The Politics of Chinese and US Foreign Direct Investment in the Developing World

Abstract

In the foreign direct investment (FDI) literature, studies show that investors prefer low-risk host states. However, the research focuses on investors from developed country democracies, such as the United States, ignoring the rise of China, an authoritarian developing country that engages in public and private investment. This paper investigates Chinese state and private FDI in 127 developing countries from 2003 to 2017 to determine the effects of political risk on FDI. We find that, as with US FDI, low-risk developing countries attract more Chinese state FDI, except in the case of natural resource investment, where Chinese investors appear to disregard risk concerns. For Chinese private FDI, on the other hand, political institutions seem to play no significant role, but political affiliations matter. Our work suggests that similarities between US and Chinese state FDI are increasing, while the investment strategies of Chinese private and state firms appear to be growing farther apart.