Policy Uncertainty and China’s OFDI under the Background of Economic Transformations

Abstract

In recent years, China has experienced large-scale and sustained rapid expansion of outward foreign direct investment （OFDI）. It is of great practical significance to explore the driving factors behind it. Policy uncertainty is the systemic shock that enterprises face in the process of investment decision-making. In the economic transformation background, potential government intervention will bring greater policy uncertainty, which will inevitably affect the investment decision of enterprises. Based on the perspectives of policy uncertainty and economic transformation, it is worthwhile to explore the rapid expansion mechanism of China’s OFDI.This paper puts policy uncertainty, economic transformations and OFDI in the same framework. Base on the theoretical analysis, this paper carries out empirical researches by using the economic policy uncertainty index （henceforth EPU） constructed by Baker, et al. （2016） and provincial panel data from 2003 to 2015 in China. The results show that, the higher the uncertainty of the economic policy is, the larger the scale of OFDI expands. This effect is more obvious in the samples after 2008 and in the central and western regions. Moreover, the marketization and privatization reforms promote OFDI significantly, and opening up has a significant inhibitory effect on OFDI; the impetus effect of policy uncertainty on OFDI decreases with the economic transformations of the above three dimensions.The conclusions of this paper have direct policy implications: First, in exploring the driving factors for the continued rapid expansion of China’s OFDI, it is necessary to consider the specific economic transformation background, especially the non-market factors such as government intervention and policy uncertainty. Second, the mitigation of impacts of policy uncertainty on OFDI relies on further deepening economic system reform including marketization, property rights reform and opening up.This paper mainly extends the existing literature in two aspects: First, considering the fact that the government intervenes in the economy during the transformation process, it analyzes the impact of EPU on China’s OFDI. Second, based on China’s specific economic transformation background and regional differences, it systematically examines the impact of major economic transformation variables such as marketization, property rights reform and opening up on China’s OFDI, and further discusses the adjustment effects of economic transformation variables on the impact of EPU on OFDI, which enriches the existing literature on the mechanism of China’s OFDI continuous rapid expansion.