Country Risk And China’s Foreign Direct Investment

As the "’Going Global" strategy being implemented for more than ten years, China’s foreign direct investment (FDI) increases steadily and China is playing one of the leading roles in the international market. Demands such as economic structural adjustment, penetrating overseas markets, hunting stable energy supply and reasonable use of foreign exchange reserves will continually drive the growth of China’s FDI. Due to the complexity and variability of global business environment as well as lack of investment experience, the profits are still far from being satisfactory.Among all kinds of risks involved in FDI, there is one type coming from the sovereign act of host country or the unstable situation of its economics or politics, for instance, nationalization, policy change, economic recession, sovereign debt crisis, war, coup, natural disaster, etc. These risks are classified as country risk, which has been considered as the most important reason of the failure in FDI. Unlike business risk, country risk is more complicated and diversified while enterprises are not capable to avoid all by themselves. Hence, a comprehensive study of country risk and its impact on FDI will be highly valued.This paper details the notion, classification and pattern of country risk then uses a contrast research to study different country risk assessment methods in order to conclude the critical indicators. Regression analysis and model building is applied to find the relationship between country risk level and FDI net inflow of China’s top5FDI receivers. The outcome of this regression analysis shows that there is significantly negative correlation between country risk level and FDI net inflow. A number of indicators such as GDP growth rate are notable variables of the model. Lastly, recommendations are given to take precaution and defuse country risk then enhance the return on FDI.