Who Follows Whom? A Location Study of Chinese Private and State-Owned Companies in the European Union.

Verfasserde Beule, Filip

1 Introduction

For years China has been a prime destination for foreign direct investment (FDI), as multinational enterprises (MNEs) invested there to build export platforms and take advantage of its fast-growing market. Now, however, China's outbound foreign direct investment is affecting the world. China is currently ranked in the top three in terms of FDI outflows (UNCTAD 2016) and is increasingly investing in Europe. In 2016, their total value of investments in the European Union (EU) amounted to a record breaking 35 billion Euro (Hanemann and Huotari 2017), an increase of 77% compared to 2015. In 2016, 18% of total Chinese FDI took place in Europe, which underscores its importance for Chinese investors. The EU has attracted both state-owned and private Chinese enterprises looking for investment opportunities, despite the historical, geographic, legal, linguistic, societal and cultural complexities of investing in the EU.

When faced with high levels of uncertainty, institutional theory suggests that firm managers will imitate the choices of others (DiMaggio and Powell 1983; Yuan and Pangarkar 2010). If firms cannot perfectly observe and analyse all relevant environmental factors and are uncertain as to the advantages of alternative locations, they can instead derive relevant information from observing prior entry location choices by other firms, and mimic prior location decisions (Belderbos et al. 2011). Especially for emerging market multinationals such as Chinese firms, uncertainty can be very high when moving to advanced markets such as Europe. Chinese multinationals typically have a short history of international expansion and usually lack the experience that is necessary to successfully cope with the cultural and institutional distance that separates them from more developed countries in Europe. It could therefore be expected that Chinese MNEs show mimetic behaviour in their FDI location decisions--that is, entries by compatriot MNEs in a particular host location will increase the likelihood that the focal firm will enter the same host location.

In this study, we attempt to assess the importance of location choice imitation in Chinese greenfield investments in Europe's regions. Although Chinese outward FDI has mostly been in the form of acquisitions carried out by SOEs; more recently, Chinese foreign direct investments are increasingly undertaken by private companies in the form of greenfield investments (E&Y 2015). Besides, the EU as well as some of these host countries have recently begun to display a more critical stance towards Chinese acquisitions (Price 2016; Tsakalidou 2016). As a result, Chinese investors have been increasingly scrutinized, especially state-owned investors and high-technological acquisition deals. China itself has also started scrutinizing outbound acquisitions amid a wave of foreign deal making that has fueled capital outflow. Furthermore, since we are interested in the strategic determinants of Chinese location choices and since foreign acquisitions are more driven by firm-specific determinants of the target firms, we have focused on greenfield investments in this study. More specifically, we examine the locational drivers of Chinese greenfield investments in the entire EU-28.

In particular, this study sheds light on the likelihood that regions attract a variety of Chinese investors in herd-like fashion by analysing the imitation and agglomeration characteristics of Chinese investments. The current body of literature has already documented mimicry effects in FDI (e.g., Belderbos et al. 2011), but the heterogeneity among investing firms and the impact of different role models remains largely unexplored.

We contribute to the literature on mimetic behaviour in internationalization by differentiating between privately owned and state-owned companies both as investing firms and as role models. Chinese investment has been traditionally dominated by state-owned enterprises (SOEs), although a more entrepreneurial group of privately owned enterprises (POEs) has made headway abroad in more recent years (e.g., Rudy et al. 2016; Ramasamy et al. 2012). Other studies that have focused on the differences in foreign entry location choices between these two sets of companies have focused on traditional locational determinants, like market size, ease of doing business or corruption, rather than on organizational mimicry. Accordingly, it will be important to examine whether there are any significant similarities or differences between these two types of companies, in terms of both the likelihood and the specific type of locational mimicry. We examine whether new greenfield investments by SOEs and POEs are more or less likely to follow other Chinese investors, and if so, if they are more likely to follow SOEs or POEs. As such, this study also informs on the strategizing of Chinese MNEs. It analyses Chinese SOE and POE locational strategies and contributes to the policy debate on Chinese investment in Europe. As Chinese investments are going to increase in the years to come, politicians and policymakers will want to know more about their investment strategies.

