Abstract:

Foreign direct investment in the knowledge-intensive manufacturing industry constitutes the key to industrial upgrading and economic restructuring in China. Present studies on foreign direct investment are still limited in regard to understanding their specific investment behaviors. Entry mode is the key strategy of foreign firms which determines their success in the host countries. Regions, as the basic spatial units with specific economic, social and cultural character, affect the entry mode of foreign firms to a great extent. This paper aims to reveal the geographical mechanism of the entry mode of FDI in the knowledge-intensive manufacturing sector, which advances the understanding of the exogenous-driven mechanism of urban and regional development within the context of economic restructuring in China nowadays. The theoretical framework of this paper proposes two fundamental locational factors influencing the choice of entry mode into the Chinese market: regional institutional environment and regional absorptive capacity. On the one hand, regional institutional environment is expected to influence the transaction cost of doing business in the host countries, in particular within the context of transition economies. When the regional institutional environment is better off, the knowledge-intensive firms tend to choose the wholly-owned entry mode to safeguard the interests of their own technology and reduce the risks of being rapidly imitated by local actors without costs. On the other hand, regional absorptive capacity enhances the willingness of foreign firms to form joint ventures with local firms in order to tap into the local knowledge pool. In regions with low absorptive capacity, foreign investment tends to constrain the scope of knowledge exchange within communities of foreign firms, and show limited willingness to cooperate and interact with local firms. Using the database of German knowledge-intensive FDI in China from 1982 to 2014, the analysis shows that the German FDI has been concentrated in the coastal areas of China. Spatio-temporal statistical analysis demonstrates that the location of German FDI has been spreading from coastal to inland provinces. In coastal provinces, it has been spreading from the central to the peripherial cities. Since 1995, the entry mode of German knowledge-intensive FDI has been shifting from joint ventures to wholly-owned mode. The logit model results further show that the entry mode of German FDI in knowledge-intensive sector is driven by multiple locational factors. On one hand, the decision of FDI firms to take joint ventures as the entry mode in the host country is influenced by the level of urban human capital and the degrees of industrial specialization. This implies that regional knowledge absorptive capacity is essential to the formation of local-global strategic coupling. On the other hand, the FDI stock and the number of authorized patents in the city significantly encourage the entry mode decision of a wholly-owned FDI firm, because the knowledge-intensive firms’ core competence lies in technology. These firms are most concerned about the issues on intellectual right protection. As a result, the regional institutional environment is an important locational determinant for the knowledge-intensive FDI firms.

Key words: knowledge-intensive firm, entry mode, spatial-temporal character, locational determinants, German direct investment in China