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Provincial interdependence and China’s “irrational” outward foreign direct investment

Author

Listed:
  • Mengheng Liu

    (Zhejiang University)

  • Xingwang Qian

    (SUNY Buffalo)

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.

Suggested Citation

  • Mengheng Liu & Xingwang Qian, 2020. "Provincial interdependence and China’s “irrational” outward foreign direct investment," GRU Working Paper Series GRU_2020_010, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    • Handle: RePEc:cth:wpaper:gru_2020_010
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    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F63 - International Economics - - Economic Impacts of Globalization - - - Economic Development

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