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

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. 摘要 中国对外直接投资是一个富有争议且日益重要的研究课题。我们认为忽略国际关系在中国对外投 资中的作用是中国对外直接投资研究中的一个重要缺陷。基于国际政治和外国直接投资的文献, 我们确认了中国和潜在东道国的政治关系影响企业投资决策及对外投资流动的机制和原因。本文 的实证创新在于用两种相关且互补的实证检验研究国际政治关系对中国对外投资的作用,第一种 检验使用 346位中国投资者的企业层面调查数据,而第二种检验使用中国 2003-­‐2005年在 95个国 家对外投资的双边数据。我们发现中国企业如认为国际关系影响越大,其投资决策就越可能受影 响,且中国对外投资最可能流向与中国政治关系更友好的国家。我们的分析也解决了为什么中国 企业倾向于去政治风险高的国家投资的难题。中国投资者去这些地方不是因为他们愿意接受高风 险,而是因为良好的政治关系降低了风险。研究中国对外投资及更广泛的对外直接投资的学者应 该关注国际政治对国际生产资金分布的重要作用。 Acknowledgement: We thank Scott Kennedy for helpful suggestions for this project. Wendy Di Wang provided research assistance. Research for this paper was supported by a grant from the Research Center for Chinese Politics & Business (RCCPB) at Indiana University.