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Does Bilateral Trade Between China and ASEAN Countries Improve Its Firm's Efficiency?

  • 투고 : 2021.10.30
  • 심사 : 2022.01.15
  • 발행 : 2022.02.28

초록

The Chinese outward foreign direct investment (OFDI) involves various bilateral trade agreements and regional agreements signed between China and other countries. This study examines the impact of Chinese OFDI in ASEAN-5 countries through ASEAN-China Free Trade Agreement (ACFTA) namely Indonesia, Malaysia, Philippines, Singapore, and Thailand from 2000 to 2016. This study attempts to address three research objectives. The first is to examine the motives for China's investment in ASEAN-5. The second is to explore the different impacts of China's investment across countries. The third is to investigate whether the OFDI conducted by state-owned enterprises (SOEs) will produce different impacts on the firm's efficiency score. Using the DEA approach, this study finds evidence that the overall Chinese OFDI is relatively efficient. We find that the estimated efficiency score of this OFDI has improved in pre- and post ACFTA where a higher overall efficiency score was reported when comparing pre- and post ACFTA signing for both SOEs and NSOEs. Finally, China's parent firms' efficiencies showed higher scores among NSOEs compared to SOEs after the signing of ACFTA for all ASEAN countries except Malaysia. We highlight that the country's institutional infrastructure, earlier investment presence, and diplomatic ties help in shaping an effective trade agreement.

키워드

1. Introduction

The outward foreign direct investment (FDI) from China has grown exponentially in recent years and China now stands as a significant source of FDI in a great number of host economies around the world. This is spurred on by the Chinese government policy reforms that have made their presence in the global arena started with their open door policy in late-1970, followed by trade liberalization associated with Deng Xiaoping in 1992 and later through “Go Global Strategy” initiated in 1999. As China’s economy continues to grow, in 2013, China has launched its “Belt and Road Initiative” (BRI) to further enhance economic integration with the rest of the world. In line with this, various bilateral trade agreements and regional agreements have been signed between the world economies with China.

Among others, in the Southeast Asia region, through the Association of Southeast Asian Nations (ASEAN) region, ASEAN-China Framework Agreement on Comprehensive Economic Cooperation has been signed at the 6th ASEAN- China Summit in November 2002 which later has led to the establishment of ASEAN-China FTA or known as ACFTA in January 2010. Later in 2015, the agreement has been further amended to provide more comprehensive economic cooperation with the “Comprehensive Economic Co-operation between ASEAN and China” which has been signed on 22 November 2015.

In general, we classify four stages for the bilateral trade relationship between China OFDI and ASEAN-5 countries, namely one without any formal bilateral trade agreement phase from the year 2000 to 2004, pre-signing ACFTA stage from the year 2005 to 2009, ACFTA stage from the year 2010 to 2014 and recently, the comprehensive economic cooperation period (2nd Package ACFTA) from 2015 to 2016. There has been exponential trade growth over these periods by Chinese firms in the ASEAN countries, from ten firms that focus on the energy sector alone in 2010 to 42 firms focusing on various sectors in 2017. Specifically, the China OFDI in ASEAN-5 countries (i.e. Indonesia, Malaysia, Philippines, Singapore, and Thailand) has grown by 471.83% between 2010 and 2017 (Scissors, 2018).

Dunning’s eclectic paradigm theory explains the motivations behind any international investment are meant to access a new market (or customer base), efficiency (or cost reduction), or resources (or strategic asset) seeking. Prior researchers have confirmed that these motivations remain to be valid in the case of China’s OFDI (Child & Rodrigues, 2005; Luo & Tung, 2007; Yiu et al., 2007; Miller et al., 2008). In this paper, we put forth an argument that the internationalization move by the Chinese government into the ASEAN region through various bilateral trade phases seems to have leaped frog certain stages of organic trade growth. Our suspicions are rooted in the fact that there seem to be aggressive targeted sectors that Chinese firms invest in across different ASEAN countries. For example, an investment made in the Philippines and Indonesia predominantly focuses on the energy sector while in Thailand, huge investment made in the technology sector while Malaysia and Singapore received an equal share of investment in a diverse range of sectors. Hence, we argue that while the motivations for this ASEAN-China investment growth might be numerous, but notably they do highlight concerns whether such aggressiveness is purely explainable based on the existing FDI theories (Dunning & Lundan, 2008) or if it is merely other than traditional motives (such as politically motivated as argued by Cheng and Ma (2010).

