The Impacts of Bilateral Political Relations on Foreign Direct Investment: Evidence from China

Existing research on the determinants of Foreign Direct Investment (FDI) in China has paid insufficient attention to the role of bilateral political relations. Utilizing panel data on FDI from 61 countries into China from 1998 to 2021 and employing the “political ideal point distance” metric constructed from UN General Assembly voting data, this paper empirically analyzes the impact of bilateral political relations on inward FDI (IFDI) in China. The findings indicate a significant correlation between bilateral political relations and the scale of IFDI, with a widening gap in political stances significantly inhibiting the inflow of foreign capital. This conclusion remains robust after a series of robustness checks, including replacing core variables, excluding samples from specific years, winsorizing, and employing instrumental variable methods. Heterogeneity analysis reveals that firms from developed countries are more sensitive to political relations, while major powers may exhibit a “cold politics, hot investment” phenomenon due to strategic considerations; investments from non-major powers, however, strictly align with the proximity of political relations as expected. The research provides empirical evidence for China to optimize its foreign investment policies within a complex international environment.