Business environment and the choice of entry mode of OFDI: Evidence from China

Abstract

The business environment is the foundation for the survival and development of market entities, and the choice of entry mode of outward foreign direct investment (OFDI) is an important strategic decision for the OFDI behavior of market entities. Studying the relationship between the business environment and the OFDI entry mode of enterprises is one of the essential contents to stimulate the vitality of market entities and promote economic circulation. Based on the data from the World Bank’s Doing Business Database and China’s OFDI events from 2010 to 2019, this paper examines the impact of the business environment on enterprises’ OFDI entry mode choices from varying perspectives, such as enterprises’ different life cycles, heterogeneous investment motivations, and the Belt and Road Initiative (BRI). The result shows that the business environment is an essential factor affecting the choice of OFDI mode. The better the business environment in the host country, the more favorable it will be for Chinese enterprises to choose cross-border mergers and acquisitions (M&A). Different investment motivations and the BRI have a moderating effect on enterprises’ OFDI entry mode choice. An improved business environment makes it easier for companies to boost cross-border M&A in developing countries than in developed ones. “Starting a business” and “trading across borders” will have a positive impact on cross-border M&A, and “getting credit” will encourage enterprises to choose the OFDI mode of greenfield investments.