Government-firm vs. government-business connections and outward foreign direct investment in China

Abstract

We replicate the study by Du and Luo (2016) and reconsider the effect of political connections on outward foreign direct investment (OFDI) in recent China. Du and Luo (2016) suggest that the traditional mode of political connections (i.e., government-firm connections) could create resource and legitimacy advantages for the connected firms in the local market and so prevent these connected firms from engaging in OFDI overseas. Whereas, the new mode of political connections (i.e., government-business connections) emerged in China recently, and has changed the processes of resource allocation and legitimacy granting to a more equal and transparent way, thereby reshaping the connected firms' advantages as well as their OFDI decisions. Specifically, the new government-business connections would diminish the resource and legitimacy advantages of the connected firms in home country while strengthen their resource and legitimacy advantages in host countries, thus driving OFDI. Based on the two mechanisms, this driving force is more salient in non-labor-intensive firms and non-state-owned enterprises. We replicate the study by Du and Luo (2016) with (1) sample from the same dataset while in more recent years (2016–2022), (2) a comparison between the impact of two modes of political connections and (3) an illustration for the resource and legitimacy mechanisms.