Sister‐city Ties and Chinese Outward Foreign Direct Investment: A Spatial Econometric Analysis

Abstract

AbstractThis paper employs dynamic spatial econometric methods to analyze the impact of the sister‐city relationship on Chinese outward foreign direct investment (OFDI) using a linked country‐level dataset from 2003 to 2016. The results show strong and robust evidence that the sister‐city relationship has been a crucial OFDI location determinant in host countries and their neighbors. Specifically, the sister‐city tie between China and the host country has stimulated Chinese OFDI in host countries. Moreover, Chinese OFDI in host countries would be reduced if China concluded sister‐city ties with their neighbors to which we refer as the neighboring effect. Further mechanism tests show that sister cities have promoted OFDI in host countries via four channels: reducing political risk, decreasing information asymmetry, narrowing institutional distance, and mitigating cultural differences. This tendency for sister‐city links to promote OFDI has varied substantially depending on OFDI entry modes (i.e., greenfield or cross‐border mergers and acquisitions), motivation (i.e., resource‐, market‐, technology‐, or efficiency‐oriented OFDI), and Sino–foreign geographical relationships (i.e., Belt and Road Initiative countries or other countries).