Entry modes and performance of foreign direct investment in China

Abstract

How does a firm choose a proper model of foreign direct investment (FDI) for entering a foreign market? Which mode of entry performs better? What are the performance implications of joint venture (JV) ownership structure? These important questions face a multinational enterprise (MNE) that decides to enter a foreign market. However, few studies have been conducted on such issues, and no consistent or conclusive findings are generated, especially with respect to China. It’s composed of five chapters, providing corresponding answers to the questions given above. Specifically, Chapter One is an overall introductory chapter. Chapter Two is about the choice of entry mode of FDI in China. Chapter Three examines the relationship between four main entry modes and performance. Chapter Four explores the performance implications of JV ownership structure. Chapter Five is an overall concluding chapter. These empirical studies are based on the most recent and richest data that has never been explored in previous studies. It contains information on 11,765 foreign-invested enterprises in China in seven manufacturing industries in 2000, 10,757 in 1999, and 10,666 in 1998. The four FDI entry modes examined include wholly-owned enterprises (WOEs), equity joint ventures (EJVs), contractual joint ventures (CJVs), and joint stock companies (JSCs). In Chapter Two, a multinominal logit model is established, and techniques of multiple linear regression analysis are employed in Chapter Three and Four. It was found that MNEs, under the conditions of a good investment environment, large capital commitment and small cultural distance, prefer the WOE strategy. If these conditions are not met, the EJV mode would be of greater use. The relative propensity to pursue the CJV mode increases with a good investment environment, small capital commitment, and small cultural distance. JSCs are not favoured by MNEs when the investment environment improves and when affiliates are located in the coastal areas. MNEs have been found to have a greater preference for an EJV as a mode of entry into the Chinese market in all industries. It is also found that in terms of return on assets (ROA) and asset turnover, WOEs perform the best, followed by EJVs, CJVs, and JSCs. Finally, minority-owned EJVs or JSCs are found to outperform their majority-owned counterparts in terms of ROA and asset turnover.