Professional Documents
Culture Documents
Department of Accounting, National Chung Hsing University, 250, Kuo Kuang Road, Taichung
402, Taiwan, Republic of China.
b
Department of Accounting and Information Technology, National Chung Cheng University,
168 University Road, Min-Hsiung, Chia-Yi 62102, Taiwan, Republic of China.
*Corresponding author.
Abstract Our research examines the concept of geographic proximity, particularly proximity to knowledge, market and labor resources in China, to understand
how the embedded spatial context of a region inuences the preferences of enterprises investing in China. Using a sample of Taiwanese enterprises investing in
China from 20072011, we nd that proximity to knowledge and labor resources
have a signicant negative inuence on the location choice of Taiwanese enterprises,
whereas proximity to market has a signicant positive inuence. Furthermore, we
nd that the inuence of proximity on location choice changes with different
industry characteristics.
Asian Business & Management (2013) 12, 351380. doi:10.1057/abm.2013.4;
published online 20 February 2013
Keywords: foreign direct investment; location choice; geographic proximity
Introduction
In 1979, China implemented economic reforms and an open-door policy,
allowing its economy to develop rapidly. The expanding internal demand and
advantages of low-cost labor and land have been attracting an increasing inow
of foreign direct investment (FDI). For example, in 2003, FDI inows into
China constituted 10 per cent of FDI worldwide and 30 per cent of FDI in
developing countries (UNCTAD, 2005). During the period 19912007, FDI in
China increased tenfold, and such foreign investment and commercial activity
became a main factor stimulating Chinese economic growth (Das, 2007).
Therefore, management of FDI in China is an important and widely discussed
r 2013 Macmillan Publishers Ltd. 1472-4782 Asian Business & Management
www.palgrave-journals.com/abm/
Yu and Shen
To ll this void, this study looks into the concept of geographic proximity to
analyze how spatial location inuences the location choice of foreign investors
in China. Geographic proximity generally refers to geographic distance among
regions (Atteld et al, 2000; Sohn, 2004), which is a factor crucial to a regions
ability to access resources from other regions (Herander and Saavedra, 2005).
In this study, we characterize each region by its proximity to knowledge, market
and labor resources distributed throughout the country, and examine how
these proximity measures affect the preferences of enterprises investing there.
We use a sample of Taiwanese enterprises investing in China. According to the
China Foreign Economic Statistical Yearbook (19792000), Taiwan is one of
Chinas top three investors. Owing to similarities in language, culture and
tradition, China has always been an important region for Taiwanese foreign
investment, particularly after 1990, when the Taiwanese government published
its Administrative Rules for Indirect Investment or Technological Cooperation
in China, drastically altering the foreign investment environment for Taiwanese
enterprises. Taiwanese investment in China entered a phase of rapid growth,
and according to the Evaluative Report on Inuences to Cross-Strait Trade and
Investment (Ministry of Economic Affairs of Taiwan, 2007), investments by
Taiwanese enterprises in China from 1991 to 2006 totaled US$54.898 billion.
Meanwhile, cross-strait trade as a percentage of total Taiwanese foreign trade
rose from 14.58 per cent in 1995 to 38.43 per cent in 2006. This has provided us
with abundant data.
From the analysis of the 5416 Taiwanese enterprises investing in China from
20012007, proximity to knowledge and labor resources have a signicant
negative impact on the likelihood that Taiwanese enterprises choose a given
region, suggesting that the closer a region is to knowledge and labor resources,
the more likely Taiwanese enterprises are to invest there. Meanwhile, proximity
to market has a signicant positive inuence, indicating that Taiwanese enterprises investing in China prefer regions farther from markets. As this outcome
may be related to the fact that most Taiwanese enterprises investing in China
are manufacturers, the data is further analyzed by industry. For food enterprises, proximity to market is an important factor in choosing a location for
investment; however, manufacturers tend to choose locations with greater
proximity to knowledge and labor resources.
This study makes several major contributions to the literature. First, scholars
have only recently begun to incorporate geographical factors into the analysis
of FDI location choice (Blonigen et al, 2007; Jensen and Pedersen, 2011);
however, their studies are limited to country-level analysis. This study contributes to this stream of research by offering a framework for how the spatial
context of particular regions inuences foreign investors location choice.
Second, sub-national location decisions are particularly relevant for investors
in large and decentralized emerging markets (for example, China and Vietnam),
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Yu and Shen
expertise or marketing expertise (Tsang and Yip, 2007). Strategic assets are
distributed in different countries, indicating that enterprises must seek strategic
assets overseas to maintain long-term advantage (Dunning, 2000). However,
regardless of perspective, prior research proposes that the purpose of FDI for
enterprises is to tap into markets, natural resources or strategic assets unavailable in the home country (Chung and Alcacer, 2002).
