productive firms being kicked out the industry. Focusing on firms⁵ choice between exports and horizontal FDI (HFDI), Helpman, Yeaple and Melitz (2004) (HYM model) extended the trade model of Melitz and proved that: first, only the most productive firms tend to engage in foreign activities; second, after weighing the transportation costs of export and the fixed costs of FDI, the most productive firms are more likely to invest abroad, while the relatively less productive firms choose to export; third, other low-productivity firms opt to serve the domestic market only and the least productive firms are forced to leave the industry. This is the first time to demonstrate firms⁵ horizontal FDI behavior from the perspective of firm heterogeneity.
Grossman et al. (2006) developed a complementary strategy model incorporating firm heterogeneity as a determinant of horizontal and vertical FDI. They showed that even within the same industry where each firm faced the same market size, fixed costs and transportation costs, firms differing in productivity have different optimal strategies. In addition, they summarized that the least productive firms produce in the home market while firms engaging in FDI are more productive, and the most productive firms will move both intermediate and assembly stages to the developing countries. Integration strategies depend on the scale of trading costs and fixed costs of the intermediate and assembly stages related.
1.2.2 Empirical Evidence from Developed Countries
Helpman et al. (2004), by using American firms’ data, found that exporters outperformed non-exporters in productivity, while the productivity of firms with OFDI was greater than export firms. Bernard et al. (2006), Bernard and Jensen (2007), by using American firms⁹ data, also discovered that firms with lower productivity only operated in the home market, those more productive ones chose to export, while the most productive firms decided to invest outbound. Yeaple (2009) reported that: first, the most productive firms invested more foreign countries and gain more revenues in these investment destinations; second the country-specific characteristics, for instance, economic development level, geographical and cultural distance and so on, had a significant influence on American OFDI activity. Eaton et al. (2004) by using French firms⁵ data, showed that the more foreign markets a firm invested, the higher its productivity, which indicated that the increasing costs of OFDI required firms to be more productive. Grima et al. (2005), by using English firms⁵ data, found similar evidence. Mayer and Ottaviano (2008) also manifested that only a small proportion of firms export or invest overseas, whose productivity was significantly higher than those only served the domestic market after investigating the international activity of European firms. By and large, the evidence from developed countries is in line with the prospection of Helpman^ theory. Because a large scale of FDI emerging from advanced countries also goes predominately to developed countries, especially in the early stage (now the share of developing countries has been enlarging), most of which is HFDI (Navarreti et al., 2006).
Compared with European and American countries, Japan as a latecomer displays some heterogeneity with respect to OFDI, where not only exists a bunch of HFDI but also a relatively large proportion of vertical FDI (VFDI). Aimed at expanding market share in host countries, Japanese firms, from the automobile and electronics industry to the household electrics industry, have made plenty of investments in other developed countries based on their comparative advantages. Meanwhile, they also locate their low and middle-end production in some peripheral developing countries, like Malaysia, Indonesia, and mainland China in order to reduce the production costs of intermediate inputs. By investigating Japanese firms⁵ data, Head and Ries (2003) found not only the consistent results mentioned before but also the fact that firms who invested in developed countries were more productive than those invested in low-income countries. As presented in the HYM model (2004), the productivity cutoff of OFDI is determined by host countries’ specific factors, like market share, factor prices, productivity and so on. Therefore, the productivity cutoff of firms for investing in developing countries tends to be lower than that in developed countries. Likewise, Ryubei and Tanaka (2009), after comparing the productivity heterogeneity of Japanese firms in Europe, America, and East Asia, discovered that firms investing in the United States and Europe simultaneously were more productive than those investing only in the United States or Europe, while those investing in East Asian countries were not necessarily more productive than exporters or those only operate in home market. Therefore, the characteristics of Japanese firms⁵ OFDI activities indicate that the efficiency of firms investing in developed countries, such as Europe and the United States, is consistent with the theoretical expectations, while the productivity of those investing in developing countries tends to remain in uncertainty.
1.2.3 Empirical Evidence from Developing Countries
With the development of globalization, the OFDI share of developing countries has been expanding in recent decades. Compared with the OFDI from advanced countries, what is the feature of OFDI from developing countries? Is there anything unexpected? Thus, this topic has caught increasing attention from researchers. Damijan et al. (2007), by exploring the rich dataset of Slovenian manufacturing firms, found that the productivity of firms investing abroad, of exporters and of firms only operating domestically decreased successively, which were in accord with the HYM model. Aw and Lee (2008) investigated the data of Taiwanese firms and presented that the productivity of Taiwanese firms, whether investigating in the United States or in the mainland of China, exhibited consistent pattern with the prediction of HYM model. In addition, firms investing only in the U.S. had higher productivity than those investing exclusively in China due to the lower fixed investment cost in China. Ryuhei and Takashi (2012) utilizing the Taiwanese firms⁵ data as well, revealed some new evidence: first, firms conducting OFDI in high-income countries are more productive than those in low- income destinations, but not definitely more efficient than non-OFDI firms; second, the more productive, the more destinations they invest regardless of the market attributes. This paper also suggested that developing countries can speed up the internationalization of firms by lowering the productivity cutoff of OFDI through government backup.
Recently, the relationship between Chinese firms，productivity heterogeneity and their OFDI activity has been a hot topic among researchers both at home and abroad. Wang and Zhao (2012) based on the firm-level data of Guangdong province, found that OFDI firms tended to be more productive, which was in line with the HYM^?s theoretical model. In addition, the more productive the OFDI firms, the more countries they invested in. Based on firms⁵ data of Zhejiang province, Tian and Yu (2012) also found similar results which further showed that the more productive the OFDI firms were, the larger the volume they invested. Xiao and Xiao and Liu (2012) by using Chinese firms’ data (2000〜2010) and incorporating geographic factor into the model, found that OFDI firms with higher productivity were more able to invest further, while less productive firms are more likely invest in adjacent countries. Chen and Tang (2014) found that OFDI was associated with better firm performance, including higher productivity, employment, export intensity, and greater product innovation, but over half of OFDI deals resided in service sectors. Chen (2014) specifically examined the OFDI in service sectors and found that the HYM theory was also applicable to service industries. Jiang(2015), by testing Chinese firms⁵ data, found not only the supportive evidence towards the firm heterogeneity theory but also additional features: first, firms investing high-income destinations were not necessarily more productive than those just investing low-income countries; second, more efficient OFDI firms were more technology- seeking-oriented relative to expanding their market share in host countries; third, state-owned OFDI firms were not definitely more productive than other OFDI firms with different
