How political risk in host country affects FDI: an explanation for the paradox of China’s investment risk preference

Abstract

In recent years, the scale of China’s outward foreign direct investment has been expanding, and the political risks are also intensifying. How does political risk affect the decision-making of outward foreign direct investment? This paper collected the relevant data of 134 countries from 2003 to 2016, using the regression method of System Generalised Method of Moments. It studies the political risk preference of outward foreign direct investment in the world and China. The study found that there is no political risk preference in the world as a whole. In contrast, China’s outward foreign direct investment has obvious political risk preference. China does not have a political risk preference for developed countries. At the same time, China has shown strong default risk preference for emerging market countries and countries along the "the Belt and Road". This study adds default risk when measuring political risk, and further subdivides political risk into five categories, taking into account their internal interaction mechanism. In addition, this paper not only studies the similarities and differences of outward foreign direct investment 's political risk preferences between China and the world, but also introduces investment motivation to better explain the location choice of China’s outward foreign direct investment.