The internationalization of emerging economy firms: Substitution and location choice

While the international business literature has become increasingly interested in technology-seeking foreign direct investment, little is known about the alternatives to sourcing knowledge abroad. Specifically, it is unclear how domestic strategies influence the propensity of emerging economy firms to invest abroad in search of knowledge. This study examines the ways in which international joint ventures with foreign multinational enterprises in a firm’s host country influence the location choice of emerging economy firms. Moreover, we address the extent to which this relation is influenced by firms’ absorptive capacity and the revealed comparative advantage of the firm’s home country. Using data on inward and outward foreign direct investment in China in the period 1978-2014 we find that domestic joint venture experience significantly influences the location choice and that both firms’ absorptive capacity and the strength of its domestic industry influence the preference for more advanced host countries. Our study thereby adds to our understanding of emerging market multinational enterprises, the liability of foreignness, and knowledge-seeking FDI.