ownership.
On the basis of the current literature on Chinese firms⁵ OFDI behavior, there still remain two major concerns requiring further investigation. One is the issue related to ownership. State-owned firms, who possess specific ownership advantages and “dual motivation”，have predominately conducted over half of China⁵ s OFDI. As presented in previous documents, the encouragement and support from the government may lower the productivity cutoff of OFDI, resulting in some unqualified firms investing abroad. Because state-owned firms tend to be easier to get access to the financial credit from state-owned banks or other external financial sources and are more likely to be sheltered by government policies compared with private firms. In addition, productivity, capital intensity, and labor intensity vary from industry to industry, which could also affect the productivity cutoff of OFDI. For instance, the high-tech industry definitely requires a higher productivity threshold than the labor- intensive manufacturing industry. Therefore, the inter-industry distinctions cannot be ignored, and we need to give more insights into the intra-industry OFDI activity.
1.3 Impacts of OFDI on firms’ Productivity
Productivity, as an important indicator of efficiency, has been referred to as the driving force of the firm^ sustained competitiveness and growth (Lieberman & Dhawan, 2005; Syverson, 2011). Thus, it is vital for emerging economies to catch up with the advanced world (Kharas & Kohli, 2011). At present, the study on productivity inequality across firms has come a long way (Bartelsman & Doms, 2000) and a large and growing body of literature has been seeking to identify the factors affecting firm^ productivity from various angles and fields, especially the levers that firms can utilize to increase their productivity (Bertrand & Capron, 2015; Syverson, 2011). OFDI, one of those levers, has been utilized as a mechanism by which firms can not only exploit ownership advantages, but also gain resource variety, fulfill resource reallocation, stir up competition, and facilitate the development of productivity (Bertrand & Capron, 2015; Cantwell, 1989; Dunning, 1988; Frost, 2001).
Due to the accessibility of firm-level data, the majority of early literature examining the productivity effect of OFDI on the home country just focuses on the practice of developed countries from the macro-level perspective. Potterie and Lichtenberg (2001) estimated the technology spillover effects of trade, IFDI, and OFDI by using country-level panel data of 13 developed countries from 1971 to 1990. The empirical results showed that OFDI flowing into countries with advanced technology indeed had positive effects on the productivity of the home country by absorbing technological knowledge from the host country. Driffield,
Love, and Taylor (2009) showed that both efficiency-seeking OFDI and technology-sourcing OFDI would strengthen domestic productivity. Hezer (2011) also revealed that, by and large, OFDI was beneficial to the productivity of developing countries in the long run.
As for the industry-level studies, by utilizing the data of the Swedish manufacturing industry, Braconier, Ekholm, and Knarvik (2001) hardly found any indication of FDI-related R&D spillovers. Bitzer and Kerekes (2008) reported that host countries of FDI got remarkable benefits from the knowledge of spillovers of IFDI, while little positive OFDI-led technology souring effects were found. Further, by investigating a similar dataset Bitzer& Gorg, (2009) even found that on average, a country^ stock of OFDI had a negative correlation with its productivity. However, Driffield and Chiang (2009) unveiled that there indeed existed a positive correlation between Taiwan’s OFDI to mainland China and its labor productivity.
Compared with analysis with country-level and industry-level data, firm-level study is deemed to be more rigorous for exploring the productivity effect of OFDI as it is free from the constraints of aggregation bias (Holz, 2004) and offers perspectives for discerning firm heterogeneity (Helpman et al., 2004), contributing to providing more insights into firm-level variations in OFDI-led productivity effect. Barba Navaretti and Castellani (2004) found that in contrast with domestic firms, OFDI of Italian multinationals improved their total factor productivity growth by adopting the propensity matching score method. Branstetter (2006) also confirmed that OFDI was a channel of knowledge spillover for Japanese MNEs investing in the United States. Hijzen et al. (2007) suspected the positive results might result from the neglect of endogeneity bias that probably could emerge when more productive firms self-select into going abroad. To address this problem, Hijzen et al. (2007) employed propensity score matching and difference-in-difference techniques to examine the Japanese firms’ data from 1995〜2002, however, they failed to find a significant positive impact of OFDI on productivity.
Despite the fact that there is a bulk of empirical studies coping with the productivity effect of OFDI in developed countries, by contrast, this topic in developing countries is still under-researched. There are a few scattered attempts based on micro-level data from Taiwan, mainland China, and Estonia, but the empirical results of these investigations are still miscellaneous.
Therefore, what are the reasons behind those controversial results even based on similar firm-level datasets and estimation methodologies? Helpman et al. (2004) proposed that firm- level specific features may well diversify firms⁵ investment strategy and performance.
Kokko and Kravtsova (2008) also affirmed that it is not automatic for productivity premium and technology diffusion. Firms that have higher R&D and absorptive capability and invest in relatively developed countries/regions tend to obtain higher productivity premium. (Dosi, 1988; Kim, 1997; Almeida & Kogut, 1997; Cantwell & Janne, 1999; Cohen & Levinthal, 1990). Besides, the diverse ownership of parent firms (Ramasamy et al., 2012) and OFDI destination (Branstetter, 2006; Li, 1995; Nocke & Yeaple, 2007) may significantly moderate emerging country’s multinational enterprises (EMEs)’ leaming-by-OFDI effect. At present, however, there has been no comprehensive report on how the firm-level heterogeneity moderates the OFDI-led productivity effect. (Almeida & Kogut, 1997; Bitzer & Kerekes, 2008; Branstetter, 2006; Chen & Yang, 2013; Chuang & Lin, 1999; Potterie & Lichtenberg, 2001; Herzer, 2008)
In the context that China is one of emerging market economies and increasing Chinese companies are going abroad, whether Chinese firms⁵ OFDI has improved their productivity and competence or not is an urgent question requiring more systematic research on their OFDI behavior. By introducing and testing an extended learning-by-OFDI model, which takes Chinese firms⁵ heterogeneity into consideration, this paper attempts to shed more light on this topic. Theories related to developing countries MNEs⁵ OFDI will be employed as the theoretical foundation for this work. The analytic framework is demonstrated in Fig 1, which can be more robust to explain and predict the Chinese MNEs⁵ OFDI-productivity effect.
A summary of the preceding study results on the productivity effect of OFDI at the firm- level has been displayed in Table 3.
Figure 1 Analytic framework
 