In general, geographic proximity can decrease transportation, management
and supervision costs and business risks (Davidson, 1980). Other papers
suggest that the investment location of enterprises inuences the efciency with
which enterprises acquire resources, and thus the effectiveness of the enterprise
(Alcacer and Chung, 2007; Nachum et al, 2008). In other words, the attractiveness of a certain location to investors is determined by its proximity to desired
resources. On the basis of this idea, this study characterizes each region by
proximity to various resources distributed across China. As the three main
resources that foreign enterprises seek are knowledge, market and labor (Jensen
and Pedersen, 2011), we focus on examining how proximity to these three
resources affects FDI location in China.
According to resource-based theory, resources can be classied into tangible
(such as land, factories and equipment) and intangible (such as brand, reputation, patents, technology and knowledge) (Hill and Jones, 1998). Intangible
resources, including knowledge, are difcult to imitate, which provides enterprises with the distinctiveness necessary for sustainability and competitive
advantage (Liebeskind, 1996). However, in a rapidly changing environment,
organizations seeking to maintain advantage in knowledge must continually
gain more knowledge to build on existing resources and further promote
organizational competitiveness (Grant, 1987). Knowledge can be produced
within an enterprise or absorbed from the external environment. Recently,
cross-border knowledge exchange has become more important in the exploitation of knowledge (Spencer, 2003). Therefore, increasing exposure to potential knowledge spillover is an important consideration for enterprises deciding
location.
Knowledge is considered partially tacit, and the transfer of knowledge
requires regular interaction, meaning that physical proximity is necessary for
enterprises to acquire knowledge from a given location (Kogut and Zander,
1992). Geographical proximity can contribute to information exchange
among enterprises and can provide opportunities for face-to-face exchange
(McDermott and Taylor, 1982). On the other hand, distance increases the
difculty of acquiring knowledge (Nachum and Zaheer, 2005). Moreover,
Spencer (2003) found that distance plays a role in cross-border exchanges of
knowledge and technology, meaning that having a source of proximate knowledge is important in acquiring knowledge. In addition, many empirical studies
demonstrate that knowledge spillover exists, and that its extent increases with
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Yu and Shen
proximity (Almeida and Kogut, 1999; Storper and Venables, 2004). Furthermore,
geographic distance increases the cost of knowledge and technology transfer
(Leamer and Storper, 2001). Therefore, regions closer to areas of dense knowledge in China have more knowledge that can be acquired, and enterprises are
more willing to invest in those regions.
Furthermore, with the increasing speed of knowledge exploitation, the
sooner knowledge is acquired, the higher its value. As geographic proximity is
benecial for earlier knowledge acquisition (Gaspar and Glaeser, 1998),
geographic proximity has high value for enterprises. On the other hand,
distance makes knowledge transmission and transfer difcult, and the knowledge base in remote regions is weaker (Chung and Alcacer, 2002). Enterprises
operating in remote regions are thus at an information disadvantage, which can
negatively impact on investment performance. Therefore, the chance of enterprises choosing to invest in such regions may decrease. That is, the closer the
regions are to areas where knowledge is distributed, the more likely the
enterprises are to invest in these regions.
Hypothesis 1:
Carr et al (2001) found that asset-seeking enterprises, which pursue low costs
for production and trade, observe comparative advantages and divide business
356
Research Method
Sample and data collection
Firms listed on the Taiwan Stock Exchange Corporation and investing in China
over the 7-year period 20012007 comprise the sample for this study. Information is mainly collected from the Taiwan Economic Journal (TEJ), the Market
Observation Post System (MOPS) and the China Statistical Yearbook published
by China Statistics Press.
