United States direct investment in the Chinese power generation sector :an industry-level case study

Abstract

This study examines the extent to which existing theories of foreign direct investment (FDI) can account for the activities of those United States fossil-fuel power generation firms (USPGs) who have invested in Chinese electric power generation market in the 1990s. Part I of the study applies orthodox theory, namely the eclectic theory, (also known as the OLI model) developed by John H. Dunning in the 1970s to investigate why some USPGs ave entered the market and some have not. The eclectic theory expounds that the possession of firm-specific ownership advantages (O), (e.g. access to advanced, patented or generally unavailable technology and sources of finance) is essential to overcome the 'costs of foreignness' if foreign direct investment is to take place (Buckley and Casson, 1991). Three determinants of FDI relating to coal-based technology, firm size and international experience are identified and tested on over a hundred USPGs based on their data from 1993 - 2000 of which 1993 was the year of one of the first market movers - the AES Corporation (AES) entering China. AES was selected as the pilot case for replication in the second part of the study. A detailed case study on AES concludes that, contrary to findings of most empirical studies which assume the use of advanced technology as one of the 'O' advantages of foreign firms, this (O) advantage in fact is not key to the relationship with the Chinese partners. The terms and conditions of power purchase agreement do not offer incentives to fully utilise the heat efficiency of imported equipment. It is the use of foreign capitals that complements the institutional deficiencies, and thus becomes the major (O) advantage of AES to enter the market. Part II of the study involves fifteen USPGs that have explicit interests in the China market. The objective of this part of the study aims at exploring why some USPGs continue their operation whereas some have exited the market. As resource dependence and inter-organisational relations are approaches used to deal with issues of how organisational environments affect and constrain organisations and how organisations respond to external constraints, the resource dependency (RD) theory is extended to this emerging country to investigate how USPGS interacted with their Chinese partners, and adapted to this new environment. Cross-case studies were conducted among three firms with realised facilities and three that have chosen to exit the market. Unlike most of the previous empirical studies which examined solely on entrants, this study emphasises the importance of taking both sides of the story. Patterns emerged between two groups of firms. The findings reveal that the institutional frameworks during the early stage of opening up the market have defined rules that confined USPGs to acquire scarce resources from Chinese partners through joint ventures. Thus, a need to select Chinese partners who were dependent on resource, namely access to sources of finance of entrants in order to form a resource interdependency relation, became the decisive factor to the viability of individual project. Failure to do so results in the termination of further development The findings also pinpoint the differences between the western model and that of China. On the one hand, USPGs were encouraged to exploit their (O) advantages to invest in this newly opened sector. On the other hand, the Chinese government nurtured some quasi state-owned firms, granted with access to sources of finance and advanced technology, to compete in the same arena. For those who chose to ally with these 'national champion teams' who would doubtfully form a resource interdependency relation with foreign parties, the potential alliance was deemed to be failure. This study applies the orthodox theories to a newly emerged market by controlling the source and host countries which permits firm-specific issues to emerge. The findings offer insights to managers on the partial applicability of the western models to a transition economy and that the interpretation of the theories has to take into account the salient features of the industry.