Peng, 2009). The formal and informal rules affect not only how a company chooses to enter an economy, but the very decision on whether or not to set up in a particular country. Institutional factors play an increasingly important role in location decisions (Zheng, 2009). Institutional factors alter the cost of doing business in one nation rather than another, which affects every aspect of the multinational’s behavior, including location choice (Henisz & Swaminathan, 2008).

Institutions establish the rules of the game that structure interactions, and organizations are the players limited by these rules, which can be both formal—laws and regulations—and informal—customs, traditions, or codes of conduct (North, 1990). According to institutional theory, companies make their strategic choices based on the interaction between institutions and the organization itself, and attempt to obtain institutional legitimacy in terms of the host country’s rules and regulations (Cui & Jiang, 2010).

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Political risk

From the regulative institutional perspective, a decision on location choice for multinationals is to determine favorable locations where regulative institutional constraints are less repressive to FDI activity so that multinationals can more readily conform to the regulative constituents of the host countries (Kang & Jiang, 2011). The political and legal regime is one of the main dimensions of these regulative institutions. In this regard, host country political risk can be considered alongside any other kind of external influence that affects the company’s operations, whether that means the possibility of expropriation or nationalization of the investment, or other government actions or changes in the political and social situation that could have a negative effect on economic activity (Kobrin, 1979; Robock, 1971; Simon, 1984).

The differences in political risk between countries affect the stability of their markets, which affects foreign companies aiming to do business there. The high degree of uncertainty associated with foreign ownership or increased asset exposure in the event of eventual expropriation are some of the factors that can hinder FDI decisions (Brouthers, 2002; Pak & Park, 2004). As a result, the conventional wisdom suggests that higher political risk will be negatively related to FDI, given that multinational companies will be more reluctant to invest in countries that are a high risk or have an unstable environment.

Although some papers focusing on Chinese multinationals support this view (Duanmu, 2011; Duanmu & Guney, 2009), there is empirical evidence suggesting that the risks of the host country do not affect Chinese multinationals in a conventional way. Cui and Jiang (2009a) found that country risk does not affect how Chinese multinationals commit FDI resources. Buckley et al. (2007) did not confirm that Chinese outward FDI is negatively associated with high levels of political risk in the host country. Some papers even report that Chinese multinationals tend to invest in countries with higher levels of risk (Bunyaratavej & Hahn, 2007; Kang & Jiang, 2011; Malhotra & Zhu, 2009; Ramasamy, Yeung, & Laforet, 2011).

The very idiosyncrasy of China’s own institutional framework may provide some arguments for these findings (Buckley et al., 2007). Because of imperfections in the Chinese capital market, the cost of capital is very low for state-owned Chinese companies. Furthermore, because they are conditioned by the institutional influences of the Chinese government, they may not be behaving purely as profit maximizers. Moreover, an important part of the Chinese outward FDI has been directed at countries with which China has close political and ideological ties, many of which have a high political risk. As a result, we propose that:

Hypothesis 1 Host country political risk is not associated with the location of Chinese outward FDI.

Cultural distance

The normative pillar of the institutional environment emphasizes the influence of social values and norms, which imposes constraints on inter-organizational behavior.

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Establishment of social legitimacy can be also more difficult than regulative legitimacy, as normative controls stress a deeper moral base and are more likely to be internalized than regulative controls (Scott, 2001). Cultural distance is considered a major barrier for multinationals gaining normative legitimacy in host countries, thus affecting FDI location choice (Kang & Jiang, 2011).

Cultural distance refers to possible existing differences in terms of how individuals from different countries observe certain behaviors, which will affect the extent to which working practices and methods can be transferred from one country to another (Hofstede, 1980, 1991). This is another traditional factor in the literature on entry decisions (Chen & Hu, 2002; Madhok, 1997; Pak & Park, 2004; Randoy & Dibrell, 2002): it can lead to additional costs in obtaining information and disrupt communication processes, as well as making it difficult for the local subsidiary to integrate, for the company’s own routines to be applied, and for the product to be adapted.

While institutions are crystallizations of culture, culture is the substratum of institutional arrangements (Hofstede, Van Deusen, Mueller, Charles, & The Business Goals Network, 2002). More precisely, culture can be considered part of the environment’s informal institutions, which underpin formal institutions (Peng et al., 2008). When multinational companies enter an institutional environment with a different set of rules, they must meet social expectations to demonstrate social responsibility and build social legitimacy in the host country. The difficulty in attaining this social legitimacy is related to the cultural distance between the country of origin and the host country (Cui & Jiang, 2009b, 2010). Multinationals would prefer to invest in countries where cultural proximity exists with the home country (Kang & Jiang, 2011). We can therefore expect that:

Hypothesis 2 Cultural distance between China and the host country is negatively associated with the location of Chinese outward FDI.

