institutional factors matter - milken...

December 2012

Institutional Factors Matter:

Perspectives on China’s

Outward Direct Investment

Tong Li

Institutional Factors Matter: Perspectives on China’s

Outward Direct Investment

december 2012

Tong Li

Institutional Factors Matter | Milken Institute

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n the past three decades, China has transformed itself from a central-planned, agricultural economy to the

world’s manufacturing base and growth engine. Expanding at an average annual rate of more than 10 percent,

the Chinese economy is now the second-largest in the world. Globalization is undoubtedly one of the most

important drivers behind this extraordinary growth.

The Chinese economy has benefited tremendously from globalization. International trade has created millions of

manufacturing jobs that helped absorb rural migrant workers. Foreign direct investment in China has not only

provided capital that is essential for regional development but also brought advanced technologies and

managerial skills. Deeper integration with global financial markets has broadened access to foreign capital for

Chinese businesses via equity offerings on foreign stock exchanges as well as venture capital and private equity

investments. The momentum of globalization further accelerated after China joined the World Trade

Organization in 2001. Since then, China has gradually opened its financial markets, allowing portfolio investment

in Chinese firms and removing certain restrictions on foreign direct investment.

Globalization is not a one-way process. As Chinese businesses grow and mature, they face new challenges. Labor

and raw material costs have risen rapidly in recent years, pushing these businesses to move away from the old

labor-intensive growth model and shift toward the higher end of the value chain. They are increasingly turning

to outward direct investment (ODI) to diversify their product portfolios, take advantage of cheaper labor in

foreign countries, and claim reliable sources of raw materials. Recent attempts by the Chinese government to

internationalize the currency have only added to the momentum.

In recent years, several instances of Chinese outward direct investment received wide media attention. Among

them were Lenovo Group’s purchase of IBM’s personal computer division in 2005 and Wanda Group’s

acquisition of AMC Entertainment in 2012. However, acquisitions of assets by state-owned enterprises in natural

resource-rich countries—especially African countries—have stirred the most concern.

Despite the hype, Chinese outward direct investment remains small in relative size. Aggregate Chinese ODI flows

from 2003 to 2011 were merely 2.5 percent of the world’s total. In 2011, China’s ODI stock was 1.7 percent of

the world’s total, or 5.2 percent of the nation’s GDP. When measured by direct investment, China is much less

globalized than when measured by international trade. According to the 2011 edition of World Investment

Report, as of 2008, only two of the top 100 transnational corporations were based there (the CITIC Group and

China National Offshore Oil Corp.).

Is China’s relatively low outward direct investment level justified by economic fundamentals? What are the

determinants of Chinese ODI? This paper uses country-level data to analyze the patterns of these investments.

The empirical analysis builds upon a simple gravity model, adopts traditional theories on motives for direct

investment abroad, examines institutional factors and adjusts for China-specific factors. Section 1 provides an

overview of China’s outward direct investment; Section 2 reviews select literature on bilateral direct investment

and summarizes common factors used by previous empirical studies on the determinants of direct investment;

Section 3 discusses the unique patterns of Chinese ODI; Section 4 presents the findings from econometrics

analysis; Section 5 concludes.

I


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1. An overview of China’s ODI

Despite China’s long tradition of trade with bordering nations, investments by Chinese businesses in foreign

countries were subdued until fairly recently. Direct investments in the 1980s and 1990s were almost entirely

initiated by the government. These investments took the form of greenfield projects, and were often associated

with international aid from China to other Third World countries. The active participation of the corporate

sector is a relatively new phenomenon.As previously discussed, in their early stage of development, Chinese

businesses did not possess sufficient financial and human capital for successful investment in foreign countries.

Restrictive policies such as capital controls limited the convertibility of the Chinese currency—the renminbi—

and created barriers for ODI. Perhaps most importantly, China is a large country with an abundant, inexpensive

labor supply and vast potential in consumer markets. Consequently, Chinese businesses often found it more

rewarding and less risky to invest domestically. Things started to change in important ways after “Going Out”

policies—enhancing economic collaborations with neighboring countries—became a priority in 1992. For a list of

ODI-related policy changes since 1992, see Appendix 1.

1.1. Despite rapid growth, the importance of Chinese ODI is relatively small

Two decades ago, the size of Chinese outward direct investment was nearly negligible. Today, China is an

important player in the ODI arena. In 2011, China’s outward direct investment flow was the ninth-largest in the

world and second-largest among emerging economies. Figure 1 shows the growth in China’s inward and

outward direct investment from 1980 to 2011, measured by both stock and flow. ODI stock nearly quadrupled

between 2007 and 2011, reaching $366 billion.

Relative to GDP, however, the growth in ODI has been less impressive. Figure 2 depicts China’s inward and

outward direct investment measures as a percentage of GDP. Inward direct investment grew rapidly from 1980

to 1997 before declining in relative importance in the Chinese economy. The sharp decline after 1997 coincides

with the Asian financial crisis, when some of China’s most important FDI source countries in Asia were hit hard.

Afterward, international trade took off, while the relative importance of inward FDI started to decline. The

decline in significance of direct investment is also due to the fact that China eventually opened its capital

markets to foreign investors. Consequently, portfolio investment became a popular option for them.


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Figure 1: China’s inward and outward direct investment (dollar amount)

0

100

200

300

400

500

600

700

800

1980 1985 1990 1995 2000 2005 2010

US$ billions

Inward

stock

Outward

stock

0

20

40

60

80

100

120

140

1980 1985 1990 1995 2000 2005 2010

US$ billions

Inward

flow

Outward

flow

Source: United Nations Conference on Trade and Development (UNCTAD).

Figure 2: China’s inward and outward direct investment (in % of GDP)

0

2

4

6

8

10

12

14

16

18

1980 1985 1990 1995 2000 2005 2010

Percent of GDP

Inward

stock

Outward

stock

0

1

2

3

4

5

6

7

1980 1985 1990 1995 2000 2005 2010

Percent of GDP

Inward

flow

Outward

flow

Source: UNCTAD.

Figure 3 shows China’s inward and outward direct investments as a share of the world total since 1980.

Although China has been a major recipient of FDI in the past three decades, FDI stock in China remains relatively

small. This reflects the fact that FDI there did not start to grow until after 1978. By that time, advanced countries

already had direct investment interests in other emerging countries that had been open to foreign trade and

capital since the 1960s. (Two examples are South Korea and Taiwan.) However, China is an emerging key player

in cross-border direct investment. From 1992 to 2011, its inward and outward direct investment flows grew at

an annual rate of 14 and 16 percent, respectively.


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Table 1 puts the relative importance of Chinese ODI in perspective. As of 2011, China accounted for 10.5 percent

of the world’s GDP. In the same year, the country accounted for 10.1 percent of total international trade and

nearly one-third of foreign exchange reserves. Chinese direct investment activity pales when compared to these

figures. In 2011, China accounted for 8.1 percent of global FDI flow and 3.8 percent of global ODI flow. Its shares

of FDI and ODI stock were 3.5 percent and 1.7 percent of the world total, respectively. China is relatively less

important in terms of cross-border direct investment activity, it is clear, than when assessed on the basis of

trade and other measures (for a comparison of China’s openness to trade and FDI/ODI, see figure 4).

