Do China's Outward Direct Investors Prefer Countries with High Political Risk? An International and Empirical Comparison

• Published date: 01 November 2014
• Date: 01 November 2014
• DOI: http://doi.org/10.1111/cwe.12090
• Author: Chien‐hung Tung,Guo‐chen Wang,Jiann‐jong Guo

22 China & World Economy / 22–43, Vol. 22, No. 6, 2014

©2014 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Do China’s Outward Direct Investors Prefer Countries

with High Political Risk? An International

and Empirical Comparison

Jiann-jong Guo, Guo-chen Wang, Chien-hung Tung*

Abstract

This paper focuses on a conventional debate regarding whether Chinese outward direct

investors tend to invest in countries with high political risk. Using 2003 –2011 data from the

World Bank, the Heritage Foundation and the KOF Swiss Economic Institute, we investigate

China’s political risk distribution and political risk index (PRI). Our results indicate that

China’s political risk index was ranked 48th among 153 economies in 2011, in the lower

risk level of the PRI spectrum. In an international comparison of political risk distribution,

the proportion of Chinese outward direct investment (ODI) among countries with high

political risk is less than the world average. The Chinese ODI political risk index has

significantly improved and remains lower than the world average. To improve Chinese

ODI PRI, the Chinese Government should continue to implement differentiation strategies

and to offer official development assistance to improve the investment environment in

developing countries and reduce political risk.

Key words: government policy, outward direct investment, political risk distribution, political

risk index, principal component analysis

JEL codes: C330, F210, F230

I. Introduction

Since China adopted a “going out strategy” at the 16th National Party Congress in 2002,

China’s outward direct investment (ODI) has increased rapidly. According to the statistics

of the United Nations Conference on Trade and Development (UNCTAD, 2013), Chinese

*Jiann-jong Guo, Associate Professor, Institute of China Studies, Tamkang University, New Taipei City,

Taiwan. Email: jj03082011@gmail.com; Guo-chen Wang, Adjunct Assistant Professor, Department of

Humanities and Social Science, Taiwan Normal University, New Taipei City, Taiwan. Email:

guochenwang@hotmail.com; Chien-hung Tung, Assistant Professor, Graduate Program of Landscape

Architecture and Recreation, National Chung-Hsing University, Taichung City, Taiwan. Email:

ct176@columbia.edu. The authors would like to thank two anonymous reviewers and the editorial board

for their constructive comments and guidance.

23

China’s ODI and High Political Risk

©2014 Institute of World Economics and Politics, Chinese Academy of Social Sciences

ODI increased from US$2.86bn in 2003 to US$84.2bn in 2012, exhibiting constant growth for

nearly 10 years and an annual growth rate of 48.1 percent. In 2012, China ’s ODI was the

third largest in the world and was ranked only behind the USA’s and Japan’s. This indicates

that China has become a crucial ODI-driving force in the world. 1

The explosive growth of the Chinese ODI has caused an increasing number of scholars

to focus on this topic. For example, at the end of 2012, the Social Sciences Citation Index

(SSCI) database contained 158 papers investigating the motivations of Chinese ODI. The

annual number of published papers increased from 8 papers in 1991 –2000 (less than 1 per

year), to 21 papers during 2001–2005 (an average of 4 per year), and 92 papers in 2006 –2010

(an average of 18 per year).2 During 2011–2012, approximately 37 papers were published.

Among these publications, some international experts (e.g. Jacques, 2009; Halper, 2010;

Meyer, 2012; Cardenal and Ara

ú

jo, 2013; Shambaugh, 2013) point out that Chinese ODI

tends to be in countries with high political risk, such as Sudan, Zimbabwe, Venezuela,

Angola, Iran, Uzbekistan and Myanmar. However, these experts have not conducted

empirical analyses. In contrast, most developed countries tend to invest in countries with

low political risk. According to a World Bank survey (MIGA, 2013), more than 70 percent of

multinational companies plan to expand their investment in developing countries in 2012 –

2015, but most of these companies view political risk as the largest constraint to their

investment plans in the medium term. It has been argued in the published literature that the

pattern of China’s ODI political risk differs from that of advanced countries; therefore, in

the present paper we quantitatively analyze the political risk of Chinese ODI to facilitate

international comparisons.

The rest of the paper is organized as follows. Section II reviews the achievements and

shortcomings of existing quantitative research. Section III describes the research

methodology, relevant variables and data sources. Section IV presents an analysis of the

empirical results for an ODI political risk distribution (PRD) and a political risk index (PRI).

Section V discusses the effectiveness of Chinese ODI policy. Section VI concludes.

II. Literature Review

Hamada et al. (2004), Ferrari and Rolfini (2008), MIGA (2013) and other researchers have

1In this article, the Chinese ODI only refers to ODI by multinational enterprises from Chinese mainland.

2According to Deng (2012), 121 articles published in peer-reviewed journals during 1991 –2010 investigated the

internationalization of Chinese firms. China & World Economy has published a special issue on “China’s Outward

Direct Investment,” which includes 7 articles. See Huang and Wang (2011) and Huang et al. (2013).