 

Main Findings
OFDI improves the firms⁵' TFP but this effect is just significant in non-state-owned firms not in state-owned firms. Besides, the productivity effect of OFDI varies due to the different political environment in host countries, i.e., firms investing in a country with low political risk can gain the positive productivity effect, while that in high or medium destines is not significant.
They find that OFDI has a positive effect on firms' productivity, but this effect is subject to the heterogeneity of parent firms and their investment strategy.
Parent firms⁵ productivity indeed rises after OFDI, but this effect varies remarkably with a firm、heterogeneity. More precisely, a firm、 absorptive ability is crucial for the own-firm effect. Additionally, technology-seeking OFDI in developed countries manifestly bolster the own-firm effect, in contrast, supports from government show insignificant impacts.
Chinese firms' OFDI is significantly conducive to enhance their productivity and scales of operation. More precisely, OFDI by M&A facilitates early access to invisible assets, but has an adverse effect on financial performance, while greenfield investments show a more significant impact on the productivity and scale of Chinese MNEs investing in Europe.
This study finds that there exist positive productivity spillovers from OFDI to domestic firms, especially to domestic suppliers of home-country MNEs; The results also demonstrate that absorptive capacity plays a pivotal role in explaining the extent (if any) of productivity spillovers to recipient firms.
Cross-border acquisitions have a positive effect on the acquirers' labor productivity at home, and these effects will be greater when there are learning opportunities in the destinations and when acquirers contemporaneously invest in domestic productivity-enhancing activities
The results reveal that the technical efficiencies of the Taiwanese firms have got improved over the sample period, which suggests that there exists a positive correlation between Taiwanese firms' OFDI and their technological advances and technical efficiency.

