However, among global foreign investment, the failure rate of Chinese enterprises’ foreign direct investment has remained high. By analyzing the tracking data of China’s large-scale foreign investment in 2005-2016, this paper studies the relationship between institutional distance, bilateral political relations and the success or failure of Chinese enterprises’ foreign direct investment. The results show that institutional distance and bilateral political relations have a significant impact on the success or failure of foreign direct investment, and bilateral political relations have a negative regulatory effect on the relationship between institutional distance and the success or failure of foreign investment. The nature of corporate property rights will also play an important role in the regulation of bilateral political relations.
After the outbreak of the financial crisis in 2008, the global economy has been greatly affected, and overseas investment by Chinese companies has been in full swing. According to the statistics of the Ministry of Commerce, the amount of foreign direct investment of Chinese enterprises in 2018 has reached US $129.83 billion, which has become one of the world’s largest foreign investment countries. However, the reality is that the failure rate of Chinese companies’ foreign investment remains high. According to the Financial Times, in 2016 the total amount of overseas transactions cancelled in China exceeded US $75 billion. More than 30 acquisitions of European and American companies were forced to “abort” due to regulatory and foreign exchange restrictions. In 2015, the amount of cancelled transactions was approximately $10 billion. Throughout the case of overseas investment failure of Chinese enterprises, the causes of transaction failure are complex and diverse, not only affected by economic factors such as market and resources, but also by non-economic factors such as the political risk and institutional environment of the host country. For example, in 2008, the acquisition of the Dresdner Bank by the National Development Bank was terminated by Germany on the grounds of “endangering national security”. With the difficulties of various countries, it is hard for Chinese companies to invest overseas.
Chiese government has been actively promoting the building of the Belt and Road, which has brought huge opportunities to enterprises, but also brought corresponding competition and challenges. Therefore, Chinese enterprises face more risks and uncertainties in the process of international investment. This shows that political and institutional risks have become an important factor in restricting Chinese companies’ foreign investment. About institutional risk in foreign investment, the existing literature discusses the relationship between institutions and corporate foreign investment in terms of acquisition experience, holding ratio, institutional quality and distance, and a large number of scholars have studied the relationship between institutional risks and foreign investment. Yang Lianxing and others studied the impact of bilateral political relations and foreign investment and the success or failure of investment. They believed that friendly city communication can significantly increase the success rate of foreign investment [
This paper specifically analyzes the direct and indirect effects of bilateral political relations on the success or failure of Chinese enterprises’ foreign direct investment. On the one hand, it is conducive to the foreign investment of enterprises with Chinese characteristics, making full use of bilateral political relations with host countries, breaking trade barriers with good political relations, participating in international cooperation, and helping achieve trade and economic prosperity between China and the world. On the other hand, it enables Chinese companies to identify problems in the process of foreign investment, including factors such as industry, resources and market. By maintaining political relations with the host country, the Chinese government can improve the efficiency of investment, which is of great significance to promote the development of international trade of Chinese enterprises.
The Eclectic Theory of International Production believes that enterprises must have the advantages of ownership, location and market internalization for international direct investment. Dunning refers to the three basic elements of international direct investment as the OLI model [
Focusing on overseas investment by Chinese companies, Buckley et al. studied the factors that influence Chinese companies’ foreign direct investment [
In North, institution is a kind of social game rule [
The institutional environment difference between the home country and the host country is defined by Kostova as institutional distance [
Zhang Jianhong discusses the factors that determine the success or failure of Chinese companies’ overseas mergers and acquisitions from all angles. They believe that the main reasons for the failure of overseas acquisitions are politics and economy [
In recent years, the analysis of the reasons for the failure of Chinese enterprises’ foreign direct investment has become a hot topic for domestic scholars. Yan Daying believes that the formal and informal institutional distance has a significant negative impact on the success of Chinese companies’ overseas mergers and acquisitions, and the accumulation of international experience can significantly weaken the adverse impact of institutional distance on the success rate of overseas mergers and acquisitions [
The existing literature has studied the relationship between institutional distance and foreign investment. It is found that the larger the institutional distance, the more difficult it is for enterprises to adapt to the investment environment of the host country, resulting in the decrease in foreign investment [
North believes that the way and results of transactions are closely related to the institutional environment [
Hypothesis 1: Bilateral institutional distance has a negative impact on the success rate of foreign investment, that is, the larger the distance between bilateral systems, the lower the success rate of foreign investment.