To shed light on the issue of China’s OFDI investment motives through their presence in the bilateral trade agreement with ASEAN-5, the study raises several important questions. Does the economic performance of Chinese MNCs improve in each phase of the bilateral trade agreement phase? Does this economic performance remain consistent when examining the ownership type of these Chinese firms, i.e. between State-Owned (SOEs) and Non-State Owned firms (NSOEs)? Does the individual country set affect China’s economic performance among SOEs and NSOEs as a result of the trade agreement? To answer these timely research questions, we analyze the economic performance of these Chinese OFDI firms through their efficiency score in terms of overall efficiency and decompose this into technical efficiencies and scale efficiencies in each bilateral investment horizon. By doing so, we make inference whether the bilateral trade has improved the economic performance of Chinese OFDI firms through their improved efficiency score hence justifying for economic motive or otherwise inefficiencies score is linked to the persuasion of political motives instead. Our approach apprises the China OFDI in ASEAN-5 in two novel perspectives.

First, we show the fact of whether there is a real economic improvement on Chinese OFDI firms as a result of this bilateral agreement. Does this improvement depend on the country where the investment is made or on the Chinese firm ownership type, i.e. SOEs and NSOEs? Currently, there is a debate on whether China’s OFDI will improve its economic performance. According to Zhang and Daly (2011), Lee et al. (2015), Lee (2016), and Zhang and Lee (2017), the motives for China’s investment abroad are to gain advanced technology, management skills and secure the supply of natural resources to guarantee the production of the country in the long-run. On the opposite, Kolstad and Wiig (2012) and Kim (2016) assert that firms that invest abroad are predominantly state-owned (SOEs), this could indicate that their investment decisions reflect political persuasions rather than private firms profit maximization due to incentives they get by supporting China’s foreign policy.

Secondly, our analysis of the Chinese firm OFDI efficiencies provides insights into the host country’s future economic prospects. In this paper, we attempt to further decompose the efficiency scores into pure technical efficiency and scale efficiency. The former, consistent with the traditional theory of FDI of efficiency-seeking indicates better allocation of resources through a better mix of inputs and outputs that could benefit the host country’s economy. While the latter indicates a larger size of investment would exhibit better economies of scale when operating in the host country. Overall, the efficiency score would enable us to gauge some insights on the benefits that ASEAN-5 countries could gain if firms from China are efficient, i.e. both technical and scale that lead to positive spillover effects to better technology and employment creation in the long run.

Our study is important as it touches upon the future sustainability of China’s OFDI in the ASEAN region in terms of its economic implications on the host country both firm and systemic level. Indeed, better bilateral trade relations and cooperation should boost the overall economic level in the region. However, skepticism raised by previous studies shows the above is not necessarily true. In 2006, 82% of China’s OFDI is conducted by SOEs and it is uncertain whether such investment will thrive in the long-run economic benefit for the host country. This is because the SOEs are created for the benefit of the politicians and to facilitate control for those in power. These firms are well known for their poor governance structure as well as weak institutions (Yeung & Liu, 2008). They also gain from the government as it allows them to lend below the market rate which further justifies the suspect that they may not be concerned about the efficiency seeking or profit-maximization compared to their privately owned counterparts. This political investment agenda through bilateral agreement also possesses a greater risk to ASEAN economies, as political agenda may change over time, especially amidst the recent worsening trade tension between US-China. As such, ASEAN economies need to align themselves with firms that gain efficiencies from their investment to enable long-term sustainable investment growth in the ASEAN region. Hence, the findings from this study would enable us to verify the improved efficiency level and gain from lower costs of production based on the efficiency-seeking theory as proposed by Dunning and Lundan (2008) and would enhance the overall economic well-being in the region.

The paper is structured as follows. Section 2 provides a descriptive overview of Chinese OFDI in each ASEAN country and relates this to the empirical literature on the topic. Section 3 then presents the empirical strategy and the data of the paper. Results on the efficiencies in each bilateral trade period are presented and discussed in Section 4. Section 6 concludes the study.