Figure 3: China’s inward and outward direct investment (in % of world total)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1980 1985 1990 1995 2000 2005 2010

Percent of world total

Inward

stock

Outward

stock

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1980 1985 1990 1995 2000 2005 2010

Percent of world total

Inward

flow

Outward

flow

Source: UNCTAD.

Table 1: China’s cross-border direct investment activities are relatively small

China's share of world

total, 2011

GDP 10.5%

Trade 10.1%

Foreign exchange reserve 30.9%

Inward FDI, stock 3.5%

Outward direct investment, stock 1.7%

Inward FDI, flow 8.1%

Outward direct investment, flow 3.8%

Sources: International Monetary Fund, World Bank, UNCTAD.


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Figure 4: China’s trade openness vs. FDI openness

0

5

10

15

20

25

30

35

40

1980 1985 1990 1995 2000 2005 2010

Percent of GDP

Outward FDI

stock

Average of

import and export

Inward FDI

stock

0

5

10

15

20

25

30

35

40

1980 1985 1990 1995 2000 2005 2010

Percent of GDP

Inward FDI

flowOutward FDI

flow

Average of

import and export

Sources: UNCTAD, World Bank “World Development Indicators” 2012.

The small size of Chinese ODI leads many to expect it to experience rapid growth in the near future, bringing ODI

into line with China’s economic power as measured by GDP, trade and foreign exchange reserves. The following

two scatter plots— figure 5 and figure 6 demonstrate the correlation between outward direct investment stock

per capita and a country’s level of development.

As these figures show, higher ODI per capita is positively associated with higher per-capita income (measured in

international PPP), while negatively associated with real GDP growth rates. As economies mature and growth

starts to decelerate, nations increasingly invest abroad in search of new opportunities. It is reasonable to expect

Chinese ODI to follow the same pattern as China progresses into the upper-middle-income stratum. Indeed,

from 2003 to 2010, Chinese ODI flow grew at an annual rate of nearly 60 percent. This momentum is likely to

persist as China gains even more importance in global capital markets. Such expectations have led to rapid

growth in studies of the subject, to be discussed in the next section.


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Figure 5: Real GDP growth vs. outward direct investment

0

1

2

3

4

5

0% 5% 10% 15% 20%

Sto

ck o

f o

utw

ard

FD

I p

er c

ap

ita

(in

log

)

Average GDP growth, 2000-2010

Sources: UNCTAD, World Bank “World Development Indicators,” author’s calculation.

Figure 6: Real GDP per capita vs. outward direct investment

-2

-1

0

1

2

3

4

5

6

2.5 3 3.5 4 4.5 5

Sto

ck o

f o

utw

ard

FD

I p

er c

ap

ita

(in

log

)

GDP per capita, PPP adjusted (in log)

Sources: UNCTAD, World Bank “World Development Indicators,” author’s calculation.


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2. Why do firms invest abroad?

Why do firms invest abroad? Scholars have examined this topic extensively from different angles. The topic was

popular in emerging countries’ growth theories, with its direct implications for attracting foreign capital to fund

domestic projects and generating valuable technological and human capital spillovers in the process. It is helpful

to review the existing theoretical framework before discussing the unique facts of Chinese ODI.

2.1. A review of select literature on FDI theory

There is a rich literature that examines the theoretical foundations of foreign direct investment, both on the

macro and micro (or firm) levels. From a macro point of view, foreign direct investment is a type of capital flow

akin to cross-border bank loans and portfolio investment. Consequently, traditional theories of international

trade and capital flows can also be applied to foreign direct investment. This includes capital market theory,

which points out that FDI is determined by real interest rate differentials in parent and host countries; dynamic

macroeconomic FDI theory, which indicates that the timing decision depends upon an economy’s macro

performance relative to others; and exchange rate theory, viewing FDI as a tool to hedge against exchange -rate

risk.

Mainstream theories on the motivations of direct investment abroad include those by Dunning, Hymer and

Vernon. Hymer (1960) articulates the process of FDI as an international extension of industrial organization

theory, pointing out that one driver of FDI is the existence of firm-specific advantages. Vernon (1966) puts FDI in

the context of firms’ product life cycles—the location of production depends on the stage of the cycle. Some

view Vernon’s theory as a subset of Hymer’s monopoly hypothesis. He identifies four stages in a product's life

cycle: introduction, growth, maturity, and decline and suggests that overseas investment is an outgrowth of the

stages of development and marketing of new products. Exports of high-tech products, for example, are often

followed by direct investment as firms discover cost advantages in manufacturing overseas.

The eclectic paradigm concept (Dunning, 1973) suggests three theories of direct foreign investment: firm-

specific ownership advantages, known as knowledge capital; locational advantages (saving transportation costs,

obtaining cheap inputs, being closer to consumers, etc.), and internalization advantages (reducing the risk of

contracting out and revealing proprietary information). This is also known as OLI theory. Investment

development path (IDP) theory is an extended form of the conditions laid out by Dunning (1981, 1986) for

internationalization of firms at the macro level to explain the foreign direct investment stock of countries.

According to IDP theory, a country’s net outward investment position is associated with its level of development,

as measured by gross domestic product. At its nascent (pre-industrialization) stage, a country usually

experiences little inward and outward direct investment. Changes in government policy, improved infrastructure,

etc., will spur the national economy’s growth, usually with a large amount of inward direct investment but little

or none focused outward. It is not until the country starts to slow down that domestic companies find the

advantages of investing abroad.

Eventually, the country will reach a stage with high levels of both inward and outward investment—but

balanced net direct investment flow (Dunning, 1981, 1986; Dunning and Narula, 1996; Buckley and Castro, 1998).

When measured by the IDP theory, China is currently at the turning point as its growth moderates. Outward


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direct investment is likely to continue to accelerate in both absolute terms and relative to inward direct

investment, until investment flows come into balance.

2.2. Common FDI determinants used in empirical studies

Most empirical studies on FDI determinants cite market-seeking, resource-seeking, efficiency-seeking, and

strategic asset-seeking as the primary motivations for direct investment abroad.[1] Market-seeking

multinational companies invest abroad to explore opportunities to sell in the host and adjacent countries. A

company can be motivated to protect its shares of foreign markets or to enter new ones. Market size and

economic growth are common proxies to measure such motives. Resource seekers look for cheap and secure

sources of supply, inexpensive and abundant unskilled labor, or human capital with managerial or technical skills.

Efficiency-seeking companies look for ways to integrate their operations across geographic regions to reduce

costs, diversify risks, and achieve economies of scale. Strategic asset-seeking companies base their ODI decision

on long-term plans to ensure their global competitiveness. Although proxies to model market-seeking and

resource-seeking behaviors are available, the pursuit of efficiency and strategic assets usually cannot be

properly measured.

There is little consensus on how to empirically model bilateral FDI patterns (Blonigen and Piger, 2011). This

paper employs a single-equation approach and examines cross-country data. Although existing studies differ

widely in their selection of proxies, transformation of variables and model specifications, many expand upon a

simple gravity model (with size of the economy and geographic distance between parent and host countries)

because of its popularity in explaining cross-border trade flows. Approaches to this model vary. To cite a few

examples, Carr, Markusen and Maskus (2001) introduce a knowledge-capital (KK) model; Bergstrand and Egger

(2007) incorporate physical capital; cultural factors such as language and common colony are included in Head

and Ries (2008), Di Giovanni (2005) and Stein and Daud (2007). Institutional factors are examined in a number of

studies, such as Head and Ries (2008), Di Giovanni (2005) and Walsh and Yu (2010).

