In the Eye of the Beholder: Political Risk, Regime Type, and China’s Multinational Corporations

Abstract

Chinese investment has been observed to favor politically risky destinations and authoritarian countries, which is puzzling for the conventional understanding of multinational corporations. One prevailing explanation is that Chinese firms’ embeddedness in risky, authoritarian institutions at home enhances their capabilities to cope with risks abroad. We argue, however, that the risk mitigation strategies firms employ in autocracies are often extra-institutional due to a lack of institutionalized political access and credible commitments; they require the accumulation of country-specific knowledge and political capital, and thus, are not easily transferrable. Therefore, we expect that Chinese investors remain sensitive to political risks in host countries. Empirically we leverage two experiments embedded in original surveys of business executives and find that Chinese firms are deterred by a wide range of political risks and have no preference for autocracy. Our study provides new insights into our understanding of the risk preferences and behavior of Chinese investors.