Ownership discrimination and outward <scp>FDI</scp> by China's privately‐owned enterprises

Abstract Research Summary We introduce the concept of ownership discrimination to better understand the outward FDI (OFDI) of privately owned enterprises (POEs) from transition economies. In a transition economy, POEs may perceive ownership‐based discrimination and thus suffer disadvantages in domestic market competition. Such perceived ownership‐based discrimination could motivate POEs to engage in OFDI as a strategic response to the resulting disadvantages. We test this idea using a sample of POEs from 31 provinces in China. We find a positive relationship between perceived ownership discrimination and POEs' engagement in OFDI. This relationship is weaker for POEs with membership in political organizations that help them obtain benefits that counter the negative impact of ownership discrimination. Managerial Summary Firms may face institutional misalignment and, consequently, competitive disadvantages in their home country. Our study helps managers identify an important type of institutional misalignment for POEs in transition economies, which we call ownership‐based discrimination. We argue that POEs can engage in OFDI as a strategic response to address the disadvantages in their domestic market caused by ownership discrimination. Based on the experiences and decisions of POEs in China, we see how such ownership‐based discrimination leads to more OFDI by these firms. One action POEs can take is to develop stronger connections in the local market through membership in political organizations, which helps counter the negative impact of ownership‐based discrimination.