Can China's Diplomatic Partnership Strategy Benefit Outward Foreign Direct Investment?

• Date: 01 September 2019
• Author: Churen Sun,Yaying Liu
• Published date: 01 September 2019
• DOI: http://doi.org/10.1111/cwe.12289

©2019 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 108–134, Vol. 27, No. 5, 2019

108

*Churen Sun, Professor, Guangdong Institute for International Strategies, Guangdong University of Foreign

Studies, China. Email: sunchuren@foxmail.com; Yaying Liu (corresponding author), PhD Candidate, School

of International Business, Southwestern University of Finance and Economics, China. Email: yaying_liu@

foxmail.com. This work was supported by the National Social Science Fund of China (No. 18ZDA039), the

Fundamental Research Funds for the Central Universities (No. JBK1907201895) and the National Natural

Science Foundation of China (No. 71832012).

Can China’s Diplomatic Partnership Strategy

Benet Outward Foreign Direct Investment?

Churen Sun, Yaying Liu*

Abstract

In the context of global integration, whether a diplomatic partnership strategy can

promote outward foreign direct investment (OFDI) and how it works are very important

issues for China. Based on a dataset featuring China’s partnerships collected from the

Ministry of Foreign Affairs website, we establish an empirical framework to assess the

role of China’s diplomatic strategy in its OFDI arising from partnerships since 1993.

The results show that the establishment or upgrade of partnerships has had a positive

effect on Chinese firms’ decisions on OFDI for at least the short term, especially for

firms with higher demand for policy guarantees from the government, such as non-

central rms and non-Beijing rms. The results also show that the increase in OFDI is

concentrated in host countries with higher political risks, such as developing countries,

neighboring countries, and Belt and Road countries, which is consistent with China’s

diplomatic focus. Our research proves that China’s diplomatic strategy can assist rms

to invest abroad.

Key words: Belt and Road Initiative, outward foreign direct investment, partnership

diplomatic strategy, political risk

JEL codes: F21, F59

I. Introduction

Outward foreign direct investment (OFDI) in China has increased dramatically since

2004. From 2004 to 2017, the number of domestic investors increased from 2965 to

25,529, OFDI flows increased from US$5.5bn to US$158.29bn and the accumulated

OFDI net stock increased from US$44.8bn to US$1809.04bn (MOF, NBS and SAFE,

©2019 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China’s Diplomatic Partnership Strategy and OFDI 109

2004, 2017). In 2015, the Chinese mainland’s OFDI ows surpassed those of Chinese

Hong Kong and Japan, and ranked second in the world.1 After the Belt and Road

Initiative (BRI) was proposed in 2013, Belt and Road (B&R) countries have become

priority areas for Chinese investors. In 2017, nearly 3000 Chinese rms set up ofces in

57 B&R countries with investment of US$20.17bn, which has increased by 31.5 percent

over the last year (MOF, NBS and SAFE, 2017). However, political risks remain

major impediments to China’s OFDI.2 In recent years, FDI from China has often been

impacted by political events, such as political turbulence, sovereign debt defaults and

security reviews for national interests. For example, the US government used the threat

of a security review to force China National Offshore Oil Corporation to withdraw

its acquisition of Unocal in 2005; the Mexican government revoked China Railway

Construction Corporation Limited’s winning bid for a high-speed railway project

from Mexico City to Querétaro because of corruption, fiscal austerity and pressure

from developed countries in 2014; and the Sri Lankan government halted the China

Communications Construction Company Ltd. Colombo Port City project, questioning

“whether the project had fulfilled the appropriate procedures” and citing a “lack of

relevant approval” in 2015.3 Faced with spreading nationalism and trade protectionism,

how to provide a safe and sound investment environment for Chinese firms and

encourage them to invest abroad has become a very important issue.

Developing global partnerships may provide a new method for alleviating the

political risks faced by rms involved in OFDI. A diplomatic partnership strategy has

played an important role in the post-war era, reecting a country’s overall judgment and

strategic planning of global economic, political and military affairs and their trust and

willingness to share benets and risks with partner countries. Since the rst partnership

established with Brazil in 1993, China has established a further 143 partnerships with

99 countries: 50 in 32 Asian countries, 29 in 23 African countries, 33 in 24 European

countries, 21 in 12 American countries and 10 in 8 Oceanian countries.4 Since the 18th

National Congress of the Communist Party of China, the pace of development of China’s

diplomatic partnership strategy has increased. In the period 2013–2018, 78 partnerships

were established or upgraded, accounting for 54.5 percent of the total number of Chinese

1In the following analysis, we only focus on sovereign countries that have already established formal

diplomatic relations with China.

2Political risks are dened as the potential risks faced by foreign rms because of host countries’ government

attitude, governance, political situation, institutional environment and relations with other countries.

3Source: http://www.globalview.cn/html/global/info_5295.html.

4These gures were obtained from joint statements on the Ministry of Foreign Affairs of the People’s Republic

of China website, available from: https://www.fmprc.gov.cn/web/.