Data and method

Data collection

The sample for this study is based on the outward FDIs made by the mainland Chinese companies listed on the Fortune Global 500. Overall, 35 different mainland Chinese firms were listed between 2005 and 2009. The data on each FDI were obtained from news items published on the website of China Daily (www.chinadaily. com.cn), the largest English-language newspaper in China. We considered only already conducted FDIs, thus not including deals or bids not absolutely confirmed. In order to enhance data reliability, we consulted other data sources, including each company’s corporate website, the Chinese newspaper Global Times, and the main “cross-border M&A deals” list reported annually by the UNCTAD World Investment Report. Having searched all news items covering international deals by each of the 35 firms between January 2002 and December 2009, we obtained 139 decisions on outward FDIs made by 29 firms in 52 countries. Since we study the decision of location or non-location of a firm in a particular country, we potentially can have a

Political risk, cultural distance, and outward FDI 1093

sample size of 1,508 (29 firms * 52 countries) but due to missing values, we had 1,421 observations.

The company that made the most FDIs during this period was China National Petroleum Corporation (CNPC), with 22 FDIs, followed by Sinopec (11), Industrial and Commercial Bank of China (ICBC) (10), and China National Offshore Oil Corporation (CNOOC) (9). The main host countries in the sample were Australia (14 FDIs), the US (10), Indonesia (9), the UK (8), and Canada and Russia (7). Table 1 lists all the firms’ number of FDIs at a yearly level, while Table 2 reports descriptive data for location distribution of our sample.

Table 1 Number of outward FDIs by firm and year 2002–2009.

Firm 2002 2003 2004 2005 2006 2007 2008 2009 Total

CNPC 中国石油天然气集团公司 0 0 0 5 4 1 5 7 22

Sinopec 中国石化 0 1 1 4 1 1 1 2 11

ICBC 中国工商银行 0 0 0 0 1 1 3 5 10

CNOOC 中国海洋石油总公司 1 0 0 1 2 1 1 3 9

Bank of China 中国银行 1 1 0 0 1 1 4 0 8

Lenovo 联想 0 0 0 2 2 3 1 0 8

Sinosteel 中国中钢集团公司 0 0 0 2 1 2 2 0 7

China Telecom 中国电信 1 0 0 1 1 0 3 0 6

China Minmetals 中国五矿集团公司 0 0 0 0 1 1 3 1 6

Sinochem 中国中化集团公司 0 2 0 0 0 1 1 1 5

Chinalco 中国铝业 0 0 1 0 0 2 2 0 5

China Construction Bank 中国建设银行 0 0 1 0 0 1 1 1 4

Baosteel 上海宝钢集团公司 0 0 1 0 0 1 1 1 4

SAIC 上海汽车工业(集团)总公司 1 0 1 0 0 1 0 1 4

China Metallurgical Group 中国冶金科工 集团公司

0 0 0 1 0 1 1 1 4

CITIC Group 中国中信集团公司 0 0 0 0 1 2 0 0 3

COSCO 中远集团 0 0 0 0 0 1 2 0 3

China Unicom 中国联通 0 1 0 0 0 2 0 0 3

State Grid 国家电网 0 0 0 0 1 1 0 0 2

China Mobile 中国移动通信 0 0 0 0 0 1 0 1 2

China Faw Group 第一汽车集团 0 0 0 1 0 1 0 0 2

CSCEC 中国建筑工程总公司 0 0 1 0 0 0 0 1 2

China Huaneng Group 中国华能集团公司 0 1 0 0 0 0 1 0 2

Jiangsu Shagang Group 江苏沙钢集团 0 0 1 0 0 1 0 0 2

China Life Insurance Company 中国人寿保险 0 0 0 0 0 0 1 0 1

China Railway Engineering Corp. 中国铁 路工程总公司

0 0 0 0 0 0 1 0 1

China Railway Construction 中国铁建 0 0 0 0 0 0 0 1 1

COFCO 中粮 0 0 0 0 0 0 1 0 1

Bank of Communications 交通银行 0 0 0 0 0 1 0 0 1

Total 4 6 7 17 16 28 35 26 139

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Measures

Dependent variable The location decision by firm i about a FDI in country j was proxied by a dummy variable, which is assigned a value of 1 if firm i invests in country j, and 0 otherwise.

