Entry modes of foreign direct investment in China: A multinomial logit approach

Abstract

The existing empirical literature on foreign direct investment (FDI) entry strategies tends to allow a binary choice between wholly owned enterprises (WOEs) and equity joint ventures (EJVs) or between greenfield investment and acquisition only. The current study specifies a multinomial logit model for the choice from all four FDI entry modes in China. Five hypotheses are developed based on transaction cost economics and tested on a data set covering 10,607 foreign investment projects in China. A foreign investor seems to prefer the WOE mode given its large investment commitment, a high level of the host country's experience in attracting FDI, a good specific industrial location, and a high asset intensity in the host industry. If the conditions of host country experience and good specific location are not met, the EJV and the joint stock company (JSC) modes seem to be of greater use. A good specific location also makes the contractual joint venture (CJV) a preferable entry mode. Compared with overseas Chinese investors from Hong Kong, Macao, and Taiwan, other foreign investors prefer EJVs over WOEs and CJVs. The results have important implications for managers.