Political Risk & China’s Outward Foreign Direct Investment

As the largest developing country in the world, China has made a remarkable achievement during the development of economy and society, and the Outward Foreign Direct Investment (OFDI) has played a vital role in this process. With the deepening of opening-up strategy, the enhancement of national economic power and the ability of enterprise internationalization, and the improvement of policies to promote investment, the scale of China’s OFDI has increased rapidly. However, what China’s enterprises have to face is not only the impact of traditional commercial risks on investment, more importantly, is the impact of risks at the national level.Firstly, this paper theoretically analyses the motivation of China’s OFDI and the impact of political risk in host countries on China’s OFDI, which find that the motivation is to seek for markets, natural resources and technology, nevertheless, the impact of political risk on investment may be based on the risk levels in host countries. In the analysis of China’s investment situation in developing economies, developed economies and transition economies, we find that quite a few of China’s OFDI has flowed into mining industry in each region, it may reflect the motivation of seeking for natural resources. Moreover, the investment in developing economies and transition economies mainly flows into countries with poorer political stability, and China prefers to invest in more stable developed economies although the political stability of these economies is inherent higher than developing economies and transition economies. Empirical method, which based on the data of China’s investment in 118 countries and regions from 2003 to 2011, is used to research the motivation of China’s OFDI and the impact of political risk on the investment in the developing countries and the developed countries. In this paper, in order to deal with the zero values of the dependent variable, we estimate the multiplicative gravity model instead of log-linearized model by the Poisson Pseudo Maximum Likelihood method (PPML). Then the interaction between motivation and political risks are introduced into the basic model to study the impact of political risk on China’s OFDI with different investment motivations, which find that China’s market-seeking investment will be promoted in the developing countries, while it will be impeded in the developed countries by the improvement of investment profile. The restraint of corruption will reduce China’s market-seeking investment, source-seeking investment and technology-seeking investment in developed countries. China’s market-seeking investment will be reduced by the decrease of bureaucracy both in developing and developed countries, while the source-seeking investment will be promoted in developed countries. Given the fact that China’s OFDI flows to some countries with high political risks, this research suggests that overseas investment insurance system should be established and improved, on this basis, the investment in the developed countries and regions should be increased, and the investment in developing countries should be consolidated, meanwhile the diversification strategy of investment should be promoted actively.