Governance, financial development and China’s outward foreign direct investment

Abstract

Deeply investigating the relationship between governance, financial development, and outward foreign direct investment (OFDI) is beneficial to formulating effective policies to accelerate Chinese firms' pace of overseas expansion. Based on the theoretical mechanism analysis, this paper empirically analyzes the impact of Asian governance and financial development on China's OFDI using the panel data of 37 Asian countries from 2003 to 2017. The results show that the host country governance has a negative and statistically significant impact on China's direct investment in Asia. The conclusion remains valid even after overcoming the interference of endogenous and economic cycle fluctuations. Moreover, using the mediating effect model, we find that financial development is an important channel through which host country governance affects China's OFDI. In further discussion, the findings suggest that with the scale of OFDI expanding, the role of governance takes an inverted "U" shape, and the "Belt and Road" initiative (BRI) weakens the negative impact of governance quality on China's OFDI. Furthermore, governance has shown more remarkable restraint on China's OFDI in neighboring, coastal, and low-income countries in the heterogeneity test. ​From the perspective of host country governance, this paper provides more specific guidance to formulate China's direct investment policy in Asia.

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