responses to the threat of foreign multinational competition by upgrading productivity, raising innovation, investment and wage rate, and altering product composition.

# 2.3 The Determinants and Impacts of Chinese Outward FDI

Within the broad FDI literature, a new emerging strand of research focuses on China’s outward FDI.<sup>5</sup> In its earliest stage, research in this area is primarily descriptive in nature. For example, Cai (1999) proposes that Chinese firms invest overseas to seek markets, natural resources, technology, managerial skills, and financial capital. Wu and Chen (2001) suggest two additional motives, namely, to transfer excessive production capacity overseas and to diversify production lines. A study by Morck, Yeung and Zhao (2008) shows that Chinese multinational firms tend to perform better than other foreign firms in environments with weak domestic institutions, possibly because Chinese firms are better at dealing with governments and operating in a country with inefficient domestic institutions.<sup>6</sup> A new wave of empirical work examines the determinants of Chinese ODI at the aggregate level. For example, Cheung and Qian (2009) find Chinese ODI tends to be attracted to countries with a larger market size and richer resources. Buckley et al (2007) find that Chinese ODI is positively correlated with the levels of host-country political risk and cultural proximity to China. Ramasamy et al (2012) use annual report data from the 200 largest Chinese firms listed in Shenzhen and Shanghai stock markets to compile Chinese ODI measures. They find that while state-controlled firms are attracted to countries with greater natural resources and more risky political environments, private There are also studies analyzing Chinese ODI from the home country perspective. At the regional level, You (2015) finds that Chinese local government policy measured by willingness to approve local ODI and investment in R&D has a positive impact on regional ODI. Another home country characteristic found to have a significant effect is lagged inward FDI. Yao et al (2016) find that a country’s lagged inward FDI stock in China is positively correlated with China’s contemporaneous ODI to that country. A case study by Hertenstein et al (2017) looks into Chinese ODI in the auto component industry and argues that business networks explain the connections between lagged inward FDI and ODI.

More recent studies of Chinese ODI explore firm-level data. Using MOFCOM project data from 1998-2009, Chen and Tang (2014) find that the ex-ante larger, more productive, and more exportintensive firms are more likely to invest abroad. They also find that ODI helps firms to achieve higher TFP, employment, and export intensity and greater product innovation. Wang et al (2016) use firm-level data from Zhejiang Province to examine the impact of financial constraints on firms’ ODI decisions and suggest that lowering a firm’s financial constraints can increase both the probability and volume of ODI. Chen, Dollar, and Tang (2016) focus on the determinants of Chinese ODI in Africa and show that Chinese ODI in Africa is shaped by firms’ profit 5 Another related literature has examined the patterns of FDI from other emerging economies. Gómez-Mera et al. (2015), for example, study the patterns of FDI from Brazil, India, the Republic of Korea, and South Africa and find that FDI from these emerging economies deals with a fundamental trade-off between market attractiveness and the transactions costs of entering distant and remote markets.

6 This “institutional advantage argument” is supported by Cuervo-Cazurra and Genc’s (2008) cross-country analysis, which argues that disadvantages at home due to weak institutions could become advantages abroad.

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