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Knowledge Seeking and Outward FDI of Emerging Market Firms: The

Moderating Effect of Inward FDI

Article  in  Global Strategy Journal · April 2012

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 Global Strategy Journal
Global Strat. J., 2: 277–295 (2012)
Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1111/j.2042-5805.2012.01042.x

KNOWLEDGE SEEKING AND OUTWARD FDI OF

EMERGING MARKET FIRMS: THE MODERATING
EFFECT OF INWARD FDI
JING LI1*, YONG LI2, and DANIEL SHAPIRO3*
1
Beedie School of Business, Simon Fraser University, Burnaby, British
Columbia, Canada
2
School of Management, State University of New York at Buffalo, Amherst,
New York, U.S.A.
3
Beedie School of Business, Simon Fraser University, Vancouver, British
Columbia, Canada

This study examines whether a host country’s industry-specific technology advantage

increases the propensity of emerging market multinational enterprises (EMNEs) to invest in
the host country. The study further explores whether inward FDI in EMNEs’ home markets,
by generating knowledge spillovers in the relevant industries, decreases EMNEs’ propensity
to invest overseas for knowledge seeking. We test our arguments using a longitudinal data
set of the overseas investment activities of Chinese manufacturing firms. We find support for
our hypotheses after controlling for other important outward FDI motives. We discuss
the implications of our results for research and practice. Copyright © 2012 Strategic
Management Society.

INTRODUCTION 1989; Chung andAlcacer, 2002). Seeking technologi-

Emerging market multinational enterprises (EMNEs)
have grown rapidly in recent years (UNCTAD, 2006).
Similar to MNEs from developed countries, EMNEs
invest overseas for multiple purposes, such as explor-
ing new markets, improving efficiency, securing
natural resources, and/or seeking advanced techno-
logical knowledge embedded in host countries
(Buckley et al., 2007a; Dunning, 1998). The last
motive, knowledge or technology seeking, indicates
that instead of utilizing capabilities already on hand,
firms expand overseas in search of capabilities that
are not available in their home markets (Cantwell,
Keywords: emerging market MNEs; knowledge seeking; com-
parative technology advantage; outward FDI; inward FDI;
China
*Correspondence to: Jing Li, Simon Fraser University, Beedie
School of Business, 8888 University Dr., Burnaby, British
Columbia V5A 1S6 , Canada. Email: jingli@sfu.ca
cal knowledge in overseas markets is particularly
important for EMNEs because they are latecomers to
the international business arena and tend to lag behind
incumbent MNEs in technological capabilities
(Buckley, Elia, and Kafouros, 2010; Child and
Rodrigues, 2005; Deng, 2009; Luo and Tung, 2007;
Rui and Yip, 2008). The current study addresses two
largely underexplored issues: do EMNEs have a pro-
pensity to invest in countries with technology advan-
tage, other things equal? How does inward FDI in
EMNEs’ home markets, by generating knowledge
spillovers, influence EMNEs’ technology-seeking
outward FDI decisions?
This study begins with the observation that
EMNEs, as latecomers to international business, are
largely in the stage of catching up with developed
market MNEs in technological capabilities in order to
be internationally competitive (Mudambi, 2008).
EMNEs are, therefore, seeking to move from a focus
on lower value-added activities, such as standardized