2.3. Empirical studies on the pattern of Chinese ODI

Empirical studies of Chinese ODI emerged only in recent years. Indeed, China started publishing ODI data

compatible with UNCTAD/IMF standards in 2003. The relatively small window for data has posed a challenge for

empirical analysis, but the recent expansion of Chinese ODI has stimulated a rapidly growing body of research.

Although empirical studies generally confirm that China’s outward direct investment is associated with host

country market size, they paint a mixed picture when it comes to institutional factors. Buckley, et al. (2007),

examined project data from 1984 to 2001 published by the State Administration of Foreign Exchange and found

that Chinese outward direct investment was associated with higher political risk. Cheung, et al. (2010), finds that

Chinese ODI is attracted to countries where corruption level is high. Li and Liang (2010) suggest that Chinese ODI

goes to countries with high political risk because the Chinese government often has good political relationships

with these countries, which reduce political risks for direct investments. Qian (2011), on the other hand, finds

China’s ODI averse to political risks. These discrepancies can be attributed in part to the data sources used.

1 For more discussion, see Behrman (1972), Dunning (1977).


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However, these studies generally confirm that Chinese ODI is attracted to offshore financial centers and

countries with abundant natural resources (minerals, metals, oil and gas). These patterns will be further

discussed in the next section.

3. Perspectives on Chinese ODI

3.1. Unique aspects of Chinese ODI

Almost all empirical studies agree that China exhibits a unique pattern of outward direct investment. Table 2

shows some of its characteristics. As can be seen, Chinese ODI is heavily concentrated in Hong Kong. From 2003

to 2010, the proportion was 57 percent. In comparison, only 3.6 percent of global ODI targeted Hong Kong over

the same time period. China’s FDI in other offshore financial centers [2] has a smaller share than the world on

average. Because of Hong Kong, however, 79.2 percent of China’s FDI from 2003 to 2010 was directed at

financial centers, compared to the world average of only 11.6 percent.

Considering Hong Kong’s special cultural and economic ties with the mainland, it is not surprising that Hong

Kong is the most important host of Chinese ODI. Chinese investment in Hong Kong can be traced back to the

early part of the 20th century. Currently, Hong Kong is the largest foreign investor in China [3] and one of its

largest trade partners. China remains Hong Kong’s largest trade partner.

Hong Kong attracts Chinese ODI for various (and good) reasons. First, as a globalized metropolis that is highly

adaptive to foreign culture, Hong Kong boasts a large number of professional managers with experience leading

multinational firms. Mainland Chinese companies, which usually lack experience managing foreign subsidiaries,

can fulfill their quest for managerial talent in Hong Kong. Secondly, corporate governance practices and

accounting standards in Hong Kong are similar to those in the West, which can benefit Chinese companies that

wish to explore markets in those countries.

Of course, as a tax haven, Hong Kong’s low cost of doing business is also a huge plus. However, what

distinguishes it from other tax havens is its status as an international financial hub and its close connections with

mainland China. Hong Kong is known for superior institutional factors and a business-friendly government. This

has attracted financial capital from all over the world, especially investors seeking to tap into China’s rapid

growth but who consider investing in mainland China too costly or too risky. Consequently, Hong Kong provides

abundant access to foreign capital and an unrestricted investment environment for mainland Chinese

companies. Geographic proximity, cultural ties, and an integrated business network all make Hong Kong a

natural choice for expansion-minded Chinese companies taking their first step abroad.

2 This paper adopts the Financial Stability Forum's list of 42 jurisdictions with significant offshore activities. For a list and

definition of these centers, see IMF (2000) or http://www.imf.org/external/np/mae/oshore/2000/eng/back.htm. 3 Although the Hong Kong special administrative region is now part of China, it remains an independent jurisdiction. In this

paper, I treat Hong Kong as a “country” in the context of direct investments.

http://www.imf.org/external/np/mae/oshore/2000/eng/back.htm


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Table 2: China’s outward direct investment pattern

2003-2010 flow 2010 flow

China ODI World ODI China ODI World ODI

All host countries (US$ billions) $246.0 $10,985.9 $68.8 $1,243.7

Of which:

China - 6.0% - 7.5%

Offshore financial centers 79.2% 11.5% 77.0% 16.8%

Hong Kong 57.2% 3.3% 56.0% 4.7%

Other offshore financial centers 22.1% 8.2% 21.0% 12.1%

All host countries excluding offshore

financial centers and China (US$ billions) $51.1 $9,058.0 $15.9 $1,153.7

Of which:

United States 6.8% 15.4% 8.3% 17.2%

Euro area 15.1% 25.6% 24.3% 21.6%

Low income 10.6% 0.6% 14.4% 1.0%

Hydrocarbon rich 23.0% 13.3% 22.0% 16.4%

Mineral rich 18.5% 2.8% 8.1% 4.4%

Resource rich 41.4% 16.1% 30.1% 20.8%

Low-income and hydrocarbon rich 5.4% 1.1% 3.6% 1.6%

Low-income and mineral rich 2.5% 0.3% 1.6% 0.6%

Sources: Chinese Ministry of Commerce, UNCTAD, World Bank “World Development Indicators,” IMF (2000), IMF (2010), author’s

compilation of data.

It is difficult, however, to accurately estimate Chinese direct investment in Hong Kong, given how closely the two

economies are integrated. The myriad complex corporate structures makes it a challenge to define ownership of

certain Chinese interests in Hong Kong, as is the case with most offshore financial centers. On one hand, one can

underestimate Chinese ODI in Hong Kong, since the size of unofficial Chinese companies there can be quite large.

[4] On the other, Chinese companies often use Hong Kong and other offshore centers as a conduit for investing

in other countries, in which case ODI to these jurisdictions can be significantly overstated. The ultimate

destinations of these investments can’t often be pinned down. [5]

Based on the discussion above, Hong Kong clearly plays a unique role in China’s ODI flows. To compare China’s

cross-border investment pattern on a consistent basis, one needs to exclude Hong Kong and China itself.

4 For further discussion, see OECD (1996).

5 One possible way to clarify the direction of these investments is to search publicly available information on cross-border

mergers and acquisitions, identifying the true domiciles of investment conduits by analyzing their representative offices.


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Using that assumption, further distinct patterns emerge. As table 2 shows, the United States and euro area

receive relatively smaller shares of direct investment from China. Low-income countries [6], in contrast, take a

larger share of Chinese ODI compared to the world average. From 2003 to 2010, 10.6 percent of Chinese ODI

went to low-income countries, much more than the 0.6 percent of global ODI directed to the same group. Over

the same period, 16.1 percent of global outward direct investment went to resource-rich countries [7],

compared to 41.4 percent of Chinese outward direct investment. Hydrocarbon-rich countries received 23

percent of Chinese ODI, but only 13.3 percent on a global basis. The difference regarding investment in mineral-

rich countries is even more pronounced. They received 18.5 percent of Chinese ODI between 2003 and 2010,

but only 2.8 percent of global direct investment. A fairly small share of Chinese ODI (2.5 percent) went to

mineral-rich, low-income countries. However, this number is still significantly higher than the world average of

0.3 percent. These findings are consistent with a number of studies observing that China’s direct investment

abroad is dominated by its quest for natural resources.