Chapter Two Overview of China’s OFDI
The spring breeze of reform and opening-up stirred up China⁵ s outward foreign direct investment (OFDI). In 1979, China^ State Council promulgated an array of economic reform policies, one of which was "to establish enterprises overseas". For the first time, OFDI was formally marked as a public policy, which opened the way for the OFDI of Chinese enterprises. For years, however, purchasing foreign securities, foreign trade credit, and foreign loans remained as the main forms of capital outflow of China, and the proportion of foreign direct investment was quite small. In 2001, China became a member of the World Trade Organization (WTO). Thereafter, the development speed of China⁵ s OFDI has become faster in conjunction with her economic development, and it plays an increasingly important role in the domain of international investment. By the end of the year 2017, more than 20000 domestic investors had set up 39200 foreign direct investment enterprises abroad, distributed in 189 countries (regions) around the world, and the total assets of those firms amounted to $6 trillion.
World Investment Report 2018 (UNCTAD) shows that in 2017, China^ OFDI accounted for 11.1% and 5.9% worldwide in terms of flows and stocks respectively. Flows ranked third place and stocks jumped to the second from sixth in 2016. During the period 2002-2017, the average annual growth rate of China⁵ s foreign direct investment is 36.5%. Obviously, China has become an increasingly important exporter of capital. This chapter mainly exhibits the different historical stages and the current situation of China⁵ s OFDI, including the investment scale, location, industries distribution, entry modes, main entities, etc. Besides, this chapter also analyses the motivation of China⁵ s OFDI at the current stage and some issues to be solved urgently. Thus, this chapter provides a realistic basis for the following theoretical and empirical research.
2.1 History of China^s OFDI
It has been 40 years, since China⁵ s reform and opening-up. Chinese firms have fulfilled remarkable achievements in these four decades in terms of going abroad and undertaking international operations. Chinese firms are still enthusiastic to enter the global market via both trade and investment in conjunction with their accumulated strength and experiences. Specifically, Chinese firms⁵ OFDI roughly can be phased into the following stages.
2.1.1 Initial Development Stage (1979-2000)
In this stage, promoted by the State Council’s policy of “setting up enterprises abroad”， some professional foreign trade companies engaged in international trade for a long period of time and international economic and technological companies conducting foreign economic cooperation first invested abroad by virtue of their affluent foreign experiences. With the promulgation of succeeding OFDI policies, a couple of influential non-trading firms, industrial magnates, and comprehensive international trust companies, such as Capital Iron and Steel Corporation, China International Trust and Investment Corporation, gradually got on the board of foreign direct investment. Later, quite a few powerful and ambitious private companies joined in.
During this period, China⁵s OFDI presents the following features: (1) the scale of investment is relatively small; (2) in terms of geographical distribution, a majority of them located in those countries or regions which are adjacent to China both from the perspective of geographical distance and cultural distance, such as Hongkong, Taiwan, and Southeast Asian countries. This is in line with the initial OFDI model of developing countries in the theory of foreign direct investment; (3) As for the industries involved, it mainly concentrates on catering, service and other industries, and gradually begins to expand to resources development, machinery manufacturing and processing, transportation, health care, and other industries; (4) the main entities are those large state-owned trading companies, quite a few manufacturing enterprises from other industries and private sector; (5) With respect to the entry modes, the joint venture is the main form of investment, and the scale of Chinese firms⁵ investment is relatively small. Greenland investment only accounts for quite a small proportion. Thus, the entry mode is relatively monotonous.
2.1.2 Juvenile Stage (2001-2008)
In 2001, China officially became a member of the World Trade Organization (WTO). Thenceforth, China⁹ s opening-up took a great step up to a new stage no matter from the perspective of depth and breadth. In 2002, the Chinese central government proposed that to comprehensively improve China⁵ s opening-up and to participate in global cooperation and competition at a higher level, it was of great importance to combine ''introducing in^,? strategy with “going out”. Since 2002, China’s OFDI has seen an increase at astonishing speed with a bunch of Chinese firms⁹ international mergers and acquisitions (M&As). In 2005, China implemented the exchange rate reform, then the Chinese currency appreciated substantially, which was greatly conducive to Chines firms⁵ international investment. By the end of the year 2005, nearly 4,000 Chinese investors had set up more than 6,000 non-financial enterprises in 163 countries (regions). For the first time, China⁵ s outward FDI flows exceeded 10 billion US dollars to 12.26 billion US dollars, and the year-on-year jumped to 123%. This period witnessed a strikingly surge of China⁹ s OFDI. In 2007, the stock of OFDI exceeded the $100 billion; The project amount also risen remarkedly from hundreds of millions of dollars to billions of dollars; The range of industry was also enlarged, involving construction, transportation, petrochemical, metallurgical engineering, ICT, power equipment, etc., though business services, manufacturing, wholesale, retail and mining industries were still the dominating parts; The recipients of investment were still clustered in Asian countries or regions, accounting for nearly 70% of the stock of China⁵ s OFDI. In addition, large-sized state-owned companies were still the main forces investing abroad.
2.1.3 Growth Stage (2009 to present)
In the context of the global financial crisis after 2008, international capital flows, cross- border investment, and mergers & acquisitions (M&A) activities contracted dramatically. Global outward FDI declined by 30% in 2009, according to the analysis of the World Investment Report 2010 (UNCTAD). During the “Twelfth Five-Year Plan” period, outward foreign direct investment was upgraded as a national strategy by the Chinese government. In 2013, with the promulgation of “the Belt and Road” strategy, a series of policies has been released to support Chinese firms ^<4going out^?,. First is to standardize and simplify the process of OFDI, by means of the policy guidance, streamlining the approval process, and decentralization. In addition, the Ministry of Commerce has compiled the Guidelines for Countries (Regions) of Foreign Investment Cooperation, which analyses the political, economic and humanistic factors of the recipient countries, points out the potential risks of investment projects and provides references for domestic investors. The establishment of the Information Service System for Foreign Investment Cooperation more conveniently provides additional information for Chinese firms, and further saves their information searching cost for their OFDI activities. On top of that, the development of China⁵ s financial industry has offered more convenient and faster financial services for Chinese investors. As China⁵s government proactive arrangement and planning, China⁵ s OFDI in non-financial sectors had shown certain growth against the downward trend. With the full implementation of “The Belt and Road” strategy after 2013, China⁵s OFDI flows keep increasing until 2017.
2.2 Current Status of China’s OFDI