2. Literature Review

2.1. The ASEAN–China Free Trade Agreement (ACFTA): An Outlook

ASEAN-China FTA is a Comprehensive Economic Cooperation Agreement between ASEAN member countries and China. The agreement is meant to not only eliminate trade tariffs but also has aimed to address behind-the-border barriers that could impede the flow of goods and services as well as encourage investment and enhance cooperation. The Framework Agreement is initially signed in November 2002, which provides the legal basis for ASEAN and China to negotiate further agreements which later leads to the formation of the ASEAN-China Free Trade Area (ACFTA) on 1 January 2010. Among the negotiation that took place between the Framework Agreement and ACFTA was The Agreement on Trade in Goods and Services which is signed in November 2004, and later revised twice in 2006 and 2010. This agreement aims to liberalize and substantially eliminate discriminatory measures with respect to trade in services among the parties in various service sectors. The ACFTA is the first FTA with external parties to be signed by ASEAN. In August 2014, ASEAN and China decide to elevate the ACFTA. In 2015, a Comprehensive Economic Cooperation between ASEAN and China is signed on 22 November 2015 in the 27th ASEAN Summit or referred to as 2nd Package ACFTA (ASEAN, 2015). This agreement is meant to update and further enhance the economic cooperation in terms of Trade in Goods, Services, Investment, and Economic and Technical Cooperation (ECOTECH). In a nutshell, the agreement is expected to promote an efficiency-seeking motive for all firms that undertake their investment initiatives in both China and other ASEAN countries (Allayarov et al., 2018).

There is a relatively large body of literature examining ASEAN–China relations, including assessments of the impact of the ASEAN–China Free Trade Agreement (ACFTA) on ASEAN’s welfare and its trade with China. Overall, the results of these studies indicate a positive impact of ACFTA on the region’s exports to China (Yean & Yi, 2014; Tran et al., 2020). An earlier study on the ACFTA by Greenwald (2006) is from a legal perspective. She argued that the long-term success of ACFTA will depend on ASEAN’s ability to adopt more legalistic measures, particularly an enhanced dispute settlement mechanism. She also argues that ACFTA can also be seen as China’s legal response to its growing economic prowess both as a method of engaging its neighbors in a “win-win situation” and as a means to influence the formation of international economic rules. In a similar vein, Park (2007) assesses the ACFTA by using a qualitative approach. Based on the customs union theory he finds that ACFTA would provide support for both ASEAN and China economies. Similarly, Devadason (2010) finds that ACFTA can provide complementarities in the export performance of ASEAN countries. He, therefore, argues that China is considered as the most practical choice for the ASEAN+1 FTA to initiate deeper trade integration within the region.

More recent studies by Sheng et al. (2012) find that the ACFTA leads to substantially higher bilateral trade between ASEAN and China. Using an extended gravity model, they argue that the ACFTA has also increased the ASEAN industrial linkage with China. From another perspective, Fukunaga and Ishido (2013) make a comparison between the first and second packages of ACFTA. They reveal that the Second Package of ACFTA only extends little additional values to the First Package. According to them, most of the “new” commitments are committed in the World Trade Organization before the ACFTA First Package. They argue that to continuously deliver progressive service liberalization, policy-makers of ASEAN countries should consider a new approach to this agreement.

As such, for our analysis, we generally classify the timeline of ASEAN-China bilateral trade relationships into four stages. First, the period without any formal bilateral trade agreement phase from the year 2000 to 2004, followed by pre-signing ACFTA stage from the year 2005 to 2009, ACFTA stage from the year 2010 to 2014, and finally 2nd package of ACFTA or the comprehensive economic cooperation period from 2015 to 2016.

2.2. Trends and Evidence

China started to publish outward FDI data following OECD and IMF standards only in 2003 (Cheung & Qian, 2008). According to the statistics of UNCTAD (2017), in South-East Asia, FDI in the ASEAN countries upsurges by 11% to $134 billion, driven by a rise in FDI flows to most member countries and a strong rebound in Indonesia. From 2010 to 2017, Chinese investment in ASEAN-5 has upsurged by 388%. Singapore remains the largest recipient of FDI Inflows with the fluctuating trend while Malaysia is exposed to a gradual increase in Chinese FDI among others as depicted in Figure 1. We will further explain the investment by sector in each ASEAN-5 country in the following paragraph.

As for sectoral compositions, Chinese outward FDI during pre- and post-bilateral trade agreements vary across sectors and types of different Chinese firms (SOEs and NSOEs). We ignore the investment period of 2000 to 2004 as there is a relatively small investment that takes place between China and ASEAN countries. During the first sub period of 2005–2009 which corresponds to pre-ACFTA, China’s investment in ASEAN by SOEs is mainly in the energy sector for all ASEAN-5 countries except Thailand. During this period SOEs also make heavy investments in the transportations sector, particularly in Malaysia and Singapore. In contrast, their private counterparts, i.e. NSOEs, invest in different sectors i.e. technology only in Singapore and the Philippines.

