The impact of host country institutional quality on OFDI: Evidence from China

This paper is aimed at investigating the influence of the institutional quality of the host country on China's outward foreign direct investment (OFDI) from a binary margin perspective. The quality of the host country's system is assumed to have a positive impact on the extensive margin of OFDI in terms of political stability (PS), regulatory quality (RQ), the rule of law (RL), and the control of corruption (CC); however, such system quality inhibits the growth of the intensive margin via RQ, voice and accountability (VA). We further find that institutional differences and the extensive margin of OFDI have a negative relationship. Heterogeneity analysis shows that the host country's institutional quality significantly contributes to the extensive margin of investment when the host country is a non-low-income country, the investment is nongreenfield investment, and the industry invested in is the real estate industry. There is a moderating effect of investment motives on the relationship between host country institutional quality and OFDI where host country institutional quality positively affects the extent of investment when the investment motive is market seeking and negatively affects the extent of investment when the investment motive is natural resource seeking.