Independent variables Based on Buckley et al. (2007), Duanmu (2011), and Duanmu and Guney (2009), host country political risk was proxied by the political risk rating of the International Country Risk Guide (PRS, 2009). This rating assigns risk points to a pre-set group of factors, termed political risk components. In every case the lower the risk point total, the higher the risk, and the higher the risk point total the lower the risk. In order to take into account institutional differences, we calculated a political risk distance by subtracting the target market risk value from the home market value (Brouthers, Brouthers, & Werner, 2008).

We used two measures of cultural distance. First, using the Kogut and Singh (1988) index, we calculated the cultural distance between China and each host country. A potential problem about this measurement lies in the fact that, for some countries, no indicators in the index are available. We tried to overcome this difficulty by assigning these countries the score of others supposed to be culturally similar (Erramilli, 1991). Second, based on data reported by the Ohio University (2009), we measured the cultural proximity to China using the percentage of ethnic Chinese in the host population. This dummy variable takes value 1 when this percentage is higher than 1%, and 0 otherwise (Buckley et al., 2007).

Control variables Characteristics of the host market such as size or potential are widely recognized factors that affect the flow of FDIs received by a country (Mascarenhas, 1992; Yu, 1990). We controlled for several host country variables that may impact FDI location choice (Yuan & Pangarkar, 2010). Domestic demand

Table 2 Location of Chinese outward FDI 2002–2009.

Location Number of FDIs

Australia 14

US 10

Indonesia 9

UK 8

Canada, Russia 7

Singapore 5

Ecuador, India, Kazakhstan 4

Germany, Iraq, Japan, Mexico, South Korea, Switzerland, UAE 3

Afghanistan, Angola, Brazil, Costa Rica, Peru, Philippines, Saudi Arabia, South Africa, Sudan, Venezuela, Vietnam

2

Azerbaijan, Bahamas, Chile, Congo, Gabon, Greece, Iran, Jamaica, Malaysia, Mauritania, Mongolia, Netherlands, Nigeria, Pakistan, Papua New Guinea, Poland, Slovakia, Syria, Taiwan, Thailand, Turkey, Uzbekistan, Yemen, Zimbabwe

1

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(measured as domestic expenditure to GDP) is a proxy for market size. Developed country is a dummy variable which is assigned a value of 1 for developed countries and 0 for developing countries.

The intensity of trade relations between home and host countries may also affect FDI flow (Grosse & Trevino, 1996). Exports to the host country may be used to supply inputs or products to subsidiaries established there. Similarly, imports from these subsidiaries may be used to supply the head office with inputs, or even to supply products to the market in the country of origin. To control the possible influence of these factors, we incorporated two more variables into the model (Duanmu & Guney, 2009): Chinese exports to the host country, and Chinese imports from the host country. The data for both was obtained from the MOFCOM (2009). We used log transformation to normalize the distribution of these variables.

In order to control the effect that industry can have on FDI location decision, we considered three industry dummies: mining-quarrying, manufacturing, and service. These industry variables may also reflect some of the motives that Chinese companies have. We also included several firm characteristics that may affect outward FDI decisions: firm size, measured as logarithm of sales, and listed firm, a dummy variable which is assigned a value of 1 if the company is listed in a stock market, and 0 otherwise.

Results and discussion

The hypotheses were tested using a conditional logit model, which is particularly appropriate in situations where the attributes of the choice may also have an impact on the outcome. It has been used in prior empirical studies of location choice (Duanmu, 2011; Yuan & Pangarkar, 2010).

Table 3 reports descriptive statistics and correlations while Table 4 shows the results of the conditional logistic regression. As can be seen, we used two models. Model 1 performs the regression considering only control variables. Model 2 also includes independent variables relating to the hypotheses.

The regression equation in Model 1 is statistically significant (Chi-square = 56.09, p < 0.001), which suggests that the control variables relating to host market, intensity of trade relations, industry, and firm characteristics explain the FDI location choice. These effects are maintained when the explanatory variables are incorporated (Model 2). The regression equation in Model 2 is also statistically significant (Chi-square = 52.14, p < 0.001).

Hypothesis 1, which stated that political risk was not related with FDI location decisions, is supported. This goes against the results of previous studies on multinationals from other countries—particularly developed countries. However, as we stated above, previous studies on Chinese multinationals obtained similar results (Buckley et al., 2007; Cui & Jiang, 2009a).

