...multinational internal capabilities, host countries' environmental contingencies, and dyadic strategic motivations have an effect on structural change to foreign direct investment in China over time. Empirical evidence from investment size, entry modes, sectoral and regional distributions in foreign direct investment in China supports the findings.

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The market environment in China was typically regarded as one full of complexity, opportunity, and dynamism. Since the end of the 1970s, China has been implementing its economic reform and opening its doors to the world, with its objective to shift from a centrally planned to a market driven economy. This transition changes fundamental managerial assumptions, criteria, and decision-making on the one hand, and represents a genuine transformation of the business on the other (Tan and Litschert, 1994; Luo and Park, 2001). After a long period of stiff trudge, China has perceived the great changes of its market context (Luo and O'Connor, 1998; Luo, 1999; Pan and Chi, 1999), and it is particularly true that many new changes have come after China entered the World Trade Organisation (WTO). China is regarded as the largest and fastest emerging market country.

In 2001, the annual GDP of China ranked the sixth in the world, while the top five are all developed countries (World Economic Outlook, 24 September 2002). In foreign direct investment (FDI), China is also the sixth largest recipient in the world and the largest among developing countries as well. The level of FDI reached $47 billion in 2001 (World Development Report, 2002), which implies that China is becoming an attractive location for foreign investors. With global competition and rapid technological development, many multinational enterprises (MNEs) foresee their opportunities in the developing countries like China rather than in developed countries. To strive for larger market in such countries is a strategic objective for most MNEs. Both the host contextual environment and MNEs' investment strategies have changed drastically (Luo and O'Connor, 1998), such change brings MNEs more opportunities in China.

This study focuses on structural change to FDI in China to find out some important factors triggering it, which may serve as guidelines for MNEs seeking more opportunities in China. Related theoretical issues are discussed in a synthesised approach and several propositions about the determinants of structural change to FDI across China are presented. Structural change to FDI in China and its important determinants are analysed empirically based on the four aspects of investment size, entry modes, sectoral and regional distributions.

Theoretical Foundations

Interest in understanding the determinants of FDI has increased rapidly. Generally, the determinants are not only associated with transaction cost but also related to host country-specific social, political and economic context (Gulati, 1995; Chang and Rosenzweig, 2001). Among earlier works, many scholars suggest that transaction cost involving the revenue-enhancing and cost-reducing opportunities are primary considerations both in the decision-making of FDI and in the selection of entry modes (Beamish and Banks, 1987; Shan, 1991; Chang and Rosenzweig, 2001) on the one hand, and on the other, cultural and national factors such as culture distance and the investing firm's country of origin are also other determinants influencing FDI activities among different countries. Several other researchers also point out that environmental risks have an incontestable effect on FDI (Shan, 1991; Luo and O'Connor, 1998; Luo, 2001).

However, most previous studies on determinants of FDI have limitations in three important ways. First, many studies focus mainly on the choice of entry mode, which can only testify indirectly the influences on FDI activities, because there are few directly logical interrelationships between the determinants of entry modes and those of FDI (Kim and Hwang, 1992; Hennart and Park, 1993; Hennart and Reddy, 1997; Vanhonacker, 1997; Chang and Rosenzweig, 2001; Luo, 2001). For example, Luo, (2001) from multiple theoretical perspectives that include transaction cost, the eclectic paradigm, bargaining power, and organisational capability, proposes that entry mode selection in an emerging economy like China is influenced by situational contingencies at four levels: nation, industry, firm, and project.

Second, many studies adopt a static approach (Beamish, 1993; Pan 1996; Hejazi and Safarian, 1999; Chang and Rosenzweig, 2001), which contains limitations in interpreting the determinants of FDI. For example, studies based on transaction cost theory implicitly assume that concerns about partners' opportunism are consistent over time, ignoring the fact that the experience and familiarity with a partner may reduce such concerns. Similarly, studies concerning cultural distance also suggest that its effect remains steady over time, and have not tested whether its importance diminishes as MNEs gain experience with the host countries' cultures (Chang and Rosenzweig, 2001).

Last, some of previous studies are short of synthesised perspectives on the determinants of FDI. Though Sun, Tong, and Yu (2002) review previous work about the influences on FDI in China and identify eight important determinants of FDI distribution across different provinces within China, their summary has some supposition among diverse variables and too many fragments as well. Further, it ignores some determinants from MNEs themselves and their home nations.

This study analyses the determinants of FDI in China in a dynamic and synthesised approach. Recently some studies have conceptualised theories to explore the determinants of FDI activities during the globalisation and international expansion, among which are sequential FDI perspective, international expansion process model, and knowledge-based theory of the firm, which serve as the theoretical foundations of this study.

Specifically, many researchers explore sequential FDI activities, with...

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