Regional Determinants of MNE’s Mode of Entry in Mainland China

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Regional Determinants of MNE’s Mode of

Entry in Mainland China

Wu Wenwen (1832654)

Supervisor: Dr. C.Dorrenbacher

Referent: Prof. dr. S. Beugelsdijk

Faculty of Business and Economics

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Table of contents

Abstract... 3

Introduction... 4

Literature review... 5

Entry mode choice from the perspective of parent company (ownership)... 10

MNE’s strategy ... 10

MNE’s size... 11

International experience... 12

Industry factors ... 13

Entry mode choice from the perspective of host country (Location)... 14

Market potential ... 15

Level of governmental intervention ... 15

Environmental uncertainty... 16

Cultural distance ... 17

Location factors in China and FDI entry mode... 18

Different entry modes concerning different regions in China... 19

Hypothesis Building ... 24

Market size... 25

Market growth... 26

Level of openness ... 27

Infrastructure... 27

Resources and labor cost... 28

Tax preference ... 29

Data and methodology ... 30

Data... 30

Model ... 31

Results and discussion ... 33

Table 4: The regression result of FDI entering with joint ventures... 34

Table 5: the regression results of FDI entering with wholly owned enterprises ... 35

Conclusion ... 38

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Abstract

At present, many existing literatures have explored the location choice of foreign direct investment in China. However, these studies did not pay attention to the displayed characteristics on FDI entry mode choices in different parts of China. Due to the imbalanced development of economics, infrastructure, labor force, laws and regulations in different regions, there is great disparity within the areas, which will affect the entry mode choice of multinational corporations. This paper analyzes several regional factors which may have influence on the FDI entry mode, and discusses what is their impact? The empirical results indicate that the regional disparity will affect the MNE’s entry mode choice; wholly owned subsidiaries are mainly located in eastern areas where investment climate is better. Moreover, the different impacts of regional factors have been examined. Wholly owned subsidiary is positively related to market size, market growth, level of openness, and tax incentives while joint venture is more sensitive to infrastructure and labor costs.

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Introduction

As a result of the booming economy and the expansion of globalization, it is an inevitable trend that more and more enterprises are going abroad, seeking for greater opportunities to enlarge their business scale and gain profit. The dynamics of the world economy and global competition patterns are encouraging multinational enterprises (MNEs) to expand into emerging economies (Luo, 2001). In the environment of globalization, China also involves in international market. Since 1979 China adopted the so called “open door policy”, transformed from planned economy to market economy, its vast natural resources and cheap labor force have attracted investors all over the world. After seven years, it has become the world second largest FDI market follow after the United States. Huge foreign capital inflows have pushed fast growth of China’s economy and brought other benefits such as creating jobs and bringing many newest technologies into the country. Especially after 2001, China’s WTO accession contributes to a fast growing amount of foreign direct investments (FDI). But in China, the distribution of FDI shows remarkable imbalance between the three different economic zones (coastal/eastern, middle and western), 90% of the FDI flows to coastal and middle areas. Many existing literatures discussed the reason for the disparity (Luo, Brennan et al, 2008; Fujita and Hu, 2001; Chien-Hsun Chen, 1996). However, most of the articles fail to analyze the regional determinants in China and their impact on the MNE’s entry mode choice.

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In the following section, I will first review some relevant literatures relating to multinationals’ entry mode choice, using the OLI (ownership, location, internalization advantage) model introduced by Dunning and transaction cost theory as the base to analyze the related articles. Moreover, the regional factors which may affect the entry mode choice and the actuality of regional disparity in China will be discussed, then I will come up with some hypothesis regarding to the regional determinants in China and MNE’s entry mode choice. Moreover, in the data and methodology part I will use secondary data to analyze the actual impact of the discussed influencing elements and present the results and discussion.

Literature review

When a multinational enterprise decides to invest equity in a foreign country, it faces at least two important decisions; first of all, it should decide whether to set up a new foreign operation from scratch (Greenfield investment) or to buy equity share in an exited foreign entity and engage in acquisition, greenfield investment and acquisition are known as establishment mode. Secondly, the MNE should also consider whether to run the business alone or to do it with a local partner, such decision between wholly owned subsidiary and joint venture is referred to as entry mode choice.

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and risks when they invest in different locations, for instance, if the market growth and market potential in the country of entry is high, MNEs tend to choose full ownership in order to receive long-term profitability, and similarly, if the perceived risk is high, a joint venture will be preferred.

