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Formal Institutional Distance and Innovation from OFDI: Evidence from China

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  • Jianing Shi

    (Business School, Renmin University of China, Beijing 100872, China)

Abstract

Recent years have seen Outward Foreign Direct Investment (OFDI) become a dominant resource for firms from emerging markets to enhance their innovation capability and achieve sustainable development. However, affected by the COVID-19 epidemic and anti-globalization, multinational enterprises (MNEs) from developing countries, especially OFDI enterprises whose main purpose is knowledge seeking, have suffered. In the face of investment constraints, improving the investment efficiency is an urgent issue for MNEs in developing countries. The formal institutional distance (FID) between home and host countries has challenged MNEs to make adjustments according to the business environments of the host countries, which largely shape the innovation benefits of OFDIs. To investigate such an important, but under-studied, issue, this paper specifically examines the impact of the FID on improving the innovation capabilities of OFDIs secured by Chinese firms. We disentangle the effect of the FID on OFDI R&D resource acquisition and its moderating effect on the relationship between OFDI R&D resource and innovation performance theoretically. We use the Worldwide Governance Indicators (WGI) to measure the FID. Based on a sample of Chinese firms that invested in 28 host countries from 2003 to 2017 and via linear regression and threshold regression methods, we found that the FID has a crucial negative effect on OFDI R&D resource and has a significant negative moderating effect (threshold effect) on the relationship between OFDI R&D resource and innovation performance (i.e., when the FID is lower than the threshold, then the FID has a considerable negative moderating effect, whereas the effect would be less influential if the FID surpassed the threshold). Our findings highlight the importance of considering the FID when choosing OFDI destinations, especially when the firm invests with the aim of strengthening its innovation capability.

Suggested Citation

  • Jianing Shi, 2022. "Formal Institutional Distance and Innovation from OFDI: Evidence from China," Sustainability, MDPI, vol. 14(9), pages 1-19, April.
    • Handle: RePEc:gam:jsusta:v:14:y:2022:i:9:p:5368-:d:805418
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    References listed on IDEAS

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    Cited by:

    1. Ojo Olukayode Iwaloye & Hong Kei Im & Adeniyi Damilola Olarewaju & Ayantunji Gbadamosi & Jose Alves & Michael Trimarchi, 2022. "The Emergence of Resources Seeking Chinese Firms’ Specific Advantages in Emerging Market," Sustainability, MDPI, vol. 14(14), pages 1-15, July.
    2. Qing Xie & Hua Yin, 2023. "Institutional Differences and the Choice of Outward Foreign Direct Investment Mode under the “Belt and Road” Initiative: Experience Analysis Based on China’s Manufacturing Enterprises," Sustainability, MDPI, vol. 15(9), pages 1-26, April.
    3. Xiaohua Yang & Cheng Liu & Jingling Lan, 2023. "Sustainable Technology Diffusion Manufacturing Outwards FDI Firms: Evidence from China Using Numerical Simulation Methods," Sustainability, MDPI, vol. 15(4), pages 1-23, February.
    4. Tong Sheng & Bingquan Fang & Xiaoqian Lu & Xingheng Shi & Chaohai Shen & Xiaolan Zhou, 2022. "The Relationship between Corporate Social Responsibility, Global Investment, and Equity Incentives," Sustainability, MDPI, vol. 14(23), pages 1-27, December.
    5. Yunxin Ye & Shiyong Zhao, 2023. "The Effect of Outward FDI on Capabilities of Sustained Innovation: Evidence from China," Sustainability, MDPI, vol. 15(5), pages 1-17, February.

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