The study also adds to the academic debate on the relevance of the locational unit of analysis. Although most research on foreign entry locations has been carried out at the national level, there has been a shift towards subnational analyses more recently. It has been argued that MNEs target specific regions within countries rather than countries as a whole (Beugelsdijk and Mudambi 2013; Crescenzi et al. 2014) as they take into account the subnational characteristics of the markets rather than national features in their location decision process. This is consistent with the notion that the competition between regions to attract FDI is stronger across countries than within countries (Villaverde and Maza 2015; Basile et al. 2008). This implies that it is essential to analyse investment decisions at the more fine-grained regional level.

Furthermore, most studies treat the alternative locations as distinct places, isolated in space, and implicitly assume that the distances between one location and another have no impact upon the likelihood of FDI location. Yet, there are many reasons to suspect spatial dependence in FDI patterns. This study takes this into account by including location-specific characteristics of the region as well as of other European regions. In particular, a broader market perspective will be relevant in an integrated European Union where goods can be freely transferred across intra-European borders.

In the remainder of this paper, we first review the literature on the location decision of foreign investments. Hypotheses are then developed related to mimetic locational investment behaviour. In the subsequent section, we describe the sample, data and method used for the empirical analysis. We then present the results. We conclude with a discussion of our findings and their implications for researchers and practitioners.

2 Literature and Hypotheses

There has been a plethora of research that focuses on the location decision of foreign firms and of geographical distribution of FDI. The empirical literature largely conceptualizes the international location of firms as a process of location scanning and choice (Smith and Florida 1994). Econometric models treat the location decisions as a form of revealed preference for the attributes of a given area. Relevant variables have been shown to be attributes such as market size, degree of openness, costs, (un)employment, education, population size and density, transportation access, infrastructure, and tax rate variables (e.g., Alcacer and Chung 2007, 2014; Bas and Sierra 2002; Belderbos and Somers 2015; Chung and Alcacer 2002).

However, it is not just locational variables that determine the spatial distribution of the economic activity of firms but the strategic response of companies to these variables and to the anticipated behaviour of their suppliers, competitors, and clients (Schenk 1996; Lieberman and Asaba 2006; Leahy and Pavelin 2003; Hoenen and Hansen 2009). Knickerbocker (1973) argued that multinationals would sometimes follow each other into foreign markets to defend their own commercial interests. This perspective on inter-organizational influences on investments abroad indicates that firms engaged in competitive rivalry follow each other's foreign market entry strategies in order to minimize the risk that rivals' investments will have a negative impact on a firm's competitive position at home and in other international markets (Knickerbocker 1973; Gimeno et al. 2005; Lieberman and Asaba 2006; Belderbos et al. 2011). This so-called bandwagon effect can be triggered not only by decisions of competitors but also of customers deciding to establish themselves in a certain market (Buckley et al. 2008). Although some research focused on the reduction of risk, others also focused on the role of mimicry to mitigate competition (Leahy and Pavelin 2003; Barnett 1993).

Another perspective on the same phenomenon emphasizes the nature of institutional isomorphism in the imitation process, in which firms look for market signals from their peers that a given behaviour is worth pursuing while generating bandwagons (Abrahamson and Rosenkopf 1993). As a large number of peer organizations engage in a decision, it becomes common practice, or a rule of thumb to implement the same decision (March 1988).

The neo-institutional perspective on locational mimicry (e.g., Henisz and Delios 2001; Guillen 2002; Chan et al. 2006; Li et al. 2007) emphasizes the legitimizing effect that previous entries in a location may have under uncertainty. As a location gains recognition as being 'rational' or 'right,' other firms are more likely to follow, particularly if firms have specific traits that are worth following (Belderbos et al. 2011).

As firms entering a new market face a high level of...

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