FDI location at the subnational level: a study of EJVs in China

Journal of Business Research 56 (2003) 835 – 845

FDI location at the subnational level: a study of EJVs in China Doren D. Chadee*, Feng Qiu, Elizabeth L. Rose Department of International Business, The University of Auckland, Private Bag 92019, Auckland, New Zealand

Abstract The location of FDI activities by MNEs is of interest to international business researchers, especially in light of the rapidly changing economic landscapes in many regions of the world. This paper adds to the literature on MNEs’ location choices, focusing on how business characteristics are related to location, in a sample of 6430 foreign equity joint ventures (EJVs) in China during 1984 – 1996. The results show that the duration of the EJV agreement, the origin of the foreign investor, and the type of business activity are related to the location of the EJVs’ business activities within China. Significant differences are noted in the locations of ventures in the manufacturing and service sectors, and there is evidence of an increasing preference for MNEs to locate their activities in China’s large, metropolitan cities. These findings reflect the dynamic nature of government policies toward FDI in China and their impact on the location choices of MNEs. D 2002 Published by Elsevier Science Inc. Keywords: FDI location; Equity joint ventures; China

1. Introduction The rapid increase in worldwide FDI over the past several decades has been accompanied by a plethora of research on various aspects of the phenomenon. Still, the question of where multinational enterprises decide to locate their FDI activities has been an under-researched area, despite the changing geography of multinational activity (Dunning, 1998) and evidence that location affects overall business operation and performance (Vanhonacker and Pan, 1997). Recognition of the importance of location in the FDI literature dates back to Dunning (1980), whose OLI framework included characteristics of the host location as critical aspects of internationalization. While some investigations of FDI location have been undertaken, most have considered choices between countries (e.g., Vernon, 1966; Rondinelli, 1987; Porter, 1996). Fewer studies have considered location issues within countries, which is the focus of this paper; most of these have focused on experiences in developed countries (e.g., Ray, 1971; Blackborn, 1972; Coughlin et al., 1991; Taylor, 1993; Mody and Srinivasan, 1998). This emphasis on developed countries is not surprising. Until recently, most of the world’s FDI has been in advanced, industrialized econom-

* Corresponding author. Tel.: +64-373-7599x5951; fax: +64-308-2324. E-mail address: [email protected]. (D.D. Chadee). 0148-2963/02/$ – see front matter D 2002 Published by Elsevier Science Inc. doi:10.1016/S0148-2963(02)00471-X

ies. Since the end of World War II, many industrialized economies have developed special areas, such as export processing zones, free trade zones, and special economic zones (SEZs), in which the government offers incentives to attract foreign investment (Rondinelli, 1987). Such initiatives permit the study of location issues at a subnational level. Countries possess distinctive physical, economic, and political attributes. National characteristics, including economic growth rates, labor costs, availability of skilled labor and technology, government regulations, and topographical characteristics, can affect the success of FDI (Lipsey, 1999). Just as between-country differences may be important determinants of where MNEs decide to locate their overseas activities, there is reason to believe that regional distinctions within countries may also influence the location of FDI (e.g., Taylor, 1993; Mody and Srinivasan, 1998). Large countries, in particular, have diverse economic and physical landscapes. Thus, it is not surprising for regions within a country to possess unique characteristics that provide distinctive sources of competitive advantage for MNEs’ FDI activities. Regional differences, such as manufacturing density, population and infrastructure (Coughlin et al., 1991), local government incentives (Ohmae, 1995; Donahue, 1991; Dunning, 1998) and the level of economic development (Bagchi-sen and Wheeler, 1989), have all been found to influence MNEs’ location decisions. In addition, many of

836

D.D. Chadee et al. / Journal of Business Research 56 (2003) 835–845

these influences are industry-specific. For example, mineral resources are required for mining industries, labor costs are more important for labor-intensive industries than for capital-intensive industries, and distance to markets is important for consumer tradable goods (Lipsey, 1999). In general, an MNE should be attracted to regions that offer the economic and institutional facilities necessary for the efficient utilization of the firm’s core skills (Dunning, 1998). Although contextual variables specific to MNE characteristics are clearly important in explaining the choice of location for their FDI, this topic has not attracted much attention from international business researchers. However, recent changes in the economic and political landscapes of various regions have led to major shifts in the worldwide distribution of FDI (Dunning, 1998). There is now renewed interest in factors that influence MNEs’ choices of location for their business activities, particularly in the context of the under-researched developing countries. China is a prime example. In less than two decades, it has become the world’s second largest recipient of FDI (Chadee and Qiu, 2001). Although research on various aspects of FDI in China has emerged over the last decade, the regional distribution of FDI within the country has not yet been investigated. In this paper, we investigate how key characteristics of equity joint ventures (EJVs) are related to their choice of location within China. By focusing on the geographic distribution of FDI activities at the subnational level in a developing country, this research fills a gap in the literature. The paper is organized as follows. First, it briefly describes recent developments with respect to FDI in China and the locational shifts of MNE activities over the last two decades. Second, we develop a theoretical explanation for the effects of EJV characteristics on business location. Third, we describe the methodology, empirical model, and data for testing the various hypotheses. The main findings are then discussed, followed by the conclusions.

2. FDI in China For much of the 20th century, China’s economy was insulated from foreign competition. That changed in 1978, when the Chinese government announced its ‘‘open-door’’ policy (kaifang zhence), a strategy aimed at internationalizing the country’s economy. This was followed quickly by the enactment of the Law of the People’s Republic of China on Joint Ventures using Chinese and Foreign Investment (1979), which granted FDI legal status in China. This law, and its subsequent amendments, provides the basic legal framework for MNEs to invest in China. Following these developments, FDI in China increased rapidly, particularly in the 1990s. From the enactment of the 1979 Law through 1998, more than US$270 billion of FDI flowed into the country (MOFTEC, 1998), placing China second, behind the United States, in terms of inbound FDI (UNCTAD, 1996).

