Evolution of China's inward FDI regime and its interactions with multinational enterprises : an institutional approach

Zhao, Yilin (2025) Evolution of China's inward FDI regime and its interactions with multinational enterprises : an institutional approach. PhD thesis, Birkbeck, University of London.

Abstract

This thesis adopts a three-paper format to examine the interactions between the Chinese government, multinational enterprises (MNEs) as well as other stakeholders in the context of China’s institutional change, framed within institutional theory. Following the introduction (Chapter 1), the first paper (Chapter 2) conducts a co-evolutionary analysis of China’s inward foreign direct investment (IFDI) policy. The paper introduces and applies the novel concepts of institutional actor/action alongside the established notions of institutional entrepreneurs/entrepreneurship to investigate institutional change in an emerging economy. Through a historical cross-period analysis, the findings reveal that China’s IFDI policy system is not solely driven by the Chinese government but evolves through a co-evolutionary dynamic process. This process involves interactions between government decision-making and institutional action or institutional entrepreneurship carried out by Guangdong grassroots farmers, MNEs and their home-country governments, local Chinese firms, and international organizations such as the WTO. The study offers a comprehensive theoretical framework for future co-evolution research and extends institutional theory by shedding light on the multifaceted sources and dynamics of institutional change in emerging economies. The second paper (Chapter 3) presents a case study of nine MNEs involved in the Heavy Air Pollution Weather Emergency Control (HAPWEC) policy reform process in a coastal province of eastern China. Using a grounded theory approach, the paper develops an EIM (Enabling Conditions, Intrinsic Mechanisms, and Typical Modes) theoretical model. This model complements the overarching theoretical framework developed in the first study by identifying the enabling conditions under which MNEs act as institutional entrepreneurs and elucidating the detailed decision-making pathways that allow MNEs to effectively engage with the Chinese government. The study deepens our understanding of the initiation and mechanisms of institutional entrepreneurship by MNEs in the context of policy reform. The third paper (Chapter 4) investigates the decline in foreign direct investment (FDI) penetration in China, focusing on the impact of the Administrative Examination and Approval Reform (AEAR) implemented after China’s 2001 accession to the WTO. Through a difference-in-differences (DID) analysis, the paper demonstrates that AEAR reduces foreign ownership bias and enhances the competitiveness of domestic firms. The findings show that AEAR significantly decreased foreign firm entry while promoting greater domestic firm participation, thereby contributing to the observed decline in FDI penetration. While the first two papers explore the interactions between the Chinese government and MNEs in driving institutional change, this paper emphasises the effects of institutional reforms on firm behaviour. It advances institutional theory by illustrating how reforms in emerging economies can reshape firm dynamics, with policies favouring domestic firms potentially creating less favourable conditions for foreign investors. Finally, Chapter 5 concludes by summarizing the key findings, original contributions, and the theoretical, policy, and managerial implications of the three papers. Keywords: China’s Inward FDI Regime; MNEs; Institutional Approach; Institutional Entrepreneur; Institutional Actor.

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