Another most widely accepted theory regarding the entry mode choice is transaction-cost theory. Transaction-cost theory emphasizes economics efficiency and cost-effectiveness when consider international investment. According to this theory, multinationals should choose the entry mode and run their foreign business at the basis of minimizing possible transaction costs. Several factors affect the transaction costs, for instance the costs of monitoring and enforcing the contract, and the existence of transaction-specific assets (Williamson, 1975).

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Table 1

Perspective Author

Parent company Location

Transaction cost theory MNE’s strategy MNE’s Size International Experience

Industry factor Market potential Government intervention Environmental uncertainty (risk) Cultural distance Is TCE theory included? (yes/no)

Gil, Nakos, Brouthers&

Brouthers (2006) √ √ √ √ √

Anne-Will Harzing

(2002) √

Brouthers and Brouthers

(1999) √ √ √ √

Aganval and

Ramaswami (1992) √ √ √ √

Brouthers & Brouthers

and Werner (1996) √ √ √ √

Kogut and Singh (1988) √ √ √ √

Padmanabhan and Cho

(1999) √

Dikova and

Witteloostuijn (2007) √

Luo (2001) √ √ √

Brouthers & Brouthers

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Perspective Author

Parent company Location

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Entry mode choice from the perspective of parent company (ownership)

The choice between wholly owned subsidiary and joint venture is essential for a multinational enterprise when it start to invest in foreign countries. In accordance to Dunnig’s OLI model, from the perspective of parent company, there can be several considerably important aspects that affect the entry mode decision of a MNE.

MNE’s strategy

In order to accomplish a firm’s international expansion, the international strategy the firm performs must be taken into account when making choice between wholly owned subsidiary and joint venture.

According to Gil, Nakos, Brouthers& Brouthers (2006), country-specific strategy will influence the multinational’s entry mode choice. They investigate western firms’ investing in central and eastern European (CEE) market and three country-specific strategies are identified to have impact on MNE’s entry mode choice when entering emerging market, respectively market-seeking strategy, client following strategy and resource seeking strategy. In accordance with market-seeking strategy, investors aim at increasing market share and maintain market growth by seeking new customers in foreign market; they found that firms pursuing market-seeking strategies preferred to establish their new ventures through wholly owned subsidiaries. With regard to client-following strategy, firms seek to protect their relationship with existing customers abroad by following the customer base across boarders, and the authors suggested that joint ventures are less likely to be used by firms pursuing client-following strategy. Concerning resource-following strategy, resource-seeking investment involves obtaining new sources of competitive advantage by seeking access to lower cost and/or scarce resources. Obviously, firms pursuing different strategies have diversified point of emphasis when investing in a foreign market; therefore, the entry mode will be different.

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acquisition and Greenfield, the importance of international strategy can not be ignored. Harzing distinguishes two types of a firm’s international strategies: “global” strategy and “multinational/ multidomestic” strategy. According to Harzing, Global strategies are characterized by a high level of globalization of competition with national product markets being interconnected and a focus on capturing economies of scope and scale. While on the other hand, multidomestic strategies are less concerned with global activities, rather, multidomestic companies will tend to act on the domestic level, such as adapting products and policies according to the local market. If a firm pursues global strategy, it is likely that the firm will internalize its firm-specific advantages to integrate a standard business mechanism and reach economics of scale; in this case, a higher level of control over the subsidiaries will be preferred. On the other hand, if multidomestic strategy is adopted, the firm aims at compete predominantly on a domestic level, while adapting products and policies to various local markets. In such circumstance, the parent company does not need to control over its subsidiary very tight. It can be concluded that firms pursuing global strategy need higher level of control than firms following multidomestic strategy. Applied to entry modes, wholly owned subsidiary is preferred by firms adopt global strategy and joint venture is favored by firms follow multidomestic strategy.

MNE’s size

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asset includes the resource and managerial ability of a firm, larger size allows firm to engage in more extensive international activities. Previous studies suggest that firm’s size is positively correlated with its propensity to enter foreign markets in general, and to choose sole and joint venture modes in particular (Aganval and Ramaswami, 1992). Firms that are larger and have more experience will be more mature globally and will be better able to utilize their ownership advantages and will thus choose high control modes of entry (Aganval and Ramaswami, 1992; K.D.Brouther, L.E. Brouther and Wener, 1996).

International experience

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and their findings show that more experienced Japanese companies tend to prefer high control entry mode to transfer their already developed daily routines and vice versa.

