Research on the Relationship between Pakistan’s Institutional Risks and China’s Foreign Direct Investment in Pakistan from the Perspective of Bilateral Political Relations

Abstract

Generally speaking, Pakistan’s institutional risks are relatively high, especially the risk of terrorism, which is the main obstacle that hinders foreign investors from investing in Pakistan, but for Chinese investors, the actual institutional risks are lower than its nominal value. What’s more, China’s foreign direct investment (FDI) in Pakistan even shows a clear upward trend when Pakistan’s institutional risks are increasing in a tolerable range, because the bilateral political relations, characterized by long-term friendship and mutual trust, have played a significant role in mitigating risks. In addition, as the bilateral political relations are shifting from geopolitics to geo-ecnomics, there are multi-level economic cooperative systems and polices forming between the central and local governments of both countries, which mitigates risks for Chinese FDI in Pakistan to a large extent. However, Pakistan’s institutional risks should not be underestimated anyway. While strengthening counter-terrorism cooperation with Pakistan, China should further diversify foreign cooperation, better mitigate risks and improve emergency response mechanisms by multi-party participation. Besides, enterprises should put efforts in improving their own security capacity in order to promote the healthy development of Chinese FDI in Pakistan as well as the smooth implementation of China-Pakistan Economic Corridor (hereinafter referred to as CPEC). This research not only bears strong practical significance, but also aims to provide experiences and inspirations for China to promote FDI in countries with relatively high institutional risks along the Belt and Road.