In essence, political relations are a specific initiative between countries, out of strategic considerations for national security, economic exchanges, and international influence [
In international investment, the host government will provide a certain degree of preferential policies and diplomatic assistance for investment from countries with good relations. On the one hand, the longer the bilateral diplomatic relations are established, the more it helps the home country enterprises to understand the investment environment and policies of the host country, which is conducive to investors’ foreign investment; on the other hand, through political exchanges and the construction of friendly cities [
Hypothesis 2: Bilateral political relations have a positive impact on the success rate of foreign investment, that is, the closer the bilateral political relations are, the higher the success rate of foreign investment.
Bilateral political relations serve as an institutional link, and friendly bilateral relations can promote diplomatic and economic exchanges between the two countries. When the formal institutional distance between the two countries is small, that is, the laws and regulations are not much different, the success rate of foreign investment will increase. If the bilateral political relations between the two countries are friendly at this time, the host government will provide certain preferential policies and diplomatic assistance to the home country investment enterprises [
Hypothesis 3: Bilateral political relations have a negative adjustment effect on the influence of bilateral institutional distance and the success or failure of foreign investment. The closer the bilateral political relationship is, the more it can alleviate the negative impact of the bilateral system on the success rate of foreign investment.
As China replaces the United States as the world’s largest overseas asset purchaser, the European and American markets are increasingly cautious about the M&A invitations of Chinese companies. National security and government interests have frequently become the reasons for the M&A countries to strengthen their censorship and rejection. In 2016, Midea’s acquisition of the German robot manufacturer KUKA caused more public attention and the vigilance of some German politicians. It tried to restrict the acquisition of Chinese enterprises in Germany, and even took action to lobby the EU to launch a merger review system to boycott Chinese companies. According to the Financial Times, 20 European transactions worth $16.3 billion in 2016 were cancelled.
Globerman and others believe that when Chinese multinational corporations conduct overseas mergers and acquisitions [
Hypothesis 4: The politically sensitive industry plays a regulatory role in the negative adjustment of bilateral institutional distance and the success or failure of foreign direct investment. If the foreign direct investment involves a politically sensitive industry, it will strengthen the negative adjustment of bilateral political relations.
Institutional economics refers to the nature of property rights as an important aspect of social economic systems. Therefore, the form of ownership is considered to be an important institutional feature based on the social system of the home country. Globerman et al. argue that because of host country concerns about the state-owned enterprise background and political goals of Chinese investment companies [
Hypothesis 5: The nature of property rights plays a regulatory role in the negative adjustment of institutional distance and the success or failure of foreign direct investment in bilateral political relations. When investment enterprises are state-owned enterprises, they can strengthen the negative adjustment of bilateral political relations.
This paper selects the US Heritage Foundation’s 2005-2016 China Global Investment Tracker data on Chinese companies’ external investment as an initial sample. As of 2016, Chinese companies have invested in 166 countries or regions around the world. After removing data-deficit countries and tax haven countries, as well as special political relations such as Hong Kong,Macao and Taiwan, they have received samples of 142 host countries.
The dependent variable of this paper is the success of the company’s foreign investment (Completion), if the enterprise’s foreign investment is successful, it is 1, otherwise 0. The explanatory variables in this paper include the following variables:
1) Institutional distance
According to the existing literature on institutional distance, this paper uses the World Bank’s World Governance Indicators (WGI) to WGI Index: Freedom of Expression And government responsibility, political stability, government efficiency, regulatory quality, legal rules, control, and corruption. This paper obtains the quality of the host country system through six special indexes. Based on the WGI index, the absolute distance between the two countries is established, that is, the distance (id) of the host country system.
2) Bilateral political relations
We use the results of the two countries’ vote in the United Nations to measure. The voting data mainly comes from Strezhnev and Voeten (Bailey, Strezhnev, & Voeten, 2017). The consistency formula for United Nations voting: diplomatic relations P = 1 – 2 × d/dmax, d is the metric distance between the votes of the total binary members, dmaxis the maximum possible distance of these votes in a given year, and the bilateral political relationship (pov) is calculated.
