Local sourcing of multinational enterprises in China

Local sourcing from indigenous firms by multinational enterprises (MNEs) is an important channel through which the former may benefit from the positive externalities generated by the latter. The purpose of this study is to analyze the extent and determinants of local sourcing of MNEs. Employing a survey dataset covering 493 multinational subsidiaries in China during 1999-2005, this paper applies the two-limit Tobit model. It is found that an MNE's local sourcing decision is influenced by its strategies, characteristics such as size and learning ability and country-of-origin. More specifically, export-orientation strategy, joint venture strategy and networking with local suppliers positively affect local sourcing. Small and autonomous subsidiaries tend to source more locally. Age has a non-linear effect. The importance of these determinants varies with regions. Aiming at capacity building and competitiveness of indigenous firms, the Chinese government has initiated local content requirement. This study shows that such policy intervention could be counterproductive. The creation of a more competitive business environment by the government could promote more linkages. Given its critical role in economic development, local sourcing by MNEs has attracted much attention. Only limited research has been carried out on FDI linkage effects in China, and the location effect on FDI linkages has not been examined. This study aims to fill the gap by using Chinese survey data.