Are Chinese Firms Attracted to Political Risk? Locational Determinants of Chinese Outward Foreign Direct Investment

This study evaluates the foreign direct investment (FDI) location choices made by Chinese firms from 1996 to 2015 and investigates the extent to which Chinese firms are attracted to investing in countries with high levels of political risk. Using new Chinese data, the study categorizes Chinese firms into Central State-Owned Enterprises and Other Chinese Firms to see the relationship between investment location and political risk for firms with varying levels of Chinese government control. Additionally, the data is divided between investments made from 1996 to 2003 and investments made from 1996 to 2015 to measure the effect that important changes in Chinese domestic policy in 2004 have had on the investment location choices of these firms. After conducting negative binomial regressions, the results show that these two types of Chinese firms have different attractions to political risk across different time periods. Central State-Owned Enterprises’ FDI location choices are not significantly influenced by a country’s political risk regardless of time period, but China’s Other Firms change from being attracted to political risk prior to 2004 to being deterred by it after 2004. These findings show that changes to Chinese domestic policy and level of control by the Chinese central government can have a profound influence on Chinese firms’ views towards political risk, and this reflects the larger ability of Chinese government intervention to enact change in Chinese firms and in the greater Chinese business environment