Prevalence of state-owned enterprise and entry mode choice of foreign firms: Evidence from China

We investigate the choice of entry mode between joint ventures (JVs) and wholly owned foreign enterprises (WOFEs) of foreign-invested firms in China. Using firm data from 1998 to 2007, we find that foreign firms are more likely to choose JVs over WOFEs when the state influence measured by the prevalence of state-owned enterprises (SOEs) in the target location is higher. The positive association between the probability of choosing JV and state influence is robust after using the “156 projects” as an instrument for SOE prevalence. Second, foreign firms are more inclined to form a JV with state capital rather than private capital, which provides supporting evidence that the role of local Chinese partners is to manage corporate–government relations. We then examine the performance of foreign-invested firms in China and find that, compared with WOFEs, JVs indeed have higher total factor productivity (TFP) and TFP growth and benefit from higher income and profits.