3) Politically sensitive industries
This article refers to Li Shi et al. on the definition of politically sensitive assets [
4) Nature of property rights (npr)
The state-owned nature is 1, otherwise it is 0. The data is mainly from CSMAR database.
5) Control variable selection
Geographical distance (gd), taking the logarithm of the actual distance between China and the host country’s capital; the host country’s gross national product (gdp) reflects the market size, and the growth rate of GDP reflects the growth of the local market. Potential (gdpg), the proportion of import and export trade to GDP reflects the degree of dependence of a country on the international market (open), and the proportion of high-tech exports to total exports reflects the host country’s high-tech (hightec). The actual interest rate of the host country reflects the economic level of a country, and the control variables are processed by natural logarithm. The above data are derived from the World Development Indicators (WDI).
Completion i j = ∑ control i j − 1 + i d i j − 1 + p o v i j − 1 + ε i j − 1
Completion i j = ∑ control i j − 1 + i d i j − 1 + p o v i j − 1 + i d i j − 1 ∗ p o v i j − 1 + ε i j − 1
Completion i j = ∑ control i j − 1 + i d i j − 1 + p o v i j − 1 + p s i i j − 1 + i d i j − 1 ∗ p o v i j − 1 + i d i j − 1 ∗ p s i i j − 1 + i d i j − 1 ∗ p o v i j − 1 ∗ p s i i j − 1 + ε i j − 1
Completion i j = ∑ control i j − 1 + i d i j − 1 + p o v i j − 1 + n p r i j − 1 + i d i j − 1 ∗ p o v i j − 1 + i d i j − 1 ∗ n p r i j − 1 + i d i j − 1 ∗ p o v i j − 1 ∗ n p r i j − 1 + ε i j − 1
Among them, id and pov represent bilateral institutional distance and bilateral politics, respectively, psi and npr represent politically sensitive industries and property rights. Control represents control variables, and i and j represent host countries and years, respectively. Based on the construction of the econometric model in this paper,
Variable | N | Mean | SD | Min | Max |
---|---|---|---|---|---|
completion | 2002 | 0.9 | 0.3 | 0 | 1 |
id | 1983 | 0.54 | 1.01 | −1.43 | 2.39 |
pov | 1548 | 0.8 | 0.22 | 0 | 1 |
psi | 1999 | 0.65 | 0.48 | 0 | 1 |
npr | 1999 | 0.78 | 0.42 | 0 | 1 |
gd | 1999 | 8.89 | 0.52 | 6.86 | 9.87 |
gdp | 1993 | 26.25 | 2.18 | 19.35 | 30.53 |
gdpg | 1816 | 1.36 | 0.79 | −4.26 | 3.54 |
hightec | 1682 | 1.74 | 1.67 | −7.45 | 4.26 |
open | 1955 | 4.12 | 0.67 | −1.78 | 6.09 |
rate | 1245 | 1.54 | 0.99 | −1.75 | 6.23 |
c | id | pov | psi | npr | gd | gdp | gdpg | H-tec | open | rate | |
---|---|---|---|---|---|---|---|---|---|---|---|
c | 1 | ||||||||||
id | −0.09 | 1 | |||||||||
pov | 0.11 | −0.72 | 1 | ||||||||
psi | −0.07 | −0.17 | 0.13 | 1 | |||||||
npr | 0.09 | −0.36 | 0.33 | 0.18 | 1 | ||||||
gd | −0.03 | 0.18 | −0.28 | −0.08 | −0.09 | 1 | |||||
gdp | −0.08 | 0.61 | −0.65 | −0.17 | −0.34 | 0.16 | 1 | ||||