3.2. State-owned enterprises play a dominant role in Chinese ODI

How should these distinctive patterns be interpreted? Is it true that Chinese firms follow unique rules and logic

when it comes to making decisions on investing overseas? This paper offers an alternative explanation, arguing

that Chinese firms’ investment behavior does not contradict general FDI theories. What is different, however, is

the composition of Chinese firms involved in direct investment abroad. State-owned enterprises dominate

Chinese ODI due to many factors such as incumbent advantage and imperfect domestic capital markets. Their

ascendancy helps explain most of the ODI patterns that seem to be unique to China.

It is helpful to provide the historical context of China’s ownership reform. All Chinese businesses were state- or

collectively owned back in 1978. Since then, China has undergone a gradual privatization process that has lasted

more than three decades. Currently, only 117 large enterprises are truly “state-owned.” The central government,

its agencies and affiliated businesses do, however, own controlling shares in many other businesses. In 2010,

state-owned enterprises (SOEs) accounted for 27 percent of Chinese industrial output. [8] Although their

relative importance has declined dramatically, SOEs continue to play an important role today.

China’s industrial policy still gives favorable treatment to SOEs, which dominate pillar industries that are key to

China’s development strategy. State-owned enterprises are typically large. They are also often “natural

monopolies,” controlling strategically important industries such as infrastructure, energy and mining. [9]

6 This paper adopts the World Bank’s definition of income groups.

7 This paper adopts the IMF’s list of oil (hydrocarbon) and mineral-rich countries, as specified in Annex 1 of IMF (2010). That

list included countries in which hydrocarbons and/or minerals contributed at least 25 percent to total government revenue and/or their exports made up at least 25 percent of the value of total exports of goods on average from 2000 to 2007. There are 53 countries on this list, three of which qualify as rich in both hydrocarbons and minerals. 8 The World Bank, “China 2030: Building a Modern, Harmonious, and Creative High-Income Society,” Conference Edition.

This report also predicts that “successful reform and the resulting structural change [would reduce the share of SOEs in industrial output] to around 10% in 2030.” 9Although large, state-owned enterprises account for most of the bank loans and have much wider access to equity and

bond markets, small- and medium-sized private businesses are arguably the growth engine of the Chinese economy, accounting for 65 percent of GDP and 75 percent of employment in 2010.


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Consequently, a large proportion of Chinese ODIs are in metals, energy, mining and transportation. By

establishing subsidiaries in resource-rich countries, SOEs are able to avoid some exchange-rate risk and secure

low-cost raw materials, as well as vertically integrate their supply chains. It is thus not surprising that their

investments abroad focus on resource-rich countries.

In 2010, only 5 percent of Chinese firms that invest abroad were state-owned. By sharp contrast, SOEs

accounted for 70 percent of Chinese ODI flows in the same year.[10] Among the 50 Chinese non-financial

companies with the largest ODI stock in 2010, 47 were state-owned enterprises.[11] This should not be

surprising. In terms of assets and revenues, many SOEs have reached the critical mass essential for managing

foreign branches and subsidiaries. [12]

SOEs have significant incumbent advantages over private enterprises. Prior 1998, outward direct investment

was discouraged by the Chinese government. SOEs were the only entities that received limited support from the

government in their expansion abroad. In contrast, ODI by private firms is a relatively new phenomenon.

Furthermore, with their closer ties to state and local officials, SOEs are more able to navigate the complex

process of obtaining approval for foreign investment. It should be noted that the situation is changing of late. In

the first three quarters of 2012, for example, private firms accounted for 62 percent of overseas M&A deals by

Chinese firms—the first time SOEs have trailed in that arena. [13]

Previous studies indicate that imperfect domestic capital markets constrain firms’ outward direct investment

hopes in most emerging economies. This is also true for China. SOEs dominate financial resources there —they

account for the great majority of bank loans and half of the market value of companies listed on the Shanghai

and Shenzhen stock exchanges. Today the corporate bond market remains underdeveloped in China, with a

handful of large SOEs being the sole issuers. Private enterprises, in contrast, rely heavily on venture capital,

private equity investment, retained earnings and informal lending to fund expansion.

China’s financial system is controlled by banks—especially large, state-owned banks.[14] This means limited

access to credit for small, private businesses, which usually have difficulty putting up sufficient collateral for

bank loans. On the other hand, large, state-owned enterprises usually can obtain bank loans at favorable terms

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Although this paper focuses on the dollar amount of direct investment flows, there have been other empirical studies that use number of transactions as the dependent variable. Naturally, findings can be quite different depending on the approach. 11

The other three companies are Geely, Lenovo and Huawei. For a list of these companies, see Appendix 2. 12

According to Steven Sitao Xu (director of advisory services, Economist Intelligence Unit China), private businesses usually experience long waiting time and complex procedures when trying to obtain approval for an outward direct investment project. For more information see http://news.hexun.com/2012-03-22/139588865.html (last accessed on December 7, 2012). 13

Although the number of M&A deals done by private firms exceeded done by SOEs in 2012, SOEs still account for the lion’s share of M&A volume since they are usually engaged in larger deals. 14

Banks accounted for roughly 60 percent of China’s financial assets and 75 percent of funds raised by the private sector in 2010. The five largest state-owned banks (Agricultural Bank of China, Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Bank of Communications) represent approximately half of China’s bank assets.

http://news.hexun.com/2012-03-22/139588865.html


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that can be used for expansion of operations abroad. [15] When state-owned banks make loan decisions, they

may favor outward direct investors when the project aligns with China’s development strategy. This is especially

the case with policy development banks since one of their missions is to support overseas direct investments.[16]

Furthermore, China’s interest rates are not fully determined by market forces and do not reflect the true cost of

capital demanded by investors. Low rates, set by the government, benefit state-owned enterprise borrowers.

Since capital is available at low cost, these enterprises have a greater incentive than their private-sector

competitors to expand both domestically and abroad. [17] Low (and sometimes negative) real interest rates in

turn make it easy to justify SOEs’ decision to seek higher returns abroad.

Xie and Jiang (2012) find that compared to American ODI, Chinese direct investments usually go to more risky

regions. They also find that Chinese ODI steadily underperforms their reference rates of return and American

ODI. These data seem to be in line with the imperfect domestic capital markets theory—given the abundant,

low-cost capital available to SOEs, these investments may prove profitable for them while their private and

foreign competitors lack similar access to financing. Somewhat ironically, it is generally believed that private

businesses operate much more efficiently and are better in identifying excellent investment opportunities.

Private businesses may find domestic investment more profitable than their state-owned competitors do,

especially given the complex approval process associated with investing abroad. It has been observed that many

of the resource-rich countries targeted by Chinese ODI have chronically weak institutions. (For example, Huang

et al., 2004; Morck et al., 2008). This includes high levels of direct state intervention, insecure property rights,

and lack of transparency in corporate and country governance. The fact that Chinese firms choose to invest in

these countries seems difficult to justify since weak institutional factors imply a higher cost of doing business.