FDI has been a large factor in China’s rapid economic development, contributing approximately 40% to export revenue and providing employment to an estimated 17.5 million people in 1997 (MOFTEC, 1998). The majority of the inbound investment (60% during 1993 – 1996) has been in the form of EJVs, which have the potential to be particularly beneficial to the country, because of positive spillover effects (Chadee and Qiu, 2001; Pan and Chi, 1999). Similar to the approaches followed by countries such as Japan and South Korea, China’s strategy for using FDI to promote economic growth has three important aspects. First, from the outset, Chinese authorities encouraged the EJV as the primary mode for foreign investment, in order to speed up the transfer of technology and both scientific and managerial know-how (Beamish, 1993). Second, the strategy of opening up the local economy to foreign investors proceeded in stages, targeting light manufacturing first, followed by more technology-intensive industries and, more gradually, the service sector. Third, foreign investors’ access to the local economy has also evolved gradually, through the creation of specially designated zones for foreign MNEs’ operations. This planned strategy, aimed at achieving a relatively controlled distribution of regional economic development throughout the country, has had important impacts on FDI location decisions. In the early stages of China’s open-door policy, the government created five SEZs (Shenzhen, Zhuhai, and Shantou in Guangdong Province; the entire island province of Hainan; and Xiamen in Fujian province) to attract foreign investors. In 1984, the government opened another 14 cities to foreign investment. [The 14 additional open coastal cities are (from north to south): Qinhuangdao, Dalian, Tianjin, Yantai, Qingdao, Lianyungang, Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Beihai, and Zhanjiang.] These 19 specially designated locations provide foreign investors with special incentives, including tax concessions, rebates and exemptions, and preferential land rents and prices for inputs. Thus, it is not surprising that the majority of overseas investment (88% in 1992– 1996) has been directed to the coastal regions of China, while FDI activity in inland regions remains relatively sparse. In addition, the geographical proximity and close cultural and linguistic links between south and southeast China and the overseas ethnic Chinese communities in Hong Kong, Taiwan, and Macao have contributed to the high concentration of FDI in the southern coastal region. It should be noted that the majority of these investments are in the form of small, export-oriented enterprises, most of which have been transplanted from Hong Kong or Taiwan in pursuit of the abundant supply of less costly labor in the mainland. Within the coastal region itself, some interesting trends have emerged over the last two decades, with the gradual opening of more regions to foreign investors. In 1990 and 1992, an additional 13 free trade areas (FTAs), designed

D.D. Chadee et al. / Journal of Business Research 56 (2003) 835–845

specifically for export processing, were established along the coast, near major cities. [FTAs have been established in Shanghai, Tianjin, Dalian, Shatoujiao and Futian (Shenzhen), Guangzhou, Zhangjiangang, Haikou, Quingdao, Ningbo, Fuzhou, Xiangu, and Shantou.] Partly as a result of this action, FDI along the south and southeast coast has declined, from 59% of the total in 1979– 1986 to less than 43% in 1992 –1997 (see Fig. 1). For example, the share of FDI in Guandong province (located on the southeast coast) dropped from approximately 50% in 1985 to less than 25% in 1997. It may be that, as the sources of FDI in China become more diversified and foreigners become more comfortable in venturing further afield when doing business there, locations in close proximity to Hong Kong are losing their attractiveness, relative to other regions. For example, the east coast region doubled its share of FDI (from 12% to 24%) from 1979 –1986 to 1992 –1996 (see Fig. 1). The Yantze River Delta (southern Jiangsu, Shanghai, and northern Zhejiang), which has developed more advanced industrial bases and markets than other regions in China, has experienced phenomenal growth in recent years. In 1995, 45% of the investment projects of at least US$10 million were located in China’s Yantze River Delta and the region’s share of pledged FDI has increased steadily over recent years. Overall, the location of MNE activity in China has been shifting over the past 20 years, from the south to the east and northeast. China’s initial strategy for attracting FDI was aimed at manufacturing MNEs capable of providing employment to large numbers of people. As a result, light manufacturing operations, mostly from Hong Kong, Taiwan, and Macau, invested heavily in neighboring special zones. More

837

recent reforms, however, have opened some service industries to foreign investment. Since 1992, MNEs operating in services such as finance, insurance, retailing, and management consulting have begun to invest in China, mostly in the large cities of Shanghai, Beijing, and Tianjin. The proximity of the northeastern provinces to Japan and South Korea also helps to explain the growth of this region, particularly as the focus of FDI shifts from light manufacturing to technologyintensive projects. In the northeast provinces, FDI from Japanese and Korean investors accounted for approximately 21% of the total between 1985 and 1995. The economic landscape in China is evolving quickly, and these changes have had profound effects on the location preferences of MNEs over the last two decades. Factors unique to particular microregions within China and the nature of the business activities being undertaken are presumed to contribute to the locational preferences of MNEs (Dunning, 1998). We now turn to a consideration of how some key EJV characteristics may influence the location of their activities in China.

3. Theoretical considerations and hypotheses EJVs are found all across China. However, neither the level of economic development nor the economic reform process is distributed uniformly throughout the country. Despite the open-door policy and the program of economic development in place since 1979, there is still a large gap in the pace of change between coastal regions and the rest of the country. In addition, intra-regional diversity with respect

Fig. 1. Geographical distribution of EJV activities in China: 1979 – 1996. Source: MOFTEC (various issues).