Empirical models
The research utilizes the conditional logit model by McFadden (1973) in the
context of econometrics, which is well suited for the modeling of polychotomous choice situations (Hoffman and Duncan, 1988). Compared with other
discrete-choice models, such as the multinomial logit model, the conditional
logit model is particularly appropriate for models in which the choice among
alternatives is modeled as a function of the characteristics of the alternatives, in
addition to the characteristics of the individual making the choice (So and
Kuhfeld, 1995; Greene, 2008). This methodology has been well developed
and widely used in estimating location choices of FDI (for example, Belderbos and
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Yu and Shen
Carree, 2002; Alcacer and Chung, 2007). Following prior studies, we employ
the conditional logit model to analyze the location choices of Taiwan investors
in China. After considering controls and variables, the study tests the following
theoretical model:
INVijt a0 a1 NKijt 1 a2 NMijt 1 a3 NLRijt 1 a4 KNOWijt 1
a5 MARKETijt 1 a6 LABORijt 1 a7 GDPijt 1
a8 INFRASINVijt 1 a9 INDUSIZEijt 1 a10 COASTALijt 1
a11 SIZEit a12 PER SALEit a13 RDit a14 GSit
a15 CAPINTSIVEit
3
X
k1
INVijt
NKijt 1
NMijt 1
NLRijt 1
KNOWijt 1
MARKETijt 1
LABORijt 1
GDPijt 1
INFRASINVijt 1
INDUSIZEijt 1
COASTALijt 1
SIZEit
PER_SALEit
RDit
GSit
CAPINTSIVEit
INDUikt
YEARint
358
bk INDUikt
6
X
gn YEARint e
n1
Measurement of variables
Dependent variables
The dependent variable is derived from the annual reports of listed enterprises,
and analysis of the TEJ database and MOPS Summary of Investments in
China. When dening investment regions, the study adopts Chinas classication of regions, as all vital statistics in China appear by region. According to
the denitions used by the China Bureau of Statistics, 31 economic areas
span China. Specically, China is ofcially organized into 22 provinces
(Anhui, Fujian, Gansu, Guangdong, Guizhou, Hainan, Hebei, Heilongjiang,
Henan, Hubei, Hunan, Jiangsu, Jiangxi, Jilin, Liaoning, Qinghai, Shandong,
Shaanxi, Shanxi, Sichuan, Yunnan and Zhejiang), 4 municipalities
(Beijing, Tianjin, Shanghai and Chongqing) and 5 autonomous regions (Inner
Mongolia, Guangxi Zhuang, Tibet, Ningxia Hui and Xinjiang Uyghur). If
enterprise i remits investment during year t to a specic Chinese province
(region) j, INVijt 1, otherwise INVijt 0.
Independent variables
The independent variables include proximity to knowledge, proximity to
market and proximity to labor resources. For measurement of proximity, the
study applies the metrics of Nachum et al (2008) and Alfaro et al (2008). The
study includes proximity of the region j to knowledge, market and labor
resources in all other regions r.
Proximity to knowledge : NKj
30
X
DISjr PATENTr
r1
30
X
DISjr PCGDPr
r1
30
X
DISjr LABORr
r1
DISjr
PATENTr
PCGDPr
LABORr
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Yu and Shen
This index will produce scores from 1 to 100. The index measures proximity
to knowledge, market and labor. The smaller the number, the greater the
proximity; the larger the number, the greater the distance.
The following three variables are used to measure the intrinsic endowments
of each region and examine how a regions intrinsic endowments inuence the
investment location of enterprises. In economics, a countrys factor endowment
is commonly understood as the amount of production factors that a country
possesses (Krueger, 1968; Wilson, 1991). Intrinsic endowments here refer to the
amount of resources inherent to a region. Prior studies indicate that regions
with a large resource endowment tend to be more desirable for foreign investors
than those with a small endowment, all other things being equal (for example,
Gao, 2005). In particular, three kinds of resources are important, namely
knowledge, market and labor resources (Jensen and Pedersen, 2011). Therefore,
we measure a regions intrinsic endowments by its current knowledge stock,
market potential and labor force, and include these variables in the model as
controls.
1. Knowledge stock (KNOW ): The number of patents approved in each
investment province (region).
2. Market potential (MARKET ): Average per capita GDP in each investment
province (region).
3. Labor resources (LABOR): Number of people with education level above
middle school in each investment province (region).
Control variables
To control for factors such as special characteristics of each province (region)
and special characteristics of the enterprises, the model includes the following
control variables:
1. Basic infrastructure (INFRASINV): Many empirical studies nd that basic
infrastructure is important in attracting overseas investment; the more
complete the basic infrastructure of an investment region, the lower the
production cost for enterprises, which helps attract enterprises to invest and
set up factories in the region (Cheng and Stough, 2006). Therefore,
360
2.
3.
4.
5.
6.
7.
8.
9.
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Yu and Shen
that Taiwan lacks, enterprises with lower capital intensity will invest in
China to take advantage of the abundant and cheap labor to reduce
production costs. The ratio of an enterprises xed assets to total assets is
used to measure capital intensity.
10. Industry dummies (INDU): To control for different industries, this study
designs three dummy variables to measure whether enterprises are in the
electronics, service or food industries.
11. Year dummies (YEAR): As the sample period covers 7 different years, this
study incorporates six dummy variables in the model to control for
differences between years.
Empirical Results
Descriptive statistics
Our research sample comprises Taiwanese-listed enterprises investing in China.
This study obtained proof of investment from the TEJ, and data on yearly
enterprise investment remittance from the MOPS. The sample covered a 7-year
period and a total of 5416 enterprises, mostly from the electronics manufacturing industry (61.34 per cent); the rest are enterprises in other manufacturing
industries (32.98 per cent), service industry (3.56 per cent) and food industry
(2.12 per cent). Of the 5416 enterprises, 120 had missing information in the
industry category, and were eliminated, leaving 5296. As enterprises choose to
invest in one of the 31 provinces (regions) in China, the sample is 5296 31,
giving a total sample size of 164 176 for testing the logistic model.
