Political uncertainty and foreign direct investment—Evidence from the government official vacancy in China's cities

Abstract

This study focuses on a new political uncertainty phenomenon, that is, the government official vacancy, and examines its effects on foreign direct investment in China's cities. Using hand-collected data about the vacancies of the municipal party secretary in China from 2003 to 2018, we find that the government official vacancy reduces foreign direct investment. A one unit (month) increase in the government official vacancy leads to a −2.225% decrease in foreign direct investment. Second, we show three possible channels through which the government official vacancy reduces foreign direct investment: reducing government efficiency, increasing economic policy uncertainty and increasing corruption. Finally, our results show that the effects of government official vacancies on foreign direct investment are stronger in cities with a strong media environment, cities with a low level of innovation and entrepreneurship and cities in the middle region of China. Our main results pass a series of robustness tests. Overall, our research offers novel evidence that political uncertainty has a negative impact on foreign direct investment.