One explanation is that given China’s own imperfect institutional practices, Chinese investors are better suited

to navigate such flawed environments than competitor firms from advanced economies (Perkins, 2005). These

intangible assets become comparative advantages for Chinese firms that engage in ODI. Also, for SOEs, business

relationships are often rooted in political relationships. China has rich political capital in many low-income

countries because of the assistance and low-interest-rate loans China has provided to the Third World since

1949.

These two explanations have dramatically different implications. The first indicates that Chinese ODI is attracted

by weaker institutional factors, while the second indicates that Chinese ODI is attracted by factors that can be

explained by general FDI and management theories, and weak institutions are but a “side effect.” In the next

section, this paper will examine how host country institutional factors are connected with Chinese firms’

decision to invest abroad.

15

For example, China Development Bank stated in its 2011 performance highlights: “As China's biggest lender in investment and financing activities offshore, CDB has maintained a strong momentum growing its cross-border business. It boasts “more deals in its portfolio supporting prominent Chinese companies venturing overseas, such as CITIC Consortium, Three Gorges Group, Goldwind Science & Technology Co., Chery Automobile Co.” All companies mentioned are state-owned or -controlled. China Development Bank is a policy bank that became a commercial bank in 2008. As of 2011, its total assets exceeded $1 trillion. 16

China has three policy development banks: Agricultural Development Bank, China Development Bank, and China Export-Import Bank. All are state-owned institutions. As discussed, China Development Bank was transformed into a commercial bank. However, supporting China’s development strategy remains one of its main missions. 17

For further discussion, see Lardy (1998), Warner et al. (2004), and Barth et al. (forthcoming in 2012).


14

4. Empirical analysis

4.1. The model

It is not the purpose of this paper to provide an all-inclusive model of the determinants of Chinese ODI. Rather,

it aims to investigate two imperative questions: 1) what types of natural resources are the primary drivers of

Chinese outward direct investment? and 2) what role does host country institutional factors play in Chinese

firms’ decision to invest abroad? The basic regression takes the form:

FDI t,i = c + ß*[conditioning set] t-1,i + ɛ t,i ,

where the dependent variable, FDI, equals FDI flow from China to host country in logarithmic form, conditioning

set includes country GDP in logarithm form and geographic distance in logarithm form.

The model is then expanded to include proxies for abundance of natural resources and country institutional

factors.

FDI t,i = c + ß*[conditioning set] t-1,i + γ*[resources set] t-1,i + δ*[institutional set] t-1,i + ɛ t,I ,

where resources set includes host countries’ ores and metal exports as well as fuel mineral exports; institutional

set includes six components of World Governance Indicators compiled by the World Bank, namely voice and

accountability, political stability and absence of violence/terrorism, government effectiveness, regulatory quality,

rule of law and control of corruption. Since country distance is the same for all country pairs across time, fixed

effect analysis was not employed. The cross-sectional panel analysis uses data covering 2002 to 2010.

Definitions of these variables, together with theoretical justifications and expected signs from existing literature,

are summarized in table 3.


15

Table 3: List of variables

Hypothesis Proxy Expected

sign

Theoretical

justification

Data source

FDI (dependent

variables)

Outward direct investment

(in log form)

Ministry of Commerce

Host country market

size

GDPP$: GDP per capita of host

country, 2010 (in US$)

+ Market seeking World Bank Development

Indicators (2012)

Geographic distance

from China

Dist: Geographic distance between

host and China

- Spatial costs CEIPS (2010)

Natural resource

abundance

OreEx: Ore and metal export as % of

all merchandise export in host

country

FuelEx: Fuel mineral export as % of all

merchandise export in host country

+ Resource seeking World Bank Development

Indicators (2012)

Country institutional

indicators

Voice: Voice and accountability

PolStab: Political stability and

absence of violence/terrorism

EffGov: Government effectiveness

Quality: Regulatory quality

RuleLaw: Rule of aw

Corruption: Control of corruption

- Institutional

factors

World Bank Governance

Indicators (2010)

Source: Author’s compilation.

4.2. Data

Before discussing the determinants of outward direct investment, it is helpful to review the varied definitions of

foreign direct investment. Hymer (1960) defines FDI as asset transfer by the formation of subsidiaries or

affiliates abroad, without loss of control. The International Monetary Fund (IMF) and Organization for Economic

Co-operation and Development (OECD) provide a more detailed definition. Foreign direct investment is “a

category of cross-border investment associated with a resident in one economy having control or a significant

degree of influence on the management of an enterprise that is resident in another economy.” (IMF, 2011;

OECD, 2008) UNCTAD follows the same definition. According to this definition, FDI involves “acquir[ing] lasting

interest in enterprises operating outside of the economy of the investor” and includes reinvestment of profits. It

is always associated with equity ownership, and consequently, having “an effective voice in the management of


16

the enterprise.” As a rule of thumb, controlling at least 10 percent of the ordinary shares or voting power in a

public or private enterprise qualifies the holder as a foreign direct investor. [18]

This paper uses FDI flow data from 2003 to 2010, published by the Ministry of Commerce (MOFCOM) in various

issues of its Annual Statistical Bulletin of Outward Direct Investment. MOFCOM’s definition is similar to the IMF

version—outward direct investment means that domestic investors establish and/or purchase foreign

enterprises, own 10 percent or more of the equity, and focus on controlling enterprise management.

MOFCOM started publishing the statistical bulletin in 2004. Outward direct investment stock and flow measures

after 2003 are available in the statistical annexes of the annual bulletins.[19] The MOFCOM data, consistent

with the definition used by UNCTAD, identify 179 countries/territories as host to Chinese outward direct

investment. (See Appendix 3 for a list of countries included.) [20] Based on previous discussions about Chinese

companies’ preference for offshore financial centers, these locations are excluded from the sample used in

regression analysis. For descriptive statistics of individual samples and pair-wise correlation matrix of the

variables, see Appendices 4 and 5.

4.3. Results

The results summarized in table 4 include three sets of panel regression analysis. Scenario 01 reports the result

of the baseline model; Scenarios 02 and 03 include ores/metal exports and fuel mineral exports; Scenarios 04

through 09 examine country institutional factors. The second and third sets of regressions add interactive terms

between institutional factors and resource variables. Coefficients are estimated using OLS panel regressions

with heteroskedasticity-consistent covariance. An AR term is added to all regressions to correct for serial

correlations.

The baseline model (01) examines the effect of host country market size (measured by ln(GDP) in lagged term)

and geographical distance on direct investment flow from China. The coefficient for market size is positive and

significant, showing that Chinese direct investment flows to larger markets. Also, the coefficient for geographical

distance is negative and significant, which indicates that lower cost of transaction is also a determinant of

Chinese outward direct investment. These findings are consistent with mainstream FDI theories as Chinese

companies appear to be market seeking and efficiency seeking in their direct investments abroad.