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Figure 1: Chinese Inward FDI in ASEAN 5 (Millions USD)

During the ACFTA stage, both SOEs and NSOEs investments are apparent in the real estate, transportation, and utility sectors in Malaysia. Similar trends of investment are also made in Singapore especially in the real estate and transportations sectors by both, while in the technology sector by NSOEs only. Landmark projects in Malaysia include Kuantan Port development, East Coast Rail Line (ECRL), Pan-Borneo Highway, MRT 2, and MRT 3 among others. We document that during ACTFA implementation, Indonesia and Thailand first receive their investment from China in the transportation sector by NSOEs.

In the final stage, from the year 2015–2017, continuations of investment are only clear in Malaysia and Singapore. In the former country, SOEs’ investment is evident in transportations, utility, and real estate while in the latter country, SOEs investments are limited to real estate only. Overall the NSOEs’ investment sectors remain the same as their SOEs counterparts’ sectors. Only Indonesia has received investment from NSOEs alone in metals and transportations sectors. The inconsistent trend of Indonesian China’s OFDI could mainly be due to the change in export and import pattern and regulation between the two countries (Global Business Guide, 2013).

While this descriptive overview of Chinese OFDI is suggestive in terms of the bilateral trade durations, it does influence the type of firms (SOE and NSOEs) that invest in ASEAN member countries as well as the sectors that each type invests in. Hence, a more systematic analysis is needed to establish the motive of Chinese OFDI firms behind these variations of investment patterns.

2.3. The Chinese State-Owned Enterprise

Companies Structure

As China’s domestic firms shift to higher-margin business, they are open to foreign companies to supply them with high-value goods and services and can tap into the considerably rapid growth in recent years (Cai, 1999; Hong & Sun, 2006; Buckley et al., 2007; Cheng & Ma, 2008).

While the open-door policy in the late 1970s has led to modest outward FDI, the liberalization associated with Deng Xiaoping’s tour of South China in 1992 and the Go Global strategy initiated in 1999 has led to a boost in Chinese outward FDI. Nevertheless, the lion’s share of this investment is made by China’s state-owned enterprises (SOEs). This is clearly shown in Figure 2.

In Figure 2, we observe that since 1994 the percentages of SOEs that invest in ASEAN-5 are between 50 percent and 60 percent in 1999. We also observe that the SOE firms from present in the ASEAN-5 are at an increasing trend even there is a reduction in the percentage of SOEs investment in the region. This may be due to the fact of an increase in bilateral trade agreements and regional trade agreements that encourage greater investment opportunities to the Chinese firms and this marks the presence of Non-SOE firms in ASEAN-5.

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Figure 2: Number of Chinese State-Owned Enterprise (SOE) Firms Invested in the ASEAN-5 Region

Due to this reason, we further divide our analysis into SOE and Non-SOE firms to gauge some insights on the efficiency of the firms and hence their contribution to the ASEAN-5 market. This is because normally, SOE firms have a concentrated ownership structure, limited disclosure, poor investor protection, and reliance on the banking system. Law enforcement is quite weak. The large block shareholders for Chinese public-listed companies (PLCs) include private, state, or institutional shareholders. Because the Chinese government privatized small- and medium-sized SOEs and corporatized large SOEs during China’s economic reforms, many Chinese public-listed companies have high levels of government ownership.

In China, the role of SOEs is mainly to compensate for market deficiencies and to develop a strategic national industry as a form of public ownership, reflecting the decisive force of the public ownership economy. The first of two functions of the market economy reflects the common while the last one reflects the characteristics of the socialist market economy. The SOEs are always closely related to the government and government-linked company’s corporate governance structure. Unlike non-government linked companies (NSOEs) in form, inevitably, they are affected by the government. Firms are often franchised by the government’s certain areas of business, the monopoly can get the advantage. When SOEs encounter significant adverse effects, they may be particularly rescued by the government. At best, SOE firms operate in a more convenient condition and better bargaining position with government support. However, it remains unclear how this privilege affects the efficiency of SOEs, especially in the international market with an unprotected business environment. We address the issue of Chinese firms’ performance and highlight whether their original structure matters in gaining opportunities from foreign investment, especially for countries geographically close to China. This is important because if the SOE’s existence is more on political interest this may not benefit the host countries that expect positive spillover effects from the FDI investment into their respective countries compared to the NSOEs’ counterparts.

3. Data and Methodology

Shares in Chinese firms are generally categorized into A shares, B shares, H shares, state-owned shares, institutional shares, employee shares, and other shares. Only A and B shares are traded on two domestic stock exchanges whereas H shares are traded on the Hong Kong stock exchange. We separate firms with state-owned shares in their ownership for us to classify them as SOEs. We also cross-check these SOEs firms with the list of firms in the State-owned Asset Supervision and Administration Commission of the State Council (SASAC) shown on the People’s Republic of China (PRC) website. Our classification reveals that there are 19 SOEs and 67 firms are Non-SOEs in our 86 sample firms.