Several explanations can be found for this result that contradicts the conventional influence of political risk on FDI decisions. First, the size of the FDI may affect the influence of political risk. Thus, when making large investments, Chinese companies can take advantage of the opportunity to acquire cheaper assets in countries with a

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T a b le

3 M ea n s, st an d ar d d ev ia ti o n s, an d co rr el at io n s.

M ea n

S D

1 2

3 4

5 6

7 8

9 1 0

11

1 . D o m es ti c d em

an d

7 1 .4 9

1 4 .4 2

2 . D ev el o p ed

co u n tr y

0 .3 3

0 .4 7

0 .1 8 * *

3 . C h in es e ex p o rt s

5 .5 9

0 .8 2

−0 .0 4

0 .5 5 * *

4 . C h in es e im

p o rt s

5 .4 0

1 .1 1

−0 .2 1 * *

0 .3 6 * *

0 .7 4 * *

5 . M in in g -Q

u ar ry in g

0 .1 4

0 .3 4

−0 .0 0

−0 .0 0

−0 .0 0

−0 .0 0

6 . M an u fa ct u ri n g

0 .3 1

0 .4 6

0 .0 0

0 .0 0

0 .0 0

0 .0 0

−0 .2 7 * *

7 . S er v ic e

0 .5 5

0 .5 0

0 .0 0

0 .0 0

0 .0 0

0 .0 0

−0 .4 4 * *

−0 .7 4 * *

8 . F ir m

si ze

4 .4 8

0 .2 6

−0 .0 0

0 .0 0

0 .0 0

0 .0 0

0 .4 1 * *

−0 .2 9 * *

−0 .0 2

9 . L is te d fi rm

0 .7 9

0 .4 1

0 .0 0

0 .0 0

0 .0 0

0 .0 0

0 .2 0 * *

−0 .3 9 * *

0 .2 2 * *

−0 .0 3

1 0 . P o li ti ca l ri sk

−0 .3 2

1 3 .8 9

0 .1 5 * *

0 .6 8 * *

0 .4 7 * *

0 .2 9 * *

−0 .0 0

0 .0 0

0 .0 0

0 .0 0

0 .0 0

11 . C u lt u ra l d is ta n ce

(i n d ex )

1 .5 9

1 .0 7

0 .2 3 * *

0 .6 0 * *

0 .3 6 * *

0 .1 9 * *

−0 .0 0

0 .0 0

0 .0 0

0 .0 0

0 .0 0

0 .6 2 * *

1 2 . C u lt u ra l d is ta n ce

(e th n ic

C h in es e)

0 .2 1

0 .4 1

−0 .1 1 * *

0 .0 4

0 .2 8 * *

0 .3 5 * *

0 .0 0

0 .0 0

0 .0 0

0 .0 0

0 .0 0

0 .2 3 * *

0 .0 1

N = 1 ,4 2 1 .

* * p < 0 .0 1 (s ig n if ic an ce

le v el s ar e b as ed

o n tw o -t ai le d te st ).

Political risk, cultural distance, and outward FDI 1097

politically unstable system (Malhotra & Zhu, 2009). Second, Chinese companies may attempt to take advantage of the opportunities presented by high-risk countries, whose markets may not be highly exploited or may even be unknown to large Western multinationals, such as first-mover advantages, less competition, or a lower level of consumer sophistication (Bunyaratavej & Hahn, 2007).

For Hypothesis 2, which stated that cultural distance would negatively affect Chinese outward FDI location choice, we obtained mixed results. Thus, Hypothesis 2 is only partially supported. By measuring the cultural distance using the Kogut- Singh index (1988), we did not obtain statistical significance. This result goes against observations made by some previous studies on Chinese multinationals. For example, using the same measure, Li and Wu (2006) found that cultural distance had a negative influence on the number of Chinese FDIs in each country, and Kang and Jiang (2011) reported that Chinese firms tended to locate FDI operations in host countries with which China had a smaller cultural distance. Using another measure, Cui and Jiang (2009a, 2009b, 2010) found that cultural barriers also had a negative impact on Chinese companies committing FDI resources.

One possible reason for our result may be that the influence of cultural distance may depend on the Chinese company’s objectives. While market-seeking invest- ments might well have been initially aimed at countries in which this distance was smaller, strategic asset-seeking investments have been mainly aimed at developed countries in North America and Europe, which are culturally more distant (Young et al., 1996). Also, many Chinese companies do not seem to shy away from cultural distance, perhaps aided by the alliances they have made in China with multinationals from developed countries (Luo & Tung, 2007).

