Does Comprehensive Geopolitical Risk Deter FDI Outflows: Evidence from China

ABSTRACT

What is geopolitical risk to multinational enterprises in a world flooded with geopolitical changes? Does such risk impact foreign direct investment flows? To answer these questions, we attempt to develop the concept of comprehensive geopolitical risk by expanding the border of geopolitical risk in the literature to include both implicit and explicit risks that overseas investors face in host countries. We further construct an index by mining big data from a news report database, which we use to examine how comprehensive geopolitical risk impacts FDI outflows from China to 154 host countries between 2003 and 2020. Our findings indicate that comprehensive geopolitical risk does negatively impact FDI outflows, especially in the energy sector. Implicit geopolitical risk also significantly deters FDI outflows.

KEYWORDS:

• Geopolitical risk
• foreign direct investment
• measuring indexes
• implicit geopolitial risk

JEL CLASSIFICATION:

• F21
• D81

Acknowledgements

We sincerely thank anonymous reviewers for suggestions and comments. We sincerely thank Biao L for his information technologysupports. We are grateful to Wang Fei, Shuqin Ma, Wanwan Ren, and Jie Xie for their valuable suggestions and comments. We also thank Zhiqiang Ma, Nengyu Liu, Yue Liu, Miao Xu, Yihuai Xu, Haoqing Zheng for their constant advices.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Data is sourced from Outward Foreign Direct Investment(2019), see its official website http://hzs.mofcom.gov.cn/article/date/202009/20200903001523.shtml.

2. For more information about PRS’ International Country Risk Guide (ICRG), refer to https://www.prsgroup.com/explore-our-products/international-country-risk-guide/.

3. Caldara and Iacoviello (2022) examined 11 primary newspapers by text searches, counted the number of occurrences geopolitical-related words to construct their index. There are, however, some differences between our measurement and the one measured by Caldara and Iacoviello (2022). For one thing, the definition of geopolitical risk used in their GPR index is different from ours. For another, GPR in this paper focuses on China and its partners all over the world. Nonetheless, their index is relatively suitable for research of developed and emerging countries.

4. For details, refer to https://www.gdeltproject.org/about.html.

5. Many thanks for Biao Li’s technological supports. The $\mathit{GPR}{C}_{jt}^{\ast }$, $\mathit{GPR}{S}_{jt}^{\ast }$, and $\mathit{GPRI}{M}_{jt}^{\ast }$ indexes are open to the public and available at: https://public.tableau.com/app/profile/lu.and.liu.2023./viz/ComprehensiveGeopoliticalRiskIndexes/ComprehensiveGeopoliticalRiskIndexes. Please use the Chrome or Safari to open it. Please cite these indexes under the citation of this paper.

6. Seasonally or monthly index is also possible, but since other variables in the following analysis are yearly, we use yearly index in this paper.

7. For details, refer to https://www.bbc.com/news/technology-53403793 .

8. For details, refer to https://www.fdimarkets.com/about/.

9. For details, refer to https://databank.worldbank.org/source/world-development-indicators.

10. Many thanks for the anonymous reviewer’ suggestions.

11. Many thanks for the anonymous reviewer’ suggestions.

12. (1) Science includes physical sciences, life sciences, environmental technology, ICT & electronics; (2) Manufacture refers to industrial, creative industries, consumer goods, wood, apparel & related products, transportation & warehousing, transport equipment; (3) Energy refers energy; (4) Construction refers to Construction; and (5) Business Service includes tourism, retail trade, professional services, financial services, agribusiness as labelled in the database.