Political Risk Aversion and OFDI Strategy Choice of Chinese Enterprises

Abstract

The political risks have become one of the most important reasons for OFDI losses Chinese firms suffer. However, firms can avoid risks and reduce losses by choosing a reasonable investment strategy. This paper employs the OFDI firm-level data from Directory of Overseas Investment Enterprises (Institutions) from 2004 to 2013 to investigate the strategy choice of Chinese firms facing the host countries' political risks, and the moderating effect of investment experience on political risks, by using binary choice model, propensity score matching method and conditional Logit fixed effect model. Our findings suggest the higher the host countries' political risks are, the more the firms tend to adopt sequential investment, and investment experience can help firms to avoid and reduce some political risks, and improves the OFDI probability of firms in the host countries with high political risks; additionally, marketing OFDI firms have larger reaction flexibility to the host countries' political risks than production OFDI firms, and with investment experience, the former is less sensitive to the political risks. It provides useful idea and reference for how to effectively avoid the host countries' political risks and raise the probability of successful M&A in the going-out process of Chinese enterprises.