Table 4 Results of conditional logistic regression.

Variables Model 1 Model 2

β SE β SE

Domestic demand (control) 0.01 0.01 0.01 0.01

Developed country (control) −0.03 0.23 −0.08 0.32 Chinese exports (control) 0.65** 0.22 0.68** 0.24

Chinese imports (control) 0.02 0.16 −0.05 0.17 Mining-Quarrying (control) 0.65* 0.26 0.60* 0.27

Manufacturing (control) 0.18 0.25 0.22 0.25

Firm size (control) 0.73* 0.35 0.73* 0.36

Listed firm (control) 0.23 0.28 0.30 0.29

Political risk (H1) 0.01 0.01

Cultural distance (index) (H2) 0.04 0.11

Cultural distance (ethnic Chinese) (H2) 0.38† 0.23

Chi-square 56.09*** 52.14***

N 1,508 1,421

Dependent variable: (1) Firm i invests in country j, (0) otherwise.

Service is the reference category for industry.

† p < 0.10, * p < 0.05, ** p < 0.01, *** p < 0.001.

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However, when cultural distance is proxied by the percentage of ethnic Chinese in the host country, a positive effect is obtained, although with a low statistical significance (β = 0.38, p < 0.1). Therefore, the proportion of ethnic Chinese in the host country seems to be a factor which favors Chinese outward FDI, in line with Hypothesis 2. This result coincides with the findings by Buckley et al. (2007), who offer various explanations for the particular importance of overseas Chinese. The Chinese diaspora has contributed to China’s integration into the world economy, thanks in particular to the number of FDIs in mainland China from Singapore, Hong Kong, and Taiwan. Overseas Chinese may also have a significant influence on the choice of host country for Chinese outward FDIs. Contacts and social networks (known in China as guanxi) are one of the essential ingredients for the Chinese when doing business. The presence of overseas Chinese in the host country may therefore reduce the risks and costs associated with identifying business opportunities by Chinese companies, thus favoring Chinese outward FDI.

With regard to the control variables, our model shows that three of the variables do seem to have a significant effect on the location decisions made by Chinese multinationals. First, Chinese outward FDI is positively associated with the volume of Chinese exports to the host country (β = 0.68, p < 0.01). However, the influence of the volume of imports from the host country to China is not statistically significant. This mixed influence of the intensity of two-way trade relations on Chinese outward FDI was also observed by Buckley et al. (2007) and Duanmu and Guney (2009).

In addition, belonging to a mining-quarrying industry is positively associated with the decision to invest in a particular country (β = 0.60, p < 0.05). As we pointed out in the introduction section, the search for resources, particularly natural resources, has been one of the traditional objectives of Chinese FDI. Although data on the specific reason behind each FDI decision are not available in our dataset, descriptive statistics of several variables may be able to reflect some of the motives that Chinese companies have. As stated above, countries rich in raw materials such as Australia, Canada, Russia, or Kazakhstan are among the main destinations of Chinese outward FDI during the period analyzed. Furthermore, oil and gas companies account for nearly 70% of the total FDI decisions covered by our sample, with CNPC, Sinopec, or CNOOC leading the ranking. Mining-quarrying industries are natural-resource intensive industries and outward FDI of Chinese multinationals belonging to these industries is mainly related to a resource-seeking motive.

Finally, firm size is also positively related to FDI location choice (β = 0.73, p < 0.05). Larger size implies greater availability of financial and managerial resources. Given the costs and risks involved, the propensity to invest abroad is likely to increase in larger firms. These firms may be in a better position to successfully compete with host country firms, especially in developed countries, and absorb the high costs and risks in international operations (Pangarkar & Yuan, 2009).

Conclusion

This paper aimed to study the influence of host country political risk and cultural distance on the location decisions made by large Chinese multinationals. Our findings show certain characteristics that differ from the conventional wisdom of

Political risk, cultural distance, and outward FDI 1099

multinationals. Host country political risk is not associated with the location of Chinese outward FDI and cultural distance does not have a strong negative influence on such decision. In addition, three other variables seem to have a positive effect on the decision to invest in a particular country: the volume of Chinese exports to the host country, belonging to a mining-quarrying industry, and firm size.

