Determinants of structural change to sequential foreign direct investment across China: a synthesised approach.

Abstract

This study tests the spatial and temporal variation in foreign direct investment across China during 1979-2001, based on the transitional economy context in China that is full of opportunities and challenges. Its findings show that three primary factors consisting of multinational enterprises' internal capabilities, host countries' environmental contingencies, and dyadic strategic motivations have an effect on structural change to foreign direct investment in China over time. Empirical evidence from investment size, entry modes, sectoral and regional distributions in foreign direct investment in China supports the findings.

**********

The market environment in China was typically regarded as one full of complexity, opportunity, and dynamism. Since the end of the 1970s, China has been implementing its economic reform and opening its doors to the world, with its objective to shift from a centrally planned to a market driven economy. This transition changes fundamental managerial assumptions, criteria, and decision-making on the one hand, and represents a genuine transformation of the business on the other (Tan and Litschert, 1994; Luo and Park, 2001). After a long period of stiff trudge, China has perceived the great changes of its market context (Luo and O'Connor, 1998; Luo, 1999; Pan and Chi, 1999), and it is particularly true that many new changes have come after China entered the World Trade Organisation (WTO). China is regarded as the largest and fastest emerging market country.

In 2001, the annual GDP of China ranked the sixth in the world, while the top five are all developed countries (World Economic Outlook, 24 September 2002). In foreign direct investment (FDI), China is also the sixth largest recipient in the world and the largest among developing countries as well. The level of FDI reached $47 billion in 2001 (World Development Report, 2002), which implies that China is becoming an attractive location for foreign investors. With global competition and rapid technological development, many multinational enterprises (MNEs) foresee their opportunities in the developing countries like China rather than in developed countries. To strive for larger market in such countries is a strategic objective for most MNEs. Both the host contextual environment and MNEs' investment strategies have changed drastically (Luo and O'Connor, 1998), such change brings MNEs more opportunities in China.

This study focuses on structural change to FDI in China to find out some important factors triggering it, which may serve as guidelines for MNEs seeking more opportunities in China. Related theoretical issues are discussed in a synthesised approach and several propositions about the determinants of structural change to FDI across China are presented. Structural change to FDI in China and its important determinants are analysed empirically based on the four aspects of investment size, entry modes, sectoral and regional distributions.

Theoretical Foundations

Interest in understanding the determinants of FDI has increased rapidly. Generally, the determinants are not only associated with transaction cost but also related to host country-specific social, political and economic context (Gulati, 1995; Chang and Rosenzweig, 2001). Among earlier works, many scholars suggest that transaction cost involving the revenue-enhancing and cost-reducing opportunities are primary considerations both in the decision-making of FDI and in the selection of entry modes (Beamish and Banks, 1987; Shan, 1991; Chang and Rosenzweig, 2001) on the one hand, and on the other, cultural and national factors such as culture distance and the investing firm's country of origin are also other determinants influencing FDI activities among different countries. Several other researchers also point out that environmental risks have an incontestable effect on FDI (Shan, 1991; Luo and O'Connor, 1998; Luo, 2001).

However, most previous studies on determinants of FDI have limitations in three important ways. First, many studies focus mainly on the choice of entry mode, which can only testify indirectly the influences on FDI activities, because there are few directly logical interrelationships between the determinants of entry modes and those of FDI (Kim and Hwang, 1992; Hennart and Park, 1993; Hennart and Reddy, 1997; Vanhonacker, 1997; Chang and Rosenzweig, 2001; Luo, 2001). For example, Luo, (2001) from multiple theoretical perspectives that include transaction cost, the eclectic paradigm, bargaining power, and organisational capability, proposes that entry mode selection in an emerging economy like China is influenced by situational contingencies at four levels: nation, industry, firm, and project.

Second, many studies adopt a static approach (Beamish, 1993; Pan 1996; Hejazi and Safarian, 1999; Chang and Rosenzweig, 2001), which contains limitations in interpreting the determinants of FDI. For example, studies based on transaction cost theory implicitly assume that concerns about partners' opportunism are consistent over time, ignoring the fact that the experience and familiarity with a partner may reduce such concerns. Similarly, studies concerning cultural distance also suggest that its effect remains steady over time, and have not tested whether its importance diminishes as MNEs gain experience with the host countries' cultures (Chang and Rosenzweig, 2001).

Last, some of previous studies are short of synthesised perspectives on the determinants of FDI. Though Sun, Tong, and Yu (2002) review previous work about the influences on FDI in China and identify eight important determinants of FDI distribution across different provinces within China, their summary has some supposition among diverse variables and too many fragments as well. Further, it ignores some determinants from MNEs themselves and their home nations.

