An Integrated Approach to Ownership Choices of MNEs in China: A Case Study of Wuxi 1978-2004

Jing-Lin Duanmu University of Bath

School of Management Working Paper Series

2006.10 This working paper is produced for discussion purposes only. The papers are expected to be published in due course, in revised form and should not be quoted without the author’s permission.

University of Bath School of Management Working Paper Series

School of Management

Claverton Down Bath

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2006

2006.01 Neil Allan and Louise Beer Strategic Risk: It’s all in your head

2006.02 Richard Fairchild Does Auditor Retention increase Managerial Fraud? - The Effects of Auditor Ability and Auditor Empathy.

2006.03 Richard Fairchild Patents and innovation - the effect of monopoly protection, competitive spillovers and sympathetic collaboration.

2006.04 Paul A. Grout and Anna Zalewska

Profitability Measures and Competition Law

2006.05 Steven McGuire The United States, Japan and the Aerospace Industry: technological change in the shaping of a political relationship

2006.06 Richard Fairchild & Yiyuan Mai

The Strength of the Legal System, Empathetic Cooperation, and the Optimality of Strong or Weak Venture Capital

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2006.07 Susanna Xin Xu, Joe Nandhakumar and Christine

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Enacting E-relations with Ancient Chinese Military Stratagems

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Spanish companies in Latin America: a winding road

2006.09

Paul Goodwin, Robert Fildes, Michael Lawrence

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The process of using a forecasting support system

2006.10 Jing-Lin Duanmu An Integrated Approach to Ownership Choices of MNEs in China: A Case Study of Wuxi 1978-2004

1

An Integrated Approach to Ownership Choices of MNEs in China: A Case Study

of Wuxi 1978-2004

Jing-Lin Duanmu Tel: +44(0)20 7487 7620 Fax: +44(0)20 7487 7574

E-mail: duanmuj@regents.ac.uk

Abstract

This paper investigates the choice of Multinational Enterprises (MNEs) between

investing through wholly owned subsidiaries (WOSs) and equity joint ventures (EJVs)

in Wuxi, P.R. China. With the new data set covering 3087 foreign entries from 66

countries and regions between 1978 and 2004 in Wuxi, this study centralizes the

empirical assessment of the impact of physical distance and cultural distance on

ownership choices, along with other institutional- and subsidiary-related factors to

identify the drivers of the increasingly important role of WOS.

Keywords: Ownership Choice, MNEs, Physical Distance, Logistic Model, China,

Wuxi.

2

An Integrated Approach to Ownership Choices of MNEs in China:

A Case Study of Wuxi 1978-2004

Introduction

The ownership choice of Multinational Enterprises (MNEs) into foreign markets is a

key aspect of their market entry strategy with different ownership arrangement

presenting different levels of control, resource commitment, risk, survival and returns

(Beamish and Banks, 1987; Contractor and Lorange, 1988; Makino and Beamish,

1998; Brouthers and Nakos, 2004). These aspects are of particular importance to firms

entering transitional and emerging environments (e.g. Makino and Beamish, 1998;

Meyer, 2001, etc). This paper investigates MNEs’ choice between wholly owned

subsidiaries (WOSs) and equity joint ventures (EJVs) in the city of Wuxi of People’s

Republic of China. With China becoming one of the largest FDI recipient countries in

the world1 and its significant legislative relaxation towards ownership choices of

MNEs since the late 1990s, MNEs’ ownership structure has undergone a large scale

adaptation. Yet this has not been captured by previous studies, which have largely

concentrated on the impact of industry, firm and location related characteristics on

ownership choices2.

Another explicit gap in the literature is that physical distance is barely used to study

ownership choices of MNEs. This omission is unfortunate because physical distance

has been found to play a significant role in determining the inflows and outflows of

FDI and international trade (Beckerman, 1956; Leamer and Levinsohn, 1995; Caves,

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1996; di Mauco, 2000; Markusen, 2001), international technology transfer (Keller,

2002; Kneller, 2005), and MNEs’ vertical spillovers in host economies (Javorcik, et

al., 2004). Intrinsically it should also have influence on MNEs’ operational and

strategic decisions since MNEs are the dominant players of international business;

however our understanding is limited of the role physical distance plays to ownership

choices of MNEs.

In contrast, considerable attention has been paid to the impact of cultural distance on

MNEs’ entry modes and ownership choices, but empirical studies have only delivered

mixed results based on rather equivocal theoretical reasoning. Consequently, one of

the motivations of this research is to conduct both a theoretical search and scrutiny of

the impact of physical distance and cultural distance on ownership choices of MNEs.

More specifically, we want to expose the microeconomic mechanisms through which

they affect ownership decisions of MNEs. As such the research supersedes previous

studies that either focus on the impact of cultural distance (e.g. Kogut and Singh, 1988;

Hennart and Larimo, 1998) or physical distance alone (Lin and Png, 2003).

This paper proceeds as follows. In the next section, we review developments in

ownership choices, with particular emphasis on some limitations of previous studies.

The third section develops hypotheses that relate ownership strategies to physical

distance and cultural factors, as well as to institutional and subsidiary related factors.

The fourth section introduces the data, methods and variables used for hypothesis

testing. The final two sessions discuss implications of the empirical results,

summarize the main conclusions, and suggest avenues for future research.

4

2. Literature Review

International expansion can take different forms and different market entry modes.

For the former, it includes market, intermediate and hierarchy; for the latter,

greenfield and acquisition are the major entry modes. The distinction between the

forms of overseas involvement and the choice of market entry modes are not always

kept separate in the empirical literature. Therefore it is important at the outset to

define terminology. The present study focuses on two kinds of ownership

arrangement of MNEs’ involvement, namely, wholly owned subsidiaries (WOSs) and

equity joint ventures (EJVs).

Many studies have focused not only on hierarchical forms of international expansion,

but they also have simultaneously studied non-hierarchical forms, such as contractual

joint ventures, export and franchising, (e.g. Cespedes, 1988; Pan and Tse, 2000;

Brouthers and Nakos, 2004; Wei et al 2005). The deficiency of the approach is that

undifferentiated empirical assessment of 3 multiple forms or modes can produce

theoretically inconsistent results. For instance, Castellani and Zanfei (2002) criticized

that using multinomial logistic model, Arora and Fosfuri (1999) obtained results that

MNEs’ international experience has a positive impact on the choice of WOS versus

technology licensing; experience is also found to simultaneously increase the odds of

joint ventures vis-à-vis wholly owned projects. Such results conflict with the

prediction that can be derived from transaction-based entry mode literature. Examples

can also be found from Wei et al (2005), in which experience of the host country in

attracting FDI is found to be positively correlated to WOSs, negatively correlated to

EJVs and has no impact on contractual joint ventures. Empirical results of this type

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make little contribution to confirming the predictive magnitude of TCE. Therefore a

concentration on opposing forms or modes is necessary to facilitate a theoretically

unambiguous investigation. Furthermore, we decide to delimit our focus to the two

kinds of ownership-based modes also because ownership-based entry modes often

represent more important and complex investment forms and structures than contract-

based entry modes (Zhao, et al., 2004).

