Institutional Directionality and Chinese OFDI: A Two-Stage Analysis of Location Choice and Scale - From a Springboard Perspective - By YU ZHENNA Master of International Trade and Business Graduate School of Kyung Hee University Advised by Dr. Sang-Whi...
Institutional Directionality and Chinese OFDI: A Two-Stage Analysis of Location Choice and Scale - From a Springboard Perspective - By YU ZHENNA Master of International Trade and Business Graduate School of Kyung Hee University Advised by Dr. Sang-Whi Lee Against the backdrop of restructuring global value chains and the profound evolution of globalization, FDI has become a critical pathway for industrial upgrading and technology diffusion. As key players in emerging economies, Chinese multinational enterprises (CMNEs) exhibit unique international expansion behaviors that align with the 'springboard' perspective. They utilize aggressive FDI to enhance their competitiveness and overcome latecomer disadvantages. However, existing research has not adequately integrated the concept of "institutional directionality"-the distinction between expanding into countries with stronger ("upward") versus weaker ("downward") institutions-into this framework. This study addresses this gap by constructing a two-stage analytical framework to investigate how institutional directionality influences both the location choice (whether to enter) and the investment scale (how much to invest) of CMNEs, while examining the moderating role of host-country natural resource endowments. Theoretically, this research synthesizes the springboard perspective with the concept of the "institutional ladder." Conventional views often treat institutional distance merely as a barrier, but this study argues that for springboard MNEs, it represents a strategic menu of opportunities. "Upward" expansion into institutionally institutionally superior countries facilitates the acquisition of advanced technologies and legitimacy , whereas "downward" expansion into weaker environments offers opportunities to exploit institutional voids or low-cost factors. Based on this, the study proposes that CMNEs tend to enter upward-distant countries to secure scarce assets (Hypothesis 1). However, regarding investment scale, a paradoxical logic is hypothesized: once entered, firms invest less in institutionally advanced markets due to the efficiency of "surgical strike" asset acquisition, but invest more in weaker markets to compensate for high transaction costs and risks (Hypothesis 2). Furthermore, natural resources are expected to amplify the attractiveness of upward entry (Hypothesis 3a), but weaken the constraining effect of institutional directionality on scale (Hypothesis 3b). To empirically test these hypotheses, the study utilizes a dataset of outward FDI by Chinese listed firms across 122 host countries from 2009 to 2023. The analysis employs a two-stage strategy: a population-averaged probit model for location choice and a random-effects Poisson regression for investment scale, utilizing the Inverse Mills Ratio to account for possible selection bias. In the first stage, this suits the binary nature of location choice: whether a firm invests in a country in a given year. Probit models effectively capture the probability structure behind entry decisions. They are widely used in international business research for location analysis. Furthermore, we employ a population-averaged specification. This captures the systemic impact of institutional environments on average entry probability within our large country-firm-year sample. It reduces reliance on individual-level random fluctuations. The second stage focuses on investment scale, defined as capital intensity post-entry. The investment scale variable is characterized by non-negative integers. It also tends toward a right-skewed distribution and over-dispersion. Consequently, traditional linear regression models are unsuitable. We therefore adopt a Poisson regression model. This model handles discrete investment data effectively. It is commonly used in international investment studies to analyze capital commitment and scale differences. The empirical findings provide robust are consistent with the formulated hypotheses. In the first stage, CMNEs exhibit a significant preference for "upward springboard," with positive institutional distance increasing the likelihood of entry. In the second stage, a distinct asymmetry emerges: positive institutional distance is associated with smaller investment scales, while negative institutional distance drives significantly larger capital commitments. This confirms that in developed markets, CMNEs prioritize targeted, efficient asset seeking, while in developing markets, they must commit heavy resources to navigate institutional voids. Additionally, the moderation analysis reveals that natural resources reinforce the appeal of upward entry-making "good institutions plus rich resources" the ideal target-while simultaneously moderating the influence of institutional directionality on investment scale. In summary, this study advances the springboard perspective by elucidating a "dual-path" internationalization strategy. It demonstrates that CMNEs navigate upward and downward paths with distinct logics-prioritizing asset-seeking entry in the former and compensatory resource commitment in the latter. These findings offer managerial implications for balancing institutional upgrading with operational feasibility and shed light on the ways in which CMNEs calibrate their global expansion strategies across diverse institutional environments. Key words :Outward FDI, Institutional Directionality, Springboard Theory, CMNE Internationalization