18

In contrast to direct investment, generally anything less than 10 percent ownership is considered portfolio investment. For more details, see http://unctad.org/en/Pages/DIAE/Foreign-Direct-Investment-%28FDI%29.aspx . 19

Previous studies such as Buckley (2007) used SAFE statistics on total approved amount of foreign exchange over a longer time period but for a much smaller sample of countries. The SAFE data are the approved amount of investment instead of actual outward direct investment. In addition, it does not include reinvestment by foreign subsidiaries after the initial approval process. 20

FDI statistics, especially outward direct investment data for non-OECD countries, are far from ideal. The MOFCOM data also have inconsistencies and errors. The data used in this paper are compiled from the annual statistical bulletins, so obvious typos are corrected. Although available data cover the eight years from 2003 to 2010, there have been changes of definition—for 2003 to 2007, only non-financial direct investments are provided, and after 2007 only the totals of financial and non-financial direct investments. Furthermore, investments in certain countries are in tiny amounts and can differ dramatically from year to year, raising the question of whether these investments are outliers. For further discussion of data accuracy and distortion, see Rosen and Hanemann (2009).


17

Models 02 and 03 include resource variables, namely ore/metal exports and fuel mineral exports as percentages

of total merchandise exports. Regression results indicate that Chinese outward direct investment is positively

correlated with host countries’ ore/metal exports as well as fuel mineral exports. This is consistent with previous

empirical studies and expert observations that Chinese outward direct investment focuses heavily on natural

resources. As discussed, this behavior can also be explained by the dominant status of SOEs in Chinese outward

direct investment.

Models 05 to 09 borrow World Bank data to examine whether country institutional factors play a role in Chinese

ODI decisions. As the table shows, Chinese outward direct investment is significantly and negatively correlated

with five out of six institutional factors. The only institutional variable that does not appear to be significant is

political stability. If one considers traditional FDI theory, this is counter-intuitive since one would expect

multinational firms to invest in countries with better governance and policy transparency to reduce costs and

minimize risks. However, this conclusion reinforces findings from most previous empirical studies that suggest

Chinese outward direct investment is attracted to countries with weaker institutions. Such behavior dramatically

diverges from typical North-to-South direct investment patterns. It can also be explained by the dominant role

of SOEs, as explained earlier.

However, this is not the entire story. Models 05a to 09a, as shown in the second part of table 4, include

interactive terms between institutional factors and ore/metal exports. For all six institutional factors,

coefficients for interactive terms are positive and significant. In other words, although ores and metals are a

primary concern for Chinese ODI, Chinese companies tend to invest in ore- and metal-rich countries with better

institutional environments. Models 05b to 09b, as shown in the third part of table 4, repeat the exercise above

but focus on fuel mineral-exporting countries. Results for this group of regressions are less significant.

Coefficients for the interactive terms are insignificant with the exception of voice and accountability and rule of

law. In these two cases, coefficients are significant and positive, consistent with findings from the previous

group of regressions.


18

Table 4: Summary of regression results

Dependent variable: Ln(ODIFlow)

01 02 03 04 05 06 07 08 09

Ln(GDP(-1)) 0.32*** 0.38*** 0.34*** 0.44*** 0.32*** 0.48*** 0.47*** 0.43*** 0.44***

Ln(Dist) -0.52** -0.56* -0.34 -0.40* -0.53** -0.51** -0.50** -0.51** -0.41*

OreEx(-1)

2.41***

FuelEx(-1)

0.87*

Voice(-1)

-1.48***

PolStab(-1)

0.16

EffGov(-1)

-1.68***

Quality(-1)

-1.61**

RuleLaw(-1)

-1.22**

Corruption(-1)

-1.34**

AR(1) 0.66*** 0.64*** 0.65*** 0.64*** 0.66*** 0.65*** 0.65*** 0.65*** 0.65***

Number of observations 598 471 460 598 598 598 598 598 598

R-squared 0.5374 0.5519 0.5439 0.5406 0.5374 0.5409 0.5408 0.5394 0.5402

Prob(F-statistic) 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000

Note: *** denotes significance at .01%, ** at 0.05%, and *at 0.1%.


19

Table 4: Summary of regression results (cont.)


04 04(a) 05 05(a) 06 06(a) 07 07(a) 08 08(a) 09 09(a)

Ln(GDP(-1)) 0.44*** 0.49*** 0.32*** 0.39*** 0.48*** 0.51*** 0.47*** 0.50*** 0.43*** 0.46*** 0.44*** 0.49***

Ln(Dist) -0.40* -0.47 -0.53** -0.51* -0.51** -0.61** -0.50** -0.60** -0.51** -0.59** -0.41* -0.48

Voice(-1) -1.48*** -1.80***

Voice(-1)*OreEx(-1)

5.67***

PolStab(-1)

0.16 -0.57

PolStab(-1)*OreEx(-1)

5.31***

EffGov(-1)

-1.68*** -2.02**

EffGov(-1)*OreEx(-1)

5.25***

Quality(-1)

-1.61** -1.95***

Quality(-1)*OreEx(-1)

4.75***

RuleLaw(-1)

-1.22** -1.41**

RuleLaw(-1)*OreEx(-1)

5.80***

Corruption(-1)

-1.34** -1.94***

Corruption(-1)*OreEx(-1)

5.11***

AR(1) 0.64*** 0.62*** 0.66*** 0.64*** 0.65*** 0.63*** 0.65*** 0.63*** 0.65*** 0.63*** 0.65*** 0.64***

Number of observations 598 471 598 471 598 471 598 471 598 471 598 471

R-squared 0.5406 0.5554 0.5374 0.5538 0.5409 0.5542 0.5408 0.5534 0.5394 0.5539 0.5402 0.5555

Prob(F-statistic) 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000



20

Table 4: Summary of regression results (cont.)


04 04(b) 05 05(b) 06 06(b) 07 07(b) 08 08(b) 09 09(b)

Ln(GDP(-1)) 0.44*** 0.38*** 0.32*** 0.32*** 0.48*** 0.40*** 0.47*** 0.40*** 0.43*** 0.35*** 0.44*** 0.40***

Ln(Dist) -0.40* -0.34 -0.53** -0.32 -0.51** -0.32 -0.50** -0.31 -0.51** -0.32 -0.41* -0.25

Voice(-1) -1.48*** -0.98*

Voice(-1)*FuelEx(-1)

3.93*

PolStab(-1)

0.16 0.20

PolStab(-1)*FuelEx(-1)

0.47

EffGov(-1)

-1.68*** -0.96

EffGov(-1)*FuelEx(-1)

1.75

Quality(-1)

-1.61** -1.06

Quality(-1)*FuelEx(-1)

1.81

RuleLaw(-1)

-1.22** -0.47

RuleLaw(-1)*FuelEx(-1)

2.18*

Corruption(-1)

-1.34** -1.07**

Corruption(-1)*FuelEx(-1)

1.57

AR(1)

0.64*** 0.65*** 0.66*** 0.66*** 0.65*** 0.65*** 0.65*** 0.65*** 0.65*** 0.65*** 0.65*** 0.65***

Number of observations 598 460 598 460 598 460 598 460 598 460 598 460

R-squared 0.5406 0.5471 0.5374 0.5421 0.5409 0.5443 0.5408 0.5447 0.5394 0.5440 0.5402 0.5445

Prob(F-statistic) 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000



21

5. Concluding remarks

5.1. Implications of the regression analysis

This paper is among a small but growing number of empirical studies that attempt to model

Chinese ODI within existing theoretical frameworks. The motivation is to verify market-seeking

and resource-seeking motives and further examine whether host country institutional factors

play a role in Chinese firms’ decisions to invest abroad. The main finding is that Chinese ODI

generally follows what is predicted by mainstream direct investment theory in terms of host

country GDP and geographic distance to parent country, indicating that Chinese ODI is sensitive

to market size and costs. Also, there is strong evidence that Chinese ODI is attracted to countries

with abundant natural resources.

