Fiscal Reforms and Multinational Entry Mode in China

Abstract

The main purpose of this study is to empirically investigate the impact of political haz- ards on the entry mode choice of multinational investment. Additionally, this study also investigates the response of a multinational ??rm to contractual hazards in forming a joint- venture. The empirical analysis demonstrates that multinational ??rms respond to political hazards by cooperating with local partners to reduce the risks. The ??scal decentralization in China increases the incentive of local governments to maintain economic prosperity and thus reduces political risks facing multinational ??rms. Therefore, multinational ??rms lo- cated in regions with higher degrees of ??scal decentralization, namely with higher ratios of local government spending or higher retention ratios of local revenue, tend to obtain more shares of joint venture. Regarding contractual hazards, foreign shares of joint-ventures are found to increase with the percentage of machinery and equipment from the source coun- try and the percentage of technicians and managerial personnel from the source country. The estimates are consistent with the theoretical hypothesis, implying that the share of multinational investment in joint-ventures increases with the risks of asset speci??city and technology speci??city.