The majority of entry mode studies have been built up on the core thesis of transaction

cost economics (TCE) (Buckley and Casson, 1976; Anderson and Gatignon, 1986;

Hennart, 1982; Hennart, 1991; Makino and Newport, 2000). The central argument is

that a higher ownership level is a response to the need to protect firm-specific

knowledge from unwanted dissemination in MNEs’ overseas affiliates. Key

constructs, such as asset specificity, among others, adopted from mainstream TCE

studies (Williamson, 1991) and often proxied with R&D and advertising intensity,

have received fair amount of empirical support (See a recent summary from Zhao, et

al, 2004).

In parallel with the fairly successful applications of TCE, there are however some

limitations. The most significant is probably some ‘arbitrary’ interpretation of TCE. In

their critical assessment of empirical support for TCE, David and Han (2004)

observed that some key propositions (e.g. relating to uncertainty) have been loosely

interpreted in empirical studies, we believe that in international business, some

applications of TCE have moved beyond ‘loose’ interpretation. For example,

‘uncertainty’, as another core construct of TCE, refers to the volatility of technology

or a composite of demand and price volatility (Williamson, 1985). The effect of

6

uncertainty on the choice of governance forms is conditional (David and Han, 2004):

when asset specificity is low, market governance should be preferred whatever the

degree of uncertainty, since continuity matters little and new transaction arrangements

can easily be made arranged by both parties if necessary. However when asset

specificity is present to a nontrivial degree, the increase in uncertainty subjects market

governance to costly haggling and maladaptiveness and increases the relative

attractiveness of hierarchies and hybrids.

How ‘uncertainty’ is interpreted in most entry mode studies is rather different. At a

conceptual level, ‘uncertainty’ is interpreted with different components, such as

environmental uncertainty, behavioural uncertainty, internal and external uncertainty,

etc (e.g. Delios and Beamish, 1999; Brouthers and Brouthers, 2003; Brouthers and

Nakos, 2004), which are not entirely consistent with the original interpretation. Even

these components may not violate the basic principle as where the predictive power of

this integrated concept originates from TCE, empirical applications do not seem to

consider the conditions where ‘uncertainty’ has an impact or not. In most entry mode

studies, uncertainty is hypothesized to unconditionally render market based entry

mode a favourable option because it provides MNEs with flexibility. But closer

scrutiny reveals that this is largely contradictory to what TCE predicts. Thus, Zhao, et

al (2004) commented that ‘the propositions of uncertainties are prone to the counter-

argument in the tradition of TCE’ (p. 527). Counter-argument is not prohibited in

academic studies; however, a convincing argument is needed either based on new

theoretical ground or on a revision of TCE. However neither can be explicitly found

in the literature.

7

The cultural distance hypothesis is another example. Kogut and Singh (1988)

suggested that cultural distance influences the perception of managers regarding the

costs and uncertainty of alternative modes of entry into foreign markets. Because

differences in national cultures have been shown to result in different organizational

and administrative practices and employee expectations, it can be expected that the

greater the cultural distance between two countries, the more different are their

organizational characteristics on average (Bendix, 1956; Lincoln, et al, 1981). This

leads to lower rates of acquisition compared to joint ventures and wholly owned

subsidiaries, due to the need to avoid internal uncertainty (Kogut and Singh, 1988).

Numerous follow-up studies have found that cultural distance induces joint ventures

(as opposed to WOSs) or lower equity sharing for the MNEs to get assistance from

local partners in order to handle internal uncertainty which results from cultural

divergence (Agarwal and Ramaswani 1992; Agarwal, 1994; Hennart and Larimo,

1998; Rajan and Pangarkar, 2000, etc).

However not all scholars agree on this proposition. The assumption of MNEs’

reaction towards cultural distance by means of ‘avoiding’ or ‘sharing’ ownership can

be replaced by ‘demanding’ ownership so that they may impose their operation

methods and ‘do it their way’ in the subsidiaries (Anderson and Gatignon, 1986; Sun,

1999). This is particularly likely considering that the strong firm-specific advantage

that motivates FDI in the first place may also induce sole ownership to exploit their

market power. Pan (1996) found that foreign firms in China were more likely to

pursue an equal or majority equity ownership as the cultural distance increases.

Consequently hypotheses on cultural distance are inconclusive. However, one thing is

clear: whichever hypothesis is chosen in empirical tests, it is illegitimate to criticize

8

TCE because the interpretations on cultural distance have moved far away from the

core tenets of TCE.

With the testing grounds gradually moving from developed economies to the

developing world, scholars also recognized another limitation of TCE, that is, it

ignores the effects of host government ownership restrictions on MNE choices.

Gomes-Casseres (1990) pioneered an integrated approach of combining both

transaction cost motivated hypotheses with institutional factors in studying entry

modes choices. It was found that the host country’s institutional environment and

legislation towards FDI had a significant impact on the ownership choices of FDI

(Makino and Beamish, 1998; Delios and Beamish, 1999; Meyer, 2001; Brouthers and

Brouthers, 2003; Morgan and Millington, 2005).

Physical distance, in sharp contrast, is almost entirely absent from the domain. Apart

from the necessity to understand whether and how physical distance influences entry

modes of MNEs, another reason to study it is that in the absence of the physical

distance between locations, cultural distance could mask some important conditions

with investment (Shenkar, 2001). In a recent study by Javorcik, et al. (2004), it was

found the volume of local sourcing was significantly correlated to the physical

distance between FDI home countries and Romania, which makes the US and Asia

MNEs, compared to EU MNEs, yield higher vertical spillovers to the local economy.

It is speculated that if physical distance were not a variable in their model, the result

of the study may well be attributed to the cultural differences associated with US,

Japan and European MNEs, especially when these three groups of countries do

represent very different cultures. This speculation crystallizes the need to study the

9

behaviours and strategies of MNEs with proper contextual factors to isolate the

impact from cultural and non-cultural related factors.

Physical distance is also shown to have different effects on international investment

and trade. Loungani et al (2002) found that physical distance, manifested as

transportation cost, reduces international trade, but its impact on FDI is much smaller.

Similarly, Gopinath and Echeverria (2004) found that as distance between two

economies increases, a home country’s bilateral exports (the host country’s bilateral

imports) fall, relative to FDI-based production. On the other hand, Portes and Rey

(2000) surprisingly found that the cross-border transactions in portfolio equities are

significantly and negatively correlated with physical distance, even though the trade

of financial assets should not be influenced by transportation costs because these

assets are virtually ‘weightless’. They revealed that it is informational costs behind

physical distance, rather than transportation costs, exposes an impact on cross-border

financial assets. Countries that are near each other know more about each other

because of greater interaction between their citizens and greater media coverage,

which all promote valuable private information transmission and this is essential for

financial assets trade.

.

