Ownership biases and foreign direct investment in China

The key theme of the seminal research began by Stephen Hymer (1976) is that foreign direct investment (FDI) is a conduit for transferring management know-how, technology, and much-needed market access to a host country, rather than a conduit for transferring financial resources.1 The purpose of this chapter is to revisit this strand of the FDI literature in the context of China and ask why FDI happens and why it happens on such a large scale in China. A central hypothesis of this paper is that China’s FDI inflows are largely, although not exclusively, a function of China’s institutional landscape. That institutional landscape is best described as manifesting a political pecking order of firms in which the firms at the top of the pecking order are the least efficient, such as state-owned enterprises (SOEs), and the firms at the bottom of the pecking order are the most efficient, such as entrepreneurial, private-sector firms.2