Foreign Investment Strategies and Sub-national ... - E-Journal

First, we hypothesised that aspects of institutions influence strategies of inward investors. Incumbent
state-owned enterprises appear to influence the institutional framework so as to encourage foreign investors
to partner with them, yet they do not have a significant deterrent effect on FDI. Weak SOEs may see JVs as a
means to enhance their competitiveness. Rather than perceiving FDI as threat to their market position, as
Russian SOEs appear to do (Suhomlinova 1999), SOEs in Vietnam may see partnering with FDI as an
opportunity to enhance their competitiveness, similar to observations by Fahy et al. (2000) in Hungary.
Following the logic of our theoretical framework (Figure 1), we believe that this is due to a direct effect of
SOEs’ control over scarce resources, and an indirect effect of SOEs influencing local informal institutions. In
addition, partnering with a local firm enhances the legitimacy of foreign investors with local constituents.
Moreover, foreign investors are more likely to locate where institutions facilitate access to scarce
resources. Provinces with industrial zones attract more FDI. Beyond the establishment of zones, the available
real estate in such zones attracts FDI and Greenfield investment in particular. This effect persists even when
controlling for past FDI (Table 4, equation 4). Provincial authorities providing land to industrial zones not
only create real estate markets, but they also signal commitment to creating a favourable investment climate.
This trilateral interaction between incumbents, institutions and (foreign) entrants extends upon work
by Peng (2000), and by Lewin and Kim (2004). We argue that informal institutions play an important role in
explaining this interdependence and, in part, explain the significant effects of the IP real estate and SOE
variables. Unfortunately, our proxies do not allow a clear separation of the formal and informal aspects of
the institutional framework. Future studies may develop better measures of informal institutions at multiple
levels of society, which may require survey-based direct measures of informal institutions that are hard to
proxy indirectly. However, this also raises important issues for further theoretical work. In particular, in
which ways do incumbents influence informal institutions, as suggested by the co-evolution aspect of the
model (also see Lewin and Kim 2004), and how do entrants such as foreign investors react to informal
institutions favouring incumbents?
Second, the results support our argument that institutions influence the pattern of FDI not only at
national but also at local level. Institutional variation within a country may be important for location
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