The descriptive statistics for the variables in the empirical model can be found
in Table 1. The means for proximity to knowledge (NK), proximity to market
(NM) and proximity to labor (NLR) are close. Moreover, the highest value
for GDP (GDP) is 26 204.47, whereas the lowest is only 117.46, showing that
market size and potential of certain regions are far higher than for others. The
highest value for basic infrastructure (INFRASINV) is 29 657.32, whereas
the lowest is just 64.05, with a standard deviation of 5869.82, showing that the
basic infrastructure of some regions is much better than for others. Observing
variables measuring enterprise characteristics, namely, R&D intensity (RD),
sales growth (GS) and rm size (SIZE), signicant differences were found
among the enterprises.
To perform a logit analysis, we rst performed a Pearson correlation
analysis, with the resulting matrix shown in Table 2. Proximity to knowledge
(NK), proximity to market (NM) and proximity to labor (NLR) have a signicant positive correlation, suggesting that knowledge, market and labor are
concentrated in certain regions in China. Meanwhile, there are signicant
362
Code
Mean
NK
167 896
41.65
NM
NLR
KNOW
MARKET
LABOR
GDP
INFRASINV
INDUSIZE
COASTAL
SIZE
PER_SALE
RD
GS
CAPINTSIVE
167 896
167 896
167 896
167 896
167 896
167 896
167 896
167 896
167 896
167 896
164 610
164 610
167 462
167 276
42.90
34.23
6440.38
1.47
22 471.27
5043.52
4853.09
0.23
0.35
15.07
13 213.85
0.03
0.18
0.22
Standard
deviation
25.75
31.50
26.12
10 274.74
1.12
15 257.86
4600.76
5869.82
0.10
0.488
1.34
21 023.08
0.14
1.04
0.21
Minimum Maximum
1.00
100.00
1.00
1.00
7.00
0.28
292.36
117.46
64.05
0.05
0
11.94
11.52
0.00
1.00
0.00
100.00
100.00
72 220.00
7.30
71 940.60
26 204.47
29 657.32
0.51
1
20.25
459 318.00
7.00
50.82
8.16
Regression results
Table 3 presents the regression results. According to the table, a regions
intrinsic knowledge, market and labor resources consistently show positive
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Yu and Shen
1. Proximity to
knowledge
2. Proximity to
market
3. Proximity to
labor
4. Intrinsic
knowledge
5. Intrinsic market
6. Intrinsic labor
7. GDP
8. Infrastructure
9. Industrialization
10. Coastal area
11. Firm size
12. Firm
performance
13. R&D intensity
14. Sales growth
15. Capital intensity
10
11
12
13
14
15
0.709
1
0.866
0.828
0.278
0.259
0.299
0.288
0.374
0.390
0.263
0.504
0.501
0.001
0.003
0.438
0.386
0.435
0.271
0.576
0.413
0.001
0.003
0.399
0.380
0.409
0.304
0.616
0.393
0.000
0.009
0.520
0.500
0.802
0.781
0.576
0.472
0.011
0.027
1
0.005
0.496
0.605
0.585
0.437
0.025
0.049
0.000
0.000
0.003
0.001
0.006
0.010
0.002
0.008
0.024
0.007
0.007
0.051
0.075
0.050
0.218
1
0.071
0.028
0.000
0.000
0.003
1
0.740
0.469
0.354
0.258
0.000
0.008
0.000
0.001
0.005
1
0.849
0.627
0.512
0.018
0.037
1
0.545
0.341
0.035
0.068
0.004
0.007
0.037
0.008
0.019
0.066
and indicate 10 per cent, 5 per cent and 1 per cent signicance level, respectively.
Note: Number of observations included in the analysis of correlations between variables is 164 176.
0.579
1
0.010 0.000
0.026 0.000
0.001
0.001
0.025
0.000
0.000
0.000
1
0.258
0.120
0.010
0.072
0.030 1
Code
Intercept
INTERCEPT
Proximity measures
Proximity to
NK
knowledge
Proximity to market
NM
Proximity to labor
NLR
Expected
sign
?
W/O proximity
measures
With proximity
measures
0.038 (249.814)
0.014 (41.964)
0.007 (3.642)
Intrinsic endowments
Intrinsic knowledge
Intrinsic market
Intrinsic labor
KNOW
MARKET
LABOR
Control variables
GDP
Infrastructure
Industrialization
Coastal area
Firm size
Firm performance
R&D intensity
Sales growth
Capital intensity
GDP
INFRASINV
INDUSIZE
COASTAL
SIZE
PER_SALE
RD
GS
CAPINTSIVE
0.000 (839.486)
0.000 (352.010)
5.028 (189.765)
0.008 (0.009)
0.204 (267.303)
0.000 (15.781)
0.068(0.320)
0.038 (4.926)
0.615 (28.443)
0.000 (832.977)
0.000 (406.815)
2.871 (61.150)
0.261 (8.410)
0.206 (269.215)
0.000 (15.933)
0.069 (0.324)
0.039 (4.975)
0.620 (28.695)
?
