Doctoral Dissertation Research in Political Science: How Authoritarian Politics Shapes China's Outward Direct Investments

University Of California-San Diego, La Jolla CA

Investigators

Abstract

This award satisfies Division B, Title V, Sec. 543 of the Consolidated and Further Continuing Appropriations Act of 2013 (P.L. 113-6, enacted on March 26, 2013). This research project has implications for US economic interests because it helps form a more nuanced expectation about China's global involvement in the world economy. The project addresses several questions about international investment, especially from authoritarian societies. Specifically, the project asks: How does domestic politics shape investments abroad? Are international investors from authoritarian regimes inherently different from those from democratic countries? Investments from countries like China and Russia are playing an increasingly important role, but most of the knowledge about foreign direct investments (FDI) comes from studying investors from mature democracies. This project explicates how the fundamental features of an autocratic political system impact firms' outward investments. The project postulates that investment risks and returns are often mismatched in an autocracy: companies in patronage circles can count on being bailed out by the political elite when investments go badly, allowing them to socialize risks associated with outward FDI. As a result, politically connected companies in an autocracy are more likely to invest abroad in riskier destinations, but may in fact be less motivated to seek protection for their investments, whether that entails participating in global governance, bribing the host government to prevent expropriation of assets, or lobbying for military activism. The freewheeling investment styles of Chinese corporations may well corner Chinese leaders into a reactive position while the companies themselves have no great incentives to participate in global governance. The project's intellectual merit is especially associated with its theoretical advancements in the study of political economy and FDI. It stands to make a significant theoretical and empirical contributions to scholarship in international political economy (IPE). The project includes an innovative theory modeling the strategic interaction between the political elite and companies in different political regimes and deriving their optimal investment portfolios. All existing models for FDI are based on studying investments from mature democracies and assume that firms maximize profits independently from political elites. The proposed theory will be one of the first to allow strategic interaction between companies and political elites and incorporate home country politics as a determinant of FDI. The theory is tested empirically using interviews, statistical analyses based on original firm-level surveys in China and Vietnam, as well as critical case studies conducted in China and Zambia. The empirical portion of the project creates two original survey datasets at the firm level. These survey data will add to a scarce pool of firm-level data on FDI and benefit the wider scholarly community. While the research focuses on China, the mechanism through which authoritarian politics mediates the choices of its multinational corporations is not specific to Chinese companies. More broadly, existing scholarship on FDI has focused almost exclusively on how host (recipient) country politics affects aggregate investment flow or the choices of a given multilateral corporation. This research agenda is proving increasingly limiting as more investors hailing from diverse political backgrounds join the global investment landscape. The project, by focusing on the impact of variations in home country politics, extends the current research agenda. In addition to its intellectual merit, this project has wide-ranging implications for policy-making. The theory suggests that China's global economic spread has the tendency to exceed its willingness and readiness to govern. Further, companies may have more motivation to grow their bureaucratic capacity and extract rents from their home country than to build truly competitive global businesses. After one decade of implementing the Go Out policy, evidence is mounting that Chinese overseas investments have encountered serious problems in profitability and sustainability. Contrary to the common arguments for mere inexperience and international hostility, the research suggests that unless China can bring forth substantive reform to its patronage-based economy, problems may persist or worsen. Once the research is concluded, the findings will provide a more nuanced understanding of China's approach to FDI, a critical issue for US economic interests.