838

D.D. Chadee et al. / Journal of Business Research 56 (2003) 835–845

to economic development and legal and policy frameworks is quite apparent, even within the coastal regions. Shan (1991) developed a regional classification of MNE activity in China, based on the degrees of economic liberalization and marketization permitted by the central government and the level of autonomy. Based on this classification, four primary locations are identified for this study. The first region (LOC1) consists of the 17 special zones (5 SEZs and 12 Open Coastal Cities) created by the Chinese government, specifically for the purposes of attracting FDI. The second region (LOC2) represents the three large, metropolitan cities of Beijing, Shanghai, and Tianjin. The third region (LOC3) refers to all other coastal cities, and includes most of the FTAs. The fourth region (LOC4) consists of all inland locations. This classification distinguishes between inland and coastal regions, and among locations within the coastal regions that host the majority of China’s FDI. Using this classification, we are interested in studying how firm characteristics relate to the choice of location. Sections 3.1– 3.6 address some key EJV characteristics, developing hypotheses regarding their relationships with location decisions.

Dunning, 1998); thus, these firms are more likely to prefer the large metropolitan cities of Shanghai, Beijing and Tianjin. Japanese investors may possess some cultural distance advantages in China, relative to their Western competitors. However, they have been quite cautious in entering the Chinese market, compared to US and European firms (Yan, 1993). Still, the importance that Japanese firms tend to place on growth in sales and market share should make the metropolitan regions more appealing to them. Given the different motivations for undertaking FDI in China, we propose the following hypotheses regarding the location preferences of MNEs from Hong Kong/Taiwan, the US, Europe and Japan:

3.1. Country of origin

Hypothesis 1d: EJVs from Japan are more likely to be located in large metropolitan cities (LOC2).

There is extensive empirical evidence supporting the notion that an MNE’s country of origin influences its choices regarding investment location (e.g., Blackborn, 1972; Watts, 1979; Grosse and Trevino, 1996). For example, lower cultural distance between home and host countries has been shown to facilitate the transfer of resources and organizational capabilities (Erramilli and Rao, 1993; Grosse and Trevino, 1996; Contractor and Kundu, 1998). Higher cultural distance tends to increase the costs of operating an overseas subsidiary (Kogut and Singh, 1998). Although investors in China come from more than 120 countries, the bulk of the FDI comes from investors in five regions: Hong Kong/Taiwan, the US, Europe, Japan and Singapore. [For this paper, the ‘‘Hong Kong/Taiwan’’ group includes investments from Macau, and the ‘‘Europe’’ group includes investment from the UK, France and Germany, who are the three dominant European investors in China.] The locational distribution of FDI from Hong Kong/ Taiwan in China reflects the close geographic proximity and cultural similarity between South China and the ethnic Chinese populations in Hong Kong, Taiwan and Macau (Vanhonacker and Pan, 1997; Chadee and Qiu, 2001). In addition, most of the FDI from these countries is in light manufacturing industries, suggesting that low labor costs represent an important motivation behind these investments (Dunning, 1998). By comparison, Western firms investing in China appear to be attracted primarily by the growth potential of the booming Chinese consumer market (Tse et al., 1997). As such, they tend to seek locations that are close to a large concentration of affluent consumers (Porter, 1990;

Hypothesis 1a: EJVs from Hong Kong/Taiwan are more likely to be located in the open coastal regions within proximity to Hong Kong, Taiwan and Macau (LOC3). Hypothesis 1b: EJVs from the US are more likely to be located in large metropolitan cities (LOC2). Hypothesis 1c: EJVs from Europe are more likely to be located in large metropolitan cities (LOC2).

3.2. Manufacturing vs. service Some distinctive characteristics of service provision dictate that the international expansion strategies of MNEs operating in the service sector differ from those in the manufacturing sector (e.g., Mathe and Perras, 1994; Patterson and Cicic, 1995; Chadee and Mattsson, 1998). The intangibility of services and the inseparability of their production and delivery necessitate a higher level of interaction between producers and consumers (Kotler, 1997). The successful provision of services also requires that firms have the ability to adapt their ‘‘products’’ and customize their delivery to fit local culture, tastes, living habits, and industrial needs. Thus, EJVs in the service sector tend to place a priority on proximity to the consumer. As a result, we expect service-sector EJVs to be more likely to locate themselves in large cities, where consumers are more concentrated. In addition, urban Chinese consumers tend to be of higher socioeconomic status and more able to afford western-type services, compared with the rural population. Larger cities are also more technologically advanced with respect to telecommunications, information systems, and transportation, allowing EJVs to achieve economies of scale and efficiencies in the production and delivery of services. This leads to the following hypotheses:

Hypothesis 2a: Service-sector EJVs are more likely to locate their activities in large metropolitan cities (LOC2) than in other regions.