This study analyses the determinants of FDI in China in a dynamic and synthesised approach. Recently some studies have conceptualised theories to explore the determinants of FDI activities during the globalisation and international expansion, among which are sequential FDI perspective, international expansion process model, and knowledge-based theory of the firm, which serve as the theoretical foundations of this study.

Specifically, many researchers explore sequential FDI activities, with reference to a life cycle of firm, industry, or network (Luo, 1999; Gulati, 1995; Hite and Hesterly, 2001). Chang and Rosenzweig (2001) point out that many previous studies characterise FDI activities of MNEs as a static decision-making process, which assumes that a particular FDI activity (such as the entry mode choice) is independent of previous activities of the same firm. Instead, for many MNEs exploring global opportunities, their FDI activities are sequential processes involving numerous investments made over time. As stated by Kogut (1983), MNEs' FDI decisions are not discrete, but should be perceived as a series of decisions that determine the volume and direction of resource flows among different countries, If the possible effect of earlier investment on the subsequent one is ignored, some important factors cannot be linked to the determinants of FDI activities. Empirically, Kogut and Chang (1996) confirm that Japanese firms with previous investment in a foreign market, especially in export-oriented distribution facilities, were more likely to invest subsequently.

Consistent with sequential FDI perspective is the model of international expansion process. Known as the representatives of famous Uppsala network school, Johanson and Vahlne (1977, 1990) developed a model considering international expansion as a process consisting of a series of step-by-step decisions. Based on the notion of experience and familiarity to FDI activities, this model maintains that MNEs with incremental experience and knowledge about host country-specific environment would perceive less uncertainty, become more confident of their abilities to correctly estimate risks and return, manage foreign operation effectively, then they would take more adaptive strategies and increase their investment commitments to local market. In short, accumulated knowledge and experience about country-specific market, practices, and environments can help MNEs increase local commitment, reduce operational uncertainty, and improve economic efficiency (Gomes-Casseres, 1989; Agarwal and Ramaswami, 1992; Luo and O'Connor, 1998; Chang and Rosenzweig, 2001). Accordingly, Luo and O'Connor (1998) divide MNEs' market entries in China into three significant phases: experimental phase, strategic investment phase, and dominant phase, based on different levels of their resource and financial commitments to China's market. Consequently, MNEs fill in the gap between them and host countries in such approaches as localising production, financing community projects, and nurturing local brands, which in turn brings them more profits (Vanhonacker, 1997).

In recent years, numerous scholars maintain the knowledge-based theory that firms compete on the ground of their abilities to learn and to apply knowledge (Prahalad and Hamel, 1990; Teece, Pisano and Shuen, 1997; Chang and Rosenzweig, 2001). From the knowledge-based approach, several researchers conceptualise FDI activities as an integrated process of both exploiting home-based existing knowledge and exploring host country-specific new knowledge from the standpoint of MNEs (March, 1991; Luo and O'Connor, 1998; Chang and Rosenzweig, 2001; Luo, 2001). For example, some scho-lars argue that MNEs usually enter foreign markets in a sequential way, beginning with lines of business where they have the strongest competitive advantages over local firms, which allow them to overcome their liabilities of foreigness in the early phase. Over time, when MNEs acquire experience of management in the host country, learning about local market, and building relations with local governments and suppliers, they enter into additional lines of business where their competitive advantages over local firms are smaller (Hennart and Park, 1993; Chang, 1995). In other words, early entries of MNEs might be motivated by exploiting their home-based competitive advantages, the later ones might seek more to explore host country-specific advantages (Chang, 1995; Chang and Rosenzweig, 2001; Luo and O'Connor, 1998; Luo, 2001).

This study proposes a dynamic and synthesised theoretical perspective on FDI activities. This comprehensive framework can avoid those deficiencies in the previous work mentioned at the beginning of this section and provide a broad and precise approach to explore the determinants of FDI across China.

China's Context and Propositions Development

There are numerous studies pursuing the determinants of FDI in China since it has been the most important developing country to attract foreign investment in the world since the 1990s. For many MNEs in the context of global competition and free trade, China's market environment presents them with both opportunities and challenges.