As a latecomer in the domain of international investment, the development pattern of China^ OFDI displays its own features in terms of motivation, location, industry, entity, so on and so forth. It is crucial to shed more light on these features in order to get a more vivid picture of China’s OFDI. This section conducts a comprehensive analysis and summary of the characteristics and trends of China⁵ s OFDI from the aspects of scale, location, industry, entry mode and ownership, in order to provide a policy basis for the development strategy of China⁵ s OFDI.
2.2.1 Scale
During the period 2002〜2017, the average yearly growth rate reached to 36.5%. By the end of the year 2017, more than 20000 domestic investors had set up 39200 foreign direct investment enterprises distributed in 189 countries (regions) around the world. The total assets of those firms amounted to $6 trillion. Figure 2 displays the trend of China⁵ s OFDI from 2002 to 2017 in terms of the amount and world ranking of stocks. In 2017, the stock surged to $1089.04 billion, which was $451.65 billion more than it in last year (2016), the global ranking climbed to the second place from the sixth in 2016. However, compared with other countries, China’s OFDI stock is still far behind the U.S. (7799 $ billion), only accounting for 23% of the U.S., though it is quite close to the number of other countries (regions), such as Hongkong, Germany, and Netherland.

Fig 2 Trend of ranking and amount of Chinese OFDI stocks
Table 4 Outward FDI Stock of China and Other Major Countries (Regions), 2017
 
 

which led to the decline of 2017. Further, these figures revealed the fact that the main destinations of China⁵ s OFDI are developing countries, the share of which exceeded 80% both from the perspective of the stock and the flow. Among these investments in Asia, Hongkong took a relatively large share both from the perspective of stock (86.1%) and flow (82.8%). This phenomenon can be attributed to the following reasons. Firstly, due to the geographical and cultural adjacency, Chinese firms are more willing to invest in Hongkong; Secondly, via investing in Hongkong and reinvesting in the mainland of China, these firms can obtain a bunch of preferential treatments as foreign investors; thirdly, Hongkong as a tax haven, it is an ideal place to establish a control center.
Table 5 Regional Distribution of China’s Outward Foreign Direct Investment, 2017

Area	Stock		Flow
	Amount	Share (%)	Amount	Share (%)	YOY Growth Rate(%)
Asia	1139.3	63.00	110.0	69.50	-15.5
Latin America	386.9	21.40	14.1	8.90	-48.3
Europe	110.9	6.10	18.5	11.70	72.7
North America	86.9	4.80	6.5	4.10	-68.1
Africa	43.3	2.40	4.1	2.60	70.8
Oceania	41.8	2.30	5.1	3.20	-1.9
Total	1809.0		158.3

 

Source: Author^ arrangement based on 2017 Statistical Bulletin of China's Outward Foreign Direct Investment
 
 
By comparison, by the end of the year 2017, China’s OFDI in developed countries was $229.1billion, only accounting for 12.7%. The reasons behind are as follows. First, the technological threshold of investing in developed countries is higher than that in developing countries; Second, the institutional and market environments are quite different from domestic ones, leading to greater potential risks. But with the development of China⁵s OFDI and fluctuation of the international market, the location strategy of China⁵ s OFDI will get changed. For example, the investment in Europe in 2017 witnessed a sharp increment with the year-on- year growth rate of 72.7 %. The proportion of China⁵ s OFDI in Africa is also quite small, mainly focusing on energy exploration and other low-end industries by using the cost advantages and comparative advantages.
2.2.3 Industrial Distribution

In recent years, the industries involved in China⁵ s OFDI have continuously become more diverse. In 2017, China^ OFDI covered 18 industries in the national economy. However, the intensity across each industry varied a lot. There were four industries, the rental and business services industry, the manufacturing industry, financial services industry, and the wholesale and retail trade industry, whose OFDI flow exceeded $10 billion (two fewer compared to that of the previous year), and their total shares accounted for 81.4% of the whole flow. Among them, the rental and business services industry remained the first, with the amount of $54.27 billion accounting for 34.3% of the total flow in that year, though it declined 17.5% year-on- year. The investment was mainly distributed in Hong Kong China, British Virgin, Singapore,


