Political uncertainty and foreign direct investment—Evidence from the government official vacancy in China's cities

Abstract

AbstractThis study focuses on a new political uncertainty phenomenon, that is, the government official vacancy, and examines its effects on foreign direct investment in China's cities. Using hand‐collected data about the vacancies of the municipal party secretary in China from 2003 to 2018, we find that the government official vacancy reduces foreign direct investment. A one unit (month) increase in the government official vacancy leads to a −2.225% decrease in foreign direct investment. Second, we show three possible channels through which the government official vacancy reduces foreign direct investment: reducing government efficiency, increasing economic policy uncertainty and increasing corruption. Finally, our results show that the effects of government official vacancies on foreign direct investment are stronger in cities with a strong media environment, cities with a low level of innovation and entrepreneurship and cities in the middle region of China. Our main results pass a series of robustness tests. Overall, our research offers novel evidence that political uncertainty has a negative impact on foreign direct investment.