On the one hand, after China opened its doors to the world two decades ago, it has achieved a great deal of economic success accompanied by social improvements. In the FDI domain, China has attracted a spectacular amount of investments from different countries all over the world. Based on the detailed studies of the determinants of FDI in this country, Sun, Tong, and Yu (2002) characterise the development of FDI in China in terms of the following three important phases. The first stage lasts from the end of 1970s to 1985 when China extended its opening achievement. In this period, FDI in China was concentrated on part of the national industries (for example, small-sized assembling and processing for export) and regions consisting of coastal zones and special economic zones (SEZs). The second stage is sustained from 1986 to 1991, in which FDI was involved in manufacturing industries, and the opening zones were extended to some central provinces in China. The third stage lasts a longer period from 1992 to the present, when the scope of FDI broadens to large infrastructure and manufacturing projects, and the opening area covers most realms of China. In addition, China amended the law on FDI several times in order to attract further investments. More importantly, China is a member of WTO and commits to open multiple industrial domains involving agricultural products, retail, textiles, automobiles, telecommunication, banking, and securities, which are profitable industries for MNEs. Both the central government and local authorities promise to improve China's openness to FDI by MNEs.

There are some disadvantageous factors for MNEs though their influences are diminishing gradually. For instance, there is a cultural gap between the East and West, which was caused by societal differences in work attitudes, motivational structures, interpersonal norms, and negotiation patterns that cannot be eliminated in a short time (Luo and O'Connor, 1998). Further, China maintains its protectionism for a certain period in some strategic and higher profitable industries like the automobile industry, though it has joined the WTO. Obviously, these environmental risks and governmental interferences in the economic domain would continue over a certain period.

To explore the advantages and disadvantages, faced by MNEs in China, a number of researchers focus on the determinant factors of FDI. For instance, Vanhonacker (1997) argues the achievement in FDI is not only attributed to Chinese governmental improvement of economic and social reform, but also initiated by MNEs' strategic motivations and their internal capacities. Sun, Tong, and Yu (2002) review previous work and summarise eight important determinants of FDI distribution in China. But they show two weak points. First, most studies in their summary involve the explanations of the allocation of FDI, but ignore other factors potentially influencing structural change to FDI. In practice, the allocation of FDI in a particular country belongs to part of the structural change to FDI. Second, those studies focus on FDI activities in such developed countries as Japan and the United States. So the conclusion is not entirely applicable in China's market setting.

In this study, three key factors determining structural change to FDI in China are drawn upon based on the above analysis. These include home-based factors, host country-specific factors, and dyadic strategic motivations.

First, host country-specific factors, which are obviously signals for those MNEs preparing to invest in China, are also significant determinants influencing structural change to sequential FDI. Such environmental factors are often referred to in many studies on environment-strategy-performance relationship in international expansion procedure (Shan, 1991; Chen, 1993; Tan and Litschert, 1994; Vanhonacker, 1997; Pan, 1996; Pan and Chi, 1999; PennerHahn, 1998; Luo, 1999; Luo and Park, 2001; Sun, Tong, and Yu, 2002). For example, in FDI theories, appropriate investment decision and investment size depend upon the investment conditions and the degree of openness among different regions within the country. When the host country environment is full of political and societal turbulence, foreign investors have to carefully implement their investment gradually. If the governmental interference or imperfect industry structure remains in the economic activities, foreign investors will be compelled to engage in collaborative activities in order to acquire necessary resource and support. Consequently, before deciding to invest in foreign markets, MNEs must learn about the local market environment ex ante. Further, in such dynamic environments, knowledge and experience about local market is particularly important for those MNEs that have already entered China. According to the notion of experience and familiarity, MNEs adopt more adaptive strategies in sequential FDI in China with the improvement pace of China's market context.

The host country-specific factors consist of social, cultural, political, and economic variables. In other words, these determinants include multilevel factors such as nation, industry, firm, and project. On the national level, they comprise cultural distance, social value norms, perfection level of legal and regulatory context, and so forth. On the industry level, these factors consist of industry policy and structure of host country, different entry barriers among industries, and sale growth of host industry, etc. On the firm level, they include the capacity of firm's organisational learning and the nature of partner's ownership (China has three basic forms of firms: state-owned, collective, and private-owned enterprises). On the project level, they refer to project nature (namely, export-oriented or local-oriented), project size, its location, etc.

Proposition 1. In an emerging economy country like China, the host country-specific environment confronted by MNEs has an important effect on structural change to sequential FDI.

Second, the home-based advantages are also crucial determinants in the sequential procedure of FDI in China. From the standpoint of MNEs, both exploiting their home-based competitive advantages and exploring host country-specific advantages are primary strategic objectives although enlarging market or acquiring higher profit is their strategic intention as well. According to the knowledge-based theory of the firm, the procedure of FDI is not only a matter of minimising transaction cost, but also reflects a need to find the most efficient way to exploit and explore the knowledge base (Chang and Rosenzweig, 2001). In addition, Chang (1995) shows that many earlier entrants often prefer a wholly owned subsidiary during international expansion process while subsequent entries tend to prefer joint venture that provides MNEs with the structural mechanisms allowing deeper knowledge exchange. As a result, the capacity of MNEs' organisational learning is an important factor to explore global competition and international expansion.

