different countries were rich in different resources those scarce and hence expensive in one place might have been cheaper elsewhere. Indeed, the very basis of investment abroad is linked to comparative advantage as suggested by David Ricardo and then developed in the terms of international trade and factor endowments by Heckscher and Olin. Later on, Kindleberge and Hymer found out that such innate differences were not the only driver of foreign investment. With the emergence of multinational corporations, these felt limited by other problems such as market imperfections, economies of scale, governmental interference, etc. and hence new incentives arose.32 By the same token, as more developed products were growing in dependence on primary materials, parts of the final product often came from subsidiary suppliers with growing intensity. Buckley and Casson suggested that internalization is yet another important motivation to pump capital abroad. Their classical FDI theory suggested that ―firms internalize missing or imperfect external markets until the costs of further internalization outweigh the benefits‖ and that ―firms choose locations for their investment activities that minimize the overall costs of their business operations.”33 Following these studies, others followed suit trying to dis/prove certain motivations, but with no theoretically rigid and sound framework.34
Regardless of this multitude of theoretical perspectives, the dictate of the market would normally suggest that firms need to have motives to put their capital abroad instead of in their countries of origin. Indeed, as perceived opportunities abroad objectively differ in time and space, so do the goals of potential investors.
While there are naturally certain innate differences between potential recipients of inward FDI, these do not play any role until the goals, aspirations and motivations are analyzed. The Dunning‟s motivation analysis of FDI is hence a groundbreaking
32 Nayak, D. and Choudhury R. N., “A selective review of foreign direct investment theories,” Asia-Pacific Research and Training Network on Trade, Working paper No. 143, March 2014.
33 Buckley, P. J. and Casson, M., “The optimal timing of a foreign direct investment,” Economic Journal, 91(361), 1985, pp. 75–87 as in Franco, C. et al, “Why Do Firms Invest Abroad? An Analysis of the Motives Underlying Foreign Direct Investments,” The IUP Journal of International Business Law, Vol. 9, Nos. 1 & 2, pp. 42-65, January & April 2010.
34 Wadhwa, K., “Foreign Direct Investment into Developing Asian Countries: The Role of Market Seeking, Resource Seeking and Efficiency Seeking Factors,” International Journal of Business and Management, Vol. 6, No. 11; November 2011.
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approach applicable in case by case. While there were numerous frameworks for such academic inquiry, Dunning‟s work proved to be replicable enough to be used as a standard.35
While the theory of FDI motivations was never studied separately, its academic diversity was helpful when discovering multiple different nuances.36 As mentioned above, the most imposing work of FDI investigation is the one by Dunning.
His initial work, the OLI Model (or Eclectic Paradigm) is sourcing on the internalization theory and looks at three other different factors: Ownership advantage;
Location Advantage and Internationalization advantage.37 While these would discuss what kind of foreign market entry is the most suitable (Licensing, Export or FDI), Dunning later on further elaborated on this theory to provide four main motivations to invest abroad:38
1) Resource seeking struggles to acquire (natural) resources that are either unavailable at home or available only at higher costs
2) Market seeking strives to reach new (and bigger) markets including suppliers and consumers while saving on export
3) Efficiency seeking is defined twofold as to “take advantage of differences in the availability and costs of traditional factor endowments in different countries” and to “take advantage of the economies of scale and scope and of differences in consumer tastes and supply capabilities”39
4) Strategic asset seeking describes investment that hopes to acquire and complement a new technological base
It is important to note that this differentiation relies heavily on interpretation. For this reason it is easy to come across works that consider cheap labor as an efficiency seeking motivation, rather than a resource seeking one; at the same time, while
35 Franco, C. et al, 2010, p. 6.
36 Check for example Chapter two from Castro, F.B., “Foreign Direct Investment in the European Periphery,” PhD. Thesis, The University of Leeds, July 2010.
37 Stoian, C. and Filippaios, F., “Dunning's eclectic paradigm: A holistic, yet context specific framework for analysing the determinants of outward FDI: Evidence from international Greek investments,” International Business Review, Vol 17, Issue 3, June 2008.
38 Dunning, J.H. 1993, Multinational enterprises and the global economy, 1993, Workingham.:
AddisonWesley as in Franco, C. et al, 2010.
