Existing research on the determinants of Foreign Direct Investment (FDI) in China has paid insufficient attention to the role of bilateral political relations. Utilizing panel data on FDI from 61 countries into China from 1998 to 2021 and employing the “political ideal point distance” metric constructed from UN General Assembly voting data, this paper empirically analyzes the impact of bilateral political relations on inward FDI (IFDI) in China. The findings indicate a significant correlation between bilateral political relations and the scale of IFDI, with a widening gap in political stances significantly inhibiting the inflow of foreign capital. This conclusion remains robust after a series of robustness checks, including replacing core variables, excluding samples from specific years, winsorizing, and employing instrumental variable methods. Heterogeneity analysis reveals that firms from developed countries are more sensitive to political relations, while major powers may exhibit a “cold politics, hot investment” phenomenon due to strategic considerations; investments from non-major powers, however, strictly align with the proximity of political relations as expected. The research provides empirical evidence for China to optimize its foreign investment policies within a complex international environment.
KeywordsBilateral Political RelationsForeign Direct InvestmentPolitical Ideal Point Distance
(Sam) Kim, S., Prideaux, B., & Timothy, D. (2016). Factors Affecting Bilateral Chinese and Japanese Travel. Annals of Tourism Research, 61, 80-95. https://doi.org/10.1016/j.annals.2016.08.001
Afonso, A., Mignon, V., & Saadaoui, J. (2024). On the Time-Varying Impact of China’s Bilateral Political Relations on Its Trading Partners: “Doux Commerce” or “Trade Follows the Flag”? China Economic Review, 85, Article ID: 102184. https://doi.org/10.1016/j.chieco.2024.102184
Aleksynska, M., & Havrylchyk, O. (2013). FDI from the South: The Role of Institutional Distance and Natural Resources. European Journal of Political Economy, 29, 38-53. https://doi.org/10.1016/j.ejpoleco.2012.09.001
Ali, F. A., Fiess, N., & MacDonald, R. (2008). Do Institutions Matter for Foreign Direct Investment? Open Economies Review, 21, 201-219. https://doi.org/10.1007/s11079-010-9170-4
Anderson, J. E. (1979). A Theoretical Foundation for Gravity Equation. American Economic Review, 69 , 106-116.
Bailey, M. A., Strezhnev, A., & Voeten, E. (2017). Estimating Dynamic State Preferences from United Nations Voting Data. Journal of Conflict Resolution, 61, 430-456. https://doi.org/10.1177/0022002715595700
Bellak, C., Leibrecht, M., & Riedl, A. (2008). Labour Costs and FDI Flows into Central and Eastern European Countries: A Survey of the Literature and Empirical Evidence. Structural Change and Economic Dynamics, 19, 17-37. https://doi.org/10.1016/j.strueco.2007.03.001
Bénassy-Quéré, A., Fontagné, L., & LahrÈche-Révil, A. (2001). Exchange-Rate Strategies in the Competition for Attracting Foreign Direct Investment. Journal of the Japanese and International Economies, 15, 178-198. https://doi.org/10.1006/jjie.2001.0472
Blanc-Brude, F., Cookson, G., Piesse, J., & Strange, R. (2014). The FDI Location Decision: Distance and the Effects of Spatial Dependence. International Business Review, 23, 797-810. https://doi.org/10.1016/j.ibusrev.2013.12.002
Blonigen, B. A., Ellis, C. J., & Fausten, D. (2005). Industrial Groupings and Foreign Direct Investment. Journal of International Economics, 65, 75-91. https://doi.org/10.1016/j.jinteco.2003.12.003
Buckley, P. J., & Casson, M. (1976). The Future of the Multinational Enterprise . Palgrave Macmillan. https://EconPapers.repec.org/RePEc:pal:palbok:978-1-349-02899-3
Busse, M., Königer, J., & Nunnenkamp, P. (2010). FDI Promotion through Bilateral Investment Treaties: More than a Bit? Review of World Economics, 146, 147-177. https://doi.org/10.1007/s10290-009-0046-x
Cai, Y., Chang, H., & Chang, T. (2023). Evaluating Time-Varying Granger Causality between US-China Political Relation Changes and China Stock Market. Finance Research Letters, 55, Article ID: 103918. https://doi.org/10.1016/j.frl.2023.103918
Cai, Y., Li, X., & Zhang, Y. (2024). Oil Market Responses to Sino-European Political Relation Shock: Insights after China’s World Trade Organization Accession. Economic Modelling, 141, Article ID: 106907. https://doi.org/10.1016/j.econmod.2024.106907
Cheng, L. K., & Kwan, Y. K. (2000). What Are the Determinants of the Location of Foreign Direct Investment? The Chinese Experience. Journal of International Economics, 51, 379-400. https://doi.org/10.1016/s0022-1996(99)00032-x
Dean, J. M., Lovely, M. E., & Wang, H. (2009). Are Foreign Investors Attracted to Weak Environmental Regulations? Evaluating the Evidence from China. Journal of Development Economics, 90, 1-13. https://doi.org/10.1016/j.jdeveco.2008.11.007
