The Effects of Globalization, OFDI and Exports on the Profitability of Firms in China

Purpose This study examines the effects of globalization, outward foreign direct investment (OFDI), and export activities of 2,546 listed firms from 2008 until 2018 on Shanghai and Shenzhen Stock Exchanges in China on the short-term and long-term financial performance with 20,189 firm-year panel data extracted from a merged data set of the RESSET database and the China Stock Market & Accounting Research (CSMAR) database. Design/Methodology/Approach This study selected fixed-effects regression model (FEM) as the best-fit models over other popular regression models such as random effects regression model (REM) and ordinary least squares regression (OLS) through a selection process such as Breusch Pagan Lagrange multiplier test (LM test) and Hausman tests. Findings First, the global Chinese firms show worse short-term OFDI and exports than the non-global Chinese firms. Second, OFDI activities show an inverse U-shaped association with firms’ profitability while exporting activities are positively associated with their financial performance. Third, the financial performance of FDI firms abroad, established, purchased, or partially owned has a statistically positive effect on that of the mother FDI firms in China in the short run. Fourth, in the long run, such inverse U-shaped effects of globalization and OFDI persist up to at least three years, while the positive effects of financial performance of FDI firms abroad persist up to three years and reverse direction from the fourth year. Fifth, the positive effects of exporting activities disappear after the year of exportation. Research Implications The effects of outward FDI by Chinese firms are positively associated with their financial performance for some level of OFDI and become negative above the level and such effects of OFDI persist for at least three years after their investment, while the positive effects of exporting activities disappear in less than a year. Therefore, firms must decide whether to invest to improve their long-term profitability through OFDI or focus on exports for short-term profitability.