Political risk distribution of Chinese outward foreign direct investment

Abstract

The purpose of this paper is to contribute to a better understanding on relations between Chinese Outward Foreign Direct Investment (OFDI) and host country political risk. To contribute to a better understanding of whether traditional wisdom on foreign direct investment (FDI) is sufficient to explain the internationalization of Chinese multinational enterprises, the author collected 15 proxy variables from the PRS Group and Heritage Foundation and applied principal component analysis (PCA) to construct a new political risk index (PRI) that measures multiple facets of political risk for 139 countries. Using this new PRI as a criterion, the author investigated changes in the political risk distribution (PRD) of Chinese outward FDI (OFDI) regarding investment destinations, large projects, annual investment outflows and sectorial distributions from 2006–2017. The author found that the vast majority of Chinese OFDI during this period is concentrated in moderate- and low-risk countries, even at the sectorial level. This paper also shows that the continuing reform of Chinese OFDI policy and strong government support have led to an unprecedented increase in Chinese OFDI, while the PRD of Chinese OFDI has maintained a gradual decline over the past decade. This research provides a new measurement that covers multiple facets of political risk.