The Impact of Political Relations on China's Outward Direct Investment

Objective: This article relates to the growing amount of literature on the determinants of the location choice of Chinese ODI. The objective of the article is to investigate whether the improvement in political relations will encourage more investment to a host country or not. Also, the article aims to identify the asymmetric impact of political relations in different host countries. Research Design & Methods: Using information on bilateral events from People's Daily Database and the website of Chinese Ministry of Foreign Affairs, we establish an indicator for bilateral political relations. Then, this article empirically examines the impact of political relations on the location choice for Chinese ODI based on the quarterly data of foreign direct investment of Chinese enterprises from 2003 to 2014 using a fixed effect model. Findings: Regression results suggest that political relations have a positive and statistically significant effect on Chinese ODI. The relation rises by one unit, it is associated with an increase in Chinese ODI by USD 25.9 million. The results also suggest that Chinese firms would prefer developing host countries which have a good relation with China, especially those with a better legal system. Implications & Recommendations: It implies that not all host countries are affected by political relations in the same way. The improvement in the bilateral political relations will increase Chinese ODI to developing countries. In terms of developed host countries, instead of bilateral political relations economic development and the market size are main determinants for Chinese ODI. Contribution & Value Added: Instead of describing political relations with a single indicator, we build an indicator based on the political events methodology to analyse the location choice of Chinese ODI by using monthly data to capture the accumulated effect of events on political relations.