Figure 5 China's OFDI flows in Manufacturing Main Secondary Category, 2017
Source: Author^ arrangement based on 2017 Statistical Bulletin of China's Outward Foreign Direct Investment
the United States, the United Kingdom, and other countries (regions). The reasons behind might be that the business service industry has the characteristics of flexible form and easy to evade supervision. On the one hand, it can help exporters diversify their origin and avoid the hostility of the third countries to China’s investment; on the other hand, it can reasonably “evade taxes” and even help capital to escape.
The manufacturing industry ranked second place with the amount of $29.51 billion accounting for 18.6% of the total flow. Further, these investments mainly went to the chemical raw materials and chemical manufacturing, automotive manufacturing,
computer/communication, other electronic equipment manufacturing, pharmaceutical manufacturing, railway/ship/aerospace, and other transportation equipment manufacturing, etc. Among them, $11.03 billion went to the equipment manufacturing industries, which fell down 22.6% year-on-year and accounted for 37.4% of total investment in the manufacturing sector. With continuous adjustment and optimization of industrial structure and the upscaling of the manufacturing industry, China⁵ s strategic emerging industries have quickened the pace of internationalization and proactively explored new cooperation modes to enhance the core competitiveness and independent R&D capabilities.
2.2.4 Entry Modes
At present, Chinese firms conduct OFDI mainly via the following modes: First, set up
overseas sales companies. By doing so, firms can globalize their sales network and reduce the
intermediate costs, such as an agent fee, which is conducive to export. Establishing a sales
company is the most prevalent way for China⁵ s OFDI though it is a relatively simple way.
However, China⁵ s export of manufacturing is facing an increasing restriction of the tariff, which
especially has exerted a threat to the labor-intensive industries; Second, build factories overseas.
This mode can effectively utilize the raw materials and labor of the host country, and most
importantly, can reduce the impacts of tariff barrier. In addition, the local factories can also
serve as a center of the surrounding countries, so as to make the sales network closer
and reduce the transportation cost; Third, cross-border M&As. This mode involves a wide Table 6 China’s M&As via Direct Investment, 2004〜2007

lead to political interference of the host country due to the strong political intention behind it.
Figure 7 shows that over a decade, the proportion of state-owned firms has been shrinking, and this is the first time that the share of non-state firms exceeded the state-owned firms. It reflects that on the one hand, Chinese government has improved the management system and strengthened the support for the OFDI of non-public companies; on the other hand, private firms can develop rapidly with their clear property rights, flexible organization structure, agile
 
Source: Author⁵ s rearrangement based on 2017 Statistical Bulletin of Chinas Outward Foreign Direct Investment
 
response, and strong innovation power.
In terms of regional distribution, in 2017, the total provincial OFDI flows of China (Figure 8) reached $86.23 billion, with a year-on-year decrease of 42.7%, accounting for 61.8% of China’s total non-financial OFDI flows ($139.5 billion). Specifically, $64.24 billion were from eastern China, accounting for 74.5% of the total provincial investment flows. $12.47 billion was from western China, accounting for 14.5% of the total provincial investment flows and with a year-on-year (YoY) increase of 8.0%. A $7.61 billion were from central China, accounting for 8.8% of the total provincial investment flows and with a year-on-year decrease of 24.7%. Shanghai, Guangdong, Zhejiang, Shandong, Beijing, Chongqing, Jiangsu, Hainan, Fujian, Tianjin were the top 10 provinces (municipalities) in terms of the provincial OFDI flows, from which a total of $67.63 billion OFDI flows were achieved, accounting for 78.4% of China’s total provincial OFDI flows (Figure 9).
As for the stocks (Figure 10), by the end of 2017, non-financial OFDI stock by local enterprises had reached $727.46 billion, accounting for 45.3% of China⁵s total non-financial



OFDI stock, increased by 0.9% compared with the previous year. In particular, $611.52 billion
Note: 1. Eastern China includes Beijing, Tianjin, Hebei, Shanghai, Jiangsu, Zhejiang, Fujian, Shandong, Guangdong, Source: Author^ rearrangement based on 2017 Statistical Bulletin of China's Outward Foreign Direct Investment and Hainan； 2. Central China includes six provinces, namely, Shanxi, Anhui, Jiangxi, Henan, Hubei, and Hunan; 3. Western China includes Inner Mongolia, Guangxi, Sichuan, Chongqing, Guizhou, Yunnan, Shannxi, Gansu, Qinghai, Ningxia, Xinjiang, and Tibet. 4. Three Northeast Provinces include Heilongjiang, Jilin, and Liaoning; The data tag includes region, OFDI flow, share, and the year-on-year (YoY)growth rate.
came from eastern China, accounting for 84.1% of the total. $53.08 billion came from western China, accounting for 7.3% of the total. $41.55 billion came from central China, accounting for 5.7% of the total. $21.31 billion came from three provinces in northeastern China, accounting for 2.9% of the total. Guangdong was still the largest province as the source of OFDI stock with $189.71 billion, followed by Shanghai with $112 billion, and Zhejiang, Beijing, Shandong, Jiangsu, Tianjin, Liaoning, Fujian, Hainan, etc. Both from the perspective of flows and stocks, China’s OFDI mainly stems from the eastern coastal areas (Figure 11).
Figure 10 Regional weightings of China’s OFDI stocks by local enterprises, by the End of 2017
Unit: Billions of US Dollars
Source: Author^ rearrangement based on 2017 Statistical Bulletin of Chinas Outward Foreign Direct Investment