D.D. Chadee et al. / Journal of Business Research 56 (2003) 835–845

Hypothesis 2b: Service-sector EJVs are more likely to locate their activities in the special zones (SEZs and open coastal cities, LOC1) than in smaller coastal cities (LOC3) or inland regions (LOC4). Hypothesis 2c: Service-sector EJVs are more likely to locate their activities in smaller coastal cities (LOC3) than in inland regions (LOC4). 3.3. Foreign equity ownership Equity ownership is the most direct means of gaining and exercising control over the EJV (Killing, 1983; Pan, 1997). Firms face different levels of risk by doing business in the various regions of China, and the level of foreign equity ownership is expected to differ accordingly. For example, by their very concept, China’s SEZs should be less risky business environments than the inland regions, where there is poor infrastructure and little in the way of government programs to assist investors. The SEZs generally offer comprehensive investment incentive packages that encourage foreign firms to assume larger equity shares in joint ventures, justified by the lower risks. An MNE’s level of ownership can also be affected by the relative strength of the Chinese partner’s position. Foreign investors may have to settle for a smaller equity share in large metropolitan cities (LOC2), because the local advantage of market size endows domestic partners with stronger bargaining power. This discussion leads to the following related hypotheses: Hypothesis 3a: EJVs with higher foreign equity ownership are more likely to be located in the special zones (LOC1) than in other regions. Hypothesis 3b: EJVs with lower foreign equity ownership are more likely to be located in large metropolitan cities (LOC2) than in the special zones (LOC1) or the smaller coastal cities (LOC3). 3.4. Contract duration Although it is not common practice in Western countries to have a predetermined duration specified in an EJV agreement, this is a legal requirement in China (Shan, 1991; Beamish, 1993). The contractual duration of an EJV agreement is usually determined through negotiation between the Chinese and foreign partners, and depends largely on the nature of the business under consideration. Foreign firms that enjoy stronger bargaining positions with regard to EJV partnerships of longer duration tend to be investing in long-term, development-oriented projects, such as public utilities and telecommunications (Pan, 1996). Such MNEs are usually attracted to more urban regions, because they offer greater potential for growth and profit (Agarwal, 1994). To gain access to such markets, foreign firms must cooperate closely with powerful local partners and dem-

839

onstrate their long-term commitment to the venture (Pan and Tse, 1997; Vanhonacker and Pan, 1997). By contrast, EJVs involved in light manufacturing tend to have much shorter contractual agreements. As discussed earlier, such ventures are more likely to be located in the FTAs than in the large metropolitan cities. This reasoning yields the following hypothesis: Hypothesis 4: EJVs with longer term contractual agreements are more likely to be located in large metropolitan cities (LOC2) than in other regions. 3.5. Size of investment From the investor’s perspective, projects involving more capital are inherently riskier than smaller projects. The level of risk is also increased when a firm places a substantial portion of its overseas investment into a single project, which is often the case for EJVs (Gatignon and Anderson, 1988). Risk exposure is proportional to total investment; when the venture’s total investment increases, the foreign partner’s resource commitment increases, even if its equity share is unchanged (Pan, 1996). Given the environmental uncertainties and risks facing joint venture operations in China, foreign investors involved in projects requiring large capital investments are expected to be more likely to locate their ventures in regions that are characterized by favorable government attitudes toward FDI and offer investment incentives. MNEs contemplating large investments should also be concerned with whether or not the location has the appropriate infrastructure (e.g., advanced transportation, communication, and freight handling technologies) to accommodate the proposed undertaking. Thus, regions with investment incentives and superior infrastructure, such as the SEZs and open coastal cities, are expected to be more attractive to larger investments, compared with locations characterized by less favorable business environments. This leads to the following hypotheses: Hypothesis 5a: EJVs requiring larger amounts of capital are more likely to be located in the special zones (LOC1) than in urban cities (LOC2) or inland areas (LOC4). Hypothesis 5b: EJVs requiring larger amounts of capital are more likely to be located in coastal cities (LOC3) than in urban cities (LOC2) or inland areas (LOC4). 3.6. Investment timing As discussed earlier, the regional distribution of FDI in China has been influenced strongly by government policy. Investment can be viewed in terms of three time periods (Chadee and Qiu, 2001). In the early years of experimenting with FDI (1984 –1986), the Chinese government created SEZs, followed by the open coastal cities; the intent was to attract manufacturing firms who could provide large

840

D.D. Chadee et al. / Journal of Business Research 56 (2003) 835–845

numbers of jobs. As a result, most of the early investment into China was located in the SEZs and open coastal cities (LOC1). During the second stage (1986 –1991), the government implemented new policies, aimed at increasing the amount of overseas investment in China. In the third stage (1992 onwards), the government shifted its efforts toward promoting foreign investment in the service sector and high-technology industries, such as telecommunications and information technology. Such firms have tended to prefer to locate their activities in regions endowed with well-developed infrastructures and high consumer densities, leading them to urban areas. Thus, our final hypotheses are:

Table 1 Variable definitions

Hypothesis 6a: Older EJVs (i.e., those approved in 1984 – 1986) are more likely to be located in the special zones (LOC1) than in other regions.

Sector in which investment is made SEC 1 if EJV is in the service sector; 0 otherwise

Hypothesis 6b: Newer EJVs (i.e., those approved in 1992 – 1996) are more likely to be located in the metropolitan (LOC2) or coastal areas (LOC3) than in other regions.

4. Model specification and estimation We are interested in assessing the extent to which EJV characteristics are related to the choice of one location over another within China. Given the four regions described earlier, a typical investor is faced with six choice sets. For the purposes of this research, we focus on the four most important locational choices facing a potential investor in China: (1) (2) (3) (4)

coastal (LOC1, LOC2 and LOC3) vs. inland (LOC4), special zone (LOC1) vs. other coastal city (LOC3), metropolitan (LOC2) vs. special zone (LOC1), and coastal city (LOC3) vs. metropolitan (LOC2).

