HOW DO INVESTORS RESPOND TO TERRITORIAL DISPUTES? EVIDENCE FROM THE SOUTH CHINA SEA AND IMPLICATIONS ON PHILIPPINES ECONOMIC STRATEGY

Abstract

How do territorial disputes affect bilateral foreign direct investment (FDI) between claimant states? Using a difference model, we find that a regime’s position on the South China Sea (SCS) significantly impacts Chinese FDI. We used a novel dataset on firm registrations in the Philippines, finding that the annual number of new firm entrants with Chinese investment significantly increases when maritime border disputes are stabilized. In contrast, we observe that conflictual relations in the maritime borders tend to decrease the number of new firms. We also notice that disputes do not influence FDI from non-claimant states.