39 Ibid.
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exports may be often considered a market seeking motivation, in the case of CEE they are also an efficiency seeking move because of tariff jumping advantages to reach other European Union (EU) markets. Further, for example, although Whadhwa et al.
think of infrastructure as resource seeking factor, this may be reasonable for their study – it is not nevertheless for this one.40 In the view of other markets, the calculations of Chinese investors would probably ponder “if it is cheaper to export to Germany from CEE or North Africa, rather than around the lines if they can reach all the potential customers within the countries themselves”. For these reasons, we cannot delineate clearly what proxy stands for what motivation cluster as suggested by Dunning. Analytical qualitative interpretation is what helps us better unearth the meaning of the results rather than just simply putting different variables under these four – or any other – labels.
While this Dunning‟s theory is the theoretical cornerstone of this work, there is a plethora of other theories – either general or focused on the case of China – that deserve to be taken into consideration.
Ekholm, for example, came up with the idea that market seeking investment does not need to be based only on the assessment of recipient economy. This economy may only serve as an “export platform” and investment is hence done in the view of other markets as well.41 Also institutions were rightfully acknowledged their importance as these set the rules of the game. Institutions are what guards uncertainties, prevents risks, but also what dictates transaction costs and thus these are both domestically and internationally (meant in each perspective recipient state) very important.42
The abovementioned theories were initially meant to explain the natural FDI flows from developed to developing countries. Since the 1980‟s, however, developing countries – mainly on the South-South axis, started to play a more important role that dramatically graduated after the global financial crisis in 2008.43 This did not mean that the traditional viewpoints and frameworks were rendered useless, but they had to
40 Wadhwa, K., 2011.
41 Ekholm, K. et al., “Export-platform foreign direct investment,” NBER, Working Paper 9517, 2003.
42 Bénassy-Quéré et al., “Institutional Determinants of Foreign Direct Investement,” CEPII, Working Paper No 2005-05, April 2005.
43 Aykut, D., “Outward FDI from developing countries are up, notably South-South flows,” The World Bank Blog, June 2011.
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Bano and Tabbada analyzed numerous reasons why developing countries tend to go abroad, with results suggesting that high domestic savings rate, an export oriented economy, rapidly growing GDP and substantial international reserves correlate with FDI outflow.44 The suggested logic is very simple. Developing countries receive foreign capital, get slowly developed on certain level, accumulate savings and reserves, and then they have the option to reinvest the money either domestically or abroad. There is hence a “systematic relationship between inward and outward [FDI] flows.”45
In the region of Asia-Pacific, this has been greatly extended by J. Mathews with his “linking, leverage, learning” framework. From his perspective, latecomers enjoy the advantage of having links to global value chains and may hence easily enter the foreign market in collaboration with native companies. The struggle to overcome further “barriers of diffusion” by imitation or substitution of resources is, on the other hand, the leverage. Repeating this process will eventually lead to learning and emulation of this know-how elsewhere.46
This is indicating not only that the very basics of Heckscher-Olin‟s theory are universally applicable (as savings rate and international reserves mean cheap capital), but also that FDI theories such as internalization and efficiency seeking is also at place.
Rugman, on the other hand, argues that theories applied to multinational corporations (MNC) from developed countries cannot work with those enterprises from developing regions. He makes a conclusion that regional expansion of MNCs from developing countries will play a more important role than a search for cheap labor force from developed economies. Institutional setup, role of the government and
44 Bano, S. and Tabbada, J., “Foreign Direct Investment Outflows: Asian Developing Countries,”
Journal of Economic Integration, Vol. 30, No. 2, June 2015.
45 Bano, S. and Tabbada, J., “Foreign Direct Investment from Developing Countries: Evidence, Trends and Determinants,” NZAE, Conference Paper, June 2012, p. 21.
46 Mathews, J.A., “Dragon multinationals: New players in 21st century globalization,” Asia Pacific Journal of Management, Vol. 23, Issue 1, March 2006 as in Thite, M. et al., “Internationalization of emerging Indian multinationals: Linkage, leverage and learning (LLL) perspective,” International Business Review, 2015.
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What is, however, the position of China, and (the eternal question): “is China different”? The “Middle Kingdom” is not only different from the developmental perspective, but also from political point of view. One party system and market dominated by State-Owned-Enterprises (SOE) may naturally not respond to economic logic only and may take into account more than the enterprise survival. While this institutional specificity may be appealed to its own sort and may conduct business on its own terms, there are also other deviating factors. These include party survival and domestic (national) development,49 or promotion of foreign policy goals and policies abroad.50 Let‟s, however, have a more detailed look into previous studies that tried to understand China‟s investment motivations.