We start from the year 2005 where this year marks the beginning of aggressive Chinese investment into the ASEAN-5 with the signing of ACFTA on 1 July 2005. The agreement is expected to promote both market-seeking and efficiency-seeking between China and the ASEAN countries. The full implementation of the ACFTA is in January 2010 with the framework for a strong foundation to enhance the economic relationships between ASEAN and China. Furthermore, the Protocol to Amend the Framework Agreement on Comprehensive Economic Cooperation between ASEAN and China is signed on 22 November 2015 at the 27th ASEAN Summit. The agreement is meant to update and further enhance the economic cooperation in terms of Trade in Goods, Services, Investment, and Economic and Technical Cooperation (ECOTECH). Having said this, we are fully aware that the efficiency score may be distracted by the investment outside of the ASEAN-5 region in this period. While recognizing it to be the limitation of the present study, it is rather impossible to make any conclusion in tracing each investment that the firm makes from various countries and innumerable reasons.

Hence, since the Chinese multinational that invests in the ASEAN-5 countries will gain from better market shares, we argue this would enhance their operational efficiencies considering various privileges gained from bilateral agreements and through the Comprehensive Economic Cooperation framework. Therefore, this study focuses on the efficiency gained by the parent firms in China where their subsidiaries operating in the ASEAN-5 region since the implementation of ACFTA. We anticipate if the parent firms are found to be inefficient, this would render to a conclusion that efficiency is not their major concern. This would be comprehensible since these firms might consist of SOEs that aim to fulfill the government objectives rather than profit-maximization cum enhanced efficiency following the trade agreements and their expansion in ASEAN-5.

The study period begins from the year 2000 till 2016, allowing us to further study the efficiency of the Chinese multinational firms, in their operation in ASEAN-5 to reap such benefit after more than a decade of implementation of ACFTA. In this case, we will study the efficiency of the firms in allocating resources namely technical efficiency in three major events. The first event will be straight after the implementation of ACFTA in July 2005, the second event is in 2010 of the full implementations of ACFTA and the last event will be in 2015 that is the Comprehensive Economic Cooperation Framework.

The annual data is extracted from the parent companies’ reports through the Thomson Reuters Eikons database to be used as the inputs and outputs in estimating the efficiency score. We use a dummy variable of 1 for SOE and 0 for NSOE. Besides the ANOVA test for significant differences within each group, we use the Data Envelopment Analysis (DEA) model to estimate the technical efficiency score of the parent companies. DEA is a linear programming technique to estimate the relative efficiency of the firm using the concept of the production frontier (Casu & Molyneux, 2003). This is an established and popular method to estimate the efficiency scores of the firms as it can accommodate the concept of multiple inputs and outputs. In this case, the linear programming technique calculates the relative efficiency ratios of weighted outputs to weighted inputs for each decision-making unit (DMU). The DMU in our case refers to individual firms. The most efficient DMU will lie on the frontier with an efficiency score of “1” while the less efficient DMU will lie below the frontier with an efficiency score of less than “1”.

The DEA estimation is first proposed by Charnes et al. (1978) with the assumption of constant returns to scale (CRS) with the proportionate increase in both inputs and outputs. Banker et al. (1984) argued that in economies of scale, the proportionate increase in input may not necessarily result in the same increase in output, and vice versa. This, therefore, leads to the formulation of the variable return to scale (VRS) of the DEA model which is known as the BCC model. The use of VRS is more practical while in the real world it may not necessarily be that the same percentage increase in inputs will result in the same percentage increase in outputs. Besides, the VRS assumption allows for the efficiency scores to be decomposed into pure technical efficiency and scale efficiency. Pure technical efficiency is known as the managerial efficiency in managing the factors of production to achieve the given level of outputs whereas scale efficiency refers to the size of the firms that contributes to the efficiency of the firms through economies of scale. The DEA estimation based on the VRS assumption is expressed by Equation (1).

