Institutional distance and Chinese investment efficiency in Africa: a stochastic frontier analysis

Elyas Abdulahi Mohamued, Muhammad Asif Khan, Natanya Meyer, József Popp and Judit Oláh

International Journal of Emerging Markets, 2022, vol. 19, issue 3, 729-751

Abstract: Purpose - This study aims to analyse the efficiency effects of institutional distance on Chinese outward foreign direct investment (FDI) in Africa. Design/methodology/approach - The study utilised the true fixed-effect stochastic frontier analysis (SFA) model. Data from 2003 to 2016 (14 years) were acquired from 42 targeted African countries, which are included in the analysis. Findings - The results reveal that FDI flow efficiency can be maximised with a high institutional distance between China and African countries. Contrariwise, comparable institutional distance, measured by the rule of law, regulatory quality and government effectiveness between the host and home countries, reflected a significant positive impact for Chinese outward foreign direct investment (OFDIs), indicating Chinese MNEs can invest directly in a country with comparable institutional characteristics. Originality/value - There have been limited exceptional studies that assessed the effect of institutional distance between emerging countries. However, none of these studies investigated the effect of institutional distance between China and Africa at a national level. Using the advantage of the SFA model, this study assesses the efficiency effects of institutional distance between the host and home country.

Keywords: Africa; China; Direct investment; Efficiency; Institutional distance; Outward foreign direct investment (OFDI); Stochastic frontier model; F21; O43; E02 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijoemp:ijoem-12-2020-1480

DOI: 10.1108/IJOEM-12-2020-1480

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