These studies demonstrate that physical distance is not merely expressed in

transportation costs. Instead, there might be different mechanisms through which it

impacts on varied forms of trade and investments. In the next section, we begin with a

theoretical discussion of the mechanism by which physical distance influences the

ownership choices of FDI. This is followed by a close scrutiny of the theoretical

foundation of cultural related factors. Hypotheses are then constructed based on our

10

literature review. In the meantime, we also discuss legislative and some subsidiary-

related characteristics to facilitate an integrated study of the forces differentiating the

choices between WOS and EJV.

Hypotheses development

Physical distance acts as a natural barrier for international trade and investment

(Loungani, et al., 2002). Most obviously, greater distance can be thought of as a proxy

for higher transportation costs (Caves, 1996; di Mauco, 2000; Markusen, 2001;

Javorcik, et al. 2004). But physical distance may also proxy information costs

between two locations, as shown in Portes and Rey’s study (2000). The multiple

mechanisms associated with physical distance motivated our literature search to

expose the mechanism which influences ownership choices of MNEs. We find there is

a considerable amount of discussion in the literature on transaction cost. Opportunism,

as one of the pillar assumptions on which TCE is built up (the other assumption is

bounded rationality), can be resolved either through ownership/hierarchy or marked-

based contract (Williamson, 1991). In the case of international direct investment, the

ownership/contract trade-off can be understood to be resolved to a choice between a

wholly foreign ownership and a joint venture (Grossman and Hart, 1986; Hart and

Moore, 1990; Milgrom and Roberts, 1992). Grossman and Helpman (2004) suggested

that ceteris paribus, the greater the physical distance between the home countries of

the MNE, the smaller the advantage it has in forming wholly owned subsidiaries

relative to joint ventures, because the monitoring ability associated with sole

ownership decreases over distance.

11

Consequently, we posit physical distance as a transaction cost related factor in

influencing the entry mode of MNEs. We identified only one empirical study that has

examined this variable based on a similar rationale. Lin and Png (2003) found that a

project that was located 1000 kilometres further away was 13-17% more likely to be

formed as an EJV compared to a WOS. Their study involved 148 Taiwanese direct

investments in mainland China. Given our data set covering 3087 FDI projects from

66 countries and regions in Wuxi, it creates a good opportunity to re-test this idea.

Therefore, building on transaction cost based theoretical reasoning and earlier

empirical evidence, we suggest the first hypothesis as follows:

H1: The greater the physical distance between the home country of the investor and

China, the less likely the MNE is to choose WOS.

In parallel with physical distance, we now review existing theoretical background of

cultural distance4. Generally speaking, the impact of cultural distance is understood as

a type of internal uncertainty in managing relationships with local work force,

suppliers, customers and government (Kogut and Singh, 1988; Agarwal and

Ramaswani 1992; Agarwal, 1994; Hennart and Larimo, 1998; Rajan and Pangarkar,

2000, Zhao, et al., 2004). Most scholars have suggested that cultural distance is

positively correlated to joint ownership vis-à-vis sole ownership or lower equity

ownership vis-à-vis higher equity sharing because of the need to utilize the local

partner to handle the issue of managing relationships with the local work force and

other stakeholders. However, two points have to be made about this hypothesis. First,

it has to be clarified that this hypothesis is inconsistent or even irrelevant to TCE

because TCE does not suggest that internal uncertainty yields a lower level of

ownership. Second, to be able to draw this hypothesis, we have to be clear whether we

12

can tell that the internal costs of managing a local partner, who holds considerable

amount of equity and control over the affiliate, is definitely lower than directly

managing local labour force, which, as a collective notion, does not hold any control

over the affiliate. On the other side, even the internal cost could be lower under joint

ownership, we also have to understand whether the internal costs saved by sharing

ownership with a local partner justifies the proportion of profits that have to be shared.

No literature has explicitly conducted a complex cost-benefit analysis. A large

number of failed joint ventures due to internal conflicts between joint ventures

partners in China raised our suspicion about this hypothesis (The Economist

Intelligence Unit, 1997).

In addition, the assumption associated with the hypothesis that MNEs need local

partners can not be accepted as a homogenous characteristic of all MNEs, especially

for those MNEs adopting global strategy to benefit from factor endowments of

different economies. This also can be particularly likely for MNEs in developed

economies expanding into developing countries, where comparatively speaking, there

is neither much need nor opportunity for them to obtain valuable expertise from

indigenous firms. Counter-argument can also be produced for those culturally distant

investors: because information asymmetry resulting from cultural unfamiliarity is

much higher and joint ventures (a very popular form of strategic alliance requiring

private information to build up mutual understanding and trust) can be a hard option

for MNEs from culturally distant countries. Consequently cultural distance, instead of

promoting joint ownership, can actually discourage it.

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A second critical assumption of this hypothesis is that the cultural distance consists of

an invariant and homogenous unit, and therefore is symmetrical (Shenkar, 2001). We

can think of one example of hypothetical cultural distance asymmetry. For instance,

the distance between China and the U.S. may be more disruptive for Chinese MNEs

investing in the U.S. than for U.S. MNEs investing in China. Firstly, considering the

overall economic status of the two countries, there are relatively more domestic

organizations in the U.S. possessing valuable expertise, knowledge and assets. For

Chinese MNES investing in the U.S., this makes them desirable for equity sharing in

order to attain local or non-local knowledge. Secondly, as the other side of the same

coin, the economic status of the U.S. indicates that it represents one of the world’s

most competitive markets, and therefore competition is fierce which can increase the

desirability to cooperate with local partners. These two aspects sum up the necessity

and desirability, ceteris paribus, of establishing joint ventures for Chinese MNEs in

the U.S. market. The opposite is more likely for US MNEs in China. Consequently,

cultural distance can be highly heterogeneous across countries and economies, and

treating it as a symmetrical concept may be misleading.

Thirdly, in the absence of physical distance, some results from earlier studies can be

re-interpreted quite differently. For instance, Hennart and Larimo (1998) found that

Japanese MNEs, compared to Finnish MNEs, are more likely to establish joint

venture with US partners. They attributed this difference to the fact that Japan is more

cultural distant from the U.S., compare to Finland. However, we feel it is difficult to

eliminate the possibility that the result may have something to do with physical

distance between Japan and US (approximate 10878 kilometres), and that of Finland

and the U.S. (approximate 6635 kilometres). The same criticism can be made of

14

towards Sun (1999) and Wei, et al (2005), who attributed their findings that compared

to foreign investors, FDI from Hong Kong and Taiwan has a higher probability to

choose WOS because of the smaller cultural distance. A methodological deficiency

with these studies is that country dummy can proxy, not necessarily exclusively for

cultural distance, but for any other factors that are common to the country. Following

the aforementioned theoretical and empirical scrutiny, we believe no distinctive

relation exists between cultural distance and ownership choices. As such, counter to

previous studies, we develop the second hypothesis as following:

H2: cultural distance has no impact on ownership choices.