Du, Y., Ju, J., Ramirez, C. D., & Yao, X. (1990). Bilateral Trade and Shocks in Political Relations: Evidence from China and Some of Its Major Trading Partners, 1990-2013. Journal of International Economics, 108, 211-225. https://doi.org/10.1016/j.jinteco.2017.07.002
Dunning, J. H. (1977). Trade, Location of Economic Activity and the MNE: A Search for an Eclectic Approach. In B. Ohlin, P. Hesselborn, & P. M. Wijkman (Eds.), The International Allocation of Economic Activity (pp. 395-418). Palgrave Macmillan. https://doi.org/10.1007/978-1-349-03196-2_38
Faeth, I. (2009). Determinants of Foreign Direct Investment—A Tale of Nine Theoretical Models. Journal of Economic Surveys, 23, 165-196. https://doi.org/10.1111/j.1467-6419.2008.00560.x
Fan, Z., Wang, T., Han, Z., & Jia, Y. (2025). Political Affinity and Opportunism in Global Supply Chain: The Mediating Role of Contractual and Relational Governance. International Business Review, 34, Article ID: 102415. https://doi.org/10.1016/j.ibusrev.2025.102415
Globerman, S., & Shapiro, D. (2002). Global Foreign Direct Investment Flows: The Role of Governance Infrastructure. World Development, 30, 1899-1919. https://doi.org/10.1016/s0305-750x(02)00110-9
Habib, M., & Zurawicki, L. (2002). Corruption and Foreign Direct Investment. Journal of International Business Studies, 33, 291-307. https://doi.org/10.1057/palgrave.jibs.8491017
Hymer, S. H. (1976). The International Operations of National Firms: A Study of Direct Foreign Investment. MIT Press.
Jiang, G. H., & Jiang, D. C. (2012). Location Selection of China’s Outward Foreign Direct Investment: A Panel Data Test Based on the Investment Gravity Model. The Journal of World Economy, No. 9 , 21-40. (In Chinese)
Kojima, K. (1978). Direct Foreign Investment : A Japanese Model of Multinational Busin ess Operations . (In Japanese)
Knill, A., Lee, B., & Mauck, N. (2012). Bilateral Political Relations and Sovereign Wealth Fund Investment. Journal of Corporate Finance, 18, 108-123. https://doi.org/10.1016/j.jcorpfin.2011.11.002
Kravis, I. B., & Lipsey, R. E. (1982). The Location of Overseas Production and Production for Export by U.S. Multinational Firms. Journal of International Economics, 12, 201-223. https://doi.org/10.1016/0022-1996(82)90036-8
Kuang, Y. X., & Xiang, H. J. (2017). The Trade Destruction and Diversion Effects in Inter-national Political Conflicts: An Empirical Research Based on Sino-Japanese Relation. World Economics and Politics, No. 9 , 139-155. (In Chinese)
Leiter, A. M., Parolini, A., & Winner, H. (2011). Environmental Regulation and Investment: Evidence from European Industry Data. Ecological Economics, 70, 759-770. https://doi.org/10.1016/j.ecolecon.2010.11.013
Li, Y., Vertinsky, I. B., & Li, J. (2014). National Distances, International Experience, and Venture Capital Investment Performance. Journal of Business Venturing, 29, 471-489. https://doi.org/10.1016/j.jbusvent.2013.08.002
McDonald, C., Buckley, P. J., Voss, H., Cross, A. R., & Chen, L. (2018). Place, Space, and Foreign Direct Investment into Peripheral Cities. International Business Review, 27, 803-813. https://doi.org/10.1016/j.ibusrev.2018.01.004
Ni, G., Teng, M., Su, B., & Chen, Z. (2024). Impact of Political Relationships on Virtual Land Flow from China’s Food Trade. Socio-Economic Planning Sciences, 96, Article ID: 102085. https://doi.org/10.1016/j.seps.2024.102085
Pan, Z., & Jin, Z. K. (2015). Bilateral Political Relationship, Host Country Institutional Risk and China’s Outward FDI. Finance & Trade Economics, No. 6 , 85-97. (In Chinese)
Vernon, R. (1966). International Investment and International Trade in the Product Cycle. The International Executive, 8, 16. https://doi.org/10.1002/tie.5060080409
Wang, T., Han, Z., Fan, Z., & Jia, Y. (2025). Impact of Changes in Political Affinity on Opportunism in Global Supply Chain: The Moderating Role of National Culture. Journal of International Management, 31, Article ID: 101206. https://doi.org/10.1016/j.intman.2024.101206
Wheeler, D., & Mody, A. (1992). International Investment Location Decisions: The Case of U.S. Firms. Journal of International Economics, 33, 57-76. https://doi.org/10.1016/0022-1996(92)90050-t
Yang, J. Y., Kim, M., Li, J., & Lu, J. W. (2023). Information Voids and Cross-Border Bandwagons of Foreign Direct Investment into an Emerging Economy. Strategic Management Journal, 44, 2751-2782. https://doi.org/10.1002/smj.3507
Yi, Z., & Sun, C. (2022). Bilateral Political Relations, Space Spillovers and the Import Expansion of China’s Bulk Commodity. Journal of Asian Economics, 81, Article ID: 101502. https://doi.org/10.1016/j.asieco.2022.101502