Spatial outward FDI: Evidence from China's multinational firms

This paper studies the impacts of geographic proximity and investment connection on the outward foreign direct investment (OFDI) decisions by Chinese multinational firms, including both greenfield investment and cross-border merger and acquisition. We model firms' OFDI expansion with the lagged spatial structure, and collect outward FDI data of 3479 Chinese multinational firms from 2002 to 2013 whose investment destination covers more than 160 countries. We find that the spatial expansion of firms' existing OFDI play an important role in shaping their future investment decisions. Firstly, firms tends to invest in destinations that are closer to China, and expand further into destinations that are geographically closer to their existing OFDI locations. This is the geographic network effect. Secondly, we also find that firms are more likely to invest in countries with more intense FDI from China, and extend their OFDI networks to destinations with stronger investment connections with their existing subsidiary locations. This is the investment network effect. We show that these two effects are robust to alternative investment and geographic network measures and further controls.