Proposition 2. In an emerging economy country like China, the home-based advantages of MNEs have a significant influence on structural change to sequential FDI in the evolutional environment.

Last, the difference between dyadic motivations in FDI process also imposes a certain influence on structural change to FDI in China. On the one hand, there are sometimes conflicting perceptions between both mutual objectives. For instance, Vanhonacker (1997) mentions that the desire for technology is one of the important reasons that China opens its market to foreign investors in the first place, whereas the foreign investors often are reluctant to give away their advanced, proprietary technology for fear of losing their competitive advantages. On the other hand, their strategic motivations might evolve over time because the host country environment or the status of MNEs' competitive advantages would change over time. In the beginning of China's opening and reforming of its economy, most MNEs aim at the expansive market and their original objective is to enter such vast market. Over time, they improve their objective to make higher profit rather than merely entering the market. Analogously, China also requires MNEs to enlarge their resource and financial commitments to local market with the pace of the market approaching mature. Naturally the third proposition arrives.

Proposition 3. In an emerging economy country like China, dyadic strategic motivations have initiated significantly structural change to sequential FDI.

Based on the above discussion, this study identifies several important determinants of structural change to FDI across China, as summarised in Table 1.

Data and Method

Many previous studies on China's context adopt archive data released by national authorities such as in Luo, (1995,1999), Luo and O'Connor (1998), Luo and Park (2001), and Sun, Tong, and Yu (2002). In addition, many other countries and international organisations in the world accept those data and information, and accept the approach as well. To match other studies on China's market setting, this study also adopts anecdotal evidence based on archival data substituting for rigorous empirical validation, and the research results are comparable.

All the data in this study are collected from three main sources: (1) China Statistical Yearbook (1983-2001), (2) Almanac of China's Foreign Economic Relations and Trade (1989-2001), and (3) A Statistical Survey of China (1990-1999). In addition, the data in 2001 came from the Web site of the Ministry of Foreign Trade and Economic Cooperation of the People's Republic of China (http://www.moftec.gov.cn/table/wztj/index.htm). In particular, China Statistical Yearbook, compiled by the National Bureau of Statistics of the People's Republic of China, is one of the most authoritative sources. It covers very comprehensive data and some selected data series in historically important years and the most recent year at national and provincial level, which reflects various aspects of China's social and economic development. In the FDI domain, it provides elaborate data about the number of FDI projects, amount of utilisation of FDI, contractual amount of FDI by sector, actually used amount of FDI by sector and by region respectively, and so forth. As a result, most of FDI data in this study come from the China Statistical Yearbook.

Unfortunately, this study has the data about actually used amount of FDI by sector in 1997-2001, whereas it lacks related data from 1979 to 1996. To close this gap we substitute contractual amount of FDI for actually used amount of FDI in the same period in order to satisfy the need of longitudinal data. This study takes ordinary least square (OLS) to measure the correlation of contractual amount of FDI with actually used amount of FDI in the same period in China, and finds that the correlation coefficient is 0.48, which implies that there is strong positive relationship between both amounts in the same period.

Structural Change in Investment Size

Table 2 lists the number of project, contractual amount of FDI, actually used amount of FDI, proposition of actually used amount in contractual amount in the same period, and average used amount per project in the period of 1979-2001. As shown in Table 2, the number of projects, contractual amount, and actually used amount of FDI increase greatly over time. This shows that the environment of the host country-specific characterised by dynamism, complexity, and hostility has been improved and attracts much more foreign investment. To be more specific, tendency of the cumulative investment amount and the number of projects indicates that foreign investment in China is sequential. If the investment environment improves, the investment size will increase (for instance, the investment from 1986 to 1993), and vice versa. This fact indicates that the earlier investments can affect later investments, which supports Proposition 1 and corroborates the theory of sequential FDI. In addition, the incremental percentage of actually used amount in contractual amount in the same period and average used amount per project show that MNEs' resource and financial commitments to China's market increase, which supports Proposition 2 on the one hand. The experience and knowledge about the local market help MNEs transfer from experimental investment to strategic investment, which validates another perspective pertaining to international expansion process.

