Does inward FDI affect outward FDI in tourism in China?

Introduction

The tourism industry has become one of the largest sectors in the world, attracting substantial capital investment (WTTC, 2019). Tourism-based foreign direct investment (FDI) has been increasing over the past decade, particularly in emerging economies (Song et al., 2019). As a developing country, China has gradually become a prominent economy for tourism-based outward FDI (Li et al., 2017). Also, the inward FDI in China has improved the development of the tourism industry (Yang and Mao, 2015). The determinants of tourism-based FDI have attracted the attention of some scholars, who have mainly focused on location selection and entry mode choice in the host country (Li et al., 2017). It is likely that inward FDI is an important driver in improving tourism productivity and thus triggers outward FDI.

This study attempts to provide a better understanding of the interactions between tourism-based inward and outward FDI, using China as an empirical case of an emerging economy. By focusing on multinational enterprises (MNEs), this research aims to explore the spillover effects of tourism-based inward FDI.

Literature review

As a significant economic activity, FDI has potentially positive spillovers (Blomstro¨m and Kokko, 1998). The spillover effects have been identified empirically in the Chinese economy (Zhang and Zhang, 2018), contributing to the development of the domestic market and the expansion of the international market. Moreover, spillovers from foreign capital to the local industry also depend on the absorptive capacity of the local economy (Mao and Yang, 2016). However, foreign firms may deliberately create a crowding-out effect for the local economies to keep their comparative edges over their rivals (UNCTAD, 2007). Hence, the spillovers may vary among different sectors and countries (Smith, 2004).

In the tourism industry, there is a relatively high absorptive capacity due to its frequent employee turnover, especially in hospitality industry (McGinley et al., 2017). Niewiadomski (2015) argued that foreign-invested hotels improve the local economy. Yang and Mao (2015) found productivity spillovers from foreign-invested hotels to domestic ones in China, and that the magnitude of spillovers increased with the productivity gap between both sides. It was further found that productivity spillovers were influenced by geographic region, star-rating classification, ownership type, and foreign capital origin (Mao and Yang, 2016). However, few studies have examined the influence of FDI inflows on the tourism-based outward FDI.

Methodology

Model specification

As the dependent variable, China’s tourism-based FDI outflow (OFDI_flow) is measured by the number of tourism-based enterprises investing abroad from China. There are two explanatory variables: the volume of FDI (FDI) capturing the total FDI and the foreign investment in star hotels (TOURFDI) as a proxy variable for the scale of tourism-based FDI. The basic model is:

O F D I f l o w i t = β 0 + β 1 ln F D I i t + β 2 ln T O U R F D I i t + ln X i t γ + u i + θ t + v i t .

OFDI_flow_it indicates the tourism-based outward FDI flows in China’s province i in year t. FDI_it and TOURFDI_it are the logarithm of the aggregate FDI and the investment of foreign-invested star-rated hotels in China’s province i in year t, respectively. X_it is the control variable set; u_i and θ _t are, respectively, the individual and the time effect; v_it is the disturbance term; and β ₁ and β ₂ measure the net effects of the total inward FDI and tourism-based inward FDI on tourism-based outward FDI. To ensure the robustness of the estimated model, three control variables are included in the equation, including tourism productivity (TEFF, the labor productivity of star-rated hotels as a proxy variable), government capacity (GOV, the proportion of fiscal revenue and expenditure divided by GDP as a proxy variable), and trade level (TRD, the level of international trade).

Data description

This article collects data from 2001 to 2015 for 31 provinces of China to construct a balanced panel database. The figures on China’s inward FDI and the level of international trade come from the China Statistical Yearbook; China’s tourism-based outward FDI flows come from the database of China’s Ministry of Commerce; and other variables are from the China Tourism Statistics Yearbook. All the variables are calculated on the basis of 2001 constant prices and the severe multicollinearity does not exist.

Table 1 shows that the dependent variable has a large standard deviation owing to the differences in the economic development between provinces. In light of the heterogeneity of the dependent variable and its nature of count data (i.e. nonnegative integer values arising from counting rather than ranking), the negative binomial model could be applied in the empirical analyses. To further reduce the variability across each observation and groups of observations, all the independent variables are in logarithm.

OPEN IN VIEWER

Table 1.

Summary of observed variables.

Variable	Mean	Median	Standard deviation	Minimum	Maximum
OFDI_flow	2.314	0	5.444	0	65
lnFDI	4.737	4.695	1.508	0.626	7.704
lnTOURFDI	8.998	9.432	2.650	0.000	13.913
lnTRD	13.556	13.326	1.716	9.137	17.204
lnGOV	−1.272	−1.315	0.414	−2.008	0.392
lnTEFF	1.395	1.355	0.401	−0.002	2.636

Empirical findings

To control the individual/time-invariant factors that influence China’s tourism-based outward FDI, two-way (i.e. individual and year) fixed effects were employed. This can to some extent solve the endogeneity problem caused by omitted variable bias. To examine the impact of inward FDI on tourism-based outward FDI, both the inward FDI and the tourism-based inward FDI were added to the models.