Apart from cultural distance studies, the nationality of the MNE has attracted attention

as well (Hennart and Larimo, 1998). Hofstede (2001) developed four dimensions of

cultural characteristics from a cultural study of IBM. Power distance and uncertainty

avoidance are the two dimensions which have received most attention in entry modes

studies. Power distance refers to how societies handle human inequality differently

(Hofstede, 2001). High power distance countries are characterized by elitist culture,

less employee participation on organization’s decision making, and comparatively

authoritarian political system. In contrast, low distance culture countries accept

inequality as an inherent nature of society, but endeavour to build up various

mechanisms to encourage bottom-up information transmission and fair competition.

Relating this to the ownership choices of MNEs, power distance seems to suggest an

inviting force for sole ownership. The other dimension of national character which has

also been studied is uncertainty avoidance. Hofstede (2001) claimed that this

dimension is based on behavioural theory of the firm, “uncertainty about the future is

a basic fact of human life with which we try to cope through the domains of

15

technology, law, and religion” (p. 145). More specifically, uncertainty avoidance

organizational culture is characterized by using rules stemming from past adjustments,

and technologies to stabilize the present and future. Therefore firms from the

countries with higher power distance prefer a higher level of equity ownership in

foreign subsidiaries.

Kogut and Singh (1988) found that, using data of FDI from 12 counties into the U.S.,

MNEs from national cultures characterized with higher level of uncertainty avoidance

are more likely to choose a joint venture or a wholly owned greenfield over an

acquisition to avoid internal uncertainty of binding two entities into one. Erramilli

(1996), Makino and Neupert (2000) found supporting evidence to suggest both power

distance and uncertainty avoidance induce sole ownership relative to joint ventures

based on FDI from 5 and 2 home countries in their empirical tests. However, Hennart

and Larimo (1998) did not find that Japanese MNEs, representing both higher power

distance and uncertainty avoidance scores compared to Finnish MNEs, are more

likely to choose sole ownership structure. We feel there is a need for further research

into entry mode studies. Hence, we suggest the third hypothesis as following:

H3: The greater power distance (PD) and uncertainty avoidance (UA) indicative of

the home base of the MNE, the greater the likelihood that it will use WOS compared

to EJV.

Now we have reviewed the literature of earlier empirical studies on physical distance

and culture related factors affecting ownership choices and below we start refreshing

other institutional and subsidiary related factors that have been studied in previous

investigations to identify the drivers of the increasingly important role of WOS. Since

16

Gomes-Casseres (1990), the influence of institutional factors in host countries has

been considered with regard to ownership choices of MNEs (e.g. Meyer, 2001;

Brouthers and Brouthers, 2003). FDI into China is a pertinent example, because FDI

was subject to significant government control during the 1980s and early 1990s.

Before 1995, policy was largely based on a system of regional preferences and a case

by case evaluation of investment proposals. However, the implementation of the

Provisional Guidelines on Foreign Investment Projects in 1995, one of the most

influential legislation relaxations the Chinese government has ever made since its

open up economic policy, has exerted large a scale impact on the ownership choices

of FDI. A recent study by Morgan and Millington (2005) found that after 1995,

German MNEs are more likely to choose WOS relative to EJV. Therefore we develop

the hypothesis:

H4: MNE will be more likely to establish a WOS than an EJV after the

implementation of the Provisional Guidelines on Foreign Investment Projects in 1995.

Previous studies have also investigated that host country/region experience in

attracting FDI can further promote FDI inflows. Tse, et al (1997) argued that a host

country’s experience in attracting FDI facilitates the adoption of more equity-based

entry modes by MNEs. By gaining experience in working with foreign investors, the

host country learns how to create an attractive and stable investment environment

(Zhan, 2003), and raises the level of confidence of foreign invested firms. Wei et al

(2005) also found the experience of China in attracting FDI is positively related to the

odds of WOS relative to equity joint ventures, joint stock companies and contractual

joint ventures. Although the present study differs from them in terms of the entry

modes studied, it is possible to apply the essential logic of their argument, and

17

therefore we propose that the host country’s experience in attracting FDI promotes

WOSs relative to EJVs. Hence the following hypothesis:

H5: the more experience the host region gains in attracting FDI, the more likely

MNEs are to adopt WOS compared to EJV.

Earlier studies on entry modes also investigated the impact of subsidiary

characteristics. Technological content of MNEs is one of the characteristics that

motivate many governments to attract FDI with various kinds of promotion policies.

According to TCE, as the technological content of the product or process increases,

firms may prefer to internalize their firm-specific advantage because of the difficulties

associated with market failure and the related issues of uncertainty, bounded

rationality and opportunistic reconstructing (Williamson, 1985; Anderson and

Gatignon, 1986). Javorcik (2000) has shown empirically that foreign investors with

more sophisticated technologies are less likely to share ownership with local firms. He

attributed this finding to concerns about knowledge dissipation. Sun (1999) found

that the high technology industry in China is more likely to observe WOSs compared

to equity joint ventures and contractual joint ventures. Meyer (2001) also found that

entrants that transfer technology are more likely to establish WOS to reduce

contractual hazards with local partners. Therefore, the technology content of the

subsidiary seems to be a compelling factor leading to WOS. As such, we propose:

H 6: MNEs categorized as within high-technology industry are more likely to choose

WOS compared to EJV.

The destination of subsidiary sales may also make a difference to the ownership

structure of MNEs. Hennart (1988) suggested that the distribution of a product in a

18

given area requires both physical facilities and an investment in knowledge. The

distributor must establish a reputation through advertising or direct selling, adapt and

produce to local tastes and conditions of use and find out how to price it and learn to

demonstrate and service it. Distribution thus involves set-up costs, which vary from

small to substantial depending on the type of products sold. The importance of access

to distribution channels as motive for both international and domestic equity joint

ventures is apparent from even a cursory reading of the literature. Kogut and Singh’s

(1988) database demonstrated that 42 percent of the joint ventures entered by

foreigners in the U.S. over the 1971-1983 periods are for marketing and distribution,

while Jacque (1986) found that close to 60 percent of U.S. joint ventures were of that

type. Nicolas (1983) also found similar evidence of British MNEs in Australia.

In addition to the theory suggesting the necessity for establishing joint ventures to

attain required local expertise for distribution and marketing, the Chinese case raises

another point. In China, even though foreign MNEs found that local retailers lack the

expertise to sell their products, to set up joint ventures with local firms became

necessary given Chinese regulations preventing foreign invested firms from selling

imported or mixed products (which would typically comprise a mixture of imports

and domestically made goods from different factories) direct to consumers (The

Economist Intelligence Unit, 1997) 5 . For instance, in the consumer electronics

industry, it was found that most MNEs were obliged to entirely rely on local Chinese

agents in the 1980s and early 1990s for their local sales. After being frustrated by the

incompetent and corrupted state monopolized retailing sector, some of MNEs started

efforts to maximize their marketing control by setting up investment and transferring

sales know-how and after-sales service to their Chinese partners, which then act as

19

their agents (The Economist Intelligence Unit, 1997, p. 51). Empirically, Lin and Png

(2003) found that an investment with a larger proportion of sales to the Chinese

market significantly lead to the likelihood of EJV relative to WOS although these

industries’ policies were not discussed in great detail in their study. The compelling

evidence in China suggests that the odds of establishing EJVs, voluntarily or

involuntarily, will be greatly reduced if sales of the affiliates are for export, which

leads to our next hypothesis:

H7: Export-oriented MNEs are more likely to choose WOS over EJV.