Copyright © 2012 Strategic Management Society

278 J. Li et al.
manufacturing and services, to higher value-added
activities based on R&D (Mudambi, 2008). Emerging
market firms can improve their technological capa-
bilities by learning and absorbing advanced techno-
logical knowledge possessed by firms in developed
markets (Child and Rodrigues, 2005; Luo and Tung,
2007; Mudambi, 2008). Thus, we propose that an
important catch-up strategy for EMNEs is to invest in
developed markets that have industry-specific com-
parative technological advantage.
An important feature of this study is that we explic-
itly consider alternative ways in which emerging
market firms can acquire knowledge. In particular,
this study posits that inward FDI in EMNEs’ home
markets provides another important channel for
emerging market firms to enhance their technological
capabilities (Mudambi, 2008). The FDI spillover
literature suggests that foreign firms typically bring
relatively advanced technologies with their invest-
ment in emerging markets. Such inward FDI gener-
ates knowledge spillovers that benefit local firms
through demonstration effects, linkages with custom-
ers, suppliers, and competitors, and movement of
skilled labor (for literature reviews, see Blomström
and Kokko, 1998; Meyer and Sinani, 2009). Since the
knowledge spillovers generated by inward FDI can
provide an alternative source of technological knowl-
edge, we propose that industry-level inward FDI
decreases EMNEs’ propensity to invest in host coun-
tries with comparative technology advantage. That is,
we posit that the availability of knowledge at home
reduces the urgency to source knowledge abroad in
the context of EMNEs’ internationalization.
We test our arguments by employing a data set
consisting of overseas equity investments of Chinese
firms in manufacturing industries from 1990 to 2009.
We employ the Cox model to estimate the impact of
comparative technology advantage in a host country
on a Chinese firm’s propensity to invest in that
country. After controlling for other important motives
in overseas investments, such as market seeking and
natural resource seeking, we find support for our
hypotheses: industry-specific technology advantage
in a host country increases the propensity of Chinese
firms to invest in that country, but industry-level
inward FDI reduces Chinese firms’ rate of investment
in the host country for technology seeking.
The current study makes two specific contributions
to the literature on internationalization of EMNEs
(Buckley et al., 2007a; Luo and Tung, 2007). First,
although both inward and outward FDI have been
viewed as important learning mechanisms for
Copyright © 2012 Strategic Management Society
EMNEs, the interaction between the two ‘catch-up’
strategies has yet to be explored (Child and Rod-
rigues, 2005; Luo and Tung, 2007). This study con-
tributes to the literature by analyzing how inward FDI
influences EMNEs’ knowledge-seeking outward
FDI. Our analysis indicates that EMNEs are attracted
to host countries with comparative technological
advantage, but that EMNEs’ propensity to invest in
those host countries is decreased by their exposure to
similar types of knowledge brought in by inward FDI
in the domestic market. Our analysis further suggests
that learning from inward FDI is an imperfect substi-
tute for the learning associated with outward FDI. In
other words, although inward FDI provides knowl-
edge spillovers that can satisfy part of EMNEs’ needs
for technological knowledge and, thus, reduce the
incentive for outward FDI, it does not replace
outward FDI as a source of technological learning.
Second, this study advances empirical research on
EMNEs’ knowledge-seeking outward FDI. Despite
the widely held belief that many EMNEs invest over-
seas to seek technological knowledge (Deng, 2007;
Luo and Tung, 2007), extant studies (e.g., Buckley
et al., 2007a) have yet to find a significant relation-
ship between technological knowledge in overseas
markets and Chinese firms’ outward FDI. By extend-
ing the sample period and developing measures that
can more accurately capture host country technology
advantage, our study shows that technology-seeking
outward FDI is more salient during 2003 to 2009, a
period in which the Chinese government formalized
its support for firms’ knowledge-seeking invest-
ments overseas (Luo, Xue, and Han, 2010).
The rest of the article proceeds as follows: we
develop the theory and hypotheses in the next section.
We then discuss the data, measures, and methods. In
the ensuing section, we report the results and robust-
ness checks. We conclude with a discussion of our
study’s implications for research and practice.
THEORY AND HYPOTHESIS
DEVELOPMENT
Technological capabilities have long been recog-
nized as a main driver of economic growth and an
important source of competitive advantage for
firms (Schumpeter, 1934; Porter, 1990; Teece, 1986).
Thus, developing technological capabilities has been
an important objective for indigenous firms in
emerging markets (Amsden, 2001; Bell and Pavitt,
1995; Kim, 1997; Lall, 1987). Emerging market
Global Strat. J., 2: 277–295 (2012)
DOI: 10.1111/j.2042-5805.2012.01042.x
 Knowledge Seeking and OFDI of Emerging Market Firms
firms, however, typically lag behind their counter-
parts in developed markets in technological develop-
ment (Cuervo-Cazurra and Genc, 2008; Mathews,
2002). From a value chain perspective, while more
knowledge-intensive, higher value-added activities
such as R&D and marketing tend to concentrate in
developed markets, less knowledge-intensive, lower
value-added activities such as repetitious and stan-
dardized manufacturing and services tend to be
located in emerging markets (Ernst and Kim, 2002;
Gereffi, 1999; Pyndt and Pedersen, 2006). Thus,
emerging market firms have strong incentives to
acquire the resources and capabilities that will
enable them to compete in higher value-added activi-
ties (Mudambi, 2008; Ramamurti, 2009).
To catch up with technology leaders in developed
markets, emerging market firms could in principle
focus on internal innovation. However, they may not
have the necessary resources or capabilities for inter-
nal development (Li, Chen, and Shapiro, 2010).
Alternatively, emerging market firms can invest in
developed markets to tap advanced technological
knowledge (Mudambi, 2008). This catch-up strategy
is viewed as a ‘springboard’ to overcome EMNEs’
latecomer disadvantages in technological areas (Luo
and Tung, 2007). Case studies and media reports have
offered some evidence for technology-seeking
outward FDI by EMNEs (Child and Rodrigues, 2005;
Deng, 2009; Rui andYip, 2008). Child and Rodrigues
(2005), for instance, observed that Chinese firms in
industries such as computers, home appliances, and
telecommunications invested in international markets
to acquire technological assets. More recent cases
also suggest that acquisitions in developed markets
by Chinese auto companies—such as Geely Holding
Group and Beijing Automotive Group—were aimed
to secure technological knowledge (Li, 2011; The
Wall Street Journal, 2009, 2010).
Conducting outward FDI to seek technological
knowledge and enhance innovative capabilities is not
a new phenomenon, nor is it unique to EMNEs. The
FDI literature has long documented knowledge-
seeking FDI that is geared less to exploiting an exist-
ing ownership advantage of an MNE, but more to
augmenting firm-specific advantages through acqui-
sition or partnering arrangements with local firms
(Cantwell, 1989; Dunning, 1998; Wesson, 1993).
MNEs, especially those from technologically
weaker countries, have been found to invest in coun-
tries with stronger technological positions to
improve their technological capabilities (Kogut and
Chang, 1991; Kuemmerle, 1999; Florida, 1997;
Copyright © 2012 Strategic Management Society
279
Serapio and Dalton, 1999). For instance, Japanese
firms are inclined to enter industries in the United
States that have stronger R&D capabilities (Kogut
and Chang, 1991).
EMNEs, when investing in developed markets
with a comparative technology advantage, can benefit
from knowledge spillovers in these markets. First,
EMNEs, via acquisition of technologies or compa-
nies in developed markets, can gain direct access to
sophisticated technologies and skilled labor. Second,
EMNEs can benefit from knowledge spillovers of
local suppliers, customers, competitors, and research
institutions by establishing formal or informal
network ties with them (Blomström and Kokko,
1998; Cantwell, 1989; Cantwell and Mudambi,
2011). Such network ties not only increase the
frequency and intensity of information exchange
between EMNEs and local knowledge holders in
developed markets, but also allow EMNEs to identify
and recruit persons who can bring critical technologi-
cal knowledge to EMNEs, both of which facilitate
knowledge transfer from local knowledge holders to
EMNEs (Almeida and Kogut, 1999; Audretsch and
Feldman, 1996; Jaffe, Trajtenberg, and Henderson,
1993; Saxenian, 1991; Song, Almeida, and Wu,
2003).
It is noteworthy that host country markets differ in
terms of the nature of their technological advantages.
For example, Cantwell and Janne (1999) showed
that different developed markets are dominant in dif-
ferent industries. We can, thus, expect that the attrac-
tiveness of particular foreign locations is likely to
have strong industry-specific characteristics. Given
the above analysis, we propose that technology-
seeking EMNEs, such as those from China, will have
a greater propensity to invest in a host country that
has an industry-specific comparative technology
advantage relative to their own country (in this case,
China). Hence:
Hypothesis 1 (H1): Other things being equal, the
stronger the host country technology advantage
relative to the emerging market firms’ home
country in an industry, the greater the propensity
of emerging market firms in that industry to invest
in the host country.
Emerging market firms can not only invest over-
seas to enhance their technological capabilities but
also exploit knowledge spillovers from inward FDI
in their domestic markets (Mudambi, 2008). MNEs
that invest in emerging markets typically bring
Global Strat. J., 2: 277–295 (2012)
DOI: 10.1111/j.2042-5805.2012.01042.x
280 J. Li et al.
advanced technological knowledge for economic
and political reasons. They tend to transfer their
firm-specific advantages, such as superior technolo-
gies, to overcome the liability of foreignness and to
thrive in local environments (Zaheer, 1995). They
are also willing to relocate some high value-added
activities to emerging markets in order to increase
the efficiency and effectiveness of these activities
(Mudambi, 2008). In addition, MNEs often face
pressure from emerging market governments to
transfer technologies in exchange for market
presence and favorable policies (Huang, 2003).
In summary, inward FDI can generate knowledge
spillovers in local markets.
Emerging market firms can benefit from such
knowledge spillovers in various ways (Blomström
and Kokko, 1998; Meyer and Sinani, 2009; Mudambi
and Navarra, 2004). First, emerging market firms,
through observation, imitation, and reverse engineer-
ing of technologies used by foreign MNEs, can
acquire technological knowledge and improve their
technological capabilities (Lu, 2000). Moreover,
emerging market firms can benefit from the supply
chain development efforts of foreign MNEs in emerg-
ing markets. When acting as suppliers to foreign
MNEs, emerging market firms are likely to receive
direct technology transfer from foreign MNEs who
want to ensure the quality and performance of sup-
plied products (Blomström and Kokko, 1998; Li
et al., 2010). Emerging market firms can also access
foreign knowledge by building connections with the
local suppliers and distributors who are already in the