In Table 2, model (1) shows that China’s FDI inflows have a statistically significant positive effect on its tourism-based outward FDI (β = 0.44; p < 0.05), meaning that inward FDI has spillover effects on China’s tourism-based outward FDI. The tourism-based inward FDI represented by the inward FDI of star-rated hotels is not significant in the full sample. In the subsample level, models (2) and (3) show that the scale of foreign-invested high-star hotels (i.e. three-, four-, and five-star hotels) positively influences tourism-based outward FDI (β = 0.01; p < 0.1). Foreign-invested high-star hotels are the main factor influencing the tourism-based outward FDI (Mao and Yang, 2016); therefore, this article uses it as the proxy variable of tourism-based inward FDI.

OPEN IN VIEWER

Table 2.

Empirical regression results.

	(1) Full	(2) High-star	(3) Low-star	(4) East	(5) Middle	(6) West
lnFDI	0.44** (2.25)	0.44** (2.33)	0.43** (2.25)	0.67*** (2.83)	−0.29 (−0.55)	−0.51 (−0.68)
lnTOURFDI	0.01 (0.19)	0.01* (1.78)	−0.01 (−0.18)	−0.00 (−0.05)	−0.01 (−0.08)	0.01 (0.85)
lnTRD	0.56*** (2.78)	0.54*** (2.88)	0.58*** (3.09)	0.66** (2.21)	−0.03 (−0.04)	1.37*** (2.71)
lnGOV	1.09* (1.71)	1.16* (1.84)	1.06* (1.69)	1.25* (1.74)	0.98 (0.42)	1.92 (0.97)
lnTEFF	0.11 (0.36)	0.10 (0.32)	0.11 (0.38)	−0.33 (−0.72)	−1.46* (−1.72)	1.71** (2.49)
Constant	−24.26 (−0.03)	−23.90 (−0.03)	−24.23 (−0.03)	−27.52 (−0.01)	−2.68 (−0.00)	−27.77 (−0.01)
N	465	465	465	165	120	180
Log likelihood	−429.78	−428.42	−429.78	−202.46	−96.02	−107.37
AIC	899.55	896.84	899.55	444.92	230.04	254.74

Note: The z-statistics are in parentheses.

*** Significance at the 1% level.

** Significance at the 5% level.

* Significance at the 10% level.

The regressions of the subsamples were further employed to examine the moderating effects of different regions due to regional discrepancies in tourism-based outward FDI in China. In light of the suggestion of Zhang et al. (2012) and Mao and Yang (2016), China could be geographically divided into three parts (i.e. East, Middle, and West) ¹ to capture the differences caused by economic development. Accordingly, the empirical results are shown in models (4)–(6). For the Eastern region of China, inward FDI appeared to have a significantly positive effect on outward FDI (β = 0.67; p < 0.01), which is consistent with the full sample regression. For the Middle and Western regions, neither the lnFDI nor the lnTOURFDI was a significant predictor. This is probably due to the regional disadvantage of the Middle and Western parts of China in attracting (tourism-based) FDI.

Conclusions

With the development of economic globalization and international tourism, the scale of FDI in tourism has been increasingly growing. Based on the 2001–2015 panel data from China, this article examines the spillover effect of inward FDI on tourism-based outward FDI. The positive effect of China’s inward FDI on its tourism-based outward FDI has been generally confirmed. Both the FDI penetration and tourism-based inward FDI in a province were found to significantly affect the province’s tourism-based outward FDI. In particular, foreign investments in high-star hotels substantially affected tourism-based outward FDI. Regarding the spillover effect, the location’s moderating effect was confirmed, and the role of inward FDI on tourism-based outward FDI was significant in China’s Eastern provinces.

This study has contributed to the understanding of the spillover effects of inward FDI on tourism outward FDI in China. These findings also have implications that are beneficial for the improvement of productivity and tourism-based outward FDI in the developing economies. Tourism-based enterprises could fully utilize the positive spillovers of foreign capital. For example, they may adopt appropriate strategies in the initial stage to absorb the methods of increasing productivity and then make good use of the example of internationalization at a later stage. Furthermore, potential tourism MNEs should also be encouraged to constantly improve their capability to capitalize on positive spillovers from FDI. Considering the regional disparities regarding effects, the government may persuade the foreign capital investors to invest in China’s Midwest area and strengthen the cooperation between local and foreign enterprises so that the spillover effects of FDI inflows can be optimized and the scale of tourism-based outward FDI can also be subsequently enabled from this region.