A firm’s commitment to its local operation in the host country also has implications

for ownership choices. It can be reflected in two aspects. First is its financial capital

commitment. Investment projects are expected to make the entry choices based on

trade-offs between risks and returns. Additionally, the choices may be determined by

resource availability and need for control (Cespedes, 1988). Agarwal and Ramaswami

(1992) suggested that the mode choice is often a compromise among these four

attributes. A high investment requires the ability of an MNE to secure final resources

and is associated with high risk and return. In general, the larger the resources

committed to the local affiliates, the smaller the probability that a firm will share the

equity (Larimo, 1993; Tse et al, 1997; Hennart and Larimo, 1998). Therefore we

suggest:

H8: MNEs making a large amount of investment tend to prefer WOS to EJV.

In a similar vein, an MNE’s commitment can be reflected by the contractual duration

obtained from the local government. Longer term commitment associated with longer

contractual duration should be positively correlated with WOS since the MNE has full

20

ownership and control over the affiliate while the EJV is also subject to the local

partner’s participation. Pan (1996) found that a foreign parent is more likely own a

50% or a majority share as the EJV contractual duration increases. We apply this line

of thinking in the new context and develop the following hypothesis:

H9: the longer the contractual duration that the MNE obtained from local government,

the more likely WOS will be preferred to EJV.

Data and variable measurement

Data

The Chinese economy is marked by uneven regional development. Judging from the

level of economic development, East China is the most developed, Central China

comes second and West China is trailing behind. Though the broad regional pattern of

FDI basically remains unchanged over the last 2 decades, the distribution within East

China has witnessed some important changes. In the early period of 1979-1982, FDI

was concentrated in the four special economic zones (especially Shenzhen) of East

China. After 1984, this concentration gradually decreased. While the actual

investment share of the south coastal area decreased from a peak level of 81.9 percent

in 1984 to 59.3 percent in 1991 and further to 38.8 percent in 2000, the share of the

central coastal area, increased from 8.0 percent in 1984 to 10.3 percent in 1991 and

further to 27.8 percent in 2000. Jiangsu saw an especially fast growth of foreign

capital inflow. From 1994 on, it became the second largest recipient of FDI in China

(Lai, 2002).

21

The city of Wuxi is the second largest FDI recipient city in Jiangsu6. The data set

draws from confidential government data: A Municipal Government Census of

Foreign Direct Investment in Wuxi 1978-2004. The original data contains a wide

range of information including the capital investment of FDI projects, country of

origin of FDI, the year of entry, ownership arrangement, Chinese and foreign partners

of EJVs, a description of the main business functions of the entity, four-digit

definition of industry, legal owner of the entity, export information, local and central

tax code and telephone and fax information of the entity, etc7.

There are 3087 foreign registered projects, among which 1442 are WOSs and 1645

are EJVs. Appendix 1 shows the year distribution of these foreign projects into Wuxi.

There was no FDI inflow until 1982 in Wuxi, which is consistent with the overall

pattern of FDI into Jiangsu. FDI into Wuxi started accelerating in 1992, which again

confirms the pattern of FDI into Jiangsu. In addition, EJV played the dominant role in

the first half of the time scale and WOS started to catch up from 1995 onwards.

Nevertheless, the increase of EJV is also enormous from 1998 onwards, although the

pace is a little slower than that of WOS, which indicates the legislative relaxation

towards FDI increases overall FDI into the city. Appendix 2 summarizes the industry

distribution of FDI.

There are 66 home countries and regions contributing to the FDI in Wuxi. Home

countries of FDI that each take over 1% of the total FDI are listed in appendix 3,

which reveals that the top 10 countries consist of 87% of the total FDI in Wuxi. Four

countries and regions each contribute to over 10% of the total FDI in Wuxi: Hong

Kong, Japan, Taiwan and the United States, which account for over 64% of the total

22

in Wuxi between 1978 and 2004. The distribution of WOSs and EJVs are fairly even

for FDI from Japan, Taiwan, British Virgin Islands and Singapore. EJVs take a

dominant role in FDI from Hong Kong and Germany. In contrast, WOSs form the

majority of FDI from Australia, U.S. Samoa and South Korea.

Variable measurement

Dependent variable

The dependent variable is ownership arrangement. WOS is assigned with value 1 and

EJV 0 to facilitate a logistic regression analysis of how the independent variables

contribute to the likelihood of ownership choices.

Independent variables

1. Physical distance (PHIDIS)

Lin and Png (2003) argued that monitoring costs might not simply be a linear function

of physical distance. Monitoring may involve a certain degree of fixed costs.

Furthermore in so far as monitoring involves travel, the actual cost of monitoring

should be lower than the costs of surface and air travel (P. 263). As such, we use the

natural logarithm of air miles from the capital city of the foreign country of origin to

Shanghai to indicate this variable8.

2. Cultural distance from China (CULDIS)

Cultural distance is a continuous variable. Using Hofstede’s indices (2001), a

composite index was formed based on the deviation along each of the four cultural

dimensions (i.e. power distance, uncertainty avoidance, masculinity/femininity and

23

individualism) of each country from Taiwan’s ranking. The deviations were corrected

for differences in the variances of each dimension and then arithmetically averaged.

Algebraically, it follows the index from Kogut and Singh (1988):

Where CDj stands for the cultural distance between the jth country and the home

country (China), Iij is the index of the ith cultural dimension (e.g., power distance,

uncertainty avoidance, individuality, and masculinity-femininity), Iih is the cultural

dimension index for the multinational firm's home country (US), and Vi is the variance

of the index in the ith dimension.

The reason for using Taiwan as the base to calculate the ‘distance’ between China and

home countries of FDI is because the data on mainland China is absent from

Hofstede’s indices. While Taiwan and Hong Kong can be potential alternative proxies

of mainland China, Taiwan is chosen due to a few historical and cultural factors. First

of all, compared to Hong Kong, Taiwan uses the same oral language as Mainland

China does. Secondly, while Hong Kong was only returned by the United Kingdom to

Chinese authority in 1997 after over a century’s governance, Taiwan instead has been

governed by the political party which fled from mainland China to Taiwan in 1949.

Even though Taiwan has undergone enormous political change since the late 1980s,

the overall cultural difference between Taiwan and mainland China should still be

smaller than that between mainland China and Hong Kong. Pan (1996), Zhao and Zhu

(1998) also used Taiwan as the base to calculate cultural distance. Although Shenkar

24

(2001) has recommended that Long-term orientation should be supplemented

especially where East-Asian countries are involved in the study, it was not included in

this research because there are too many missing values in the Hofstede (2001) index.