Structural Change in Entry Modes

China Statistical Yearbook distinguishes the choice of entry mode by MNEs in China in terms of joint venture enterprises (JVEs), cooperative operation enterprises (COEs), foreign investment enterprises (FIEs), cooperation development (CD), foreign investment share enterprises (FISEs), and other business operations. Because the percentage of the amount of the last two modes in total FDI amount per year is no more than 1.5 per cent, they are omitted in this study. Table 3 shows structural change to actually used amount of FDI by entry mode in China.

Many studies mention that foreign investors prefer a wholly owned subsidiary to a joint venture during subsequent foreign investment (Vanhonacker, 1997; Luo and O'Connor, 1998; Pan and Chi, 1999; Sun, Tong, and Yu, 2002). In this study, Table 3 implies that not only the market environment and investment policy in China encourages investment, but also the investment return of MNEs in such quasi-market country is enhanced. Table 3 shows two changes according to environment-strategy-performance relationship (Tan and Litschert, 1994; Luo and Park, 2001). First, the choice of entry mode changes joint venture into a wholly owned subsidiary, which indicates that MNEs benefit from joint ventures with local partners, accumulate much knowledge and 1985 experience, and become more confident in their capacities and the environment. But Vanhonacker (1997) argues that this shift is not because of a change in China's legal or regulatory codes, but to the experimenting with FIEs of pioneering MNEs that were frustrated by the limitations and under-performance of JVEs. Second, the growth of the proportion of cooperative development in FDI is obvious. MNEs improve their commitments to local market, because in FDI theory, the home firm primarily undertakes R&D activities and only mature and widely diffused products and technologies are transferred to the host country (Sharma, 1995).

Structural Change in Distribution of Industrial Sector

We have measured the correlation of the contract amount of FDI with actually used amount of FDI in China in order to clarify whether there is distinct difference between them. Since we cannot acquire all the data about actually used amount of FDI by sector in China in the period considered, we have to substitute contractual amount of FDI for them. Table 4 lists structural change in contractual amount of FDI by industrial sector from 1986 to 2001.

Table 4 shows completely different distributions of the contractual amount of FDI on the basis of the disparate sector. In general, labour-intensive industries involve agriculture, commerce, wholesale and retail trade, catering service; and social service; fund-intensive industries include real estate management, supply of energy sources, tour service, etc; while technology-intensive industries include manufacturing, science research and polytechnic service, and so forth.

In Table 4, we can see investment domains by MNEs transfer from labour-intensive industries to fund- and technology-intensive industries during the sequential FDI procedure, which indicates that dyadic strategic motivations evolve over time. MNEs in the early investment period enter China to capture cheaper labour and abundant resources, then turn to make bigger profit in the long run in the sequential process. This shift from investment in general sectors to strategic sectors implies the decline of entry barriers, which indirectly supports Proposition 1. On the other hand, the host country opens its market to pursue more financial and advanced technologies sequentially, and therefore this shift verifies Proposition 3. In addition, this increase of MNEs' financial commitment to host market also supports Proposition 2 to a certain extent.

Structural Change in Regional Distribution

Table 5 lists actually used amount of FDI by region from 1988 to 2000. Owing to historical and locational factors, there is great difference of actually used amount of FDI by region. In the past, though FDI was located throughout China, there were still very few FDI in the central and western regions since the degrees of economic development and stages of reform are not the same in different regions across China (Luo and O'Connor, 1998). Many MNEs typically consider the central and western regions more complex, uncertain, and dynamic than the eastern region, for the former include much more governmental interferences and cultural distances. The obvious difference between investment in the coastal region and those in the central and western regions shows that the degree of openness in China has an important effect on foreign investment according to Proposition 1. Whereas, the gradual growth in the central and western regions also confirms that MNEs expands their investment in such zones in order to respond to western development policy of China.

During the process of globalisation and free trade, China is a spectacular target because of its increasing economic development and gradual political reform. MNEs making less profit in developed countries nowadays turn to such emerging economy as China to pursue broader market and higher performance.

Based on macro-level data on structural change to FDI across China, this study investigates the spatial and temporal variation in FDI, and analyses the determinants initiating structural change to FDI in an emerging market country like China. It finds that the home-based competitive capabilities, the host country-specific environment contingencies, and dyadic strategic motivations, the three prime factors, have an effect on structural change to FDI in China over time. Empirical evidence from investment size, entry modes, sectoral and regional distributions of FDI in China also support these findings.