To investigate the choices, we estimate four separate models; in each case, the investor is choosing between two locations (or sets of locations). As the dependent variable for each model is binary, we use binomial logistic regression models of the form: h

P½Li ¼ 1 ¼ 1 þ eðaXj bÞ

i1

;

where

Li ¼

8 < 1; if the EJV is located in location set i :

0; otherwise

is the dependent variable, Xj is the vector of independent variables for the jth observation, a is the intercept and b is

Variable name

Definition

EJV location in China LOC1 LOC2 LOC3 LOC4

1 1 1 1

if if if if

SEZs or Open Coastal Cities; 0 otherwise Shanghai, Beijing or Tianjin; 0 otherwise other coastal cities; 0 otherwise inland regions; 0 otherwise

Foreign partner’s country of origin CO1 1 if Hong Kong, Taiwan or Macau; 0 otherwise CO2 1 if US; 0 otherwise CO3 1 if Japan; 0 otherwise CO4 1 if Europe; 0 otherwise CO5 1 if Singapore; 0 otherwise

Share of foreign equity ownership in EJV OWN Percentage (25  OWN  99) Contractual duration of EJV DUR Number of years Size of investment SIZM SIZL

1 if ‘‘medium’’ (US$5 – 20 million); 0 otherwise 1 if ‘‘large’’ (over US$20 million); 0 otherwise

Year of EJV approval Y1 Y3

1 if 1984 – 1986; 0 otherwise 1 if 1992 – 1996; 0 otherwise

the vector of coefficient parameters. The model parameters are estimated via maximum likelihood, using SAS. The estimated coefficients reflect the effect that a change in the explanatory variable is expected to have on the logarithm of the odds that a particular locational choice will be made. A positive and significant estimated coefficient implies that an increase in the value of the explanatory variable is associated with an increased probability of an EJV’s being located in that region. 4.1. Data The variables used in the empirical analysis are defined in Table 1. The models are estimated using data from 6430 EJVs approved between 1984 and 1996. The primary data source was the Almanac of Foreign Economic Relations and Trade of China, published by the Chinese Ministry of Foreign Trade and Economic Co-operation (MOFTEC). For each EJV, the following information is provided: name of the foreign party, total dollar amount of the venture, percentage of foreign equity share, agreed duration for the EJV, type of business, location of the operation, and time of approval of the EJV by Chinese authorities. This data source is considered reliable, and has been widely used in other research (e.g., Hu and Chen, 1996; Pan, 1996; Chadee and Qiu, 2001).

D.D. Chadee et al. / Journal of Business Research 56 (2003) 835–845

841

LOC4 (other coastal cities) increased significantly over the same periods. The manufacturing sector accounts for 85% of the EJVs in the sample; however, the mix shifts significantly in the 1992 – 1996 period, with a reduced proportion of manufacturing and an increased proportion of service-sector ventures ( P < .05). Project size demonstrates dramatic shifts over the 12-year period considered in this study. Small EJVs (investment less than US$5 million) account for 87% of the sample for 1984 – 1986, but only 4% of the sample for 1992 – 1996. The proportions of both medium (total investment US$5 – 20 million) and large (greater than US$20 million) EJVs are significantly higher for 1992 – 1996 than for the earlier periods ( P < .05). The average foreign equity ownership also appears to be on the rise. The 53% figure for 1992– 1996 is significantly higher than the values for either of the two earlier time periods ( P < .05).

5. Discussion of results 5.1. Descriptive statistics The data used in this study are drawn from a comprehensive listing of foreign EJVs in China. The sample EVJs have a combined contribution of US$31.76 billion of FDI in China, and represent 15% of the entire EJV population approved by MOFTEC from 1984 through 1996. Table 2 presents a summary of the descriptive statistics for the sample. The distribution by country of origin indicates that the sample is fairly representative of the population of EJVs in China. In the sample, approximately 63% of the foreign partners are from Hong Kong/Taiwan; the corresponding population average is 59% for the 1979– 1995 period (PRC Yearbook, 1996– 1997). It is noteworthy that the proportion of Hong Kong/Taiwan-based foreign partners is significantly higher ( P < .05) in 1984– 1986 than in the later two periods. The proportions of EJV partners from the other origins of interest also compare favorably with the population. In addition, the locational distribution of EJVs in the sample reflects the emerging trends for FDI in China. The proportion of EJVs in LOC1 (5 SEZs and 12 open coastal cities) declined significantly (based on 95% confidence intervals) from 1984 – 1986 to 1987 – 1991 and from 1987 – 1991 to 1992 – 1996, whereas the proportion in

5.2. Logistic regression results The four locational choices described earlier are modeled using logistic regression; the maximum likelihood parameter estimates and their significance levels are summarized in Table 3. All four models perform reasonably well, based on fit statistics (e.g., c2, t, concordant values). Based on the correlation coefficients for the explanatory variables, there is no evidence of problem multicollinearity.

Table 2 Summary of sample 1984 – 1986 (%)

1987 – 1991 (%)

1992 – 1996 (%)

Overall 1984 – 1996

31 18 38 13

26 20 43 11

18 14 48 20

1517 1093 2861 959

23 17 45 15

71

60

62

4057

63

10 8 4 4 3

17 9 6 4 4

12 6 9 3 8

875 466 437 247 348

14 7 7 4 5

Sector Manufacturing Service Duration (average, in years)

85 15 13

94.5 5.5 15

77 23 26

5497 933 19

85 15

Project size < US$5 million US$5 – 20 million >US$20 million Foreign equity share (average, %) Overall

87 11 2 41 20

84 13 3 42 37

4 56 40 53 43

3289 1988 1153 46.5 6430

51 31 18

Location SEZs and open coastal cities Shanghai, Tianjin or Beijing Other coastal cities Inland regions Country of origin Hong Kong, Taiwan or Macau US Japan Europe Singapore Others

