Going global : demystifying Chinese outward foreign direct investment in the United States

Abstract

A major shift is underway in the direction of global capital flows in different forms, especially foreign direct investment (FDI). Historically, FDI flowed from developed to developing countries. In recent decades, however, emerging markets including China have become more active overseas investors. In the late 1990s, Chinese firms became leading investors in emerging regions in Africa and Asia. Since the late 2000s, Chinese investment has begun to expand into more developed economies such as Western Europe and North America. While a number of studies have attended to these shifts in Chinese outward FDI (OFDI), the patterns and strategies of Chinese multinational enterprises (MNEs) in advanced economies at the sub-national level remain under-examined. This research develops a comprehensive framework combining theory from international business, economic geography, political economy and spatial econometric techniques to investigate Chinese OFDI in the United States across the 50 states and Washington, D.C. from 2005-2017. The results from the analysis conducted within this framework are disseminated across three main chapters. The first main chapter explores the role of third-region effects on the location decision of Chinese OFDI in the United States. The spatial Durbin panel data model is estimated with direct and indirect effects to capture the spatial dependence and spillover effects of FDI and economic factors of neighboring states. The empirical results reveal that the presence of spatial dependence of Chinese OFDI in one state considerably affects neighboring states’ likelihood of receiving investment, which is consistent with a mode of complex-vertical FDI. This study also determines that ethnic Chinese contributes greatly to facilitating Chinese OFDI in foreign market. The second main chapter investigates the internal complexity and heterogeneity of Chinese MNEs active in the U.S., comparing investment patterns by Chinese state-owned enterprises (SOEs) and private enterprises (PEs). The empirical results suggest that a firm’s ownership structure strongly impacts its investment patterns and strategies. SOEs are more inclined to pursue greenfield investment motivated by market-seeking and resource-seeking objectives, while PEs predominantly pursue mergers and acquisitions to obtain strategic assets. Additionally, Chinese PEs arise likelier than SOEs to have a dependence on ethnic networks to mitigate potential risks and information asymmetry. This reliance may be due to their relative lack of government subsidies and guarantees compared to SOEs. The third main chapter explores the dynamics of Chinese FDI in real estate (FDIRE), the sector which now attracts more investment from Chinese firms than any other in the U.S. The empirical results reveal that apart from typical market conditions such as market size and housing price, Chinese migrant communities vitally shape Chinese FDIRE. Chinese PEs, however, depend more on Chinese potential home-buyers and ethnicity-based social networks to expand their investments and mitigate transactional costs. Taken together, the results from these three chapters conclude that Chinese OFDI in the United States is a sophisticated and heterogeneous practice not only determined by place-specific economic characteristics, but also ethnic social networks and the spatial dependence of FDI.