gdpg | 0.006 | −0.39 | 0.397 | 0.125 | 0.23 | −0.21 | −0.39 | 1 | |||
h-tec | −0.09 | 0.49 | −0.39 | −0.03 | −0.24 | 0.063 | 0.44 | −0.24 | 1 | ||
open | 0.05 | 0.048 | 0.28 | −0.03 | 0.085 | −0.24 | −0.37 | 0.07 | 0.06 | 1 | |
rate | 0.07 | −0.36 | 0.36 | 0.08 | 0.17 | 0.06 | −0.35 | 0.15 | −0.13 | 0.01 | 1 |
Variables | Model 1 | Model 2 | Model 3 | Model 4 | Model 5 | Model 6 |
---|---|---|---|---|---|---|
id | −0.037** | −0.089*** | −0.0505 | 0.0407 | ||
(0.017) | (0.026) | (0.042) | (0.052) | |||
pov | 0.0106*** | 0.00494 | −0.00580 | −0.0001 | 0.026* | |
(0.004) | (0.004) | (0.006) | (0.0104) | (0.015) | ||
psi | −0.0138 | |||||
(0.0675) | ||||||
id*pov | 0.014*** | 0.0092 | −0.004 | |||
(0.005) | (0.008) | (0.01) | ||||
id* psi | −0.0448 | |||||
(0.042) | ||||||
pov * psi | −0.004 | |||||
(0.011) | ||||||
id * pov * psi | 0.0044 | |||||
(0.009) | ||||||
npr | 0.299*** | |||||
(0.096) | ||||||
id *npr | −0.15*** | |||||
(0.054) | ||||||
pov * npr | −0.037** | |||||
(0.015) | ||||||
id * pov * npr | 0.022** | |||||
(0.011) | ||||||
gd | 0.0115 | 0.0416* | 0.0423* | 0.0254 | 0.0267 | 0.0219 |
(0.019) | (0.022) | (0.022) | (0.023) | (0.023) | (0.023) | |
gdp | 0.00038 | −0.002 | 0.0083 | 0.0146 | 0.0087 | 0.0186** |
(0.007) | (0.007) | (0.008) | (0.008) | (0.009) | (0.009) | |
gdpg | −0.0087 | −0.0124 | −0.0141 | −0.0158 | −0.0139 | −0.0166 |
(0.016) | (0.016) | (0.016) | (0.016) | (0.016) | (0.016) | |
open | 0.057*** | 0.055*** | 0.075*** | 0.059** | 0.052** | 0.058** |
(0.02) | (0.02) | (0.022) | (0.023) | (0.023) | (0.023) | |
hightec | −0.02*** | −0.02*** | −0.017** | −0.02*** | −0.01** | −0.019** |
(0.007) | (0.0073) | (0.007) | (0.007) | (0.007) | (0.007) | |
rate | 0.009 | 0.004 | 0.004 | 0.0035 | 0.0034 | 0.0037 |
(0.012) | (0.0117) | (0.0117) | (0.0116) | (0.0116) | (0.0116) | |
Constant | 0.587* | 0.357 | 0.0430 | 0.158 | 0.316 | −0.169 |
(0.326) | (0.337) | (0.370) | (0.371) | (0.384) | (0.387) | |
Observations | 964 | 964 | 962 | 962 | 962 | 962 |
***p < 0.01, **p < 0.05, *p < 0.1.
institutional distance and the success or failure of foreign investment. In the following table, we conclude that the negative regulation of bilateral political relations is significant. Explain that effectively improving bilateral political relations is good for corporate foreign investment. The model 5 coefficient is not significant, indicating that there is no secondary regulation of bilateral political relations in the politically sensitive industry. The coefficient of Model 6 is significantly negative, indicating that the nature of the property rights of enterprises has a secondary adjustment relationship to the negative adjustment of bilateral political relations. That is, compared with non-state-owned, when state-owned enterprises invest abroad, the main effect of bilateral political relations The negative regulation effect is greater.