Frequency

%

100

842

D.D. Chadee et al. / Journal of Business Research 56 (2003) 835–845

5.3. Country of origin The models suggest that investors from Hong Kong/ Taiwan are less likely to invest in large, metropolitan cities, opting instead for the SEZs and other coastal regions. Hong Kong/Taiwan firms also show a marginal preference for inland regions; see Model A. These results are consistent with the historical information that most of the EJVs from Hong Kong, Taiwan and Macau have been located in the FTAs in close proximity to the islands. In contrast, investors from the US, Japan and Europe demonstrate preferences for Shanghai, Beijing and Tianjin. This pattern of investment reflects the notion that investors from these developed countries are motivated by China’s domestic market growth potential, and are drawn to economically developed areas and their large markets. No significant marginal locational preferences are noted for investors from Singapore. These empirical results provide support for Hypotheses 1a – 1d. 5.4. Sector The variable identifying service-sector EJVs (SEC) is highly significant in Models B, C and D. These results suggest that service firms tend to prefer to concentrate their activities in large cities (LOC2), followed by SEZs and other coastal cities. Thus, Hypotheses 2a and 2b receive substantial support, although Hypothesis 2c is not supported. It appears that the economic incentives offered by the met-

ropolitan cities are more attractive to service firms than the government incentives offered by the SEZs. The success of service delivery depends not only on a favorable policy environment, but also on the availability of well-developed infrastructure, a large population base, and well-established financial and industrial sectors. Together, these characteristics create a business environment that is conducive to the establishment, development, and growth of service-sector ventures. Overseas investors appear to believe that large metropolitan areas, such as Shanghai, Tianjin, and Beijing, are most likely to offer such environments. 5.5. Equity ownership Higher foreign equity ownership is associated with a higher probability of the EJV’s being located in the SEZs (LOC1), providing strong support for Hypothesis 3a. [Note that the coefficient estimates that are close to 0 are artefacts of the scale of the equity ownership measure (between 25 and 99), compared to the other variables in the models (0– 1 dummy variables).] The result from Model C provides partial support for Hypothesis 3b, which hypothesizes that foreign firms with lower equity levels are more likely to locate their EJVs in metropolitan areas (LOC2). 5.6. Contract duration The duration of the EJV contract is found to be highly significant in Models B, C and D. Longer-term agreements

Table 3 Results of logistic regression modeling Explanatory variables

Model A: coastal vs. inlanda

Model B: LOC1 vs. LOC3b

Model C: LOC2 vs. LOC1c

Model D: LOC3 vs. LOC2d

Intercept CO1 (Hong Kong, Taiwan, Macau) CO2 (US) CO3 (Japan) CO4 (Europe) CO5 (Singapore) SEC (service industry) OWN (foreign equity ownership) DUR (EJV duration) SIZEM (total investment US$5 – 20 million) SIZEL (total investment >US$20 million) Y1 (1984 – 1986) Y3 (1992 – 1996) Sample size Concordant t c2

1.90 (90.08)* * *  0.29 (3)*  0.27 (2.02) 0.22 (0.9)  0.32 (2.24)  0.37 (2.22)  0.07 (0.55) 0.01 (17.02)* * * 0.00 (0.33) 0.58 (18.23)* * * 1.06 (42.96)* * *  0.23 (4.6)* *  1.44 (101.27)* * * 6430 62.6% 0.07 175.98

 1.04 (36.39)* * * 0.00 (0.00)  0.22 (1.68) 0.35 (3.44)*  0.33 (2.77)*  0.03 (0.02) 0.37 (13.25)* * * 0.00 (3.23)* 0.02 (47.13)* * * 0.18 (0.12) 0.15 (0.31) 0.35 (16.31)* * *  0.91 (54.9)* * * 4378 61.8% 0.11 191.13

 0.09 (0.17)  0.48 (6.76)* * * 0.56 (7.59)* * * 0.71 (11.16)* * * 0.68 (8.55)* * *  0.13 (0.24) 0.88 (60.21)* * *  0.01 (4.73)* * 0.01 (4.1)* *  0.22 (2.77)*  0.30 (3.46)*  0.39 (12.79)* * *  0.05 (0.09) 2610 66.1% 0.16 217.13

1.26 (41.52)* * * 0.39 (5.44) * *  0.29 (2.66)  1.06 (28.85)* * *  0.34 (2.9) * 0.12 (0.23)  1.24 (137.77)* * * 0.00 (0.94)  0.03 (74.95)* * * 0.04 (0.11) 0.26 (2.48)  0.03 (0.08) 0.90 (41.51)* * * 3954 69.5% 0.16 414.66

The numbers in parentheses are Wald c2 statistics. a The dependent variable is 1 if the EJV location is in coastal areas and 0 if in inland regions. b The dependent variable is 1 if the EJV location is in LOC1 (5 SEZs and 12 open coastal cities) and 0 if in LOC3 (other coastal areas). c The dependent variable is 1 if the EJV location is in LOC2 (Beijing, Shanghai and Tianjin) and 0 if in LOC1. d The dependent variable is 1 if the EJV location is in LOC3 and 0 if in LOC2. * P < .10. ** P < .05. *** P < .01.

