Sister cities and outward foreign direct investment: evidence from the Chinese listed firms

In the current volatile international geopolitical landscape, fostering firm internationalization is crucial for enhancing economic cooperation and boosting economic growth among countries. This study aims to examine the impact of establishing sister cities, as a formal diplomatic institution between countries, on firms’ outward foreign direct investment (OFDI). Using panel data of Chinese listed firms with high-dimensional fixed effect regression models, we find that sister cities can significantly increase firms’ OFDI. Adopting a bilateral institutional perspective, we further investigate how institutions in both the home and host country influence this relationship. Our findings reveal that the positive effect of sister cities on firms’ OFDI is stronger when marketization in home countries is less developed, while it is amplified in host countries with better governance quality. The heterogeneous analysis indicates that sister cities promote OFDI for private-owner enterprises (POEs) more than state-owner enterprises (SOEs); firms located in the middle and western regions are more incentivized by sister cities in promoting OFDI compared to those in the eastern regions; sister cities have a more pronounced impact on promoting OFDI for firms in the mining and construction industries. These findings offer valuable implications for firm internationalization strategies and policy makers in emerging markets.