Entry modes of foreign direct investment in China: a multinominal logit approach
The existing empirical literature on foreign direct investment (FDI) entry strategies tends to allow a binary choice between wholly owned enterprises (WOEs) and equity joint ventures (EJVs) or between greenfield investment and acquisition only. The current study establishes a multinomial logit model for the choice from all four FDI entry modes in China. Hypotheses involving country-, industry- and firm-specific factors are developed based on transaction cost economics, and tested on a data set covering 10607 foreign invested firms in China. A foreign invested firm is found to prefer the WOE mode given its large investment commitment, a high level of host-country experience in attracting FDI, a good specific industrial location, and a high asset intensity in the host industry. If the conditions of host-country experience and good specific location are not met, the EJV and the joint stock company (JSC) modes would be of greater use. A good specific location also makes the contractual joint venture (CJV) a preferable entry mode. Compared with overseas Chinese investors from Hong Kong, Macao and Taiwan, other foreign investors prefer EJVs over WOEs and CJVs. The results have important implications for managers.
Entry Mode, Foreign Direct Investment, Multinomial Logit Model, China
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