The Effects of the Institutional Environment on the Internationalization of Chinese Firms - Part 18

However, we have to acknowledge some limitations of this study. There are institutional factors that we have not addressed here, for instance, China's foreign exchange rate system. On July 21, 2005, after more than a decade of strictly pegging the Chinese currency RMB to the U.S. dollar at an exchange rate of 8.28, the People's Bank of China announced a 2.1% appreciation against the dollar, a starting point to reform the exchange rate regime (PBOC, 2005). However, in the following years, China accumulated the world's largest foreign reserve resulting from its huge trade surplus, especially with the United States. As a result the Chinese RMB has been under continuous pressure for further appreciation. It has been said that this is similar to what Japan faced in the mid-1980s (Masaki, 2005). As a result of the 1985 Plaza Accord, the value of the Japanese Yen increased sharply against the U.S. dollar, which prompted Japanese manufacturers to move their production bases abroad. If the Chinese RMB is further appreciated significantly, say by 20 or 30%, will this lead to more outward FDI by Chinese firms? This is an interesting topic for future research regarding the impact of the movement of the Chinese RMB on the outward FDI of Chinese firms.

The existing literature on Chinese MNCs mainly focuses on pre-entry motivations and less attention is given to the challenges of post-entry integration (Morck, et al., 2008). Surveys on Chinese firms with overseas investments showed that the success rate for overseas investments by state-owned enterprises was less than 50% (Zhao & Yan, 2003). In addition to the lack of experience and the lack of competitive advantages in overseas markets, institutional barriers and restraints may also negatively affect the overseas performance of Chinese MNCs. More research is needed in this area in the future.

In conclusion, this study adopts an institutional perspective to explain the surge in China's outward FDI. Specifically, we propose that the institutional factors at the government, industry and corporate levels affect firms' linkage, leverage and learning capabilities, which shape firms' internationalization strategies. As North (2005) argued, it is difficult to use the standard models of economic and political theory to explain China and the secret of China's success is the creation of institutions that readily adapt to changing circumstances. We anticipate that, with national economic development priority given to further globalization of Chinese firms, the Chinese institutional environment will inevitably change to be even more supportive to facilitate the internationalization of Chinese MNCs in an ever more vigorous way.

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