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Host country institutions and firm-level R&D influences: An analysis of European Union FDI in China

Cai, Huifen; Boateng, Agyenim; Guney, Yilmaz


Huifen Cai

Agyenim Boateng


The paper investigates the effects of institutions and their interaction with firms’ research & development (R&D) levels on foreign direct investment (FDI) inflows in China based on a sample of 680 European Union (EU) firms over the period of 1998 to 2008. Employing panel data estimation approaches and further augmented with the cross-validation technique, our results indicate that EU FDI in China is influenced by the host country’s institutions, rendering support to the institutional theory. Our analysis indicates that the rule of law, institutional reforms and the interaction between institutional reforms and R&D have significant effects on FDI inflows in China. Further analysis suggests that the coefficient for the interaction between the rule of law and R&D is positive and significant after World Trade Organisation (WTO) entry implying that the effects of reforms following the WTO entry much outweigh the impact of rule of law in EU firms’ decisions to invest in China. We also find evidence that EU firms tend to adjust their FDI levels in China in an attempt to reach the desired investment level.

Journal Article Type Article
Publication Date 2019-01
Journal Research in International Business and Finance
Print ISSN 0275-5319
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 47
Pages 311-326
APA6 Citation Cai, H., Boateng, A., & Guney, Y. (2019). Host country institutions and firm-level R&D influences: An analysis of European Union FDI in China. Research in international business and finance, 47, 311-326. doi:10.1016/j.ribaf.2018.08.006
Keywords Business, Management and Accounting (miscellaneous); Finance
Publisher URL
Copyright Statement © 2019. This manuscript version is made available under the CC-BY-NC-ND 4.0 license