supply chains of the foreign MNEs and receive tech-
nology transfer from the foreign MNEs (Spencer,
2008).
In addition, emerging market firms can benefit
from equity joint ventures (JVs) with foreign MNEs.
Equity structures in joint ventures align the interests
of partners and provide incentives for foreign MNEs
to transfer technologies (Beamish and Banks, 1987;
Li, Zhou and Zajac, 2009). Also, social and struc-
tural mechanisms within joint ventures foster close
interactions between partners that, in turn, facilitate
technology transfer (Dhanaraj et al., 2004; Lyles and
Salk, 1996).
Emerging market firms can also benefit from
foreign MNEs’ human capital development efforts in
local markets. MNEs often invest in training of local
employees, ranging from low rank workers to techni-
cally advanced professionals and top-level managers.
The gains from such activities may spread to local
firms as a result of employee turnover (Blomström
Copyright © 2012 Strategic Management Society
and Kokko, 1998). Empirical evidence in both
Mexico and India indicates that many managers in
large local firms started their careers working for
local subsidiaries of foreign MNEs (Blomström and
Persson, 1983; Patibandla and Petersen, 2002).
Finally, inward FDI contributes to technological
development of local firms through increased market
competition; such competition forces emerging
market firms to explore efficient uses of existing
technologies or to develop new technologies (Caves,
1996).
Extant research has provided ample evidence that
inward FDI generates positive spillovers in emerging
markets, increases the productivity of local firms in
the same industry, and enhances competitive posi-
tioning both domestically and globally (Blomström
and Kokko, 1998; Meyer and Sinani, 2009). Blom-
ström and Persson (1983), for instance, found that in
Mexico the labor productivity of local plants is posi-
tively related to foreign presence in an industry.
Blomström and Sjoholm (1999) also observed that
joint venturing with foreign firms contributes to local
firms’ productivity improvement in Indonesia. Simi-
larly, multiple studies have found that FDI spillovers
help improve Chinese firms’ productivity and
product innovations (e.g., Buckley, Clegg, and
Wang, 2007b; Li et al., 2010; Tian, 2007; Zhang
et al., 2010). In a meta-analysis of 66 empirical
studies on FDI spillovers, Meyer and Sinani (2009)
concluded that FDI spillover benefits are salient and
positive in low-income countries because of large
technology gaps between foreign and local firms and
the resulting learning opportunities for local firms.
Since emerging market firms can benefit from posi-
tive knowledge spillovers from inward FDI in their
home markets, inward FDI represents an important,
alternative source for them to acquire technological
knowledge. Moreover, accessing foreign knowledge
from inward FDI in domestic markets is less costly
than obtaining similar knowledge from direct invest-
ments in developed markets. MNEs will likely incur
liabilities of foreignness in overseas markets and
many EMNEs have yet to accumulate sufficient inter-
national experience to efficiently engage in global
technology seeking (Luo and Tung, 2007).
Given that benefits from inward FDI are largely
spilled over to companies within the same industry
(Blomström and Kokko, 1998),1 we expect that
1
Abundant empirical evidence has been found for intraindustry
FDI spillover benefits (Blomström and Kokko, 1998; Meyer
and Sinani, 2009). Interindustry spillovers (e.g., between
Global Strat. J., 2: 277–295 (2012)
DOI: 10.1111/j.2042-5805.2012.01042.x
 Knowledge Seeking and OFDI of Emerging Market Firms
industry-level inward FDI will reduce the propensity
of EMNEs to invest in foreign countries with
industry-specific comparative technological advan-
tage. Formally, we have:
Hypothesis 2 (H2): The higher the level of inward
FDI in an industry, the weaker the positive effect
of the host country technology advantage in that
industry on emerging market firms’ propensity to
invest in the country.
METHODS
Data and sample
We employed the Securities Data Corporation
(SDC) database to derive a sample of outward FDI
by Chinese firms over the period 1990 to 2009. Such
overseas investments include equity joint ventures
(JVs) and wholly owned subsidiaries established
through mergers and acquisitions (M&As). The SDC
database provides up-to-date, firm-level information
on Chinese firms’ overseas investment activities, and
it is one of the most important, publicly available
data sources for Chinese overseas investments. Prior
studies have used this database in the investigation
of international market entries (e.g., Xia, Tan, and
Tan, 2008).
A limitation of the SDC database is that it does not
contain information on wholly owned subsidiaries
established through greenfield investments. Although
no studies, to our best knowledge, have systemati-
cally documented the proportion of each investment
mode adopted by Chinese firms in their overseas
investments, existing evidence suggests that joint
ventures have been the main investment mode in the
1990s and that M&As have been the primary invest-
ment mode since 2000 (Buckley et al., 2008; Deng,
2007).
Our sample is consistent with those of existing
studies. For example, extant data suggest that M&As
have been increasingly adopted by Chinese firms in
their overseas investments in recent years. According
to the Chinese Ministry of Commerce, the value of
cross-border M&As experienced a 17-fold increase
from 1990 to 2002, and M&As accounted for, for
upstream and downstream industries in the value chain) can
also be salient, although very limited studies have examined
interindustry FDI spillovers due to the challenge in empirically
measuring such spillovers, a challenge that our study shares.
Copyright © 2012 Strategic Management Society
281
instance, 39 percent of total Chinese outward FDI
flow in 2006, 54 percent in 2008, and 43.2 percent in
2010 (Ministry of Commerce, 2006, 2008, 2010).
Our sample suggests a similar pattern: M&As have
become a more important investment mode recently;
the number of M&As accounts for about 15 percent
of all foreign entries by Chinese firms from 1990 to
2000 and for 69 percent from 2001 to 2009. In addi-
tion, Buckley et al. (2008) observed that JVs have
become a less important investment mode relative to
wholly owned subsidiaries for Chinese firms in
recent years and suggested that a rise in the use of
wholly owned subsidiaries is partly due to the use
of M&As. In our sample, JVs account for 85 percent
of all overseas investments by Chinese firms before
2000 and for only about 31 percent after 2000. For
these reasons, we believe that our sample has cap-
tured the primary outward FDI activities of Chinese
firms during the last two decades.
We focused on overseas investments of Chinese
firms since 1990, following Luo et al. (2010)’s
observation that outward FDI had not become an
important part of national development in China
until the early 1990s. We excluded Chinese firms’
investments in Hong Kong and Macau because
investments in these places may take a ‘round trip’
back to China and are not necessarily ‘true’ interna-
tional investments. We also excluded investments in
tax havens such as Cayman Islands. We focused on
the manufacturing industries (SIC codes between 20
and 39) because business examples suggest that
technology-seeking investments are salient among
manufacturing firms (Child and Rodrigues, 2005;
Deng, 2007). In addition, information on industry-
level inward FDI is available for only manufacturing
firms from the China Census Data. Our final sample
contains 464 overseas investments made by 410
Chinese firms in 69 different countries over the
period 1990 to 2009.
Model specification
This study examines how the technology advantage
of a host country affects EMNEs’ propensity to invest
in that country and further explores whether inward
FDI in an emerging market will reduce EMNEs’
propensity to invest in the host country in order to
acquire technological knowledge. Accordingly, we
apply the hazard model to test our hypotheses
(Cameron and Trivedi, 2005; Greene, 2002). Specifi-
cally, we specify a semiparametric Cox model to
estimate the hazard of investment in a host country:
Global Strat. J., 2: 277–295 (2012)
DOI: 10.1111/j.2042-5805.2012.01042.x
282 J. Li et al.
h ( t x ) = h 0 ( t ) exp ( x ′b ) (1)
where h(t|x) is the hazard rate that denotes the likeli-
hood of a Chinese firm to invest in a particular country
at time t conditional on the fact that the firm has not
invested in that country at time t-1; t is the ‘survival’
time prior to the ‘failure’ event (i.e., the Chinese
firm’s investment in that country), x a vector of time-
invariant and time-varying explanatory variables,
h0(t) the baseline hazard function, and b the vector of
unknown regression parameters to be estimated. As
compared with parametric models, the Cox model has
the advantage that it does not require specifying a
probability distribution of time dependence of the
hazard (Cameron and Trivedi, 2005). The unit of
analysis is a firm-host country-year pair.
Variables and measurements
Dependent variable
The dependent variable is the hazard of investment,
denoting a firm’s propensity to invest in a country in
a given year. Given that outward FDI has become
important for Chinese firms only since 1990, we
used 1990 as the originating time for a firm to be at
‘risk’ of investing in a foreign country. For firms that
were founded after 1990, we used the founding date
as the originating time. We manually collected com-
panies’ founding year information using search
engines such as Google and Baidu.
Independent variables
Industry-specific host country technology advantage
is calculated as the number of patents in the industry
that a Chinese firm’s subsidiary in the host country
belongs to, subtracted by the corresponding
industry-level patent number in China. Prior studies
(e.g., Kogut and Chang, 1991) have employed a
similar measure to examine the influence of technol-
ogy advantage on foreign entry. Patents are widely
used empirical indicators of technology and innova-
tion (Almeida and Phene, 2004; Fagerberg and
Srholec, 2008; Furman, Porter, and Stern, 2002;
Kumaresan and Miyazaki, 1999; Niosi, 2002), even
though they do not capture the full extent of a firm’s
(or a nation’s) innovative activity (Nelson and
Rosenberg, 1993). Patents are the result of both the
level of innovation inputs and the innovation produc-
tivity. A country with higher counts of patents in an
Copyright © 2012 Strategic Management Society
industry relative to China should be more attractive
to Chinese firms seeking technological knowledge in
that industry. As a robustness check, we also used the
ratio of the two patent numbers to measure industry-
specific host country technology advantage (Chung
and Alcacer, 2002), and we found consistent results.
We collected the patent data from OECD Patent
Statistics. We constructed the patent measure based
on patents that belong to the Triadic Patent Families
(defined as a set of patents applied to or granted by
the European Patent Office, Japan Patent Office, and
United States Patent and Trademark Office that share
one or more priorities). Since patents are categorized
according to the International Patent Classification
(IPC) system, we adopted the OECD Technology
Concordance to translate IPC to SIC-based indus-
tries (for detailed procedures, see Johnson, 2002).
Because the SDC database contains information on
each subsidiary’s SIC code, we were able to generate
the relative patent measure between a host country
and China at each two-digit SIC code. Industry-
specific host country technology advantage is, thus,
a dyadic, industry-level and time-varying measure.