\(\text {min}_{\theta, \lambda} \theta, \\ st \quad -q_i + Q \lambda \geq0 \\ \qquad \theta x_i - X \lambda \geq0 \\ \qquad l1' \lambda = 1 \\ \qquad \lambda \geq 0\)       (1)

Where θ is the scalar and λ is a I × 1 vector of ones with q is the outputs vector and x as the input vectors. The value θ obtained is the efficiency score for the i-th firm. We use input-oriented in the estimation because we assume that the firms choose to minimize the inputs at a given level of output. Following the theory of firm efficiency level that is based on the concept of production possibility where the frontier firms employ their land, labor, and capital as the main factors of production, we have chosen three inputs, namely the labor, capital, and fixed assets. In this case, the labor is proxy by total personnel expenses. Capital is considered as the input for the firm as it serves as the source of funding from the entrepreneurial. Following Floros et al. (2014) in their estimation of efficiency of manufacturing firms’ efficiency, we have resorted to two main outputs of the firms that are the total sales and profits. All data are extracted from the income statement and balance sheet downloaded from Eikons, Thomson Reuters.

Table 1 presents the descriptive statistics for the inputs and outputs vector used in the estimation of efficiency scores. Besides, we also present the average SOEs to indicate the present SOE firms in ASEAN-5. Consistent with our suspicions we find that the Chinese firms that invest in ASEAN-5 are mainly SOEs with an average of 52.2.

Table 1: Descriptive Statistics

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4. Results and Discussion

With reference to Table 2 below, our results show that the Chinese firms that make the investment in ASEAN-5 are relatively inefficient based on the reported average efficiency of 36.95%. Statistically, this means that the firms are wasting 63.05 percent of their inputs in producing a given level of output. Examining this result in the 4 phases of bilateral trade, our results show that ACFTA does improve the Chinese firm’s efficiency score. This is based on the comparison made pre and post-year 2010. By looking at the highest components of efficiency score, scale efficiency reports the score compared to technical efficiency. Our findings of the improved efficiency score are reiterated by the ANOVA test where, statistically, there are significant differences between pre- and post ACFTA signing.

The underpinning fact on this score indicates that the presence of Chinese firms in the ASEAN-5 region is motivated for efficiency-seeking motives instead of resource seeking. These findings are inconsistent with prior findings that China firms are more motivated on resource-seeking motives (Zhang & Daly, 2011; Lee et al., 2015; Lee, 2016; Zhang & Lee, 2017). The findings are in support of the notion that indicates that there could be various reasons, but notably, it could be there is a similarity of resource endowment and ASEAN-5 that may boost firms’ productivity better than those of industrialized economies.

The results also suggest that SOEs are relatively inefficient as compared to their Non-SOEs counterparts with an overall efficiency of 36.09 percent whereas the Non- SOEs are 37.84 percent. Higher efficiency scores are also reported by Non-SOEs during pre and post ACFTA signing. With reference to technical efficiency, it shows that SOEs report a higher score than Non-SOEs in each bilateral trade phase. The reason for this could be attributed to the presence of large Chinese SOEs at the host country’s strategic level, i.e. CEO or Board level, which would enable the transfer of technology and knowledge in boosting the efficient input used to boost output in the home country. Our country specific data (will be discussed later) reinforces this point that China’s SOE begins their ASEAN-5 investment starting from Singapore since pre-signing of ACFTA phase, i.e. 2005 to 2010 and evidently, Singapore has no natural resources except for technical know-how that could have benefited them. This supports the discussion by Deng (2004) and Nguyen et al. (2020) that China MNCs have less incentive to seek resources since they have ample supply of low-cost labor and inexpensive land. Interestingly, our ANOVA test indicates that there are no significant changes in the efficiency score among Non-SOEs since bilateral trade agreement has less impact on their ongoing profit maximization persuasions as compared to their SOEs counterparts.

Table 2: The Estimation of Efficiency Scores in Each Phase of Bilateral Trade and its Breakdown into Pure Technical and Scale Efficiency Score

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Notes: 2000–2004 is the period before the implementation of ACFTA; 2005–2009 indicates the first event study on the implementation of ACFTA; 2010–2014 refers to the second event study on the full implementation of ACFTA; 2015–2016 refers to the event of Comprehensive Economic Cooperation Framework. *,**,*** denotes to 10, 5, and 1 % significance level.

Table 3: Overall Efficiency by Country

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Notes: 2000–2004 is the period before the implementation of ACFTA; 2005–2009 indicates the first event study on the implementation of ACFTA; 2010–2014 refers to the second event study on the full implementation of ACFTA; 2015–2016 refers to the event of Comprehensive Economic Cooperation Framework. *,**,*** denotes to 10, 5, and 1 % significance level.

The estimation of efficiency scores is done using the DEA model and the results are presented in Table 2. 