This study provides some implications for MNEs' global expansion and competition in the new millennium. First, earlier entrants in an emerging country lead higher performance than the later ones according to many studies. MNEs should improve their resource and financial commitments to local market in order to acquire higher profits in a long run. Second, because the host market context and dyadic strategic motivations are dynamic and complex, the FDI in an emerging country is sequential. It is advisable for MNEs to adjust their objectives and take more strategic action to adapt to dynamic market change. Last, the knowledge-based theory of the firm argues that MNEs' success depends on their capabilities of exploiting and exploring knowledge, which is also tenable in an emerging economy like China's. MNEs need to integrate their competitive advantages with the experience and knowledge about foreign market to win more success in such markets.

Table 1: Potential Determinants of Structural Change to FDI in China

            Category                      Potential Determinants

1. Host country-specific factors   Market demand and market size
                                   Legal, social and regulatory context
                                   Level of economic development
                                   Culture tradition
                                   Industry structure
                                   Industry policy, etc.

2. Home-based factors              Investing country of origin
                                   Core competence
                                   Capacity of organisational learning
                                   Commitment to local market, etc.

3. Dyadic strategic motivations    Market entry
                                   Resource satisfaction
                                   Higher profit
                                   Need of advanced technologies
                                   Need of finance, etc.

Table 2: Structural Change in Investment Size

 Year     Number of    Contractual     Actually Used
          Projects    Amount (US$100   Amount (US$100
                        million)         million)

1979-82       922          60.10            11.66
1983          470          17.32             6.36
1984        1,856          26.51            12.58
1985        3,073          59.32            16.61
1986        1,498          28.34            18.74
1987        2,233          37.09            23.14
1988        5,945          52.97            31.94
1989        5,779          56.00            33.92
1990        7,273          65.96            34.87
1991       12,978         119.77            43.66
1992       48,764         581.24           110.07
1993       83,437       1,114.36           257.59
1994       47,549         826.80           337.67
1995       37,011         912.82           375.21
1996       24,556         732.77           417.25
1997       21,001         510.04           452.57
1998       19,799         521.02           454.63
1999       16,918         412.23           403.19
2000       22,347         623.80           407.15
2001       26,140         691.95           468.78

 Year     Proportion of    Average Used
          Used Amount in    Amount per
           Contractual     Project (US$
           Amount (%)        million)

1979-82       19.40            1.26
1983          36.72            1.35
1984          47.45            0.68
1985          28.00            0.54
1986          66.13            1.25
1987          62.39            1.04
1988          60.30            0.54
1989          60.57            0.59
1990          52.87            0.48
1991          36.45            0.34
1992          18.94            0.23
1993          23.12            0.31
1994          40.84            0.71
1995          41.10            1.01
1996          56.94            1.70
1997          88.73            2.15
1998          87.26            2.30
1999          97.81            2.38
2000          65.27            1.81
2001          67.75            1.79

Table 3: Structural Changes in Entry Modes
(Actually used amount in US$ 100 million)

Year         JVEs     COEs     FIEs    CD

1979-1982     1.04    5.33     0.39   4.90
1983          0.73    2.27     0.43   2.92
1984          2.55    4.65     0.15   5.23
1985          5.81    5.86     0.13   4.81
1986          8.05    7.94     0.16   2.60
1987         14.86    6.20     1.83   0.25
1988         19.75    7.79     2.30   2.10
1989         20.37    7.52     3.72   2.32
1990         18.86    6.73     6.83   2.44
1991         22.99    7.63    11.35   1.69
1992         61.15   21.23    25.20   2.50
1993        147.30   43.63    62.42   4.24
1994        179.33   71.20    80.36   6.78
1995        190.79   75.34   103.18   5.89
1996        207.55   81.07   126.05   2.55
1997        194.97   89.29   161.88   3.58
1998        183.48   97.19   164.70   1.79
1999        158.27   82.34   155.45   3.84
2000        143.43   65.96   192.14   3.82
2001        157.37   62.11   238.75   5.11

Table 4: Structure Changes in Industrial Distribution
(Contractual amount in US$100 million)

Year   Agricul-   Manufac-   Construc-   Transpor-   Commerce
        ture      turing     tion        tation

1986     0.73       13.37       0.13        1.90       0.24
1987     0.78       15.30       0.17        2.27       0.09
1988     2.09       40.21       1.19        0.91       0.65
1989     1.21       46.64       0.67        0.52       0.67
1990     1.22       55.70       1.81        0.36       1.07
1991     2.20       96.24       1.34        0.95       1.74
1992     0.29      326.66      18.37       15.40      14.41
1993    11.92      511.71      38.78       14.90      46.02
1994     9.72      438.99      23.94       20.30      39.22
1995    15.71      558.42      17.36       15.38      31.01
1996    11.36      504.87      20.00       15.97      23.45
1997    10.66      277.82      36.57       31.21      26.22
1998    12.04      316.78      19.69       17.51      23.03
1999    14.72      273.02      10.97       11.13      12.04
2000    14.91      444.93       8.33       14.22      14.41
2001    17.64      488.45      18.20        8.86      13.98

