Digital Economy of the Host Country and Location Choice of China’s OFDI: A Study Based on the Data of Listed Companies

Zhang Junyan, Jia Yucheng, Zhang Cheng

Journal of Shanghai University of Finance and Economics Vol. 25, Issue 04, pp. 49 - 62 (2023)  DOI:10.16538/j.cnki.jsufe.2023.04.004

Summary

With the rapid development of the global digital economy, the digital economy of the host country has become an influencing factor that Chinese multinational firms need to consider when investing abroad, but its effect and mechanism are still controversial. On the positive side, the elements of the digital economy have high information mobility, which means that the developed digital economy of the host country has the advantage of market transaction costs, thus forming the location advantage over OFDI. On the negative side, the development of the digital economy has made cross-border markets more interactive, which helps to create more virtual global business networks and leads to some non-physical market entry methods, thereby reducing the need for international investment. Based on the HMY model of the nearby concentration tradeoff theory and from the perspective of firm productivity heterogeneity, this paper constructs a theoretical model of the impact of the digital economy development of the host country on the OFDI decisions of multinational firms. Using the OFDI data of Chinese listed companies from 2007 to 2019 and the high-dimensional fixed-effect Posson Pseudo-maximum likelihood regression model, the empirical test finds that the digital economy development of the host country significantly enhances the country’s attraction to China’s OFDI, and local cost and additional cost paths are used as the intermediary mechanism, among which, the former is manifested as an increase in the return on the capital of the host country by the digital economy, and the latter is manifested as an increase in the degree of openness to cultural systems. Based on the test of firm attributes and country heterogeneity, the conclusions are as follows: At the macro level, the digital economy of developed countries is more attractive to China’s OFDI, while the digital economy of less-developed countries is difficult to form a regional advantage. At the firm level, the digital economy is highly attractive to Chinese low-productivity and low-digitalization multinational firms, while it is less attractive to high-productivity and high-digitalization firms, which indicates that the development of the digital economy can lower the threshold for the OFDI of the host country. At the same time, it is more attractive to firms entering the host country for the first time, which shows that the digital economy helps Chinese firms overcome the outsider disadvantages caused by their lack of investment experience in the host country. The inspiration of this paper is that: First, firms should be encouraged to carry out cross-border investment in the elements of the digital economy. Second, more help in the digital field should be given to multinational firms with low productivity, so as to promote their international investment.

Keywords

OFDI; digital economy; local cost; additional cost