Industry-level inward FDI is measured as the
average foreign capital ratio (i.e., foreign capital
divided by total capital) in an industry in China in the
past five years (Buckley et al., 2007b; Meyer and
Sinani, 2009). We used the past five years’ data to
address the potential reverse causality problem that
outward FDI can potentially influence inward FDI.
We kept ‘true’ foreign capital investments in China
and excluded investments from Hong Kong, Macau,
and Taiwan (HMT) for two reasons. First, many
investments from Hong Kong and Macau may be
round-tripping in nature (Huang, 2003). Second,
knowledge spillovers by HMT firms may be limited
in an industry because HMT firms tend to bring in
less knowledge-intensive investments than the ‘true’
foreign firms from more advanced economies
(Buckley et al., 2007b). The industry-level inward
FDI information was collected from the China
Census Data compiled by the National Bureau of
Statistics of China. This measure is industry and year
specific.
Control variables
We included a number of additional variables to
control for other factors that might affect FDI deci-
sions. We first included four control variables at the
host country level. Host country GDP and GDP
growth from the World Bank and United Nations
Global Strat. J., 2: 277–295 (2012)
DOI: 10.1111/j.2042-5805.2012.01042.x
 Knowledge Seeking and OFDI of Emerging Market Firms
capture firms’ market-seeking motives for invest-
ments overseas. We expect that countries with higher
GDP or GDP growth attract Chinese firms to invest
in these countries at a higher rate. Crude oil reserves,
collected from the U.S. Energy Information Admin-
istration, is used to control for natural resource
conditions in the host country and partly captures
firms’ natural resource-seeking investments. The
fourth variable is the number of overseas Chinese,
collected from Overseas Compatriot Economy Year
Book (1997, 1999, 2002, 2003, 2007, and 2008)
published by Overseas Compatriot Affairs Commis-
sion, Taiwan. We expect overseas Chinese in a par-
ticular country to facilitate investment of Chinese
MNEs in that country (Iriyama, Li, and Madhavan,
2010).
Factors that capture the economic relations and
distances between China and a host country include
geographic distance, cultural distance, institutional
distance, China’s export to a host country, inward
FDI from a host country, and the exchange rate.
Geographic distance was computed based on the
latitude and longitude of the city where the Chinese
firm is located and the capital city of the host
country. It was measured as the log of geographic
distance in kilometers (Sorenson and Stuart, 2001).
The cultural distance measure was based on the
Hofstede cultural dimensions (Hofstede, 1980) and
computed as in Kogut and Singh (1988). We expect
that Chinese MNEs will have a lower propensity to
invest in those countries with larger distances in
geography and culture due to unfamiliarity with
local environments and the extra costs therein.
The institutional distance between a host country
and China was calculated as the average value of the
institutional dimensions in the World Governance
Index that a host country has minus the correspond-
ing value that China has (Kaufmann, Kraay, and
Mastruzzi, 2007). The effect of institutional distance
on Chinese MNEs’ rate of investment is more com-
plicated. On the one hand, institutional distance
increases firms’ unfamiliarity with foreign institu-
tional environments and the costs of doing business
in those environments, thereby reducing their pro-
pensity to invest in those countries (Xu and Shenkar,
2002). Chinese firms may also prefer countries with
lower institutional distances because they are expe-
rienced in dealing with relatively poor institutional
environments (Cuervo-Cazurra and Genc, 2008). On
the other hand, Chinese firms have an incentive
to invest in countries with better institutional envi-
ronments for lower transaction costs and better
Copyright © 2012 Strategic Management Society
283
protection of properties. ‘Institutional escapism’ has
been identified as a potential motivation for EMNEs
to invest overseas (Witt and Lewin, 2007). There-
fore, the net effect of institutional distance on
Chinese MNEs’ propensity to invest in a host
country remains an open issue.
We calculated export based on China’s export data
from the National Bureau of Statistics of China.
Since export to a specific host country represents an
alternative means to access the host country market,
we expect it to have a negative effect on firms’ pro-
pensity to invest in that country. Inward FDI from the
host country is measured as the amount of FDI from
a specific host country in the past five years in which
a Chinese firm invested. The inward FDI information
was collected from the National Bureau of Statistics
of China. To calculate the measure for exchange
rate, we first collected the exchange rates between
Chinese Yuan and U.S. Dollars from the State
Administration of Foreign Exchange of China and
then collected the exchange rates between U.S.
Dollars and other currencies from the World Devel-
opment Indicator. We used U.S. Dollars as the
benchmark to obtain how much one Chinese Yuan
can be exchanged for another currency. We expect
the exchange rate to have a positive effect on
Chinese firms’ propensity to invest in foreign coun-
tries because a stronger Chinese currency makes
investment overseas relatively less expensive for
Chinese firms (Buckley et al., 2007a).
We also included a home country-level control
variable—China’s industry sales growth—that is
measured by sales growth of an industry (classified
by two-digit SIC codes) in China. Robust domestic
market growth increases the attractiveness of staying
in the home market relative to investing overseas. We
collected this information from the China Census
Data.
Firm-level control variables include firm owner-
ship type, diversification, and firm experience. State-
owned enterprise (SOE) is coded as ‘1’ if the
ultimate owner of the firm is the government. We
used the SDC database for the information. SOEs
receive financial and policy support from the
Chinese government (Buckley et al., 2007a; Luo and
Tung, 2007; Luo et al., 2010), which helps SOEs
enter foreign countries. Firms may use international
expansion for diversification rather than knowledge
seeking. We measured diversification as a dummy
variable, which is equal to ‘1’ if the Chinese parent
and its subsidiary have different two-digit SIC codes
for their primary industries and ‘0’ otherwise.
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284 J. Li et al.
Finally, we controlled for Chinese firms’ invest-
ment experience in the host country and Chinese
firms’ collaboration with host country firms in
China. Using information in the SDC database, we
calculated Chinese firm’s experience in the host
country as a firm’s average number of equity joint
ventures and M&As in a host nation in the past
five years. Chinese firms’ collaboration with host
country firms in China was measured as a Chinese
firm’s average number of equity joint ventures with
host country firms in China in the past five years. We
expect firm experience in the host country or firm
experience with host country firms in China to
increase Chinese firms’ propensity to invest in that
country because such experience increases Chinese
firms’ familiarity with the host country’s cultural
and institutional backgrounds and reduces their
liability of foreignness (Delios and Beamish, 1999).
For all the estimations, we also included subsid-
iary industry dummies based on two-digit SIC codes
since observations in the same industries may not be
independent of one another due to industry fixed
effects. Similarly, we included year dummies to
control for temporal effects on firms’ propensity to
invest in foreign countries.
RESULTS
Tables 1 and 2 present the summary statistics for the
sample. Table 1 breaks down Chinese manufacturing
firms’ overseas investment by year, industry, and
host country from 1990 to 2009. Table 1a shows that
Chinese firms have more foreign market investments
in recent years (2007, 2008, and 2009); investments
in these three years accounted for 38 percent of total
investments. Table 1b shows that the top five manu-
facturing industries where Chinese firms have been
most active in overseas equity investments are elec-
tronic and other electric equipment, primary metal
industries, transportation equipment, chemicals and
allied products, and industry machinery and equip-
ment. Table 1c lists Chinese firms’ investments by
host country. The top five destination countries for
Chinese manufacturing firms are the United States,
Japan, Australia, Singapore, and Germany.
Table 2 reports the summary statistics and corre-
lations for the variables. The variance inflation
factors (VIFs) are less than 4.20 for all the variables
and the mean VIF is 1.73. None of the correlations
are sources of concern for multicollinearity.
Copyright © 2012 Strategic Management Society
Table 3 reports estimation results for the hazard
rate of Chinese firms investing in a host country.
Model 1 is the baseline model with only the controls.
Models 2 and 3 present the main results for the
hypotheses, and Models 4 to 6 summarize the
robustness test results. We used Akaike’s informa-
tion criterion (AIC) to compare the fit among
models, and smaller values of AIC represent better
model fits (Akaike, 1974). Table 3 suggests that rela-
tive to Model 1, inclusion of industry-specific host
country technology advantage (Model 2) and its
interaction term with industry-level inward FDI
(Model 3) results in better models.
Hypothesis 1 predicts that Chinese firms have a
greater propensity to invest in a host country with
greater industry-specific technology advantage
relative to China. Both Models 2 and 3 show
that industry-level technology advantage in a host
country has a significant, positive effect on the
hazard rate of Chinese firms investing in that country
(p < 0.01 in both models). We further evaluated the
economic effects based on the results in Model 3.
With the value of all other variables held at the mean
level, an increase in the industry-specific host
country technology advantage from the 20th percen-
tile to 90th percentile leads to an increase of 0.15 in
the hazard of investment. Therefore, H1 receives
strong empirical support; industry-specific technol-
ogy advantage in a host country increases the pro-
pensity of Chinese firms to invest in that country.
We proposed in H2 that industry-level inward FDI
in China weakens the positive relationship between
industry-specific host country technology advantage
and Chinese firms’ propensity to invest in a host
country. In Model 3, the interaction term between
industry-specific host country technology advantage
and industry-level inward FDI has a negative
and statistically significant coefficient estimate
(p < 0.01), indicating that the level of inward FDI in
an industry in China attenuates the positive effect of
host country technology advantage in that industry
on the hazard rate of Chinese firms investing in the
host country. We further gauged the size of the inter-
action effect based on the results in Model 3. When
inward FDI is at the 90th percentile, an increase in
the industry-specific host country technology advan-
tage from the 20th to 90th percentile results in an
increase of 0.04 in the hazard of investment. Com-
paring this effect with the effect when inward FDI is
at the mean level, we found that the net interaction
effect of inward FDI is a decrease of 0.11 in
the hazard of investment, which is economically
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 Knowledge Seeking and OFDI of Emerging Market Firms 285
Table 1. Number of foreign market investments by year, industry, and host country