Year   Real      Tour      Health &   Educa-   Science    Other
       Estate    Service   Sports     tion     Research   Sectors
       Manage-
       ment

1986     3.91      0.00      0.04      0.40      0.00       7.58
1987     4.94      0.00      0.30      0.04      0.00      13.18
1988     5.30      0.00      0.01      0.07      0.12       1.92
1989     5.24      0.00      0.36      0.07      0.04       0.58
1990     4.52      0.00      0.38      0.05      0.32       0.53
1991    15.03      0.00      0.63      0.56      0.18       0.89
1992   180.82      0.00      3.95      0.99      0.64      13.08
1993   437.71     14.82      4.77      4.52      5.91      38.08
1994   238.62      0.00     19.80      6.08      3.01      22.51
1995   161.56      8.68      7.61      3.14      2.48      14.14
1996   127.51      2.91      3.52      1.69      1.76      21.54
1997    18.41     62.22     26.68      1.43      0.71      18.16
1998    13.13     66.48     30.11      1.41      0.21      20.63
1999    41.80     30.18      0.74      0.49      0.62      16.82
2000    52.63      0.00     44.36      0.81      2.51      11.65
2001    50.30      0.00     42.90      0.69      6.57      14.25

Table 5: Structural Change in Regional Distribution
(Actually used amount in US$100 million)

       Eastern   Central   Western
Year   Region    Region    Region

1988    27.79     1.85      2.54
1989    29.25     2.32      2.29
1990    30.88     2.76      1.18
1991    38.33     3.12      2.01
1992   101.80     6.20      2.24
1993   241.77    23.26      9.33
1994   294.95    26.28     15.51
1995   320.91    39.23     14.19
1996   351.78    46.61     17.14
1997   386.70    50.46     12.65
1998   396.69    44.20     13.74
1999   354.34    37.47     11.38
2000   366.10    38.30     12.58

References

Agarwal S and S Ramaswami, "Choice of Foreign Entry Mode: Impact of Ownership, Location, and Internalisation Factors", Journal of International Business Studies, 23, 1992, pp 1-27.

Beamish PW, "The Characteristics of Joint Ventures in the People's Republic of China", Journal of International Marketing, 1(2), 1993, pp 29-48.

Beamish PW and JC Banks, "Equity Joint Ventures and the Theory of the Multinational Enterprise", Journal of International Business Study, 18, 1987, pp 1-16.

Chang, Sea-Jin. "International Expansion Strategy of Japanese Firms: Capability Building through Sequential Entry", Academy of Management Journal, 38(2), 1995, pp 383-407.

Chang, Sea-Jin, and PM Rosenzweig, "The Choice of Entry Mode in Sequential Foreign Direct Investment", Strategic Management Journal, 22, 2001, pp 747-776.

Chen C, "The Environment for Foreign Direct Investment and the Characteristics of Joint Venture in China", Development Policy Review, 11(2), 1993, pp 167-183.

Erramilli L, "The Experience Factor in Foreign Market Entry Behaviour of Service Firms", Journal of International Business Studies, 22, 1991, pp 479-501.

Gomes-Casseres B, "Ownership Structure of Foreign Subsidiaries", Journal of Economic Behaviour and Organisation, 11, 1989, pp 1-25.

Gulati R, "Does Familiarity Breed Trust?" Academy of Management Journal, 38, 1995, pp 85-112.

Hejazi W and EA Safarian, "Trade, Foreign Direct Investment, and R&D Spillovers", Journal of International Business Studies, 30, 1999, pp 491-511.

Hennart JF and Y Park, "Greenfield vs. Acquisition: The Strategy of Japanese Investors in the United States", Management Science, 39(9), 1993, pp 1054-1070.

Hennart JF and S Reddy, "The Choice between Merges/Acquisitions and Joint Venture: The Case of Japanese Investors in the United States", Strategic Management Journal, 18(1), 1997, pp 1-12.

Hite JM and WS Hesterly, "The Evolution of Firm Networks: From Emergence to Early Growth of the Firm", Strategic Management Journal, 22, 2001, pp 275-286.

Johanson J and J Vahlne, "The Internationalisation Process of the Firm: A Model of Knowledge Development and Increasing Foreign Market Commitment", Journal of International Business Studies, 8, 1977, pp 23-32.