In any case, when interpreting our results, the limitations inherent to the nature of our empirical research should be taken into account. The main limitation may be that certain variables that may also have an influence on location decisions could not be included, such as the specific reason for each outward FDI—looking for resources, markets, or strategic assets. Depending on what the objective is for Chinese companies in each country, the institutional factors linked to each location may play a very different role. For example, institutional restrictions that may arise when a Chinese company makes an investment to access a resource considered strategic for the host country may not be applied when investments are made in that same country for the purposes of accessing its market.

Anyway, our research makes some theoretical and empirical contributions to the literature. From a theoretical standpoint, this study contributes to the understanding of FDI location choice by examining the influence of two of the most researched host country institutional factors—political risk and cultural distance—on Chinese outward FDI. More precisely, we tried to analyze if the conventional wisdom, mainly based on developed country multinationals, applies in the case of Chinese firms. Our results show that the location patterns of Chinese multinationals share some characteristics with approaches traditionally associated with institutional theory. Thus, the presence of overseas Chinese in the host country seems to be a factor that helps Chinese companies to overcome the possible cultural barrier. However, other findings seem to go against the conventional logic that has been observed in location decisions made by multinationals from other, particularly Western, countries. A high political risk in the host country does not act as a particular disincentive for Chinese multinationals. Furthermore, although we used a conventional measurement that is widely used in the literature on multinationals, we were unable to confirm that cultural distance is an important institutional barrier for Chinese companies. All this may challenge traditional considerations of the institutional approach, which would need to be adapted to explain the international behavior of Chinese multinationals.

The main empirical contribution of our research lies in having provided new evidence regarding a phenomenon that is acquiring ever-increasing economic importance: the arrival of Chinese multinationals on the international scene. Even though in recent years more and more studies have focused on Chinese multina- tionals, given the recent nature of their internationalization process, more research is needed to extend our knowledge of these companies.

There are several interesting avenues for further research. As well as incorporating other variables that could affect location patterns, such as those mentioned above relating to the specific objectives of each outward FDI decision, there are other questions that require further study. As occurs with institutional theory, it is still necessary to analyze the degree to which the international expansion of Chinese multinationals is a challenge for other consolidated theoretical frameworks, such as the resource-based view, the transaction-cost perspective or the agency theory. It would also be interesting to study how Chinese multinationals make other important decisions, for instance, how

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they choose entry modes or the type of native or expatriate staff for their foreign subsidiaries. Moreover, analyzing the steps of the internationalization process may be useful in order to discover if some Chinese firms go to the more popular locations in the early stage, and then expand to the less popular locations. Further research on the motivations of Chinese multinationals is also needed in order to determine the underlying motives that drive them to engage in outward FDI. Finally, comparing the similarities and differences between this recent internationalization process of Chinese multinationals and the previous expansion of its Japanese and Korean neighbors could be another promising avenue for future research.

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Diego Quer (PhD, University of Alicante, Spain) is an associate professor in the Department of Management at the University of Alicante, Spain. His primary research interests include several topics of international management, such as entry modes or the internationalization process, with a special focus on the Chinese context. He has published research papers in international journals including the Asia Pacific Journal of Management, International Business Review, Emerging Markets Finance and Trade, Chinese Management Studies, Family Business Review, Cross Cultural Management: An International Journal, International Journal of Tourism Research, International Journal of Contemporary Hospitality Management, Journal of General Management, Journal of Asia Business Studies, Asia Pacific Journal of Business Administration, and Journal of China Tourism Research.

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Enrique Claver (PhD, University of Valencia, Spain) is a professor and Head of the Department of Management at the University of Alicante, Spain. His primary research interests are strategic management, knowledge management, and international management. He has published research papers in international journals including the Information & Management, Total Quality Management & Business Excellence, International Business Review, Asia Pacific Journal of Management, Emerging Markets Finance and Trade, Journal of Asia Business Studies, Family Business Review, Journal of General Management, Chinese Management Studies, Cross Cultural Management: An International Journal, International Journal of Tourism Research, and International Journal of Contemporary Hospitality Management.

Laura Rienda (PhD, University of Alicante, Spain) is an associate professor in the Department of Management at the University of Alicante, Spain. Her primary research interests include family business management, international management, and business and management in India. She has published research papers in international journals including the Asia Pacific Journal of Management, Family Business Review, Chinese Management Studies, Cross Cultural Management: An International Journal, Journal of General Management, Journal of Small Business and Enterprise Development, Asia Pacific Journal of Business Administration, and La Revue des Sciences de Gestion. Direction et Gestion.

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