(a). Investment by year

Year Number of investments Year Number of investments

1991 5 2001 14
1992 19 2002 22
1993 21 2003 9
1994 23 2004 23
1995 29 2005 20
1996 9 2006 29
1997 25 2007 56
1998 15 2008 49
1999 24 2009 70
2000 2 Total 464

(b). Investment by industry

Industry Number Percent Industry Number Percent

Food and kindred products 22 4.74 Rubber and misc. plastics products 2 0.43
Tobacco products 1 0.22 Stone, clay, and glass products 9 1.94
Textile mill products 14 3.02 Primary metal industries 80 17.24
Apparel and other textile products 9 1.94 Fabricated metal products 15 3.23
Furniture and fixtures 2 0.43 Industrial machinery and equipment 55 11.85
Paper and allied products 4 0.86 Electronic, other electric equipment 93 20.04
Printing and publishing 2 0.43 Transportation equipment 68 14.66
Chemicals and allied products 66 14.22 Instruments and related products 11 2.37
Petroleum and coal products 5 1.08 Misc. manufacturing industries 6 1.29
Total 464 100

(c) Investment by host country

Host country Number Percent Host country Number Percent

Argentina 3 0.65 Mexico 2 0.43

Australia 43 9.27 Netherlands 9 1.94
Austria 2 0.43 New Zealand 4 0.86
Belgium 1 0.22 Nigeria 1 0.22
Brazil 7 1.51 Pakistan 1 0.22
Bulgaria 2 0.43 Peru 3 0.65
Canada 18 3.88 Philippines 5 1.08
Chile 2 0.43 Portugal 4 0.86
Colombia 2 0.43 Russian Fed. 8 1.72
Czech Republic 2 0.43 Saudi Arabia 4 0.86
Denmark 1 0.22 Singapore 28 6.03
Egypt 1 0.22 South Africa 3 0.65
Finland 1 0.22 South Korea 15 3.23
France 18 3.88 Spain 4 0.86
Germany 27 5.82 Sweden 5 1.08
Hungary 3 0.65 Switzerland 3 0.65
India 19 4.09 Taiwan 12 2.59
Indonesia 4 0.86 Thailand 9 1.94
Iran 2 0.43 Turkey 1 0.22
Israel 1 0.22 United Kingdom 18 3.88
Italy 15 3.23 United States 74 15.95
Japan 50 10.78 Uruguay 1 0.22
Jordan 1 0.22 UAE 2 0.43
Luxembourg 1 0.22 Venezuela 1 0.22
Malaysia 21 4.53 Total 464 100

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DOI: 10.1111/j.2042-5805.2012.01042.x
 286

Table 2. Descriptive statistics and correlations

# Variables 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

1 Host country GDP growth 1

2 Host country GDP per 1
J. Li et al.

-0.23
capita
3 China’s industry sales -0.06 0.00 1
growth

Copyright © 2012 Strategic Management Society

4 Geographic distance -0.01 0.18 0.04 1
5 Oil reserves -0.01 0.04 0.01 0.20 1
6 Exchange rate 0.07 -0.13 0.01 -0.12 -0.02 1
7 Institutional distance -0.41 0.37 -0.04 0.22 -0.03 -0.38 1
8 Cultural distance -0.33 0.40 -0.07 0.21 -0.03 -0.26 0.58 1
9 Export -0.37 0.57 0.10 0.02 0.07 -0.08 0.42 0.22 1
10 Overseas Chinese -0.20 0.39 -0.03 0.18 0.05 -0.06 0.41 0.07 0.58 1
11 SOE 0.04 -0.05 -0.04 0.01 0.00 0.04 0.06 0.08 -0.03 0.03 1
12 Diversification -0.04 0.02 -0.01 -0.08 0.00 0.09 -0.08 -0.06 0.00 -0.03 -0.02 1
13 Inward FDI from the host -0.39 0.64 0.10 -0.28 -0.08 -0.14 0.43 0.18 0.25 0.02 -0.07 0.04 1
country
14 Industry-level inward FDI -0.12 0.07 -0.09 -0.05 -0.07 -0.01 -0.05 -0.03 0.09 0.05 -0.20 0.11 0.07 1
in China
15 Chinese firm’s experience -0.07 0.07 0.02 0.07 -0.01 0.01 0.06 0.09 0.12 0.08 0.00 -0.05 0.06 -0.02 1
in the host country
16 Chinese firm’s -0.02 0.10 0.03 -0.03 -0.01 -0.03 0.03 0.07 0.07 0.05 0.02 0.03 0.04 0.00 0.01 1
collaboration with host
country firms in China
17 Industry-specific host 0.03 0.26 -0.39 -0.12 -0.04 -0.04 0.11 0.18 0.06 0.10 -0.02 0.04 0.11 0.02 -0.06 0.25 1
country technology
advantage
Mean 1.69 2.85 -0.91 8.64 0.01 0.03 1.42 2.86 14.52 12.30 0.32 0.17 0.14 0.12 0.03 0.01 0.96
S.D. 3.58 3.89 4.46 0.84 0.04 0.16 0.71 1.35 2.05 3.65 0.47 0.37 0.16 0.05 0.08 0.06 3.09
VIF 1.42 3.72 1.33 2.22 1.09 1.12 2.19 1.87 1.95 1.44 1.07 1.05 4.12 1.12 1.04 1.09 1.51

N = 833. Correlations with absolute values larger than 0.07 are significant at p < 0.05.

