Risk as Opportunity: Geopolitical Risk and the Location Choice of Chinese Outward Foreign Direct Investment

This study examines how geopolitical risk influences the location choice of Chinese outward foreign direct investment (OFDI). We construct a novel project–destination–month dataset by combining cross-border investment data for Chinese listed firms with the Geopolitical Risk Index developed by Caldara and Iacoviello (2022). Using a mixed logit model, we find that Chinese firms are more likely to invest in locations with higher geopolitical risk, in sharp contrast to evidence from developed-economy multinationals. This positive association is largely driven by the resource-seeking orientation of Chinese OFDI. Consistent with growth options theory, greater uncertainty increases the expected long-term returns of investments aimed at securing natural resources or advanced technologies. The strategic value of such investments outweighs the deterrent effects of geopolitical risk arising from investment irreversibility and weaker host-market demand. China's extensive export experience, domestic institutional environment, and government support further enhance Chinese firms' ability to invest in geopolitically risky locations.