I keep running into papers which cite Buckley et al.’s 2007 work on Chinese outward foreign direct investment (FDI), so I decided for this reflection post to just head straight to the original.
Summary: Buckley and co. ask if the investment location decisions of Chinese multi-national enterprises are explicable by standard FDI theory or something new & local to China which is (a) a developing country and (b) guided by central planning? They create a model to test several assumptions about the determinants of Chinese investment (1984-2001**), including two assumptions that are probably the most cited/discussed today.
- The amount of natural resources a country has does not have significant impact on whether or not Chinese investment will go to that country.
- The more politically ‘risky’ countries attract more Chinese investment.
Reflections: I see this paper cited a lot for the second conclusion, the apparent Chinese ‘preference’ for risk. What is sometimes lost when this paper is cited is that the political risk of a country was only a significant determinant when both developed and developing countries (OECD vs. non) were included in the same model. Among non-OECD countries, political risk is not a significant determinant of where Chinese investment will go. Buckley et al. provided rationalizations for the Chinese ‘preference’ for risk. For example, preferring to invest in developing countries b/c of China’s political advantages there or shared ideologies; state-owned-enterprise structure allows for better risk mitigation; lack of knowledge in ‘young’ Chinese companies; or even that the political risk variable itself was calculated with a Western understanding of risk. Still, those explanations obscure the basic point that outside of directing more of their investment towards non-OECD countries (less competition, perhaps?), Chinese investors appear no more attracted to the seriously risky countries than any other investor.
** This paper was written in 2007 and uses a dataset from 1984 to 2001. It would be fascinating to see an update. There are some factors that did not play a significant role in the 20th century Chinese economy that absolutely do play a role now. The authors themselves point this out by saying Chinese investment in their study was not motivated by asset-seeking as that wave had yet to happen by 2001 but was absolutely occurring in 2007 at the time of writing (think Chinese companies buying US R&D firms). However, I think returning to the natural resources and political risk question with 2002-present data would be equally as compelling.