With regard to institutional factors, this paper finds that Chinese ODI is generally attracted to

countries with weaker institutional factors, which is consistent with several previous studies

(Buckley, et al. 2007, for example). However, although the result confirms that natural resources

in host countries dominate Chinese firms’ decisions to invest abroad, it is also clear that Chinese

ODI goes to countries with rich ore/metal resources and better institutions as measured by all

six institutional factors examined. A similar pattern is not found for exporters of fuel minerals,

with the exceptions of voice and accountability and rule of law. One explanation is that demand

for fuel is less elastic than demand for ore/metal. In addition, although China is not a major fuel-

exporting country, its fuel resources are fairly abundant. Ores and metals, in contrast, are sorely

in demand to meet the rising needs of industrial production.

Given the primacy of state-owned enterprises in China’s ODI, it is not a surprise that the national

goal of energy/resource security is blended with enterprises’ quest for low-cost raw materials.

Going forward, however, more private-sector involvement is likely as dramatic growth in ODI

seems to be the next step in globalization, given China’s stage of development. Private

companies are expected to grow and mature, while SOEs’ share of the national economy is

expected to decline over the next two decades. It is possible, therefore, that China will shift

somewhat from exclusively investing in resource-rich countries and gravitate toward acquiring

strategic assets and improving operational efficiency through investing abroad.

5.2. The path ahead: Policy suggestions

Outward direct investment is an emerging dimension in China’s globalization process. It is also

an inevitable trend as China moves up the manufacturing value chain and its economy becomes

more integrated with the rest of the world.

It has been widely acknowledged—theoretically and empirically—that foreign direct investment

usually promotes economic growth in host countries. However, few, if any, empirical studies

have examined the impact of outward direct investment on parent countries’ economic

performance or cost of capital. It is thus unclear whether promoting ODI should become a policy

priority as a general strategy for growth. Yet in China’s case, certain policies can be adopted to

improve the efficiency of investment abroad.


22

Up to now, Chinese ODI has been driven by the quest for natural resources. By broadening their

view of the benefits associated with outward direct investment—increased foreign market

share, lower production and management costs, higher managerial quality—Chinese firms can

realize greater returns on these investments. The hunt for resources abroad should not be

limited to natural endowments. Financial and human capital in foreign countries can also enrich

Chinese businesses. Furthermore, Chinese firms can vertically integrate by investing abroad,

benefiting from the better decisions made by professional managers with the right knowledge

and skill sets. These are among the reasons that promoting outward direct investment has

become a national strategy. It should also be noted that with one of the highest corporate

savings rates in the world and $3.3 trillion in foreign exchange reserves, China faces an

increasingly urgent need to find direct investment opportunities abroad that will yield higher

returns.

The biggest challenge for policymakers is to adopt policies that enhance a the competitiveness

of Chinese enterprises in the long run, instead of being protective and encouraging rent seeking

and inefficient allocation of financial and physical resources. The author believes the following

reforms are needed to correct distortions in resource allocation pertaining to Chinese ODI: 1)

Simplify approval processes and ensure equal treatment for state-owned and private

enterprises that plan to invest abroad; 2) Gradually remove capital controls and allow free

convertibility of the renminbi so that barriers to cross-border direct capital flows are eliminated;

3) Deepen financial reform, develop a healthy bond market and regulate the informal lending

market, so that private, small businesses have better access to financing; 4) Promote further

reform in the compensation system to encourage personal consumption—this will increase the

profitability of small businesses but push some low-paying jobs overseas while China shifts to

the higher end of the corporate value chain. By removing policy barriers to outward direct

investment, the Chinese economy will prosper from the full spectrum of globalization.


23

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27

Appendix 1: ODI-related policy developments

Phase 1:

Tight controls

1979-1983

Restrictive attitude toward ODI due to ideological skepticism, inexperience, and low

foreign exchange reserves. Only specially designated trade corporations could apply for

ODI projects. No regulatory framework existed’ firms had to apply for direct, high-level

approval from the State Council on a case-by-case basis.

Phase 2:

Cautious

encouragement

1984-1991

As global markets gained more importance, the government gradually started to

encourage ODI projects that generated foreign technology, control over resources,

access to overseas markets, and foreign currency. The first regulatory framework for ODI

was drafted in 1984-85, allowing companies other than trading firms to apply.. However

foreign exchange reserves were still at a low level and only firms that earned foreign

exchange from overseas activities could qualify for ODI projects.

Phase 3:

Active encouragement

1992-1996

The post-Tiananmen decision to accelerate economic reforms and global integration led

to a policy of more active encouragement of ODI. The goal was to increase the

competitiveness of Chinese businesses, with a special focus on 100- plus state-owned

“national champions.” The foreign exchange regime shifted from an “earn-to-use” to a

“buy-to-use” policy, and ODI approval procedures were gradually eased and localized.

Phase 4:

Stepping back

1997-1999

Government tightened regulatory processes for ODI projects and recentralized foreign

exchange acquisition against the backdrop of the Asian financial crisis, which revealed

that many firms had used ODI for illegal and speculative transactions, leading to heavy

losses of state assets and foreign exchange reserves.

Phase 5:

Formulation &

implementation of the

“Going Global” policy

2000-2006

In anticipation of WTO accession and growing competition in domestic markets,

policymakers returned to their previous stance of encouraging ODI and created policies

aimed at supporting Chinese firms from various sectors to “go abroad.”

In 2004, the regulatory process was reformed and foreign exchange controls were

further eased and localized. Central officials and local governments began to provide

broad and active political and practical assistance for firms with overseas expansion

plans.

Phase 6:

Political support for

transnational

corporations and a new

push for liberalization

2007-present

Policymakers’ support for outbound FDI further increased because of China’s massive

foreign exchange reserves (surpassing $1 trillion in 2006) and the need to build up

competitive transnational corporations to change China’s economic growth model. A

regulatory framework implemented in May 2009 further eased and decentralized

approval procedures. New rules proposed by SAFE in the same month significantly eased

foreign exchange management for overseas projects and broaden the sources of

financing available for outbound investment.

Sources: Adopted from Rosen and Hanemann (2009) and Voss, et al. (2009).