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Global Strat. J., 2: 277–295 (2012)
 Knowledge Seeking and OFDI of Emerging Market Firms 287
Table 3. Results of Cox models predicting hazard of investment

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Host country GDP growth 0.11*** 0.10*** 0.10*** 0.07*** 0.00 0.11***
(0.02) (0.02) (0.02) (0.02) (0.06) (0.02)
Host country GDP per capita 0.09*** 0.06** 0.05* 0.02 -0.03 0.03
(0.03) (0.03) (0.03) (0.03) (0.08) (0.03)
China’s industry sales growth -0.01*** -0.01*** -0.01*** -0.01*** 0.08 -0.01***
(0.00) (0.00) (0.00) (0.00) (0.10) (0.00)
Geographic distance -0.40*** -0.35*** -0.33*** -0.22** 0.12 -0.08
(0.08) (0.08) (0.08) (0.09) (0.27) (0.08)
Oil reserves 1.11 0.86 1.08 1.57 0.49 1.33
(1.22) (1.23) (1.23) (1.37) (3.70) (1.21)
Exchange rate -0.12 0.34 0.31 0.25 1.37* 0.48
(0.16) (0.32) (0.32) (0.41) (0.71) (0.32)
Institutional distance 0.31*** 0.31*** 0.28** 0.11 -0.06 0.13
(0.11) (0.11) (0.11) (0.13) (0.25) (0.10)
Cultural distance 0.11** 0.08 0.09 0.10 0.12 0.11**
(0.05) (0.06) (0.06) (0.07) (0.12) (0.05)
Export -0.19*** -0.19*** -0.19*** -0.21*** 0.28 -0.11***
(0.02) (0.02) (0.02) (0.03) (0.22) (0.03)
Overseas Chinese 0.05*** 0.05*** 0.05*** 0.07*** -0.08 0.02
(0.02) (0.02) (0.02) (0.02) (0.05) (0.02)
SOE 0.20* 0.26** 0.26** 0.38*** -0.23 0.16
(0.10) (0.11) (0.11) (0.12) (0.28) (0.10)
Diversification 0.04 -0.00 -0.01 -0.27 -0.31 -0.19
(0.15) (0.15) (0.15) (0.20) (0.42) (0.15)
Inward FDI from the host country -2.26*** -2.08*** -1.80** -0.98 -0.55 -1.16*
(0.72) (0.73) (0.73) (0.84) (1.94) (0.69)
Industry-level inward FDI in China -7.08*** -6.79*** -5.45*** -9.01*** -14.82 -1.74
(1.49) (1.56) (1.62) (1.99) (25.93) (1.39)
Chinese firm’s experience in the 0.42 0.45 0.51 0.53 -3.97 -0.15
host country (0.82) (0.81) (0.82) (0.87) (3.66) (0.83)
Chinese firm’s collaboration with 0.91 -0.05 -0.48 -0.22 -1.13 -0.79
host country firms in China (0.74) (0.80) (0.74) (0.86) (3.79) (0.80)
Industry-specific host country 0.08*** 0.10*** 0.09*** 0.15 0.03*
technology advantage (0.02) (0.02) (0.02) (1.16) (0.02)
Industry-specific host country -0.89*** -0.62** -4.55 -0.58**
technology advantage X
industry-level inward FDI in China (0.29) (0.29) (27.84) (0.28)
Year dummy 2003 -1.50***
(0.15)
Industry-specific host country 0.19***
technology advantage X year
(0.05)
dummy 2003
Industry dummies included included included included included Included
Year dummies included included included included included _
Observations 833 833 833 537 296 833
No. of firm-country pairs 425 425 425 326 221 425
No. of investments 464 464 464 361 103 464
Log likelihood -2640 -2556 -2551 -1813 -437.2 -2533
AIC 5365.62 5199.32 5192.28 3712.88 956.38 5139.87
Wald chi square 352.5 369.5 378.6 285.3 161.1 415.0
R squared 0.40 0.43 0.43 0.42 0.70 0.47

Notes: Standard errors appear in parentheses. *** p < 0.01, ** p < 0.05, *p < 0.10. Model 4 is based on the subsample with high
technology gap industries and Model 5 is based on the subsample with low technology gap industries.