--, "The Mechanism of Internationalisation", International Marketing Review, 7(1), 1990, pp 11-24.

Kim WC and P Hwang, "Global Strategy and Multinationals' Entry Choice", Journal of International Business Studies, 23, 1992, pp 29-53.

Kogut B, "Foreign Direct Investment as a Sequential Process", in Kindleberger, CP and Audretsch, D (eds), The Multinational Corporation in the 1980s, MIT Press: Cambridge, MA, 1983, pp 38-56.

Kogut B and H Singh, "The Effect of National Culture on the Choice of Entry Mode", Journal of International Business Studies, 19, 1988, pp 414-432.

Luo Y, "Business Strategy, Market Structure, and Performance of International Joint Venture: The Case of Joint Ventures in China". Management International Review, 35(3), 1995, pp 241-264.

--, "Structure-performance Relationship in a Transitional Economy Context: An Empirical Study of Multinational Alliances in China", Journal of Business Research, 46(1), 1999, pp 15-30.

--, "Determinants of Entry in an Emerging Economy: A Multilevel Approach", Journal of Management Studies, 38, 2001, pp 443-472.

Luo Y and N O'Connor, "Structural change to Foreign Direct Investment in China: An Evolutionary Perspective", Journal of Applied Management Studies, 7(1), 1998, pp 95-109.

Luo Y and SH Park, "Strategic Alignment and Performance of Market-seeking MNCs in China", Strategic Management Journal, 22, 2001, pp 141-155.

March JG, "Exploration and Exploitation in Organisational Learning", Organisation Science, 2(1), 1991, pp 71-87.

Pan Y, "Influences on Foreign Equity Ownerships Level in Joint Ventures in China", Journal of International Business Studies, 27, 1996, pp 1-26.

Pan Y and PK Chi, "Financial Performance and Survival of Multinational Corporations in China". Strategic Management Journal, 20, 1999, pp 359-374.

Peng MW and Y Lu, O Shenkar and DYL Wang, "Treasures in the China House: A Review of Management and Organisational Research on Greater China", Journal of Business Research, 52, 2001, pp 95-110.

Penner-Hahn J, "Firm and Environmental Influences on the Mode and Sequence of Foreign Research and Development Activities", Strategic Management Journal, 19(2), 1998, pp 149-168.

Prahalad CK and G Hamel, "The Core Competence of the Corporation", Harvard Business Review, 68(3), 1990, pp 79-91.

Sharma A, "Entry Strategies of U.S Firms to the Newly Independent States, Baltic States, and Eastern European Countries", California Management Review, 37(3), 1995, pp 90-109.

Shan W, "Environmental Risks and Joint Ventures Sharing Arrangements", Journal of International Business Studies, 22(3), 1991, pp 555-578.

Shaw W and I Meier, "Second--generation MNCs in China", China Business Review, 4, 1994, pp 10-15.

Shenkar O, "International Joint Ventures' Problems in China: Risks and Remedies", Long Range Planning, 23(3), 1990, pp 82-90.

Sun Q, W Tong, and Q Yu, "Determinants of Foreign Direct Investment across China", Journal of International Money and Finance, 21, 2002, pp 79-113.

Tan JJ and RJ Litschert, "Environment-strategy Relationship and Its Performance Implications: An Empirical Study of the Chinese Electronics Industry", Strategic Management Journal, 15, 1994, pp 1-20.

Teece D, G Pisano, and A Shuen, "Firm Capabilities, Resources and the Concept of Strategy", Strategic Management Journal, 18(7), 1997, pp 509-533.

Vanhonacker W, "Entering China: An Unconventional Approach", Harvard Business Review, 75(2), 1997, pp 130-140.

Venkatraman N, "Strategic Orientation of Business Enterprises: The Construct, Dimensionality, and Measurement", Management Science, 35, 1989, pp 942-962.

Wei, SJ, "Attracting Foreign Direct Investment: Has China Reached Its Potential?", China Economic Review, 6, 1995, pp 187-199.

World Economic Outlook September 2002. International Monetary Fund (IMF), The World Economic Outlook (WEO) Database September 2002. www.imf.org/external/pubs/ft/ weo/2002/02/data/index.htm. (Accessed 1 March 2003).

Zhang Yi 

Zhang Zigang

Men Xiaobo

Huang Shengjie

College of Management

Huazhong University of Science and Technology 

The authors are very grateful to Professor Changrong Fan and Mr Yunkai Chen for their enthusiastic assistance.