Chinese and American OFDI: The general theories of FDI

We feel that there are two catalogues of theories, suitable for developing and developed countries respectively, based on different economic development, resource endowment and ownership advantage. Many studies may focus on the experience of traditional industrialized countries. While conducting certain respect in emerging economics, it is likely to require special application of the theory. This is the case of China.

The location aspect of the mainstream or general theory, as encapsulated in Dunning’s eclectic paradigm, suggests three primary motivations (Dunning, 1977, 1993):

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Foreign-market- seeking FDI;

Efficiency (cost reduction)-seeking FDI;

Resource-seeking FDI (including a subset that is known as strategic-asset-seeking FDI). That is to say, a company with OLI module (ownership advantages, internalization advantages and location advantages), can probably conduct the foreign direct investment. Among these three aspects, Dunning’s theory may give us a more systematic understanding of driving factors for MNEs’ foreign direct investment in developing countries as well as in developed countries.

Both David Ricardo’s theory of comparative advantage and Heckscher-Ohlin theory, to some extent, attempt to explain somewhat what sectors are preferred for Chinese ODI to Africa. However, as the traditional FDI theory is used to explain foreign investment from the perspective of a developed economy, in the case of the new emerging economies such as in China, we need more applications of the theories (Zhang and Daly, 2011). As far as China OFDI to Africa is concerned, China (home country) tends to support optimizing its domestic industrial structure by shifting its comparatively less efficient sectors to Africa (host country as a whole), in which those sectors are comparatively more efficient ones. At the same time, Africa may make full use of their comparative advantages of these sectors to boost their economic growth rate. However, China, in the process of optimizing their domestic industrial structure, tends to diminish their labor intensive sectors, which focus on manufacturing. In contrast, most countries in Africa seem to be in their initial economic stages, and generally in great demand for developing manufacturing. As a result, China’s ODI can make a positive contribution not only to China but also to Africa. The Theory of Small Scale Technology means that developing countries have a competitive advantage in the production of national goods and other sectors associated with Small Scale Technology (Wells, Jr., 1978). Thus China’s technology from SMEs are possibly more suitable for Africa’s economic development rather than big companies, owing to Africa is in their early economic stages demanding greatly diversified and multi-leveled market. Specifically, labor intensive sectors, which are competitive in China, can suggest a significant advantage in small scale technology in Africa (Wells, Jr., 1978).

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