Copyright © 2012 Strategic Management Society Global Strat. J., 2: 277–295 (2012)
DOI: 10.1111/j.2042-5805.2012.01042.x
288 J. Li et al.
significant. Taken together, our empirical results
support H2, suggesting that inward FDI decreases
Chinese firms’ propensity for knowledge-seeking
outward FDI.
Figure 1 illustrates how the effect of technology
advantage on Chinese firms’ investment propensity
(the hazard rate) varies depending on different levels
of industry-level inward FDI in China. The horizon-
tal axis is the industry-specific host country technol-
ogy advantage, and the vertical axis is the hazard rate
multiplier (i.e., exp(x’b)). Figure 1 is based on the
results in Model 3. ‘Low,’ ‘moderate,’ and ‘high’
refer to the value of a variable at the 20th, mean, and
90th percentile, respectively. The figure shows that,
holding all other variables at the mean level, as the
level of inward FDI in an industry increases from
low to moderate to high, the positive effect of
industry-specific host country technology advantage
on the hazard of Chinese firms’ outward FDI
decreases substantially. Thus, as predicted in H2,
inward FDI in an industry in China reduces the pro-
pensity of Chinese firms to invest in a host country
with technology advantage in the same industry.
It is worth noting that at both the high and low
levels of industry-level inward FDI, an increase in
the comparative technology advantage in a host
country has a positive effect on the propensity of
Chinese firms to invest in that host country (see
Figure 1 for an illustration). This observation indi-
cates that inward FDI is an imperfect substitute for
the knowledge and learning associated with outward
FDI.
Several results for the control variables in Model 3
are worth discussion. First, GDP growth and GDP
per capita in the host countries significantly and
Copyright © 2012 Strategic Management Society
Figure 1. Hazard rates under dif-
ferent levels of industry-specific
host country technology advantage
and industry-level inward FDI in
China
positively affect the hazard of investing in those coun-
tries (p < 0.01 and p < 0.10), which is consistent with
the argument that EMNEs also invest overseas for
market seeking (Buckley et al., 2007a). China’s
industry sales growth has a negative effect on Chinese
firms’ propensity to invest overseas (p < 0.01), indi-
cating that Chinese firms are less inclined to pursue
foreign markets when domestic markets experience
high growth. Second, Chinese firms have a higher
propensity to invest in institutionally distant countries
(p < 0.05), suggesting that seeking a better institu-
tional environment is an important motivation for
Chinese firms’ outward FDI (Witt and Lewin, 2007).
Third, the result that China’s exports to a host country
have a negative effect on Chinese firms’ propensity to
invest in that country (p < 0.01) suggests that exports
represent an alternative to outward FDI. Fourth, the
number of overseas Chinese in a host country is
associated with a higher hazard of investing in that
country (p < 0.01). Overseas Chinese can help
Chinese firms overcome some challenges in doing
business in host countries and, thus, can increase
Chinese firms’ propensity to invest in those countries.
Finally, state-owned Chinese firms have a higher
propensity to invest in foreign countries than pri-
vately owned firms (p < 0.05), which suggests that
domestic institutional (e.g., financial and policy)
support is important for firms’ overseas investments
(Luo et al., 2010).
Supplemental analysis
We conducted several robustness checks. First of all,
we generated alternative measures for industry-
specific host country technology advantage based on
Global Strat. J., 2: 277–295 (2012)
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 Knowledge Seeking and OFDI of Emerging Market Firms
the number of patents granted by the United States
Patent and Trademark Office alone. We also used a
ratio measure (Chung and Alcacer, 2002) instead of
the difference measure. Both led to results consistent
with those in Table 3.
Our results suggest that inward FDI in an industry
can alleviate the urgency for Chinese firms to invest
directly in foreign countries for the purpose of tech-
nology seeking. We suspect that this attenuating
effect of inward FDI is particularly strong when it
suffices for Chinese firms to learn from MNEs’
knowledge spillovers in the Chinese market. One
indicator of the sufficiency of learning in the Chinese
market alone is the technology gap between Chinese
firms and MNEs in the Chinese market (Sjoholm,
1999; Zhang et al., 2010). When the gap is large in
the domestic market, Chinese firms will have a lot to
learn from MNEs’ operations in China; when the gap
is small, Chinese firms will face limited learning
opportunities, and they are more inclined to invest in
foreign countries for more advanced technologies
(Zhang et al., 2010). Therefore, we conducted a
robustness check to see whether the moderating
effect of inward FDI on the relationship between
industry-specific host country technology advantage
and Chinese firms’ propensity to invest in host coun-
tries varies across industries with high and low tech-
nology gaps.
Following the FDI spillover literature (Kokko,
1994; Sjoholm, 1999; Zhang et al., 2010), we mea-
sured the industry-level technology gap between
Chinese and foreign firms in the Chinese market as
the ratio of the average productivity (i.e., firm
annual value added/the number of employees) of
foreign firms to that of Chinese firms in an indus-
try, based on the information in the China Census
Data. We found that the average technology gap is
about 1.78 among all industries and that more than
75 percent of the industries have average technol-
ogy gap values of more than 1.20. These numbers
indicate that Chinese firms in most industries tech-
nologically lag behind foreign firms operating in
the Chinese market. Thus, knowledge spillovers
from foreign firms operating in the Chinese market
can be an important source of technological knowl-
edge for Chinese firms.
We also conducted additional regression analysis
with the technology gap measure. We found that in
the subsample with a high technology gap (i.e.,
larger than the mean value of the technology gap
measure) between Chinese and foreign firms in the
Chinese market, inward FDI significantly weakens
Copyright © 2012 Strategic Management Society
289
the positive effect of industry-specific technology
advantage in a host country on Chinese firms’ pro-
pensity to invest in that country (see the interaction
term in Model 4, p < 0.05). In the subsample with a
low technology gap, inward FDI has no significant
moderating effect (see the interaction term in Model
5). These results indicate that when the technology
gap is large and Chinese firms have a lot to learn
from foreign firms operating in the Chinese market,
industry-level inward FDI is likely to satisfy part of
the Chinese firms’ need for advanced industry-level
knowledge and, thus, reduce the firms’ propensity to
invest in foreign countries with comparative technol-
ogy advantage. This is not the case for Chinese firms
who have already narrowed the technology gap in
the domestic market.
It is worth noting that while our study finds strong
support for Chinese firms’ knowledge-seeking
outward FDI motives, Buckley et al. (2007a) did not.
This is likely due to one major difference in empirical
design. While Buckley et al. (2007a) examined
Chinese firms’ outward FDI from 1984 to 2001, we
focused on Chinese firms’ outward FDI from 1990 to
2009. We suspect that in more recent years Chinese
firms have been more active in technology seeking
through outward FDI. To examine this possibility, we
created a year dummy variable (Year dummy 2003),
which takes the value of ‘1’if Chinese firms’ overseas
investments have taken place since 2003 and ‘0’
otherwise. We chose 2003 as a cutoff point for the
dummy variable because: (1), in 2003, the Chinese
government formalized favorable policies to support
Chinese firms’ knowledge-seeking investments over-
seas; and (2) anecdotal evidence on Chinese firms’
technology-seeking M&As has increased in business
news since 2003 (Luo et al., 2010; Rui and Yip,
2008). In Model 6 of Table 3, we found that the
interaction term between the year dummy and
industry-specific host country technology advantage
has a positive and statistically significant coefficient
estimate (p < 0.01), which suggests that Chinese
firms had a greater propensity to invest in countries
with technology advantages after 2003.
Finally, as a robustness check, we controlled for a
host country’s openness to foreign investments by
including the FDI Restrictiveness Index developed
by OECD (results are available upon request).
Despite a substantially smaller sample (i.e., 666), we
found that this index has a statistically significant
and negative effect on Chinese firms’ propensity to
invest in that host country (p < 0.01). The results for
our main hypotheses remain consistent.
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290 J. Li et al.
DISCUSSION AND CONCLUSION
There is a global trend toward knowledge economies
in which the source of value has been shifting from
tangible assets to intangible knowledge assets
(Mudambi, 2008). Because activities at the upstream
(R&D) and downstream (marketing) ends of the
value chain are intensive in their application of
knowledge, value added has become increasingly
concentrated at these two ends (Mudambi, 2007).
Creating and capturing value from knowledge assets
has become a cornerstone of firm strategy (Teece,
1998). Emerging market firms have made tremen-
dous efforts in recent years to catch up with
developed market firms and perform more know-
ledge-intensive, higher value-added activities
(Mudambi, 2008). Our study examined emerging
market firms’ efforts in acquiring technological
knowledge at the upstream end.
We found that Chinese manufacturing MNEs tend
to invest in a host country that has industry-specific
technology advantage relative to China. This result is
consistent with the knowledge-seeking argument
that EMNEs invest overseas to enhance their tech-
nological capabilities in order to catch up with devel-
oped market MNEs. We also found that inward FDI
in the Chinese market decreases the positive impact
of a host country’s industry-specific technology
advantage on Chinese manufacturing firms’ short
run propensity to invest in the host country. This
finding supports our argument that inward FDI in
emerging markets, by generating knowledge spill-
overs that benefit local firms, represents an important
alternative source of technological knowledge for
EMNEs and, thus, decreases EMNEs’ propensity for
technology-seeking outward FDI.
It is noteworthy that we obtained these findings
after controlling for a large number of factors iden-
tified in the previous literature. These factors include
