The dissuasive effect of U.S. political influence on Chinese FDI during the Going Global policy era

Abstract

Building on the growing debate on political determinants of foreign direct investment, we investigate the relationship between U.S. political influence and the global distribution of China's outward foreign direct investment (OFDI). Using country-level and firm-level datasets of China's greenfield investment, we find strong evidence that Chinese state controlled firms strategically reduce investment in host countries under significant political influence of the United States. Our results are robust to alternative specification and two falsification tests. The findings suggest that the Chinese government uses FDI as a way of economic diplomacy.