Location factors and country-of-origin differences: An empirical analysis of FDI in China

Multinational Business Review, Spring 2000 by Zhao, Hongxin, Zhu, Gangti

Using foreign direct investment (FDI) data of 50 locations over a four-year period in China, we investigated the effects of heterogeneous location factors and countries-of-origin on the level of FDI inflow. Results indicate that while market potential, cost factors, and infrastructure adequacy affect FDI location preference, foreign investors do reveal divergent sensitivity to a set of location variables. Statistical results from structure break tests and multiple regression analysis showed that responses to location-specific factors vary significantly among foreign investors with different countries-of-origin.

INTRODUCTION

Since Dunning's seminal work on eclectic theory [Dunning, 1979], scholars active in the field of international business have sought to examine location factors as determinants of FDL Though a considerable number of researchers has studied location preferences of multinational firms across national borders, investigation of location preference of foreign investors within the boarder of a given host country is lacking (Swamidas, 1990). This is particularly true in the context of FDI in China. While China-related FDI issues have drawn increasing attention of researchers over the years [Beamish, 1993; Shan, 199 1; Zhao and Zhu, 1998; Teagarden, 1992; Pearson, 1991], systematic analysis of location effects on the FDI absorption is almost non-existent. Given the phenomenon of uneven distribution of FDI in China. The FDI imbalance raises two important research questions. First, why do foreign investors from a given country tend to flock to certain locations within a country rather than others? Second, do foreign investors of different countries-of-origin differ in the level of FDI commitment, facing a similar business environment but different location conditions? This paper attempts to address these two research questions by empirically examining FDI inflows into 50 locations in China from 1992 to 1995. The inquiry of these research questions has both academic and practical implications.

Despite the increased research into FDI in China, few studies have been undertaken so far to empirically analyze the influential factors on the location choice by foreign investors. To the best of our knowledge, these factors have remained primarily anecdotal. Systematic analysis of location choices by foreign investors in the Chinese context can add to our understanding of FDI in general, and enrich our knowledge of FDI in China in particular. Practically, identifying factors influencing the location preferences of FDI from different countries-of-origin can help design specific regional policies to both attract FDl from a specific country-of-origin and/or divert venture business into designated cities/regions where foreign capital is most needed. As China has recently been pursuing vigorous policies towards foreign investments and diverting the FDI inland, she needs to recognize the importance of location conditions in influencing the inflow of FDI from different countries-of-origin.

This study sets out to achieve two specific objectives: (1) identify and estimate the important factors that influence the intracountry location choices of foreign investors in general and (2) examine whether location preferences of foreign investors vary due to different countries-of-origin. The remainder of this paper is organized as follows: Section 2 presents research hypotheses built on the theoretical development of location preference of FDL Section 3 describes the research method and model specification. Section 4 discusses empirical results using data of FDI inflows in 50 different locales from 5 country-of-origin groups during 19921995. The final section summarizes and concludes our analysis.

THEORETICAL BACKGROUND AND HYPOTHESES

Location Factors and FDI

The choice of location for firms within a foreign country has to be made within the strategic framework. However, foreign investors do not focus their investments in the same area "because they appear to accord different weights to various locational characteristics" [Little, 1978]. Profit-seeking companies will explore the location-endowed assets from a variety of locations [Dunning's 1998]. They view location-bound assets as complements to their own core competencies, since location-specific factors present themselves with varying degrees of attractiveness to foreign investors.

Following Dunning's work, subsequent studies indeed identified the important roles of location factors in FDI. Svcdberg [1981] identified a list of location factors that influence the FDI decision: psychic proximity, host government policy and investment incentives, infrastructure adequacy and price of resources. Casson and Associates [1986] suggested that the decision of a firm to locate different stages of production in different countries (vertical integration) depends on the comparative advantage between home and host country, barriers to trade and incentives to internalize. On the other hand, the horizontal integration of FDI was influenced by trade barriers in the form of tariffs and transport cost. The rational global planning model by Robock and Simmonds [1983] attempted to link internalization to location decision that represents rational patterns for supplying a particular market based on market objectives and location economics. The factors included in the model are labor supply, management, capital, and the availability of marketing and research facilities.