Between Markets and Institutions in China: Multinational Enterprises As Actors, East Asian Production Networks and an Organizational Approach to Foreign Direct Investment

Since the end of the Cold War, there has been an extraordinary increase in the share of foreign direct investment (FDI) going to developing countries, and social scientists have taken notice.  Research has focused on institutional factors, in particular their importance in establishing credible commitments.  However, in focusing on institutions, the investors themselves – the multinational enterprises (MNEs) – are largely ignored.  This is because the literature models and measures FDI as bilateral economic flows between countries, rather than conceptualizing it as networks of actors, with strategies, goals and the capacity to organize international production.  We are missing half the story. 

This paper focuses on China, the most successful, large developing country FDI host in absolute terms and relative to its large economy.   In the general and China-specific FDI literatures alike, China presents a string of anomalies in both aggregate inward FDI and when it is decomposed, including unusual allocations across industries, MNE modes of entry and by country of origin.  Almost without exception, China’s domestic institutions serve as the principal explanations, including ones based on credible commitments. 

This paper reconsiders these anomalies through the lens of MNE organization – specifically, their fragmentation of global production through vertically specialized production networks.  Using disaggregated and nested data of industries, sub-industries, firms and a unique database of millions of individual trade transactions, the paper inductively re-constructs Chinese statistical data to uncover very consistent patterns of inward FDI that reveals an underlying MNE organizational logic in the restructuring of East Asian production, for which institutional arguments and market forces alone are unable to account.  More importantly, in contrast to institutional accounts which offer diverse explanations for the anomalies, a MNE organizational approach parsimoniously offers leverage across them.  By examining the international economy through the reconstruction of disaggregated national data, we can learn something about China, East Asia and the organization of the international economy.