What Drives Outward Fdi Of China?: A Regional Analysis
Abstract

China has become one of the world's biggest source of outward FDI in the past decade. A fair amount of literature have emerged explaining home determinants of China's outward FDI at country- and firm-level. Our study attempts to examine drivers of China's overseas investment from a fresh angle – China's regional outward FDI. While central outward FDI is made by large central firms which are directly supervised and managed by the State Council, regional outward FDI is from regional firms that are owned by regional governments and the private sector. The rising importance of regional outward FDI compared with central outward FDI warrants a thorough investigation on the former. We propose a theoretical framework that incorporates an extended Investment Development Path (IDP) theory, home locational constraints, policy incentives and geographic factors. Many variables examined in our study have never been introduced previously to analyse China's outward FDI. Empirically, we employ the Bayesian Averaging Maximum Likelihood Estimates method to address model uncertainty. This is the first time this method is used in FDI literature. All proposed theories (except the geographic factors) are found to capture important perspectives explaining China's regional outward FDI. Our results particularly highlight the importance of government policies (presence of SOEs, willingness to approve local outward FDI, and investment in R&D), but do not support the original IDP hypothesis that outward investment is automatically generated as income grows. We found two variables based on the extended IDP theory, namely trade openness and agglomeration effect to be robust determinants. Pollution is the only home locational constraint that is robust, and geographic factors have little impact on regional outward FDI. Our findings have both regional and central policy implications. Central policy makers need to recognise that local outward investment may response to different set of factors compared with central investment abroad and take this into account when setting outward FDI policies. At regional level, our study provides direct reference on tools local government can employ to facilitate outward investment.


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