Agarwal and Ramiswami (1992), integrate measures of ownership, location and internalization advantage in their study of the US equipment leasing industry. The result of their study suggests that firms with little multinational experience are not expected to have sufficient skills and abilities to enter a large number of markets, thus joint venture allows them to share cost and risks, as well as gain skills and experience with local partner.

Brouthers and Brouthers (1999) classify the multinational experience of a firm as the intangible asset of the firm, they suggest that firms with more multinational experience are tend to choose high level of control to convey their experience and daily routine, applied to entry mode, wholly owned subsidiary will be preferred in this case. In another article also written by Brouthers and Brouthers (1996), the authors state that experienced firms tend to use more integrated entry modes, under which the firm develops its own manufacturing, sales and services in the target market; whereas less experienced firms use independent modes.

Industry factors

Firms in different industries have diverse characteristics and their targeted market and customers are also distinct, therefore, to choose the right entry mode concerning different industries is worth thinking.

l Manufacturing/service

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investment-intensive nature of manufacturing industry make it respond to environmental uncertainty sensitively when choosing entry mode, services may be influenced by behavioral uncertainties. Erramilli and Rao (1993) suggest that at the stage of new venture formation, service firms may react differently than manufacturing firms. They suggest that service firms may prefer joint ventures in situations where manufacturing firms may use wholly owned subsidiaries

l R&D/Advertising

Kogut and Singh (1988) suggest that, firms from R&D-intensive industries might joint venture if they possess the requisite technologies but lack the marketing depth. Dikova and Witteloostuijn (2007) studied foreign investors’ entry into CEE countries using an integrated framework of dual entry-establishment mode choice, the frame work combines both entry mode (wholly owned/joint venture) and establishment mode (acquisition/greenfield) concerning FDI in Central Eastern European countries. In the paper they include advertising intensity as a control variable for their research. They state that advertising campaign calls for abundant knowledge about local customs and consumer behavior and their finding show that advertising intensity is positively related to the possibility of enter through a shared-ownership.

Entry mode choice from the perspective of host country (Location)

The above factors which influence the MNE’s foreign market entry mode choice are viewed and discussed from the perspective of the parent company, both at company level and industry level. The location advantage discusses the specific characteristics of the host country that may influence the entry mode choice of MNEs. Host country specific locational factors include host country government policies, economic, financial and foreign exchange regulations, as well as other factors related to local resources (Low and Jiang, 2006).

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characterized such market attractiveness into two aspects: market potential and investment risk.

Market potential

Market potential includes market size and market growth, the market size is one of the pivotal considerations when making FDI decisions. Numerous empirical studies have tested the positive relationship between market size and its attractiveness to FDI, when the national market size is big enough to make production more cost-effective, foreign investors are likely to enter the market by full ownership, furthermore, a larger market size enables the foreign investors to enter the market with lower cost and ensure investors to attain economic of scale (Zhao and Zhu, 2000).

In high market potential countries, investment modes are expected to provide greater long-term profitability to a firm, compared to non-investment modes (e.g. licensing and franchising), through the opportunity to achieve economies of scale and consequently lower marginal cost of production. Even if scale economies are not significant, a firm may still choose investment modes since they provide the firm with the opportunity to establish long-term market presence.

Level of governmental intervention

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because of cultural constrains, therefore, Luo concluded that when the perceived governmental intervention is high, MNEs tend to choose joint ventures other than wholly owned subsidiaries.

Gomes-Casser, B (1990) studied the MNE’s entry mode choice using an integrated framework of firm’s ownership preference and host government restrictions. In his paper, the author emphasized the importance of government ownership restrictions on a MNE’s entry mode choice. When host government imposes certain restrictions on foreign ownership, investors must make concessions and trade-offs in order to get their preference to the best of their abilities. That means if the bargaining power of local government is strong, MNEs will face greater difficulty when determining ownership structure. In order to buffer the possibly unfavorable influence of host government’s bargaining power, a joint venture can be used.

Environmental uncertainty

The investment risk in a host country reflects the uncertainty over the continuation of present economic and political conditions and government policies which are critical to the survival and profitability of a firm’s operations in that country (Agarwal and Ramiswami, 1992).

In emerging economies, investors often suffer from frequent changes in regulatory framework and interference from government officials. Moreover, assorted components in the national environment changes overtime and are hard to predict (Luo, 2001). The environmental uncertainty can not be neutralized easily as other risks such as contractual risk. Since the uncertainty and risks which is embedded in the contextual environment are not controllable by firms, therefore, as the environmental risk of the host country increases, firms would choose lower levels of equity ownership.

