Riding on the Dragon: Host Country Regulatory Constraints and FDI Bandwagon Diffusions in China

This study examines observation- and network-based bandwagon phenomenon of foreign direct investments (FDI) among global investors from different home countries into a host country. We argue that the two bandwagons both drive FDI entries into a host country, yet their effects of magnitude depend on the host country’s regulatory constraints. Our analysis on FDIs in manufacturing industries in China from 54 home countries over its early (1979-95) period of transition corroborates the ideas. We identify a network bandwagon associated with the global trade networks between investors’ home nations and find that this bandwagon and together with observation bandwagon both drive international FDI entries into China during the period of the study. We also find the effect of observation-based bandwagon is weaker whilst the effect of network bandwagon is stronger in restricted industries than in non-restricted industries for FDI. The findings highlight asymmetric effects of host country institutional constraints on different FDI bandwagons.