The Impact Of Home Country Political System On OFDI

As more and more developing economies join into the tide of foreign direct investment(FDI), especially countries that China and Russia represent had a stunning performance, the scale of OFDI in these countries have received widespread attention. On the other hand, the existing FDI theories cannot make comprehensive explanation on OFDI behavior of developing and transition economies. So people began to turn their attention to institutional factors, and the emergence of the institution-based view provides a new perspective for the research. Institutional factors influence a country's FDI both from the host country side, and the home country side. Existing studies about institutional factors and FDI mostly discuss from the perspective of the host country that how to attract FDI, the perspective of home country is not common, that explain a country's OFDI with soft factors "system" is even fewer. So this article selected the aspect of country political system, to analyze the relationship between political institution and OFDI.After reading numbers of literature, this paper chose six indicators to measure the quality of a political system, on the basis of factor analysis, a comprehensive evaluation of each country's political system quality will be generated, and on the basis of this result, samples can be divided into countries with poor political institution quality and counties with better political institution quality. After a regression test of two type countries respectively. The results found that:first, through factor analysis, it gets a classification based on comprehensive evaluation, which is highly similar with the classification of developed countries, and developing countries& transition economies. Most of developing and transition economies belong to the poor quality of the political system. Secondly, the national political system has significant influence on a country's OFDI level, especially in developing and transition economies, the dependence degree of OFDI to home country's political system is bigger; it can be even regarded as an endogenous variable, the adjustment effect is obvious. Thirdly, for developing and transition economies, there is a negative correlation between OFDI and factors such as democratic level, social order and stability of the government, which contrary to results of developed countries. It means that, OFDI of developing and transition economies have its particularity, there is a part of OFDI flow belongs to risk aversion to its home country political system, which becomes institutional escape type OFDI. So for countries and regions that may achieve institutional reform success, when the level of democracy and legal system, the degree of political stability and political order are improved, this part OFDI flow may be reduced. Thirdly, for the developed countries, the quality of the political system to adjust the OFDI is not as obvious in developing countries, but the promotion of democracy, a smooth transition of government and political institutions are significance to promote the OFDI. Fourthly, the financial crisis indeed has explanatory power in world FDI pattern changes. In many developed countries, established multinational enterprises were severely impacted in the financial crisis, which means a cross-border M&A opportunities for developing countries enterprises like China.This paper discuss OFDI and institution from a macro level, thus ignore the micro-level factors inevitably. But OFDI is a rational behavior of enterprise to maximization its self-interest, many micro-level factors, especially ownership system of enterprises, have a great influence to enterprise's OFDI behavior. So the study from the enterprise level may be more persuasive, the perspective of enterprise level or industry level can be discussed in the future.