Foreign Direct Investment Inflow and Bilateral Political Relationships

40 Pages Posted: 11 Mar 2023

See all articles by Jiashun Huang

Jiashun Huang

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

Jim Huangnan Shen

School of Management, Fudan University ; The Growth Lab, Center for International Development, Harvard Kennedy School, Harvard University; Core China Research Center, School of Economics and Business, University of Navarra

Weiping Li

Sun Yat-sen University

Chien-Chiang Lee

Nanchang University

Abstract

In this paper, 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.  Both our theoretical and empirical results show that 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 relationships, Political relationship index, Sequential game model

Suggested Citation

Huang, Jiashun and Shen, Jim Huangnan and Li, Weiping and Lee, Chien-Chiang, Foreign Direct Investment Inflow and Bilateral Political Relationships. Available at SSRN: https://ssrn.com/abstract=4385388 or http://dx.doi.org/10.2139/ssrn.4385388

Jiashun Huang

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

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

Jim Huangnan Shen (Contact Author)

School of Management, Fudan University ( email )

Shanghai
China

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

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

Core China Research Center, School of Economics and Business, University of Navarra ( email )

Campus Universitario
Pamplona, Navarra 31009
Spain

Weiping Li

Sun Yat-sen University ( email )

Haizhu District
Guangzhou
China

Chien-Chiang Lee

Nanchang University ( email )

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

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