other important FDI motives besides knowledge
seeking (e.g., market seeking, natural resource
seeking), firm characteristics (e.g., firm experience
in host and home countries and government
support), and home and host country characteristics
(e.g., institutional and cultural distances).
This study has theoretical and empirical implica-
tions for research on EMNEs (Buckley et al., 2007a;
Luo and Tung, 2007; Ramamurti, 2009; Rugman and
Li, 2007). Our study is among the first to investigate
how inward FDI influences knowledge-seeking
outward FDI in the context of emerging markets.
Inward FDI and outward FDI, as two learning
Copyright © 2012 Strategic Management Society
mechanisms for EMNEs, can both provide opportu-
nities for EMNEs to access superior knowledge that
will help them conduct higher value-added activities
along the value chain. The fact that inward FDI in
China can mitigate Chinese firms’ propensity to
conduct technology-seeking outward FDI further
indicates that inward FDI and outward FDI provide
overlapping learning opportunities for EMNEs. In
industries where Chinese firms have a larger tech-
nology gap with foreign firms in the Chinese market,
the mitigating effect of inward FDI is more salient,
which suggests that technology supplied by inward
FDI can, in this case, satisfy Chinese firms’ knowl-
edge need to a greater extent.
We caution that the need to conduct outward FDI
is not completely eliminated by inward FDI. Even in
industries with substantial inward FDI, Chinese
firms are still attracted to host countries with com-
parative technology advantage (see Figure 1). Thus,
despite the fact that inward and outward FDI provide
some overlapping learning opportunities to emerg-
ing market firms, outward FDI can bring in
additional knowledge benefits that are not readily
available in domestic markets. Our conclusion is
consistent with the observation that MNEs from
developed markets tend to transfer more standard-
ized technologies to emerging markets while
keeping more sophisticated technologies at home
(Mudambi, 2008).
Our study also contributes to the empirical litera-
ture on Chinese MNEs’ outward FDI. In particular,
our study extends Buckley et al. (2007a)’s pioneer-
ing empirical research in two aspects. First of all, we
developed a more fine-grained analysis by focusing
on firm-level rather than country-level outward FDI
and using industry-specific patent information
rather than country-level patent data to capture
host country comparative technology advantage. Our
approach allows us to examine more closely how a
firm’s decision to invest overseas for technology
seeking depends on host country industry-specific
technology advantage. Furthermore, our study com-
pared the effect of industry-level technology advan-
tage on Chinese firms’ outward FDI in different
time periods. The empirical analysis indicates that
technology-seeking outward FDI has gained
momentum among Chinese firms since 2003, which
suggests that the Chinese government’s recent
policy support for technology-seeking overseas
investments may have played an important role in
Chinese firms’ overseas investment decisions (Luo
et al., 2010).
Global Strat. J., 2: 277–295 (2012)
DOI: 10.1111/j.2042-5805.2012.01042.x
 Knowledge Seeking and OFDI of Emerging Market Firms
Our study has important practical implications for
firms’ international strategies. First of all, while
emerging market firms can invest overseas to
enhance their technological capabilities, they should
also evaluate the possibility of securing technologi-
cal resources from their interactions with foreign
firms operating in the domestic market. Seeking
technology overseas can be challenging for emerg-
ing market firms due to their limited international
experience and weak ability to develop network ties
with technology leaders. Cantwell and Mudambi
(2011) observed that as compared with technology
leading MNEs, technology laggard MNEs have
limited resources to establish local connections and,
thus, have a hard time sourcing knowledge from
knowledge clusters in foreign countries. Learning
from inward FDI may, therefore, be a viable first step
for laggard EMNEs to enhance their technological
capabilities. As they source knowledge locally and
become stronger in their technological capabilities,
they can invest abroad to gain access to knowledge
networks in advanced economies.
Our analysis further suggests that while inward
FDI can, to some extent, satisfy Chinese MNEs’
need for advanced technological knowledge, knowl-
edge spillovers from inward FDI do not fully substi-
tute for knowledge gained from outward FDI. In
particular, when the technology gap between
EMNEs and developed market firms in EMNEs’
domestic markets is gradually decreased and when
learning opportunities become increasingly limited
in domestic markets, knowledge spillovers from
inward FDI will not suffice and EMNEs need to
consider pursuing technology acquisition opportuni-
ties through outward FDI. Thus, learning from
inward FDI may reduce only the immediate need for
EMNEs to make technology-seeking outward FDI
and any short run substitution effect may not be
permanent.
Limitations and future research
Since our arguments are developed specifically for
EMNEs, a natural question is whether the arguments
are also applicable to developed market MNEs.
There is strong evidence that firms in developed
markets also have the incentive to invest overseas for
technology seeking (Chung and Alcacer, 2002;
Kogut and Chang, 1991). However, inward FDI will
likely have a differential effect on the outward FDI
decisions of EMNEs and developed market MNEs
for the following reasons: first, EMNEs tend to lag
Copyright © 2012 Strategic Management Society
291
behind developed-market firms in technological
capabilities, and so inward FDI from developed
markets can provide abundant learning opportunities
for emerging market firms’ technology catch-up. By
contrast, the technology gap among developed
markets is much smaller, and inward FDI in devel-
oped markets will likely create relatively limited
learning opportunities. Indeed, Meyer and Sinani
(2009) argued that inward FDI generates negligible
demonstration effects in developed markets, and that
it benefits domestic firms primarily through compe-
tition effects. Second, while EMNEs tend to have
limited international experience to efficiently engage
in global technology seeking (Luo and Tung, 2007),
developed market MNEs tend to be more experi-
enced and efficient in global technology seeking
because of their early-mover status in international
investment (Mudambi, 2008).
For these two reasons, while inward FDI can
reduce the urgency for EMNEs to invest overseas for
technology-seeking purposes, the mitigating effect
of inward FDI may be less salient in developed
markets. We encourage future research to undertake
a multicountry analysis to compare the interaction
between inward FDI and outward FDI in developed
versus emerging markets.
Scholars can adopt a more direct approach to
examine the knowledge-seeking behavior of EMNEs
in future research. To the extent that Chinese MNEs
tend to invest in countries with industry-level
comparative technology advantage, our findings
are consistent with the argument that EMNEs seek
knowledge overseas. Such an approach has been fre-
quently adopted in the literature. For instance, to
examine the extent to which firms go abroad to
access technology available in other locations,
Chung and Alcacer (2002) investigated whether and
how a state’s technical capabilities in the United
States affects foreign firms’ location choice in the
US. Similarly, Kogut and Chang (1991) investigated
Japanese firms’ knowledge-seeking behavior by
examining the effect of relative technological capa-
bilities that the United States has over Japan on
Japanese direct investments into the United States.
Nevertheless, we encourage future research to inves-
tigate directly emerging market firms’ knowledge-
seeking behavior overseas, such as through the
establishment of R&D alliances with firms from
developed markets, and engagement in innovation
clusters overseas (Cantwell and Mudambi, 2011;
Narula and Santangelo, 2009). We also encourage
the use of qualitative approaches such as survey or
Global Strat. J., 2: 277–295 (2012)
DOI: 10.1111/j.2042-5805.2012.01042.x
292 J. Li et al.
case studies to gather first-hand evidence of emerg-
ing market firms’ knowledge-seeking behavior in
foreign markets (Deng, 2009; Rui and Yip, 2008).
Due to data limitations, we incorporated only
Chinese MNEs’ international investments in joint
ventures and wholly owned subsidiaries through
M&As. JVs and M&As have constituted Chinese
firms’ primary outward FDI activities over the last
two decades (Buckley et al., 2008; Deng, 2007).
Even so, we suspect that greenfield wholly owned
subsidiaries (such as R&D centers) will become
more important in the future. Scholars can compare
these different investment modes used by EMNEs
for knowledge seeking.
While both the upstream R&D and downstream
marketing activities are knowledge intensive
(Mudambi, 2008), this study focused on EMNEs’
technology seeking at the upstream end of the value
chain. In practice, EMNEs’ knowledge seeking goes
beyond technology and may include acquisition of
other valuable resources and capabilities, such as
brand equity and marketing expertise (Luo and
Tung, 2007). Therefore, researchers can examine
whether host country comparative advantage in mar-
keting capabilities and brand equity drive EMNEs to
pursue outward FDI and whether inward FDI
strengthens or weakens EMNEs’ propensity to invest
overseas for brand and marketing knowledge.
Finally, it is important to note the advantages and
shortcomings of using patents as a measure of tech-
nological knowledge. Patents are a fairly objective
indicator of technology and innovation (Almeida
and Phene, 2004; Fagerberg and Srholec, 2008;
Furman et al., 2002; Kumaresan and Miyazaki,
1999; Niosi, 2002). We can also generate a fine-
grained longitudinal and cross-sectional analysis
with patent measures (Cohen, Nelson, and Walsh,
2000). Nevertheless, patents are an imperfect
measure of technological knowledge (Nelson and
Rosenberg, 1993), as some knowledge is not patent-
able, different companies in different industries have
different incentives to apply for patents, and patent
counts may not fully reflect the economic value of
patents.
ACKNOWLEDGEMENTS
We are grateful for the constructive guidance and
insightful comments provided by the coeditors,
Alvaro Cuervo-Cazurra and Torben Pedersen. We
also thank two anonymous reviewers for their
Copyright © 2012 Strategic Management Society
invaluable suggestions. We acknowledge the finan-
cial support from the Social Sciences and Humani-
ties Research Council of Canada. The usual
disclaimer applies.
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