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mode. He states that the investment risk is associated with the uncertainty of different host country’s economic, legal, political systems, and market attractiveness, and suggests firms are likely to enter markets which are less risk and more attractive. Thus, when entering into more stable countries wholly owned subsidiaries will be preferred so as to achieve high return on investment, however, joint ventures are favored when firms enter into countries characterized by high investment risk and environmental uncertainty.

Cultural distance

Cultural distance indicates the differences in culture between the one country and another country, when cultural distance is large, one may perceive great maladjustment. In the same way, when the culture difference between the targeted country of investing and parent country is remarkable, the risk of investment increases, therefore, MNEs may choose shared ownership to reduce the risk, and vice versa. Brouthers and Brouthers (1999) find out that when firms enter markets with small culture distance, they prefer to choose the entry mode with high level of control because the perceived country risk is low, so as to maximizing their firm-specific advantage. On the contrary, if firms enter into markets with large cultural distance, they are likely to opt for the entry mode with low level of control in order to minimize the perceived high country risk.

Kogut and Singh (1988) studied the impact of national culture on the entry mode choice of organizations using a multinomial logit model, they investigated 228 entries into the United States. The authors state that uncertainty has a significant influence on the decision of FDI entry, such uncertainty has been interpreted and one interpretation

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Location factors in China and FDI entry mode

In recent years, because of the continuously economic growth in China, the abundant natural resources and cheap labor, and favorable governmental policies, China has been the second largest FDI market since 1993. The situation of FDI in China has received great attention from academia; empirical studies already discuss many aspects concerning the foreign direct investment situation in China.

Luo (2001) analyzes the MNE’s entry mode in emerging markets using an integrated framework linking entry mode selection with contingencies at the country, industry, firm, and project levels. And he finds out that in emerging market, for example, China, the level of governmental intervention, the level of property rights protection, environmental uncertainty perceived by managers are positively related to a MNE’s choice of using joint venture as entry mode, while host country’s sales growth and growth of number of firms will be positively related to the MNE’s choice of using wholly owned mode to enter.

Many other studies also have similar findings with Luo (2001). For instance, Y. Wei, B. Liu and X. Liu (2005), investigate 10607 foreign invested firms in China using transaction cost theory. With regard to location-specific factors, they find out that the more experience the host country gains in attracting FDI, the more likely the foreign investors adopt wholly-owned subsidiaries, and a preferable specific location (e.g. greater market, large number of customers, better economic structure and etc.) encourages foreign investors to choose WOEs.

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that each one of the three main regions (coastal, middle and western) in mainland China has different characteristics and conditions which influence foreign investors’ locational choice of FDI, 90% of the FDI are located in Coastal regions; she also investigated how the locational elements in China affect the FDI distribution. Results show that potential for market extension, allocative efficiency, transportation linkages are positively related to FDI; labor cost is negatively related to FDI. In another article written by Linda F.Y. Ng and Chyau Tuan (2003), by investigating empirically the spatial location development of foreign direct investment (FDI) in Guangdong in the context of a core-periphery system (CPS) using firm (micro)-level data, they studied the location decisions of manufacturing FDI in China, they suggest that natural geographical hardship transmitted in the form of transaction costs affects firm location choice.

Nevertheless, there are abundant articles on the location factors in China and the FDI entry mode, but these articles discuss the Chinese market as a whole, very few studies pay attention to the influence of regional disparity in China on FDI entry mode choice. Although some articles talk about the regional disparity, they fail to analyze the impact of such difference on the entry mode choice of multinationals. In the next section, I will discuss some of the regional differences between the three main economic areas in China and their influence on the FDI entry mode choice.

Different entry modes concerning different regions in China

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hand, these five provinces and cities also show the highest rate of having wholly-owned FDI at the same time (Hainan, 73.1%; Fujian, 70.8% 9; Tianjin, 63.19 percent; Shanghai, 48.43 percent; Guangdong, 46.36% respectively). Simultaneously, in terms of the number of projects, the provinces and cities that possess the highest proportion of joint ventures are as follows: Shanxi (75.21%), Xinjiang (74.79%), Hebei (74.53%), Henan (71.50%), and Inner Mongolia (70.05%), these places have more than seventy percent of joint venture as FDI entry mode. Again, the above five provinces are also the districts that attract least wholly-owned FDI inflows, Shanxi, 15.27%; Xinjiang, 17.55%; Hebei, 18.09%; Inner Mongolia, 20.18%; Henan, 20.61%. Apart from these districts, most of the provinces and cities have the proportion of joint venture projects in a percent between 40 percent and 70 percent, and the number of wholly-owned projects accounts for 30% to 45%.