Table 3 below shows that overall, China’s firms’ efficiency score grew tremendously after the post ACFTA period, i.e. the year 2010 onwards in comparison to the pre-ACFTA period. Statistically, our ANOVA test shows significant improvement in China’s efficiency score by investing in each ASEAN-5 member country except Indonesia. The improved score may suggest that there could be ongoing economic spillover effects to the respective host country that enable China to consistently increase their investment besides bilateral agreement. We find that the highest significant improved efficiency score experienced by China is through their investment in Thailand, followed by Singapore, the Philippines, Malaysia, and Indonesia. The devaluation of the Thai Baht after the 1997 financial crisis has invested in Thailand cheaper for China. The popular investment made in Thailand by China firms includes agriculture-related business, chemical products, textiles, and garments as well as metal and machinery among the few. In contrast, the investment made by China in Indonesia is the least impacted by the bilateral trade agreement over the period. This might be due to the fact that Indonesia, with its abundant resources and cheap labor may not be attractive for China’s firms who seek efficiency advantages from their investment.

We also found that the post ACFTA improves China’s firms’ efficiency score for Singapore to 41% compared to below 30% during the pre-ACFTA period. This confirms our prior discussion that, even though Singapore with no natural resources, it continues to be a favorite destination for China’s investors. This reiterates the fact that China’s gain of much technical know-how will ultimately justify the efficiency-seeking incentive by its investors. Singapore is often known as the world’s best economic, financial and shipping center in the world. Among noticeable China’s high-tech investments in Singapore is by China Mobile International (CMI) for Singapore’s submarine cable system. Philippines receives the earlier investment in the energy sector during the pre-signing ACFTA phase from 2005 to 2009. The last start of Sino-Philippine investments is mainly due to political uncertainties on the territorial claim over the South China Sea islands among others. Despite this, there are increasing trends of investment by Chinese conglomerates in the energy and infrastructure sectors which include China Telecom, Gezhouba Group, China Harbour Engineering, and China’s Baiyin Nonferrous Group, etc. Nevertheless, unquestionably, these investments are made by proficient China’s conglomerate which enhances the spillover effects in the host country. Thus, the claim that China’s investments are politically motivated and inefficient is rejected in these findings and ACFTA does improve China’s efficiencies.

Table 4: Overall Efficiency of SOEs and Non-SOEs

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Post ACFTA phase results also show that Chinese investors gain more efficiencies from their investment made in Malaysia. Malaysia as an avenue for China’s investments started mainly in the transportation sectors from 2005 to 2009. The landmark investment deals in transport sectors include the Guangxi Beibu Gulf International Port Group acquisition of a 40% stake in Kuantan Port Consortium Sdn Bhd, Guanxi Beibu partnering with IJM Corp Bhd for the new deep-water terminal at Kuantan Port, and Beijing Urban Construction Group involvement in the construction of an undersea tunnel linking Penang island to the mainland, among others. Based on this, one can deduce that the priorities of Chinese investment in Malaysia are to make Malaysia a logistic hub, where improving the logistic connectivity will improve trade facilitation by China with Europe and elsewhere in the world. In a nutshell, these are strategic investments and are meant for efficiencies-seeking rather than resource-seeking. In the next section, we will analyze these findings considering the investor ownership type, i.e. SOE and Non-SOE, to clarify the issue of efficiency-seeking or resources-seeking debate.

In extending the findings made in Table 3 above, we investigate to further explain whether the source countries where China’s firms invest in influence in improving the overall efficiency score, especially the post-ACFTA period. In doing so, we also attempt to show whether the types of ownership influence the countries that China invests in. Table 4 below reports the level of efficiency score between China SOEs (Panel A) and Non-SOEs (Panel B) across their investments in ASEAN-5 countries. The results show that there are different patterns of efficiency level found between these two groups of ownership types across ASEAN-5 countries in different phases of the ACFTA period. For example, during the pre-signing ACFTA period, in Panel A reports, the efficiency values for Malaysia range from 18.38 percent (2000–2004) to 54.12 percent (2010–2014). This is in stark contrast to the level of efficiency among Non- SOE firms in Panel B where the lowest efficiency values for Malaysia are from 2010 to 2014 (34.78 percent) and the highest is in the 2000–2004 period (51.13 percent). The better efficiency is reported during the post ACFTA period, where SOEs outnumber their Non-SOE counterparts.