Filippov and Saebi identified three very broad motives that drive capital out of China: First, it is the macroeconomic flow of capital from places where it is cheap to places where it is scarce. The amount of money in the “Middle Kingdom” simply begs to be invested elsewhere. The need to internationalize, gain further know-how, experience, survive competition etc. is a second motivation shared by Chinese enterprises. Third motive is, however, according their study not economic but bows to political logic as Beijing simply wants to extend influence abroad. As Chinese companies are often state-owned, their ownership of firms abroad may be also linked to Zhongnanhai‟s decision-making.51 Such potential leverage over EU‟s decision-making is, however, too hard to measure at this point as its potentiality is even more elusive than a simple motivation analysis.
47 Sauvant, K., Maschek, W., McAllister, G. (eds), Foreign Direct Investment from Emerging Markets:
Challenges ahead, Palgrave Macmillan US, 2010.
48 Gill and Singh, for example, carried out a comparative study of China and India, finding that their investment target countries differ both sectorally and regionally . For more info see: Gill, A. and Singh, L., “Internationalization of Firms from Emerging Economies: Theory, Evidence and Policy,” Punjabi University, March 2012.
49 Deng, P., “Outward investment by Chinese MNCs: Motivations and implications,” Business Horizons, 47(3), 2004.
50 Yeung, H. W. C., & Liu, W. (2008). Globalizing China: the rise of mainland firms in the global economy. Eurasian Geography and Economics, 49(1), 57-86.
51 Filippov, S. and Saebi, T., 2008.
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majority of studies on China‟s OFDI do not conform to traditional internationalization theories of FDI. In conclusion, they suggest that these theories – in order to let us better understand the nature of Chinese OFDI – need to undergo at least a certain degree of extensions and modifications.52 Other researchers agree.Morck et al. suggest that, although economic-wide logic plays an important role, a number of distortions occur mainly because majority of Chinese investors abroad are SOEs. For various reasons, their rationale to invest in certain countries and/or sectors may differ from general theories driven by liberal and capitalist worldviews. Three key findings may help us understand Chinese behavior better – since these SOEs have deep knowledge of elaborate bureaucratic systems, institutional closeness of recipient state may play an important role. Second, certain maturing industries in China have been due to their growing capabilities able to reverse the traditional developmental roles as they may know their needs better than other investors, hence they take initiative. And third, “China’s outward FDI may be justified economically to SOE insiders who overvalue control due to their distrust of markets and sense of national pride”.53
Interestingly enough, Child and Rodrigues do support this thesis in similar terms. They present the idea that China‟s OFDI is not driven by hopes to gain better competitive advantage but to address their competitive disadvantages. They suggest that catch-up strategies, role of the government, institutional background and liability of the foreigners should be taken into account as well.54
Further, Buckley et al. found that special explanation of Chinese OFDI did bring fruitful outcomes. Their study incorporated such non-traditional variables as capital market imperfections, special ownership advantages and institutional factors into the general theory of MNCs investment incentives. With this study, they
52 Berning, S.C. and Holtbrugge, D., “Chinese Outward Foreign Direct Investment – a Challenge for Traditional Internationalization Theories?,” Journal für Betriebswirtschaft, Vol. 62, Issue 3, pp 169-224, December 2012.
53 Morck, R. et al, “Perspectives on China‟s Outward Foreign Direct Investment,” Journal of International Business Studies, 2008.
54 Child, J. and Rodrigues, S., “The Internationalization of Chinese Firms: A Case for Theoretical Extension?,” Management and Organization Review, Vol. 1, Issue 3, pp 381-410, November 2005.
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successfully identified positive correlations with host country political risk, cultural proximity, market size and natural resources endowments.55
While some studies argue whether well- or badly-governed countries attract more investment, Li and Liang, regardless of these measures, had a look at bilateral relations of respective countries with China. They did find out that the better political relations, the higher flows of China‟s FDI. Their logic suggests that better political ties would serve as protective measures for China‟s money.56
While these theoretical works served as the background understanding of FDI motivations, the selection of respective FDI has been made not only in the view of these, but other peer studies were taken into account as well. This was done in order to make mutual comparison possible.
55 Buckley, P. et al, 2007.
56 Li, Q. and Liang, Q., “Political Relations and Chinese Outbound Direct Investment: Evidence from Firm- and Dyadic-Level Tests,” Research Center for Chinese Politics and Business, Working Paper
#19, Indiana University, 2012 as in Matura, T., 2015.
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