Political Relations and Chinese Outbound Direct Investment: Evidence from Firm- and Dyadic-Level Tests

Research Center for Chinese Politics and Business Working Paper No. 19

32 Pages Posted: 3 Nov 2012

See all articles by Quan Li

Quan Li

Texas A&M University - Department of Political Science

Guoyong Liang

United Nations - Conference on Trade and Development (UNCTAD)

Date Written: February 1, 2012

Abstract

Chinese outbound direct investment (ODI) has been a controversial phenomenon and an increasingly important research topic. We argue that ignoring the role of international relations in Chinese outbound investment is an important oversight in the literature on the determinants of Chinese ODI. Building on the literature on international politics and FDI in general, we identify the mechanisms and reasons for why China's political relations with potential hosts significantly influence firm investment decisions and ODI flow patterns. A novel empirical contribution of the paper is to test the effects of interstate political relations on Chinese ODI using two interrelated and complementary empirical tests: one at the firm level based on survey responses of 346 Chinese investors and the other at the dyadic level based on Chinese ODI flows to some 95 countries from 2003 to 2005. We find that the more importance a Chinese firm attributes to interstate relations, the more likely its investment decisions will be affected and that Chinese ODI is more likely to flow to countries with which the Chinese government has better political relations. Our analysis also addresses the puzzle of why Chinese ODI tends to go to countries of high political risks. Chinese investors go to those environments, not because of their risk acceptant preferences, but rather because of the risk-reduction effect of good political relations. Scholars of Chinese ODI as well as FDI in general should note that international politics does matter to the distribution of international production capital.

Suggested Citation

Li, Quan and Liang, Guoyong, Political Relations and Chinese Outbound Direct Investment: Evidence from Firm- and Dyadic-Level Tests (February 1, 2012). Research Center for Chinese Politics and Business Working Paper No. 19, Available at SSRN: https://ssrn.com/abstract=2169805 or http://dx.doi.org/10.2139/ssrn.2169805

Quan Li (Contact Author)

Texas A&M University - Department of Political Science ( email )

College Station, TX 77843-4353
United States

Guoyong Liang

United Nations - Conference on Trade and Development (UNCTAD) ( email )

Palais des Nations
Office E 8074
Geneva, 1211
Switzerland

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