?
?
?
?
?
?
?
?
0.309 (66.709)
0.237 (3.269)
0.012 (0.014)
0.308 (19.660)
0.887 (151.409)
1.838 (540.784)
0.618 (38.211)
1.892 (203.067)
3.313 (471.666)
21
28 249.50
0.326
164 176
0.312 (67.245)
0.239 (3.297)
0.012 (0.014)
0.379 (23.222)
0.939 (129.975)
1.805 (409.599)
0.354 (10.875)
1.189 (66.259)
2.522 (241.748)
24
27 727.20
0.340
164 176
0.000 (37.277)
0.824 (1132.370)
0.000 (4.782)
0.000 (40.083)
0.795 (984.640)
0.000 (3.825)
,
and indicate 10 per cent, 5 per cent and 1 per cent signicance level, respectively.
Note: Wald statistics included in parentheses.
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Yu and Shen
The log-likelihood ratio ( 2 log-likelihood) for the model including the
proximity measures and for the model without proximity measures is 27 727.20
and 28 249.50, respectively, which are both signicant at 99 per cent condence
level. In addition, the predictability of the model with the measures for
proximity is higher than the predictability of the model without the measures,
indicating that proximity measures have incremental explanatory power with
regard to location choice.
As shown in Table 3, proximity to knowledge, proximity to market and
proximity to labor resources each have a different inuence on location choice
by Taiwanese enterprises. The coefcient for proximity to knowledge (NK)
is 0.038, which is signicant at the 1 per cent level, suggesting that regions
more centrally located with regard to the spatial distribution of the countrys
knowledge are more likely to be chosen for investment, which supports
Hypothesis 1. Moreover, this suggests that the cost of accessing knowledge,
higher in regions that are farther away, decreases an enterprises desire to invest
in a region.
The coefcient for proximity to market (NM) has a signicant positive effect
(0.014, P-valueo0.01), indicating that regions less centrally located with regard
to the countrys markets are more likely to be chosen for Taiwanese enterprises
investment locations, which is contrary to Hypothesis 2. It is generally observed
that many Taiwanese manufacturers entering China early set up production
bases in China; however, they mainly export their products, instead of focusing
on the Chinese market. Therefore, being close to the market has relatively fewer
benets, particularly as the facility costs are higher in high-population areas.
As the sample period is 20012007 and the sample for this study mainly
comprises manufacturers, particularly electronics manufacturers, the results
from this study are consistent with practical observations.
Finally, consistent with Hypothesis 3, the coefcient for proximity to labor
resources (NLR) has a signicant negative effect ( 0.007), suggesting that
proximity to regions with large labor pools also increases the likelihood of
Taiwanese enterprises investing in that region.
Furthermore, according to Table 3, most of the control variables are statistically signicant, which is consistent with the expectations. First, the coefcients for basic infrastructure (INFRASINV) and level of industrialization
(INDUSIZE) are positive and statistically signicant, indicating that the higher
the level of basic infrastructure and industrialization, the more likely Taiwanese
enterprises are to invest in the region. This is consistent with past locationchoice research, and shows that geography is an important inuence in location
choice. If these factors are absent from the regional model, judgment about
location choice by enterprises will include bias. On the other hand, the coefcients for the enterprise characteristics variables, including enterprise size
(SIZE), rm performance (PER_SALE) and sales growth (GS), are positive
366
and statistically signicant, suggesting that the larger the enterprise, the better
the rm performance, the greater the sales growth therefore, the more likely
the enterprise is to invest in China.
The coefcient for capital intensity (CAPINTSIVE) is negative and statistically signicant, suggesting that a labor-intensive enterprise will most probably
invest in China. This is consistent with the main reasons given by Taiwanese
enterprises. In addition, the industry dummies are statistically signicant,
meaning that different industries might have different reasons and strategies
for investing in China. The effect on the electronics industry is positive, whereas
the effect on the food industry is negative, showing that compared with other
manufacturing industries, enterprises in electronics manufacturing will most
probably choose to invest in China. However, the food industry is less likely to
do so. As the Chinese economy has developed and consumer purchasing power
has increased, the number of enterprises investing in China is changing.
However, these results are consistent with actual facts during the sample period.
Different industries have various considerations for location choice, due to
different investment purposes. To gain additional insight into industrial
variations on the impact of proximity, this study examines location choice
across various industries, specically viewing the manufacturing, food and
services industries. Table 4 shows the results.
