Location and Performance of Foreign Firms in China (1)

Abstract * This study examines the effects of location on the performance of foreign firms within a host country. Past studies have shown that location advantages and agglomeration economies positively affect the location choice of foreign firms. However, few studies have provided empirical evidence on the effects of location on FDI performance. * This article attempts to fill this gap by testing the effects of location on the productivity of foreign firms in China. Key Results * Results of statistical testing based on a comprehensive database from China's industrial census show that location significantly affects the productivity of foreign firms. Specifically, location advantages (infrastructure and factor inputs), agglomeration (concentration of foreign firms), and the effect of the reforms (privatization) positively affect the productivity of foreign firms. Industry concentration of domestic firms exerts an adverse effect on the productivity of foreign firms. Introduction How a foreign firm chooses its location in a host country is critical for its success. Thus, this is one of the most important themes in the study of international business. Scholars of international business and economic geography have examined this issue from different perspectives. International business scholars have traditionally emphasized the unique factor endowments of each location and the advantages arising therefrom. International trade and investments are primarily efforts to realize such advantages. Scholars of economic geography, on the other hand, focus their attention on the geographic proximity of firms. They argue that it is the positive externality generated from firm clustering in a specific location that attracts a firm to a specific location (Nachum 2000). More recently, scholars of strategic management have extended the ideas underlying theories of economic geography that explain firm activities and have applied them to examine intra-country differences in the relative abundance of resources and the importance of agglomeration economies in explaining the location patterns of foreign firms (Porter 1998, Enright 1998, Nachum 2000). Empirical studies have provided evidence to support the above theories about the location choice of foreign firms within a host country. The positive agglomeration effects on FDI location choice within a country have been found in many studies (e.g., Head/Ries/Swenson 1999, Shaver/Flyer 2000). Studies on location advantages (immobile resources and conditions) also found strong empirical support at the level of regions within countries (Coughlin/Terza/Arromdee 1991, FriedmaN/Gerlowski/Silberman 1992). Nachum (2000) demonstrates that location advantages and agglomeration economies simultaneously affect FDI location within the United States. If foreign firms choose their location based on location advantages and agglomeration economies, such choices must affect performance. However, few studies have examined the effect of the location of foreign firms on their performance. This article examines the relationship between FDI location and performance within a host country, using industrial census data from China (NBS 1994b-1996b). We address the following questions. Does location matter to FDI performance? If the answer is positive, then what are the location-related factors that affect FDI performance? In answering these questions, we hope to fill the gap in the literature on FDI location and performance, and to shed light on FDI performance in China, one of the fastest-growing and largest FDI recipients in the world. Theoretical Considerations and Hypotheses Our theoretical framework is based on three bodies of scholarly literature: studies on firm performance, theories of FDI location, and institutional theory. Location and Performance of Foreign Firms The study of firm performance has been developed predominantly by industrial organization (IO) economists and scholars of business strategy. …