D.D. Chadee et al. / Journal of Business Research 56 (2003) 835–845

are associated with a higher probability of location in metropolitan cities (LOC2), compared with both SEZs and other coastal cities, supporting Hypothesis 4. Compared with other coastal locations, China’s large cities are more attractive to foreign investors who are making long-term commitments to the Chinese market. The potential for growth in both markets and profits in these urban areas appear to be important considerations for MNEs when they are making commitments of longer duration. 5.7. Size of investment As described earlier, we classify investment size into three categories: small, medium and large. Thus, we use two dummy variables to capture the relationship between investment size and choice of location. These variables are significant only in Models A and C. EJVs whose investment exceeds US$5 million are more likely to be located in coastal regions, rather than in inland areas. In addition, these large- and medium-sized EJVs have higher probabilities of being established in the SEZs than in the large metropolitan cities. Taken together, these findings provide partial support for support Hypotheses 5a and 5b, but do not give a robust answer regarding the influence of EJV size on the choice of location. Assuming that risk is positively related to the size of the investment, larger EJVs appear to reduce their risk by choosing locations that provide both policy and economic incentives. 5.8. Temporal effects Finally, we address the extent to which EJV location preferences have changed over time, using two dummy variables (Y1 = 1984 –1986 and Y3 = 1992– 1996) to capture the three time periods discussed earlier. Somewhat unexpectedly, EJVs established in both the earlier (1984 – 1986) and later (1992 –1996) time periods are more likely to be located in inland regions than in coastal areas, compared with the middle years. Among the three coastal locations, early-entering MNEs have a higher probability of being located in the SEZs, while later-entering investors are more likely to have established their operations outside of both the SEZs and major metropolitan cities. These findings are consistent with the notion of shifts in the destinations of FDI in China through time, but provide minimal support for Hypothesis 6a or 6b.

6. Conclusions In this paper, we set out to investigate the extent to which characteristics of EJVs are related to their choice of location in China. Now the world’s second-largest recipient of FDI and the largest among developing countries, China has experienced substantial increases in FDI since the mid1990s. EJVs constitute the most common mode of entry

843

for foreign MNEs into the country (Chadee and Qiu, 2001; Pan and Chi, 1999). In 1998, for example, utilized FDI in China reached US$45.3 billion, approximately 55% of which was in the form of EJVs (MOFTEC, 1998). Despite the importance of EJVs in China, the geography of their business activities has not been systematically researched. This paper contributes to the literature by studying this important issue. Generally, our analysis suggests that the level of foreign equity ownership, the home country of the foreign partner, the industry sector, the duration of the EJV contract, and the size and timing of investment all help to explain the choice of location in China. Investors, dominated by firms from Hong Kong, Taiwan, and Macau, are found to have shifted their focus from the SEZs, established when FDI in China was still in its infancy, to other open coastal regions in more recent times. This result supports the conventional wisdom that the proximity of Hong Kong and Taiwan to the southern coast, together with their shared ancestral roots, explains the dominance of ethnic Chinese investments in the SEZs and the open coastal cities. By comparison, investors from the US, Europe, and Japan are more attracted to the large consumer markets in the urban cities, reflecting the strategic approaches of MNEs from developed markets that enter the Chinese market. The results also indicate that EJVs in the service sector tend to locate their operations in major metropolitan cities. Given the characteristics of service delivery, the more advanced infrastructure and technology bases of urban locations provide more inviting environments for service firms. As the service sector is further deregulated in China, it is reasonable to expect that FDI in the three metropolitan cities will increase at a faster rate than in other regions. The immense inflow of foreign capital to South China is largely attributed to its close proximity and cultural similarity to Hong Kong and Taiwan and the early government policies regarding FDI. However, the steady shift of investment toward China’s eastern coast can be attributed to its developed infrastructure, established industrial bases, and highly trained human capital. This may also explain why MNEs have increasingly focussed their capital-and skillintensive investments in Shanghai, compared with other coastal provinces, whose lower labor costs attract laborintensive FDI. In 1996, for example, Shanghai accounted for US$9 billion in contracted FDI, up 36% from the previous year. At present, more than half of the world’s top 100 industrial MNEs have invested in Shanghai (CCPIT, 2001). Over time, there has been a shift in the location preference of EJVs in China. This is partly a result of continuous change in the country’s economic reform and development policies, which were initially aimed at the SEZs and a number of coastal cities, and then spread to major cities and the rest of the country. In recent years, the low labor cost, favorable investment environment, and rapid economic growth in coastal regions outside the SEZs have

844

D.D. Chadee et al. / Journal of Business Research 56 (2003) 835–845

contributed to making these locations increasingly attractive destinations for FDI. The choice of location for the activities of a joint venture is an important strategic decision. Managers face the difficult task of determining an appropriate location by considering a multitude of factors related to their businesses. In this paper, we consider how a few important firm characteristics influence location choice for EJVs. The results show that firm-specific variables are related to the choice of location. However, as with any research, there are limitations in this study. First, it is clear that differences among industries constitute an important part of the explanation of EJV location. Our data only permit us to distinguish between the manufacturing and service sectors. Future research, using more detailed industry sector data, may be able to more fully capture the influence of industrial characteristics on location choice. Second, future research that considers a broader set of firm-specific factors, such as managerial competencies, prior international experience, and the extent of management contacts in China, should provide a better understanding of the nuances of location decisions. Third, the distinction between EJVs established for exporting and those focussed on the host country is an important one, which is not addressed in the present study. Chinese government policy clearly favors export-oriented FDI, as evidenced by the creation of special zones for such activities. Thus, EJV location decisions should be affected by whether MNEs are aiming for export markets or the domestic Chinese one. Lastly, this research leaves several questions regarding EJV location decisions unanswered. For example, to what extent is oligopolistic reaction important in the context of China; do firms locate their operations in a particular location in order to follow (or avoid) their competitors? Do firms go to a particular location in order to join an existing cluster of firms from the same industry? To what extent is location determined by the need to locate operations in proximity to those of important customers? Answers to these questions will provide more insights into the location behaviors of MNEs in China. Acknowledgements The authors are extremely grateful to Kiyohiko Ito, whose comments have improved this paper. References Agarwal S. Socio-cultural distance and the choice of joint venture: a contingency perspective. J Int Mark 1994;2:63 – 80. Bagchi-sen S, Wheeler JO. A spatial and temporal model of foreign direct investment in the United States. Econ Geogr 1989;65:113 – 29. Beamish PW. The characteristics of joint ventures in the People’s Republic of China. J Int Mark 1993;1:29 – 48. Blackborn A. The location of foreign-owned manufacturing plants in the Republic of Ireland. Tijdschr Econ Soc Geogr 1972;63(November/December):438 – 43.

