Provincial Interdependence and China’s “Irrational” Outward Foreign Direct Investment

Mengheng Liu () and Xingwang Qian
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Mengheng Liu: Zhejiang University

Open Economies Review, 2021, vol. 32, issue 1, No 5, 153-181

Abstract: Abstract China’s outward foreign direct investment (OFDI) has increased by more than 70-fold since early 2000. A sudden plummet of 30% OFDI in 2017 particularly merits explanation. We suggest that the interdependent behavior of Chinese provincial OFDI plays a key role in the astonishing increase and sudden decease in China’s OFDI. Using OFDI data from 31 Chinese provinces, we find that OFDI from one province positively depends on neighboring provinces’ OFDI. While the spillover from neighbors’ behavior increases provincial OFDI, it tends to lead to more OFDI than warranted by economic fundamentals, resulting in an irrational OFDI bubble. Further, we argue that the “follow the leader” firm behavior and the OFDI promotional policies under China’s political tournament environment give rise to the neighboring interdependence. Finally, based on our results, we make a plausible estimation of the amount of irrational OFDI in China in 2016.

Keywords: China’s outward FDI; Provincial interdependence; Spillover effect; Government promotion policy (search for similar items in EconPapers)
JEL-codes: F21 F63 (search for similar items in EconPapers)
Date: 2021
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Working Paper: Provincial interdependence and China’s “irrational” outward foreign direct investment (2020)
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DOI: 10.1007/s11079-020-09589-0

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