The OFDI by ECMs significantly exceeded that of EIMs in the 1980s and their absolute gap has only increased over time (Table 2). There was a sectoral shift in OFDI through EIMs from manufacturing activities in the 1960s-1970s to service activities in the 1980s. The share of manufacturing and services in the total outward investments of EIMs was 52 percent and 43 percent respectively in the 1980s compared to 28 percent and 25.5 percent in OFDI flows from ECMs (Figure 1).
The comparative picture of OFDI undertaken by ECMs and EIMs underwent major changes in the 1990s. The developing regions concerned attracted more than 56 percent of OFDI through EIMs in the 1990s, compared to just 39 percent of OFDI from ECMs. EIMs began to seriously adopt overseas M&As in the 2000s—a favored strategy of OFDI by Chinese firms since the 1990s.
The developing regions' bias towards OFDI flows from ECMs in the 2000s appears to be a result of Chinese companies directing their large share of OFDI to offshore financial centers (OFCs). The story is the same for OFDI flows from EIMs, with four OFCs (Singapore, Mauritius, Channel Island and Cyprus) appearing in the list of top 10 host locations and accounting for almost 42 percent of India's OFDI flows in the 2000s names. In the current decade, ECMs are increasingly aggressive from the services sector, accounting for more than 65 percent of total Chinese OFDI flows (see Figure 5).
Overall, the role of all three economic sectors appears to have been more balanced in EIM FDI than ECM in the 2000s.
Locational Determinants of Indian and Chinese OFDI Flows
This study adds to the existing literature on FDI in emerging markets by analyzing the locational determinants of Chinese and Indian FDI in recent years. In light of the above theoretical understanding, a number of possible factors can be identified to explain the locational pattern of OFDI with ECM and EIM. Consistent with the gravity prediction, distance (DIST) may play a negative role in the geographic expansion of OFDI by emerging multinationals.
A large increase in the price level is likely to reduce the real earnings of foreign firms in local currency and may cause uncertainty in the overall investment environment of the host countries in question (Bajo-Rubia and Sosvilla-Rivero, 1994). As noted earlier, the share of non-FDI receiving countries in the total number of potential host countries is as high as 67 percent for Indian OFDI flows during 2001-2008 and 42 percent for Chinese OFDI flows during 2003 -2008. Given the higher levels of censoring in OFDI flows from India (more than 60 percent of the total number of countries do not receive FDI) and China (the average ratio is about 40 percent), the domestic distribution of OFDI in the CQR has focused on 75 percent in evaluation.
To the best of our knowledge, the application of three-step CQR to the location determinants of FDI has yet to receive attention in the literature. Among host country demand factors, POP is statistically significant with a predicted positive sign, while it explains FDI flows through EIMs and ECMs in the Tobit estimation. Although the same result holds for EIMs in the three-step CQR estimation, POP is found to have a negative and modestly significant effect on ECMs.
GDP per capita, PGDP, is found to have positive effects for EIMs and ECMs in the three-step CQR estimation, but only reaches statistical significance for EIMs. The natural resource endowments of the host countries represented by FUEL and ORE come with highly positive impacts for ECMs consistently across different estimations, but their effects become insignificant for EIMs in the three-step CQR estimation. Similarly, the skills variable, ERNL, appears to play a minor role in the location decision of EIMs and ECMs.
Its effects do not differ from zero for ECM and EIM in the three-level CQR assessment. Both BIT and DTT had a negative sign that was different from zero for ECM in the three-level CQR estimate. XR shows a negative coefficient that is statistically different from zero for EIM and ECM in the three-level CQR estimation.
Contrary to expectation, INF has a positive significant influence on OFDI from EIMs and ECMs in the three-stage CQR estimation. Therefore, the political stability factor has a small role to play in the location decision of EIMs and ECMs.
Conclusion
The decade of the 1990s has seen a dramatic increase in OFDI from India starting from a low base but with striking changes in the nature of such investments. Indian OFDI profiles now registered a marked improvement in the share of the primary sector indicating growth in natural resource-seeking OFDI from India on a sustained basis. Against Chinese OFDI flowing more to developing regions in the 2000s, Indian OFDI went more to developed regions.
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