CCPIT. Trade promotion. Beijing: China Council for the Promotion of International Trade; 2001. Chadee D, Mattsson J. Do service and manufacturing exporters behave and perform differently? A New Zealand investigation. Eur J Mark 1998; 32(9/10):122 – 34. Chadee D, Qiu F. Foreign ownership of equity joint ventures in China: a pooled cross section-time series analysis. J Bus Res 2001;52(2):123 – 33. Contractor FJ, Kundu SK. Model choice in a world of alliances: analyzing organizational forms in the international hotel sector. J Int Bus Stud 1998;29(2):325 – 58. Coughlin CC, Terza J, Arromdee V. State characteristics and the location of foreign direct investment within the United States. Rev Econ Stat 1991; 73(4):675 – 83. Donahue JD. Disunited States. New York: Basic Books; 1991. Dunning JH. Toward an eclectic theory of international production: some empirical tests. J Int Bus Stud 1980;11(1):9 – 31. Dunning JH. Location and the multinational enterprise: a neglected factor? J Int Bus Stud 1998;29(1):45 – 66. Erramilli KM, Rao CP. Service firms’ international entry mode choice: a modified transaction cost analysis approach. J Mark 1993;57(3):19 – 38. Gatignon H, Anderson E. The multinational corporation’s degree of control over foreign subsidiaries: an empirical test of a transaction cost explanation. J Law Econ Organ 1988;4(2):305 – 36. Grosse R, Trevino LJ. Foreign direct investment in the United States: an analysis by country of origin. J Int Bus Stud 1996;27(1):139 – 55. Hu MY, Chen H. An empirical analysis of the factors explaining foreign joint venture performance in China. J Bus Res 1996;35(2):165 – 73. Killing PJ. Strategies for joint venture success. New York: Praeger; 1983. Kogut B, Singh H. The effects of national culture on the choice of entry mode. J Int Bus Stud 1998;19(3):411 – 32. Kotler P. Market management: analysis, planning, implementation and control. 9th ed. NJ: Prentice Hall; 1997. Lipsey RE. The location and characteristics of U.S. affiliates in Asia. Working Paper, National Bureau of Economic Research, MA; 1999. Mathe H, Perras C. Successful global strategies for service companies. Long Range Plann 1994;27(1):36 – 49. Mody A, Srinivasan K. Japanese and U.S. Firms as foreign investors: do they march to the same tune? Can J Econ 1998;31(October): 778 – 99. MOFTEC. Ministry of Foreign Trade and Economic Co-operation. Beijing, China; 1998. Ohmae K. The end of the nation state: the rise of regional economies. London: Harper; 1995. Pan Y. Influences on foreign equity ownership level in joint ventures in China. J Int Bus Stud 1996;27(1):1 – 26. Pan Y. The formation of Japanese and U.S. joint ventures in China. Strateg Manage J 1997;18(3):247 – 54. Pan Y, Chi PSK. Financial performance and survival of multinational corporations in China. Strateg Manage J 1999;20:359 – 74. Pan Y, Tse DK. Cooperative strategies between foreign firms in an overseas country. J Int Bus Stud 1997;27(5):929 – 46. Patterson PG, Cicic M. Profile of service firms in international markets. NZ J Bus 1995;17(2):49 – 66. Porter ME. The competitive advantage of nations. New York: Free Press; 1990. Porter ME. Competitive advantage, agglomerative economies and regional policy. Int Reg Sci Rev 1996;19(1/2):85 – 94. PRC Yearbook. Beijing: PRC Year Book Publishing House; 1996 – 1997. Ray DM. The location of United States subsidiaries in southern Ontario. In: Gentilcore RL, editor. Geographical approaches to Canadian problems. Scarborough, ON: Prentice-Hall; 1971. p. 69 – 82. Rondinelli DA. Export processing zones and economic development in Asia: a review and reassessment of a means of promoting growth and jobs. Am J Econ Soc 1987;46(1):89 – 105. Shan W. Environmental risks and joint venture sharing arrangements. J Int Bus Stud 1991;22(4):555 – 78.

D.D. Chadee et al. / Journal of Business Research 56 (2003) 835–845 Taylor J. An analysis of the factors determining the geographical distribution of Japanese manufacturing investment in the UK, 1984 – 1991. Urban Stud 1993;30(7):1209 – 24. Tse DK, Pan Y, Au KY. How MNCs choose entry modes and form alliances: the China experience. J Int Bus Stud 1997;28:779 – 806. UNCTAD. World Investment Report 1996: transnational corporations, investment, trade and international policy arrangements. New York: United Nations; 1996.

845

Vernon R. International investment and international trade in the product cycle. Q J Econ 1966;80:190 – 207. Vanhonacker WR, Pan Y. The impact of national culture, business scope, and geographic location on joint venture operations in China. J Int Mark 1997;5(3):11 – 30. Watts HD. Large firms, multinationals, and regional development: some new evidence from the United Kingdom. Env Plann A 1979;11:71 – 81. Yan DY. The investment is getting hot in China. Fortune 1993;July:52 – 7.