As shown in Table 4, the explanatory powers of the model for the
manufacturing, food and services industries (Nagelkerke R2) are 0.349, 0.242
and 0.270, respectively, whereas the log-likelihood ratios ( 2 log-likelihood)
are 26 118.95, 527.53 and 868.52, respectively, all of which are signicant at 99
per cent condence level. However, the inuence of the different proximity
factors on the various industries differs.
For manufacturers, the intrinsic characteristics of the regions signicantly
inuence location choice by enterprises, as knowledge stock (KNOW), market
potential (MARKET) and labor resources (LABOR) all have a signicant
positive effect. This indicates that the higher the knowledge stock, the greater
the market potential, and the greater the labor resources of a region therefore,
the more likely Taiwanese enterprises are to invest in that region. Beyond the
intrinsic characteristics of a region, the inuence of proximity measures on
investment position is also statistically signicant, as proximity to knowledge
(NK) and proximity to labor resources (NLR) have a signicant negative effect,
whereas proximity to market (NM) has a signicant positive effect. This
indicates that for manufacturers, regions closer to Chinas knowledge and labor
resources are more likely to attract investment. Meanwhile, as the effect of
proximity to market is signicantly positive, this suggests that manufacturers
are less likely to invest in regions that are proximate to Chinese markets.
For the food and services industries, the effect of knowledge endowments
(KNOW) and labor resources (LABOR) is insignicant. Rather, the market is
r 2013 Macmillan Publishers Ltd. 1472-4782
367
368
Intercept
Proximity measures
Proximity to knowledge
Proximity to market
Proximity to labor
Intrinsic endowments
Intrinsic knowledge
Intrinsic market
Intrinsic labor
Control variables
GDP
Infrastructure
Industrialization
Coastal area
Firm size
Firm performance
R&D intensity
Sales growth
Capital intensity
Year dummies
Year 2002
Year 2003
Year 2004
Year 2005
Year 2006
Year 2007
Degree of freedom (DF)
2 log-likelihood
Nagelkerke R2
N
,
Code
Expected sign
Food
8.334
Service
6.983
Manufacturing
9.355 (1377.733)
INTERCEPT
NK
NM
NLR
KNOW
MARKET
LABOR
GDP
INFRASINV
INDUSIZE
COASTAL
SIZE
PER_SALE
RD
GS
CAPINTSIVE
0.000 (0.167)
0.000 (0.083)
4.879 (3.857)
0.871 (2.819)
0.270 (3.376)
0.000 (6.649)
64.550 (3.033)
1.639 (2.075)
1.519 (1.175)
0.000 (5.838)
0.000 (1.425)
4.022 (4.740)
0.398 (0.819)
0.059 (0.627)
0.000 (2.050)
18.762 (0.955)
0.174 (0.744)
1.464 (9.453)
0.000 (844.196)
0.000 (426.039)
2.774 (52.768)
0.320 (11.382)
0.213 (274.787)
0.000 (16.926)
0.069 (0.330)
0.042 (5.949)
0.702 (23.325)
YEAR_2002
YEAR_2003
YEAR_2004
YEAR_2005
YEAR_2006
YEAR_2007
?
?
?
?
?
?
0.492 (1.042)
0.960 (3.549)
1.074 (4.308)
1.780 (5.726)
1.500 (3.279)
3.094 (9.115)
21
527.53
0.242
3565
0.391 (0.779)
0.824 (3.419)
2.057 (16.617)
1.099 (3.801)
2.388 (9.723)
3.680 (18.591)
21
868.52
0.270
4836
0.394 (23.325)
0.975 (129.264)
1.848 (394.492)
0.305 (7.482)
1.090 (51.318)
2.452 (211.351)
21
26 118.95
0.349
155 775
(10.306)
0.001 (0.013)
0.029 (5.548)
0.026 (2.552)
0.000 (2.488)
0.432 ((6.408)
0.000 (0.698)
and indicate 10 per cent, 5 per cent and 1 per cent signicance level, respectively.
Note: Wald statistics included in parentheses.
(23.626)
0.010 (0.926)
0.037 (10.288)
0.011 (0.491)
0.041 (261.197)
0.014 (38.386)
0.008 (4.306)
0.000 (0.487)
1.063 (63.065)
0.000 (0.882)
0.000 (46.938)
0.802 (927.781)
0.000 (5.499)
Yu and Shen
Variables
Sensitivity analyses
The correlation coefcient for the relationship between proximity to knowledge
(NK) and proximity to labor resources (NLR) is 0.866. Although the VIF did
not show any problems of multicollinearity, to eliminate any statistical issues
due to the relationship between proximity to knowledge and proximity to labor
resources (Allison, 1977), the study uses a method from prior literature (for
example, Mosteller and Tukey, 1977; Smith and Sasaki, 1979) to eliminate
factors related to proximity to knowledge in the measure for proximity to labor,
and produce a new measure for proximity to labor. This test is implemented in
two steps. First, we estimate a pooled regression of proximity to labor on a
constant and on proximity to knowledge. The coefcient estimates on the
constant and proximity to knowledge are then used to construct estimates of
new proximity to labor resources. That is, new proximity to labor resources is
estimated as the residual in the regression of proximity to labor resources on a
constant and on proximity to knowledge; hence, the new proximity to labor
resources is unrelated to proximity to knowledge. Second, original proximity to
labor resources is replaced with new proximity to labor resources and the
empirical model is then estimated. As Smith and Sasaki (1979) demonstrate, the
coefcient for the new proximity to labor resources measure from the regression
using this method is unbiased. The rst column of Table 5 presents the results of
the test.