3. National Character (Power distance and Uncertainty Avoidance)

For Power Distance, a two digit numeric value is assigned to the 66 countries or

regions in the data set9 based on Hofstede’s indices (2001). Similarly, for Uncertainty

Avoidance, a two digit numeric value is assigned to the 66 countries or regions of the

data set based on Hofstede’s indices (2001).

4. Host country policy (Policy 1995)

Policy 1995 is a nominal variable, which takes a value 0 if investment took place

before 1995 and 1 afterwards (Morgan and Millington, 2005).

5. Host country experience (EXPER)

The year 1978 is used as the base since China started its program of economic

liberalization and opening to the outside world at that time. For instance, if a foreign

investor launched an investment project in China in 1982, then the observation for the

host country’s experience is 1982-1978=4. This measurement follows (Wei, et al.,

2005).

6. High-technology (HIGHTEC)

High-technology is a nominal variable, which takes a value of 1 for the firm

categorized as high-technology by the government and 0 otherwise. According to the

local government officer, foreign invested firms have to apply high-technology in

25

order to qualify for tax breaks. This ensures that firms have the incentive to apply

whenever they perceive themselves to have high-technology operations and therefore

their incorporation into this category can be a good indicator of the degree of

technology in their local operation.

7. Export (EXPORT)

Export is a nominal variable, which takes a value 1 if over 70% of the subsidiary’

sales are for overseas market and 0 otherwise. This data follows the original data

coding where foreign firms with over 70% of their production for export are assigned

YES and otherwise NO. This is a distinctive advantage with this data set where the

subsidiary-level export proportion has been unambiguously recorded.

8. Financial resource commitment (INVES)

One important limitation of the current data set is that the data do not have the

information on foreign parent firms. This data on the parent firms’ sizes, R&D

intensity and technological capabilities and their experience in international business

are not available. However the amounts of investment into their affiliates can reflect

the parent firms’ financial resource commitment. This measurement follows Pan

(1996) and Wei, et al (2005).

9. Contractual duration (CONTRAC)

Contractual duration is a continuous variable counting the number of years the

permission that foreign projects registered with the local government for their

operation in China. According to what the local government officer explained, the

common situation is that local government encourages firms to apply for longer

26

periods as this show a long-term commitment to their investment. However some

firms choose to apply for a relatively short period as this may minimize exit barriers

in cases where business is declining.

Empirical results

Appendix 4 reveals that the correlations among the independent variables are not

critical. An exception is that between Experience and Policy 1995 with a coefficient

of .703. The potential collinearity of the two variables will be discussed shortly. Table

1 presents the results of estimating a logic model of the determinants of the ownership

choice. The regression coefficients show the impact of the independent variables on

the likelihood of investment through a WOE with positive coefficients indicating

positive correlation with WOS. The model classified 74.1% of the observations,

which is similar to the majority of binary models in previous studies (e.g. Makino and

Neupert, 2000; Brouthers and Brouthers, 2003; Brouthers and Nakos, 2004; etc). Chi-

square from the Ominibus test of model coefficients is 969.971 with 10 degrees of

freedom. The Hosmer-Lemeshow test is 5.893 at .649 significant level. This value is

larger than 0.05 which indicates support for the model.

(INSERT TABLE 1 ABOUT HERE) The impact of physical distance received the expected result. It has a significant and

negative correlation with WOE, which indicates that the further the distance from the

investor’s home country to China, the less appealing it is to set up WOS because the

monitoring advantage associated with WOS reduces. This is one of the strongest

27

predictors of ownership choices. Secondly, the non-significant statistic result supports

our cultural distance hypothesis that there is no relation between cultural distance and

ownership choices. previous studies indicated that cultural distance to be positively

correlated with EJV; however our result shows an opposing tendency, namely a

positive yet insignificant correlation between cultural distance and WOS, which lends

some support to the ‘ownership demanding’ argument.

Neither power distance nor uncertainty avoidance receives the expected result in the

test. The hypotheses on the ‘National Character’ are therefore unsupported. This

finding may echo Hennart and Larimo’s (1998) criticisms of the ‘National Character’

augment that it lacks solid theoretical foundation. Two other studies, Kim and Daniel

(1991) and Pisano (1989) also found that the cultural characteristics of the home

country have no impact on entry strategy. One possible latent reason is that societies

characterized having a particular degree of power distance and uncertainty avoidance

may also have differing economic status. For example, power distance, as manifested

in organizational and institutional structures, also exerts impact on national economic

performance. History has generally suggested that democratic societies perform better

than communist economies, and this can make the MNEs from lower power distance

societies possess stronger firm-specific assets based on relatively superior institutional

infrastructure, which makes sole ownership more likely to exploit their firm-specific

advantage with regard to international expansion. Consequently, the impact of cultural

characteristics on the overall economic status may blur the direct relation between

ownership choices and cultural attributes. This warrants further study to either control

the macroeconomic status of home countries, or to directly control the MNE’s firm-

28

specific advantage as a moderate factor to isolate the causality between cultural

character and entry modes.

The impact of policy change is investigated through the variable Policy 1995. The

result strongly supports the hypothesis that since 1995 the likelihood of WOS is

significantly higher (.000) than that of EJV with the ownership relaxation of

government policy. The strength of the correlation is 4.7, which indicates that foreign

projects entering Wuxi after 1995 are 4.7 times more likely to choose WOS than those

entering Wuxi before 1995. This is the strongest predictor of WOS among all the

tested variables.

Contrary to previous studies, the host regions’ experience is found to be

insignificantly correlated to WOSs, i.e. the hypothesis is not supported. There could

be three possible explanations for the result. One is that the difference between this

model and others (e.g. Wei, et al., 2005) is that government policy is included as an

institutional factor influencing the entry mode choices in the presence of the host

regions’ experience in attracting FDI. Consequently, there is a possibility that the

significant influence of experience in previous studies is spurious and what is at stake

is the institutional change in the host country. A second possibility is that since

experience of the host country and the legislative relaxation often work in the same

direction and with similar pace, there is a substitute effect between the two variables

which renders the insignificant impact of experience in the presence of the policy

variable. Thirdly, some studies, such as Feenstra and Hanson (2003), show that the

region’s experience of attracting FDI attributes to more dispersed ownership structure

between MNEs and local firms because of the ‘thicker market’ effect resulting from

29

longer period of economic opening-up and the associated capability accumulation of

local firms. Consequently, the impact of the host region/country’s experience on

MNEs’ ownership is shown to be inconclusive.

