Does internet security matter for foreign direct investment? A spatial econometric analysis

This paper examines the impact of the Internet security environment on Chinese outward foreign direct investment (FDI) using a merged cross-country data set over 2010-2017 with a dynamic spatial model. The results show that Internet security is a crucial determinant for Chinese firms to make location decisions overseas. Particularly, a secure Internet significantly promotes Chinese outward FDI to a host country. In contrast, Internet security in surrounding countries yields negative spatial location spillovers that hinder Chinese firms from investing in the host country. This phenomenon can be regarded as a national competition for Internet security to attract FDI. Mechanism tests show that Internet security promotes FDI in host countries through four channels: operating cost reductions, transaction cost-cutting, information asymmetry decreases, and confidentiality protection. Further heterogeneous analyses show that the impact of Internet security is more significant as time passes and the host country becomes an Internet society. In contrast, specific international cooperation frameworks led by China weaken the location effect of Internet security for Chinese outward FDI. These results are robust after controlling for potential endogeneity and to different specifications. Therefore, the host authorities should endeavor to create a high-quality Internet security environment to attract FDI.