The Effects of the Institutional Environment on the Internationalization of Chinese Firms - Part 2

In their review of research on corporate strategy in emerging economies, Wright, Filatotchev, Hoskisson, and Peng (2005) suggested that institutional theory is the most useful perspective compared with transaction cost theory, resource-based theory, and agency theory. They further argued that research on emerging economies has pushed the research frontier of institutional theory. However, the answers to research questions, such as how institutions matter, remain a subject of considerable debate. There has been a call for more studies on the institutional impact of the internationalization of emerging MNCs. Dunning (2006) pointed out that researchers should incorporate institutional factors into their internationalization frameworks in future studies, because the institutional capabilities of firms and the incentive structure and enforcement mechanisms of home and host countries increasingly affect MNC activities, particularly those from emerging MNCs.

Similarly, researchers generally agree that institutional factors impact on the internationalization strategies of Chinese firms (Child & Rodrigues, 2005). However, few studies have examined the underlying institutional drivers of the internationalization of Chinese firms. In order to fill the research gap, this study addresses the research question of how institutional factors affect Chinese MNCs' internationalization strategies. We argue that, especially at the macro level, China's institutional environment in general offers a favorable environment for internationalization and the Chinese companies gravitate toward strategies that take advantage of these opportunities. However, factors, such as the transitional economy and underdeveloped financial market lead to many institutional constraints, which force Chinese companies to adopt strategies to overcome those constraints.

The rest of this chapter is organized as follows. First is a review of the development stages of Chinese MNCs and the relevant literature to provide some background information for the study. Second, we review some key literature on institutional theories and their application in international business (IB) research, which lays the foundation for our analyses. Third, we examine the institutional environment of Chinese MNCs at government, industry and corporate level. We conclude by offering a discussion and suggestions for future research directions.

Internationalization of Chinese firms

Development of Chinese MNCs

From the negligible amount of US $0.1 million (Cai, 1999) of outward FDI at the beginning of its economic reforms in 1979 to US $21.16 billion in 2006 (China National Statistic Bureau, 2007), China has traveled a long way to become the largest outward foreign investor among all developing countries.

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