2.2.6 Current issues
(1) Increasing political and economic risks
Since the global financial crisis in 2008, the international political, economic and diplomatic situation have become more unstable and precarious. The growing anti-globalization trend marked by the withdrawal of the United States from the Trans-Pacific Partnership Agreement (TPP), and the Brexit has also led to the intensification of protectionism. Many countries have become extremely sensitive to the chain reaction of investment policies. Under the principle of investment liberalization, different sorts of restrictive policies and regulations related to investment have been widely used by several countries. Industrial protection has gradually gone beyond the scope of the economy with a political color, and the scope of protection has gradually extended from the protection of traditional industries to emerging services, financial industry, high-tech industry, etc. The purpose of protection Wois not to cultivate the ability of free competition, but to strengthen the monopoly of domestic and foreign markets. The main means of protection are invisible protection, such as technical standards, environmental protection, labor standards and so on. In addition, the change of regime and regulations caused by the general election in various countries will also lead to an increase in risks and uncertainties faced by Chinese firms⁹ transactional operations.
With the continuous development of China⁵ s economy and the large-scale OFDI of Chinese firms, "China Threat Statement^M has gradually stepped in the spotlight of world opinion. Even some countries condemn China for its frenzied plunder of foreign resources and neocolonial tendencies in its foreign investment. Because of the differences in ideology and national strategy, the West World always tends to associate the “going out” of Chinese enterprises with the will of the state and has a great political tendency when scrutinizing China’s investment. In addition, the instability of the global economic recovery and the financial turmoil has rendered exchange rate risk become one of the main risks of Chinese firms⁹ OFDI.
(2) Insufficient policy support
Firstly, investment facilitation still needs to be improved urgently. Although the examination and approval system for overseas investment projects has been changed to the record-keeping system, the whole procedure is still very complicated and time-consuming, which will cost at least 90 days to finish and then lead to missing the business opportunity. Secondly, there is no clear industrial policy or guidance for Chinese firms⁵ foreign investment activities currently. In terms of the stock of Chinese firms⁵ OFDI, industrial distribution is relatively concentrated in the leasing and business service industry, mining industry, financial industry, and the wholesale and retail industry. The growth of OFDI is mainly driven by the primary industry, low-end service industry, and the financial industry .While the proportion of the manufacturing industry is relatively small, although China⁵ s investment in technologyintensive industries has also increased in recent years. In addition, many domestic investors, especially for private firms, lack sufficient foreign-related experiences and reasonable evaluation of their projects in terms of market prospect, trade friction, political risks, culture and so on, which can affect firms⁹ business safety and sustainable development. Thirdly, Chinese firms⁵ foreign investment lacks proper coordination—Sometimes several Chinese enterprises compete with each other in the same project. They often adopt low-price promotion, competitive bidding even vicious competition, which not only damages their own interests but also easily causes economic and trade disputes with foreign governments or enterprises.
(3) Financial constraints
Domestic financial institutions fail to fulfill their role as bridges and ties in the process of Chinese firms⁵ foreign investment, lagging in providing investment proposals and financial services, and lack of follow-up support, resulting in Chinese enterprises having to be subjected to foreign investment banks. Compared with developed countries, China⁵s enterprises have more restrictions on domestic financing. In 2017, $86.15 billion of M&As were overseas financing, an increase of more than 70% than the previous year, accounting for 72% of the total M&As amount and being the record high in terms of enterprise oversea financing. For private firms, they are more suffering with respect to financing restrictions due to the high financing threshold of policy banks and the discrimination of commercial banks. In addition, China⁵s mechanism of providing credit guarantees and insurance for foreign investment is still unsound. Firms⁵ overseas projects can only be mortgaged by domestic assets when financing at home, while overseas assets cannot be mortgaged. What is more, in terms of financial credit, domestic enterprises are often limited by the loan quota and specific foreign exchange quota, which has a particularly prominent impact on private enterprises. Taking the State Administration of Foreign Exchange as an example, the main purpose of some exchange regulations is to effectively crack down on the international illegal capital flows, however, it will hinder private enterprises⁵ OFDI and financing to a certain extent, and may miss out on good opportunities for cross-border M&As.
(4) Lack of managerial talents in multinational corporations
The lack of excellent overseas project management personnel has become an obstacle to the further development of enterprises’ overseas business. Many Chinese MNEs are facing human resource bottlenecks, and lack of enough managerial talents who are experienced in transnational cooperation. Compared with developed countries, most of the Chinese expatriates are not qualified, experienced and have no comprehensive knowledge of international trade and investment, and local cultures. As a result, overseas enterprises cannot achieve their foreign business very smoothly and, which can seriously affect their investment benefits.