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Number of Projects (%) Contractual Amount (%) Actual Amount (%) Districts Joint Venture Contractual Joint Venture Wholly-owned Joint Venture Contractual Joint Venture Wholly-owned Joint Venture Contractual Joint Venture Wholly-owned Beijing 57.03 9.20 33.59 39.31 29.20 29.36 38.11 25.00 32.96 Tianjin 33.12 3.70 63.19 33.63 11.70 54.80 53.25 3.75 42.99 Hebei 74.53 7.38 18.09 58.08 19.06 22.74 67.17 14.98 17.75 Shanxi (m) 75.21 9.52 15.27 56.38 26.07 17.55 28.36 54.65 16.99 Inner Mongolia 70.05 8.65 20.18 45.53 30.21 22.35 49.71 14.37 25.64 Liaoning 62.62 8.30 29.01 50.74 14.64 33.65 52.55 9.61 36.05 Jilin 54.39 6.98 38.60 55.05 15.84 28.49 69.23 9.41 21.14 Heilongjiang 55.91 5.17 38.91 55.85 17.45 25.83 64.44 9.82 24.54 Shanghai 35.90 15.53 48.43 37.61 16.05 44.09 42.77 16.63 38.49 Jiagsu 58.01 4.65 37.25 33.68 5.73 60.43 40.55 5.53 53.64 Zhejiang 64.97 3.36 31.64 42.24 6.36 51.29 48.37 6.48 44.94 Anhui 61.62 5.97 32.35 47.31 12.94 38.55 55.67 12.34 29.98 Fujian 24.92 3.56 70.89 18.86 7.51 73.90 25.68 8.46 65.45 Jiangxi 49.29 6.38 43.94 34.77 9.28 54.92 40.65 7.72 50.56 Shandong 50.74 4.43 44.81 37.93 10.14 51.60 43.39 8.67 47.17 Henan 71.50 7.77 20.61 54.06 22.09 23.68 55.65 19.12 22.92 Hubei 62.18 4.93 32.86 51.45 14.90 33.43 60.27 9.45 29.44 Hunan 53.46 9.43 37.09 33.56 21.97 44.44 49.76 13.30 36.92 Guangdong 30.73 22.89 46.36 24.96 30.59 42.02 29.80 30.13 38.74 Guangxi 53.61 14.84 31.51 39.41 23.13 37.27 44.21 20.35 33.62

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Note: eastern regions include 12 provinces and municipalities (Liaoning, Hebei, Tianjin, Beijing, Shandong, Jiangsu, Shanghai, Zhejiang, Fujian, Guangdong, Hainan and Guangxi); middle areas cover 9 provinces and autonomous regions (Heilongjiang, Jilin, Inner Mongolia, Shanxi (m), Henan, Anhui, Hubei, Hunan and Jiangxi); western areas insist of 9 provinces and autonomous regions (Shanxi (w), Gansu, Ningxia, Sichuan, Yunnan, Guizhou, Qinghai, Xinjiang and Tibet).

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Hypothesis Building

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market extension, labor cost, allocative efficiency and transportation are important factors that affect the FDI location choice in mainland China. In this paper, I propose that there might be six reasons that affect FDI entry mode in different economic regions within China, these elements including the market potential (market size and market growth rate), the economic growth rate, the opening level, the infrastructure factor, the labor force factor and the tax preference.

Market size

First of all, the market size is one of the most important factors in determining FDI. Brouthers K.D., Brouthers L.E. and Werner (2007) state in their paper that the market size and market potential are the two key factors relate to demand uncertainty. It is proposed that, the market demand will be higher in places where market size is big than places where market size is small. Thus, the uncertainty of market demand will be lower in places where market size is big. According to transaction cost, invest in places where the perceived market uncertainty is high, MNEs tend to choose joint ventures to reduce cost and probable risks. Furthermore, in areas where the market size is big enough, it is easier for the multinational corporations to find partners, but it also means a more fierce market competition. Therefore, under a more developed market economy environment, the multinationals are more likely to transfer their advanced technology and other specific resources to compete in the market. In this circumstance, a wholly-owned subsidiary will be preferred. Here, I anticipate that market size is more important to wholly-owned enterprises.

