Financial Development, International Relations, and FDI Outflows : Evidence from China

This paper investigates the effects of financial development of FDI target countries on FDI inflows, and how bilateral political relations change the effects through the evidence from China. The results show: (1) FDI target countries’ financial activities, financial sizes, and financial efficiencies positively affect China’s FDI outflows. An increase of 1% in the level of financial activities, financial sizes, and financial efficiencies in target countries promotes a 2.8%, 3.8%, and 3.9% increase in Chinese outward FDI; (2) Bilateral political relations significantly amplify the effects of destination countries’ financial development on China’s outward FDI. The higher level of bilateral partnerships are, the higher the effects of destination countries’ financial development on China’s outward FDI are; (3) Especially, currency swap agreements and countries along the “Belt and Road”, which China advocates recently, significantly strengthen the effects of financial development indicators on China’s outward FDI