Resource misallocation, production efficiency and outward foreign direct investment decisions of Chinese enterprises

Resource misallocation, as an essential characteristic of China's progressive reform, has become a significant factor restricting high-quality outward foreign direct investment (OFDI). Using the Database of Chinese Industrial Enterprises (2009-2013), this paper empirically analyzes the impact of resource misallocation on OFDI and its heterogeneous characteristics via the Heckman two-stage selection model. This study finds that total factor productivity has a positive influence on expanding investment quantity. In addition, from the perspective of resource misallocation, factor price distortion inhibits the role of productivity in increasing investment propensity. A mechanism analysis indicates that there is no productivity paradox in the decision-making process of OFDI in China as a whole; but there may be an investment productivity paradox in foreign-funded enterprises, enterprises in coastal areas, and large-scale enterprises. After controlling for factor price distortions, the productivity paradox disappears. Thus, total factor productivity (TFP) becomes an important factor in promoting OFDI propensity of overseas-funded enterprises, enterprises in coastal areas and large-scale enterprises.

Automated summary

Resource misallocation is a significant factor restricting high-quality outward foreign direct investment in China. Total factor productivity plays a crucial role in expanding investment quantity. The investment productivity paradox may exist in certain enterprises but disappears after controlling for factor price distortions. Total factor productivity becomes important in promoting OFDI propensity in overseas-funded enterprises, enterprises in coastal areas, and large-scale enterprises.