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capacity is weak. Another issue is that the economic aggregate in this region is quite limited, per capita incomes and the level of consumption are low. The GDP in the western region in 2001 accounted for only 17%, the national per capita income is only 42% of that of the eastern region. As a result of the imbalanced economic development situation, the market demand is very small. And therefore, the risk of investing in western area will be higher than investing in coastal and middle areas. Combined with the above discussed elements, hypothesis 1 can be drawn:

Hypothesis 1: market size is more important for MNEs to choose full ownership as

entry mode, when entering Chinese market investors tend to prefer wholly-owned subsidiary in eastern area and joint-venture in western region.

Market growth

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effect on the FDI entry mode choice, and has greater impact on wholly-owned subsidiaries.

Hypothesis 2: the economic growth rate in China will affect MNE’s entry mode

choice, and wholly owned subsidiary respond more sensitive to market growth.

Level of openness

The opening level of an area determines whether the level of economic management in this area is geared to international standards; it also determines whether the products that are produced in the area have a reliable and effective distribution channels to foreign markets; moreover, it represents the acceptance of foreign capital of the local government, companies and residences. In other words, in areas with higher opening level, the investment environment will be better in line with international norms, thus the uncertainty of foreign investments which arise from the gap of the social economic background between both sides is lower. The transaction cost of such investment in areas with high opening level will be lower than in areas with low opening level, at the same time multinationals are more likely to invest resources that have high degree of exclusivity. In line with the above arguments, I propose that

Hypothesis 3:the open level is more important to the wholly owned subsidiary, and when entering China, foreign investors are more likely to set up wholly owned enterprises in eastern regions than in western regions.

Infrastructure

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and Mody (1992) defined agglomeration effect as the interaction effects of well developed infrastructure, levels of industrialization and the level of usage of foreign investment. And found that agglomeration economies in developing countries will influence the location choice of the U.S. companies. In areas where basic infrastructure is well developed, it is easier for multinationals to get access to better market, well educated labor force and etc., thus improve the investing climate for FDI. Such advantage will in turn reduce cost and investment uncertainty for multinationals (Nagesh Kumar, 2001; Amy Glass). Therefore, I propose that:

Hypothesis 4: infrastructure has an effect on the entry mode choice and has greater

impact on wholly owned subsidiaries.

Resources and labor cost

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western area. Thereby, I suspect that:

Hypothesis 5: labor cost is more important to wholly-owned enterprise, regarding

labor cost, joint ventures are preferred over wholly owned enterprises in western region.

Tax preference

The host government’s policies can considerably influence the ownership structure of foreign subsidiaries. For instance, if the host country government practices a more favorable tax policy on joint ventures, other things being equal, the MNEs are more likely to choose joint ventures when investing in that country (Haishun Sun, 1999). According to the regulations of the National People’s Congress and its Standing Committee and the State Council of China, there are 14 taxes applicable to the enterprises with foreign investment, foreign enterprises and foreigners in China now. these taxes includes VAT, consumption tax, business tax, income tax with foreign investments(joint venture) and foreign enterprises(wholly owned subsidiary), and etc. In order to better open to the outside world and encourage inward flow of funds, China offers numerous preferential treatments in foreign taxation, and has set up special economic zones, coastal open cities, economic and technological development zones, high-technology industrial development zone, bonded area, as well as provincial-level economic development zones and other areas where there are tax incentives for foreign investors. For example, China’s Foreign Enterprise Income Tax (FEIT) is a tax levied on the income of the enterprises with foreign investment and foreign enterprises, this tax is applied to the enterprises with foreign investment, including Chinese-foreign joint ventures, wholly foreign funded enterprises. . In special economic zones, a special tax preference of 15% is applied to foreign direct investments rather than a normal tax rate of 33% (Haishun Sun, 1999). Since the tax incentives are the same concerning both joint ventures and wholly owned subsidiaries, I propose that:

Hypothesis 6: in China the tax incentives practiced by government has positive effects

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Table 3 shows the dependent and independent variables which I am going to investigate:

Table 3 Summary of variables chosen

Dependent variable: FDI entry mode (influence on MNEs choosing Wholly owned enterprise) Independent variable Influencing elements Anticipated influence Independent variable Influencing elements Anticipated influence

GDP Market scale + GROW Economic

growth

+

OPEN Degree of

openness

+ WAGE Labor unit

costs

-

ROAD Infrastructure + TAX Tax

preference

+

Data and methodology

Data

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provinces and cities comes from the “China Statistical Year Book” published each and every year.