Firms in the category of ‘high-technology’ are not more likely to choose WOS: the

statistics test is insignificant and the direction is actually negative. This hypothesis is

therefore unsupported. Nevertheless, this result is consistent with that of Morgan and

Millington (2005) where German MNEs under high-technology category were not

found to favour WOS. One of the possible reasons is that due to the technology gap

between China and that of investing countries, the technologies that can be classified

as high technology in China are not necessarily the core technologies of the foreign

invested firms, and therefore not correlated with WOS. Another possible explanation

is related to the industry policies in China. In its effort to promote technology

transfers of FDI to the Chinese economy, the Chinese government has been constantly

using a ‘technology for market’ strategy to induce technology transfers from MNEs. It

often encourages MNEs, especially those perceived to possess the desired

technologies, to establish joint ventures with local firms, as joint ventures are believed

to enable genuine technology transfers to the local economy. In return, MNEs can sell

products to the local markets with less strict ‘local sales quotas’, prioritized

distribution services, tax treatment and favourable land prices, etc. As a result, EJVs,

rather than WOSs, can be strongly associated with a high technology content because

of the deliberate government intervention. This might explain why the correlation

between high technology and WOS, counter to our prediction, is negative in our test

and is also negative in Morgan and Millington (2005).

30

The hypothesis on export is supported at .000 significant level. Export-oriented

investment projects tend to choose WOSs over EJVs due to limited attachment with

local markets and limited demand for local knowledge. Similarly, financial capital

investment which indicates the level of commitment of the subsidiary is found to be

significantly correlated to WOE and therefore the hypothesis is supported. Contractual

duration is also found to be positively correlated to WOS at .000 significant level.

This supports the hypothesis that contractual duration indicating a long-term

commitment of the foreign firms is positively correlated with WOS compared to

shared ownership structure.

Discussion

Based on a binary logistic regression the study integrated physical distance and

cultural characteristics with institutional and subsidiary factors to identify the key

drivers leading to the increasingly important position of WOS in Wuxi, P.R. China.

The results first of all suggest that the evolution of ownership choices in Wuxi

between 1978 and 2004 can be substantially explained by changes in the legislative

environment in China. More importantly, physical distance, based on unambiguous

theoretical reasoning, is found to be negatively correlated to WOS. As such we

reclaimed a very important transaction cost variable in studying FDI’s entry modes.

The insignificant statistical result of cultural distance lends support to our criticism of

the conceptual deficiency of this construct. We feel our empirical result can be read

with confidence considering that our data set is superior to previous studies,

particularly to those using dummy country variables and with a very smaller number

of countries. Export is found to be significantly correlated to WOS due to little

31

attachment to local markets and little demand for local knowledge. Long-term

commitment of the affiliate, as reflected in financial capital investment and

contractual duration, are both found to make WOS the preferred ownership structure.

For policy makers, the predominant position of WOS need not be read as a negative

signal. There is reason to believe that with a more liberalized investment environment,

MNEs can choose the ownership structure that is perceived as the most favourable for

their subsidiary operation in China. As shown in the data set, WOSs have a longer

term commitment and heavier investment in their local operations, which should be

beneficial to the host economy. It is also speculated that with a more liberal

investment environment, MNEs will be able to choose local partners that can truly

contribute to their operation, and as such EJVs between MNEs and indigenous firms

will be more stable and more consistent with the partner’s economic rationality, rather

than simply a passive outcome of government intervention. The larger number of

unstable and failed EJVs from the 1980s and early 1990s in China may be replaced by

healthy and successful EJVs in the future.

Some limitations of the research have to be acknowledged. First some important MNE

parent level characteristics are unavailable from the data, such as R&D intensity, size,

and level of multinationality, etc. Nevertheless these factors also received rather

mixed results in previous studies, and may not exert a significant impact on the results

of our study. For instance, the same data problem is also present in Wei et al (2005),

but their statistics test reached good results. Considering the overall fitness of the

statistic model of our study, the results can be read with confidence. Secondly, the

link between the ownership structure and the subsidiary’s performance is not studied

32

due to the non-availability of the data. Notwithstanding the limitations, the paper,

compared with some other studies in the area, has several advantages. The data set is

the most comprehensive city level one regarding the foreign invested firm’s activities

in China available. Good coverage by year from 1982 to 2004, by industry, and by

country of origin all facilitates a robust statistical test. It has systematically tested the

impact of cultural factors and provides new evidence that they do not have profound

impacts on ownership choices of MNEs. In contrast, the new evidence regarding the

impact of physical distance furthers our belief that economic factors, along with

institutional factors, such as legislative relaxation towards FDI, play an indisputable

and significant role in determining the ownership structure of FDI.

33

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38

Table 1: Logistic Analysis of determinants of choice between EJVs and WOSs

B S.E. Wald df Sig. Exp(B) 95.0% C.I.for EXP(B)

Lower Upper Step 1(a)

PHIDIS -.601 .206 8.543 1 .000 .548 .367 .820

CULDIS .094 .058 2.631 1 .105 1.098 .981 1.231 PD -.006 .005 1.741 1 .187 .994 .985 1.003 UA .004 .002 3.535 1 .060 1.004 1.000 1.008 PO95 1.556 .202 59.116 1 .000 4.738 3.187 7.045 EXEPER -.004 .018 .042 1 .838 .996 .961 1.033 HITECH -.239 .203 1.393 1 .238 .787 .529 1.171 EXPORT .459 .119 14.991 1 .000 1.583 1.254 1.997 INVES .513 .070 54.451 1 .000 1.671 1.458 1.915 CONTRAC .055 .003 292.555 1 .000 1.057 1.050 1.063 Constant -1.934 .895 4.665 1 .031 .145

a Variable(s) entered on step 1: PHIDIS, CULDIS, PD, UA, PO95, EXEPER, HITECH, EXPORT, INVES, CONTRACTUAL DURATION.

39

Appendix 1: Year distribution of WOSs and EJVs in Wuxi 1982-2004

Appendix 2: Sector distribution of WOSs and EJVs in Wuxi

Entry modes Total

EJV WOS INDUSTRIES Agriculture and mining 15 11 26 Service10 125 83 208 Foodstuffs 33 30 63 Textiles, clothing and shoes 370 243 613 Paper, wood, woodworking and office

supplies 55 53 108

Chemical products, pharmaceuticals and plastics 345 245 590

Metal products and general equipment manufacturing 338 264 602

Special equipment manufacturing 84 132 216

Vehicle manufacturing 71 69 140 Electrical and electronics equipment

manufacturing 158 254 412

Precision instruments manufacturing 21 24 45

Indigenous products and gift articles 30 34 64

Total 1645 1442 3087

1982 1983 1984 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Entry Year

0

100

200

300

400

Count

Entry modes

EJV

WOS

40

Appendix 3: Top 10 Foreign Direct Investors in Wuxi - Country of origin distribution (by number of entries 1978-2004)

Entry modes Percentage of Total

RANK Country of origin EJV % WOS % 1 Hong Kong 596 69% 271 31% 28.1

2 Japan 254 55% 204 45% 14.8 3 Taiwan 185 47% 205 53% 12.6 4 United States 114 37% 191 63% 9.9 5 British Virgin Islands

94 47% 108 53% 6.5

6 Singapore 88 46% 105 54% 6.2

7 South Korea 36 31% 79 69% 3.7

8 Australia 20 31% 44 69% 2.1

9 Germany 36 63% 21 37% 1.8 10 Samoa 15 31% 33 69% 1.6

Total 1438 1261 87.3 Percentage of total 87% 87% 87.3%

Appendix 4: Correlation matrix among independent variables

Constant Policy 95 EXEPER HITECH EXPORT INVES CONTRAC PD UA PHIDIS Step 1 Constant Policy 95 .152