First, we choose diplomatic relations as a substitute for bilateral political relations. This article refers to the classification of Li Shi [
This paper combines institutional theory and political economy, and uses the empirical analysis of Chinese enterprises’ foreign investment data from 2005 to 2016 to obtain the following conclusions. 1) The distance between bilateral systems has a significant negative impact on the success or failure of foreign investment, and bilateral political relations have a significant positive impact on the success or failure of foreign investment. 2) Bilateral political relations can regulate the relationship between the distance between the bilateral system and the success or failure of foreign investment. The close bilateral relationship between China and the host country can alleviate the adverse effects brought about by the institutional distance; and the alienated bilateral political relations will aggravate the negative effects of institutional distance and increase the failure rate of foreign investment. 3) Politically sensitive industries have no secondary adjustment effect on bilateral political relations, while the nature of property
Variables | Pov |
---|---|
time | 0.000154*** |
visits | −0.0593*** |
diplomacy | 0.0248*** |
constant | 0.736*** |
observations | 1547 |
R-squared | 0.177 |
***p < 0.01, **p < 0.05, *p < 0.1
Variables | Model 1 | Model 2 | Model 3 |
---|---|---|---|
id | −0.190*** | −0.249*** | 0.0275 |
(0.0702) | (0.0752) | (0.145) | |
p | −0.0512 | −1.377* | 2.427 |
(0.446) | (0.714) | (2.067) | |
npr | 0.782*** | ||
(0.263) | |||
id * p | 1.229** | −1.403 | |
(0.505) | (1.252) | ||
id * npr | −0.318** | ||
(0.154) | |||
p * npr | −4.411** | ||
(2.215) | |||
id * p * npr | 3.434** | ||
(1.379) | |||
gd | 0.154 | 0.130 | 0.134 |
(0.0944) | (0.0953) | (0.0977) | |
gdp | 0.0574 | 0.0737** | 0.0866** |
(0.0360) | (0.0366) | (0.0387) | |
gdpg | −0.0924 | −0.0910 | −0.123 |
(0.0851) | (0.0858) | (0.0911) | |
open | 0.370*** | 0.334*** | 0.367*** |
(0.105) | (0.106) | (0.112) | |
hightec | −0.111*** | −0.107** | −0.109** |
(0.0431) | (0.0430) | (0.0445) | |
rate | 0.0279 | 0.0234 | 0.0397 |
(0.0524) | (0.0524) | (0.0538) | |
constant | −3.117* | −3.063* | −4.200** |
(1.685) | (1.688) | (1.815) | |
observations | 961 | 961 | 961 |
***p < 0.01, **p < 0.05, *p < 0.1.
rights of enterprises can regulate bilateral political relations twice. The main performance is: when state-owned enterprises make foreign investment, the host government will reject Chinese enterprises because of factors such as national security or political pressure. Therefore, compared with non-state-owned enterprises, the adjustment role of bilateral political relations during the investment of state-owned enterprises will be more significant.
This paper explores whether there is a re-adjustment of the regulation of bilateral political relations from the perspectives of politically sensitive industries and the nature of corporate property rights. This is the innovation of this paper. The empirical results not only illustrate the necessity of the implementation of the current “One Belt, One Road” policy, but also have a far-reaching significance for developing China’s foreign investment. The re-regulation of the nature of property rights also proves the importance of the nature of the enterprise in the process of foreign investment. The state-owned nature of the enterprise may cause the host country to refuse to accept investment due to political pressure and national security.
However, this article also has certain limitations. On the one hand, whether there are other relations in the politically sensitive industry needs more scholars to further explore and distinguish different industries to study the specific impact of political relations on the success or failure of investment. On the other hand, future scholars can also conduct research from the perspective of industry and property rights, and explore the sensitivity of bilateral political relations to the relationship between institutional distance and business operation costs. Based on the above analysis, how to improve the investment success rate of Chinese enterprises when investing abroad, the practical guidance of this paper lies in the following aspects:
On the one hand, correctly grasp the negative impact of institutional distance on the success or failure of investment. In the process of conducting foreign investment, enterprises should fully consider the differences between the host country and China in the legal system and cognition, conduct targeted regional investment, effectively avoid investment risks, and strive to reduce the investment cost of investment as much as possible, thereby increasing the success rate of investment. For areas that differ greatly from our system, we must prepare before investing, understand the local market and industry conditions, and ensure that we can respond to investment uncertainty in a variety of ways, thereby reducing investment risks.
In addition, make full use of and play an active role in bilateral political relations. According to the dynamic changes in bilateral political relations, timely and effective adjustment of investment plans, for countries with good diplomatic relations with China to make full use of effective resources for regional investment. With China’s current “One Belt, One Road” policy, enterprises should actively develop economic partnerships with countries along the line, and integrate the maximum resources of the country’s political mutual trust, economic integration, and culturally inclusive interests to conduct effective investment. As China’s economic influence in the world is increasingly prominent, enterprises need to actively improve multilateral cooperation, pay more attention to the role of property rights in the process of foreign investment, and of course, be good at using bilateral political relations to increase the success rate of foreign investment.
The author declares no conflicts of interest regarding the publication of this paper.
Qian, W. (2019) Institutional Distance, Bilateral Political Relations and the Success or Failure of Chinese Enterprises’ Foreign Direct Investment. Open Journal of Social Sciences, 7, 198-214. https://doi.org/10.4236/jss.2019.711014