The Effects of the Institutional Environment on the Internationalization of Chinese Firms - Part 6

In depicting the evolutionary process of Chinese MNCs, Warner, et al. (2004) explored the extent to which Chinese MNCs have been able to “catch up” with their Western counterparts because of their “late development.” They also emphasized the significant role played by technology transfer as an enabling factor in the “catching up” by the Chinese MNCs. Different from the mainstream FDI theory assuming that firms internationalize to exploit competitive advantages, Child and Rodrigues (2005) argued that Chinese MNCs are generally making outward investments to overcome their competitive disadvantages and that Chinese MNCs regard internationalization as the means to equip themselves to gain competitive strengths. Child and Rodrigues (2005) further argued that examining Chinese MNCs provides an opportunity to extend existing FDI theories, as China may provide new insights regarding the impact of the institutional environment on internationalization.

In searching for major determinants of China's outward FDI, Buckley, et al. (2007) empirically tested whether capital market imperfections, institutional factors, and ownership advantages had influenced China's outward FDI. Based on official Chinese FDI data collected between 1984 and 2001, Buckley, et al. (2007) found that market size and the host country's natural resource endowments strongly attracted Chinese MNCs, which did not shy away from countries with high political risks, such as African countries. Government liberalization on trade and investment has had a positive influence on stimulating China's outward FDI and relationship assets constitute a special ownership advantage for Chinese MNCs.

Institutional theory and its application in international business research

The rise of institutional perspective in the social sciences can be traced back to the 1970s, while its adoption by IB and strategy scholars is a more recent phenomenon, since the 1990s (Peng, Wang, & Jiang, 2008). According to institutional theory, systems surrounding organizations affect organizations' behaviors and decisions (Scott, 1995). Institutions are created from rules and constraints that affect a firm's strategic choices, and firms are players bounded by formal rules (e.g., laws and regulations) and informal constraints (e.g., norms and self-imposed codes of conduct) (North, 1990). Researchers have examined the impact of institutional factors from economic perspectives (e.g., Coase, 1998; North, 1990) and sociological perspectives (DiMaggio & Powell, 1983; Scott, 1995).

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