As shown in Table 5, the intrinsic endowments of a region have a signicant positive effect on investment location choice, whereas the measures for
proximity have incremental explanatory power for location choice. Proximity
to knowledge and proximity to labor resources have a signicant negative effect
on location choice, indicating that regions more centrally located in the spatial
distribution of Chinas knowledge and labor resources are more likely to
become investment locations. On the other hand, proximity to markets has
r 2013 Macmillan Publishers Ltd. 1472-4782
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Yu and Shen
Code
Expected
sign
INTERCEPT
NK
0.043 (313.532)
0.031 (298.676)
NM
NLR
0.014 (41.964)
0.007 (3.642)
0.012 (52.577)
0.007 (3.642)
KNOW
MARKET
LABOR
0.000 (40.083)
0.795 (984.640)
0.000 (3.825)
0.000 (40.083)
0.795 (948.640)
0.000 (3.825)
GDP
INFRASINV
INDUSIZE
COASTAL
SIZE
PER_SALE
RD
GS
CAPINTSIVE
0.000 (832.977)
0.000 (406.815)
2.871 (61.150)
0.261 (8.410)
0.206 (269.215)
0.000 (15.933)
0.069 (0.324)
0.039 (4.975)
0.620 (28.695)
0.000 (832.977)
0.000 (406.815)
2.871 (61.150)
0.261 (8.410)
0.206 (269.215)
0.000 (15.933)
0.069 (0.324)
0.039 (4.975)
0.620 (28.695)
?
?
?
?
?
?
?
?
?
0.312 (241.748)
0.239 (3.297)
0.012 (0.014)
0.379 (23.222)
0.939 (129.975)
1.805 (409.599)
0.354 (10.875)
1.189 (66.259)
2.522 (241.748)
24
27 727.20
0.340
164 176
0.312 (67.245)
0.239 (3.297)
0.012 (3.297)
0.379 (23.222)
0.939 (129.975)
1.805 (409.599)
0.354 (10.875)
1.189 (66.259)
2.522 (241.748)
24
27 727.20
0.340
164 176
Alternative
measure no. 1
Alternative
measure no. 2
,
and indicate 10 per cent, 5 per cent and 1 per cent signicance level, respectively.
Note: Wald statistics included in parentheses.
Endogeneity issue
Another concern about our analysis is potential endogeneity, mainly reverse
causality and omitted variables bias. In our empirical results above, we address
possible endogeneity in several ways. First, extensive control variables are
included in the model to resolve omitted variable bias. Specically, all the
frequently examined determinants of FDI location choice in the literature are
entered into the analysis, such as basic infrastructure (Cheng and Stough, 2006),
gross domestic production (Zhao and Zhu, 2000), coastal area (Belderbos and
Carree, 2002), level of industrialization (Sun et al, 2002) and rm characteristics
(Makino et al, 2002).
Second, we use the discrete choice Instrumental Variable (IV) estimator to
control for endogeneity. Following the econometrics literature (for example,
Smith and Blundell, 1985; Rivers and Vuong, 1988), this study employs a twostage estimator. The estimation procedure is to model a continuous endogenous
regressor as a linear function of the exogenous regressors and instrument.
Predicted values from this regression are then used in the second stage discretechoice model. This two-step method is suggested to be consistent (Adkins,
2009). After reviewing available data, we nd one variable to be an appropriate
instrument regional density. This variable is measured by dividing the number
of rms distributed in one region by the oor-space of that region. It is highly
correlated with the potentially endogenous regressors (that is, three proximity
measures), but does not directly inuence the dependent variable (that is,
location choice). In addition, while estimating the discrete-choice IV model, we
exclude one control variable, level of industrialization, from the model, because
of its potential correlation with the instrument. The estimation results are
reported in Table 6. The coefcient for proximity to knowledge is signicantly
negative ( 0.011), supporting Hypothesis 1. Consistent with Hypothesis 3, the
coefcient for proximity to labor has a signicantly negative effect ( 0.013).
