Three Essays on Determinants of Outward Direct Investment: Firm-level Evidence from China
Open AccessThis dissertation consists of three essays examining determinants of outward foreign direct investment (FDI) from China, especially the role of firm political connections. The first essay builds a theoretical model based on Helpman et al. (2004) and introduces another aspect of firm heterogeneity, political connections, in addition to productivity. The essay models political connections as a special firm characteristic motivated by the underdeveloped capital market and weak institutions found in most developing countries such as China. The model demonstrates that the stronger the political connections a firm has, the lower the productivity threshold is required for the firm to engage in FDI. Therefore, in the presence of liquidity constraints and fixed costs of FDI, political connections act as a complement to productivity and increase the likelihood of FDI. In the second essay, I employ a unique data set of publicly-listed Chinese firms and measure firm-level political connections using board directors' political backgrounds. The results in the non-parametric analysis and discrete-time survival analysis both show support for the theoretical hypothesis established in the first essay. Using proxies for financial frictions faced by Chinese firms such as institutional quality and dependence on external financing, I found that firms benefit more from their political connections when they are located in under-developed financial markets or when they are in greater demand for external funds. Therefore, loan financing is identified as the main channel through which political connections affect firms' FDI decisions, which results from the financially-constrained firms and the large amount of initial investment required for first-time FDI. In the third essay, I combine external country-specific factors of the potential host countries with internal firm-specific characteristics of Chinese multinational enterprises (MNEs) to examine the location decisions of Chinese MNEs. The results show that the cutoff values of total factor productivity (TFP) and political connections are increasing in tougher FDI conditions measured by smaller GDP or higher entry cost. The results indicate strong incentives of Chinese MNEs to invest in countries that are abundant in capital, skilled labor and natural resources and the political network measured by the foreign aid from China shows positive effect too.
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