Model

Based on the hypotheses discussed above, there are six independent variables, respectively GDP, economic growth rate, infrastructure, level of openness, wage and tax preference in the various provinces and cities of China. On the other hand, the dependent variable of this article is the entry mode of foreign direct investment in different places in China, in this study, the joint ventures and wholly owned enterprises. Inline with the theoretical hypotheses, the following regression equation can be drawn:

Ln(JV

it

OrWFOE

it

)

2. WFOEit: the contracted amount of FDI which choose to be wholly owned enterprises in various provinces and cities in China, data collected from “China Foreign Economic and Trade Yearbook”,

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collected from “China Statistical Year Book”,

4. GROWit: the economic growth rate of each provinces and cities, indicated by the GDP growth rate of comparable price, data collected from “China Statistical Year Book”

5. ROADit: the basic infrastructure of diverse provinces and cities, represented by the density of roads and highways in the end of each year of the different places, data collected from “China Statistical Yearbook”,

6. OPENit: the level of opening up of provinces and cities, expressed by the percentage of contracted FDI amount account for the GDP amount of each year. In order to make the two comparable, the agreed FDI amount is to be converted into Chinese Yuan; the annual exchange rate is replaced by the average exchange rate of each year. In which the data of the amount of contractual FDI of the various provinces and cities is from "China Foreign Economic and Trade Yearbook", the data of exchange rate and GDP are from "China Statistical Yearbook" of each year,

7. WAGEit: labor cost of various provinces and cities, represents by the ratio of the average wage of workers of each provinces and cities to the average wage of workers of the nation, data collected from “China Statistical Yearbook”,

8. TAXit: tax incentives, expressed by the preferential tax indices. In order to calculate the tax incentives indices, the first step is to fix the tax incentives index base. Because the period of this study is 1993-2003, the initial base value for tax preference in 1993 is set to 1. Subsequently in 1995, 1997 and 2002, China promulgated a new “provisions and catalogs to guide the direction of foreign direct investment” which poses a new preferential tax policies every time, and therefore add 1 to the base value of tax incentives in the above mentioned years. It is thereby established the index base of tax incentives in all regions: from 1993 to 1995 is 1, 1995 to 1997 is set as 2, from 1997 to 2002 is 3 and after 2002 the indices is 4.

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are legal to enjoy tax preferences; these are economic and technological development zones, high-tech industrial development zones and bonded areas. Although the tax incentives level in these areas is the same, the scope of coverage is different, the Economic and Technological Development Zone, the most extensive; the tax incentives level of high-tech industrial development zones and bonded areas decline correspondingly. So in this study, the tax preference index of the above mentioned three kinds of open areas is set at level 3, 2, 1. Special economic zones in all open areas has the highest tax incentives level, here the tax preference index of such area is set to be level 4. So long as each provinces and cities have an open area mentioned above in one year, adds the corresponding tax preference level to its tax incentives index. Finally, add on the tax incentives base value and the tax incentives level of each year and each provinces and cities can we get the tax incentives index.

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Table 4 and Table 5 show the regression results of FDI entry into various provinces and cities in China using joint ventures and wholly owned enterprises, both results have significant coefficients on some variables that have been tested.

First of all, same as the previous theoretical assumptions, this regression analysis found that market size is more important to the wholly-owned enterprises when investing in China. The coefficient of GDP variable in the model of both joint ventures and wholly owned enterprises in are positive, and are strongly significant, but the coefficient in wholly-owned enterprise model is 1.629, while in the joint venture model is 1.220, which indicates the location choice of wholly owned enterprises is the more sensitive to market size.

Second, in areas with fast-growing economy, multinational companies tend to choose joint ventures when entering into China. The economic growth rate variable in the two models are significantly negative, but the number in wholly-owned enterprise model is -0.978, while in the joint venture model is -0.628, indicating that the location choice of wholly owned enterprise is more sensitive to the economic growth rate of a region. This result is inconsistent with the argument of Gomes-Casser (1990), but is constant with the arguments of Nakos and Brouthers K.D. (2002); Brouthers L.E, Brouthers K.D and Werner, (1996), the results indicate to some extent that there is little ownership-control policies carried out by government.

