Diplomacy and investment – the case of China

Abstract

Purpose - – The purpose of this paper is to analyze the impact of diplomatic activities on outward foreign direct investment (OFDI). Design/methodology/approach - – The paper first develops a set of hypotheses drawing insights from politics, international business and institutional theory. It then tests these hypotheses by estimation of Panel Corrected Standard Error models, using the data of Chinese OFDI flow to 131 countries over the period of 2003-2010. Findings - – The main findings are: friendly bilateral diplomatic activities help OFDI in general; bilateral diplomatic activities provide effective support to some sensitive and important investments; and bilateral diplomatic activities play an important role in host countries where institutions are absent or poor in quality. Practical implications - – Friendly bilateral diplomatic activities provide strong support to multinationals investing abroad. Originality/value - – The paper incorporates a neglected but important factor, diplomacy, into a model to analyze its influences on OFDI. It investigates not only the direct impact of diplomatic activities on OFDI but also their moderating effect on other OFDI determinants, such as economic and institutional factors.

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