Chapter Three Firms Productivity and OFDI
This chapter mainly aims to empirically examine the relationship between Chinese manufacturing firms⁹ OFDI and their productivity based on the firm heterogeneity theory (Helpman et al. 2004). More specifically, this chapter mainly includes the following contents. First, the author briefly reviewed the mechanism of firms⁵ OFDI based on HYM model and then untied some presumptions, for example, countries are no longer symmetric, to show different potentials. Second, by using the dataset of Chinese manufacturing firms the author tests whether the HYM model is applicable for explaining China⁵ s case and which kind of firms are more likely to undertake OFDI when considering firms⁵ characteristics.
3.1 Mechanism of firms⁹ OFDI
3.1.1 Consumer preferences
Helpman et al. (2004) proposed that firm-level specific features may well diversify firms⁹ investment strategy and performance, which is the theoretical framework of this study. CES utility function represents consumer preferences.
U = , 0 <a<l (3.1)
where x(a>) is the demand function of goods co, Q denotes a set of differentiated goods co. s=l /(I-a) and £>1, represents the substitution elasticity. With budget constraint,
^= 1 (3.²⁾
where p((〇) is the price of good co, and I denotes the income level of a country. By maximizing the utility function, we can yield the Marshallian demand function of good co：
p ⑼一 ％■ ^p/"^£
Pj is the price index of country；, whose formula is as follows: ^PJ =
3.1.2 Firms⁹ production and market strategy
Suppose that labor is the only input factor of the manufacturer^ production. If the output of each unit labor is cp, then ^denotes a firm^ productivity. Prior to entering the market, firms face uncertainty about how productive they will turn to be. To start producing a particular variety, a firm has to bear a fixed cost,/_e units labor. Upon paying this sunk cost, we assume that firms⁵ productivity level is exogenous and subjected to Pareto distribution.
G{cp) = 1 — cp~^k, k > a — 1 37

If the wage level of country/ is W/, then the marginal cost a firm is C/= W/ /^9, which varies across firms. By profit maximization, a firm sets a price such that:
Pi =-=—
a acp
Let⁹s postulate domestic fixed cost is f^d_{ , then the total cost TC —
R = p. x(〇))and profit of a firm for producing units product are as
nf = x{(x))w_t/acp - (/^ + x<i〇))Wi/(p)
Substitute formula (3.3) into (3.7), we can obtain:
^ = (1-a)(奶广 -/? (3.8)
where a firm^ profit is the function of its productivity. As e>l, a firm^ profit is positively associated with its productivity. To simplify formula (3.9), set A_i = (1 — a)(aP^)^£_1/^ , then we can get:
Atcp⁸-¹ -ft^d (3.9)
Melitz (2003) introduced trade frictions, the fixed cost for exporting to country； is ff. Besides, firms need to pay for the transport costs (iceberg costs) Tj > 1. The fixed cost of investing in countryj is f-^nv , and the relationship is fj^UV > > f_t^d . Thus, in such context, the profit of a
firm for exporting and investing are as follows:
tt/ = (1/TjWiy-¹ Aj-cp⁸-¹ -// (3.10)
nj^nv=(l/w_jy~¹ Ajcp⁸-¹ -fl^nv (3.11)
Under the condition of market clearing, firms⁵ economic profits equal to zero. Thus, according to formula (3.9), (3.10) and (3.11), we can derive the productivity level of different production modes:
^^{d =} (^：)^£-^iwi (3.12), cp^exp = (^—(3.13), cp^inv = (3.14)
where 7p,7p and 7p respectively denote firms⁵ zero-profit productivity of serving in the domestic market, exporting and OFDI. When a firm^ productivity (pis below 7p^d, it will be forced to exit the domestic market. When a firm^ profit of exporting equals that of OFDI, namely when 7rJ(cp)= ^^^(cp) , it can choose either to export or invest overseas. Thus, from

formula (3.10) and (3,11), we can get the OFDI cut-off productivity:

cp < cp < cp (3.16)
which means that if the difference in the fixed cost of OFDI and export is greater than that of the variable cost, then the zero-profit productivity of OFDI is higher than that of exports. Firms will choose OFDI rather export when firms⁵ productivity cp > ^ . This is in line with the expectation of HYM model, which is based on the horizontal FDI practices of developed countries. Because they assume that (1) countries are symmetric, namely, there is little disparity between the host country and home country in terms of market scale and wage level (^4^ ^ Aj, T{Wi ^ Wj) and (2) export and OFDI are substitutive for each other. Thus, under these assumptions and from equations (3.13), (3.14), (3.15) we can obtain such relationship:
7p^d <^^exv<7^^nv
which reveals that the most productive firms serve the foreign market via subsidiary sales; lower productivity firms serve foreign markets via exports; still lower productivity firms only serve the domestic market. We can also catch the intuition from Fig 12 below. HYM model well explained the horizontal FDI among developed countries, which had been heavily tested by subsequent empirical analysis (Mayer and Ottaviano, 2007; Yeaple, 2009).
However, the real situation is different from what the model portrayed. Countries are not symmetric, developed countries and developing countries are different from market scale or wage level. In addition, compared with the majority of developing countries, China⁵s wage level actually is relatively higher. Therefore, let^?s assume that the wage level of the home


which means that if the difference of variable cost between OFDI and export is greater than that of fixed cost, then the zero profit productivity of export is higher than that of OFDI (Fig 13).This

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