Thirdly, constant to the theoretical assumptions of this article, the level of opening of an area is more important to the choice of wholly-owned enterprises. The variables of opening level in the two models are positively significantly. However, in wholly owned enterprises model, the coefficient is 0.745, and in the joint venture model the coefficient is 0.642.

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models, from the host government's point of view, in case of joint venture as the level of basic infrastructure rises the host Government is likely to post more restrictions on the ownership of multinational corporations. In this context the findings and conclusions also shows to some extent that raising the level of infrastructure will increase the bargaining power of host governments so that it can inhibit the need of multinational corporations to control over joint ventures; (2) Lorenzen and Mahnke (2002) suggest that MNCs that enter clusters are in need of collective assets and to knowledge institutions which are not possessed by any particular firm, in areas where there gathered more multinationals the MNCs can benefit from agglomeration effect. In this case, MNCs will choose joint ventures as entry mode. (3) Road density may not well represent the level of a region's infrastructure, which may be a reason why the empirical research and theoretical assumptions is inconsistent. If is the reason, it will need further study on the influence of infrastructure in the future.

Fifth, in accordance with conclusions of the theoretical model, wholly-owned enterprises respond more sensitive to labor costs. In the wholly-owned enterprise model, the coefficient of labor cost is a significant 0.677, in the joint venture model the coefficient is 0.399. That is because in China, areas of high labor costs always have correspondingly high labor quality and productivity. Therefore, the findings of this article also indicate to a certain extent that wholly-owned enterprises regard the quality of the workforce as important, while the joint ventures think highly of labor costs.

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Conclusion

Contribution: most of the previous study on FDI location choice did not focus on entry mode. From existing studies we already know that the regional disparity in China can affect the amount of FDI inflow (Linda F.Y. Ng and C. Tuan, 2003; Chen, Y. -R., et al, 2008; Chien-Hsun Chen, 1996, Pan, 2003), however, not many studies link the regional factors with FDI entry mode choice. This article discusses the relationship between FDI entry mode and location choice in different parts of China. After analyzing the data, it can be concluded that different characteristics of different regions not only influence FDI amount but also have an impact on the entry mode choice of multinational corporations. It is proved that Wholly-owned enterprises have been concentrated in China's southeast coastal areas and other economically developed districts in which have a longer history of opening up. Although joint venture mainly concentrated in these areas, they are relatively more decentralized, a lot of joint ventures are attracted to enter central and western regions. Moreover, after discussed the different entry mode in different Chinese regions, the paper tries to analyze what impact do regional elements have on the mode of entry. Empirical research results show that the wholly-owned enterprises pay more attention to the local market size, opening level and labor quality, while the joint ventures pay more attention to the economic growth rate, labor costs and tax incentives. The results can provide some insight for MNEs that want to invest in the Chinese market.

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reasons are explained in discussion part. Another possibility is that when the foreign investment is in industries that require large-scale operation, it is also likely that MNEs will choose joint ventures to reduce risk and cost (Tse, Pan and Au, 1997). Further more, when investing in China, the government encourages multinationals to invest in areas where infrastructure is not well developed in order to improve the local basic infrastructure construction. Such investment will induce large costs, therefore, MNEs are likely to enter with joint ventures.

Secondly, the agglomeration effect which can be another critical factor is not included in the analysis. Since agglomeration effect is a contingency of high market growth and advanced infrastructure, it is likely that economic agglomeration will have similar influence on the multinationals’ choice of entry modes. Nevertheless, this is just a logical inference, but not testified in the research.

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industries have diverse characteristics and in turn influence the entry modes of MNEs. According to L.E Brouthers and K.D Brouthers (2003), the service requires less financial investment than manufacturing industry. The biggest difference between services and manufacturing is that service as a product is intangible, can not be stored or be transported. In the industry of services, production and consumption is at the same time, inseparable. The manufacturing industry is often large in scale, requires more tangible assets investments, and thus bears higher risks, while the service industry, especially in business services, requires a relatively small investment of human resources, the risks are smaller. In China, due to the imbalance between the eastern and western areas, nowadays, the investment in eastern regions have gradually change from manufacturing to service, and in western regions, mainly manufacturing. Applied to the theory discussed, wholly owned subsidiary is preferred in eastern regions while joint venture is favored in western regions.

Implication for further research: the empirical results in this paper show the relationship between the six regional factors and MNEs’ entry mode choice. Yet the study is conducted on the regional level rather than specifically on the three economic zones, it will be more interesting and intuitive if the research can be done directly on the different economic zones.

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