EXEPER -.283 -.703

HITECH -.005 -.061 .093

EXPORT -.011 -.030 .054 -.026

INVES -.089 .055 .004 -.108 .004

CONTRAC .029 .074 -.084 -.093 .009 -.382

PD -.724 -.007 .010 .001 -.032 -.019 -.043

UA -.663 -.002 -.008 -.027 -.062 .096 -.007 .482

PHIDIS -.871 .007 -.031 -.014 -.016 -.041 -.039 .521 .580

CULDIS .450 -.040 .035 .003 -.013 -.032 -.045 .025 -.353 -.502

41

Endnotes: 1 Although China is the largest FDI recipient country in the developing world, China’s FDI looks very different when expressed in per capita terms. According to The Economist Intelligence Unit (1997), when spread across a population of more than 1.2 billion, FDI in China amounted to only US$ 32 per person in 1996. It is not flattering when compared with countries like Mexico (US$45) and Brazil (US$50). When put up against the world’s leaders in terms of estimated per capita FDI in 1996 - Chiles (US$290), Hungary (US$350), Poland (US$110), and the Czech Republic (US$ 100), China also pales (US$ 26). Therefore it could be misleading or unfavourable to use the real term rather than the comparative indicators in discussing FDI into China because it can cause a misconception that China had taken disproportional FDI. 2 One exception is Morgan and Millington (2005) 3 Some studies, although including a variety of types of entry modes and forms, differentiate them into two opposing groups, such as hierarchical and non-hierarchical forms, and then study the sub-forms within each category respectively (e.g. Pan and Tse, 2000). Such studies are methodologically superior to those treating different forms and modes on as conceptually equal categories. 4 Although labelled with different terms sometimes, such as ‘psychic distance’ (Shawna, 1996; Meyer, 2001) and social-cultural distance (Sun, 1999), this is often called ‘cultural distance’ in most studies. 5 The Economist Intelligence Unit (1997) found that the Chinese government also sets quotas for the proportion of a manufacturing joint ventures output that can be sold in China and wholly owned subsidiaries are often required to export everything they product in China, which makes it a ‘necessary evil’ for MNEs to set up joint ventures to promote their local sales. 6 Data access to the city of Suzhou, the largest FDI recipient city in Jiangsu did not succeed. The advantage of using Wuxi is that it is similar with Suzhou in a wide of range of indicators, such as its economic development, size, population and geographical location. 7 An agreement that the data will be used only for non-commercial research conduct was reached with the local municipal government for the use of the data. Its generous support is also acknowledged here. 8 There is no international airport in Wuxi, which makes using Shanghai as a proxy easier to find out the air miles between the capital cities of home countries of FDI and Wuxi. The physical distance between Shanghai and Wuxi is only around 60 miles, which makes it unlikely to cause distortion by using Shanghai as its proxy. 9 Some countries and regions are absent from the IBM database, such as Brunei, Myanmar, Luxembourg, Hungary, Poland, Russia, Kazakhstan, Belize, Paraguay, Bermuda, Tonga, Tuvalu, and other Pacific islands. 10 Service includes electricity, gas and water supply; construction service; transportation service; computer service; retail and wholesale; hotel and restaurants; real property; scientific research and technology service; environmental and public facilities service; education and culture and entertainment.

42

University of Bath School of Management

Working Paper Series Past Papers

School of Management

Claverton Down Bath

BA2 7AY United Kingdom

Tel: +44 1225 826742 Fax: +44 1225 826473

http://www.bath.ac.uk/management/research/papers.htm

2005

2005.01 Bruce A. Rayton Specific Human Capital as an Additional Reason for Profit Sharing

2005.02

Catherine Pardo, Stephan C. Henneberg, Stefanos

Mouzas and Peter Naudè

Unpicking the Meaning of Value in Key Account Management

2005.03 Andrew Pettigrew and Stephan C. Henneberg

(Editors)

Funding Gap or Leadership Gap – A Panel Discussion on Entrepreneurship and Innovation

2005.04 Robert Heath & Agnes Nairn

Measuring Affective Advertising: Implications of Low Attention Processing on Recall

2005.05 Juani Swart Identifying the sub-components of intellectual capital: a literature review and development of measures

2005.06 Juani Swart, John Purcell and Nick Kinnie

Knowledge work and new organisational forms: the HRM challenge

2005.07 Niki Panteli, Ioanna Tsiourva and Soy Modelly

Intra-organizational Connectivity and Interactivity with Intranets: The case of a Pharmaceutical Company

2005.08 Stefanos Mouzas, Stephan Henneberg and Peter

Naudé

Amalgamating strategic possibilities

2005.09 Abed Al-Nasser Abdallah Cross-Listing, Investor Protection, and Disclosure: Does It Make a Difference: The Case of Cross-Listed

Versus Non-Cross-Listed firms

2005.10 Richard Fairchild and Sasanee Lovisuth

Strategic Financing Decisions in a Spatial Model of Product Market Competition.

2005.11 Richard Fairchild Persuasive advertising and welfare in a Hotelling market.

2005.12 Stephan C. Henneberg, Catherine Pardo, Stefanos Mouzas and Peter Naudé

Dyadic ‘Key Relationship Programmes’: Value dimensions and strategies.

43

2005.13 Felicia Fai and Jing-Lin

Duanmu Knowledge transfers, organizational governance and knowledge utilization: the case of electrical supplier

firms in Wuxi, PRC

2005.14 Yvonne Ward and Professor Andrew Graves

Through-life Management: The Provision of Integrated Customer Solutions By Aerospace Manufacturers

2005.15 Mark Ginnever, Andy McKechnie & Niki Panteli

A Model for Sustaining Relationships in IT Outsourcing with Small IT Vendors

2005.16 John Purcell Business strategies and human resource management: uneasy bedfellows or strategic partners?

2005.17 Richard Fairchild Managerial Overconfidence, Moral Hazard, and Financing and Investment Decisions

2005.18 Wing Yee Lee, Paul Goodwin, Robert Fildes,

Konstantinos Nikolopoulos, & Michael

Lawrence

Providing support for the use of analogies in demand forecasting tasks

2005.19 Richard Fairchild and Sasanee Lovisuth

Product Differentiation, Myopia, and Collusion over Strategic Financing Decisions

2005.20 Steven Brammer, Andrew Millington & Bruce

Rayton

The Contribution of Corporate Social Responsibility to Organisational Commitment

2005.21 Richard Fairchild and Ganggang Zhang

Repurchase and Dividend Catering, Managerial Myopia, and Long-run Value-destruction