1. ¹Department of Finance and Management Science, University of Alberta and NBER, Edmonton, Canada
2. ²Stern School of Business, New York University, New York, USA
3. ³Guanghua School of Management, Peking University, Beijing, China
4. ⁴Ross School of Business, University of Michigan, Ann Arbor, USA

Correspondence: B Yeung, Stern School of Business, New York University, KMC Building, 7–87, 44 West 4th Street, New York, NY 10012, USA. Tel: +1 212 998 0425; Fax: +1 212 995 4221; E-mail: byeung@stern.nyu.edu

Received 13 June 2007; Revised 12 September 2007; Accepted 27 September 2007; Published online 14 February 2008.

Abstract

Recent economic data reveal that, at the infant stage, China's outward foreign direct investment (FDI) is biased towards tax havens and Southeast Asian countries and are mostly conducted by state-controlled enterprises with government sanctioned monopoly status. Further examination of China's savings rate, corporate ownership structures, and bank-dominated capital allocation suggests that, although a surge in China's outward FDI might be economically sensible, the most active players have incentives to conduct excessive outward FDI while capital constraints limit players that most likely have value-creating FDI opportunities. We then discuss plausible firm-level justifications for China's outward FDI, its importance, and promising avenues for further research.