Sister-city Ties and Chinese Outward Foreign Direct Investment: A Spatial Econometric Analysis

Abstract

This paper employs dynamic spatial econometric methods to analyze the impact of the sister-city relationship on Chinese outward foreign direct investment (OFDI) using a linked country-level dataset from 2003 to 2016. The results show strong and robust evidence that the sister-city relationship has been a crucial OFDI location determinant in host countries and their neighbors. Specifically, the sister-city tie between China and the host country has stimulated Chinese OFDI in host countries. Moreover, Chinese OFDI in host countries would be reduced if China concluded sister-city ties with their neighbors to which we refer as the neighboring effect. Further mechanism tests show that sister cities have promoted OFDI in host countries via four channels: reducing political risk, decreasing information asymmetry, narrowing institutional distance, and mitigating cultural differences. This tendency for sister-city links to promote OFDI has varied substantially depending on OFDI entry modes (i.e., greenfield or cross-border mergers and acquisitions), motivation (i.e., resource-, market-, technology-, or efficiency-oriented OFDI), and Sino–foreign geographical relationships (i.e., Belt and Road Initiative countries or other countries).