FDI Inflow and Bilateral Political Relationship -Theory and Evidence

39 Pages Posted: 13 Aug 2019 Last revised: 1 Jun 2020

See all articles by Jiashun Huang

Jiashun Huang

Institute for New Economic Thinking (INET), at Oxford Martin School

Weiping Li

City University of Hong Kong

Chien-Chiang Lee

Nanchang University

Jim Huangnan Shen

Center for International Development, Harvard Kennedy School, Harvard University

Date Written: August 5, 2019

Abstract

This research reveals the inherent dynamics between the amount of foreign direct investment (FDI) inflow in the host country and its political relationships with other countries. We demonstrate in a two-stage sequential game model that there exists an inverted U-shape relationship between FDI inflow and bilateral political relations. Employing the political relationship index (PRI) to test our theory using Chinese data from 2002 to 2016, we find that the empirical results are broadly consistent with the theories proposed herein. When there is an initial rise in the level of bilateral political relationships, there will be more FDI inflows into that country due to a decline in the level of economic and political uncertainties. However, when the level of bilateral political relationships exceeds a certain threshold, the FDI inflow will tend to deteriorate. This indicates that an excessive level of political relationship rules out the earning opportunities due to the decrease and removal of the preferential policy on supporting business in the over-maturation of the host country. Our empirical results are also valid after using robustness checks and IV tests. We provide the case of the Sino-U.S. relationship to illustrate our general findings.

Keywords: FDI inflow; Bilateral political relationship; Political relationship index; Sequential game model

JEL Classification: F14, F51, C32, O57, P45

Suggested Citation

Huang, Jiashun and Li, Weiping and Lee, Chien-Chiang and Shen, Jim Huangnan, FDI Inflow and Bilateral Political Relationship -Theory and Evidence (August 5, 2019). Available at SSRN: https://ssrn.com/abstract=3432329 or http://dx.doi.org/10.2139/ssrn.3432329

Jiashun Huang

Institute for New Economic Thinking (INET), at Oxford Martin School ( email )

Manor Road Building, Manor Road
Oxford, OX1 3U
United Kingdom

Weiping Li

City University of Hong Kong ( email )

Tat Che Avenue
Hong Kong
Hong Kong

Chien-Chiang Lee

Nanchang University ( email )

999 Xuefu Avenue
Hong Gu Tan New District
Nanchang, Jiangxi 330031
China
330031 (Fax)

Jim Huangnan Shen (Contact Author)

Center for International Development, Harvard Kennedy School, Harvard University ( email )

One Eliot Street Building
79 JFK Street
Cambridge, MA 02138
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
38
Abstract Views
321
PlumX Metrics