r 2013 Macmillan Publishers Ltd. 1472-4782
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372
Yu and Shen
Code
Expected sign
Model 1
( 26.31)
Model 2
5.461
( 26.40)
Model 3
4.036 ( 8.46)
INTERCEPT
4.311
NK
NM
NLR
0.011 ( 6.13)
0.006 (3.31)
0.013 ( 1.92)
Intrinsic endowments
Intrinsic knowledge
Intrinsic market
Intrinsic labor
KNOW
MARKET
LABOR
0.000 (11.31)
0.343 (16.01)
0.000 (2.07)
0.000 (3.33)
0.366 (15.27)
0.000 (2.29)
0.000 (4.63)
0.225 (2.60)
0.000 (2.73)
Control variables
GDP
Infrastructure
Coastal area
Firm size
Firm performance
R&D intensity
Sales growth
Capital intensity
GDP
INFRASINV
COASTAL
SIZE
PER_SALE
RD
GS
CAPINTSIVE
0.000 (25.58)
0.000 ( 21.85)
0.065 ( 1.22)
0.107 (17.37)
0.000 ( 3.87)
0.084 (1.70)
0.018 (2.06)
0.278 ( 4.98)
0.000 (20.95)
0.000 ( 20.74)
0.145 (4.52)
0.106 (17.37)
0.000 ( 3.89)
0.072 (1.43)
0.018 (1.94)
0.265 ( 4.83)
0.000 (11.78)
0.000 ( 1.55)
0.445 (6.73)
0.102 (17.05)
0.000 ( 3.95)
0.067 (1.34)
0.018 (2.06)
0.260 ( 4.82)
Intercept
Proximity measures
Proximity to knowledge
Proximity to market
Proximity to labor
,
INDU_elect
INDU_food
INDU_ service
YEAR_2002
YEAR_2003
YEAR_2004
YEAR_2005
YEAR_2006
YEAR_2007
?
?
?
?
?
?
?
?
?
0.119 (6.49)
0.064 ( 1.07)
0.018 (0.37)
0.116 ( 3.45)
0.3767 ( 10.59)
0.682 ( 17.13)
0.097 ( 1.96)
0.399 ( 6.64)
0.952 ( 12.95)
21
6946.79
0.0000
164 176
0.118 (6.52)
0.082 ( 1.38)
0.001 ( 0.02)
0.06 ( 1.96)
0.212 ( 6.56)
0.629 ( 15.98)
0.725 ( 17.43)
1.473 ( 29.80)
2.008 ( 34.44)
21
6834.53
0.0000
164 176
0.121 (6.77)
0.084 ( 1.42)
0.007 (0.14)
0.108 ( 2.01)
0.264 ( 5.41)
0.399 ( 11.08)
1.002 ( 20.20)
0.7551 ( 12.41)
1.142 ( 12.40)
21
5850.79
0.0000
164 176
1
2.15
0.1426
1
2.43
0.1187
1
0.58
0.4473
and indicate 10 per cent, 5 per cent and 1 per cent signicance level, respectively.
Note: Wald statistics included in parentheses.
373
Yu and Shen
375
Yu and Shen
The outcomes have the following implications for management. First, the
present study is a quantitative study of the geographic characteristics of Chinese
regions, and the results can help foreign investors in China compare differences in
geographic characteristics of various regions and develop a better location-choice
strategy to increase their competitive advantage in China. Second, China is a very
large country where the geographic environment and resource endowments of
various regions differ greatly, as well as the geographic distance between regions.
Therefore, this study provides a model to assist enterprises in weighing the tradeoff between geographic distance and resource endowments, which will help
enterprises establish rm-specic advantages through location choice.
Furthermore, the results show that beyond the intrinsic endowments of regions,
the spatial context in which a specic region is embedded is also an important
factor inuencing a regions potential for value creation, indicating that if
enterprises ignore this factor, they may not make an optimal location choice.
Finally, this study nds that industries have differing concerns when they make
location choice, and therefore the inuence of geographic distance and resource
distribution on location choice differs according to industry characteristics.
The research has limitations. As the study focuses only on Taiwanese-listed
companies investing in China, the attributes of these Taiwanese enterprises may
have inuenced the results. Future research could focus on a different country
of origin for comparison and further analysis. In addition, as Taiwan law limits
investment in China in certain conditions, there may be a few Taiwanese
enterprises that reinvest through a third country, and do not report these
investments in their annual reports. However, as the sample includes all direct
investments in China by Taiwanese-listed companies, the missing information
should not inuence the results and ndings.
Acknowledgements
The authors acknowledge constructive suggestions from two anonymous reviewers and are grateful for comments by Mei-Chu Huang, Chun-Yuan Christian
University, and Chun-Ju Liu, Tunghai University, on earlier drafts. The authors
also acknowledge nancial support from the National Science Council of Taiwan,
Republic of China (NSC 96-2416-H-194-032-MY3). The authors alone are responsible for all limitations and errors that may relate to the study and the article.
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