Entry modes of foreign direct investment in China: a multinominal logit approach

The existing empirical literature on foreign direct investment (FDI) entry strategies tends to allow a binary choice between wholly owned enterprises (WOEs) and equity joint ventures (EJVs) or between greenfield investment and acquisition only. The current study establishes a multinomial logit model for the choice from all four FDI entry modes in China. Hypotheses involving country-, industry- and firm-specific factors are developed based on transaction cost economics, and tested on a data set covering 10607 foreign invested firms in China. A foreign invested firm is found to prefer the WOE mode given its large investment commitment, a high level of host-country experience in attracting FDI, a good specific industrial location, and a high asset intensity in the host industry. If the conditions of host-country experience and good specific location are not met, the EJV and the joint stock company (JSC) modes would be of greater use. A good specific location also makes the contractual joint venture (CJV) a preferable entry mode. Compared with overseas Chinese investors from Hong Kong, Macao and Taiwan, other foreign investors prefer EJVs over WOEs and CJVs. The results have important implications for managers.