Nevertheless, it should be noted that a different pattern of results is observed for Indonesia, Thailand, and the Philippines where the declining pattern is found on the efficiency score across time among SOEs compared to the NSOEs. These results further suggest that from the rational expectations point of view, NSOEs can negotiate better trade deals in ACFTA deals as their presence in these countries is much earlier than their SOE counterparts. Large China SOEs may find themselves being mobilized aggressively by the Chinese authorities only after the pressure often against the backdrop of China premier during the visits to these countries for promoting ACFTA. Interestingly, while the findings agree that ACFTA improves the efficiency score, the ownership type and countries’ institutional conditions do play roles in affecting the efficiency score.

For Singapore, although the results show that the NSOEs are relatively more efficient than their Non-SOE counterparts, interestingly, both groups show a similar pattern of increasing efficiency levels over time. This may be due to the better institutional quality offered by the Singapore market. This is supported by Li (2009) as the country with better institutional quality minimizes the risk for foreign direct investment as it has better property rights protection, policy, and regulatory stability which leads to a lower cost of doing business. Overall, our findings remain consistent that Chinese firms’ efficiency score improves even in each ASEAN-5 country relatively between SOEs with NSOEs during pre and post ACFTA, which ultimately rejects the claim of political investment motive by Chinese firms.

5. Conclusion

The Chinese OFDI has gained its momentum especially with the signing of the ACFTA bilateral agreement among ASEAN economies. This has led us to study the efficiency of the parent firms of the Chinese firms that make the investment in ASEAN-5 to provide some insights into the benefits that the ASEAN-5 countries have gained from the Chinese OFDI. We compare the efficiency score of these firms in various phases of ACFTA using the DEA model in estimating the efficiency score between the year 2000 to 2016 for both the SOEs and NSOEs. Our study has made at least three contributions to the literature.

First, we find that our results show that ACFTA does improve the Chinese firm’s efficiency score. Theoretically, our results indicate that overall the parent firms from China are relatively efficient and this rejects the hypothesis of resource-seeking and supports the efficiency-seeking motives. This is inconsistent with the argument put forward in the studies of China’s OFDI (Deng, 2004; Zhang & Daly, 2011; Lee et al., 2015; Lee, 2016; Zhang & Lee, 2017) that China’s OFDI is different from the rest of the world where the main objective is resource-seeking rather than efficiency-seeking. Reinforced by the technical efficiency findings, the results consistently support for efficiency motive of China’s investment after the signing of the bilateral agreement. In other words, this shows that the trade agreement benefits the host economies where it opens more avenues to the OFDI between China and ASEAN where it not only focuses on political interest but also moves towards economic interest in the region.

Secondly, we also analyze the efficiency of these firms by dividing them into their respective ownership type, i.e. SOEs and Non-SOEs. The theoretician asserts that the SOEs are less efficient as compared to their NSOEs as has been justified in this study. However, we find that the overall higher efficiency score is reported when comparing pre- and post ACFTA signing for both SOEs and NSOEs. In sum, these findings indicate that the trade agreements between China and ASEAN are no longer focusing on the political interest only but also moving towards the economic interest which is proven by the improvement in efficiency over time especially in the Non-SOEs as compared to the SOEs.

Finally, the study’s findings when analyzing each ASEAN -5 country, China’s parent firms’ efficiencies show a higher score among NSOEs compared to SOEs after the signing of ACFTA for all ASEAN countries except for Malaysia. This finding among NSOEs’ success following the ACFTA period is attributed to the presence of solid institutional infrastructure to promote efficiency adapted to Singapore, as well as the advantages garnered by NSOEs’ investments over SOE counterparts in Thailand, Philippines, and Indonesia. Malaysia has the only improved performance score among SOEs after the ACFTA. The only improved performance score in post ACFTA among SOEs is in Malaysia. We conclude this is only possible since the diplomatic ties of trust between Malaysia and China have been established even before the ACFTA signing. This allows more SOEs to invest safely in Malaysia especially in long-term infrastructure projects.

Overall, this study confirms that economic interests are still the major contributors to the efficiency of the Chinese parent firms which enables the firms to allocate their resources efficiently over time. These results have implications for the bilateral trade policies of governments that the country’s institutional infrastructure, earlier investment presence, and diplomatic ties help in shaping an effective trade agreement. This study also sheds more light on the OFDI recipient countries on the importance of considering investment motives and the benefits that they could gain from the trade agreement, which are vital to generating a positive spillover effect to the host country. For example, importance should focus on institutional governance as ACFTA attracts investors to benefit from economic gains between ASEAN regions from China’s OFDI.

*Acknowledgements:

This research is supported by the RP060D-17SBS University Malaya Research Grant (UMRG) from the Equitable Society Cluster, University of Malaya.

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