28

Appendix 2: The top 50 Chinese multinational non-financial companies

Rank Name State-owned Industry

1 China Petrochemical Corp. Y Energy

2 China National Petroleum Corp. Y Energy

3 China National Offshore Oil Corp. Y Energy

4 China Resources (Holdings) Co., Ltd. Y Energy

5 China Ocean Shipping (Group) Co. Y Transportation

6 China National Cereals, Oils & Foodsuffs Corp. Y Agricultural

7 Aluminum Corp. of China Y Metals

8 China Merchants Group Y Finance

9 Sinochem Corp. Y Industrial

10 China Unicom Corp. Y Telecom

11 China State Construction Engineering Corp. Y Construction

12 China Minmetals Corp. Y Metals

13 China National Aviation Holding Corp. Y Transportation

14 SINOTRANS Changjiang National Shipping (Group) Corp. Y Transportation

15 SinoSteel Corp. Y Metals

16 CITIC Group Y Finance

17 China Shipping (Group) Co. Y Transportation

18 China Huaneng Group Y Energy

19 China Mobile Communications Corp. Y Telecom

20 China Metallurgical Group Cop. Y Metals

21 China Power Investment Corp. Y Energy

22 China National Chemical Corp. Y Industrial

23 ZTE Corp. Y Telecom

24 Hunan Valin Iron & Steel (Group) Co. Ltd Y Metals

25 Geely Holding Group N Manufacturing

26 Legend Holdings Ltd. N Technology

27 Shum Yip Holdings Co. Ltd. Y Real Estate

28 China Nonferrous Metal Mining & Construction (group) CO., Ltd. Y Metals

29 China Communication Construction Co. Ltd. Y Industrial

30 GDH Ltd. Y Infrastructure

31 China North Industries Group Corp. Y Industrial

32 Wuhan Iron & Steel (Group) Corp. Y Metals

33 SINOHYDRO Co., Ltd. Y Energy

34 State Grid Corp. of China Y Energy

35 Shougang Corp. Y Metals

36 Anshan Iron & Steel Group Corp. Y Metals

37 Shenhua Group Corp. Ltd. Y Energy

38 Shanghai Baosteel Group Corp. Y Metals

39 China Guangdong Nuclear Power Holding Co., Ltd. Y Energy

40 CRCC-Tongguan Investment Co., Ltd. Y Metals

41 BeiJing Enterprises Group Co.Ltd. Y Utility

42 China Telecom Y Telecom

43 China Chengtong Holdings Group Ltd. Y Real Estate

44 Yanzhou Coal Mining Co. Ltd. Y Energy

45 Aviation Industry Corp. of China Y Transportation

46 China Datang Corp. Y Energy

47 Huawei Technologies Co. Ltd. N Technology

48 Shanghai Overseas United Investment Co. Ltd. Y Industrial

49 Guangzhou Yuexiu Holdings Ltd. Y Real Estate

50 Jinchuan Group Ltd. Y Metals

Source: MOFCOM.


29

Appendix 3: Countries in the MOFCOM dataset Afghanistan Albania Algeria Angola Antigua and Barbuda Argentina Armenia Australia Austria Azerbaijan Bahamas Bahrain Bangladesh Barbados Belarus Belgium Belize Benin Bermuda Bolivia Bosnia and Herzegovina Botswana Brazil British Virgin Islands Brunei Bulgaria Burundi Cambodia Cameroon Canada Cape Verde Cayman Islands Central African Republic Chad Chile Colombia Comoros Congo Congo DR Costa Rica Côte d'Ivoire Croatia Cuba Cyprus Czech Republic Denmark Djibouti Dominica Dominican Republic East Timor Ecuador

Egypt Equatorial Guinea Eritrea Estonia Ethiopia Fiji Finland France Gabon Gambia Georgia Germany Ghana Greece Grenada Guinea Guinea-Bissau Guyana Honduras Hong Kong Hungary Iceland India Indonesia Iran Iraq Ireland Israel Italy Jamaica Japan Jordan Kazakhstan Kenya Kuwait Kyrgyzstan Laos Latvia Lebanon Lesotho Liberia Libya Liechtenstein Lithuania Luxembourg Macau Macedonia Madagascar Malawi Malaysia Mali

Malta Marshall Islands Mauritania Mauritius Mexico Micronesia Moldova Mongolia Montenegro Morocco Mozambique Myanmar Namibia Nepal Netherlands New Zealand Niger Nigeria North Korea Norway Oman Pakistan Palau Panama Papua New Guinea Paraguay Peru Philippines Poland Portugal Qatar Romania Russia Rwanda São Tomé and Principe Saudi Arabia Senegal Serbia Seychelles Sierra Leone Singapore Slovakia Slovenia Solomon Islands South Africa South Korea Spain Sri Lanka St. Vincent and the Grenadines

Sudan Suriname Sweden Switzerland Syria Taiwan, China Tajikistan Tanzania Thailand Togo Tonga Trinidad and Tobago Tunisia Turkey Turkmenistan Uganda Ukraine United Arab Emirates United Kingdom United States Uruguay Uzbekistan Vanuatu Venezuela Vietnam Western Samoa Yemen Zambia Zimbabwe

Source: MOFCOM.


30

Appendix 4: Descriptive statistics (individual samples)

ODIFlow

($mn)

GDP

($bn)

Dist

(km)

OreEx

(%)

FuelEx

(%)

Voice

(%)

PolStab

(%)

EffGov

(%)

Quality

(%)

RuleLaw

(%)

Corruption

(%)

Mean 64.90 435.71 8,721.28 9.96 20.96 42.87 40.23 45.94 45.62 43.09 44.06

Median 7.37 47.73 8,151.35 3.15 5.97 39.42 37.02 42.72 42.16 38.76 40.78

Maximum 4,807.86 14,447.10 19,297.47 85.97 99.74 100.00 100.00 100.00 100.00 100.00 100.00

Minimum 0.01 0.20 955.65 0.00 0.00 0.00 0.00 0.49 0.00 0.47 0.48

Std. Dev. 246.77 1,458.88 4,041.59 17.02 29.75 29.03 26.78 28.72 28.68 28.92 29.43

Skewness 11.63 7.13 0.40 2.55 1.54 0.44 0.33 0.29 0.29 0.43 0.35

Kurtosis 190.01 61.27 2.88 8.92 3.90 2.07 1.94 1.94 1.96 2.08 1.94

Observations 64.90 435.71 8,721.28 9.96 20.96 42.87 40.23 45.94 45.62 43.09 44.06

Appendix 5: Correlation of variables

Ln(ODIFlow) Ln(GDP) Ln(Dist) OreEx FuelEx Voice PolStab EffGov Quality RuleLaw

Ln(GDP) 0.3781***

Ln(Dist) -0.1842*** -0.1655***

OreEx 0.0821** -0.2623*** 0.2044***

FuelEx 0.1294*** 0.0487 0.0077 -0.2102***

Voice 0.0188 0.5231*** 0.0862** -0.0312 -0.4311***

PolStab -0.0104 0.2477*** -0.0246 0.0253 -0.2144*** 0.6808***

EffGov 0.1096*** 0.6405*** -0.1027** -0.1403*** -0.3086*** 0.8315*** 0.7042***

Quality 0.0879** 0.6142*** -0.0733* -0.0935** -0.3114*** 0.8427*** 0.6852*** 0.9252***

RuleLaw 0.0680* 0.5572*** -0.0902** -0.1071*** -0.2969*** 0.8255*** 0.7618*** 0.9400*** 0.9185***

Corruption 0.0579 0.5303*** 0.0487 -0.0567 -0.2851*** 0.8156*** 0.7571*** 0.9285*** 0.8879*** 0.9441***


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